MarineMax Inc (HZO) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the MarineMax Incorporated Second Quarter Fiscal 2010 Earnings Conference Call. One note that today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Kate Messmer with ICR. Please go ahead.

Thank you, operator. Good morning everyone and thank you for joining this discussion of MarineMax's 2010 fiscal second quarter results.

I'm sure that you've 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 email one to you.

I would now like to introduce the management team of MarineMax, Bill McGill, Chairman and 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'd 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 a 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'd like to turn the call over to Bill.

Thank you, Mike, and good morning everyone.

The results of our team's efforts over the past year to substantially reduce our inventory levels and improve its aging, rationalize our store count, reduce our overall expense structure, were all evident in our March quarter as our net loss and balance sheet improved significantly compared to the prior year.

From a top line standpoint, we were hoping to continue our first quarter trend of positive same-store sales. While we do believe we took additional market share, we did face the challenges of unfavorable weather in many of our markets that dampened our results, as well as the continued softness in the overall industry demand.

As you may have seen, some industry sources indicate that unit sales were down in the 20% range for January and February. While our boat shows were generally encouraging during that time, the data suggests that the marine industry recovery is likely to be gradual.

From a positive standpoint, we have been able to produce more consistent gross margins now that our inventory levels and those of the industry have come down substantially.

In that regard, the industry is in much better shape than a year ago. Our inventory aging has dramatically improved and a good portion of our sales were for more current products which carry higher gross margins.

Thus for each incremental sale, we are generating more gross profit dollars than we were in prior quarters when we had to sacrifice our margins to drive revenue as we reduced inventory.

Even with our same-store sales under pressure, we were able to further reduce our inventory levels in the March quarter, when compared to the December quarter and the prior year.

Normally as we prepare for the summer selling season, inventory builds in the March quarter, but our efforts to tightly manage inventory allowed us to make further progress in reducing during the quarter.

Along with more stable gross margins and lean inventories, we reported another sizeable reduction in our expenses. Last year, we took the necessary steps to streamline our store count and remove other expenses from our cost base and this, in turn, has allowed us to reduce our SG&A expenses to approximately $30 million run rate for the past two quarters.

We are continuing to carefully review every line item and expenditure to keep our costs down and reduce them where we can.

While some of our variable costs will come back as sales return, many of the initiatives that we implemented to reduce our cost structure are sustainable and should allow us to achieve higher operating margins as sales recover.

We now operate with 56 stores, compared to 93 in the peak of 2007. We believe we are positioned to drive more business through each of our stores, better leveraging the fixed cost base of each location.

With the failure of competitive dealers in our industry, we are seeing customers willing to travel further to our existing stores without the need for the secondary locations we had in the past.

We believe that our current footprint in our markets will be sufficient for growth as the ability of new dealers to be added is made more difficult by the tough wholesale credit environment and the recent trend from banks to require more equity be invested in the inventory for all dealers.

Industry reports are that approximately 1,400 marine dealers have failed in the past 18 months. With the many failures, the glut of the repossessed new boats has presented a challenge to us from a sales and margin perspective.

The good news is that we right-sized our inventories and the repossessions are drying up, as evidenced by our margin improvements.

We continue to believe that the progress we have made on inventory and debt reductions will pay dividends going forward.

The steps that we have taken to reduce our expenses and inventories has yielded a balance sheet with very strong ratios and increased financial flexibility.

We reduced our outstanding borrowings by 82%, or $241 million, to $53 million at the end of March. 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 comments about the quarter and looking ahead. A large portion of our sales usually comes in the key summer selling season and the June and September quarters.

Geographically, we were encouraged to see an increase in our same-store sales in the March quarter in Florida, which is a key region for us, comprising over 50% of the overall sales on an annual basis.

Weather did have an impact on our results in Florida as well as other east coast regions. So, with more normalized weather and the summer selling season and continued improvement in economic trends, we believe our business will continue to gradually improve.

So, to recap the quarter, we were disappointed in the sales and the loss of earnings. However, we're encouraged by the improved gross margins, our reduced expenses, reduced inventories, reduced debt, and a significantly strengthened balance sheet.

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

Thank you, Bill, and good morning again everyone.

For the three months ended March 31st, 2010, our revenue was $110 million, down from approximately $130 million in the prior year.

Our same-store sales declined approximately 5%, compared with the 41% 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 $13 million.

Gross profit as a percentage of revenue increased to approximately 22% in the quarter, from 15.2% in the prior year quarter.

As a result, as Bill touched upon, we were able to generate a large increase in gross profit dollars during the quarter, despite our revenue declining by 15%.

With the substantial progress we made reducing our inventory and improving its aging, we believe our margins have the potential to continue improving as we move through the seasonally higher volume months from April through September.

Our selling, general and administrative expenses decreased approximately 18.5% or $6.7 million during the quarter, as the initiatives we have implemented to reduce our cost structure allowed us to leverage expenses even on a decline in sales.

As a percentage of revenue, SG&A expenses declined by approximately 115 basis points compared to the prior year.

We have two quarters behind us, each with SG&A below the $30 million range, which is a substantial expense run rate reduction from our 2009 level.

Interest expense decreased approximately 72% to $1.1 million as a result of a reduction [in] our average borrowings on our line of credit due to the inventory reductions.

Regarding income taxes, we did not recognize a meaningful tax benefit in the quarter, as we have already carried back our losses as far as permitted by current tax law. You should not be modeling a meaningful tax benefit or expense until we return to annual profitability.

Our net loss for the second quarter fiscal 2010 was $6.3 million, or $0.29 per share, much improved from our net loss of $20.3 million, or $1.09 per share for the comparable quarter last year.

For the six months, I will only add that we are still running at a positive same-store sales rate from the strength of the December quarter.

I would also note that the tax loss carry back that we accrued in the December quarter has allowed us to report positive net income, but more importantly, it has allowed us to increase our cash inflows and further reduce our outstanding borrowings.

Turning to our balance sheet, at quarter end we had approximately $17 million in cash, which is up from approximately $15 million in the prior year.

As we have said before, our borrowings are a function of how much we leverage our inventory.

Our inventory at quarter end was $174 million, which is down more than $225 million, or 56%, for the comparable period last year and also down more than $16 million from the December quarter.

Our inventory reduction was even greater on a unit basis, as our total units in inventory as of March 31st were down approximately 61% on a year-over-year basis.

The aging of our inventory is also much improved compared to where we stood a year ago. Our improved aging is evident by the increases we are experiencing in our gross margins.

As we mentioned before, we are now forecasting our purchases with the manufacturers three times a year versus the once a year approach in the past. This allows us to ensure that what we are ordering is more closely aligned with what we are selling at retail, thereby increasing turns, reducing risk and potentially helping margins.

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 $241 million on a year-over-year basis, bringing the line down to only $53 million, as Bill mentioned.

We are in compliance with the terms of our financing facility which provided that we could lose $22 million in cumulative EBITDA as defined through the end of March.

The agreement further stipulates that we can lose the cumulative $15 million through June. For the year-end calculation, EBITDA as defined 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.

Through March, our reported earnings, before interest, taxes, depreciation, amortization, plus stock compensation, was a loss of about $7 million, versus the $22 million EBITDA loss allowed as defined in the agreement. Accordingly, we had plenty of room.

With the progress we made in right-sizing our inventory, our store footprint and related cost structure, as well as our results here to date, we do not believe we will have issues maintaining our compliance with these requirements as we move through fiscal 2010.

The strength of our balance sheet continues to lead our industry and provides us with financial flexibility that many of our competitors do not have.

I need to point out that our outstanding debt is about as low it has ever been and the equity in our inventory, a measure of debt to inventory, is also about as good as we've ever had.

Our tangible net worth now stands at approximately $205 million. We own 33 of our locations debt free.

We ended the quarter with a current ratio of almost 2 and a total liabilities [to] tangible net worth ratio of [0.57]. Both of these are among the best we've ever reported.

We are pleased with the continued progress we have made with our inventory and we continue to believe that we are well-positioned for cash flow generation and profitability as conditions start to improve and we benefit from our lower cost structure.

I would add that while April started somewhat soft, sales have been building as we have progressed through April and head towards the summer selling season.

And with that said, I'll turn the call back over to Bill for some closing comments.

Thank you, Mike.

Today we are a much more significant player in the boating industry than we were prior to the recession.

Overall, we are controlling our inventory levels and expenses and operating more efficiently as a company than we did in the past.

We have also significantly strengthened our balance sheet, which Mike talked about in detail, which provides us with a competitive advantage that will allow us to capitalize on growth opportunities as they arise.

We are reviewing opportunities as we speak, including non-competitive brand expansions, and will continue to seek opportunities which make sense for the near and long term.

Many boat retailers have failed as a result of this economic condition that we're in, which has and will only continue to improve our competitive position, especially after distressed inventory has worked its way through the system.

While it may be a long road to a full recovery, we remain convinced that as our industry conditions rebound, we will start to see sales from the pent up demand from those customers who have either delayed their purchase or the next boat to be purchased by a potential customer.

Our customers remain passionate about the boating lifestyle and MarineMax is well positioned to serve their boating needs with our superior customer service and access to capital.

We are encouraged by our increasing store traffic and our customers' excitement to be involved in our getaway events with their families. Our team and customers have not lost their passion and enthusiasm for the MarineMax lifestyle of boating and we will continue to teach them, service them and show them how to have fun with their families.

And with that, Operator, we'll open the call up for questions.

Thank you. (Operator Instructions).

And we'll go first to Hayley Wolff with Roachdale Securities.

Hey there.

Hey, Hayley.

Good morning, Hayley.

First, you talked about Florida being up in the quarter and what percent of your sales is that in the first, in the second quarter, sorry.

Annually, Hayley, Florida's normally 40%. I'm going to say --

I think you had 50%.

Normally, annually it's around 40%, a little bit over 40%. In the March quarter it would be greater than that. It may be approaching 50%, in the March quarter.

So then what areas were disproportionately down to offset Florida?

I can -- Florida was up slightly as Bill mentioned. It was up. The Northeast was up. Most other regions were down. No one was down significant. But everybody was down slightly enough to take the whole company down 5%, even with Florida and the Northeast being up.

And in the third quarter, does anything change in the geographic distribution that gives you more optimism? I assume it's more Northeast weighted.

It's more out of the Sun Belt weighted. All of our other markets do much more business during the June quarter. And I think as all those customers come out of the winter time, obviously everybody is hopeful and optimistic that they're going to return to boating and purchase their new boat or trade up into another boat.

In previous years, Hayley, before the times that we're in, normally in the northern markets there's an excitement to go ahead and get the boat and to be ready for spring. And that urgency is just not there with the customer in the current economic environment that we're in. And so, I think that's part of what we're seeing.

Weather was an impact. It's hard to get excited in the Northeast when you're having floods and severe weather, as well as Florida.

As you know, I do a lot of water skiing and normally through March I would have been out on the water, from January through March, maybe 8 to 10 times and I was out one weekend.

Wow.

It was the only weekend that it was even possible for me to get out either due to the cold weather or the wind. And a lot of our customers are in that same boat, because I've spoken with many of them that say, My Gosh, normally this time of year I'd have 20, 30 hours on my boat and I've got 2 or none.

Okay. Any progress on the sale of some of the closed dealers? Or leasing of the underlying land?

I'd say there's progress, but nothing's happened yet, Hayley. We've got interested parties on a couple of our facilities, namely the ones out in California. But nothing has been agreed to yet from us.

Same issue, they can't get financing or different issues now?

In one case there was a zoning delay to make sure that the new company's business can effectively utilize the property. And I don't think that's cleared up yet. But we don't expect that to be an issue.

I will add, based on what we're and who we're in discussions with either if we lease it or if we sell it, the sales would be above book value and the leasing terms seem to make sense.

Okay. Another question -- there's always been concern that with all the discounting from the past, let's say 18 months, has pulled forward some buyers. And if you look at the sales number this quarter, particularly compared to the prior quarter, what's your confidence that the buyer is just not very price sensitive now and isn't interested in kind of fuller priced model year 2010? They just want the discounted stuff.

Well, first of all, there are a lot of our customers that are wanting that new boat, with the Axius or the Zeus or the new (inaudible) or whatever it is, and there is a reluctance on their part right now, I guess call it fear of the unknown of what's going to happen in this country, and even though there are some positive signs.

And so that reluctance is there, but also they're wanting the new product. As far as did we pull business forward earlier, maybe a little, but not a lot because most of the people that were buying the products that we were throwing out at distressed prices almost were people that were not our existing customers. And so that's probably some good news there.

We're seeing the store traffic up, Hayley. So we're seeing some very positive signs. We appear to be working a lot more deals. There's been a reluctance, or it's a difficult task to convince a potential buyer today that if they don't buy this boat it's going to be a while before they get one because they're still believing that there's a glut of inventory out there, which is not the case.

And so, we're having to work our way through that. We believe, and hope's not a strategy, but we do believe that with the active getaway participation as this season has begun and finally let up for Florida, as an example, that it'll create even more urgency and desire on the customers, from the customers' perspective.

Retail financing is not a big issue right now. We can pretty well get it done with anybody that's got good credit. And so the banks have freed that up some. And so it's just a matter of getting everybody convinced that now is a good time to go ahead and move and that we're on the way to an economic improvement.

I think the bigger issue than the price issue, Hayley, is just the consumer confidence, just the overall how does the buyer feel.

We did sell a lot of boats in the quarter, even though our same-store sales -- there's a lot of boats that we sold, 2010s, some 2009s, at pretty decent margins.

One last question, do you have a target for inventory turns?

I can say that we used to be three turns and we would like to be back to three turns or maybe greater. Maybe greater may be difficult.

But I think with the way the manufacturers have changed along with the dealers how you look at forecasting and how they're trying to build more to what's selling at retail, which I think they can do now because of where the capacity is in the plants, I think that's helping turns right now for all dealers.

And with our current inventory levels, which are such that we should be able to get back to higher turns, there's a very good possibility the turns will come up this year. We just got a little help with positive news out there.

It's amazing at how low your inventories are. And your credit line.

Yes.

Right. We had the net credit line -- if you net out the cash was below $40 million.

Wow. You won't even need one soon. You won't have to renegotiate it.

Right.

Some of our lenders are probably listening, so we'd like them to think that we need it and keep them as a partner.

Sorry. Alright, thanks a lot, guys.

Thanks, Hayley.

(Operator Instructions).

We'll go to Greg McKinley with Dougherty.

Yeah, thank you.

Guys, could you just talk a little bit about, I know you were mentioning potential proceeds from either a sale or a lease of some owned facilities, can you give us a sense for the magnitude of that potential transaction in terms of the cash flow to the company?

The lease would be really insignificant. It would be a monthly lease. We agreed to some number of years. It would not really even show up on the radar screen with the stores.

We only have, let's see how many stores, I think three stores that we'd be considering selling right now.

And where are those located?

Two in California.

One in Utah.

No, one in Vegas. Our Las Vegas store.

The cumulative book value, Greg, of those three properties, and this is an educated guess, I don't have it front of me, is probably less than $4 million.

Oh, okay.

Yes, it's not a huge number. Most of our real estate is still in use that we own and we have no intention of selling it.

Okay. Speaking about inventory, talking with some dealers the last quarter or so, occasionally for the first time in forever I've sort of heard this notion that maybe we've swung a little, the pendulum a little too far in the other direction in terms of getting too tight with current year product.

Do you feel like that is happening to a degree? Has there been over-correction or is this where you want to be, you feel like you've got the product you need when you need it?

Greg, I would say that maybe with a few specific models, we could use some more, but overall we feel comfortable with our inventory level and the ability to be able to satisfy the consumers' needs.

I think most of our industry has gotten pretty well used to the thing that you need two or three or four of each model in a store versus sometimes, not sometimes, but almost always, product in demand commands higher margins and also creates greater urgency.

So, we do not see it as an over-correction at this point in time.

Okay.

Greg, what you may be hearing is that these dealers including some of our own locations, when you walk into them there's a significant reduction in inventory sitting in the store. But that's what's needed at retail. You may hear from some people just that it just feels low because of what their store looks like because they have these massive stores with 15 boats in them.

But it's not a bad thing, Greg. I remember times going way back where we didn't have any inventory in the stores hardly. And we were calling up customers and saying, would you bring your boat in? I'll give you a free detail and do some things for you if you'll give us something to show.

We're doing a little of that right now in specific models because we're really watching it, but supply and demand curve works. When it's in demand, that helps the whole equation.

Yeah. Mike, really quickly can you share your D&A and CapEx levels here in the quarter?

CapEx would be very small. D&A is around $2 million in the quarter. I'd say CapEx was $500,000, $600,000, something like that, Greg. I don't have that right in front of me, but it would be not have been very significant.

Okay. And then finally, you talked a little bit about a slow start to April. Can you give us some context around that? What does that mean? Is that similar to the March quarter trends or did we see additional deterioration? I'm guessing, the reason I'm asking is I would think the month of April is much more important to the fiscal year than any of the first three months of the year. And just want to understand the order of magnitude what a slow April means.

Greg, March was de-accelerating is probably the best way to explain it and we think a lot of that was the weather because it just kept getting worse and worse, not better.

And April has been accelerating. When you move from March were there wasn't a lot of activity going on where there should have been. To create the enthusiasm and excitement again, it takes a little bit to get it built back up and so therefore, I think that's the reason we're seeing more of an acceleration in April.

But this week was better than last week and was better than the week before. So, those are all positive signs.

Thank you.

Thanks, Greg.

And from RBC Capital Markets, Ed Aaron.

Thanks. Good morning, guys.

Hey, Ed, how are you?

Good morning, Ed.

I'm great, thanks.

I wanted to get your take on what's happening in the pre-owned market because it's been a lot of pretty good condition, recent model year used boats that have been floating through the system and wondering kind of what you're seeing through your stores in that part of the business?

Ed, I tell you our used boat business is doing well. I think what you're seeing in the industry, you also saw in the auto industry and the motorcycle industry, the used boat pricing was probably beaten up with repossessions, with the jump in unemployment and all that type of stuff, if you go back a year.

But the pricing on used boats has actually stabilized and is actually moving north right now.

Which is good.

Which is very good.

With our ability to make trades, the values and everything else is increasing is a positive thing, Ed. But there were some one-time opportunities there on some repo boats and things that we were more concerned about making sure that we got our inventories aligned, which we did, for the future and long term.

But those deals that were out there are gone now. There's very, very few of them if any, and of course, we look at them and if something makes sense we'll jump in and buy them as well.

Okay. Thanks. You mentioned I think that you generally feel pretty good about your ability to get the supply of boats that you need, but it sounded like there might be a couple of pockets where perhaps you could use a bit more inventory.

What segments of the market might you be seeing that?

Mostly in the 17 to 23 feet.

The boats that you would typically -- more stocking boats, boats that you would typically kind of carry more inventory or everybody would carry more inventory, in this time of the season it's just, in a more build-to-order market you're just not seeing the supply as even?

I'd say the way you characterize it is on a limited basis in some pockets, that's correct.

Okay, thank you.

Thanks, Ed.

Thank you, Ed.

Ladies and gentlemen, that is all the time that we have for questions today. Mr. McGill, I'll turn things back to you for any closing or additional comments.

Well, thank you everyone for your continued interest in supporting MarineMax and I'd also like to thank our team members for their hard work and passion for our business, especially during these challenging times.

It is truly due to their efforts that we can call ourselves the leading boat retailer in the country.

Mike and I are available today if you have any calls and thank you for your participation.

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