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MarineMax, Inc. (NYSE:HZO)

F3Q09 (Qtr End 6/30/09) Earnings Call

July 30, 2009 10:00 AM ET

Executives

Kate Messmer - ICR, LLC

Michael H. McLamb - Executive Vice President, Chief Financial Officer and Secretary

William H. McGill, Jr. - Chairman of the Board, Chief Executive Officer, and President

Analysts

Joe Hovorka - Raymond James

Operator

Good day everyone and welcome to the MarineMax Incorporated Third Quarter Fiscal 2009 Earnings Conference Call.

Today's call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to Ms. Kate Messmer of ICR. Please go ahead ma'am.

Kate Messmer

Thank you, operator. Good morning everyone and thank you for joining this discussion of MarineMax's 2009 fiscal third quarter results.

I am sure that you've all received a copy of the press release that went off this morning. But if you have not, please call Linda Cameron at 727-531-1700, and she will fax or e-mail one to you.

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

Mike?

Michael H. McLamb

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 of 1995. These statements involve uncertainties that may cause actual results to differ materially from expectations. These risks include, but are not limited to the impact of seasonality and weather, general economic conditions and the level of consumer spending, the company's ability to reduce its inventory and related financing, 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.

William H. McGill, Jr.

Thank you, Mike and good morning everyone.

During the June quarter the marine retailing environment continue to be adversely impacted by the soft economy, more restrictive retail lending practices and shaken consumer confidence. All caused by general uncertainty. And in addition to these macro factors, we also faced challenges brought about by dealer failures and re-possessions of boats previously sold, which create short term dumping of products resulting in margin pressure.

Despite these challenges, I am pleased that we significant progress towards our stated goals of reducing expenses and inventory during the quarter. We are able to report another substantial reduction and expenses with the decline of approximately 17 million in the quarter on a comparable basis versus the prior year. In fact, we generated 17% more revenue in our June quarter than our March quarter and our expenses were only up 3% after excluding unusual items in both periods. Keep in mind, the March quarter reflected substantial cost savings as well. Our improved cost structure reflects the actions we've taken to downsize our business in response to weaker retail demand.

Specifically, the savings we've realize have come from reducing the number of team members, closing storage and looking for opportunities to lower our cost in just about every area of our business. The team member reductions continue to be the most difficult decisions to make as they impact back families, but unfortunately are necessary during these difficult times.

We closed nine stores during the quarter, bringing us to a total of 65 stores compared to the 87 at the same time last year. We continue to evaluate our footprint on a market by market store by store basis to make sure that we achieve the optimum balance between serving our customer base and achieving the necessary throughput for our stores.

Additionally, we continue to make significant progress in reducing our inventory. Despite the challenges that I mentioned earlier, we were able to further reduce our inventory by another 60 million from the end of March. Today, we have reduced our inventory about 175 million on year-over-year basis. We continue to pursue aggressive margin strategy to dry down our inventory levels. However, we weren't able to get aggressive as we would like to have gotten until the last part of the quarter after we secured an amendment to our credit facility.

With the amendment in place, we now have more flexibility to drive sales and are very focused on further reduce our inventory levels by the end of the September quarter. As we stated on our last call, we believe the strategy of reducing inventory and related borrowings will better position MarineMax to capitalize on the opportunities that may come about due to the many challenges that our industry basis. This also positions us for better earnings potential when the conditions begin to improve.

While the current environment has led to ongoing pressure on our sales, the actions we have taken to prove our inventory and expense levels has allowed us to generate strong cash flows. By reducing our inventory through June, we have generated over 100 million in cash from operations.

This coupled with less purchase has allowed us to reduce out outstanding borrowings by 154 million on year-over-year basis. Please keep in mind that the only debt we have is the inventory financing through our line of credit with no long-term debt whatsoever. With considerably more near-term flexibility under our current bank agreement, we expect to continue to drive down inventory in the fourth quarter.

With all these silvering top, I think it's important to emphasize how supportive our manufactures have been as we will work to right-size our inventories. They are providing sales incentives that help us drive sales and lower the inventory levels.

They also continue to be great partners by supporting us with the best products available, including continuing to develop exciting and innovative new models. We have known for years that we picked the best manufactures to do business with and their actions during this difficult environment further confirming.

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

Michael H. McLamb

Thank you, Bill, and good morning again everyone.

For the three months ended June 30th, 2009, our third quarter revenue was 151 million compare to 271 million last year. Our same store sales declined approximately 39% or about 95 million compared with the 27% decrease in the same quarter last year.

Additionally, revenue declined approximately 25 million from stores closed that are no longer eligible for inclusion in the same store sales space. Generally during the quarter, we continued to experience softness across all of our markets and segments that we participate.

Gross profit as a percentage of revenue decreased approximately 130 basis points to 21.5%. The decrease in our overall gross profit margin was largely due to our more aggressive pricing to drive inventory reductions. As Bill mentioned, given the flexibility afforded by our amendment, we expect to continue this aggressive stance throughout the September quarter.

Our selling, general and administrative expenses decreased approximately 24.5% or about 12.6 million during the quarter. However, the current quarter includes about 2 million of unusual expenses for store closing costs. And we also had about 400,000 of loan closing costs associated with our recent amendment. Likewise, the June 2008 quarter had about 2.6 million of unusual gains for items like business interruption insurance, cancelled interest rate swaps and changes to our benefit plans.

When factoring in these items, we have actually reduced our expenses by about 33% on a year-over-year basis. And as Bill mentioned, our expenses were close to flat sequentially for March while rising revenues 17%. Interest expense decreased approximately 29% to 3.4 million as a result of reduction our average borrowings underlying the credit. As for income taxes, it is important to note as we've mentioned in the past, our loss carry back is limited by the current tax lot.

As such the tax benefit, we recorded during the quarter was minimal. This significantly increased our reported losses. If the tax loss carry back low is changed, we'd be to substantially increase our benefit. Finally, our reported net loss for the third quarter fiscal 2009 was 9.2 million or $0.49 per share compared to reported net loss of 113 million or $6.15 per share for the comparable quarter last year. Remember the last year, we rolled up all of our goodwill resulting in a very large non-cash charge.

For the nine months through June, I will comment on just the few items. First, our same stores sales have declined about 44% compared with the 23% decrease in the comparable period last year. Second, our margin decline on a year-over-year basis as primarily due to the same factors that affected our June quarter results. Third, we reduced expenses by about 53 million on a comparable basis when factoring out the unusual items in both periods.

Turning to our balance sheet; at quarter end, we had approximately 13.8 million in cash. Keep in mind that the amount of cash we have at point in time is the function of how much we leverage our inventory. As I've stated before, we have substantial cash in the form of un-leveraged inventory.

We ended the quarter with 340 million in inventory, which is down approximately 175 million from the comparable period last year. There is an even greater reduction on unit basis as our total units and inventory as of June 30th were down over 50% on year-over-year basis from the prior year.

We believe that we will continue to achieve reductions in inventory as we move to the fourth quarter. We are prepared to continue our aggressive stands on margins as we feel the payoff is higher margins and profit when the industry recovers. The extent of the margin pressure is hard to estimate given the many variables that come into consideration and difficulty predicting demand. But we do plan to be aggressive in driving sales to get inventory levels down.

Additionally, as we've mentioned in the past, our dealer agreement with the Freddie Group expired last August, requiring them to repurchase our remaining inventory at essentially our purchase price less cost to repair and refurbish the products. Freddie has repurchased or we have sold approximately 41 million of this inventory through June 30th. And we have just under 30 million in remaining in inventory today, but they are still required to repurchase.

We are on going on discussions with our managements about the completing and contraction obligation to repurchase the many bugs that we own. We're also continuing to aggressively market the buzz. We remain optimistic that we will continue to make progress converting the Freddie Group inventory to cash either through their repurchases or by outselling the product.

Turning to our liabilities, the cash we've generated to reducing our inventory combined with lower purchases has reduced our related inventory financing by a $154 on a year-over-year basis. Keep in mind the only debt we have is the debt that finances our inventory.

We are in compliance with the new terms of our financing facility, which provides the company can lose 40 million of adjusted EBITDA as defined through the end of September. We are able to add back store closing costs and losses on specific brands, no longer carried by the company as defined in the agreement.

As a result, the amendment provides us with increased flexibility to operate our business and navigate through these difficult economic conditions. Our tangible network now stands at approximately 210 million, which is considerably higher than our current market cap.

We own 33 of our stores, which have no outstanding mortgages. And what has proven to be a challenging nine months of the fiscal year, we were able to generate in excess of a $100 million of cash from operations largely due to the inventory reduction. And we believe the potential for sizable cash flows will continue as we proactively manage the balance sheet. Our current ratio and total liabilities of tangible network ratio have improved on a year-over-year basis as well.

Before I turn the call over to Bill, I will add that while July is reportedly another challenging month from marine retailers, our sales trends have improved compared to July last year. I can state the degree that our sales have improved as we are still closing the month and a lot of our deals closed around month-end. But the fact that we are up is encouraging.

Having said that, we are very aware that one-month does not make a trend and we recognize that we are being more aggressive, which is helping to drive business. Accordingly, I expect margins to contract when the month is completely closed. Regardless it is nice to see in that month that the so many consecutive declines.

However, for those of you modeling the business, it's way too early to take this comment and think that August, September or another out period will repeat July's trends. Our inventory related financing levels have also continued to drop as we move through July.

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

William H. McGill, Jr.

Thank you, Mike.

As we continue to navigate our company through this challenging environment, our industry leading possession should offer opportunities for us to consider expanding into new markets and/or leveraging our existing brands. We continue to pursue market share gains aggressively and evaluate other potential growth opportunities. I want to also reiterate that MarineMax has amassed substantial tangible network over the years, which provides us with the financial strength to weather the storm and emerge as a stronger company when industry growth returns.

We are working to capitalize on our competitors' weaknesses and take the necessary actions to transform MarineMax into a lean organization both in terms of inventory and also expense levels. I am confident that these actions will put MarineMax in a position for even stronger growth when the economy begins to recover. As we approach in plan for fiscal 2010, the challenges facing the retail boating industry are expected to exist for the foreseeable future.

While glimmers of economic hope are reported more frequently now than several months ago, it seems clear to most that recovery will take longer than typical recessions. Retail financing while incrementally improving is still harder to secure than it has been and continues to make it difficult for us to close deals.

The less favorable retail lending environment also impacts our ability to drive financial insurance profits, which is as you know have historically been one of our highest margin businesses. We believe that dealer failures are likely going to escalate as we head into the winter. Again that's were challenge us on our margin line and our market share on a short-term basis until the pipeline have deeply discounted re-possessions are sold.

On the other hand, these challenges they confront the industry should very well turned into long-term benefits for MarineMax. This could be the recessions that leans the industry of too many manufactures and too many dealers that do not deliver the proper experience to the customers. As dealers fail, we will likely be presented with opportunities to expand. Also as dealers and manufactures fail the potential for growth to our long-term market share opportunities, should substantially increase along with other potential benefits.

As we are in the middle of the boating season, we are pleased to see that our customers are still out in the water boating. As we and our customers know boating provides a much needed escape and a great family recreation and it's actually more affordable now that has been in recent years due to relatively low gas prices and dockage fees.

Certainly, our customers' passion of our boating remains strong and it is likely leading to pin up demand that we hope to capture as economy and consumer confidence improves. I am proud of our team's extra efforts to stay focused on our tactical task at hand while delivering the boating dream to our customers.

Also as we approach to 2010 during this perfect storm in the world economy, we are running our business to be prepared for the worst, but yet hope for the best. While we realize that hope is not a strategy, we are prepared to weather the storm. And to repeat a popular quote, life isn't about how to survive the storm, but how to dance in the rain.

And with that operator, I'll turn the call back over to you for questions.

Question-and-Answer Session

Operator

Thank you, Mr. McGill. The question-and-answer session will be conducted electronically. (Operator Instructions). And our first question comes from Joe Hovorka with Raymond James.

Joe Hovorka - Raymond James

Thanks guys. I just want to -- you said July retail was actually up?

Michael McLamb

Well, first of all thanks for asking the question, Joe. I thought we did such a good job with the script that we'd addressed anybody's question. But, yes, July will end up for us, I don't know the degree that it's going to be usually you guys ask us that question. I wanted to be proactive and say it in the script. And also wanted to put a lot of caveats around that we are driving business pretty hard, we're being aggressive. But July finish up for MarineMax.

Joe Hovorka - Raymond James

Okay, that was my next question. So part of that is, you increase the amount of discounts in July versus what you did in the June quarter?

Michael McLamb

Yes.

William McGill, Jr.

That is fair to say.

Michael McLamb

Fair to say.

William McGill, Jr.

As we are being up, we're being very aggressive to move the inventory out and basically any buyers or potential buyers we have -- we are making sure they do not leave that we -- they received the deal of life time in some cases.

Joe Hovorka - Raymond James

And the comps as you went through the June quarter, I am assuming June was the best of the three months?

Michael McLamb

They roll pretty close to the same, to be honest with you. There wasn't any events during the June quarter a year ago to make us have an easier or a harder comp this year. They were all in that 35 to 40% down. I know there is some statistics out there, saying that some data points to June maybe being little bit better than the prior year. But I think it was pretty much the same. And for us, as it had -- each of the months are about the same, Joe, I apologize.

Joe Hovorka - Raymond James

Okay. Great. Thanks guys.

Michael McLamb

Thanks.

William McGill, Jr.

Thank you, Joe.

Operator

(Operator Instructions).

Michael McLamb

I think we did such a good job, Bill.

William McGill, Jr.

Well, then I'll do the closing statement operator. So, thank you everyone for your continued interest and support in MarineMax. I would also like to thank our team members for their hard work and their passion for the business and serving our customers during these challenging times. They are truly they keyed our industry at leading position.

Mike and I are available all day, if you have any additional questions. Thank you everyone.

Operator

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

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