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MarineMax, Inc. (NYSE:HZO)

F3Q11 (Qtr End 06/30/11) Earnings Call

July 28, 2011 10:00 am ET

Executives

Brad Cohen - ICR

Bill McGill - Chairman, President and CEO

Mike McLamb - CFO

Analysts

James Hardiman - Longbow Research

Greg McKinley - Dougherty

Operator

Good day everyone, and welcome to the MarineMax Incorporated third quarter 2011 earnings conference call. (Operator Instructions) At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Brad Cohen of ICR.

Brad Cohen

Thank you, Operator. Good morning everyone, and thank you for joining this discussion of MarineMax's 2011 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 email one to you.

I would now like to introduce the management team of MarineMax, Mr. Bill McGill, Chairman, President and Chief Executive Officer and Mike McLamb, Chief Financial Officer of the company. Managements will make some comments and then be available for your questions.

And with that, let me turn the call over to Mike.

Mike McLamb

Thank you, Brad. 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’d like to turn the call over to Bill.

Bill McGill

Thank you, Mike, and good morning everyone. As seen in today's results, we have reported strong new boat sales for the third consecutive quarter. We’re encouraged by the fact that our sales growth exceeds the data that is generally being reported by our industry. Despite industry challenges, with a drop in already low consumer confidence, not to mention generally rising fuel prices for most of the June quarter, we continue to drive positive traffic and were able to achieve Same-store sales growth of 33%.

With increased new unit sales for the past three quarters, we replenished our availability of used boats as customers traded in their boats for new ones. For the first time this year, because of these trade-ins, we had a slight increase in used boat sales over the prior year. From a pricing perspective, used boats continued to incrementally increase in value as the availability generally has tightened in the industry.

With increases in used boat pricings, consumers are rethinking their consideration of new boats when making their purchases and are more willing to trade in their boats when they can realize higher trade-in values. As the industry continues to improve, we are starting to gain confidence that this positive momentum is in new and used sales were build and proved to be sustainable as we move through the next few years.

However, given the seasonality of the business and the unstable microeconomic factors, there is most likely to be continued quarterly volatility. Nearly 33% Same-store sales growth in the quarter is significant and clearly shows that our industry is alive and also shows the passion and desire that our customers have to be out on the water with their family and friends.

At this point, it's worth mentioning that during the depths of the recession and through today, we made strategic decisions to not reduce in anyway the things that we do for our customer. For example, we are doing more Grady-White trips with our customers, our mobile service efforts have increased, our training classes for customers or team members for that matter have not been cut.

We also launched more ways for us to stay in touch with our customers. We created a call center. We launched a rewards program for our customers. We enhanced the ability of our customers to reach us through the web offerings. We offered MarineMax care which provides two annual services for new boat sales and so forth and so on.

We believe that these efforts are the main drivers for a strong double-digit unit growth as compared to the unit growth the industry generally is reporting, because these efforts kept our customers boating, it kept them happy, and as kept MarineMax involved with them as being part of our family.

Of course, these efforts have a cost. But we determined it was and still is the right long-term investment to drive share growth. We also believe that our one-price pricing strategy in the brands we carry, provide our strong team with added advantages over the competition and in further enhanced our unit growth.

On previous calls, we commented that as our new boat business returns and drives boat sales to be a larger percentage of our overall revenues, our consolidation margins will be impacted. With a very strong boat sales driven growth that we experienced this quarter, our higher margin businesses shrank as a percentage of the whole. This drives down margin percentages as compared to the relatively low boat sale quarter last year that we had when our higher margin businesses were larger percentage.

Additionally, we incrementally sold more larger products this year versus last year which typically carries lower gross margin percentages. There is good news in the fact that our product margins are still 300 basis points to 400 basis points below historical level. And therefore, as we move forward in the recovery, the opportunity increased profitability remains compelling.

As stated earlier, our results for the June quarter in the segments in which we focused and are in contrast to the industry reports. However, there are increasing reports that the industry has bottom and unit growth is beginning to return. Most recent reports indicate flat to single-digit unit growth in the June growth.

During this, the quarter we did generate incremental Same-store sales growth from the new brands that we added. We believe that the new brands like Nautique, Malibu, Bayliner and Mako will continue to drive sales as we grow with these brands.

In the future, these brands’ additions along with the expansions we have made into new markets with our existing brands should yield greater Same-store sales growth opportunities. We are pleased that for another quarter, we had an improvement in the aging of our inventory and we are comfortable with our inventory level and the ability of our manufacturing partners to adjust production if it's needed.

We also believe that the industry inventory level remains in pretty good shape. During the quarter, we made a strategic decision to spend additional marketing funds to ensure that we captured significant share in what was and always has been the largest quarter of the year. While this did result in greater SG&A spend, it definitely paid off. However, we will closely watch the balance between spend and share gain to be sure we maintain an optimal balance.

We exit the June quarter quite pleased with sales gains we have achieved. Through our sales initiatives and broader product offerings we are finding more ways to satisfy our customers, to attract new customers and overcome the many negative influences of this economy.

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

Mike McLamb

For the three-months ended June 30, 2011 our revenue was a $153 million, up approximately 33% or about $38 million from the prior year. Our Same-store sales increased a strong 33%. Our new unit growth was even greater than our overall Same-store sales growth. We experienced strong new unit sales in every market that we operate and across all segments that we carry.

Florida was modestly stronger than other parts of the country. Gross profit as a percentage of revenue was 25.5% in the quarter, down about 450 basis points from the prior year. As Bill said, that it is worth repeating the year-over-year decrease in the margin percentage was directly the result of the shift in our revenue mix.

With much stronger boat sales this quarter versus a year ago, our higher margin offerings like service, parts and accessories, finance and insurance fell as a percentage, resulting in the overall drop in our margins.

Additionally, we had growth in larger boat sales which historically have carried a lower margin. Overall, our product margins did well in the quarter but we still have plenty of room to get them back to historical averages.

Selling, general and administrative expenses fell as a percentage of revenue by approximately 600 basis points compared to the prior year. On a dollar basis, our SG&A increased 5.7%. The largest contributors of the increase were increased commission associated with a large increase in boat sales and additional cost related to the expanding presence of our new brands and increased marketing spend in the largest quarter of this season.

The share gains, we experienced in the quarter appear to be significant. We did have about $400,000 in extra expense associated with accelerated depreciation related to replacing our phone system with a new internet-based phone system which long term will be more cost effective.

Interest expense increased slightly to $837,000. Regarding income taxes, we had a tax benefit of $333,000 for the quarter compared to no income tax benefit in the prior year. Our effective income tax rate will remain essentially zero until we have annual profitability due to limitations on our net operating loss carry-back availability.

The net income for the third quarter fiscal 2011 was $3.4 million or $0.15 per share. This is a significant improvement over our net income of $512,000 or $0.02 per share last year.

I will only make a few comments about the nine months ended June, 30 results. First, our Same-store sales growth stands at 11%. Second, our margins have remained fairly constant even as we have increased our boat sales component which should imply that our product margins are doing okay. Third, we have essentially held expenses in check. In the nine months, we've added over $8.7 million in gross margin dollars with a modest increase in expenses.

Turning to our balance sheet, at quarter end we had approximately $27 million in cash up from $24 million last year. As we have said before, our borrowings and our cash are a function of how much we want to leverage our inventory.

Our inventory at quarter end was $201 million. As Bill mentioned, the year-over-year increase in our inventory was mainly due to new product lines and the timing of the receipt of boats. The aging of our inventory continues to improve.

Turning to our liabilities, our short-term borrowings were $105 million at the end of June up approximately 17% from $90 million at March 31, 2011 primarily due to the increase in inventory. Our line is up over the prior year and our accounts payable are down as a result of our new floor plan facility.

With our new facility, manufacture payables are applied directly to our line of credit. In early June, we announced and increased our existing financing facility with GE capital that provides us with a $150 million of financing. The previous facility had a $100 million limit. The facility has the three-year term now expiring on June 2014 and it has two one-year options to renew.

We must remain in compliance with certain balance sheet related covenants. Given the strength of our balance sheet, we do not foresee any issues remaining in compliance with the facility. Our balance sheet is in great position, and we ended with the quarter with a current ratio of 1.68 and total liabilities of tangible net worth ratio of 0.79, both very strong ratios.

Our tangible network stands at approximately $200 million. We earn more than half of our locations which are all debt free. We remain confident that we are well-positioned for driving additional cash flow generation and profitability as we leverage our financial strength and capture additional shares as industry conditions continue to improve.

I would add that so far July looks like it will be up double-digit in units for the month but not as strong as the June quarter. Obviously, we need to work hard to keep the momentum going for the entire quarter. While we've seen three quarters in a row of double-digit new boat sales, we all should expect some ups and downs as the industry works its way out of this historically difficult environment.

With that background on the quarter, I would turn the call back over to Bill.

Bill McGill

Thank you, Mike. I'm sure it’s good to see new unit sales up for the third consecutive quarter. We felt we hit bottom last summer and based on the track record so far this year looks like we did just that. This was our strongest quarter in recent years that we aim for MarineMax to continue its share growth in the future.

Our team is committed to providing our customers with a great boating experience and helping the company drive improved results as we move ahead. We have spent a great deal of time improving our product offerings, implementing leading retail strategies that help us capture market share and driving increased cash flow. While the business might still be lumpy quarter-to-quarter, we believe that the worst is behind us and our results are going to continue to show improvement.

As I mentioned earlier, we have remained focused on our strategies and investments to support our customer and their boating lifestyle. Over the years, I have found that when our customers boat with their family and friends, their passion for this lifestyle gets stronger and stronger.

Our team is helping our customers enjoy this boating with MarineMax more so today than ever. Our customers had been anxiously but cautiously waiting for more positive economic news. And our strong Same-store sales support that statement. As our customers continue to boat with family and friends, the MarineMax family will be a vital part of that equation.

As we enter a time when customers are more focused on trading or upgrading their boats, no one in the industry is better positioned than MarineMax to serve customer needs and help them find the boat of their dreams.

Our Getaway trips this summer are standing (inaudible) and our service teams are busier then ever helping our customers prior to enjoy the many water activities and events that are available to this indoor community. As we have said many times, our industry may be cyclical, but our customers' passion for boating as an escape and family bonding experience is not cyclical.

And with that being said, operator will open up the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our question from James Hardiman with Longbow Research.

James Hardiman - Longbow Research

Congratulations on some really impressive sales momentum here. Couple of questions with that 33% Same-store sales number in mind. Obviously no matter how you tease things out you guys had a great quarter from a topline perspective. I was hoping you could give us just a little bit more color on the underlying momentum of the Florida market since obviously you guys have probably better insight than anybody into that market?

But obviously, you have the delta negative last year, positive presumably this year from the oil spill, but ultimately once we get past through that oil spill comp do you think that Florida is still a market that's going to be trending positively and better than the rest of the industry?

Bill McGill

We do see recovery recurring in the Florida markets. We believe we would have seen even a greater increase from the northern markets but as we've heard from many different sources the weather has been an issue, and summer was late coming, spring was kind of missed in a lot of the northern markets, so we had our challenges there, and I think they would have been stronger as well, but we see Florida is coming back.

I can tell you, as we mentioned, our participation in our Getaway events is standing remotely, and so the customers are really out there boating. So we just need a little help from what's going on with our current government.

Mike McLamb

It goes to reason, James, that Florida is going to be bouncing back may be even a bit stronger and faster than the rest of the country. Just given that it was the first of all, I mean really, into that as a big market like in our industry, it starts falling in late of '06, early of '07; whereas the rest of the country maybe didn't fall until late of '07, early of '08 even though our employment down here is still higher than the country on average and the housing is still a challenge. And I don’t want to take away from the rest of the country, meanwhile, Florida was stronger. We had strong double-digit Same-store sales growth outside the state also.

Bill McGill

But it would have been stronger if the weather had cooperated a little better in the North Americas.

James Hardiman - Longbow Research

And then, just a couple other sort of intricacies of the quarter. Can you talk a little bit about pricing on a year-over-year basis? It sounds like small boats were a big part of the mix a year ago and maybe there is a little bit of a shift this year, and then how much demand could you help quantify or may be just give us some anecdotal color on how much of the contribution came from the new boat brands that you brought in?

Mike McLamb

I can add just a couple of comments and Bill, you can certainly follow-up it. I think the new brands added may be single-digit Same-store sales growth, may be 3% to 5% something like that.

Bill McGill

Not a whole lot, because they were just getting inventory into the field.

Mike McLamb

Just getting to be ramped up. But from a margin perspective, and to your anecdotal point, if you look back at June quarters, I mean this 25.5% that we posted in this quarter historically is very high. I think it’s the highest that I’ve showed and maybe the one quarterly back, but that should imply to everybody that the underlying product margins on the boats that we're selling under are doing reasonably well.

I mean they're not back to historical averages, as Bill said they’re still 300 to 400 points below. But when you compare what we sold a boat for this year and what we sold it last year for the most part they're pretty comparable summer-up, summer-down, but it's really comparable overall with a view towards margins slowly incrementally increasing.

Bill McGill

And we've got a consorted effort to make sure that the boats are priced correctly for the market with our one-price strategy which we call at this boat as low as, on the stickers that we put on the boat. And our consumers are really accepting that and are very pleased with that we're pricing the boat to the market and we're being straightforward with them without negotiation not only on the boat price but also on the trade price. And they appreciate that.

And we believe that that will continue to help us because at the end of the day, what people are looking for today is really the best price and so we're trying to do the best price we can for the market to price the boats correctly. So that's helping also, James.

James Hardiman - Longbow Research

But to the pricing question, I'm just curious, I mean obviously, I want to be comparing apples-to-apples, the industry you're saying is flat to may be up a little bit. That’s a units number. Your 33% is a dollars number. What kind of a pricing benefit, if any, did you get versus the unit number that industry is reported on?

Mike McLamb

I'd say a very small incremental. We were getting more for the boat, but it's an incremental change, not a mediocre change.

James Hardiman - Longbow Research

And then just last question, the July commentary that you gave, was that an overall Same-stores sales number? Was that a new boat sales number? What was that exactly again?

Mike McLamb

It's not the same store sales number. We don't calculate that before the end of a quarter, but it's a unit, what’s going on from a unit perspective. From our perspective, we think units are really, but we all should be watching out more people buying new boats and so forth.

And today, we still have some time to close at July. But we are looking at a double-digit increase for the month of July. I will say it's not as strong as June was, but that's fairly consistent with all the commentary that we've made and others have made that this recovery is going to be a little bit lumpy. And we are certainly got the momentum going and our team is working really hard to take care of our customers and sell much of the products as they can.

Operator

(Operator Instructions) Our next question comes from Greg McKinley with Dougherty.

Greg McKinley - Dougherty

You made a comment that product margins are still 300 basis points to 400 basis points below historic levels. Can you remind us of the differentials at the trough of the market? How far below did they used to be?

Mike McLamb

Back in the 2009¸ we were probably 1,200 points below. The market was at single-digit margins.

Bill McGill

With a lot of pressure from the retail markets.

Mike McLamb

It put a lot of pressure on everything. So we started recovering overall pretty quickly in 2010. The first quarter of 2010 has pretty good margin. Once we got the reports cleaned up and the overhang of the inventory cleaned up, it started recovering. And then it's incrementally getting better. I think what's happening still within the industry, these scars are still so fresh on the minds of all dealers, including ourselves, of what '08, '09 fell. So if we have deal on a boat, do we walk away from it or do we take it.

And I think overall that's what's still keeping our margins down below the historical average. But I think the longer we're away from the financial meltdown, the more confident the industry is going to have to search for that next customer or the confidence we're going to have to say to the customer, no, you've got to pay this price. And that's what we're seeing. We are seeing margins rising as confidence is coming back within the industry.

Greg McKinley - Dougherty

Now in terms of your operating expenses for the quarter, obviously there is an element there of variable selling expense for commissions, but you also indicated that you chose to invest more in marketing. So what form did that take place? Can you maybe give us a sense for how much incremental dollars you've spent? And is that something that we should continue to expect from you as you maybe see the market bounce off the bottoms here?

Mike McLamb

I think the biggest spend is probably over the internet. We did do localized cable, localized friends, direct mail. We just got very aggressive, billboards and some other stuff in the marketplace. We wanted to really capitalize on share during this quarter. The magnitude of it would be north of $1 million from a spend perspective. How much of that was incremental in the prior year? It'd probably close to that level.

It's not our intention to be spending that each quarter. Our belief is that our expense structure, all things considered, is going to be around that $30 million, $31 million in that range per quarter. As our both sales recover, you're going to start adding incremental sales commissions to that. And if we determined that we feel there is a need either for share gain or because we are sensing softness or something else that we need to ramp up the marketing bus again. We would do that, but that's not what the plan is basically.

Greg McKinley - Dougherty

And then one of you could just recap for us the different brands that you've brought into the portfolio, I guess, regionally where you plan to use those brands and sort of the timing of rolling those out?

Bill McGill

We've launched Mako in a bunch of our markets, which is Tracker Marine, Bass Pro Shops brand with a very powerful brand name, and it gives us an entry level fish boat, basically something that we needed in our portfolio. And so in almost every location where it makes sense to have the fishing boats, we've launched it. So that's all of the salt water markets, some of the inland markets, the Great Lakes, et cetera.

And it was kind of slow ramping it up because of the inventory that we needed and getting it into the stores and the training that was necessary with the team, et cetera. We've launched Nautique in Minnesota, Georgia, Chattanooga, Tennessee and on the West Coast of Florida. And as such, we are saying that that's working very well. We actually had a team and made some sales at the Masters Ski Tournament as an example. And so it's being very well accepted, a premium brand.

As well as in Malibu, we have out in Arizona, and that's going very well as well as in Missouri and Kansas. So we're seeing some positive upsides and some new buyers, new customers, to our family. Additionally, Bayliner is being launched in a lot of our markets. And what we piloted just about a couple of years ago, began to pilot in New York, it's really how does Bayliner fits within our stores with Sea Ray. And at the end of the day, we've got that model figured out and we're convinced. And as inventory starts coming in, I think we'll see some upside there.

But if the customers have shifted somewhat as far as their wallets are concerned, we can offer a premium product called Bayliner, built by Brunswick, to people who want to spend a little bit less and it's less content in the quality as Sea Ray product that we saw. So that's going very well.

Greg McKinley - Dougherty

So is that Bayliner fully rolled out at this point?

Mike McLamb

It's fully rolled out. We're still training our team, completing marketing plans and so forth. But we think it's something fully rolled out. We generally say it probably takes two-and-a-half to three-year mark where everybody in the community knows you've got it and so forth. But it takes a while to get ramp it.

Bill McGill

But what we are absolutely convinced that is it can work within the same store with the Sea Ray products, and it actually complements Sea Ray sales and vice versa. Bayliner gets complemented by the fact that there is not everyone that in today's time was to step up and spend the money for the highly featured, benefited Sea Ray product.

Mike McLamb

The other thing that's pretty beneficial also is where we've expanded with existing brands. We've gone through another call with Whaler, Hatteras, Chicago and New York or Azimut in Florida or Meridian in Chesapeake or Boston Whaler and Fort Myers in Naples and other markets. And no one could really see the benefit of that as the industry was dropping. I think we'll start seeing more the benefit of that now that the industry has bottomed and beginning to recover.

Bill McGill

And we are seeing good growth with Azimut product. And as we basically having on the Eastern Sea Board of United States and that's going very well as a lot of our Sea Ray customers are migrating into that product.

Operator

And it appears there are no further questions at this time. Mr. McGill, I'll turn the conference back over to you for any additional closing remarks.

Bill McGill

Okay. Thank you, operator, and thank you everyone for your continued interest in supporting MarineMax. As always, I'd like to thank again our team members for their hard work and for their passion for our business. To their efforts, we have been leading boat retailer in the country. Mike and I are available today. If you have any additional questions, please give us a call. And thank you to everyone for being on this call.

Operator

That does conclude today's conference. Thank you for your participation.

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