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MarineMax, Inc. (NYSE:HZO)

F3Q10 (Qtr End 06/30/2010) Earnings Conference Call

July 29, 2010 10:00 AM ET

Executives

Kate Messmer – IR

Mike McLamb – EVP, CFO and Secretary

Bill McGill – Chairman, President and CEO

Analysts

James Hardiman – Longbow Research

Joe – Raymond James

Pete Mahon – Dougherty

Tim Conder – Wells Fargo

Steve Bowman (ph) – Divistar Capital

Dan Mendoza – Prospect Capital Advisors

Operator

Good day everyone and welcome to the MarineMax Incorporated third quarter fiscal 2010 earnings conference call. Today’s call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Ms. Kate Messmer with ICR. Please go ahead.

Kate Messmer

Thank you, operator. Good morning everyone and thank you for joining this discussion of MarineMax’s 2010 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 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 would like to tell you that certain of our comments are forward-looking statements as defined in the Private Securities Litigation Reform Act.

These statements involve risks and uncertainties that may cause actual results to differ materially from expectations. These risks include but are not limited to the impact of seasonality and weather, general economic conditions and the level of consumer spending, the company’s ability to capitalize on opportunities or grow its market share, and numerous other factors identified in our Form 10-K and other filings with the Securities and Exchange Commission.

With that in mind, I would like to turn the call over to Bill.

Bill McGill

Thank you, Mike and good morning everyone. I am pleased to report that MarineMax was profitable for the quarter albeit a slight profit. Given the continued soft economy and the weak consumer confidence, I am proud of our team for delivering profits on such low volumes. As a result of the progress we made over the past year and a half against our key initiatives, we were able to achieve profitability on a low level revenue that we have ever experienced in our history.

Our focus over the past two years has been centered on three main areas. First, lowering our inventory substantially, which has now put us on a position to be able to report higher boat margins. Second, meaningfully reducing our cost structure through a dramatic store count reduction from 93 to 56 locations and scrutinizing every area of expenditures in our business. And third, our long-standing but increased efforts towards growing our service, parts, storage, brokerage and F&I components of our business, all of which generate much higher margins than boat sales. The increasing margins on our core products namely boats and the expansion of our higher margin businesses as a result of our sales allowed us to report the highest quarterly margin we have ever reported. This combined with the expense reductions we have made allowed us to report a slight profit in the quarter.

Our inventory levels now stand at approximately $180 million, which is down from approximately $550 million at our peak. Overall industry levels and the industry are also much better aligned with demand allowing for a more stable pricing environment supported of improving gross margins.

Our aging has also dramatically improved and we were able to keep our inventory levels very low even with our same stores sales decline. Our inventory did increase modestly on a sequential basis as we wanted to make sure that we keep our inventory fresh by introducing select new models to our product offering.

We have been producing healthy gross margins on sales of newer miles of boats, which is encouraging. While boat margins are still below the levels we typically achieved before the current recession, they have moved steadily up this year.

We have spoken before about the negative impact of repossessed boats and dealer failures on the gross margins, while the industry is still experiencing higher than historical levels of repo boats, the level in the marketplace has improved greatly, which has also helped to improve margins.

Another key area of focus for us is expenses. Last year we took the necessary steps to streamline our store count remove other expenses from our cost structure in order to lower our overall cost. This in turn has allowed us to report three quarters in a row of SG&A expenses in the $30 million to $32 million range excluding the debt write-off cost this quarter. While some of our variable cost will come back as sales return, many of the initiatives that we implemented to reduce our cost structure are sustainable and should allow us to achieve higher margins when sales recover.

We continue to monitor our cost structure very closely looking for additional opportunities to reduce cost and improve processes helping to keep our expenses at low levels. I will add that the 56 stores we operate today produced in excess of $1 billion in revenue in the years 2006 and 2007. This fact combined with the dealer failures and the incident that the industry has experienced and the tough wholesale financing market, which is expected to continue should enable us to grow our business substantially without adding to the store count as revenues increase.

The recent economic data has suggested that the recovery maybe more bumpy than we had all hoped. During the quarter our topline results continue to be pressured by weak consumer confidence and spending. The most recent consumer confidence stated (ph) posted one of the most dramatic monthly drops in June that we have seen. Some marine industry sources indicate that the unit sales were down in the 25% to 30% range for the June quarter or even worse depending on the category or the area of the country. As an example, early reports indicate that Florida maybe off as much as 40% in the quarter.

This soft environment was exacerbated by the impact of the BP oil spill in certain of our markets. During the quarter the oil spill most directly impacted our Northern Gulf of Mexico stores in Orange Beach, Alabama and Pensacola in Destin, Florida. The stores in the Florida Panhandle and the Orange Beach historically of accounted for less than 5% of our revenue.

Our concerns about the oil spill were also felt on the West Coast of Florida and to a degree on the East Coast of Florida causing customers to delay their purchases. We have had customers stop a boat purchase over concerns related to the oil leaks impact on their business and others telling us they are just going to wait and see. Encouragingly, a study from the national Oceanic and atmospheric administration show that there is a low probably of the oil reach in the West Coast of Florida. On the East Coast of Florida, experts believe that if any of the oil reaches this area, it would have spent considerable time to grating and dispersing. Likely forming scattered tar balls rather than a large slick of oil, which would damage a lot of the marine environment.

We are hopeful that as people become more confident with the path and likely outcome of the oil situation, our customers should start to feel more comfortable about making purchases. The company is also seeking advice and counsel as to its legal options relative to the spill.

Amidst these challenging economic and oil spill related conditions, we were able to successfully secure a new three-year financing facility with GE Finance. This $100 million replaced an old facility, which was due to expire next May. The new facility has more favorable terms than the old one as Mike will later discuss. The new facility allows us to operate our business with more flexibility than before and is the only debt we have outstanding.

While we would like to have been able to drive better topline numbers, we are encouraged by sustained improvement in gross margins, our ability to keep our inventory and expenses at very low levels and our new credit facility as well our ability to post a slight profit on deflated revenues.

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 June 30, 2010, our revenue was $115 million, down from approximately $152 million in the prior year.

Our same-store sales declined approximately 17% compared with a 39% decrease in the same quarter last year. Revenue from store closures that are no longer eligible for inclusion in the same-store sales base was about $12 million.

Gross profit as a percentage of revenue increased to approximately 30% in the quarter from 21.5% in the prior-year quarter. As Bill mentioned, this is the highest gross margin we have ever reported for a quarter. Much of the increase was due to the mix shift in our business. When our lower margin boat sales slow like they have and service parts accessories, finance and insurance and brokerage businesses expand as a percentage of our business, it allows us to have significantly higher margins as long as boat margins in general do okay, which they did.

It’s nice to see an increase in gross margin dollars despite the 24% drop in overall revenue. Given the improved aging in levels of our inventories as well as the industry in general, we believe our margins have the potential to be better than historical averages as we go forward.

Our selling, general and administrative expenses decreased approximately 14.5% or $5.6 million during the quarter to $33 million. Excluding unusual expenses in both period, SG&A expenses declined approximately $4.7 million or about 13%. Part of the reason that expenses bumped up a little this quarter versus the March or the December quarter was due to higher commissions earned or the increased margins as well as higher commissions related to the increased brokerage sales. While we are focused on holding down expenses, increases for these reasons are understandable. Overall we have managed to keep our expenses in the $30 million to $32 million range for the past three quarters, which is substantially below our expense levels in fiscal 2009.

Interest expense decreased 79% to approximately $700,000 as a result of reduction in our average borrowings on our line of credit due to the inventory reductions we have made.

Regarding income taxes, we did not recognize any income tax expense and we are likely not to do until we return to sustained annual profitability.

Net income for the third quarter of fiscal 2010 was $512,000 or $0.02 per share, much improved from our net loss of $9.2 million or $0.49 per share for the comparable quarter last year. As was previously mentioned, our net loss for the quarter included approximately $1 million or $0.04 per share of loan cost written off associated with our recently retired financing facility.

Turning to our balance sheet, at quarter end, we had approximately $24 million in cash. As we have mentioned in the past, our cash is a function of how much we want to leverage our inventory. We had substantial cash in the form of unlevered inventory.

Our inventory at quarter end was $181 million, which is down more than $158 million or 47% from the comparable period last year. Our inventory reduction was also significant on a unit basis as our total units in inventory as of June 30 were down approximately 46% on a year-over-year basis.

The aging of our inventory has much improved compared to where we stood a year ago as is evident by the increases we are experiencing in our gross margins.

As we mentioned on past calls, we are now forecasting our purchases with our manufacturers three times a year versus the once a year approach historically used by the industry. This allows us to ensure that what we are ordering is more closely aligned with what we are selling at retail which should result in increased turns, reduced risk and better margins.

Turning to our liabilities, the cash we have generated through reducing our inventory, lowering our expense structure, raising equity last September and the onetime tax benefit we recognized in December has allowed us to reduce our related inventory financing by $193 million or 77% on a year-over-year basis bringing the line down to only $57 million or $33 million when you net out the cash.

As Bill mentioned in late June we secured a new financing facility with GE replacing our previous financing facility. The new three-year facility provides up to a $100 million of floor plan financing, which can be increased to $150 million if needed and includes two one-year renewal options assuming that GE approves. This new facility has several terms that are favorable to us. First interest on the facility accrues at a rate of LIBOR plus 378 basis points, which is approximately 110 basis points below what we paid under the previous facility.

Second, the primary collateral that supports the facility is our inventory and related accounts receivable, which means that our real estate is no longer pledged asset. Third the facility focuses on balance sheet covenants versus operating covenants.

The current ratio is required to be greater than 1.2 and the total liabilities to tangible net worth ratio can’t exceed 2.75 to 1. We ended the quarter with a current ratio of 1.85 and total liabilities to tangible net worth ratio of 0.63. Both of these are very healthy balance sheet ratios and are far better than the required covenant levels.

This new facility also provides us with financial flexibility that many of our competitors do not have. This facility and the flexibility that it affords was able to be achieved due to the considerable balance sheet that we had built over the years including our $207 million of tangible net worth. Our outstanding debt remains among the lowest in our history and the equity in our inventory which is a measure of debt to inventory is also at very low levels. We own more than half of our locations which are debt free.

We are pleased with the progress we have made in continuing to manage our inventories and we continue to believe that we are well positioned for cash flow generation and profitability as conditions start to improve and we benefit from our lower cost structure.

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

Bill McGill

Thank you, Mike. According to some industry sources, over 1400 dealers have shut their doors in the marine business. This places MarineMax in an excellent position as the largest boating retailer in the country to continue to gain share and capitalize on the opportunities ahead. We are controlling our inventory and expenses with a great level of discipline and vigor than we ever have before. We have also significantly strengthened our balance sheet and have considerably more financing flexibility under our new financing facility.

I mentioned last quarter that we were reviewing opportunities for growth and I am pleased to say that we have positioned the company to resume its strategy focused on growth. We are continuing to look for opportunities to grow via brand expansion and other opportunities to further entrench our position as the country’s largest and stronger boating retailer.

We have been pleased to see that our customers are boating more this summer, which is evident that their passion for their boating lifestyle has not waned. In fact, the National Marine Manufacturers Association showed in a recent report that boating participation in 2009 was 10% above 2006 levels, and 25% above 2008 levels. Our quantity of fuel sales are up in our Marinas substantially this season and participation in our customer events continues to grow.

I was at our Montauk, New York event this past weekend and experienced over 90 families enjoying boating activities. Customers boated from North Carolina, Maryland, Massachusetts, New York, Delaware and Connecticut to enjoy their friends and families with their Sea Rays, Azimuts, Meridians, Boston Whalers and Hatteras. It was a fun time for all. While it may not be a quick and sharp recovery, we believe we are well positioned to benefit as the pent up demand continues to grow. These customers not only have the passion for the boating lifestyle but have also been reminded during these challenging times about the wonderful benefits that boating provides in terms of relieving stress and maximizing their time with their families.

MarineMax has and will continue to help our customers maximize their enjoyment on the water by teaching them, servicing them and showing them how to have fund.

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

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from James Hardiman of Longbow Research.

James Hardiman – Longbow Research

A couple of quick questions. It sounds like mix played a pretty significant role in the quarter. I was hoping you can give us an idea, obviously there is some noise, this is an interesting year. But historically, new boats have been, say 70% of your sales, used have been, say 18% to 20% and then the remaining 10% is everything else of all the really high margin stuff. Last year, new boats were closer to 60%.

Can you give us an idea of compared to those historical numbers or compared to 2009, where we were in the June quarter? And then realistically, where do we expect, just sort of big picture, those numbers to be longer term?

Mike McLamb

It’s difficult to and we don’t disclose mix on quarter-to-quarter basis because it’s kind of bumpy and lumpy and jumps around depending on boat sales. But you are right, I mean historically 90% of our revenue came from new and used boat sales. If you kind of track the percentage that are disclosed in our Ks from ‘06 to ‘09, in ‘06 7.7% of our revenue was service and parts and accessories, in ‘09 it was up to 12.9%, and plus some of the other businesses like F&I, brokerage and so forth grew incrementally.

So what’s happening is as boat sales are moving closer to that 80% overall level and then depending on which quarter could even drop below that. But you are right, that is driving some of the margin pictures to what’s going on here and then plus we continue to be focused on those other businesses probably more so than ever. So that as boat sales do eventually recover and you start to get maybe boat sales become 83% or 84% or 85%, we certainly hope that incrementally those other businesses will continue to be a great percentage of our company going forward than they were historically when we were at comparable levels which ought to help margins on a going forward basis as well.

James Hardiman – Longbow Research

Okay. So you don’t necessarily expect the trend of the last three or four years to continue at that rate? Meaning do you expect new boats to ever be much less than 60% or should I expect that trend to continue?

Mike McLamb

I would anticipate that boat sales as industry begins to recover will become a great percentage of our business than they will be like for fiscal 2010 as an example. But I think when we compare us, let’s say we get to $850 million again or $900 million, I think at that point of time if you look at what percentage of service is our revenue, it’s going to be greater than the last time we were $850 million or $900 million. But you got to remember our average unit selling price is so high that as boat sales begin to pick up, it’s hard for service to keep that same percentage. I mean it will be higher than it was but it will probably decline from the levels than it is today.

James Hardiman – Longbow Research

From a market share perspective, obviously, you’ve had a couple of quarters now with a smaller overall footprint. Clearly, that helps you focus on some of the key markets and it sounds like you’re gaining share in the individual markets in which you are focusing on.

Can you speak a little bit towards your ability to get back to the share numbers of the overall U.S. market going forward? I think the hope, to a certain degree, had been that you’d be able to service a lot of the same areas with fewer stores, but have you been able to do that and do you think you will be able to get back to the sort of historical share of the overall U.S. market despite the smaller footprint?

Bill McGill

I would say that it’s been a challenge here recently to really make substantial gains in market share because of the repo boats and the dumping that’s been going on by banks and even consumers that have decided they need to dispose off their products that were kind of in trouble with them. And so that has put some pressure on us.

But that being said, we have a what I think is really a game changer in the industry and that is we have the ability to get wholesale financing in order to be able to stock the products and to buy the products and to do the things that we need to do to really take advantage of the recovery that’s going to come one day.

So, the industry is significantly challenged right now with wholesale financing and we are hearing – we are getting calls from dealers saying help, we are getting calls from dealers saying I can’t buy big boats, the banks won’t let me do it or the interest rates are very, very high. And I think that’s a real competitive advantage from us which will further help us with market share.

We didn’t see the recovery in the economy that we had all hoped and prayed for that would be occurring this summer and perhaps this fall even though this fall is yet to come. And as a result, with approximately 1400 dealers that have failed across the country, some sources that we have talked to indicate that that number could be an equal number that failed through the winter months of this coming winter because they didn’t get the, just like we didn’t get the revenues on boat sales, most of our competitors did not get it either. And as a result, it’s going to be a greater challenge for them and there will most likely be more failures.

As such, our customers that are shopping that are – we travel less in the good time, we travel farther in the bad times. And so we believe that our current locations of 56 stores I mentioned it, we can be back that – and get back to perhaps where we were in ‘06 and ‘07 without opening another store, not that we are looking for opportunities. And so, we believe we can better serve those customers and from where we have got and most stores we have can do that.

And so, we have a focus on market share but at the end of the day we got to let the repo and problem boats work their way through the system and there probably will be some more but we are making the margin on what we are selling then and our inventories are in good shape. So that’s the good news.

Operator

We will go next to Joe (inaudible) with Raymond James.

Joe – Raymond James

Can you run over the retail sales numbers again, you said for the June quarter and what that specifically covers, is it just –

Mike McLamb

You are talking about 25% to 35% down.

Joe – Raymond James

Yes. Is that a fiberglass 18 or whatever or what does that account for?

Mike McLamb

It’s basically fiberglass, stern driven and in board boards.

Joe – Raymond James

Okay, no foot range just from –

Mike McLamb

It’s not (inaudible), 18 to 60 feet.

Joe – Raymond James

Right, you said 20% to 25% down in the June quarter?

Mike McLamb

25% to 30% down.

Joe – Raymond James

Sorry, 25% to 30% in the June quarter.

Mike McLamb

Depending on the market, like the data that we have seen on Florida shows, it could be down as much as 40%. As you know, the data at this point in time is pretty fresh and it takes some while for it to mature, but that’s what we have seen on Florida.

Joe – Raymond James

Okay, geographically, any other areas like Midwest or something like that that may have shown a significantly better trend than that or no, is it all other than Florida, relatively consistent.

Bill McGill

The last couple of calls, I was able to say Florida is having strength and also the northeast is having strength and on this call I would tell you that Florida and the northeast both were little weaker than the rest of the country.

Joe – Raymond James

Okay, any trends in July yet?

Mike McLamb

July has improved, it’s doing better than what June did, which July never does better than June, normally less last year while we were liquidating our balance sheet it did, but July should prove to better than June by a decent percentage, still a small month relative to historical averages but it’s nice to see that at least it’s better than June.

Joe – Raymond James

So a lesser decline is what you’re saying?

Mike McLamb

Yes, correct, I am sorry. Remember last year we had that monster quarter and so we will be still be down from last year. But sequentially for July to be better than June with decent margins while we are not liquidating products, it’s at least a little bit of an encouraging sign.

Bill McGill

I am hearing from the stores almost all of them that are saying that actually the interest has picked up a little bit especially in some of the larger products and it’s a little encouraging but there is still a lot of concern about what’s going on in our country here that seems to have everybody locked up. And up at Montauk is an example, I mean I talked to a good portion of the 90 families that were there and they are all talking about their next boat. I mean there is absolutely none of them that were saying, I am going to stay where I am. I did hear, I got to see things get better before I get in that next larger boat but this is large Azimuts, (inaudible) Sea Rays, etcetera. Our getaway trip this year to the Bahamas have been packed. And so, most all of our events are up, AquaPalooza is included.

And the customers are out on the water, they are talking about the next boat, they want the next boat, but they are struggling with what’s going on right now. And the oil spill had a lot of them locked up, not from the standpoint of boating as much as the impact on their business, if they own a restaurant or if they are dependent upon the tourist strait in Florida or whatever. And of course, as you know, housing is still an issue in Florida.

So we got a probably a long road ahead of us but we are going to look at the opportunity here and we are being presented with many opportunities, we are evaluating right now. And the good news is we got our bank deal done, that is very good news. We don’t have to worry about that next May and we got a lot of maneuvering room here and we got a great partner in GE and we are very excited about it.

Joe – Raymond James

In regards to the oil spill, do you see anything within Florida where there is a difference in demand? That is, we are along the Gulf and maybe the Panhandle, do you see more of a decline than, I don’t know if you could tell, Inland or on the East Coast or –

Bill McGill

We heard it all the way to Carolinas, customers are saying it may come here. And in Florida, there was, I mean I specifically talked to customers that said, they were in the tourist type business and with the restaurant or with the motel or whatever the case might be that said their occupancy was down on the west coast to Florida because of the oil spill in the Panhandle which if you look at the Gulf stream flow, I mean the chances of it coming to the West Coast of Florida was pretty strong from day one. But it still locks people up, the news which we all – there is good and bad in it, but it gets exaggerated, I mean when I was up in New York I had customers saying they will – all the beaches have problems in Florida. And that’s what the news projects out there even though it’s just a very few beaches and that Panhandle that had a problem. And so, you have to deal with it. But the good news is they are boating, their passion is there for this recreation and they are more focused today, absolutely more focused on I got to get out and get away from all of this stress that’s going on and boating does it. And so, we hear that everywhere.

Joe – Raymond James

On your margins in the September quarter, your boat margins were depressed in the September quarter more so than the rest of last year because of the inventory reduction, you did like a 5% or 6% gross margins in the quarter.

Mike McLamb

That’s correct.

Joe – Raymond James

I know we saw dramatic increases on, but can we see even a larger, not a year-over-year increase but maybe relative to where you have historically reached peak margins before. I mean can we repeat 30% in the September quarter? I know there used to be a hole back there that kind of helped your margins in the September quarter, I don’t know if it’s still there or –

Bill McGill

I know I mentioned this when the programs change, when we went to this three times a year forecasting, that hole back, that backend money from the manufacturers that used to be earned and paid in the September quarter and therefore a lot that was recognized in the September quarter is now earned and paid kind of a three different points (ph), it’s earned, it’s not paid, it’s earned at three different points throughout the year.

So that big spike in margins in September where it goes as high as 20.5 and 27.5, that should not happen to that degree from the backend program, to your point. As for where the margins could be, I mean we did 30% this quarter which we are pleased with, we would be pleased obviously if we did 30% in the September quarter but so much of it depends on the ultimate mix, what the boat sales do and also to a degree on product mix. If we are fortunate and deliver a number of larger products, whether they are Hatteras or Azimuts, which I think as you know historically carry a lower margin than like our Sea Ray business does, that could affect what that outcome will be as well. So it’s real hard to say that September would be.

I think in general the comment that I made earlier on it with James’ question that if you think on an annual basis, I think our margins for similar revenue levels have the potential to be higher as we move forward because of the focus we have on the higher margin businesses.

Operator

We will go on to Greg McKinley with Dougherty.

Pete Mahon – Dougherty

Wanted to get your thoughts around kind of 2011 and the topline outlook. We spent the last few years year-over-year decreases were kind of the norm. Do you think 2011 is kind of the year where we start to see year-over-year increases in sales and what kind of gives you the confidence for or against that outlook?

Mike McLamb

If you looked at predictions of the future for the economy, I think you might be stretching to say that the economy would be flat for next year, I don’t know because there is a lot of predictions that it will be worse. But if you look at fallout in our industry, 1400 dealers thus far and perhaps 1000 or 1400 through the winter months, then even though the economy may not recover in 2011, our chances of perhaps seeing an uptick is there. However hope is not a strategy and so we are going to continue to run our business from an expense line, the inventory level assuming that things are flatter or perhaps even down a little bit for 2011.

But we are still working our way through it and we are in discussions with our board as to what our best guess is with our very cloudy crystal ball could be for what 2011 is going to hold. So it’s anybody’s guess at this point as to what it could be is probably another way of saying it.

Bill McGill

Industry data, industry reports I think for the remainder of this calendar year that the industry for calendar 2010 or it’s going to be down 10% or 20% overall, that includes aluminum, fiberglass, everything and there is a couple of people that are saying 10 or 20, couple are 10 or 50, something like that for all of them.

We don’t give guidance anymore on specifically what we think next year is going to be but I think there will probably be some industry forecast coming out for 2011, probably darn quick because the model here for 2011 is upon us right now at least, starting soon.

Pete Mahon – Dougherty

One other question is we talked about how SG&A sequentially was up a little bit due to higher commissions relating to the higher margin boat and the broker sales. Do you think that as we think about the September quarter in 2011, that should probably become more the norm opposed to the exception?

Mike McLamb

Well, I think if we have same trend on margins then you are going to get a little bit of a bump up from where we were tracking from an expense perspective which, I will take all day long, I will take $12 million, $13 million of gross margin dollars for the additional commission expenses that we paid all day long.

So that would be great if that’s the case. If for some reason the margins aren’t delivered that way that our cost structure is across the company would have our expenses come back down into the roughly $30 million range, maybe little bit below that for the quarter.

Operator

We will continue on to Tim Conder with Wells Fargo.

Tim Conder – Wells Fargo

You have already commented the difficulty in making any type of projections here just given the economy and the volatile nature of everything here. But the repo and the driveway to the driveway used market, do you get a sense or are we kind of reaching, in your opinion, the peak downside intensity of that or do you see that leveling off? And then again, from the non-current product that appears to making some very good progress year-over-year, but I guess if you restrict those availabilities of both of those two buckets, then the alternative then is our new boats.

So I guess the more critical one here would be the repo and the driveway to driveway used market.

Bill McGill

I would say that the repo are decreasing. So it’s not something that’s I think is leveled off. I think it continues to decrease. Albeit there will be, if there is more dealer failures, there will be more repos. But that being said, the used boat pricing that we are seeing, other words that the retail pricing that’s occurring with used and repo is increasing. And the reason is that is the quantity is decreasing.

So the unbelievable deals that were out there at one point in time that you couldn’t compete with are becoming more realistic to what the used boat market should be today. And so, that’s some good news but we will continue to have to work our way through it some because consumers today are still looking for the deal. I mean it’s hard to get them off of that considering all the news that we hear about what’s going on in the economy.

And boating, as you know, the passion hasn’t gone away but it’s not as high on the list as some of the other things like buying a new car or whatever the case maybe that people see as a necessity.

Tim Conder – Wells Fargo

Just any commentary, thoughts on Brunswick’s announcement just hitting the tape here in the last hour to sell Triton and then looking for alternatives on Trophy. And then one other kind of big picture item, any guesstimate and I know that’s probably the key word there, but any guesstimate, your insight on looking into next year and the impact of the Obama Care items kicking in the next couple of years, expiration of the Bush tax especially on the $200,000, $250,000 plus crowd customer that buys that larger 35-foot plus boat.

Bill McGill

Well, the Triton Trophy, we do not do any business with Triton. We do very little business with Trophy and we can’t really speak to as to the reasons they were sold, but I am sure they were very good reasons or Brunswick would have not done what they have done. But it will have no impact on us as far as Obama care and everything else is concerned, you don’t want to get me started and Mike is holding on my shoulders and head right here but –

Mike McLamb

Shouldn’t have asked the question.

Bill McGill

I believe and this is so, you asked, I am going to do it, okay. I believe that November and if we can get some of this control taken away that our consumers will start buying something, be more confident and start buying. And I am hearing it from the customers. We are hearing it from the customers, everybody is scared to death, the Bush cuts are going to go away, everybody is scared to death about the healthcare and everybody is scared to death about what we are doing to our great country.

And so, we all need to go back and look at the basis that this country was founded and see what we can do to get it back there versus where the damn thing is headed. Sorry about that, Tim.

Operator

We will continue on to Steve Bowman (ph) with Divistar Capital.

Steve Bowman – Divistar Capital

I’m not sure if I missed this. You mentioned that you had a write off of some financing cost in the quarter. Where was that on the income statement?

Mike McLamb

SG&A.

Steve Bowman – Divistar Capital

It’s in SG&A and not in interest expense?

Mike McLamb

No, it’s not. It’s about $1 million that went through SG&A. It’s treated like amortization expenses. We had a credit facility that was due to expire in coming up here May 2011, and we went out and replaced that with a new facility with GE capital and so that caused us to write off whatever low cost that still hung up on our balance sheet that we are amortizing.

Steve Bowman – Divistar Capital

That was $1.0 million, okay. I think, Mike, you said before that SG&A kind of been running in the $30 million to $32 million range. So really the right SG&A number to think about is kind of $32.3 million (ph) on this level of gross profit and sales?

Mike McLamb

That’s correct, yes.

Steve Bowman – Divistar Capital

So you actually do compensate based on gross profit, I thought that’s last year when you had that big blowout quarter with very poor margins, you had talked about the fact that you needed to pay commissions on those sales.

Mike McLamb

What we did last year, I mean different – throughout our 13 years as a public company and our commission structure for 12 years and 75% of the last year was based gross profit dollars and gross profit percentages. In the September quarter, we moved to a cash flow commission structure for our team to reward them even though the company wasn’t going to make much money on the boats, which was the right thing to do to get our balance sheet down. And it worked, we got our balance sheet down. But that was just that one quarter, then starting in October, we went back to the typical commissions that we have had for many, many years, which is what we are operating under now.

And so the greater the gross margin, the greater the commission for the sales team.

Steve Bowman – Divistar Capital

And then kind of piggybacking off some of the earlier questions and understand that the outlook kind of changes week by week here but looking at last year, obviously, you grew sales sequentially from the June to the September quarter by very healthy amounts, what, 40% or something?

Mike McLamb

Yes, 38%.

Steve Bowman – Divistar Capital

That seems to be kind of anomalous seasonality to me as I look back over previous years, normally your June quarter is much higher than your September quarter. Would you agree with that characterization and is it reasonable to think that September could be up over June?

Mike McLamb

I would tell you, I think last year was the only year I think that it was up, if you take that acquisition. Sometimes we may have completed an acquisition in a quarter, so the absolute dollars may have been up in September but normally the June quarter is the seasonally largest quarter and then September would the second biggest and so that would be correct. And last year, when we were lifesizing the balance sheet, we had the very strong growth.

I think at this point with kind of how the industry has dramatically dropped because the industry is much, much smaller than it used to be. I think little news events or even big news events can have a more exacerbated impact on a quarter like I think we experienced in the June quarter. I think whatever caused consumer confidence to drop as far as it did, was reflected in our business, our June was much weaker than we would have liked. It’s nice to see July picking up here. We obviously will do everything we can to make the September quarter bigger than the June quarter but it’s day by day battle as you can probably imagine.

Steve Bowman – Divistar Capital

Can you talk a little bit more about kind of that day by day battle? It seems like there has been quite a bit better news on the oil spill in the last couple of weeks than we have had, certainly in the prior three months. Do you guys see that filtering into consumer behavior? Have you had sales that were deferred that have now picked up?

Mike McLamb

I think it’s too quick to directly tie them back in fourth. But right now I will say just living here in Florida whether you are at a dinner party or you are out at your son’s football practice or something like that, people feel a lot better that that well is capped. I mean definitely people feel better about it. And whereas three week ago, people talked a lot about it, it’s been front page news down here since it started leaking.

So we are optimistic. I think as Bill said in his remarks that some of these folks have deferred their purchases perhaps in the June quarter that maybe they will come back and buy now in the September quarter but only time will tell ultimately.

Bill McGill

We need some positive news in our economy and one of the most positive news is that it needs be heard by our customers that everything is going to okay as to why we run our country. And I am very serious when I say that I hear it with almost every customer I talk to and our team hears the same thing. We are all scared to death and that’s what has our customers locked up right now.

Steve Bowman – Divistar Capital

I wonder if you can talk a little bit more about the pace of business through the quarter? If you talked about this already, I missed it, but it sounds like June was the weakest month, is that right?

Mike McLamb

We commented on our last call that April had started off slow and kind of was building on our last call, what you did and obviously I believe April was down over the prior year but I don’t have that data right in front of me. May was softer than we expected, but was acceptable. June was certainly softer than we were expecting. So June will be probably of all the three months would have been the greatest let down in the quarter from a revenue generation standpoint. A lot of that’s because of historically big June has been, June is normally – everybody gets their boats before July 4. So it’s usually a pretty big month and it just didn’t materialize to the month that we thought that it would.

So that’s kind of how we look at the quarter. Keeping in mind that everything is relatively low compared to historical levels.

Operator

We will take our final question from Dan Mendoza from Prospect Capital Advisors.

Dan Mendoza – Prospect Capital Advisors

I want to kind of triangulate a bunch of different data points, I don’t know if you had a change to go through the Brunswick numbers in detail but it looks like their domestic boat revenues were up something like 160%. So just kind of trying to square that with your inventories being down where they were year-over-year and kind of your commentaries about availability of wholesale financing to other folks. I mean because obviously those boats are going someplace.

So I was hoping to get your thoughts on that and hoping to understand that and then also just to kind of try to understand where the inventory levels are for the industry on a broader basis with that kind of number from Brunswick.

Mike McLamb

I believe and again I have not actually read all of Brunswick’s release, I saw some of it when it came out but what you are seeing in ‘09 production was taken pretty far down. In 2010, you are seeing and I think this is what a lot of manufacturers have said is they are kind of filling some of the channel back up to a reasonable level but they are very – the manufacturers are very carefully watching inventory just like the dealers are. So I think what you are seeing with the manufacturers in the industry is just kind of the restocking of the dealers. The dealer that in 2008, he may have had a $10 million line of credit, he has only got a $2.5 million line of credit now or $3 million line of credit.

So I think that’s Bill’s comments relative to back to where it used to be, the lines have all been brought down or they are gone because the dealer went out of business. Your question on inventory levels. From our perspective, industry inventory levels continue to improve and they are in pretty darn good shape right now but they continue to improve. The aging is getting very good. It’s harder to find 2008 non-current at dealerships and we don’t have that, but it’s hard to find that type of product. It’s even the 2009s are getting lean out there. So the industry has greatly improved from where it was 18 months ago and I know our margins on our products have done quite well and I believe other dealers are probably doing better than they had last year on margins also because of that. So it’s a much healthier industry overall than it had been.

Dan Mendoza – Prospect Capital Advisors

Maybe it’s a better question for Brunswick but trying to square up 160% with an industry that was down 25% to 30%.

Bill McGill

It’s just refilling the pipeline, that’s what’s it’s doing.

Mike McLamb

I think it’s all relative to also how far down they took it last year probably.

Dan Mendoza – Prospect Capital Advisors

And then I guess your commentary about the potential for additional dealer closures, I mean you guys have been in the industry for a long time. Are those numbers out there that some people are projecting for winter closures numbers that you sort of agree with?

Bill McGill

If it’s based upon the calls that we seem to be getting because we have had quite a few calls from dealers that’s saying help, but I would have to say that number could be a realistic number for further closures of dealerships. However, a lot of it depends on what happens for the rest of this year because if it doesn’t improve, you got to say it’s probably a realistic number. If it improves some, maybe it’s too higher number.

But there is issues out there and the cash is king and if the financing sources have cut down the availability of cash, I mean if you don’t have cash, you are done, and that’s what’s happened to a lot of dealers. This is shame because some of them are very good dealers. And it’s a fact of these times.

Dan Mendoza – Prospect Capital Advisors

And as you have said so that relative to the other 1400 dealers that the inventory that they are carrying is a little bit fresher, can you give us a sense of how long it would take for the industry to clear that inventory out?

Bill McGill

Well, I think it’s pretty low anyway and so I don’t think it would take a long time to clear it out. And so, it’s not going to be nearly the issue that we saw –

Mike McLamb

Leaving 2008.

Bill McGill

Leaving 2008, 2009. So that’s the good news. It’s much less of a problem and it’s helped by the fact that values have gone up. And so, our repo boat that we are selling through 56 months ago, maybe selling through 60 today. I think that helps the whole picture, there is less supply.

Operator

That does conclude our question-and-answer session today. I will turn things back over to Mr. Bill McGill for any additional or closing remarks.

Bill McGill

Well, thank you everyone for your continued interest and support in MarineMax. I would also like to thank again our team members for their hard work and passion for our business. It’s truly due to their efforts that we can call ourselves a leading boating retailer in the country. Mike and I are available today if you have any additional questions. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s presentation. Thank you for your participation and have a great afternoon.

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Source: MarineMax, Inc. F3Q10 (Qtr End 06/30/2010) Earnings Call Transcript
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