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MarineMax Inc. (NYSE:HZO)

F2Q08 (Qtr End 3/31/08) Earnings Call

May 1, 2008 10:00 am ET

Executives

Brad Cohen - Senior Managing Director, Integrated Corporate Relations, Inc.

Mike McLamb - EVP, CFO and Secretary

Bill McGill - Chairman, President and CEO

Analysts

Greg McKinley - Dougherty

James Hardiman - FTN Midwest Securities

Hayley Wolff - Rochdale Securities

Laura Richardson - BB&T

Steven Rees - JPMorgan

Edward Aaron - RBC Capital Markets

Operator

Good day, everyone, and welcome to the MarineMax Incorporated Second Quarter Fiscal 2008 Earnings Call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Mr. Brad Cohen. Please go ahead, sir.

Brad Cohen

Thank you very much, operator. Good morning, everyone. Thank you for joining this discussion of MarineMax’s 2008 fiscal second quarter. 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 at 727-531-1700, and she can fax or email it out to you again.

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. Management will make some comments, and then will be available for your questions. 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’d like to tell you that certain of our comments are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements involve uncertainties that may cause actual results to differ materially from expectations.

These risks include, but are not limited to, the impact of seasonality and weather, general economic conditions and the level of consumer spending, the company’s ability to complete and integrate its acquisitions into existing operations, and numerous other factors identified in our Form 10-K and other filings with the Securities and Exchange Commission.

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

Bill McGill

Thank you, Mike, and good morning, everyone. Let me state at the onset that everyone at MarineMax is disappointed with our financial performance during this quarter. Having said that, we also recognize that we are operating in perhaps the worst marine retailing environment in over 30 years. I want to thank our team for their dedication and passion for our customers and fellow team members during these challenging times.

From a trend perspective, January and February same-store sales were both softer than last year in the low double digit area. March weakened significantly starting after the first week or so, and continued to get worse as the month progressed. You may recall that March is usually about as big as January and February combined. With such a weak month of March, it drove the entire quarter down significantly from a same-store sales standpoint. While our same-store sales were down 28% for the quarter, we can’t lose sight of the fact that our customers are still out there buying boats and boating.

The trend is still soft although and as we closed April yesterday, I can report that April was not nearly as soft as March. Having said that, it is important to realize that April is the smallest month in the June quarter. So it’s important to not extrapolate April’s trend into the entire quarter giving the uncertainties that exist today.

Our final March quarter results, which reflected a net loss of $0.19 per share, were in line with our pre-announcement on April 16. As we expected, our gross margins did indeed rise. While the margins on the boats we sell do move around, they have been generally stable. Despite the soft environment, we have not felt unusual margin pressure today, which we attribute to the buyers in these times, seeking a complete MarineMax boating lifestyle experience, rather than just buying a boat.

While the industry inventory levels are higher than ideal, we don’t see them to be at the problematic levels that have caused margin erosion during the past downturns. Based upon the significant reduction in boat orders that we have made this year, we expected our ending inventory levels to be below those of last year. However, the unexpected weak March offset the inventory reduction progress we were anticipating. And Mike will give you more specifics, but we expect our September ending inventory to be below that of last year as we indicated when this year started.

We also have made some progress on the expense reduction side of things. But again with such a significant drop in March, it’s hard to reduce expenses at the same speed resulting in the overall earnings loss that we experienced. Currently we are balancing SG&A reductions against the need to not lessen our customers experience with MarineMax as the boating season begins in our Northern markets.

Based on my 35 years of industry experience, I want to comment on this downturn. As I mentioned earlier, inventory level seem to be better managed in general by both the manufacture and the dealer today than in the past significant downturns. The US manufactures that we partner with are being aided by the weak dollar, allowing our partners to increase their international business, allowing them to continue to invest in not only retail level support that helps drive sales, but also in research and development efforts.

The past significant downturns – in the past significant downturn, the manufacturers were unable to assist dealers in retail support, and certainly slowed their research and development efforts. The R&D efforts will give us one of the youngest lineups of products to sell as we move to the summer and into next year.

Obviously, we would rather be in a tough environment with new models to sell than with stale models. We believe that having new innovative models as retail improves, will give us an even greater competitive advantage.

Many of you will recall that during the past two September quarters, we held the world’s largest boat sale. This event generally held at offsite locations, has been very successful at driving increases in market share and unit sales. At the start of the fiscal year, we decided to do a major offsite event in the June quarter after Memorial Day. The logic is that the June quarter is the largest quarter, so we wanted to capitalize on the best selling environment versus an end of the season event.

We will be holding the sale in late May and early June this year, and are convinced it will lead to market share gains and incremental sales over and above what we would have otherwise experienced. We are also prepared to hold another major offsite event in September if we need to.

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

Mike McLamb

Thank you, Bill, and good morning again, everyone. For the three months ended March 31, 2008 our second quarter revenue decreased to 233 million from 325 million last year. Our same-store sales declined approximately 28% with just over 90 million, compared with a 2% in the same quarter last year. Revenue from stores that are not eligible for inclusion in the same-store sales base decreased approximately 1.4 million.

Bill previously indicated that we experienced the most softness in March. As a reminder, geographically, Florida was over 40% of our business in fiscal 2007. Due to seasonality, Florida is even a larger percentage of our business in the December and March quarters. The housing issues in Florida have amplified the economic softness that has been widely reported, making it one of our softer markets. Historically, as we move into the June and September quarters, Florida shrinks as a percentage of our overall revenue.

Gross profit as a percentage of revenue increased by approximately 105 basis points to 23.4%. The increase in our overall gross margin was due to generally stable margins on the boats that we sold and incremental increases as a percentage of revenue in our higher margin businesses, such as finance and insurance, and service and parts and accessories.

Our selling, general and administrative expenses decreased 5.6%, or 3.3 million, in the second quarter. However, last year our SG&A was net of a $2 million gain from insurance proceeds associated with Hurricane Wilma in 2006. As such, SG&A expenses in the prior year would have been higher. Accordingly on a comparable basis, we experienced a reduction of 5.3 million in expenses, which is a decrease of approximately 8.6% over the prior year.

The decrease in dollars of SG&A expenses is due to lower personnel costs, including a decline in commissions and bonuses, as well as lower marketing costs. As we mentioned on our last call, we did a reduction in force of about 10% of our team members in January. Since that time we have incrementally further reduced our team through attrition. We experienced relatively limited savings in the quarter from these actions due to the timing and payments of severance, et cetera. We’ve also gone line by line to reduce costs where we can to help keep costs in line with retail trends.

Interest expense decreased 21% to 6 million as a result of the more favorable interest rate environment, and generally less borrowings throughout the quarter. Our tax benefit in the quarter was 4.2 million, which equated to an approximate 54% tax rate for the quarter.

Finally, our net loss for the second quarter of fiscal 2008 was about 3.5 million, or $0.19 per share, compared to a reported net earnings of 3.3 million, or $0.17 per diluted share, for the comparable quarter last year. Backing out the insurance gain, gives a comparable diluted earnings per share last year in the March quarter of $0.11 per share.

For the six months through March, I will only comment on a few quick things. First, our same-store sales have dropped about 20%, partly driven by the soft month of March. Second, our margin decline on a year over year basis is primarily due to the mix of generally larger yacht products in the December quarter. The larger yachts carry a lower margin. On a product-by-product basis, our margins on the boats that we are selling are generally stable.

Turning to our balance sheet, at quarter end we had approximately 24 million in cash, compared to 23.5 million a year ago. Additionally, we have substantial cash in the form of unleveraged inventory as we utilized excess cash to reduce our inventory financing. We ended the quarter with 554 million in inventory, up 5.9 million, or approximately 1% from the comparable period last year. The increase in inventory is essentially attributable to the sharp decline in March sales. Our inventory was tracking below the prior year levels until sales slowed in March. We have further reduced our orders since our last call, when we indicated we were expected to purchase approximately 20% less in units and 15% less in dollars.

Today, through additional cuts with our manufacturing partners, we now expect that we will order more than 30% less in units and approximately 25% less in dollars this year versus last year. The model year essentially ends June 30 for most of our manufacturers. We have not yet begun the process of forecasting for the 2009 model year, which starts generally July 1. But we believe the reductions we have made on orders to-date along with our purchases for 2009, will allow us to achieve a lower inventory level when this fiscal year ends in September. Of course, much of this expectation depends on retail activity.

Customer deposits decreased about 36% year-over-year. But as we have said repeatedly in the past, our deposits are lumpy and are not necessarily reflective of current business trends. Overall, our balance sheet has gotten stronger year-over-year with book equity exceeding 367 million. Our book value per share now stands at approximately $20 before giving any credit to the appreciation that has occurred over the years in our real estate, which we have previously estimated at 60 million above book value.

I would also note that our current ratio improved over the year ago quarter, as did our ratio of total liabilities to tangible net worth. Speaking of tangible net worth, our tangible net worth per share, again before the upside in our real estate, is approximately $13.40 at the end of the quarter.

And now I would like to turn the call back over to Bill for some closing comments.

Bill McGill

Thank you, Mike. Historically difficult times have provided us opportunities to grow. We anticipate that this will occur again, both through new brand expansions and also acquisition opportunities. But we are going to be patient. We know we need to maintain a solid balance sheet so that we are positioned to capture those opportunities and will value for the long term.

While industry trends are difficult to predict for the remainder of 2008, we will remain focused on taking market share and continuing to inspire our customers’ passion for boating. Over the years, we have developed and refined a premium brand offering, outstanding team and customer-centric strategies that we know are very competitive advantages and will continue to benefit us in this current period, as well as when the market turns.

In this type of environment, it is important to take market share, and by all available data our long-standing track record of market share gains seems to be intact. One of the most encouraging indicators of our future is that our customers are still out there enjoying the boat that they own with their families. Our getaway trips, our classes, our excursions, are filling up as fast or even faster than ever. This makes us convinced that when we eventually get some relief on the economic front, those who have sat on the dock and delayed their purchase will return helping to drive same-store sales. Our business may be cyclical, but our customers and our team members’ passion for boating is not cyclical.

And with that, we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Ed Aaron at RBC Capital Markets.

Edward Aaron - RBC Capital Markets

Thanks. Good morning, guys.

Bill McGill

Good morning, Ed.

Mike McLamb

Good morning, Ed.

Edward Aaron - RBC Capital Markets

A couple of questions for you. First, you had made a comment about market share and your comps were down 20% in the quarter. That seems to be a little bit worse than what the industry data is showing for the first calendar quarter of the year. How should we think about it as it relates to your market share? And do you have any data that shows just relative to your exposure in your specific markets, how you performed versus the industry in the quarter?

Mike McLamb

I think – Ed, I think some of the industry data out there is, as I just said, it’s industry wide data. If you look at the geographic areas where MarineMax does business, Florida and the different markets that we are in, the data that – we do get flash data as the quarter and the month closes, and the data shows that our market share in the quarter has held up fine. And it also shows that within the markets that we operate that the unit decline is actually greater than our same-store sale dollar decline.

Edward Aaron - RBC Capital Markets

Okay. The inventory target for the end of the year, I know what you are doing with your orders, but – if demand is, just call it, 20% lower this year versus last year, would you infer from that, that inventories need to be down year-over-year by about that same order of magnitude in order to have supply and demand essentially more balanced?

Mike McLamb

If demand is down 20%, I think it would be ideal to have inventories down around that same level or greater. And I think that’s inside the realm of reason.

Edward Aaron - RBC Capital Markets

Okay. And then lastly just a couple of questions on the gross margin. It held up pretty nicely in the quarter all things considered. Did you see any – I am assuming there are some dealers out there that are under a little bit of financial stress, you might say, in this environment. Just wondering if you saw any impact of that from dealers that might be needing to move some inventory if they are going out of business or just desperate to move products and what you saw in your markets as far as that’s concerned and how you are able to hold the line on price?

Bill McGill

Well, Ed, the pressure is, as we said on the call here, is not as great as it’s been in the past, because we don’t believe that the inventory levels in most of the dealers out there is way up. And so it is a manageable process and also the manufacturers are helping them. But – so we haven’t seen a lot of pressure from the other dealers. Now there have been a few that have gone out, and some of those boats that are now owned by the banks will have to work their way through the system.

But mainly the thing that’s different about this time than any other is, as we mentioned, the international business has for some of the manufacturers have given them the ability that kind of help the dealers, and that’s a good thing because we don’t need a lot of the pressure on the inventory. But that being said, what we are seeing is, is that people are going to make this purchase decision today. It’s not about, as much about buying a boat at the discount from local Joe boat dealer, as it is getting a whole experience that they get with MarineMax. And so it’s even more important to make sure that it meets the needs for themselves and their family, and that’s the thing that’s helping us, even though the economy and all the news is not helping us.

Edward Aaron - RBC Capital Markets

Great. And how would you think about – you talked in your prepared remarks about possibly having two different kind of year end clearance programs this summer if need be. How do you go about preserving the pricing integrity of your business, when – if you have to run those programs with greater frequency than you did in the past?

Bill McGill

The programs really, Ed, are not about giving the boats away. In fact, what we saw in the world’s largest boat sales that we did historically in August, is that we really didn’t give up very much margin, if any at all, during the event. It was more about creating excitement and introducing people into boating, and that’s what we are planning on doing with this event as well. If you will remember, about two-thirds of the sales that we made at the world’s largest boat sales, which were offsites, were to customers that probably weren’t going to buy a boat or weren’t even in our database in a lot of cases.

And so the old saying, you fish when the fish are biting, is kind of what’s driving, let’s do something the weekend after Memorial Day and followed – and following into early June, because that’s the best time to be out there and really promote it. And we still may turn around and do something in August. But we do not believe that it will have a big impact on our margins, but yet at the same time it will give us a chance to even make more progress on our inventory.

Edward Aaron - RBC Capital Markets

Okay. Thanks, guys.

Bill McGill

Thanks, Ed.

Mike McLamb

Thanks, Ed.

Operator

And we will go next to Steven Rees at JPMorgan.

Steven Rees - JPMorgan

Hi, thanks. Just on the SG&A cut, it sounds like you made some nice progress there this quarter. But I guess what further opportunities do you see for more cuts? And I guess what would you need to see in your business to implement those cuts, if there are opportunities?

Mike McLamb

I think the line-by-line initiatives that we have already done to-date, and again you don’t see necessarily all the benefits in the quarter of that because of the timing of those, are about – I wouldn’t say sound at the moment – it is about what we can do for now as we are going into the very important boating season. As Bill said, the Northern dealerships are getting all the customers’ boats into the season and beginning the season up there. So it’s important to balance the SG&A cuts with the right experience level for the customer.

So I think as we move into the June and September quarter, the actions that we have already did should actually show even a greater increase in the reduction of SG&A dollars. I can’t speak too much about how that’s going to look as a percentage of revenue, because we don’t know for sure what revenue is going to do. But I would expect we will see some bigger increases in the dollars as we go into the June and September quarters.

Bill McGill

I mean, Steven, we are being real careful to make sure we can deliver to our customers the experience that we promised them. And at the same time – and this is not your question, but I will speak to it – at the same time we are – we have major initiatives in our company to make sure that our customers are as happy as they can possibly be. And based upon the book called The Ultimate Question, which is how you measure your customer satisfaction by basically one simple question, would you recommend MarineMax to a friend or associate. And then follow it up with one more question, why did you give us the score you gave on a scale of zero to ten.

I, as the CEO of the company, am looking at every single one of the responses and emailing on a weekly basis to each of the store managers what those responses are, whether that’s a – they give us a nine out of a ten, which means what we call them as a fan. The book refers to it as a promoter, which means they will recommend us to their friend or associate. Or if they have to give us a zero to six, which means they are not out there helping us, we are all over the top of it. And the store managers and service managers and team are getting back to me and to their regional presence and all and saying, here is what we are doing about it to make sure customers are happy. And if we took major market share, which we have over the last 18 months or so, it is incumbent upon us to make sure that these customers are as happy as they can be with our experience. And so we are not only measuring it, we are acting upon it. And you better believe that our company understands we need to make sure they are all fans.

And so it’s a major thing that we are doing. It’s a major initiative and it’s not that we haven’t always been top of our customers. But it’s more about making sure that every single thing and touch point that we do for our customer that they are a fan and they are out recommending to their friends and also repeating their business with us. So there is things that we are not going to back off on, especially during this busy season in the way of SG&A initiatives that we could. But that being said, we could look at maybe combining some stores down the road and we have done that to-date, if things were to get even worse. But right now we think we are well positioned for this spring and summer selling season.

Steven Rees - JPMorgan

Okay. Thanks. And just finally on the same-store sales and I missed the beginning of the call, so I may have missed this. But with Florida becoming a smaller percentage of your upcoming quarters, is that logical to assume any improvement in reported same-store sales and could you just comment on April whether or not that sort of continued March’s trend?

Mike McLamb

I can comment that overall Florida for – on fiscal ‘07 was about 40% of our business, maybe a little bit north of 40%. Generally the December and March quarters that percentage goes to – I think probably it averages about 60% when you combine the two quarters together. And then in the back half of the year it drops to about 35 or actually less than that, probably a third or something like that of our business, where it averages is just over 40. So with Florida being a softer market, one of the softer ones that we are operating in, the potential is there for the northern markets to kick in and to offset some of the softness that we are experiencing down here. The only caveat that I would say on that is that we haven’t experienced the season up in the up north markets. We don’t really know for sure how they are going to – how’s all going to pan out. But I think the theoretical question and the outcome is potentially there.

And I will say, I think this addresses your next question, the March quarter, in the month of March our sales were down about 44%, which is a big number. In the month of April, as Bill said, April is not near as bad. April, we actually are still booking business, closing deals that came in overnight, but it looks like April is going to be down in the 19, 20% range, which is a lot less than what March was down. We would have taken 19 or 20% down in March. But, as Bill said, 19, 20 down is not that great, but it’s a lot better than 44. We just don’t know what the rest of June is going to hold until we get into May and June, and we have got some marketing events that should help to incrementally improve whatever business we would have had in the June quarter through the world’s largest boat sale type event in the June quarter.

Bill McGill

Well, we all got clobbered. Our customers got concerned and everything with all the banking news that occurred, banking news that occurred late March. And that’s – I think that’s what kind of shut our customers down in March.

Mike McLamb

Well, it appears that way.

Steven Rees - JPMorgan

Okay, thanks. That’s helpful.

Bill McGill

Thank you.

Operator

And we will go next to Laura Richardson at BB&T.

Laura Richardson - BB&T

Good morning, everybody.

Bill McGill

Hi, Laura.

Laura Richardson - BB&T

Couple of questions for you all. What should the tax rate be for the year and the share count?

Mike McLamb

Tax rate is going to be around that 50% level. When the earnings of a company shrink your permitted items and your non deductible items like stock-based compensation goes up, so your tax rate increases. So we are at 48% I think right now through six months. I would use 50% to be safe.

Laura Richardson - BB&T

So that’s going to hurt you more in the profitable quarters.

Mike McLamb

That’s correct. It arguably helps you in the loss quarter; it hurts you in a profitable period, so the next two quarters it hurts you. The – pardon me.

Bill McGill

Share count.

Mike McLamb

Yes, the share count is going to be on a full year basis, it should be around 19 million.

Laura Richardson - BB&T

Okay. And I want to also follow-up on Ed’s question on when you talk about the purchases and how you are trying to balance sales expectations and the inventory levels and what you are ordering, can you talk me through that again?

Mike McLamb

Well, we are – I will update you on what we have done to- date. To-date we are going to order, it’s over 30% less in units, and it’s about 25% less in dollars. And that does not include the reductions that could be made as we go into the September quarter, which is the first quarter of the new model year. And when I say it doesn’t include, it does include with some manufacturers orders all the way through the September quarter. But for our larger manufacturers it does not. So when we go through and forecast for the ‘09 model year, which we started that process here about a month, whatever orders we give if that’s below what we had last year, that would be a further reduction in our fiscal year purchases. That makes sense?

Laura Richardson - BB&T

Yes. I am sorry. In terms of what I should be forecasting for inventory in the balance sheet, if sales are as you expect then the inventory should be down like 25% from last year though you are saying by the end of the June quarter.

Mike McLamb

No. I think it all depends on what assumption you have for retail. We’ve said they will buy 25% less in dollars, depending on what everybody is assuming our sales activity is going to be, then the delta of that would be the reduction in inventory. In other words, if sales are just miraculously up and your purchases are down 25%, then yes, you would have a big reduction. If sales are down 10%, you are buying 25% less, then you are only going to get about 15% reduction, just using swag numbers. That’s kind of logically how it works.

Laura Richardson - BB&T

Okay. I think I got it. And then my last question is, last conference call Bill had some really interesting comments on the boater psychology and – like at the boat shows, the cancellations and purchases and that kind of – so could you update us on where do you think the boater mentality is these days? And beyond what you already said about there is enthusiasm still for boating. It’s good to hear that that’s there, but what’s keeping people from buying the boats you think?

Bill McGill

Well it’s – what’s keeping the people from buying the boats is probably uncertainty. Some of it is what is going on in their business, because some of our customers have been impacted by construction or by additional fuel cost expenditures in their own business. But most of it is just general uncertainty. And I think that there is two inflection points here in our business. And one is whenever we become convinced or kind of convinced, and the news gets tout there that, okay, we have hit bottom, it’s as bad as it’s going to get. And I think that will bring a lot of our customers into making the trades and purchases that maybe they are delaying right now. The second inflection point, which is the more obvious one is, whenever, oh, my gosh, we are on our way to recovery and I have told our team that – right now we have got eight store managers in here for training and so we are keeping those type of efforts going. And I told our team, I said that you better hang on with both hands when the recovery starts, because they are going to be coming out of the woodwork like there is no tomorrow, ready to make that purchase.

When we do our getaway preps, and I mentioned that we’re doing a lot of them, Laura. And I will give you a great example. We did a specific Meridian trip to Southeast Plantation about three weeks ago. Southeast Plantation is a resort out of Fort Myer. And I believe that its $9 a foot a night for your boat there, and these boats are ranging in size from 34 to 50 feet. And most of the customers were there three to five nights. They were eating in the restaurants. They had burned the fuel to go as far as Fairwater, which was a three hour trip away, or Naples or Marco Island, which were a couple of hours away, to be together. And what we heard at the event is nothing about what’s going on in the economy. It was families enjoying their family and other families, and enjoying this whole boating lifestyle resort, whether it was out fishing during the day or whether it was playing little golf on their nine-hole golf course or whether it was eating in the restaurant or having a docktail party on the back of their boat.

And so as I have learned over the 35 years that it is one of the best stress reliefs that’s out there. And I still water ski, I will be out on Sunday. And when I get out on that water and I am going with a couple of my grandkids, I forget it all, and that’s exactly what our boaters do. When they get out on that water with their family, they totally forget everything else that’s going on that maybe pressures them, and it is a fabulous family experience. And so those two things is what sustains our recreation better than any. But they are out, they are boating and it’s not fuel. And I was over at one of our stores a couple of days ago, and one of the salesman said, I am trying to sell this $2.6 million [inaudible] and said – the customer said to me, with fuel prices today, I don’t know if I ought to be doing this. And so he said to the customer, okay, there is 1,800 gallons of fuel on the boat and you are spending $2.6 million for this boat, because of what it will do for you and your family. He said, okay, so when you pull up to the gas pump, it’s $1 a gallon more, is that 1,000 or $1,800 extra going to stop you from boating. And the guy said, you are right, let’s move on. And that’s really the case. Now what about the boat that’s got 50 gallons, is it the extra $1 a gallon that means $50 of boating which you are not going to use all of that in the weekend, most people wouldn’t, it’s not going to make any difference. So it’s not about fuel, but fuel does have a trickle down effect on a lot of our customers and with what’s going on in their business.

Laura Richardson - BB&T

Right.

Bill McGill

Things are still there. That passion is there greater than ever, Laura. Mike is a boater; he is out on the water. You heard him comment that we pulled at the Three Rooker Bar I think a couple of weeks ago and couldn’t find a place to bring the boat in.

Mike McLamb

Laura, there is a marina I drive by and it’s very large marina in the West Coast of Florida. And last Sunday it was crowded I have ever seen it, which is a great news. I mean, obviously people are buying boats, at least are using boasts which is great.

Laura Richardson - BB&T

Right. And when are we going to have a getaway for the investment community?

Bill McGill

How about this weekend?

Mike McLamb

Great.

Laura Richardson - BB&T

Okay. I have to schedule little further in advance. But you are talking up really well. I am sure there will be a lot of demand for such an event. And okay, last follow-up to this is, so you had mentioned sometime in the last call about the number of cancellations from boat shows was high and is that still the case, and was it ever the same for – people place an order in the store and then backing out, out of the uncertainty or...?

Mike McLamb

You get a much lower cancellation rate at the stores. I mean, you always have some cancellation rate. It’s probably no higher now. I actually don’t have the number. But it’s probably no higher now, may even be lower because the issue now is when you are driving up and down the street and you are listening to your satellite radio, whatever maybe the bad news, you are not likely to pull into a dealership. Those that do pull in are more serious, and so at the store level your fallout rate arguably could be lower subject to real bad events like a Bear Stearns meltdown. You may have had a increase in cancellations around that event. But the boat show falloff was greater during the boat show season this year than we would have liked. And I don’t have the final numbers, but it definitely tracked higher than last year.

Laura Richardson - BB&T

Okay. Thanks a lot guys and good luck.

Bill McGill

Laura, thank you.

Operator

We will go next to Hayley Wolff at Rochdale Securities.

Hayley Wolff - Rochdale Securities

Hi, guys. Just a couple of questions. First, you commented that April will improve incrementally from March. Can you give any color on sort of geographic strength, weaknesses or is it just too early to tell what is going to go on in the New York markets or the northern markets?

Mike McLamb

I can make just a couple of comments based on what we’ve experienced through the seven months through April. And all this is really pretty consistent I think, with what you read in other industry reports. California is very soft; Florida is soft, not as soft as California; our Midwest states, which would be Minnesota, Ohio and Missouri are – they are soft, but they are doing relatively well. They are not as soft as Florida or California. Texas is doing pretty well. Our New York, Connecticut, Rhode Island markets are doing really reasonably well for the time of the year and the season. New Jersey is a little softer.

So you kind of get a little bit of gyrations as you move around. I would say when you sum it all up, everybody is softer than you would like – then we would ideally like, but there are pockets of differences. And I think that’s consistent with some other reports that have been put out there, about even like delinquency rates on loans and number of inventory of houses. It’s the markets where we are seeing the greatest softness or where you have the greatest inventory of homes and the greatest defaults on loans and all type of stuff. There is a pretty high correlation between some of that activity and what we are seeing at retail.

Bill McGill

But a lot of it, Hayley, is you just can’t get away from the news. And I just said that the store managers and I sent out a letter to the whole team that basically said my suggestion is turn off the TV, don’t get the newspaper, don’t listen to the radio and focus on boating and your customers. Because if you listen to the news, you will think the world is ending and at the end of the day, we all know we live in the very best country in the whole world. So let’s focus on that and not on the negative. And with the election that’s going on and who knows what’s going to happen there, it’s just – everything you hear is not positive and there is just so much positive that is going on. I mean, look at the stock market, as an example.

So the customers are getting shutdown and they start delaying their decisions whenever they get uncertain, and that’s the previous question about cancellations is more to do with, oh, my gosh, I listened to some bad news or I got a little concerned, so maybe I have to wait and see. And in a lot of cases, it is not the ability to buy the boat or the desire that keeps them from moving forward as much as, oh, well, are we at the bottom, is it going to get worse? And so that’s back to the point that I think we will start making some significant progress once we get some data that shows, hey, it’s bottomed out, the things are starting to at least not get worse.

Hayley Wolff - Rochdale Securities

There has been some talk about pushing back the model year to maybe September from July. What is your opinion of that and would this be a good opportunity to take that step?

Bill McGill

Well, our opinion is, the model year should be in September. We believe that’s really the appropriate thing to do. I mean, it doesn’t make sense to make everything last year’s model at the peak of your season, and that’s what our industry has done. It’s not going to happen this year, and that’s unfortunate. But at the end of the day it has to do with what’s going on in the market that I think is limiting it, plus there is time that’s necessary to prepare for the model year change. And we are going to push and voice our opinions to the manufacturers in the industry that the right time to have the model year change is September. And I think maybe we can get it done for 2010 model year, but for this year it’s not going to happen.

Hayley Wolff - Rochdale Securities

Okay. And last question to beat a dead horse on the inventory versus your purchases. Your purchases are going to be down 25% in dollars this year. When you define year, you are defining your fiscal year September to September, not a model year and not a calendar year, right?

Mike McLamb

Yes. Actually what I am defining is some of our manufacturers have a model year that ends on our year, September basically. And so for those manufacturers we know we are buying through the September quarter. There is some other manufacturers including some very significant manufacturers like Sea Ray, who – which is our largest supplier, whose model year ends on June 30. So for the Sea Ray data I am taking through June 30 because we haven’t forecasted the ‘09 model year yet, as an example. We don’t know for sure we are going to be buying in the September quarter. Although today I doubt that it would be up from what we bought last September quarter.

Hayley Wolff - Rochdale Securities

Okay.

Mike McLamb

And so the 25% could actually get larger in terms of the dollar reduction depending on what we end up forecasting for 2009 commitments with our manufacturers.

Hayley Wolff - Rochdale Securities

Okay. And the backend money you will give that up because of the change in your orders?

Mike McLamb

The backend programs with manufacturers put the moneys at risk. We were negotiating with our manufacturers on a daily, weekly, monthly basis to figure out the overall backend program for MarineMax.

Hayley Wolff - Rochdale Securities

Okay. Thanks a lot.

Mike McLamb

Thank you.

Bill McGill

Thank you, Hayley.

Operator

And we will go next to James Hardiman at FTN Midwest Securities.

James Hardiman - FTN Midwest Securities

Good morning. A couple of questions. Could you elaborate a little bit about how the downturn is affecting your acquisition strategy, both in terms of – obviously, you would think that there would be some attractive opportunities out there, but also your ability to take advantage of those opportunities based on your balance sheet?

Bill McGill

James, obviously, as you have heard us say many, many, many, many times, maybe it’s not obvious, but we continue the discussions with other potential acquisition candidates. And I think the thing that’s – that has got us not moving forward with some right now and we could is – to the previous discussions we’ve had about, is it going to get any worse is – or are we at the bottom is being factored into that, as well as cash is king and having a strong balance sheet will always be the best thing to do for the company and for our shareholders for the long term and also the short term. So they will be there.

The key point here is there is no one else making acquisitions. And even if there were some that were thinking about it, that’s pretty well dried up. So that opportunity will be there, whether it’s a month from now or two years from now, because there is no one else that is really doing it. So there is no competitive pressure to make the acquisition in front of this and eliminate our opportunity for the future. So we are taking more of a conservative approach right now because there is no need to really do it right now. And everything we have tried to do for the company is for the long term and protecting that balance sheet is we think the most important right now.

James Hardiman - FTN Midwest Securities

Right. And would there be – I guess, would there be a certain debt level that you would like to get to, I guess, in conjunction with certain cash flow run rate that you would once again even consider doing that?

Mike McLamb

I mean, from an acquisition perspective, James, we have plenty of cash and plenty of firepower to make whatever acquisitions we want to make, just as a general rule not taking away anything from what Bill just said. The size dealers we are talking to, the opportunities that we are talking to, there is no restrictions on from that perspective. So we don’t have any challenges there.

James Hardiman - FTN Midwest Securities

Okay. And then second question. You have talked in the past about the value tied into your real estate over and above book value. Given the down turn in the Florida real estate market, I don’t know how much of that is just residential versus commercial land, but can you give us any sort of an update on where you stand today?

Mike McLamb

Yes, I would say – just keep in mind. The way we got most of the upside in our real estate is the company formed in 1998 in the pooling of interest transaction. Those of us who have been around for a while, you will remember that the old pooling rules allowed you to bring the acquired company’s assets over at net book value, and you did not mark them up and you recognized no goodwill. And so a very large chunk of our upside in our real estate came though the original mergers.

And so like Bill’s store, he has got a store here in Clearwater, Florida – or he had a store, it is now MarineMax’s store – on a very busy highway on the water in Clearwater. It’s on our books for around $400,000 net book value, which is his depreciated basis plus or minus the improvements that we have made to the store. For those of you who had seen the store you will know it’s easily even in today’s environment a $6 million facility if not higher than that. Same thing in some other markets within Florida.

So even though there has been some softness in the Florida markets, we never valued our real estate on a best used basis like a – best used would be put a couple of condominium towers or at least it would have been a couple of years ago in the state, not sure we would do that today. So we never used those type of valuations when we were coming up with our estimates to begin with. And so I still feel pretty comfortable that the upside is in that $60 million neighborhood just based on how the evaluations were derived to begin with, and hope that answers your question.

James Hardiman - FTN Midwest Securities

Yes. So basically over and above book, you still think $60 million is a reasonable estimate. It’s just that you might – the use of it might be a little bit different based on what’s going on. Is that fair assessment?

Mike McLamb

Our valuation that we did was basically for our type of use. It wasn’t for another type of use. So to the extent that property values have come down for our type of use, there could be some adjustment. But I don’t think there would be, because we also didn’t update the number as things were going crazy in Florida. It has been 60 million for a while.

James Hardiman - FTN Midwest Securities

Great. And then just last question, not to belabor sort of the difference between March and April. But obviously if you could talk about, as the geographical mix changes through the year that helps you guys. Do you think uptick or I guess the relative improvement from March to April was actual improvement in any of your markets or was it mainly just that geographical shift?

Mike McLamb

What I think when you dig down and look on a store by store on a geographical basis and go back to March and roll it forward, March grew – started growing soft like around, I am going to say, March 10, or it was around the time of the Bear Stearns announcement. There is a high correlation there. And the build in our contracts written on a day-over-day basis really slowed. And what I think what’s happened in April more than anything is, there is at least not quite as bad news as that was, and is our takeaway from what’s happened between April and March. Now I don’t know what announcements and what news is going to come out today or tomorrow or the next day that could screw up the psychology of the – of our potential buyers, which is why we put a whole lot of caution around the statement of where April was versus March. But we figured everybody kind of wanted to know what April did.

James Hardiman - FTN Midwest Securities

Okay. Great, thanks guys.

Bill McGill

Yes, thank you, James.

Operator

And we will go next to Greg McKinley at Dougherty.

Greg McKinley - Dougherty

Yes, thank you. With you guys expense cuts occurring during the year, should we sort of look at the – as the quarter play out, should we continue to look at seasonality in your operating expenses this year as having been similar to prior years? And would you expect a relatively smaller share of your operating expenses to recur in the second half as you continue to sort of pull the rates back?

Mike McLamb

I guess in theory you are right. You have a little bit less because of seasonality. I think for modeling purposes I probably still use the general overall percentage as I think I will agree.

Greg McKinley - Dougherty

Where it steps up sequentially each of the four quarters.

Mike McLamb

That’s correct.

Greg McKinley - Dougherty

Okay. And from an inventory standpoint, again not to beat a dead horse here, but obviously with the March sales shortfall, I am guessing you are entering your June quarter probably ahead of what you’re originally tracking on your inventory reductions, but now are cutting purchases meaningfully. So should we reasonably expect some moderation in inventories in the June quarter, but really the big drop off to get you down maybe towards a 20% decline year-over-year that would be a big step down in Q4 with only a modest step down in Q3?

Mike McLamb

Just a couple of things. The company I don’t think has ever said to expect a 20% year-over-year decline in inventory. We are buying less than 25% less in dollars and subject to retail. I think conceptually it makes sense in the June quarter we could experience a decrease in inventory. I can tell you that we are planning and hoping to have a decrease in inventory. So much of it ultimately, Greg, depends on what retail does. But that is certainly in the master plan that we have a decrease.

Greg McKinley - Dougherty

Yes. And then finally, could you just talk to us a little bit about your dialog with your creditors? Where you feel their opinion is around the availability of financing for your business, your compliance with sort of the metrics they are looking for you to stay within?

Mike McLamb

Yes, we have – in our facility we have eight banks. We have $500 million line of credit. We have three financial ratios that we have to stay in compliance with, two of those are balance sheet focused, a current ratio and a total liabilities intangible net worth ratio. The balance sheet ratios because of the strength in the balance sheet are very well intact. There is really no issues. There is no projection or modeling that would show us to have any concern from a balance sheet perspective. When this fiscal year started – let me back up. We also have another ratio, a third ratio called a fixed charge coverage ratio. I think most of you are familiar with that, but it basically says how much cash is the company going to generate in a 12-month basis and how does that relate to your fixed obligations, like your interest expense, your leases, your current maturities or long-term debt, and stuff like that.

When this year started, we modeled the company like we always do and we looked out and we ran some different scenarios and we said, it’s a potential that the fixed charge coverage ratio could at least have an increased risk of having a violation in the foreseeable future. And so we went and talked to our banks in the December quarter and then we met with our banks in the February quarter – excuse me the month of February, and we kind of rolled through some scenarios with them and showed them kind of modeling that we are doing and talked to them about the flexibility that we needed to operate the company and so forth. And we asked for an amendment to our facility. We were not in violation of anything, so you don’t get away. But we asked for an amendment of our facility to reduce the fixed charge coverage ratio and that was the 8-K that we filed in early March.

I would tell you just – given this banking environment and all of you guys own stock in companies or you follow companies that have been negotiating with banks, I think the fact that we were able to go to our banks and within probably less than a month negotiate amendments to our fixed charge coverage ratio that we think helps the company speaks volumes about the relationships we have with our banks. I think it also speaks volumes about how the banks look at the company. It’s an asset-based lending facility. We have 250 million intangible net worth, which is almost what we borrow, not quite. But we have substantial capital in the company that make the banks feel more comfortable.

But having said all that, we brought the fixed charge coverage ratios down permanently. We also brought it down temporarily for four quarters starting September 30 of 2008 and ending out in 2009, we brought it down to even a lower level. All of our modeling shows that at that lower level we would not have any real risk of violating the lower level. That temporary drop down starts in the September quarter and as we end the June quarter, we are at the permanent drop down level of 1.25. And there is risk that if the month of March trends obviously were to continue in the June quarter, you would certainly have risk that our fixed charge coverage ratio could be violated as we finish June.

We don’t think that’s going to happen sitting here today. I think the possibility is there. I think if it does violate, I go back to the balance sheet that we’ve got, the equity the banks have in their inventory, the relationships the company has with the bank, and while no one likes to violate a covenant, I am fairly confident that the company and the banks would work their way through this, this time in the industry and allow the company to operate its business as it needs to. Perhaps interest expense would be higher, something else. But we are not there yet. We don’t think we will get there. But I think it is fair to ask the question, at least point out the risk.

Greg McKinley - Dougherty

Yes. Okay. Are you hearing anything broadly speaking from the banking community about – I mean, are they pulling back from other dealers? Or are you guys – do you feel like you have unusually strong support from the financing community along those lines? Or are they sort of comfortable where they see the industry heading in terms of inventory management, given the sales backdrop?

Mike McLamb

Like any industry, you always have your core banks that are the – that have always been supporting the industry for a long period of time. Those core banks are standing tall within the industry, supporting the dealers. They certainly are looking at their asset base having higher risk today and there are some business failures. Although, what I am hearing – we had a very large bank in here yesterday talking about some business opportunities together. And what they were saying is the same thing that Bill said, is that the business failures, if this was 1991, the business failures would have been much greater today than we are seeing because of the management of inventory between the manufacturers and the dealers. And I am talking of good brands. There are certainly some substandard brands out there that are having more issues, but that doesn’t really affect us as much because our buyers aren’t looking for substandard brands anyhow.

So I would say in general on the wholesale financing, the banks are standing tall. They are committed to the industry. There has been no exiting of the industry. On the retail financing, which is our customer financing, I can make a general, similar statement that the way that the banks go to market, the credit worthiness they look for in the customers and all of that stuff is staying fairly consistent with one caveat. I think the banks are looking at a higher spread today than they would have historically because of all the issues the banks are experiencing. And that could also be true on the wholesale line. But all the major lenders are standing tall on the retail side. I think just like any other industry, you get some from time to time jump in and jump out, and I won’t be surprised if some jump in and jump out, or at least jump out on the retail side. But nothing that I believe is going to significantly impact our ability to get our customers financed or our ability to keep financing our operations.

Greg McKinley - Dougherty

Yeah, okay. Thanks.

Mike McLamb

Thank you.

Bill McGill

Thank you, Greg.

Operator

Ladies and gentlemen, that will conclude today’s question-and-answer session. I would like to turn the conference back over to your speakers for any additional or closing remarks.

Bill McGill

Thank you, everyone, for your continued belief and support in MarineMax. I also greatly appreciate all of our team members for their hard work and continued passion for boating, which is vastly important during this challenging period of our industry. Mike and I are available today if you have any additional calls. Thank you.

Mike McLamb

Thank you.

Operator

This does conclude today’s presentation. We thank everyone for their participation. You may disconnect your lines at any time.

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Source: MarineMax Inc. F2Q08 (Qtr End 3/31/08) Earnings Call Transcript
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