MarineMax Inc (HZO) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the MarineMax, Incorporated first quarter fiscal 2010 earnings conference call. One note that today's call is being recorded.

And now I would like to turn the conference over to Kate Messmer of ICR. Please go ahead, Kate.

Thank you, operator. Good morning, everyone.

And thank you for joining this discussion of MarineMax's 2010 fiscal first quarter results. I'm sure that you have all received a copy of the press release that went out this morning, but if you have not, please call Linda Cameron at (727) 531-1700, and she will fax or e-mail one to you.

I would now like to introduce the management team of MarineMax; Bill McGill, Chairman, President, and CEO; and Mike McLamb, CFO of the Company. Management will make some comments and then will be available for your questions. Mike?

Thank you, Kate. Good morning, everyone. And thank you for joining this call.

Before I turn the call over to Bill, I would like to tell you that certain of our comments are forward-looking statements as defined in the Private Securities Litigation Reform Act. These statements involve uncertainties that may cause actual results to differ materially from expectations. These risks include but are not limited to the impact of seasonality and weather, general economic conditions, and the level of consumer spending, the Company's ability to capitalize on opportunities or grow its market share, and numerous other factors identified in our Form 10-K and other filings with the Securities and Exchange Commission.

With that in mind, I would like to turn the call over to Bill.

Thank you, Mike. And good morning, everyone.

A considerable progress we made during fiscal 2009 in reducing our inventory, streamlining our expenses, and optimizing our store count allowed us to report significantly improved results for the December quarter, compared to the prior year. During the quarter, we generated sales that were consistent with the prior year despite operating with over 20 fewer stores, and facing a continued headwind resulting from the difficult economic environment. We believe that our sales in the quarter were aided by our competitive advantages coupled with the failure or struggles of other dealers or brands. As we have said in the past, our competitive advantages created by our solid balance sheet position, and customer-centric approach, should continue to yield market share benefits as the industry works its way through these historically challenging times. Our strategy of optimizing our store count clearly worked in the December quarter as we generated the same level of sales as last year, resulting in double-digit same-store sales growth.

Going forward, we are committed to optimizing our store count while maximizing revenue and market share. It is important to also note that we were able to generate the 13% increase in same-store sales while implementing a less aggressive pricing strategy that we have been operating under for most of physical 2009. As such, our gross margins rebounded dramatically from the levels we had been experiencing. With our aging much improved, a larger portion of our sales were from fresher and more current products, which yield higher gross margins. The increase in same-store sales along with our strict inventory management allowed us to continue to reduce our inventory levels. We managed our inventory down 57%, or $250 million, from the prior year. Inventories also dropped sequentially from the September quarter, which is only the second time this has happened in the Company's history. Normally, due to seasonality, inventory builds in the December quarter, and March quarter, we believe that our inventory reduction sales trends continue to lead the industry. However, it is also important to note that we believe inventory levels are in much better shape across the industry, which should help us to lay the ground work for a more stable pricing and sales environment in the future.

Along with reducing our inventory levels, another key element in our strategy for weathering the downturn and positioning MarineMax for future profitability, was to significantly reduce our operating cost structure. The store closures that I've previously mentioned were a large part of this strategy, and removed a considerable portion of expenses from our cost base. We took actions in nearly every area of our business over the past two years to reduce our costs. While some of these costs that are more variable in nature, and will come back as sales return, many of the reductions that we implemented are sustainable, and should lead to improved operating margins in the future as sales recover. The strategic actions we have taken on inventories and expenses have allowed us to right-size our balance sheet, improve our cash flow generation, and reduce our outstanding borrowings. We generated over $200 million in cash from operations during fiscal 2009, and generated over $27 million in the December quarter, which combined with our equity offerings in September allowed us to reduce our outstanding borrowings by $227 million on a year-over-year basis, to $102 million, as of December 31.

As a reminder the only debt we have is the inventory financing through our line of credit. We have no long-term debt and our own properties are all debt-free. Let me add a few more details about the quarter and update you on current trends. The December quarter is typically a small quarter and one that is fueled by generally larger boat sales. The units sold in the quarter are usually very low for the industry. This year is no exception and most reports show the industry is down in excess of 30%. While we have seen hints of increased unit sales in certain markets, such as Florida and the northeast, which both combine - - comprise about 60% of our annual revenues, overall our units for the quarter were down about 14%. Having said that, the early boat shows that we have participated in are encouraging. Generally, the results from the shows are flat or up, and the traffic appears to be up from last year. Also, at most of the shows, we have noticed an absence of many of the competitive brands. Finally, retail financing remains challenging, but continues to gradually improve as the lenders desire more of the retail paper, which is a positive sign for us, and also for our customers.

I will now ask Mike to provide more detailed comments on the quarter and the year. Mike?

Thank you, Bill. And good morning, again, everyone.

For the three months ended December 31, 2009, our revenue was approximately flat compared to the prior year at about $100 million. Our same-store sales increased approximately 13%, compared with the 52% decrease in the same quarter last year. Revenue from store closures that are no longer eligible for inclusion in the same-store sales base was about $11 million. The fact that we generated consistent revenue compared to the prior year, with fewer stores, supports our belief that in markets where we have consolidated our store base, our remaining stores will capture the majority of the sales from the closed stores. Gross profit as a percentage of revenue decreased to 21.3% in the quarter, for approximately 23.7%, in the prior year quarter.

However, our gross profit was up substantially for the margins we reported in the last three quarters in fiscal 2009, which averaged about 14%. With this substantial progress that we made reducing our inventory, and improving its aging, we feel the opportunity for continued margin growth exists as we move through fiscal 2010. Our selling, general, and administrative expenses decreased approximately 25%, or $9.8 million during the quarter, even though our revenue was flat versus the prior year reflecting the progress we've made in reducing our cost structure. As we move through fiscal 2010, with our greatly reduced store count and our inventory levels down substantially, we are targeting our overall expense structure to be in line or perhaps better than prior years when we had similar revenue and store count. Interest expense decreased approximately 64% to $1.5 million, as a result of a reduction of our average borrowings on our line of credit. Regarding income taxes, due to the recent change in tax laws, which increased the historical years that companies can carry losses back to, we recognized the benefit of approximately $19 million, or $0.87 per diluted share, during the quarter. Our tax team was very proactive and sent in our filing as soon as the new legislation was announced. As a result, we actually received the refund in the first week of January.

While we recognize that this is a one-time benefit, we were able to use this cash to further reduce our borrowings. Additionally, the refund added nearly $1.00 per share to our tangible net worth. As such, it was very meaningful to us. Our reported net income for the first quarter of fiscal 2010 was $10.2 million, or $0.45 per diluted share. Excluding the tax carry-back benefit I just mentioned, we would have recognized a net loss of approximately $9.1 million, or $0.42 per share, which is still greatly improved compared to our net loss of $14.3 million, or $0.78 per share, for the comparable quarter last year.

Turning to our balance sheet, at quarter end we had approximately $13 million in cash, which was down slightly compared to the prior year, as we further paid down our line of credit. Remember as we have said in the past, our cash is a function of how much we leverage our inventory. Our inventory at quarter-end was $190 million which is down more than $250 million, or 57%, from the comparable period last year, and also down $16 million from the September quarter, which as Bill mentioned, was only the second time that we have achieved a sequential reduction at this time of the year. Last year was the first time we achieved it. Our inventory reduction was even greater reduction on a unit basis as our total units in inventory as of December 31 were down approximately 62% on a year-over-year basis. The aging of our inventory is also much improved compared to where we stood a year ago. We have 72% fewer new boats and 87% fewer used boats, aged over one year old than we did this time last year and we continue to make further progress. Starting in 2010, most of our manufacturers changed how they think about the model year. And now we're in a position to build boats much more in line with retail trends.

Basically, we now reforecast with the manufacturers three times a year versus the once a year approach in the past. Accordingly, we and the manufacturers are being careful to be sure we align the supply and demand of products as we move through 2010. While we would expect that we would end up ordering more boats in 2010 than 2009, the ultimate level of our purchases will be driven by what happens at retail. As we have mentioned in the past, the expiration of our dealer agreement with the Ferretti Group and Bertram legally requires them to repurchase our remaining inventory at essentially our purchase price less cost to repair and refurbish the product. Through our sales efforts and their repurchases we are currently down to less than $15 million in Ferretti Group and Bertram product. Understanding the reality of the world economic conditions and their inability to live up to these obligations, we continue to work aggressively to sell these boats and expect to report further progress in converting this inventory into cash either through their repurchases or by us selling the product.

Turning to our liabilities, the cash we have generated through reducing our inventory, lowering our expense structure and raising equity in September, has allowed us to reduce our related inventory financing by $227 million on a year-over-year basis, bringing the line down to $102 million. As Bill noted the only debt we have is a debt that finances a portion of our inventory. As I noted earlier the tax benefit we received in January further reduced our outstanding borrowings. We are in compliance with the terms of our financing facility which provided that we could lose as much as $22 million in adjusted EBITDA as defined through the December quarter. Looking at the remainder of the year, the maximum adjusted allowable cumulative EBITDA losses are $22 million through March, 2010 and $15 million through June, 2010. For the year end calculation, EBITDA must cover our interest expense. The definition of EBITDA allows an add-back for equity compensation charges as well as an adjustment equal to about $10 million which represents approximately 50% of the equity offering we completed in September.

The required levels of defined EBITDA which I just mentioned includes the $10 million adjustment. For the December quarter, I reported EBITDA plus stock compensation was a loss of about $4.8 million, versus the $22 million loss allowed. Accordingly, we had plenty of room. Given the substantial reduction in our borrowings, interest expenses also expected to be significantly below last year's levels. With the progress we made in right-sizing our inventory, our store footprint and related cost structure, as well as our results in the first quarter, we do not expect compliance with this covenant to be an issue in fiscal 2010.

The strength of our balance sheet continues to lead the industry. Our tangible net worth now stands at approximately $209 million. We ended the quarter with a current ratio of 1.79, and a total liabilities to tangible network ratio of well below one. Both of these are among the best we have ever reported. We owned 33 of our locations which have no outstanding mortgages. We are pleased with the progress we have made with our inventory, and as we stated last quarter, if sales in 2010 are at least comparable to 2009, we would expect to end 2010 with less inventory on hand which will yield additional cash from operations. We believe we are well positioned for cash flow generation as conditions start to improve, and we benefit from our lower cost structure.

With that said, I will now turn the call back over to Bill for some closing comments.

Thank you, Mike.

You know we entered this recession as the leading marine retailer in the country and I'm pleased to say that due to our tactical efforts we are emerging with an even stronger position with streamlined inventory levels, expenses and a refined store base. While we expect the industry to remain challenging for some time, due to the actions we have taken to make ourselves stronger, we are able to take advantage of the hints of stabilization we are starting to see in the industry. We believe our same-store sales growth of 13% in the quarter and our related unit sales will outpace the industry, which the latest data suggests is down even greater. These share gains reinforce our industry-leading position and should help MarineMax to capture pent-up demand as customers return. Our strong position will also allow us to take advantage of opportunities, including exploring new markets, expanding our current brands, and evaluating new brands.

For example, as a reminder, in the last 12 months or so, we expanded with Hattersley and Cabo in the northeast. We expanded with Meredian in our western markets as well as the Chesapeake, we expanded with Boston Whaler in Fort Myers in Naples, Florida and we expanded with Azimut in the state of Florida. All of these expansion efforts came with very little cost to MarineMax and should yield great upside when the economy recovers. We are positioning MarineMax to take advantage of the pent-up demand that we believe will start to service as the economy recovers, which we may have started to see early signs of in the past two quarters. Our customers' passion for boating remains as strong as ever. And we believe that those customers who have delayed buying their first boat or upgrading to their next boat will return. MarineMax continues to differentiate itself from other dealers through our ability to teach our customers, service them, and show them how to have fun with their boats better than anybody else in the industry.

While it may be a long road to the full recovery, we believe we are well positioned with a strong balance sheet, streamlined cost structure, right-sized inventory levels as well as the leading team which is executing with a solid strategy to capture sales as the customers return. Our many competitive advantages are access to capital, and our customer-centric strategies have been and will continue to facilitate our leading position in the marine industry.

And with that, operator, we will open the call up for questions.

Thank you. (Operator instructions). We will go first to Haley Wolff with Rochdale Securities.

Good morning, Hayley.

A couple of questions. First, you talked about units being down, I think you said 14%, but yet revenue was flat in the quarter. As we go through the remaining quarters of the year, I think the ASP's probably took a bigger nose-dive as discounting got worse. So do we think about sort of ASP's being down somewhere between - - I mean units being down somewhere between zero to 10%, but SAP's getting better than they did in the first quarter and thus maybe we can see some revenue growth?

I think the estimates that are out there Hayley are in that neighborhood of down 10 for the industry. As far as our AUP's, obviously, they went up this quarter. I would expect that our AUP's will continue to go up for the reasons you said, less discounting.

So then do they go up at a faster pace than they did in the first quarter?

I think that is to be determined as we move through the next couple of quarters. Sequentially, I think the March quarter has relatively easy comps, so does the June quarter. The September quarter gets much more difficult from a unit standpoint but gets much better from a discounting standpoint.

Right. Okay. And then sort of what is your confidence that - - Bill talks about the evidence of the consumers on the sideline. What's your confidence that that is in fact the case, versus demand being brought forward with all of the discounting that we saw?

Hayley, the greatest evidence about the pent-up demand that is there is the fact that our customers are out on the water using their boats. Our events as we've mentioned in the past are up. Our get-away events where we take our customers on excursions. And we're also seeing that our customers actually telling us that, okay, I've been holding off on this next purchase, and I want that next boat. So as soon as they get a little more confidence in the economy, and maybe my business strengthens in some cases, or whatever, we're going to be back there. But we're not seeing any deterioration in our customers using their boats, and that's the greatest confidence we can have, that it is going to return. And it will return with a vengeance whenever we get some real positive signs in this economy.

So we feel very confident that customers have not lost their desire whatsoever. As far as the business, we may have robbed out of the future. When we go back and look at the big discounting that we did on a lot of the products that we sold - - primarily in the September quarter, at huge discounts, what we found is that most of them were not our customers that have been doing repeat purchases. And part of that was, is because of retail financing, and trade evaluations - - restricted some of that ability for some of them to take advantage of some of those low-priced deals. So - - a lot of it was new-found business which we think is pretty encouraging.

What is encouraging also, I know it is a very early sign, but just with boat show traffic and Bill mentioned the shows generally are trending up or flat to last year, versus down, which is what they did last year.

Okay. And then on gross margins, can you just elaborate on your comments? Are you talking they're going to improve sequentially or are you talking they're going to improve year-over-year? Or both?

For sure year-over-year, I can feel pretty confident they will improve.

I'm going to lose a bunch of sleep if it's not - -

And - - it is hard to say what's going to happen in any one quarter, but I think we've positioned our Company, I think the industry is in good enough shape from an inventory perspective, that we ought to start getting our margins back to the levels that we enjoyed. Maybe not all the way back to levels we enjoyed prior to this softening, but certainly back closer to those levels, on a March quarter or June quarter, it really shouldn't matter the quarter ultimately. Probably the biggest pressure we will have, still remaining from some of these dealers going out of business and repos, probably will be in this March quarter. And then I think we should start to subside as we go through the summer time.

And Hayley, we had our team focused in the September quarter - - a different mind set, than they were typically used to, and it was more, it is let's make a deal and the inventory has got to go at all costs and so make it happen. And I got to tell you, our team did not enjoy that. And so I think it is surprising, not surprising, but we're excited about is our team is happy to get back to selling everything that we sell, which is the experience with MarineMax, and it is not as much about price. So I think that does a lot to try to help margins. Because we've made it through the tough time of having to get the inventory levels where they needed to be.

Okay. And then just on this pent-up demand, how much of it is due to lack of retail financing and what is going on in that front?

As Bill said, retail financing is incrementally getting better. When the underwriting criteria changed pretty dramatically last January or February, if we submitted 100 deals, maybe 40 would be approved, where as before, the underwriting criteria changed, if we submitted 100, 80 would be approved. Now, if we're submitting 100, probably 60 to 65 are being approved. But to your point, I think in general, the people who are coming to look at boats now can better afford them anyhow. And so that may be skewing the 60 to 65 that we're getting a better quality person coming through the door than maybe we did prior to the underwriting tightening. But it is incrementally getting better almost as each month goes on, from a retail financing standpoint. That should help us, and also our consumers as well.

One of our competitive advantages is we have access to many more sources for retail financing than the typical dealer. So we're actually finding that we're putting some deals together for some fellow dealers out in the market that we've known a long time. And because we have a greater availability to the retail part of it, due to the size of our Company.

All right. Thank you, guys.

Thanks, Hayley.

And from Raymond James, Joe Hovorka.

Hi, guys. Just a couple quick questions. One, on your taxes, when will you be required to start to record a tax provision? Do you have to show profitability before you do that? Or - -

Basically, all material respects, Joe.

And is it just showing it on one quarter or do you have to show that on an annualized basis?

You have to have the belief and projections that you're going to make income on an annualized basis.

Okay. And then secondly, can you give the - - or give an estimate of what the closed store revenue would have approximated in the next fiscal quarter? I think it was at $11 million-ish in this most recent quarter?

I don't have that number in front of me. But I would tell you the $11 million number, probably add a couple million to it, is probably about right, Joe. Maybe $11 million to $15 million would be kind of an estimate.

Okay. And then how about for the year?

I think for fiscal 2009, the revenue from the closed stores was around $50 million to $60 million. It is actually in our annual press release from last year, it talks about the revenue from store closures that - - or stores that are no longer eligible. And my memory, I don't have that right in front of me, Joe. I apologize. It is in that $50 million to $60 million range. But it is in the September press release.

Okay. And just to follow up on the question from Hayley on - - on the retail financing. You do or don't have evidence that the criteria has changed? - - that is, focus on consumer balance sheets or FICO scores or whatever? Or you're just saying you have a better class of customer maybe coming through and that's why approval rates are up?

No. I think the underwriting criteria has relaxed a little bit. I don't want to oversell that, it is a little bit. It is hard to say specifically in which area because there are so many banks that do the retail paper. We are also having additional banks come into the industry to provide retail loans for the customers, which competition creates a better environment for us and for our customers. So we've seen lenders begin to come in, either on a regional basis, or even on a more macro level, a couple other larger players have come in.

But it is not back at the level it was.

No.

No, we're still a long ways from that.

Right. Thanks, guys.

And from Dougherty, we will go to Greg Mckinley.

Thank you. Real quickly, I'm wondering if you could care to comment on how you think inventory positions will unfold here as we head into the March quarter? I mean typically, I think that's a quarter where there isn't necessarily a lot of change sequentially. And I wonder if you could tell us a little bit about how your inventory planning this year might just start that performance versus what we've seen in the past? And then maybe also give us a little color in terms of what you're seeing at your stores quarter to date?

Our inventory planning is pretty consistent with what we see in the past, with the exception of what I had commented on earlier, that we kind of forecast now, three times a year. And so intuitively, as you head into the season, which in theory we're starting to head into the season now, which let's call it starts in March or April, we are going to want more boats. So in theory, we put in an order to get maybe more boats through March than we would normally get.

It is hard to say exactly what is going to happen at inventory because it all depends also on retail. If retail doesn't pan out the way we would like it to, we will have to talk to our manufacturers about adjusting our orders as an example. But I think normally, the idea that normally inventories build during the winter time is probably still the right way to think about things. With the caveat that we have more flexibility now to adjust our purchases than we've had in prior years.

Okay.

And as far as the stores, what we're seeing within the stores, Greg, - - this is a slow quarter for us, obviously, with Christmas and everything else and the holidays that go on. And so it is not a great measure of the activity that is going on in the stores. But what we're hearing and seeing at our stores as well as off-site events and the boat shows is that there is a - - seems to be an improvement in the consumers confidence - - as to where we're going to go.

And we're hearing more and more, even though a lot of our customers don't talk about external things, other than just boating when we're talking to them. We are hearing that they believe we have bottomed, and that the slow recovery has begun, which is positive. The other thing we're hearing is that, from people that we had perhaps quoted boats to that when we were disposing of inventory, they're now saying oh, my gosh, I missed an opportunity. And so we're telling them well there is still some here, and there is still some inventory that we have some opportunities in. And so it is a more positive attitude concerning everything, I think, is what we're hearing.

And the boat shows, which Bill mentioned, I mean is, it is encouraging.

And I probably shouldn't say this, but Monday, a couple weeks ago, you wouldn't believe the number of positive comments from our customers.

Are you willing to share a quarter to date comp trend with us?

We don't have that calculated yet, Greg.

Okay.

You're talking like the month of January, right?

Yes.

No, we don't have that calculated. We're still pulling together everything for the month as we speak.

Okay. Thank you.

Thank you, Greg.

We will go back to a follow-up question with Hayley.

Hi there. Just following up on Greg's question. You don't have January tabulated but most of the boat shows have been happening in January, right, so you're feeling pretty good walking out of those?

Yes. We will put cautionary words around that.

And interesting, I made a comment in the script, Hayley, about it is amazing to see the number of manufacturers and dealers that are not at the show this year. It is very surprising. And I mean we're seeing some major brands, other than Brunswick brands, that are not present, which we consider that to be a serious fault that the other - - or mistake that the others have made, because we're having some good results at the shows.

Well, at the New York Boat Show, wasn't there one Genmar brand there and that was it, right?

I think that's correct. I think that's correct. And there were some other major manufacturers not there. - - that speaks to the weakness of a lot of the other dealers. I mean there is still a lot of fall-out, in our opinion, that is going to occur between now and spring. But that is an opportunity. And that is - - we're now trying to get very strategic as to how we approach this.

And in that vein, when you talk about a lot of these buyers over the past year have been new to the MarineMax. I mean is that - - can you talk about life cycle, trade-up, historical patterns with these consumers?

Well, in normal times, our trade cycle is about three years, or 3.5 or so, and - - that has been stretched out over the last couple of years. And so the argument could be made that once things really begin to recover, the people that are now at year five or six are even more anxious. The old - - the longer the bear is in the den, the hungrier they are when they come out, and our customers are a lot like that too. With the new innovations, with Zeus and Axeus, and a lot of the new products like with Boston Whaler, etc. There is a new Meridian on the drawing board, well it is actually in production. And so there is a lot of reasons for customers to say I want to make the next move.

And we're actually doing things to enhance the customer experience and further separate our competitive advantages from other dealers to make it even more for a reason. We've measured our customers, Hayley, and we've got an outside firm that has been doing that, and we continue to do it. And - - the customer today, with their wallets are saying, I'd better be getting a real value and more of an experience with what I'm paying. And - - that helps us, and so those that are not delivering on this whole experience for the customers, I think are going to be even more challenged going forward, because the customers expect more for the dollars they're spending today.

Any comment on big boats versus small boats? Trends?

The December quarter is traditionally more fueled by larger boats. It tends to be more Florida driven and more to the northeast. It probably does seem like there is a little stronger retail activity above maybe 36 feet than there had been. And also stronger maybe down at the 17 to 24, with maybe some of the challenges right there in the middle, are still remaining, just kind of thinking through how the December quarter played out.

Okay. And then the interest expense for the rest of the year, we kind of look at this first quarter?

Well, you got to be careful, because the $20 million, or I'm sorry, $19.2 million that we got from the tax refund came in the first week of January, so we paid that down. So effectively, if our line was $102 million at the end of the year, you can basically take $20 million off of that. It is going to be substantially below where it was last year. Last year, I think it was $8.9 million, is my memory. I would venture to guess that something in the five to six range is probably more like the interest number, which we don't give guidance, but you guys can calculate that yourself. It's not too overly complicated, I don't think. Around that number, though.

Okay. Great. Thank you.

And there are no further questions at this time. I will turn the conference back over to Mr. Bill McGill.

Okay. Thank you, operator. And thank you, everyone, for your continued interest and support in MarineMax. I would also like to thank our team members for their extra hard work and their passion for our business and our customers, even during these difficult times. It is truly due to their efforts that we can call ourselves the leading boat retailer in the industry. And it is really nice to see everybody back having fun. Mike and I available today if you have any additional questions. Thank you, everyone.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.