MarineMax Inc (HZO) 2013 Q2 法說會逐字稿

Good day and welcome to the MarineMax, Inc. second quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brad Cohen at ICR. You may begin.

Good morning, everyone and thank you for joining this discussion of MarineMax's 2013 fiscal second quarter earnings call. 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, extension 10100 and she will fax or email one to you right away.

I would now like to introduce the management team of MarineMax, Mr. Bill McGill, Chairman, President and Chief Executive Officer and Mr. Mike McLamb, Chief Financial Officer of the Company. Management will make some comments about the quarter and then will be available for your questions. Mike?

Thank you, Brad. 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 risks and 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'd like to turn the call over to Bill.

Thank you, Mike and good morning, everyone.

We are pleased with our 12% growth in same-store sales, which is up against a very strong comparable from the prior year of 26%. Our sales growth came from significant increases in both new and used boats in our Southern markets. We attribute this to a combination of solid execution by our team, along with ongoing training and coaching and the broad appeal of our products which we now offer.

What was eye-opening in the quarter was the significant impact we encountered from weather, which gave rise to truly bifurcated results in our sales and even more significantly to our earnings. Like all of our teams around our country, our teams in the Northeast and Midwest worked very hard to create excitement for boating during the quarter, but normal spring weather has not come on time and as a result, our normal spring launch is definitely behind previous years in those regions.

As we have previously discussed, it is very apparent to us that the industry's recovery is underway and that the industry growth in units will be much greater in the future, but we have also noted that the steps along the way can be susceptible to headwinds.

Based on this past quarter and with the wide-ranging impact of Hurricane Sandy last year, these challenges will not only be economic but weather will continue to play a role as well. The lingering effects of Sandy and the persistence of cold and blustery weather in our Midwest and Northern regions of the country depressed both sales and margins during the March quarter.

For us, weather is not an excuse; it's an unfortunate reality. While our Southern regions also experienced cooler weather than last year, we were able to significantly overcome such effects and generate very strong sales and unit growth. This makes us believe that, as the weather turns in our other markets, there should be pent up demand for us to capture in future quarters. We recognize that certain industry data points have turned negative, but our results clearly show such trends are weather-related.

In trying to overcompensate for the pressure on sales in the quarter, we increased our sales and promotional efforts and became more aggressive on the pricing front. While many of our initiatives in this regard were affected, they came with increased costs. These costs were proportionately higher than our resulting sales, which fell short of our expectations.

Seasonally, March is typically as big as January and February combined. This year was no exception in our Southern markets, but we anticipated delivering even more revenue in the quarter in our Northern and Midwest stores. So, not only did the weather impact the volume of units, but also our ability to actually deliver those boats.

Operationally, in March we typically de-winterize and launch customer boats to a much greater degree than we did this year. Of course, this resulted in less service revenues, and as one would expect, along with increased inefficiencies in our service business, both of which depressed margins and added to a less efficient expense structure.

As we reflect on the quarter, and in particular the Southern markets where we were less impacted by the weather, we saw the continuation of trends that we've commented on in the last several calls, namely strength across essentially all product categories that we sell, with a skew towards larger boats. It again proves insight that this recovery appears to have staying power.

Let me also comment further on our margins. Our product margins continued to hold up well, albeit in our Southern markets during the quarter as we attempted to drive sales in North and Midwest. We are still behind historical averages of about 75 basis points. While we continue to outpace the industry, based on the latest data, we still believe our size, scale and breadth of products will allow us to capture a disproportionate share of the market as recovery continues.

We also continue to see improvement in both used boat pricing and sales. This is a positive trend, as it supports a base of customers that can either trade in their current boats for new ones or it can serve as an entry point into the industry for new customers that can lead, over the long-term, to a sustainable driver of new boat sales for both MarineMax and the industry overall.

Looking at our inventory, we have the right products and the broadest selection of boats that we have ever offered. This helps us to complete sales and enables us to target even a broader boating audience than before. That said, we're going to remain vigilant and work hard with our manufacturers to ensure we are closely monitoring sales levels in this June quarter as an effort to maintain an appropriate inventory level.

We will continue to work to stimulate demand and to capture more than our share of sales in each of the markets. However, we do not see the need to be as promotional given the historical seasonal strength and renewed evidence that the industry is recovering.

While we cannot control the weather or the economy, we can control many facets of our business. That's what we are focused on in order to drive our cash flow and return the Company to sustainable annual profit levels.

With that update, I'll ask Mike to provide more detailed comments on the quarter. Mike?

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

For the three months ended March 31, 2013, our revenue increased more than 11% to just over $160 million. Our same-store sales increased by about 12%. Based on available industry data, our March quarter new boat unit sales for the segments we are in are above reported industry trends. Once again, like the December quarter, sales were stronger in our larger product, but we are continuing to see a broader distribution of sales across all of our categories.

Geographically, due to the weather, the quarter had two completely different results. Our Southern markets with more normal weather patterns were very strong, with boat revenue growing by more than 36%. Keep in mind this is on top of very strong double-digit same-store sales growth last year during the March quarter. In these markets, the Southern markets, all categories of product performed well in both units and margins, including the Sport Cruiser segment, which has been one of the last segments to recover.

Our Northern and Midwest markets, however, were down about 26% in revenue and we also experienced a decline in margins as our team tried to kick-start some momentum. The decline in revenue in our Northern markets largely came in the seasonally important month of March.

Gross profit increased 9.5% to $37.7 million for the quarter. Gross profit as a percentage of revenue decreased slightly to 23.5%. The decrease in gross profit as a percent of revenue was primarily the result of selling an increased number of larger yachts in the quarter, combined with the overall increase in boat sales. Additionally, the efforts of our Northern stores aggressively going after business by lowering margins and the lack of de-winterization service revenue also impacted our consolidated margins.

Our SG&A increased $5.1 million to $36.1 million. As Bill mentioned, a significant portion of the increase in SG&A was the increased promotional efforts from both a marketing and sales perspective.

We also experienced an unexpected and significant increase in health benefit costs. This increase was approximately $1 million in the quarter and was due to a flurry of unusually large claims. We are self-insured with individual and aggregate stop-loss limits.

As expected, we also experienced an increase in the costs of other insurance, which we have experienced for the last three quarters. However, in those three quarters, we were able to overcome the increased costs of the other insurance with improved leverage, which we did not achieve this quarter due to other inefficiencies. We anniversary this increase in insurance effective May 1st.

As Bill also said, we are certainly not happy with the lack of leverage in the quarter and have curtailed the promotional efforts we implemented. We constantly review our recurring costs and are looking at areas that could be further reduced to help ensure we improve the leverage in the Company's structure. We are concerned about our recent spike in healthcare costs as it's an unusual trend that is difficult to predict, but we are monitoring it closely.

Interest expense remained roughly flat for the quarter.

The Company had tax expense of $40,000 for the quarter, compared to a tax benefit of $116,000 last year. Our effective income tax rate will remain essentially zero for the near-term, primarily due to the availability of substantial net operating loss carry-forwards, which are fully offset by a valuation reserve.

Our net income was $344,000, or $0.01 per diluted share, compared to net income of $2.3 million or $0.10 per diluted share last year.

On to our balance sheet. At the end of the quarter we had approximately $30 million in cash, plus a significant amount of liquidity in the form of unlevered inventory. Our inventory level at quarter-end was about $231 million, which is up 12% from last year.

The increase is due to a handful of factors, such as the expansion of the brands we have added; the acquisitions we completed over the past several months in Orlando, Daytona, Connecticut and Rhode Island; an increase in products in our charter fleet in the BVIs; and lastly, the increase in boats that were contracted and ordered for customers but we were unable to deliver in the Northern and Midwest markets for the March quarter.

Turning to our liabilities, our short-term borrowings were about $141 million, up from the prior year, largely due to the increase in inventory. While we always say it's hard to get a good sense on trends from our customer deposits, the bottom line is that they remain very strong and are basically at levels more associated with a much larger MarineMax.

Our balance sheet is strong and will continue to strengthen with increased cash flow as the recovery takes hold. We ended the quarter with a current ratio of 1.50 and total liabilities to tangible net worth ratio of 0.96. Both of these are very strong ratios. Our tangible net worth stands at more than $200 million. We own about half of our locations, which are all debt-free, and we have no debt except for the inventory financing that I mentioned.

Regarding our April sales, it's important to understand that it is the smallest month of the three in the quarter and it's not a great barometer for the full quarter. The weather trends we saw in the March quarter have, unfortunately, continued into April. Despite those weather trends, we expect a strong April, partly due to the sales that we were unable to close in March that will be captured in April.

Additionally, geographic trends based on contracts written are beginning to level out, which is encouraging. However, trends at our Southern stores remain stronger than our other markets. Our Northern and Midwest stores are actually very busy on good weather days. We just need more of them. We will improve our levels of solid execution, including an enhanced focus on costs, to ensure we continue to drive improved performance.

With that update, I'll turn the call back over to Bill.

Thank you, Mike. You know, as we stated, while disappointed with the lack of leverage, we are very encouraged with the industry trends. Although the industry is going to have some volatility quarter to quarter, sustainable improvement in the recovery over the long-term is underway. As warm weather begins to arrive, our Northern and Midwestern stores should be very busy with spring launches, with sales and also deliveries.

MarineMax continues to be the one-stop solution for all of our customer boating needs. We have put in place a broad assortment of premium brands. We have an outstanding and passionate team to serve our customers and with our strong balance sheet we have made a significant competitive advantage that will continue to result in ongoing market share gains.

I do want to thank our team for fighting through the weather, and more importantly, for taking care of our customers so well. Our net promoter score, a reliable measure of customer satisfaction, incrementally improves each quarter above our already world class levels. Our team provides our customers with a boating lifestyle that maximizes their time and experience both on and off the water. Boating with MarineMax changes customers' lives by uniting them with their self and with others.

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

(Operator Instructions) Jimmy Baker, B. Riley & Company

Good morning, guys.

Good morning, Jimmy.

Good morning, Jimmy.

Could you just maybe give us some examples of promotional activity that your booking and selling expense is, versus pricing that would show up in product margins? Any color there would be really helpful, particularly as it pertains to maybe how you'd back off that spend going forward.

Jimmy, the promotional activities would not show up in product margins, with the exception of us being more aggressive to try to stimulate activity by being more aggressive price-wise. That would affect margins.

Yes.

Everything else is down in our SG&A. So more off-sites, even greater spend at some of the boat shows during the season, which this is the quarter with all the boat shows, SPFs for our sales team members and contest for our sales teams - all of that would be down in SG&A.

And we did quite a few more promotional activities, in-house events. We went to a few more boat shows than we had historically trying to drive business, especially in the Northern markets, and so that's a lot of the spend, Jimmy.

Okay, thanks, that's helpful. And then just trying to kind of drill down further into your commentary about what you're seeing here in April and then also your expectation for a release of some pent up demand in Northern markets. So, given the easier comparison, is it fair to assume that we should expect your same-store sales to accelerate here in the third quarter, in your fiscal third quarter?

Well, we're just into -- we're through April, and May and June are larger than April are. But we're quite pleased with what's been happening in the Southern markets. The spring is just beginning in our Northern markets. In fact, we had snow in Minnesota a couple of days ago and the ice is still out on the lakes, etc.

But we feel pretty encouraged by not only what we are seeing in those markets that we have the ability to be able to get customers out on the water and make deliveries and that type of thing, but we're also encouraged by what we're hearing from the consumers when we do these offsite events and boat shows. And we spent more -- back to your first question, we spent more at boat shows and offsite events and that type of thing. The good news about that is that the prospects that our team are working is greater than we've seen in a lot of years. And so we believe the return will be there. It just wasn't there for the short-term.

And maybe you could just talk about what you've seen through the first four months of the calendar year in terms of strength by mix or talk about maybe in terms of foot range, where you're seeing the most strength and what drove the sales growth?

Yes. I would tell you, obviously in the South, I don't think we have a category that's down. Every category is up in the South. It does seem to be maybe a little stronger the bigger the boat, I guess. But that Sport Cruiser segment, which is so important to the industry and to us, we commented that we saw growth in the December quarter, actually really good growth in December quarter, and in the South we have pretty good growth in Sport Cruisers.

I don't have all of my breakdown of units from the North and the South right now. In the North, our units are down, as you'd expect with the revenue being down. There doesn't seem to be any one area that would be down worse, like yachts aren't down lower than sport boats. It just seems like almost every place is down, but units aren't quite down as far as revenue's down in the North, but it's down a fair amount up there.

Okay, just a last one for me and I'll pass it off. Just in terms of adding lines to your recently acquired locations, is that something you've been able to do ahead of this selling season? Or is that process kind of more ongoing?

I'd say it's ongoing. We have added lines where it was appropriate to the acquisitions that we've made. We're also expanding lines that are new to our Company within the regions that were not just acquisitions. And we're very pleased with our line of lineup of product right now and the opportunities, whether it's ski boats, or aluminum pontoon boats, or some fishing boats, high-end fishing boats or our Azimut.

Okay, thanks a lot, Bill. Thanks, Mike.

Okay. Thank you.

Thanks, Jimmy.

(Operator Instructions) Mike Swartz; SunTrust.

Hey, good morning, guys.

Good morning, Mike.

Good morning, Mike.

Hey. I just want to touch on your commentary around some of the boat orders that you had contracted for but were not able to deliver in the March quarter. I would assume we should start to see those revenues flow in, in the June quarter. But could you maybe provide some commentary around or maybe even quantify what that impact would be?

Yes, I'd tell you it's close to $10 million of boats that were ordered, paid for, and did not deliver in the Northern markets. When I say paid for, we paid for them to get them here from the manufactures and were due to deliver.

And they would have delivered if we'd have had the weather to do it.

So another way to put it is you took the cost but didn't book the revenue.

Well, not costs. It's inventory until it sells. So we have the inventory, right. And some of those boats I know have already delivered in April; some of those boats are still in markets that we're waiting for some normal weather to deliver, but obviously they're going to deliver in the June quarter. But they haven't all delivered yet.

Okay. And then, just with some of the comments around the Northern markets and the Northern retail locations. I mean, do you -- I guess what's your comfort level around having the appropriate inventory in place in some of those stores as the weather starts to turn? I mean, are there any chances that you're going to be caught short on having particular models in stock?

We've put a lot of planning and effort into making sure that, to the best we can do it, that we have the proper inventory in the stores to support this spring, up north in particular. And we think we're in great shape there. If we're not, it's not that difficult for us to move it from some other stores, which is one of the advantages that we have over a lot of dealers out there. And that is if we -- as an example, if we have a particular boat that we sell out of in the North because it gets really hot, guess what. We can go pick one up from Florida or from Texas or wherever and make that demand and still get the people out boating in time for the wonderful season up North.

Okay, great. And then maybe you can -- a final question you can comment on some of the locations that were impacted by Hurricane Sandy. I mean, are they back up and running and are you still having incremental costs come through with getting those kind of up and running?

They're up and running and we're doing repair work, best we can with the weather, because they've been challenged with weather as well. And there're still some infrastructure issues in the North. As an example, customers that -- the marina that they normally would keep their boat at isn't recovered.

And also, it's been a lot slower getting checks in customers' hands than we anticipated. The insurance companies have really held onto the checks a little longer, even though in a lot of cases they've already settled with the customers as to what that check's going to be. They've just been slow coming.

But we're starting to see customers walk into the showroom now and say -- I've got my check, I'm ready to go. What's really good news is most of them have already picked out the next boat they want or what they want to do. So we anticipate that it'll be good. It's a little slower than we had hoped and we think some of that is the weather, not just Sandy.

Yes, Mike, and we did have additional costs in the quarter that went to the expense, the SG&A line, and some increased inefficiencies, if you will, or I'll just say inefficiencies. The dollars aren't massive, but they're just a contributing factor to our expense increase.

And you know in all your Northern stores, in some cases they've got 400 or 500 boats they've got to get out in a few weeks and as far as de-winterizing them and get them ready for the customers and get them into their marinas and out rolling. And we have the team in place to do that and when you're not able to do that, because you're scared it's going to freeze the next weekend or whatever and so you don't dare de-winterize the boat, it's hard to offset some of that extra expense you've incurred.

Okay, great. Thanks for the color, guys.

Thanks, Mike.

Okay, thank you, Mike.

(Operator Instructions) Peter Mann, Dougherty.

Good morning, guys.

Good morning, Pete.

Good morning, Pete.

A couple of questions. You talked about price concessions and a few other things in terms of promotional activity on the boats. Could you give -- do you have any idea how much that would be quantified in terms of gross margins? Is it 100 basis points, 200 basis points?

Yes. If you look at the pricing differential between our Northern stores and our Southern stores just kind of as a barometer and then also look at the de-winterization revenue, which affects the service part of our business, so service volume and service revenues, our estimate is it's over 100 basis points of margin in the quarter. There's a -- and I'm just using, just as a barometer, Southern margins versus North. The Southern margins are typically lower than the North, so there's a chance it could even be a little higher than that, but that just gives you a basic read on what the margin impact probably was.

Okay, great, thanks. And then looking at the inventory, are you guys comfortable with kind of the new versus used inventory? Are we kind of back to kind of historical norms in terms of the balance between those two?

Yes. Peter, we're -- it's more like normal times in the used boat market out there. Actually, prices have pretty well returned to historical levels before the Great Recession. And additionally, we're comfortable with the inventory. We've got some inventory that has a little aging on it, because you always have that, but at end of the day it's much less aged than it was a year ago. And so we've made a lot of progress there.

With that, you know, as inventory ages, you give up a little bit of margin. That's kind of what happened to some extent in the North. We had some aged product that we had lowered margins on and we didn't -- weren't able to offset a lot of that with new sales and higher margin business when we didn't have Spring.

Got it. Great, thanks. And then finally, Mike, I'm not sure if I heard this correctly. But did you mention that in terms of just total revenues the Northern markets were down 26% year over year?

Yes. North was down 26% and I think I said the South was up 35% --

35%, yes.

-- or 36%. Yes.

Got it. Great. Thanks a lot, guys.

Thank you, Peter.

Thank you, Peter.

And that concludes our question and answer session. I'll turn it back over to our speakers for any closing remarks.

Well, thank you. And in closing I'd like to thank all of you and for your continued interest in supporting MarineMax. Mike and I are available today if you have any additional questions. And thank you for your belief in MarineMax.

That concludes today's conference call. We appreciate your participation.