Marinemax Inc (HZO) Q2 2024 Earnings Call Transcript

Good morning, and welcome to MarineMax, Inc. Fiscal 2024 Second Quarter Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Scott Solomon of the company's Investor Relations firm. Please go ahead, sir.

Good morning, and thank you for joining us. Hosting today's call are Brett McGill, MarineMax's President and Chief Executive Officer, and Mike McLamb, the company's Chief Financial Officer. Brett will begin the call by discussing MarineMax's operating highlights. Mike will review the financial results. And then management will be happy to take your questions. The earnings release and supplemental presentation can be found at investor.marinemax.com. With that, I'll turn the call over to Mike.

Thank you, Scott. Good morning, everyone, and thank you for joining this call. I'd like to start by reminding you that certain of our comments are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Any forward-looking statements speak only as of today. These statements involve risks and uncertainties that could cause actual results to differ materially from expectations. These risks include but are not limited to the impact of seasonality and weather, global 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. Also on today's call, we will make comments referring to non-GAAP financial measures. We believe that the inclusion of these financial measures helps investors gain a meaningful understanding of the changes in the company's core operating results. These metrics can also help investors who wish to make comparisons between MarineMax and other companies on both a GAAP and a non-GAAP basis. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in today's earnings release. With that, let me turn the call over to Brett. Brett?

Thank you, Mike. Good morning, everyone, and thanks for joining us. Before we get into the specifics of the quarter, let me acknowledge the dedication and commitment of our team in what continues to be a challenging period for the marine industry and indeed for the outdoor recreation market in general. Across our retail dealerships, superyacht operations, marinas, and manufacturing locations, our team has worked hard to deliver on our high standards for product and service excellence, ensuring customers experience all of the terrific benefits of the boating lifestyle. Moving to our March quarter, we posted solid revenue of more than $582 million, driven mainly by higher boat sales and positive contributions from the IGY portfolio and the other marinas in our network. Our gross margin, while historically high, came in a bit below where we expected. This was primarily driven by more aggressive promotional activity designed to create consumer urgency given the economic environment and increased seasonality. From an industry perspective, demand was weaker than we had anticipated, with U.S. powerboat registrations posting a year-over-year decline through the first three months of the calendar year. That being said, our strategy around premium brands combined with our promotional initiatives and customer focus enabled us to drive positive same-store sales growth and modest unit growth in Q2. Although we were not able to close all of the revenue we had anticipated in the quarter, we performed well on the top line in comparison with the industry as a whole. We are continuing to receive increasing support from our manufacturing partners, both from the perspective of incentives and in moderating production levels in response to the retail environment. Our industry is cyclical, but we have a track record of emerging from these troughs even stronger than when we went into them, and I am confident that will continue to be the case. Despite the sluggishness of near-term retail demand, interest in boating is robust as evidenced by online activity on our events and boat shows. The Miami International Boat Show in February and the West Palm Beach International Boat Show in March were both strong events for us, generating positive momentum as we move into the summer selling season. We continue to prioritize growth through the addition of strong businesses that fit our acquisition criteria. During the quarter, we completed the acquisition of Williams Tenders USA. This grants MarineMax distribution exclusivity in the United States and the Caribbean for the world's leading brand of rigid inflatable jet tenders for the luxury yacht market. This transaction is consistent with our strategy of investing in brands, products, and services that improve the customer experience and increase our margin profile. In March, we also announced the expansion of our footprint in the Florida Keys with Native Marine, a Boston Whaler and Mercury Marine dealer in Islamorada. We're excited to provide the dealership's customers with our broad range of products and services, including maintenance, repairs, boating accessories, and events. Let me address two items that occurred since we spoke with you on our Q1 call in January. First, as previously disclosed, in March, we determined that the company had experienced a cybersecurity incident. I'm extremely proud of our technology team and the efficiency with which they handled the incident. Although the containment measures that we put in place resulted in some disruption to a portion of our business, we quickly initiated our incident response and business continuity protocols and took immediate steps to contain the incident. The training and preparedness of our team played a significant role in the effectiveness of the response. While our investigation into the incident continues, to date, there has been no material long-term impact on our operations. Secondly, last week we filed an 8-K regarding what we consider to be the unlawful taking of our Marina operations at Cabo San Lucas, Mexico. The Marina has been operated by a subsidiary of IGY for more than 20 years. Our IGY team was in the process of finalizing a new renewal agreement with Mexican officials when the Marina was taken without notice. In light of the ongoing situation, we can't comment beyond the information contained in the 8-K, except to say that we are pursuing the appropriate remedies. The Cabo Marina accounted for less than 4% of assets and 1% of revenue in fiscal 2023. Before I conclude, let me touch on some very important operational improvement plans we are working on. While we have taken steps in recent months to reduce expenses in the areas that do not directly impact our customer experience, we believe it's prudent to take additional actions to align our cost structure with the current environment and improve our operating leverage. We began taking more significant actions which cover a broad range of expense reductions. We continue to maintain a strong cash position and a healthy balance sheet, positioning our business well as industry conditions improve. And with that, I'll turn the call over to Mike for comments on our financial performance in the quarter. Mike?

Thank you, Brett. Brett noted the overall decline in boat registrations through the first calendar quarter of 2024. We had anticipated registrations coming in flat or perhaps up slightly as noted on prior calls given the rather easy year-over-year comparisons, which is in stark contrast to the nearly 16% decline in fiberglass boat registrations for the period. Having said that, our own data suggest that seasonality may be partly contributing to recent industry trends. As an example, in the first half of fiscal 2024, the sales mix between our Florida and non-Florida retail locations closely resembled the mix we experienced prior to 2020, indicating more seasonal patterns in northern markets. Overall, revenue grew 2% to more than $582 million, primarily reflecting a 2% increase in same-store sales. Our same-store sales growth was driven mostly by modest unit growth. Our manufacturing businesses of cruisers, yachts, and Intrepid Powerboats experienced revenue declines as they adjusted production, like other manufacturers in the industry. Gross profit margin declined to 32.7%. While we did expect to decline around this magnitude, the final results were lower than expected given the discounting needed to drive sales. SG&A increased to $169 million in the quarter. Excluding transaction costs, changes in contingent consideration, weather events, and other nonrecurring items in both periods, SG&A increased approximately $16 million or 11%. The increase in expenses is in a number of areas, including compensation, inventory, maintenance, marketing, insurance, and other factors related to the current inflationary environment. Also, roughly $3 million of the increase was from entities we did not own last March quarter. These entities are also seasonally slowest in the winter quarters. However, as Brett noted, we're taking more aggressive steps to offset those increases and the scope of what we are considering is broad. The goal is to improve our SG&A operating leverage and ultimately improve our operating margin. Some of our actions will be near-term reductions while others will take more time. Because we are still working through our actions, we plan to talk in more detail about these initiatives on our third quarter call. Interest expense increased to $19.4 million as a result of higher rates and increased inventory. Floor plan interest in the quarter was close to $12 million compared to $6.5 million last year. On the bottom line, GAAP net income was $1.6 million or $0.07 per diluted share compared with net income of $30 million or $1.35 per diluted share last year. Adjusted net income was $4.1 million or $0.18 per diluted share compared with $27.4 million or $1.23 per diluted share last year. Adjusted EBITDA for the quarter was $29.6 million compared with $57.4 million last year, primarily reflecting lower gross margins, higher SG&A, and higher floorplan interest expense. Moving on to the balance sheet. We ended the quarter with nearly $217 million in cash. Inventories of $933 million were up about 6% from calendar year-end, generally in line with historical trends, but a bit higher than we expected given some revenue that we were unable to close in the quarter. On a same-store basis, unit inventories are over 26% below 2019 levels. Turning to liabilities. Our short-term borrowings, which is our floorplan financing, were up largely due to increased inventories. Customer deposits were up modestly as expected from calendar year-end as we move into the seasonal selling period. Debt to EBITDA net of cash was a little over 1x at quarter-end as we continued to maintain a strong liquidity position. We have additional liquidity in the form of unlevered inventory and available lines of credit totaling close to $200 million. Turning to guidance. Based on our year-to-date results and expectations for the remainder of the year, we are adjusting our 2024 guidance. Our expectations are based on an incrementally improving second half of the year, with increased seasonality playing a role. Although we are now forecasting industry volume to be down on a unit basis for our fiscal year, we expect our volume to be up modestly for the period consistent with what we've experienced in the first half of the fiscal year. For the year, we anticipate same-store sales growth in the low- to mid-single-digit range and gross margins remaining in the low 30s on a percentage basis. We expect SG&A expenses to be elevated above our 2023 level given our year-to-date performance, but with the year-over-year increase moderating in the back half as we implement additional cost reduction actions. Interest expense will be on a run-rate basis, generally consistent with the first two quarters of this fiscal year. Based on those drivers, we now expect our adjusted net income per share to be in the range of $2.20 to $3.20 for fiscal 2024, with adjusted EBITDA to be in the range of $155 million to $190 million. We are using an annual expected tax rate of just over 27% and a share count of 23.1 million in our assumptions. The wide range on EPS versus EBITDA is because our noncash items like stock-based comp and depreciation and amortization grow more meaningfully as a percentage. Looking at current trends, we commented a few times that we did not close all the business we expected in March. That does set up for a strong April. But we have a lot of work to do to get things wrapped up. And trends in general have picked up presumably in part due to seasonality.

With that, I will turn the call back over to Brett for closing comments. Brett? Thank you, Mike. Although our industry continues to experience near-term challenges, combined with the return to seasonality, we have outperformed the market and are focused on the strategic steps necessary to maintain our historically strong margin profile and the financial flexibility to deliver on our strategic priorities. With that, Mike and I'll be happy to answer your questions. Operator, please open the line for Q&A.

Our first question is from Drew Crum with Stifel.

So Mike, you addressed the variance in terms of guidance for earnings and EBITDA. Can you talk about why the updated guidance range for those two metrics has widened versus three months ago? And then I have a follow up.

Yes, that's a good question. While our GAAP earnings are decreasing, the noncash items remain largely unchanged from year to year, particularly stock-based compensation. Depreciation and amortization, along with stock-based compensation, are increasing as a percentage of the total earnings, and that's what is influencing that trend.

Okay. Okay. Maybe shifting gears just on gross margin. You talked a little bit about this, but I want to get a sense as to the level of promo spend you're anticipating for the selling season. How you see that impacting gross margin over the balance of fiscal '24? And kind of related, do you believe boat margins have bottomed here?

Yes, Drew, I'll comment. This is Brett. I think the promotional activity, including discounting and additional efforts at boat shows, will continue as we approach the selling season. We're focused on moving our products, particularly since some boats remain in high demand with low inventory. We want to capitalize on those opportunities. We feel that margins have stabilized at their lowest point. We will keep collaborating with our manufacturers to ensure we receive the necessary support, as they are all committed to that. However, there may be some additional margin pressure on certain units, but we believe we have reached a historical norm. Mike, would you like to add anything?

Yes, margins are back to historical levels in the industry based on what we're seeing. To clarify our guidance, last quarter we indicated that we expected our gross margin to settle in the low to mid-30s. This quarter, we're suggesting it will be in the low 30s. The question is whether what we just posted falls into the low to mid range or is closer to the lower end. It leans more towards the lower end, which is why we've slightly adjusted our expectations for the second half of the year.

Our next question is from the line of James Hardiman with Citi Group.

This is Sean Wagner standing in for James. I would like to follow up on the previous question and answer. Can you provide some insight into the extent of the OEMs' contribution to the promotional environment? Do you believe that margins have reached their lowest point? When do you expect the promotional environment to ease, or is it likely to persist?

From a promotional perspective, we are consistently engaging with the manufacturers. We remain attentive to the retail sector and our responsibility is to communicate insights, such as identifying weaknesses in certain models where we need additional support. They are generally responsive to our needs. However, there can be some delays between retail observations and their response capabilities. Overall, they are very cooperative, and we are putting in considerable effort. I would say they are currently at appropriate levels, though perhaps we could benefit from slightly increased and quicker support as the selling season approaches. Mike, please go ahead with the margin comments.

I believe the industry is expected to see positive year-over-year comparisons. However, in the last six months from October to March, only October showed positive results. This likely concerns other dealers and may pressure manufacturers to increase incentives. While manufacturers are taking necessary actions, I anticipate they may become more aggressive as we approach the summer selling season. They need dealers to maintain good inventory levels as we approach the midpoint of summer, considering the new model year starting on July 1 for most manufacturers. If dealers hold excess inventory, they may not place as many orders as manufacturers prefer. Therefore, we might see more promotional activities from various manufacturers in response to the latest industry data.

Okay. In the segments you are focused on, where do you see the most inventory overhang or need for support across the industry?

I'd like to provide an industry perspective. It's been widely recognized that there have been challenges with towboats and pontoon boats. However, I would emphasize that the issues are more extensive than just specific segments. The industry has experienced lower retail sales than many anticipated, leading to higher inventory levels across most categories. While some brands we offer are performing exceptionally well, others are situations where we are collaborating closely with manufacturers on promotional efforts and order management. The positive takeaway is that manufacturers share a vested interest in maintaining a healthy industry and appropriate inventory levels, and I believe they are also somewhat taken aback by the recent retail trends.

Next question is from the line of Joe Altobello with Raymond James.

I just want to go back to the promo environment. And I know it's been a while since we've seen a normal promotion season, if you will. But is this kind of normal? Is this what the industry looked like really before COVID? And it just feels a lot more aggressive given we've come off a period where there was very little promotion going on.

Yes, I think you're right, Joe. We've always had programs at certain times of the year, and we're noticing that trend again. It might just seem like we haven't experienced them recently, but I would say this feels historically normal to us.

Understood. Regarding SG&A, you mentioned the factors that contributed to the year-over-year increase. What caught your attention about the SG&A changes? Additionally, where do you identify the most significant opportunities for savings in this area?

I think one surprise has been that the inflationary environment is impacting us more than we anticipated. This includes aspects like property and casualty insurance renewals and our health insurance costs remain high. Additionally, even smaller items like audit fees are affected. It seems everyone is experiencing ongoing inflation, particularly at the service level. Regarding your second point, Joe, you were asking about our future plans, correct?

Yes. The biggest opportunities, kind of high level.

I think we will be examining various areas such as payroll and related expenses, marketing spending and efficiency, and location optimization. We are looking at many different aspects of the business, which is much broader than our initial focus. This shift reflects the current state of the industry, which is experiencing more softness than we expected at the beginning of this fiscal year.

Our next question is from the line of Fred Whiteman with Wolfe Research.

Just a follow-up on that last question. I mean, you've had to cut the outlook a few different times from a top line and an earnings perspective. When you look at sort of the retail environment coming in softer than expected, you've talked a few times about the margin pressure that you're seeing and expecting to continue. Like what gives you confidence at this point in the selling season that you've been conservative enough with the forward outlook of the forward assumptions?

I'll tell you, and number one, we don't like cutting guidance twice. Let's go on record to say that. I will reiterate again that the outlook that we had for the industry was much different than how the industry is trending. We expected a flat to up slightly unit industry through the first six months. We saw what happened in December in the December quarter, where it was down worse than we expected. We didn't think it would happen again in the March quarter. So you know what, Fred, you put in your best outlook, you put in your best assumptions, which I think we're doing that here again, you lower your numbers to where you think they're going to be achievable. Every company wants to have upside in the numbers. So you always strive to do that. The issue is ultimately in the industry you're playing in, where does it settle? And are we finding the right place for it to sell.

And Fred, I'll add that we have data that Mike mentioned in his comments about the return to seasonality. Last year, we indicated there was a return to seasonality, and it continues to trend that way, where most of your business really starts to take off during the selling season. These data points also help us plan for the next two quarters.

That's fair. And there was a comment that things had picked up in April. I wasn't sure if that was a sequential comment to maybe reflecting more of that normal seasonality? Or is that a year-over-year comment? What exactly do you guys mean there?

Yes, I can address that. Looking back to last year, we noted that April was somewhat weaker due to the banking crisis, so we have a favorable comparison for this April. The data suggests that seasonal factors may be more pronounced this year, particularly with the mix of business between Florida and other regions in the March quarter. In terms of activity in April, Florida continues to perform well for us, and we are seeing positive developments in northern markets as well. Overall, April appears to be shaping up as a strong month for us, although we still need to finalize everything next week. That was primarily a seasonal observation.

Okay. And then just lastly, is the Williams' acquisition reflected in the new EPS guidance? I don't think it was included last quarter. Is there a specific note related to EPS for that?

So thanks for bringing it up. It is in our guidance, and it is a fantastic company to merge. We're happy to get them on the team. In the size and scope of MarineMax anymore, there's not a lot of acquisitions that really just move the needle when it comes to revenue and EPS in a meaningful way to really call it out. It is accretive. It is a high-margin business. It's got a fantastic management team with a great product. So we're really happy to bring on board.

Okay. But specifically not enough to move the needle in.

It's adding to it. So the guidance reflects some contribution from them. It's just not a real big dollar amount from them.

Our next question is from the line of Mike Swartz with Truist Securities.

Maybe just a little color on inventory. And I think, Mike or Brett, you had mentioned that inventories may be a little more dependent on brand or category, but maybe at a high level, just give us a sense of where are your turns today? And maybe where do they need to be over the next three or six months before you feel a little more comfortable?

Yes, I don't have the exact data right now, but I'm fairly sure that with our growth of 12%, our inventory turns are around 2.4 to 2.5, whereas historically the industry hovers around 1.8x. We typically perform better than that. Our inventory is in decent shape; we do have some areas with opportunities, like many others, but we've been proactive in moving product. Our noncurrent percentages are significantly better than other dealers we've observed. Ideally, we’d like to achieve inventory turns above 3x, which will require considerable effort over time. Before COVID, we were usually at 2.5% or sometimes a bit higher. I hope that answers your question, Mike.

We have some opportunities for share in inventory, but we've been also aggressive moving like we were in the March quarter too.

That's helpful. I appreciate that. And maybe there's been a lot of talk about the NOAA regulations on offshore speed. And maybe just if you want to go on record and give us maybe your quick thoughts about those regulations that proposed and any impact that might have on your business?

We haven't studied the direct impact on our exact stores and locations. Yet we're still trying to learn more about what it means and kind of relying on some industry information there. So we haven't studied it exactly for our stores and business. It potentially in some locations, it could be not very impactful at all because of the seasonality of where those restrictions are in those stores kind of the seasonality is okay. But it will have an impact on. I think when you're reading, there's a lot of commercial industry impact that's getting most of the media. I'm not at all trying to underestimate that it couldn't have a recreational impact, but for sure, on the commercial.

The final rules are not released yet, and the industry is anticipating them to better understand their impact. This is something we are all closely monitoring.

Our next question is from the line of Eric Wold with B. Riley Securities.

I want to revisit the guidance change. I understand that adjustments to guidance are not ideal, as there are many factors involved. However, I'm looking for clarification on the main drivers behind this change. If I remember correctly, your previous guidance did not account for any rate cuts influencing demand. It seems that this has remained consistent. Regarding the miss in Q2 compared to your expectations, I wonder if this is more about increased seasonality returning to the market. It appears that you may see some reversal of that in April. Can you evaluate the other remaining factors for the year? I realize it involves multiple aspects, but could you prioritize whether it is an increased concern about underlying demand pressures even without rate changes, more competition from other players, or the need for heightened promotional efforts to attract customers? I suspect all these elements are influential, but I’m interested in how you would prioritize them, especially if seasonality was likely a significant reason for the miss in Q2 compared to your initial expectations.

I would say we are facing a more challenging industry environment, and while there are indications that seasonality might positively influence the summer selling season, we are preparing for a tougher retail climate. Consequently, we plan to adopt a more aggressive stance on margins. The combination of a challenging environment and margin pressures is likely the most significant factor driving changes in the latter half of the year. We also anticipated higher revenue during the March quarter, particularly because we were comparing against a negative 13% comp, leading us to expect more than 2% same-store sales growth. However, we experienced some revenue that did not close as expected. Additionally, our inventory levels are somewhat elevated, which will slightly increase our interest expenses in the June quarter, although we expect those to decrease by the end of that quarter, with a slight rise in interest costs again in September. Overall, the key factors are margins, the challenging environment, and interest expenses.

It does. Regarding inventories, we ended the quarter higher, which is a bit of a change since they previously came in below. You mentioned that OEMs are being a little more accommodating and adjusting production. If we finished September of last year with $813 million in inventories, what do you anticipate for this September? Do you expect inventories to be higher, lower, or about the same as last fiscal year-end? Assuming we enter a better environment in fiscal '25 and demand improves, is the current inventory level at the end of this quarter, around $800 million, suitable for a low single-digit retail growth scenario? Would you need to aim for a higher level?

Inventories will increase in value compared to last summer. During that time, while inventories were being built, some brands hadn't reached adequate product levels due to supply chain or manufacturing challenges. Therefore, I anticipate that inventory levels will indeed be higher. I'm not exactly sure of the figure we expect, but it will be an increase. Additionally, it's important to consider the details by brand and segment and our collaboration with manufacturers regarding projections for 2025 and production incentives. Generally, many in the industry, including Brunswick, suggest that 2024 may serve as a low point, with an industry recovery in model year 2025, which seems logical. We just need to reach that point to confirm whether this plays out as expected.

Our next question is from the line of David MacGregor with Longbow Research.

This is Joe Nolan on for David. Most of my questions have been answered at this point, but I just wanted to ask whether, obviously, first quarter always has some sort of weather impact, but it seems maybe a little bit worse than a typical first quarter. So I was just wondering if you could talk a little bit about the cadence of sales through the quarter as we saw weather improve a bit.

Yes. I'd say weather did probably play a little bit of a role, believe it or not. I mean, we live here in Florida and Florida had a wet, windy, cold March quarter, a lot of folks up North don't feel sorry for us, but I usually build a fair amount in the March quarter, and I was not out much at all. So and April weather is shaping up pretty nicely here, which you can kind of see that in our comments about April being strong. Yes. So there probably is some play on weather that we're probably experiencing now, including here in the northern markets, too.

And then obviously, we're seeing the step-up in promotion. Can you just talk about the success level that you've seen with the promotions and driving retail activity, whether that's been maybe better or worse than you originally would have expected?

When we collaborate with a manufacturer, we develop a comprehensive consumer-focused program that enhances their offerings and generates urgency. This approach is definitely effective, and that's the key.

Ladies and gentlemen, I now hand the conference over to Mr. McGill for his closing comments. Please go ahead.

Well, we appreciate everybody joining the call this morning, and we look forward to updating you on our progress in the next quarterly call. Have a great day.

Thank you. The conference of MarineMax has now concluded. Thank you for your participation. You may now disconnect your lines.