MarineMax Inc. F4Q09 (Qtr End 09/30/09) Earnings Call Transcript

Nov. 5.09 | About: MarineMax Inc. (HZO)

MarineMax Inc. (NYSE:HZO)

F4Q09 (Qtr End 09/30/09) Earnings Call Transcript

November 5, 2009 10:00 am ET

Executives

Kate Messmer – IR, ICR

Mike McLamb – EVP, CFO and Secretary

Bill McGill – Chairman, CEO and President

Analysts

Greg McKinley – Dougherty & Company

Ed Aaron – RBC Capital Markets

Operator

Good day everyone and welcome to the MarineMax Incorporated fourth 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 Kate Messmer of ICR. Please go ahead.

Kate Messmer

Thank you, operator. Good morning everyone and thank you for joining this discussion of MarineMax's 2009 fiscal fourth quarter and year-end results. I am sure that you've all received a copy of the press release that went out this morning. But if you have not, please call Linda Cameron at 727-531-1700, and she will fax or 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?

Mike 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. 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 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.

Bill McGill

Thank you, Mike, and good morning everyone. As you saw in our press release this morning, we made substantial progress executing our planned strategy of reducing inventory levels during the September quarter. I am very proud of our team’s accomplishment. We believe better alignment with supply and demand as well as improved ageing of our inventory will be key factors in helping to restore profitability to MarineMax. As such, we launched and executed on a planned strategy to finish 2009 with much lower inventory levels and better ageing. While we believe that our inventory reduction in related sales undoubtedly led the industry, we also believe that inventory levels had come down substantially for all dealers and manufacturers, which is an important step towards improving the health of the marine industry in the overall pricing environment.

During the quarter, we drove inventory down almost 40% or $134 million from the June quarter. This is the largest sequential reduction to date and this resulted in a very large year-over-year reduction of $263 million or about 56%. The reduction of inventory allowed us to generate substantial cash flows from operations and drive a 41% increase in same-store sales. This is the first same-store sales increase we have reported in more than two years. We generated this increase in sales at a time when industry data is still suggesting decreased sales overall. As such, we believe we have taken market share during this challenged time period, which ultimately will yield future sales for MarineMax as incremental customers we have now added trade into larger and newer products.

As planned, we adopted an aggressive pricing strategy to drive sales and improve our inventory position as we took advantage of the enhanced flexibility under our amended credit agreement, which we discussed in our June quarter call. While this aggressive selling greatly impacted our gross margin for the quarter and our net loss, we believe it was the right strategy. Additionally, it is important to note that the pricing actions we took were largely on our older inventory, our inventory for brands that we no longer carry.

We believe that fresher, current products will lead to improved margins going forward. As an example, the 2009 Sea Ray that we sold during the September quarter had comparable margins to the 2008 that we sold in the September quarter of last year. This implies that we can earn solid margins with fresh, current products even in this environment by focusing on the MarineMax lifestyle of boating and less on price.

I don’t want to overstate our same-store sales growth because we are very aware that our pricing strategy, which is not sustainable drove the increase, but it is an encouraging sign. Don’t lose sight of the fact that our average unit-selling price typically exceeded $110,000. The fact that we were able to generate such an increase in same-store sales speaks to the willingness of customers to spend and perhaps to some initial signs of easing in this very tough environment that we have been operating in for the past two years.

Our second goal as we closed fiscal 2009 was to get our operating costs in line with the reduced level of business. Accordingly we closed an additional 11 stores during the quarter bringing us to a total of 55, which is down from 93 stores at peak. By and large, a high percentage of the stores that we closed were smaller locations where we have other stores in the general market area. We did however close our Northern California and Utah stores and are no longer in those markets. In both of these cases, the market had been so extremely hit by the economic softness, we felt it was prudent to focus our efforts and resources in markets that will have a greater potential for upside. In the future, we will evaluate these markets and consider reentering them if the long-term potential warrants. We believe that for the foreseeable future, the industry will be more focused on inventory ageing and improving inventory turns. As our sales gradually improved from an inventory capacity perspective, we may not need the same-store count as we had before.

The actions we have taken to significantly lower our inventory and expense levels have allowed us to improve our cash flow generation and reduce our outstanding borrowings. We have generated over $200 million in cash from operations during the year, which in turn along with the $20 million in equity we raised in September allowed us to reduce our outstanding borrowings by $230 million on a year-over-year basis. As a reminder, the only debt we have in the inventory financing through our line of credit is through our line of credit. We have no long-term debt and our own properties are free and clear.

I would like to point out how supportive our manufactures have been as we reduced our inventories. Over the years, we make careful decisions as it relates to which brands we should represent and the support to us in our customers through this challenging environment affirms our decisions were correct. As I alluded to earlier, we in our industry have learned a harsh lesson from this downturn. The historical model of slow turns has to change. So we and our manufacturers are working on ideas and ways to change the low turns the industry has historically achieved. Going forward, we will be even more focused on inventory turns and obviously maximizing profitability from each of our stores.

I will now ask Mike to provide more detailed comments on the quarter and the year, Mike?

Mike McLamb

Thank you, Bill, and good morning again everyone. For the three months ended September 30, 2009, our fourth quarter revenue increased 25% to $207 million compared to $166 million last year. Our same-store sales increased approximately 41% or about $57 million compared with a 45% decrease in the same quarter last year. Revenue declined approximately $15 million from store closures that are no longer eligible for inclusion in the same-store sales base. I will note that this is the first September quarter where revenue exceeded the June quarter. We generally feel that where we have consolidated stores within a market, our remaining stores in that market will capture the bulk of the sales from the closed stores. The market share data we have seen today as well as the results from this quarter would seem to support this belief.

Gross profit as a percentage of revenue decreased to approximately 6% in the fourth quarter from approximately 25% in the prior year. The decrease in our overall gross profit margin was largely due to our planned efforts to aggressively move boats through pricing to drive inventory reductions of aged products. A few items also contributed to the dramatic drop from last year. First, we incurred losses and increased reserves $6.6 million related to brands we no longer carry. Second, because of dramatic reduction and cancellation of orders during 2009, we consciously chose not to qualify for certain manufacturer performance incentive s that typically are earned and paid in the September quarter. Absent these two items, gross margin would have been closer to 11%. We do expect to achieve such performance moneys in fiscal 2010 subject to our ultimate purchase levels, which are dependent on resale activity. I will note that in general we made money at the gross profit line on boat sales.

Our selling, general and administrative expense decreased approximately 19% or $10.6 million during the quarter. However, the current quarter includes $2.8 million of store-closing costs, likewise the September 2008 quarter had about $1.6 million of store-closing costs. When factoring in these items, we actually reduced our expenses by about 22% on a comparable basis. This 22% reduction was achieved in a quarter that had an absolute revenue increase of 25%. It is nice to see the results of our cost reduction efforts during an up revenue quarter. As we head into fiscal 2010 with our store count down to 55 locations and our inventory in much better alignment with current retail levels, we are targeting our overall expense structure to be in line with prior years when we had similar revenue and store count.

Interest expense decreased approximately 20% to $2.8 million as a result of reduction in our average borrowings in our line of credit. Regarding income taxes, as we have noted in the past, our loss carry-back is limited by the current tax law. As such, the tax benefit we recorded during the quarter was minimal. This significantly increased our reported losses. If a tax law’s carry-back law is changed, we would be able to increase our benefit by about $17 million under the currently proposed legislation. Finally, our reported net loss for the fourth quarter of fiscal 2009 was $33 million or $1.72 per share compared to a reported net loss of $11 million or $0.60 per share for the comparable quarter last year.

I will now provide just a brief overview of our full-year results. For the 12 months ended September 30, 2009, same-store sales declined 29% compared with a 28% decrease in the comparable period last year. Our gross margins declined from 23% in fiscal 2008 to 15% in 2009. When you remove the losses and the reserves for brands we no longer carry, and the loss performance incentives, this resulted in a gross margin of approximately 18% for the year. Finally, we reduced expenses by approximately $65 million or 30% on a comparable basis when factoring out the unusual items in both periods.

Turning to our balance sheet at quarter end, we had approximately $25 million in cash. As we have said before, our cash is ultimately a function of how much we leverage inventory. Our inventory at quarter end was $206 million, which is down more than $216 million or 56% from the comparable period last year. There is an even greater reduction on a unit basis as our total units in inventory as of September 30 were down almost 65% on a year-over-year basis from the prior year.

We also made really great progress on the ageing of our inventory. For example, we have 70% fewer new boats and 84% fewer used boats aged over one year old than we did this time last year. The percentage of our total aged boats over one year old has dropped substantially as well, which is impressive given that we bought very few new boats this year. We continue to tightly manage our inventory levels and believe that we are close to where we would like to be in total inventory given our current level of sales. Accordingly, we would not expect the same degree of margin pressure in the future that we experienced during this quarter.

An additional note about inventory that we have mentioned in the past is the exploration of our dealer agreement with the Freddie Group, which legally requires them to repurchase our remaining inventory at essentially our purchase price less cost to repair and refurbish the products. Through our sales or their [ph] repurchases we are down to about $18 million in Freddie Group products. This is a substantial reduction from this time last year. We are also continuing to aggressively market these boats. We remain optimistic that we will continue to make progress converting the Freddie Group inventory into cash either through their repurchases or by us selling the product.

Turning to our liabilities, the cash we have generated through reducing our inventory combined with lower purchases and a $20 million of equity raised in September has allowed us to reduce our related inventory financing by $230 million on a year-over-year basis, bringing the line down to $142 million at September 30. As Bill noted, the only debt we have is the debt that finances a portion of our inventory. We are in compliance with the terms of our financing facility, which provided that we could lose $40 million of adjusted EBITDA as defined through the end of September. Recall that for fiscal 2009, we could add back store-closing costs and losses on specific brands no longer carried by the company as defined in the agreement.

For 2010, the operating covenant of our facility provides maximum cumulative EBITDA losses that we can recognize throughout the year. It also requires that our EBITDA for the full fiscal year must cover our interest expense. The definition of EBITDA allows an add back for equity compensation charges as well as an adjustment equal to about $10 million which represents approximately 50% of the equity offering we completed in September. For 2010, the maximum adjusted allowable cumulative EBITDA losses are now $22 million through December 2009, $22 million through March 2010, and $15 million through June 2010. For the year-end calculation, EBITDA as increased by the $10 million adjustment must equal our interest expense. Based on the substantial progress we made right sizing our inventory, our footprint and our related cost structure, compliance with this covenant is not expected to be an issue in 2010. As noted a few times during the quarter, we issued approximately 2.9 million shares of stock through a secondary offering for net proceeds of about $20 million. Combined with the stock sale, we secured an amendment to our credit agreement, which provided the additional EBITDA flexibility that I just outlined.

Our tangible network now stands at approximately $197 million. We ended the quarter with a current ratio of 1.51 and a total liability for tangible net worth ratio of below 1. Both of these are among the best we have ever reported. We own 33 of our locations, which have no outstanding mortgages. For the fiscal year, we generated more than $200 million of cash from operations driven primarily by the substantial inventory reductions we have made. While we feel pretty good about where we have driven our inventory, if sales in 2010 are comparable to 2009, we would expect to end next year with less inventory on hand which will yield incrementally more cash from operations as well. However we also believe we are well positioned for cash flow generations in the future as conditions start to improve and we benefit from our lower cash structure.

Before I turn the call back over to Bill, I would like to add a few details about the quarter and current trends. The increase in sales we experienced in the September quarter was across all segments and all areas of the country, however we did see stronger activity from Florida and to a lesser degree the Northeast. This is encouraging since these two markets make up well over half of our sales. Retail financing, which is still more challenging than it was last year, has incrementally improved and new banks have entered the market on a regional (inaudible) market basis. I would add as you would expect that our wholesale lenders are pleased with our performance.

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

Bill McGill

Thank you, Mike. Our successful inventory and expense reduction strategies allow us to settle [ph] today as one of the strongest companies in our industry. Our leaner cost structure should position us for operating margin expansion as conditions improve. As many other retailers struggle or fail through these challenging fall and winter months ahead, we are exploring strategic opportunities including expanding into new markets. Inventories in the channel are dropping but dealer (inaudible) are likely to continue as cash constraints in excess to dealer financing continues to challenge them.

Hope is not a strategy but the most encouraging indicator of the future opportunities is that our customers’ passion for boating remains strong and is creating pent-up demand which we may have seen signs of this quarter. Our customers are still out boating with their families and more than ever today are demanding that we provide them with what we do best, which is to teach them, service them, and show them how to have fun. As a result of these factors, we believe that we will emerge from this period in an even stronger competitive position as the industry leading boating retailer, well positioned with the right team and right strategies for market share gains and long-term growth.

And with that operator, we will open the call out for questions.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Greg McKinley from Dougherty & Company.

Greg McKinley – Dougherty & Company

Yes, good morning. I wanted to understand where you are in your process of inventory reductions, obviously you made significant strides in the September quarter largely due to a clearance activity, I know you indicated your plans would be to have further reductions in inventory levels in 2010, but are you still sort of behaving similarly from a promotional standpoint and clearance standpoint here to start the beginning of a new fiscal year or should we expect to see a fairly quick into some of that real aggressive promotional activity?

Bill McGill

Greg, if you look at our mix of inventory, we still have some models as an example in the Freddie Group that we will continue to discount and have (inaudible) some other product that we did not move that we will continue to be aggressive on, but all in all, most of the inventory is fresh as we mentioned and is newer inventory and so we should be able to get back to the higher margins. We just finished up before Lauderdale Boat Show and it as a good show especially for some larger boars, and as we mentioned, the margins seem to be holding up very well on the ’09 products and most of what we have now is ’09. So we are encouraged by the show, we are also encouraged by what looks like October to make a quarter, but looks like October same-store sales are up also.

Greg McKinley – Dougherty & Company

Okay.

Bill McGill

We have got a little mix issue that we are still working through with some of the products but it is very low and I think we exceeded even our greatest expectation zone for what we did this quarter.

Greg McKinley – Dougherty & Company

Okay.

Bill McGill

Greg, I would tell you the pockets of challenges that we still have are very manageable and from a total dollar level, we are pretty close to where we need to be on inventory. The team did a great job getting us to where we are now.

Greg McKinley – Dougherty & Company

Yes, absolutely. I have looked back historically, typically we see a seasonal increase in inventory levels per store in operation from the September to December quarters, I would imagine your inventory management behaviors through this cycle are not typical. So, are we going to see that surface again or is this sort of a new approach to inventory behavior and we are going to be much more cautious about building inventories on a store basis to start at the beginning of the year?

Mike McLamb

I think long-term the industry because of its seasonality it is going to be hard to get away from some level of build up in the winter time but I think this time period that we have all just lived through has been so painful that be it from the manufacturer to the dealer, we are all trying to figure out how to build more from, I would call it, just in time but how to build more to demand and to retail than to the way we have done it historically. The answer is going to be kind of a little bit of both, I think you will probably see long term some seasonal build in the winter but it will be less exaggerated than it had been in the past.

Greg McKinley – Dougherty & Company

Okay. And then two quick follow-ups. Mike, could you again go through the EBITDA provisions of your debt covenants and explain the adjustments, the $10 million and I think you mentioned stock comp, I just want to make sure I understand how that works again, and if indeed you are saying you have to be flip positive on a cumulative basis equal to your interest expense on an adjusted basis for the full fiscal year in Q4, can you go through that again and then maybe comment on October, you said it is still showing some signs of strength, just how strong of a follow-through have you seen since the September quarter?

Mike McLamb

Yes, for the EBITDA, the amendment that we did in September is, you take the allowable loss EBITDA that was in the previous agreement and you add $10 million to it basically to increase EBITDA. So, for the December quarter, our maximum allowable EBITDA loss, and EBITDA is the regular definition that you would think about, but then you add back stock compensation, then you also add $10 million on top of that, and we are allowed to have up to $20 million adjusted EBITDA loss basically through the December quarter.

Greg McKinley – Dougherty & Company

Okay. So, your as reported EBITDA loss could be something into the mid $30 million range?

Mike McLamb

Correct. And then, if you look at the six months through June, it is the same $22 million, so the six months through June we need to be below that $22 million –

Greg McKinley – Dougherty & Company

Through March.

Mike McLamb

I am sorry, through March, yes. And then, for the nine months through June, it is $15 million and just so everybody understands, if you actually take those numbers and apply them and calculate an adjusted EBITDA number without the $10 million for 2009, we basically will be in compliance with these numbers anyhow in 2009.

Greg McKinley – Dougherty & Company

Okay.

Mike McLamb

And then if you look at the full year, we have got to cover our EBITDA as adjusted as increase but the $10 million has to cover our interest and we believe that based on the cost initiatives that we have done in terms of getting the stores down to the right level, and number of team members, and inventory levels and all that, we believe that complying with that number should not be a problem for 2010.

Greg McKinley – Dougherty & Company

I got you. So on an as adjusted basis, it must be positive for the full fiscal year.

Mike McLamb

That is correct.

Greg McKinley – Dougherty & Company

Okay and what is that $10 million again?

Mike McLamb

It is the amendment we did in September as we were going out to raise equity, we decided to tie the amendment back where we got additional flexibility in our EBITDA covenant within our facility where we took 50% of our net proceeds and we added it to the EBITDA. So, it was a restructured process to give us additional flexibility in 2010.

Greg McKinley – Dougherty & Company

Yes. And then finally, just some comments on the follow-through of strength in October?

Mike McLamb

October, as Bill alluded to, would be the fourth month that we have actually seen positive same-store sales growth. We have an absolute growth in revenue and with the stores that we closed by default, you are going to have a decent same-store sales numbers. It is not near as strong as it was in the September quarter but also the margins are obviously returning back to where we would like to see them be, they are not all the way back to where they need to be yet but they are coming back up to those levels. So we are pleased that we are able to, I guess, get refocused on what we need to be focused on, which is selling products for a good margin and getting the business aligned towards putting us in the best position to be profitable.

Greg McKinley – Dougherty & Company

And just a clarification, absolute growth in revenues, so you are saying you are tracking to do more revenues on 55 stores than you did on 75 stores in the year-ago period.

Mike McLamb

Yes, I think the number is something like 80 stores in the year-ago period and we have more revenue today in October than we did last year with much more stores, that is correct, I need to obviously add the cautionary statement that Bill added, I mean, one month (inaudible) we don’ t know we got to close all the deals from October from the Fort Lauderdale Boat Show and so forth, but I would rather be able to tell you that we are up than we are down, so take that for what it is worth as we are looking for incremental signs of improvement here.

Greg McKinley – Dougherty & Company

Thank you.

Bill McGill

Thank you, Greg.

Operator

We will take our next question from Ed Aaron from RBC Capital Markets.

Ed Aaron – RBC Capital Markets

Good morning everybody.

Bill McGill

Good morning Ed.

Ed Aaron – RBC Capital Markets

I want to just dive in a little bit deeper on just the process for restoring the price integrity in the business, just it is one of those things that is hard to get back once you lose and as I thought about your company in the past, it is hard to make the model work unless you have gross margins that are north of 20. Can you just maybe talk a little bit about the path of getting back to that level if you do think that those are attainable margins to get back to?

Mike McLamb

I would tell you Ed that what we have seen in October would tell you that that is realistic for 2010.

Bill McGill

Well, plus the fact Ed that we mentioned that in the quarter that the sale of 2009 Sea Rays the margins were comparable with a year ago. So at the end of the day, people are buying a lifestyle, and even though we put out the message that let’s make a deal because we have too much inventory and we are adjusting to this market, and so there were deals there but at the end of the day people are buying a lifestyle and it is not as much about price even though we had to make it that way. But most of our, probably most is a big word, but a lot of our sales that we made during the September quarter were not to our customers. So that is encouraging. So our customers are still out there and of course they are sitting on the edge of their boat seat saying, “Honey, we need the next one that is larger and more innovative and better,” but they are still in the wait-and-see mode Ed because of the uncertainty that is out there with consumer companies.

Ed Aaron – RBC Capital Markets

Right. And then historically, I think your revenue per store has trended roughly $13 [ph] million plus or minus, and I am just curious to know what you think that number is going to look like over time because presumably the market is going to be smaller but at the same time you have shed your smaller stores, so what would you kind of look out what you consider to be a more normalized sales environment? What do you think a typical store will contribute in revenue on an annual basis?

Mike McLamb

Ed, I think you are 100% right, I think mathematically our revenue per store will go up over time even above what it has been historically because we have obviously shrunk our footprint, we plan to tightly control that footprint also as this begins to return, so we can push more volume through the stores, part of that is going to be achieved through the intense focus that the industry has on improving inventory turns.

Bill McGill

And Ed, the necessity to have 90 plus stores with some of it was because there was a lot more competitors out there than there are today. We are seeing a lot of fall-outs in the markets even in the selling seasons that we just finished and we believe there will even be more. So the willingness of a customer to travel a little bit further to go to our main store it is not complicated by the fact that there is a dealer down the street that is a little easier for him to get to. So we think that will help leverage this 55 store that we have even better.

Ed Aaron – RBC Capital Markets

Right, thank you.

Operator

There are no questions in queue. At this time, I would like to turn the call back over to Bill McGill for any closing remarks.

Bill McGill

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 our business in upholding the high standards of customer service. They worked with us to transform our business during these difficult times and positioned us for growth in the future. Mike and I are available today, if you have any additional questions. So, thank you everyone.

Operator

This concludes today’s presentation. Thank you for your participation.

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