Apr 25, 2013
Executives
Brad Cohen – IR Mike McLamb – EVP, CFO and Secretary Bill McGill – Chairman, CEO and President
Analysts
Jimmy Baker – B. Riley & Company Mike Swartz – SunTrust Robinson Humphrey Peter Mahon – Dougherty & Company
Operator
Good day and welcome to the MarineMax, Inc., Second Quarter 2013 Earnings Conference call. Today’s conference is being recorded.
At this time I’d like to turn the conference over to Brad Cohen at ICR. You may begin.
Brad Cohen
Good morning everyone, and thank you for joining this discussion of MarineMax’s 2013 fiscal second quarter earnings call. I am sure that you have 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, extension 10100 and she will fax or email one to you right away.
I would now like to introduce the management team of MarineMax, Mr. Bill McGill, Chairman, President and Chief Executive Officer; and Mr.
Mike McLamb, Chief Financial Officer of the company. Management will make some comments about the quarter 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. 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. We are pleased with our 12% growth in same-store sales which is up against a very strong comparable from the prior year of 26%.
Our sales growth came from significant increases in both new and used boats in our southern markets. We attribute this to a combination of solid execution by our team along with ongoing training and coaching and the broader appeal of our products that which we now offer.
What was eye-opening in the quarter was the significant impact we encountered from weather which gave rise to truly bifurcated results in our sales and even more significantly to our earnings. Like all of our teams around our country, our teams in the northeast and Midwest work very hard to create excitement for boating during the quarter, but normal spring weather has not come on time and as a result, our normal spring launch is definitely behind previous years in those regions.
As we have previously discussed, it is very apparent to us that the industry to recovery is underway and that the industry growth in units will be much greater in the future. But we have also noted that the steps along the way can be susceptible to handle the headwinds.
Based on this past quarter and with the wide ranging impact of Hurricane Sandy last year, these challenges would not only be economic, but weather will continue to play a role as well. There are lingering effects of Sandy and the persistence of cold and blustery weather in our Midwest and northern regions of the country, depress both sales and margins during the March quarter.
For weather – for us weather is not an excuse, it’s an unfortunate reality. While our southern regions also experienced cooler weather than last year, we were able to significantly overcome such effects and generate very strong sales in unit growth.
This makes us believe that as the weather turns in our other markets, there should be pent up demand for us to capture in future quarters. We recognize that certain industry data points have turned negative, but our results clearly shows such trends are weather related.
In trying to overcompensate for the pressure on sales in the quarter, we increased our sales and promotional efforts and became more aggressive on the pricing front. While many of our initiatives in this regard were affected, they came with increased costs.
These costs were proportionately higher than our resulting sales which fell short of our expectations. Seasonally March is typically as big as January and February combined.
This year was no exception in our southern markets, but we anticipated delivering even more revenue in the quarter in our northern and Midwest stores. So not only did the weather impact the volume of units but also our ability to actually deliver those boats.
Operationally in March, we typically de-winterized and launched customer boats to a much greater degree than we did this year. Of course this resulted in less service revenues and as one would expect, along with increased inefficiencies in our service business, both of which depress margins and added to a less efficient expense structure.
As we reflect on the quarter, and in particular the southern markets were we’re less impacted by the weather, we saw the continuation of trends that we commented on the last several calls, namely strength across essentially all products categories that we sell with a skew towards larger boats. It again proves insight that this recovery appears to have staying power.
Let me also comment further on our margins. Our product margins continue to hold up well, albeit in our southern markets during the quarter, as we attempted to drive sales in the north and Midwest.
We are still behind historical averages of about 75 basis points. While we continue to outpace the industry based on the latest data, we still believe our size, scale and breadth of products will allow us to capture a disproportionate share of the market as recovery continues.
We also continue to see improvement in both used boat pricing and sales. This is a positive trend as it supports a base of customers, they can either train in their current boats for new ones or it can serve as an entry point into the industry for new customers that can laid over the long-term to a sustainable driver of new boat sales for both MarineMax and the industry overall.
Looking at our inventory, we have the right product and the broadest selection of boats that we have ever offered. This helps us to complete sales and enables us to target even a broader boating audience than before.
That said, we are going to remain vigilant and work hard with our manufacturers to ensure we are closely monitoring sales levels in this June quarter as an effort to maintain an appropriate inventory level. We will continue to work to stimulate demand and to capture more than our share of sales in each of the markets.
However, we do not see the need to be as promotional given the historical seasonal strength and renewed evidence that the industry has recovered. While we cannot control the weather or the economy, we can control many factors of our business.
That is what we are focused on in order to drive our cash flow and return to company to sustainable annual profit levels. With that update, I’ll 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, 2013, our revenue increased more than 11% to just over $160 million.
Our same-store sales increased by about 12%. Based on available industry data, our March quarter new boat unit sales for the segments we are in are above reported industry trends.
Once again like the December quarter, sales were stronger in our larger products, but we are continuing to see a broader distribution to sales across all of our categories. Geographically due to the weather, the quarter had two completely different results.
Our southern markets with more normal weather patterns were very strong with boat revenue growing by more than 36%. Keep in mind, this is on top of very strong double-digit same-store sales growth last year during the March quarter.
In these markets, the southern markets, all categories of product performed well in both units and margins including the sport cruisers segment which has been one of the last segments to recover. Our northern and Midwest markets however were down about 26% in revenue and we also experienced a decline in margins as our team tried to kick start some of them.
The decline in revenue in our northern markets largely came in the seasonally important month of March. Gross profit increased 9.5% to $37.7 million for the quarter.
Gross profit as a percentage of revenue decreased slightly to 23.5%. The decrease in gross profit as a percentage of revenue was primarily the result of selling an increased number of larger yachts in the quarter, combined with the overall increase in boat sales.
Additionally, the efforts of our northern stores aggressively going after business by lowering margins in the lack of de-winterization service revenue also impacted our consolidated margins. Our SG&A increased $5.1 million to $36.1 million.
As Bill mentioned, a significant portion of the increase in SG&A was the increased promotional efforts from both the marketing and sales perspective. We also experienced an unexpected and significant increase in health benefit costs.
This increase was approximately $1 million in the quarter and was due to a flurry of unusually large clients. We are self-insured with individual and aggregate stop loss limits.
As expected, we also experienced an increase in the cost of other insurance which we have experienced for the last three quarters. However in those three quarters, we were able to overcome the increased costs of the other insurance with improved leverage which we did not achieve this quarter due to other inefficiencies.
We anniversary this increase in insurance effective May 1. As Bill also said, we are certainly not happy with the lack of leverage in the quarter and have curtailed the promotional efforts we implemented.
We constantly review our recurring costs and are looking at areas that can be further reduce to help ensure we improve the leverage in the company’s structure. We are concerned about our recent spike in healthcare costs that is an unusual trend that is difficult to predict but we are monitoring it closely.
Interest expense remained roughly flat for the quarter. The company had tax expense of $40,000 for the quarter compared to a tax benefit of $116,000 last year.
Our effective income tax rate will remain essentially zero for the near-term primarily due to the availability of substantially net operating loss carry-forwards which are fully offset by valuation reserve. Our net income was $344,000 or $0.01 per diluted share compared to net income of $2.3 million or $0.10 per diluted share last year.
On to our balance sheet; at the end of the quarter we had approximately $30 million in cash plus a significant amount of liquidity in the form of un-levered inventory. Our inventory level at quarter end was about $231 million, which is up 12% from last year.
The increase is due to a handful of factors such as; the expansion of the brand we have added, the acquisitions we completed over the past several months in Orlando, Daytona, Connecticut, and Rhode Island, an increase in products in our charter fleet in the BVI and lastly, the increase in boats that were contracted and ordered for customers but we were unable to deliver in the northern and Midwest markets for the March quarter. Turning to our liabilities, our short-term borrowings were about $141 million, up from the prior year, largely due to the increase in inventory.
While we always say it’s hard to get a good sense on trends from our customer deposits. The bottom line is that they remained very strong and are basically at levels more associated with the much larger MarineMax.
Our balance sheet is strong and we’ll continue to strengthen with increased cash flow as the recovery takes hold. We ended the quarter with a current ratio of 1.50 and total liabilities of tangible net worth ratio of 0.96.
Both of these are very strong ratios. Our tangible net worth stands at more than $200 million.
We own about half of our locations which are all debt free and we have no debt except for the inventory financing that I mentioned. Regarding our April sales, it’s important to understand that it is the smallest month of the three in the quarter, and it’s not a great barometer for the full quarter.
The weather trends we saw in the March quarter have unfortunately continued into April. Despite those weather trends, we expect a strong April probably due to the sales that we were unable to close in March that will be captured in April.
Additionally geographic trends based on contracts written are beginning to level out which is encouraging. However trends in our southern stores remain stronger than our other markets.
Our northern and Midwest stores are actually very busy on good weather days, we just need more of them. We will improve our levels of solid execution including an enhanced focus on costs to ensure we continue to drive improved performance.
With that update, I’ll turn the call back over to Bill.
Bill McGill
Thank you, Mike. As we stated, we’re disappointed with the lack of leverage, we are very encouraged with the industry trends.
Although the industry is going to have some volatility quarter-to-quarter, sustainable improvement in the recovery over the long-term is underway. As warm weather begins to arrive, our northern and Midwestern stores should be very busy with spring launches with sales and also deliveries.
MarineMax continues to be the one-stop solution for all of our customer boating needs. We have put in place a broad assortment of premium brands.
We have an outstanding and passionate team to serve our customers, and with our strong balance sheet, we have made significant competitive advantage that will continue to result in ongoing market share gains. I do want to thank our team for fighting through the weather and more importantly, for taking care of our customers so well.
Our net promoter score, a reliable measure of customer satisfaction, incrementally improves each quarter above our already world class levels. Our team provides our customers with the boating lifestyle that maximizes their time and experience both on and off the water.
Boating with MarineMax changes customers’ lives by uniting them with their self and with others. And with that operator, we’ll open the call up for questions.
Operator
(Operator Instructions) We will take our first question from Jimmy Baker with B. Riley & Company.
Jimmy Baker – B. Riley & Company
Good morning, guys.
Bill McGill
Good morning, Jimmy.
Jimmy Baker – B. Riley & Company
Could you just maybe give us some examples of promotional activity that – your booking and selling expenses versus pricing that would show up in product margins, any color there would be really helpful, particularly as it pertains to maybe how you back off that spend going forward?
Mike McLamb
Jimmy, the promotional activities would not show up in product margins with the exception of us being more aggressive to try to stimulate activity by being more aggressive price line, that would affect margins, everything else is down on our SG&A, so more off-sites – even greater spend at some of the boat shows during the season which is – this is the quarter of all the boat shows, space for our sales team members and contest for our sales teams, all that would be done in SG&A.
Bill McGill
We did quite a few more promotional activities, in-house events, we went to few more boat shows and we added historically trying to drive business especially in the northern markets and so that’s a lot of the spend Jimmy.
Jimmy Baker – B. Riley & Company
Okay, thanks. That’s helpful.
And then just trying to kind of drill down further into your commentary about what you’re seeing here in April and then also your expectations for a release of some pent up demand in northern markets, so I mean given the easier comparison, is it fair to assume that we should expect your same-store sales to accelerate here in the third quarter, in fiscal third quarter?
Bill McGill
Well we have just ended – we are through April, and May and June are larger than April are. But we are quite pleased with what’s been happening in the southern markets, the spring is just getting in our northern markets.
In fact we had snow in Minnesota a couple of days ago and the ice is still on the lakes et cetera but we feel pretty encouraged by not only what we are seeing in those markets that we have the ability to be able to get customers out on the water and make the leverage [ph] that type of thing but we’re also encouraged by what we’re hearing from the consumer is when we do these off-sites events and boat shows. And we spent more – back to your first question, we spent more on boat shows and off-site events and that type of thing, the good news about that is that the prospects that our team are working is greater than we’ve seen in a lot of years and so we believe the return will be there just what is there for the short-term.
Jimmy Baker – B. Riley & Company
And maybe you could just talk about what you’ve seen through the first four months of the calendar year in terms of strength by mix or talk about maybe in terms of foot range, where you’re seeing the most strength and what drove the sales growth?
Bill McGill
Yes, I would tell you, obviously in the south, I don’t think we have a category that’s down. Every category is up in the south.
It does seem to be maybe a little stronger, the bigger the boat I guess, but that sport cruisers segment which is so important to the industry and to us, we commented that we saw a growth in the December quarter, actually really good growth in December quarter. And in the south, we have pretty good growth in sport cruisers.
And I don’t have all of my break down of units from the north and the south right now. In the north, our units are down as you would expect with the revenue being down.
It doesn’t seem to be any once area that would be down worst, like yachts aren’t down lower than sport boats, it just seems like almost every place is down, but units aren’t quite down as far as revenue is down in the north but it’s down a fair amount up there.
Jimmy Baker – B. Riley & Company
Okay, just last one for me I’ll pass it off. And just in terms of adding lines to your recently acquired locations, is that something you’ve been able to do ahead of this selling season or is that process kind of more ongoing?
Bill McGill
I’d say it’s ongoing. We have added lines where it was appropriate to the acquisitions that we’ve made.
We are also expanding lines that are new to our company within the regions that we’re – not just acquisitions. And we’re very pleased with our lineup of product right now and the opportunities whether its steamboats or aluminum fine tuned boats or some fishing boats, high-end fishing boats or Azimut.
Jimmy Baker – B. Riley & Company
Okay, thanks a lot Bill. Thanks Mike.
Bill McGill
Okay.
Mike McLamb
Thank you, Jim.
Operator
(Operator Instructions) We’ll take our next question from Mike Swartz with SunTrust.
Mike Swartz – SunTrust Robinson Humphrey
Hi, good morning guys.
Mike McLamb
Good morning, Mike.
Bill McGill
Good morning, Mike.
Mike Swartz – SunTrust Robinson Humphrey
I just wanted to touch on your commentary around some of the boat orders that you had contracted for but were not able to deliver in the March quarter. I would assume we should start to see those revenues flow in, in the June quarter but could you maybe provide some commentary around what or maybe even quantify what that impact would be?
Mike McLamb
Yes, I’ll tell you it’s close to 10 million of boats that were ordered, paid for and did not deliver in the northern markets. When I say for paid for, we paid for them to get them here from the manufacturers, that were due to deliver.
Bill McGill
And they would have delivered if we’d had the weather to do it.
Mike Swartz – SunTrust Robinson Humphrey
So another way to put it is you took the costs but didn’t book the revenue?
Mike McLamb
Well not cost, its inventory until it sells, so we have the inventory, right. And some of those boats I know have are already delivered in April, some of those boats are still in markets that we’re waiting for some warmer weather to deliver but obviously they are going to deliver in the June quarter, but they haven’t all delivered yet.
Mike Swartz – SunTrust Robinson Humphrey
Okay. And just with the – some of the comments around the northern markets in the northern retail location, I mean I guess what’s your comfort level around having the appropriate inventory in place in some of those stores as the weather starts to turn in, are there any other chances that you’re going to be caught short on having particular models in stock?
Bill McGill
We’ve put a lot of planning and effort into making sure that to the best we can do it that we have the proper inventory in the stores to support the spring of north in particular. And we think we’re in great shape there.
If we’re not it’s not that difficult for us to move it from some other stores, which is one of the advantages that we have over a lot of dealers out there and that is if we – as an example, if we have a particular boat that we sell out up in the north because it gets really hot, guess what, we can go pick one up from Florida or from Texas or wherever and make that demand and still get the people out boating in time for the wonderful season of north.
Mike Swartz – SunTrust Robinson Humphrey
Okay, great. And then maybe you can – final question, you can comment on some of the locations that were impacted by Hurricane Sandy, I mean are they back up and running, and are you still having incremental costs come through with getting those kind of up and running?
Bill McGill
They are up and running and we’re doing repair work best we can with the weather because they’ve been challenged with weather as well. And there is still some infrastructure issues in the north, as an example, customers that the mariner [ph] that they normally keep – would keep their boat at isn’t recovered.
And also it’s been a lot slower getting checks in customers’ hands than we anticipated. The insurance companies have really hold onto the checks a little longer even though in a lot of cases they’ve already settled with the customers to what that check is going to be, they’ve just been slow coming but we’re starting to see customers walk into the showroom now and since I’ve got my check, I’m ready to go.
What’s really good news is most of them have already picked out the next boat they want or what they want to do. So we anticipate that it will be good.
It’s a little slower than we had hoped, and we think some of that is the weather, not just Sandy.
Mike McLamb
Yes, and Mike we did have additional costs in the quarter that went through the expense, the SG&A line and some increased inefficiencies if you will or I’d say inefficiencies. The dollars aren’t massive but they are just – they are contributing factor to our expense increases.
Bill McGill
And all of your northern stores in some cases they’ve got 400 or 500 boats they’ve got to get out in a few weeks and as far as de-winterizing them and get them ready for the customers and get them into their mariners and out rolling and we have the team in place to do that. And when you’re not able to do that, that you’re scared is going to freeze the next weekend or whatever and so you don’t there to de-winterize the boat.
It’s hard to offset some of that extra spend you’ve incurred.
Mike Swartz – SunTrust Robinson Humphrey
Okay, great. Thanks for the color guys.
Mike McLamb
Thanks, Mike.
Bill McGill
Thank you, Mike.
Operator
(Operator Instructions) We’ll take our last question from Peter Mahon with Dougherty.
Peter Mahon – Dougherty & Company
Good morning guys.
Bill McGill
Good morning, Peter.
Peter Mahon – Dougherty & Company
Just a couple of questions. You talked about price concessions and a few other things in terms of promotional activity on the boats.
Could you give – do you have any idea that how much that would be quantified in terms of gross margins, is it 100 basis points, 200 basis points?
Mike McLamb
Yes, if you look at the pricing differential between our northern stores or southern stores just kind of as a barometer and then also look at the de-winterization revenue which affects the service part of our business, the service volume and service revenues, our estimate is over a 100 basis points of margin in the quarter. There is – and I am just using just as a barometer, southern margins versus north.
The southern margins are typically lower than the north, so there is a chance of getting little higher than that but that just gives you a basic read on what the margin impact probably was.
Peter Mahon – Dougherty & Company
Okay, great thanks. And then looking at the inventory, are you guys comfortable with kind of the new versus used inventories?
Are we kind of back to kind of historical norms in terms of the balance between those two?
Bill McGill
Yes, we are – it’s more like normal times in the used boat market out there, actually prices have pretty well returned to historical levels before the great recession. And additionally, where we’re comfortable with the inventory, we’ve got some inventory that has little aging on it because we always have that but at the end of the day it’s much less age than it was a year ago.
And so we’ve made a lot of progress there with that is inventory ages you give up a little bit of margin that’s kind of what happened to some extent in the north. We had some aged product that we had lower margins on and we didn’t – we weren’t able to offset a lot of that with new sales and higher margin business when we didn’t have frame.
Peter Mahon – Dougherty & Company
Got it, great, thanks. And then finally, Mike I’m not sure if I heard this correctly, but did you mentioned that in terms of just total revenue in the northern markets were down 26% year-over-year?
Mike McLamb
Yes. North was down 26% and I think I said the south was up 35% or 36%, yes.
Peter Mahon – Dougherty & Company
Got it, great, thanks a lot guys.
Mike McLamb
Thank you, Peter.
Bill McGill
Thank you, Peter.
Operator
And that concludes our question and answer session. I’ll turn it back over to our speakers for any closing remarks.
Bill McGill
Well thank you. And in closing, I’d like to thank all of you for your continued interest and support in MarineMax.
Mike and I are available today if you have any additional questions and thank you for your belief in MarineMax.
Operator
That concludes today’s conference call. We appreciate your participation.