MarineMax Inc (HZO) 2017 Q3 法說會逐字稿

Good day, and welcome to the MarineMax, Inc.'s Third Quarter Fiscal Year 2017 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brad Cohen at ICR. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Thank you for joining this discussion of MarineMax's 2017 Fiscal Third 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 (727) 531-1700, and ask for Linda Cameron and she will email one to you right away.

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

With that, let me turn the call over to Mr. Mike McLamb. 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 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'm very proud of our team's effort in driving improved margins and unit sales growth. Although we did expect that we would generate even greater revenue in the quarter, industry data showed that sales of larger products were mixed but generally down during the quarter. However, we did not experience this choppiness until the later months of May and June. During the quarter, media reports pointed to increased frustration of higher-income individuals over the slow progress of change in Washington, which has impacted their confidence in the economy for the near term. This likely contributed to the softness. While we believe this is to be temporary and expect the trend to reverse itself, it clearly pressured our results. Also, while I prefer not to discuss the weather, our stores across much of the Midwest, including the Northeast, started their season very late in June due to unseasonably wet and cool temperatures, further dampening our results. Having said this, I think it is important that I give you even more color on the quarter.

Last year in the June quarter, we called out the strength of product over 60 feet as an important component of the 44% same-store sales growth. We said over half the growth was driven by an increase in average unit selling price. By comparison, when we exclude the Northeast and our business over 60 feet, our same-store sales is about 11% and most of the regions outside of the Northeast were up in total revenues regardless of size.

Factoring in this deeper understanding of our revenue and the fact that we produced reasonably positive unit growth over last year's strong June quarter is why we are convinced about the long-term state of the industry. Another reason for our confidence is that the industry is still off about 40% from a unit perspective from the prior 20-year average before the financial meltdown. Pent-up demand for new models by our manufacturers continues to be greater than any point in time over my 40-year career. Plus many new boaters are joining the MarineMax family and the industry as evidenced by both our and the industry's growth in smaller boats, which is critical to the long-term health of the business. Further, from a macro-industry perspective, we are now seeing deep discounting or aggressive incentives from other dealers. Dealers generally feel that new and used boat inventory are tighter than ideal. As an example, many of our storage had less inventory that we would've liked for certain recreational day boats, and we are firmly confident that our unit growth would have been measurably higher if we had, had this additional product in our stores. Clearly, our ability to deliver the right product, combined with our customer-centric approach, continues to resonate well with the boating enthusiasts and together, it creates strong demand.

Let me now recap a few additional highlights for the quarter. Our gross margins grew 290 basis points in a very material quarter, which is outstanding. Despite a decline in revenue, we incrementally grew pretax earnings and we produced almost $27 million of cash in the quarter, adding more firepower to our already strong balance sheet. Another quarterly highlight is that we completed our first full quarter with 6 additional stores from the Hall Marine group acquisition, which we closed in mid-January. The integration and business combination have gone very well.

We continue to reap the benefits of numerous brand and segment expansions that we executed over the past several years. They provide our customers with greater breadth of choice and, ultimately, the expansions have allowed us to be more diversified and better able to serve boating enthusiasts. We believe that our team's commitment to ensuring our customers capitalize, own and enjoy the boating lifestyle along with the continued flow of fresh, innovative product from our manufacturing partners, should allow us to grow same-store sales and drive improved results as we move full steam ahead.

And 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 June quarter, revenue approached $330 million. Our decline in revenue year-over-year was driven by a 10% reduction in same-store sales. However, from a unit perspective, we had a mid-single digit increase on a comparable basis. Our average unit selling price was down greater than our same-store sales decline. This illustrates the impact of a larger boat softness. As Bill said, growing units on top of the 44% growth we had last year is pretty strong. Geographically, Bill gave good color earlier when he said outside the Northeast, most regions were up. Given that Florida tends to sell more product above 60 feet in other markets, a few markets were down in Florida. Despite revenue being pressured, we were able to grow gross profit dollars to $85 million in the quarter. This was driven by a meaningful increase of 290 basis points to our consolidated gross margins to 25.7%. In both the December quarter and the March quarters, we commented that on a brand-by-brand basis, we were seeing gross margins expand. In this quarter, that expansion continued across most of the brands and segments we carry. The biggest drivers of the product margin expansion are a greater mix of newer models, our improved use of market-based pricing, especially when new models are launched, and the stable environment we are operating within. This, coupled with our team performing well in our higher-margin segments, mixing our revenue more favorably, led to a large increase overall. As we look ahead, we have the ability to incrementally improve gross margins on an annual basis for the foreseeable future.

Selling, general and administrative expenses exceeded $59 million for the quarter. The increase in dollars over the prior year was a little over $5 million, of which close to $3 million is due to the acquisitions we have completed year-over-year. Other increases were largely due to investments we made assuming our growth would be greater. While we still feel very good about the future and our industry, we have taken actions to curtail some of the investments to better align expenses with sales.

Interest expense increased modestly due to an increase in borrowings to finance our inventory. From an income tax perspective, as we stated on prior calls, we do not expect to pay any material taxes until we absorb our remaining NOLs and other deductions, which approximated $21 million when fiscal 2017 started. Based on trends and our expectations, the NOLs will be absorbed before the end of 2017 and we will pay some leveling taxes. We do provide for an income tax provision and our annual rate should be about 39% until any corporate tax reform that may happen.

Let me remind you of the new accounting standard that we adopted at the close of fiscal 2016. The new rule required that the difference between book and tax expense for equity compensation be reflected as a change in the tax provision. Previously, these changes ran through equity on the balance sheet. The rule required financials to be retroactively reflect the impact of the new standard. It reduced last year's 9 months through June by $0.01 and had a similar impact on the current year. We don't plan to talk about the standard in the future since going forward, it's a normal recurring item.

Turning to earnings for the June quarter. Our diluted earnings per share was $0.57 this year compared to $0.56 last year.

Regarding our first 9 months, I will make only a few comments. While we would've preferred stronger results, our team produced same-store sales growth of 6%, which is on top of 25% growth last year and 23% growth in the comparable period 2 years ago. When you add back depreciation of stock-based compensation, we produced more than $44 million of cash and our earnings increased to $0.78 per diluted share, all healthy results.

Onto our balance sheet at quarter end, we had about $59 million in cash. Keep in mind, we have substantial cash in the form of unlevered inventory. Our inventory increased to $385 million. As we have previously discussed, 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 and the addition of more stores. Our property and equipment has increased due to the acquisitions we completed the past 12 months as well as investments we have made to several of our mariners and ongoing normal maintenance CapEx.

On the liabilities, our customer deposits, while not a perfect indicator of the future due to the size differences of deposits and the impact from large trades, continued to be substantially up year-over-year and now 24% over last year. We ended the quarter with a current ratio of 1.52 and total liabilities tangible net worth ratio of 1.06, both of these are very strong ratios. Our tangible net worth is now up to about $309 million or $12.30 per diluted share. We own over half of our locations, which are all debt-free, and we have no debt other than our inventory financing.

Turning to guidance. We are updating our earnings per share guidance for the full fiscal year. Based on our performance thus far in fiscal 2017 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 6% to 9%. This would imply low to high single-digit same-store sales growth for the fourth quarter. We now expect diluted earnings per share in the range from $0.97 to $1.02, down from our previous guidance of $1.14 to $1.24. This compares to a non-GAAP adjusted to fully taxed diluted earnings per share of $0.87 in fiscal '16 and $0.47 in fiscal '15. Our revised guidance does not anticipate any material gross margin expansion or better leverage than what we achieved in the past 2 fiscal years. We will continue to update guidance as dictated by our performance. We will also plan to provide guidance for fiscal 2018 when we report our September results.

Let me comment on current trends. Last year, we produced 12% same-store sales growth in the September quarter. As we are moving through July, our backlog is greater than last year and building. It's too early to draw conclusions for the balance of the quarter, but we have started to see signs of better large boat sales. In this quarter, July and September are similar in size and August is usually the smallest as families get ready for school. We have much work ahead of us to produce the results we want for the quarter and our team is focused and working very hard.

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

Thank you, Mike. We have had a productive 9 months from a sales, earning and cash flow perspective, with an optimistic view towards future sustaining levels of growth. Our manufacturers are producing new models, laced with innovative designs and technology enhancements. With our increased depth and breadth of product, along with our proven approach of delivering the boating dream, our team is ready to build on our performance. Our efforts to expand and strengthen our geographical presence in key boating markets is ongoing. However, we will remain patient and are focused on adding locations that could produce sustained cash flow through a sale of industry-leading brands. We are committed to building long-term value for our shareholders by consistently exceeding our team's, our customers' expectations one at a time.

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

(Operator Instructions) Our first question comes from James Hardiman from Wedbush Securities.

Sean Wagner, on for James. Just kind of hoping you could some just kind of additional color on the big boat weakness. I know you talked about some maybe economic uncertainty among higher-end consumers a little bit, but anything else that you can point to that's driving that? And that -- you mentioned the weakness is primarily May and June. How long is that weakness expected to continue? Or is there any indication that things will turn around or improve in the near term or going forward?

Well, Sean, we -- the consumers that we're talking to, some of them are existing customers, some of them are potential new customers. We're not hearing a lot of "Hey, I'm going to wait." We're not hearing, "I'm not going to do until times get better." What we are seeing is they're just taking a longer time in order to bring them across the table and get the deal done. We are working bigger products and as we -- as Mike shared, we've seen an uptick in the bigger boat business in the last few weeks, and we don't believe that it's something that's going to continue for a long-term. The thing that impacts our business the most is called uncertainty. And what's going on in Washington right now, everything that they're trying to get done is a pushback by the Democrats and a few of the Republicans. And as such, that creates uncertainty. Is our President and this administration are going to be able to execute on the things that were promised to the people that went to the polls and voted this in and voted in the Congress. And so I think everybody is kind of a wait-and-see. You'd flip on the news and I listen to all of the different news channels, and you would swear you're in different countries as you listen from one news channel to the next. This whole thing about Russia is just blown way out of proportion, in my opinion, and it just continues to be that way. And so it confuses people and it makes them feel uncertain about what the heck are we going to do? You've got people saying they're going to impeach our President. That gets people concerned. And so we're -- we saw an uptick in units. The business is doing just fine. The big boat business is taking a little longer to get it done. And when you're selling multimillion dollar boats and between 1 quarter and the next or a few quarters, it makes a huge difference, and I think that's what got us caught this quarter.

Okay. And I know you pointed to the Northeast and kind of parts of Florida as the weaker regions, weather being the main concern in Northeast and big boats, obviously, in Florida. But is there any kind of ASP or unit growth color you can give us regionally where unit's up in either of those regions? Or kind of are there any, as far as like traffic, store traffic or the interest kind of metrics that you track, are those still obviously outside of the big boat weakness? Are there still strength in as far as the interest in some of the new models from your...

Yes, for sure. So our same-store unit growth was in the mid-single digits. That would certainly include Florida. The Northeast, I don't have the exact breakdown now, but it's probably down, unit wide, because of weather. I traveled up there in May and June and it was, I hate to talk about weather, but it's pretty ugly in Northeast in May and June. No, but Bill said it, the demand that we are seeing for new models, let me give you a number of examples, but from our different manufacturing partners is very, very strong. Still, industry seems to be very healthy, probably more importantly as is the lifestyle is very healthy. People are out there in the water enjoying their boat, enjoying their lifestyle. You couple that with our unit growth, with the unit growth the industry is seeing, it tells you that, fundamentally, there's a lot of positives out there. there's just something that's got the maybe the wealthier side of the spectrum, pausing a little bit more than they used to.

Okay. And as far as weather goes, in theory, you could expect to get at least some of those sales back? Obviously, we're pretty late into the...

Yes, they're -- we're very busy right now in the northern markets that were impacted by weather in June. So once the sun broke in late June and weather got nicer, we've been slammed up there. Will we get it all back? In time, we will tell. That's certainly the goal, but time will tell on that.

Next question comes from Greg Badishkanian from Citi.

This actually Fred Wightman, on for Greg. I was just hoping you could maybe bridge the gap. I mean, when you reported in late April, it sounded like you were expecting sales to be positive for the month, and there was a decent backlog for May. Could you just sort of walk through what changed between then and sort of the end of the quarter?

Yes, good question, Fred. When the March quarter ended, we did not see softness in larger products. All of our boat shows we're very strong. The month of April did finish up double-digit same-store sales growth. Brunswick, on their earnings call, commented they saw some softness on larger boats which prompted 10 different investors to call me. And in fact, the industry data that came out on March, which would've come out in late April, did show softness on larger boats in March. We didn't see it. Maybe it was our great execution of boat shows, maybe it was geographically how our stores are, we didn't see it. You go into May, which is a much bigger month than April, and then June, which is usually the biggest month of all of them, and we saw some difficulty in larger boats in those 2 months, which is what's impacted our top line. So it's really the -- what we saw in May and June that we had not seen prior to that period on larger product.

Okay, that make sense. And then it sounds like, for the gross margin outlook for the rest of the year, you're still not expecting an improvement. I mean, if you look at what you guys posted here in the third quarter, even against a pretty tough top line, why are you -- can you just sort of walk through the rationale for why you're still not expecting an improvement?

When I look at the last several quarters, we had -- in the December quarter, we had modest improvement in gross margin. It's kind of hard to see it because we had a big spike in big boats as well. March quarter, we had a little bit of improvement. This quarter, we've got a great improvement. I just think it's too early to start putting that into our guidance. We may weigh that more into 2018 when we start thinking about 2018.

Our next question comes from Steven Dyer from Craig-Hallum.

Your guidance implication for Q4 would suggest probably a better revenue performance than you saw kind of quarter-over-quarter last year, if I'm sort of backing into it or using your EPS guidance and your gross margin commentary, et cetera. Am I thinking about that right? Is it kind of more a down 15% to 20% quarter-over-quarter than the 35% you saw last year?

So we had 12% same-store sales growth in the September quarter last year and 44% in the June. So if you kind of do the math, we were down 10% in the June quarter. And what we're seeing for the September quarter is low to mid- to high single digits. So 3% to 7.5%, 8%, something like that, in that range. Part of that depends on do we end up seeing a little bit of life on some larger boats. Do we not? Did the Northeast come back? But we think we are up against an easier comp than we had than the March quarter or the June quarter. But we're comfortable with that range that we put out there, low to mid-single digit comp.

Okay. And then as it relates to inventory, you've talked a few quarters now about being constrained in some of the smaller big boats. Is there a sort of a view to that loosening in the near future? Is that a constraint you expect for the foreseeable future?

I think when it comes to all the new models we have coming from manufacturers, the manufacturers have all the right intentions to get the new models integrated and get them in our showroom as fast as they can. I think reality has been it's been tougher to get them integrated. So I think part of this, thus level-setting our expectation, is that we probably won't get them all to the degree that we expected to have them. They still are tight in our stores today, certainly impacting our unit growth than we otherwise would have seen in the June quarter.

And Steve, you heard us say that new models sell. And there's a lot of new models from almost all of our manufacturers, and with that comes ramp-up. And with ramp-up means you don't get the units as quick as you want them or you need them. And they are selling in the stores, that's part of the reason our unit sales are up so well, is that we have new models from a bunch of our manufacturers. And so as Mike said, it'll probably always be a bit of a challenge because of the new models that they're bringing out, and that is the right thing for the manufacturers to be doing. But we feel good about our inventory. The question wasn't asked, but the model mix is right. The products we have in our inventory are good models. We don't have a lot of issues from there and the aging is in very good shape, so it's a little higher than probably what our sales came out to be for the first 9 months of our fiscal year. But we've still got this quarter remaining with the active customers out in the water, our getaways and events are very, very, very busy. And as such, people are out boating. The waterways are packed on the weekends in the markets where we're having decent weather.

Our next question comes from Mike Swartz from SunTrust.

Just a question on how you're, I guess, defining big boats and then where you saw the softness in May or June. It's somewhat, I guess, a nebulous terms. So can you just give us a sense of, really, where you're seeing the weakness within the big boats?

It's -- let's call it 60 feet and larger is -- and that goes all the way up into 80s and 90s, with the brand like Ocean Alexander and with Azimut. But it -- the potential customers are still there, as we said, Mike, that it's just -- we're having a little more trouble getting them to pull the trigger.

Mike, the industry data cuts it a bunch of different way. The industry data has talked about 40 to 62 also being soft. I'm sure there's some of that impacting us. We tend to be able to somehow plow through that a little bit better than maybe what the industry is showing, but for sure, above 60 feet is what Bill called out in his prepared remarks.

And maybe the next question is, I mean, let's just take a more kind of bearish view on that end of the industry and assume maybe that persists. I mean, the -- what -- is there a way you can just give us maybe a rule of thumb? I know this probably bounces around from year-to-year, but how much of your revenue, how much of your unit volume comes from boats over 60 feet?

So units would be very low. The revenue, I'd be guessing here in the call, it's a material number, meaning, it's going to be over -- it's going to be probably around $100 million-ish, something like that, over 60 feet?

Around 10%.

Yes, probably around that at the top line. It's going to be a smaller percentage of the bottom line because the margins up there shrink. But it's an important part of who we are and what our business is and it's something that we've been very passionate about for the 20 years that we've been around. And once in a while, you do have ebbs and flows in the business. It has been -- that specific segment has been fairly hot since the recession ended. So this is the first time there's been somewhat of a pullback since probably 2010 or '11, that us and others in the industry believe it would be short lived once things in Washington gets moving in one direction or the other. It doesn't all have to be rosy. You just need to move on to whoever it's going to be and get done and people are going to make a decision about what they're going to buy.

And it's not for the consumer having the cash or ability to finance because financing is excellent. It's just -- they've got -- we believe that they just need to feel a little more comfortable with what's going on.

Understood. And just, I think, Mike, in your prepared remarks, you had mentioned that you're looking to cut or reduce some of the SG&A expenses, I think, is what you were talking about. Maybe just give us a better sense of where the cost-reduction opportunities lie.

Honestly, we're going through every line. We have done some of these already, every line, every store every department, just looking, is it something we really need today? Can we do without it today? Is it going to help us drive revenue, take care, obviously -- and if it takes care of a customer we're not going to reduce. So it's not any one specific place, Mike. There'll be reductions in different places in the organization to try to better align the overall expense structure with what we're seeing from a sales perspective.

And it's the prudent thing to do, moving into the winter months, anyway, to make a clean look at everything you're doing and say, how do we minimize expenses without hurting the business?

I mean, I guess, it's just safe to say that this isn't going to impact marketing spending around boat shows and things of that nature?

;

We'll evaluate what we did last year from a boat show perspective, what brands we took, what spaces we had, what boat shows we're in, what was the anticipated returns. So there could be some tightening of the belt of different shows. It's one of the things that we're looking at.

And if it is a tightening, it'll be a smarter way to do it.

Right.

It's just cutting what we're doing.

And I'd like to turn it back to Mr. McGill for any additional or closing remarks.

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

This does conclude our presentation. Thank you for your participation. You may disconnect.