MarineMax Inc (HZO) 2016 Q3 法說會逐字稿

Good day and welcome to the MarineMax fiscal third-quarter 2016 earnings call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to your host, Brad Cohen from ICR. Please go ahead, Sir.

Thank you, operator. Good morning, everyone. And thank you for joining this discussion of MarineMax's 2016 fiscal third-quarter results. I am 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 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, the Chief Financial Officer of the Company. Management will make some comments about the quarter, and then be available for your questions.

With that, let me turn the call over to Mike.

Thank you, Brad. Good morning again, 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 by 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. I am extremely proud of the very strong results produced by our team this quarter. Our team is truly the best of the best.

As we've said several times, what customers desire is new, different and innovative products; and, fortunately, our manufacturers are delivering such. Clearly our ability to deliver the right product combined with our customer-centric approach is resonating well with boating enthusiasts, and together it is creating strong demand.

While the official market share data will not be out for 90 days, we believe our results are much stronger than the industry. But the industry, like us, is clearly continuing to make progress and grow, which is great to see.

Let me now recap a few highlights for the quarter. More than 49% revenue growth, driven by 44% same-store sales growth in a very material quarter, which is really outstanding. Our pretax earnings, [removing] the gain in the same quarter last year, grew 75%. We delivered $0.57 per diluted share this quarter.

All in all, it was one of the best quarters in our history as it represents our third-largest revenue quarter and the second-highest pretax profit quarter ever. What is even more important to understand is that the industry is still off about 45% from a unit perspective from the prior 20-year average before the financial meltdown.

The brand and segment expansions that we executed over the past several years has made us much larger and more profitable at considerably lower unit levels than before. We are more diversified and better able to serve a broader customer base which is driving much greater growth. As such, our ability to produce more meaningful earnings and cash flow over the coming years is very much in place.

In the quarter, we saw a robust growth across most segments and categories. In particular, we had an unusually strong quarter selling larger yachts, over 60 feet. While these products carry lower gross margins, they certainly contribute to our growing cash flow and earnings. Used boats also performed well in the quarter, yet they also carry a lower margin, relative to other products.

The bigger boat sales, combined with a meaningful increase in overall boat sales in the quarter, did pressure our consolidated margins since boats are the lowest-margin product within our revenue mix. However, we were nonetheless able to increase our comparable diluted earnings per share by over 78%.

Furthermore for the first nine months of our fiscal year, we are at a 25% same-store sales growth, which was on top of 23% last year. The 25% same-store sales growth, combined with our ability to control costs, resulted in our adjusted pretax earnings and diluted earnings per share more than doubling. Our diluted earnings per share stands at $0.70 through June, with one quarter left in this fiscal year.

As we exit the June quarter, with inventory extremely clean, from an aging perspective, and loaded with fresh new models, we are well-positioned to support additional growth and profitability as we work through this important September quarter.

The April edition of Boston-based Russo Marine to our family has gone very well, with many synergetic benefits to both of our teams, a win-win for all.

As we've said, our manufacturing partners are continuing to invest more capital in R&D than they have the past eight years, resulting in greater innovation and delivering the right products that are stimulating demand. Combined with our team's focus and approach on helping our customers enjoy the boating lifestyle, the enthusiasm and demand is growing and helping to drive our increasing profits and unit sales.

More than ever, the boating lifestyle and desire to be on the water are sought after by our customers and new potential boaters.

And with this update, I'd ask Mike to provide more detailed comments on the quarter. Mike?

Thank you, Bill, and good morning again, everyone. I also want to thank our team for an outstanding performance in the quarter. For the June quarter, our revenue grew by more than $113 million to over $345 million.

Our growth was driven by very strong same-store sales growth of 44% which is on top of 10% growth in the same quarter last year. A little over half of our same-store sales growth was driven by an increase in average unit selling price, and the rest by an increase in units. As Bill mentioned, bigger boats helped to power our growth, but we had considerable unit expansion in almost every segment and brand.

In the quarter, the reported industry data was soft for April and May. Sometimes it is hard to reconcile that data to our result, as we saw strong double-digit unit growth every month of the quarter, which was true generally across all of our markets.

Our consolidated gross margins compressed about 180 basis points to 22.8%. As Bill said, the decrease is largely due to the strong increase in bigger boat sales which traditionally carry a lower margin. However, the positive is that this drives dramatic gross margin dollars and ultimately earnings growth.

Generally, we are not in a discount environment. Late-model used boats are still in short supply. We have an improving mix of newer models in our inventory. These are all factors that will lead to considerable annual margin improvement over time.

Selling, general and administrative expenses on the surface reflect an increase of $13.3 million. However, you need to eliminate the $1.6 million real estate gain that we called out in last year's June quarter. Doing so results in a comparable increase of $11.7 million which represents good operating expense leverage in the business.

We remain committed to controlling costs, and believe we can effectively leverage our expense structure as we move ahead.

Interest expense increased modestly due to an increase in borrowings to finance our inventory. For the June quarter this year, we recorded an income tax provision of $9 million compared to no income tax provision last year. As we've discussed the past two quarters, MarineMax returned to providing an income tax provision September 30 last year.

However, we are not expecting to pay significant dollars until we absorb our beginning NOL of about $50 million in other deductions. We expect that our fiscal-year tax rate for the expense will be approximately 39%.

For the quarter, removing the gain last year and applying the same tax rate in both periods, our diluted earnings per share was $0.57 this year compared to $0.32 last year, an increase of more than 78%.

Regarding our first nine months, I will make only a few comments. We are very proud to have produced same-store sales growth of more than 25%, which is on top of 23% last year. Absent the gain last year, pretax earnings have more than doubled the $28.5 million. And our earnings per diluted share also more than doubled to $0.70 per diluted share. All very strong results, and certainly much better than the industry overall.

Onto our balance sheet, at quarter end we had about $56 million in cash. Keep in mind we have substantial cash in the form of unlevered inventory. Our inventory was up about 19% year-over-year to $307 million, yet it's down 11% sequentially from the March quarter.

Part of the planned increase in inventory is due to our expectations regarding our ability to outperform in an improving industry, combined with the need to have new models in stock that we did not have last year.

Overall, our inventory increase is less than our same-store sales growth, resulting in a planned continual improvement in inventory turns. The rise in property and equipment year-over-year is due primarily to the marina we acquired in Pensacola, Florida, which is already yielding better results than expected for that marketplace; plus the Russo acquisition in the Boston area that we completed in April.

Turning to our liabilities, our short-term borrowings were about $177 million at quarter end, which was up primarily due to the additional inventory and the timing of payments.

Our customer deposits, while not a perfect indicator of the future due to the size differences of deposits and the impact large trades can have, continue to be up substantially year-over-year, now up 33% over last year. We ended the quarter with the current ratio of 1.66 and total liabilities to tangible net worth ratio of 0.84. Both of these are very strong balance sheet ratios.

Also, our tangible net worth is now up to approximately $292 million or $11.81 per diluted share. We own over half of our locations which are all debt-free, and we have no additional debt other than our inventory financing.

Turning to guidance, we are again raising our earnings per share guidance for the full fiscal year. Based on our performance thus far in fiscal 2016, and our expectations for the balance of the year, we now believe we will deliver same-store sales growth for the full fiscal year of approximately 20%, with the potential to exceed that if sales continue to outperform.

We now expect diluted earnings per share to range from $0.86 to $0.90, up from our previous guidance of $0.68 to $0.75. This compares to our adjusted, but fully taxed, diluted earnings per share of $0.47 in fiscal 2015. The adjustments to 2015 eliminates certain gains and the deferred tax asset reserve reversal. We will continue to update guidance as dictated by our performance.

Furthermore, while we will plan to provide guidance for fiscal 2017 when we report our September results, I wanted to provide some early perspective on growth expectations for the coming year.

Most in the industry feel that mid-single-digit unit growth for the foreseeable future is reasonable. If that is the case, we would typically outperform such growth, and likely see a modest increase in average unit selling price resulting in same-store sales growth in the 9% to 10% range. Of course, we're going to challenge ourselves to do more, but it's not prudent to expect more than that until we advise such.

Lastly, I will comment on current trends. As we started the quarter, our backlog continues to be up significantly over last year, and traffic and interest in new boats remains strong. In this quarter, July and September are similar in size, and August is usually the smallest as families get ready for school.

We are well-positioned with improved inventory, and the consumer is energized about boating. We are up against a 17% comp in this quarter last year, and we currently expect July to finish ahead of last year. However, we have much work ahead of us in the rest of the quarter.

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

Thank you, Mike. What a great nine months this team has produced from a sales, earnings, and cash flow perspective. We're seeing newer models with innovative designs and technology hitting our stores, and they are selling well. As we look ahead, we understand the consumer is craving new desirable features such as joystick controls, improved electronics and creative designs, and innovative materials that are resonating with the consumer, and the manufacturers are delivering.

We also would expect to build on our market share expansion, given our increased depth and breadth of product along with our proven approach of delivering the boating dream to our customers. We will continue to pursue and look to strengthen our geographic presence in key boating markets as we maintain our disciplined acquisition approach through targeted acquisitions.

We will remain patient, and are focused on strong cash-flow-producing companies that sell industry-leading brands. We will continue to change people's lives and enhance their boating experience, and stay committed to building long-term value for our shareholders by consistently exceeding our team's and customers expectations.

And with that, operator, we'd like to open up the call for questions.

(Operator Instructions) Steve Dyer, Craig-Hallum.

Good morning, guys; nice quarter.

You know, you guys continue to really outperform the industry pretty significantly, and I was wondering if you could kind of rank the factors, whether it's Brunswick exposure or your geographies or your brand expansion. What is sort of driving that delta?

I'd say, Steve, the primary driver is the customer strategy that we have. You know, we get involved with them, with events. So, you know, we are in the Bahamas. We've got a Nantucket event for our Azimut owners that's occurring this weekend. We took them over to Italy. We are up in Lake of the Ozarks.

So we're involved with our customers. And, you know, you've heard us say that we change people's lives through boating, as it changed Mike and ours life as our kids grew up. And it continues to do so. But I'd say that's the primary driver.

Obviously, having the right product is important, and having new models that resonate well with the consumer. And you've heard us say in past calls that the lack of new product over the downturn period really hurt our Company. And we are starting to get them now, and you're seeing it in the results. And so we're on the manufacturers, and they are delivering the new products and what our customers want. But that's a big driver.

The brand expansions that we've done, Ocean Alexander is delivering well for us, as well as Azimut and Galleon and, of course, Sea Ray with their new products. So it's a combination of many things. But the stars have really aligned for us at MarineMax. And most of it is it's about time. We now have what we need to deliver to our customers who have been patiently waiting for their new products.

That's helpful, and that kind of leads into my next question. What, I guess, maybe what inning do you think we are in sort of the Brunswick refresh cycle? And as it relates to inventory, do you feel like you're able to get enough of everything you want, or could you do more if you had certain product?

I think we've all said, Brunswick said and we've said, if you take the Sea Ray product line, roughly one-third was due to be refreshed in our fiscal 2015, so last year. Not all of that got refreshed and got delivered to us in time where we could actually sell boats in 2015. Some of that is coming here in 2016.

And then another one-third was supposed to be done here in 2016. I'm using general round numbers. But, again, we're not going to get that full one-third. So I would say we're certainly less than halfway through the initial refresh in terms of what we can get into our stores and deliver.

But what's encouraging is the cycle is not going to stop. And I can't speak for Brunswick, but I know from what our planning is with them, once these boats that have been refreshed come in and are with us for a couple of years, there's a whole another set of models that are going to be coming in the not-too-distant future. So they're getting back to the cadence of new model development that they were on for years and years, and what made Sea Ray Sea Ray, quite frankly, and what made Brunswick strong in the boating business.

So it's not a one-and-done; it's a constant evolution of getting back into the right cadence of new product development. And I would say probably everybody in the industry is moving in that direction, which is starting to reflect good unit growth for the industry overall as well.

But to Mike's point, Steve, we could have used many, many more of the new products, such as these new SLXs that are coming out from Sea Ray and the SPXs that are new and the new 420, 42-foot Whaler and the larger Scouts.

So the demand is exceeding supply right now on the hot new models. So as they continue to ramp up and to get us the new models, I think we'll see even greater success.

Great, that's helpful. I'll hop back in the queue. Thank you.

Michael Swartz, SunTrust.

Good morning; this is Anna on for Mike. Thanks for taking my questions.

So first of all, the full-year guidance would imply for 4Q incremental margins in the mid-single digits versus the typical midteens return. Why should that decelerate or are there any costs we should be thinking about that could limit incremental margins in the near term?

Yes, it actually doesn't. It all depends on what you think the same-store sales number is going to be.

When the year started, we told everybody to expect same-store sales growth of around 10% and flow-through of around 12%. Our guidance has something like 12% flow-through in it, and I think it's 12% to 13% to 14% same-store sales growth. So we did reduce the same-store sales growth, just not knowing did we pull some of the business from September into June.

Let's get through the quarter of September to see what really happens from a sales perspective. With the backlog being good, with trends being good, there's good trends continuing from June into July. But the leverage in the Company is more like 12% in our guidance.

Got it. And then are you seeing any changes in the credit environment?

So on the retail side of credit for our customers, there continues to be more lenders interested in marine retail lending and getting into the industry. Quite frankly, as automotive spreads decline and they're difficult to make money, and they're jumping into marine. So there's more people than ever, probably than ever, lending in our industry, which is great.

Keep in mind that marine retail loans always stay on the banks' balance sheets. They never securitize them. So they are underwritten maybe a little differently than something that gets securitized. But I'd say it's a continuously improving retail lending environment and has been for a while.

And wholesale is going very well with Wells.

Their bank group, yes.

The bank group. So everything is fine on the wholesale and retail financing aspect of our business.

Got it. And then lastly, could you give some more color on the backlog, particularly as it applies to mix?

There's nothing in the mix that jumps out as unusual. I did not really study that in preparation for the call. But nothing jumps out as unusual. It's not driven by a bunch of used boats. It's not driven by a bunch of really big boats. It's just a healthy mix of business.

And probably the best thing to think about from a color perspective is looking at our customer deposit line, which I know we say don't read too much into it because it can be lumpy. We typically don't give what percentage our backlog is up or down, but the backlog continues to be healthy. Sales trends continue to be healthy. The industry is doing well right now.

Got it. Thank you very much.

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

Good morning, guys. Great quarter.

A couple of follow-up questions here. One just on the guidance commentary you had there, Mike, the 12% to 13% or 14% comp and 12% flow-through. Is that speaking specifically about Q4, and can you just remind us what your full-year comp expectation is?

Yes, so for fiscal 2016, which is only one quarter left, we said approximately 20% same-store sales growth. The only way you'd get there, if we're 25% through June, the only way you can get there is some growth below 25%.

And so I think it's like -- it's 15% or something like that, is our same-store sales growth, with the flow-through similar to what we gave when we gave the full-year guidance. Trying to be reasonable, conservative, all that stuff, I think at the 12% range for the fourth quarter gets you into the $0.16 to $0.20 range for the quarter.

Okay. And then just looking at the customer deposits and kind of triangulating that into the backlog, the customer deposits up 34% year over year despite the very strong yacht business here in Q3, can you just talk about how much of those customer deposits are for yachts or higher-ASP boats to be delivered in the September quarter versus fiscal 2017? And any commentary just generally on how July has fared thus far?

Yes, I don't have specific answers for you, Jimmy, on that. I can tell you that it's great to have a 33% growth in customer deposits following the June quarter. Clearly, larger boats tend to drive bigger dollars, although we take deposits on everything. So even a bunch of smaller deposits add up to nice growth.

I'd say, I'm going to say the majority of the deposit line will deliver in the September quarter. There certainly will be some going into December and probably even some into the March quarter. Our backlog when we started July, for July was strong. July will finish ahead of the prior year.

We're up against a 17% comp. I don't know if we ever broke down how that comp was last year. But June -- or I'm sorry, but July and September are the really important months. So you can assume we had a decent July last year, and we're going to comp above that this year.

So trends are still going reasonably well, but we have a lot of work to do. We are not a business that has a backlog of 90% of our sales for the quarter already. We've got to go create it. And so, we try to be pretty reasonable in our expectations and update guidance if we can outperform from a sales perspective.

Understood. I just have two more here. One, kind of a big-picture question. If you look at your customer demographics that have contributed to the unit growth, would you say your active customer base is expanding, or is this more a function of new models triggering your existing customers to trade up?

And I guess I ask that in part because I'm curious to know if sort of the total customer fleet is expanding such that we ought to see an uptick in some of your ancillary revenue sources, the higher-margin service storage and whatnot.

It's definitely expanding, Jimmy. There's been a little shift in the demographics, with -- middle-class America is not active right now in our business. There's some, but not like it was. But the upper-middle class is very active right now, people that their income is $150,000 and greater. And, of course, the high-net-worth individuals are extremely active right now.

So there's been a shift, but a lot of it is new business. We still are getting a lot of customers trading up, but those customers are able to do it. And, of course, as we spoke earlier, the financing part of it is getting about as easy as it's ever been.

So it's very positive. And we're seeing the customers are very active out in our events, which is a great sign. The industry says that boating participation is up. So there's a lot of very good signs right now.

You know, if you get out on the water in almost any of our markets this weekend or last weekend, what you'd see is boating is extremely active. And the shift to new models and new products with more innovation, etc., gives people reasons to say, hey, let's go get that new boat. And that's what we're seeing.

That's very helpful, Bill. Just lastly for me, I think, Mike, in some of your comments, you signaled that if the industry continues to grow at this mid-single-digit unit clip that you could drive same-store sales of up to 10%. But the industry, of course, if we think about 2017, the industry isn't going to be up against a 42% two-year comp stack.

So isn't it reasonable to think that your same-store sales could actually be weaker than the industry growth, just given the very challenging comparisons that you'll be up against?

Well, obviously, good question, Jimmy. And if I hadn't been sitting in this chair for 19 years, including all the very good years from 1998 through 2007, where we produced year-over-year, over year, over year, double-digit same-store sales growth outperforming the industry every year, I would maybe be concerned. But I'm very confident in our team's ability to outperform the industry, even with what we're up against.

It's certainly not easy; it's a challenge. But our team continues to rise to that challenge. So I don't think that's -- if the industry grows mid-single digit, we'll grow more than the industry, and then we'll have the benefit of average unit selling price growing. At least we have every other year that we've been around. So, we feel pretty good about that growth range.

We're giving our customers what they want and what they desire, which is a lifestyle that they can enjoy with as few hassles as possible. And that's been our strategy since day one, and all the surveys and interactions that we do with our customers keep saying the same thing, Jimmy.

And that is, thank you; you've given us something we can do as a family, in a lot of cases, or we can do with our friends that's not only an escape, but it's a recreation that everybody can enjoy. And when the mother of the household comes up and says to Mike or I or to Chuck or Brad or our regional presidents or whatever, thank you, I've got something I can do with my husband and our kids, and the kids are saying, thank you, I've got something I can do with my parents, that makes it pretty easy.

Not all of our industry does that very well. In fact, most of it doesn't do it very well. We do. We measure customer satisfaction with Net Promoter Score. And there was a book written on it called The Ultimate Question. And if you look at that book and you look at what they call world-class companies, we outperform most in the book and would be at the top of the list.

So we not only deliver a great recreation, we really take care of our customers. And that's a focus that our team has as foremost. And it is proven to work for us. And I think it will continue. And I'd be very disappointed if we don't continue to significantly outperform the industry, as we have this time.

I mean, 44% same-store sales growth, when it's believed that in revenues, the industry was maybe less than 10%, I'd say that's outperforming, and we'll continue to do that.

Very helpful, and congrats again to you and your team, Bill.

Thank you, Jimmy, we appreciate it.

Thanks, Jimmy.

And that concludes today's question-and-answer session. Mr. McGill, at this time I'd like to turn the conference over to you for any additional or closing remarks.

Okay, well thank you, operator. And in closing, I'd like to thank all of you for your continued support and your interest in MarineMax. And you know, especially I want to thank our team for focusing on their fellow team members and also upon our customers.

Mike and I are available today if you have any additional questions. Thank you.

And this concludes today's conference. Thank you for your participation. You may now disconnect.