Earnings Call Transcript - HZO Q3 2023

Operator, Operator

Good morning, and welcome to the MarineMax, Inc. Fiscal 2023 Third Quarter Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Scott Solomon of the company's Investor Relations firm, Sharon Merrill. Please go ahead, sir.

Scott Solomon, Investor Relations

Thank you, and good morning, everyone. Thank you for joining us. Hosting today's call are Brett McGill, Chief Executive Officer and President of MarineMax; and Mike McLamb, the company's Chief Financial Officer. Brett will discuss the company's operating highlights, Mike will take you through the financial results. Brett will make some concluding comments, and then management will be happy to take your questions. By now, you should have received a copy of the earnings release that was issued today. If not, please e-mail our IR team at hboinvestorrelations.com, and a copy will be e-mailed to you. With that, I'll turn the call over to Mike.

Michael McLamb, CFO

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?

William McGill, CEO

Thank you, Mike, and good morning, everyone. Thank you for joining us. As always, I'd like to begin by thanking our teams around the world whose great efforts contributed to a strong third quarter driven by revenue of more than $720 million, a new quarterly record for MarineMax. Across all our locations, including our 59 marinas around the world, the MarineMax team consistently embodies our mission of delivering the world's best pleasure boating experience. The secret to our success is staying close to our customers. The relationships and customer service reputation that we've built over the past 25 years have been central to our strong operational and financial performance. To that point, while I am proud of our financial accomplishments, I am most proud of our team's ability to continually raise the bar in keeping our customers happy, as evidenced by our outstanding Net Promoter Score. This morning, I'd like to begin with three key takeaways from our Q3 performance. First, we are delivering on our strategy to structurally enhance MarineMax's margin profile through acquisitions and expansion into higher-margin business. Second, in the short time we've owned IGY Marinas, it has already begun to demonstrate its potential as a growth platform and is well positioned to drive growth. And third, while factors such as seasonality and economic conditions may affect our results from quarter to quarter, we are upgrading MarineMax with a long-term lens. From that perspective, we are highly confident both in our strong market position and the global trends that are fueling the world's passion for the boating lifestyle. Turning to the specifics of the quarter: through strategic moves in marketing and other customer-centric activities, we began to drive higher sales in May and June. These were not only the two biggest revenue months in the quarter, but also the strongest in our company's history. It is becoming clear that the industry is returning to seasonality, as we suggested on prior calls. But in a trend that is favorable to our brand strategy, the premium end of the industry continues to outperform other segments. Even with the modest margin declines we had anticipated, it's gratifying to see that we were able to achieve further market share gains and drive top-line growth while sustaining strong consolidated margins. To that point, Q3 marked the 11th consecutive quarter of gross margins of 30% or higher. While IGY has unquestionably contributed to our solid margin performance this year, so have other areas of our lines of business, including super yacht services, marinas, manufacturing and service, all of which reduced the cyclicality of our business and diversified our revenue stream. Our other revenue categories outside of boat sales continue to grow as a percentage of our business. During the third quarter, we acquired C&C Boat Works, a generational boat dealer in Minnesota's important white fish chain of lakes. C&C is a great example of the type of boat dealerships we seek to acquire. It's a great family-run business that understood well the importance of diversifying into storage, which is undoubtedly a big reason they were in business for over 60 years. C&C annually stores more than 600 boats in addition to their marina capability. This certainly helps drive higher margins and cash flows. The industry M&A pipeline is active, and we continue to be opportunistic in identifying businesses that have the potential to advance our operational and financial priorities, including our higher-margin focused strategy. With the size and number of superyachts around the world steadily increasing, our superyacht services organizations continue to be very active. Additionally, those organizations and IGY are working to produce stronger synergies and benefits for our superyacht clientele. We are just beginning to scratch the surface of those exciting opportunities. IGY is not simply a collection of some of the world's best marinas but a growth platform. To that point, in June, IGY announced a partnership with NEO, a global waterfront development taking shape in the Red Sea. IGY has been engaged to help develop and operate a prestigious new superyacht Marina at Sindala, which will be this gigaproject's luxury island destination. This marina will become an iconic destination for the world's yachting community and will be the closest ultra-prime superyacht Marina in Europe and the Mediterranean, further expanding our network of superyacht Marinas and adding another destination for our customers. We are excited about this new alliance as we capitalize on IGY's unique expertise to help Sindala and NEO set the benchmark for a premium customer experience. We are also very pleased with the progress of Cruisers Yachts and Intrepid Power Boats, which are exceeding our expectations. Intrepid just announced that we will begin building larger boats at our Swansburg, North Carolina operation. Their new flagship model will be a 60-foot Intrepid, the largest model ever. It's something the Intrepid Nation has been waiting for, for a long time, and the announcement has been greeted with tremendous enthusiasm. Exciting times ahead for both companies. And with that update, I'll ask Mike to provide more detailed comments on the quarter. Mike?

Michael McLamb, CFO

Thank you, Brett. I also want to thank our team for producing another record quarter with over $720 million in revenue. To put things in perspective, it was not that long ago when our annual revenue was around $1 billion. The demand for the boating lifestyle is clearly alive and well. While the quarter opened with a down April, as we noted on our March quarter earnings call, the strategic moves Brett mentioned helped accelerate business in May and June, which ended up being the two strongest revenue months in our history. Revenue in the quarter grew about 5%, primarily reflecting the addition of IGY, growth in both Cruisers Yachts and Intrepid Power Boats, as well as a modest increase in same-store sales and other recent acquisitions. Geographically, markets like the Midwest performed well, which supports the seasonal commentary. Not surprisingly, Florida was a bright spot, a trend we expect to continue for the foreseeable future. Our unit volume was down low double digits given the softness in April and continued industry sluggishness in pontoon and tow boat sales. But in May and June, many of our premium brands showed growth. Given our premium focus, our average unit selling price continues to rise. Gross profit increased to $244 million on the strength of strong revenue, combined with a healthy gross margin of 33.8%. As we indicated on our last call, we anticipated and planned for a modest decline in boat margins, partially offset by the addition of IGY. SG&A expenses increased to over $169 million primarily due to the addition of IGY as well as other businesses we have acquired, combined with the inflationary environment. Like other companies, we continue to look for ways to be more efficient and reduce costs where possible while not impacting our ability to provide outstanding service and experiences for our customers. Interest expense increased by $13.8 million, reflecting higher interest rates, the increase in long-term debt related to IGY and higher inventory. In the quarter, we had floor plan interest costs of more than $7 million compared to basically zero last year. On the bottom line, we generated GAAP net income of over $44 million or $1.98 per diluted share compared to net income of $70 million or $3.17 per diluted share last year. On an adjusted basis, net income for the quarter was $46 million or $2.07 per diluted share compared with $71 million or $3.23 per diluted share last year. Adjusted EBITDA for the quarter was $83 million compared with $105 million last year, primarily due to lower net income as well as higher floor plan interest expense. On a year-to-date basis, adjusted EBITDA was $194 million compared with $241 million last year, with floor plan interest making up about $17 million of the difference. Moving on to the balance sheet. We ended the quarter with cash of more than $226 million. Inventories at quarter end increased to $739 million. This was up 4% from March, which is a bit more modest than we expected. On a same-store basis, unit inventories are in the neighborhood of 35% down compared with June of 2019 levels. While we'd like it to be lower than 2019, for some models and brands, we could use more inventory today. Looking at liabilities, our short-term borrowings rose largely due to increased inventories and the timing of payments. Customer deposits continue to be historically very high at $98 million, showing the strength of demand for the boating lifestyle. We expect deposits to gradually decline over time as inventory modestly builds, allowing us to more quickly meet customer demand. Our liquidity position remains strong. At quarter end, debt to EBITDA net of cash was less than one, and we have additional liquidity in the form of unlevered inventory plus available lines of credit that totaled $200 million. Additionally, earlier this month, we announced we increased our floor plan facility by $200 million as part of the ongoing feature of our credit agreement. This increase is consistent with our historical practice of adding floor plan capacity as needed for growth. Our ability to smoothly and easily increase the facility despite a more challenging debt market is a reflection of the strength of our balance sheet, our strong underlying fundamentals, and the relationships we have built with our lending partners. Turning to guidance. Based on our year-to-date results, we are adjusting our 2023 guidance. As noted on prior calls, this has been a challenging year to forecast given the industry's return to seasonality combined with the Fed-driven macroeconomic uncertainty. For our fiscal year, despite the recent uptick in retail strength in the industry, we still believe the industry units will be down around double digits. Keep in mind, our fiscal year includes the December quarter last year, which saw significant unit declines, as did the industry this year through April. This results in our expectation that our fiscal year 2023 same-store sales will be down in the mid-single-digit range. As we have seen to date, our premium product concentration should continue to benefit us. We expect margins to be consistent with our past guidance, which was a modest decline for fiscal 2022 due to product margin moderation, partially offset by IGY and other higher-margin businesses, but still in the mid-30s. We are also assuming interest expense is elevated due to higher year-over-year inventories as well as rates. As we have moved through the year and have a better idea for the annual sources of pretax earnings, we believe our 2023 tax rate will approach 27%. Accordingly, we are raising the low end of our guidance range and leaving the top end the same. We now expect our fiscal year 2023 adjusted earnings per share guidance to be in the range of $5.10 to $5.50. This assumes a share count of 22.4 million shares. In addition, we are forecasting 2023 adjusted EBITDA to be in the range of $225 million to $245 million. Looking at current trends, July is forecasted to finish with positive same-store sales growth as boaters are looking to enjoy the rest of the summer. Having said that, we have much work ahead through the rest of the quarter. With that, I'll turn the call back over to Brett for closing comments. Brett?

William McGill, CEO

Thanks, Mike. We entered the final quarter of fiscal 2023 with positive momentum. Despite the more pronounced seasonality across the recreational marine industry, the fundamentals of our business remain strong. At more than $230 billion, the annual economic impact of the recreational boating industry in the U.S. has never been more robust. Based on our interactions with customers and partners across the globe, the enjoyment and freedom of being out on the water is booming. Our higher-margin businesses provide a diversified income stream that over time, reduces exposure to the industry's seasonality. Just as important, assets like IGY put us on a competitive global footing to generate sustained long-term growth. And with that, operator, please open up the line for questions.

Operator, Operator

Our first question is from James Hardiman from Citi.

James Hardiman, Analyst

Could you provide a specific same-store sales number? I think you mentioned it was in a range, but could you clarify that a bit more? Additionally, could you break out the AUP? That unique number would be very helpful.

Michael McLamb, CFO

Thank you, James. Yes, it's up, but it doesn't even reach 1%. So it's above 0, which is nice to have a little growth, especially considering that April was down significantly. We mentioned that our units were down in the low double digits. To achieve positive same-store sales, there will need to be double-digit AUP growth to get there. Just to clarify, the units we talked about include pontoons and some others, which were sluggish during the quarter.

James Hardiman, Analyst

Okay. Helpful. I wasn't sure if that's low double digits with the quarter to say it sounds like it was the full quarter. Okay. And then as you think about same-store sales I think you guys were previously assuming down high single digits. And I think what you said is now a mid-single-digit number, even though industry function is still the same. How should I take that? Is that sort of a commentary on better ASPs sort of driving the revised guidance, what's the bridge there?

Michael McLamb, CFO

It's really how we performed for the first nine months of the year now, with the June quarter being modestly stronger, stronger than we had anticipated when you look at the rest of the year and bake in the industry assumptions, you get to a down mid-single-digit range versus high. So it's just fine-tuning the comment that we made at the end of the March quarter.

James Hardiman, Analyst

Okay. And so if I think about that mid-single-digit decline, units are expected to be down something still meaningfully more than that. I think you're saying you still expect ASP to be pretty meaningfully for the year. Obviously, and that's obviously been the case in the first three quarters.

Michael McLamb, CFO

Yes, the average selling price will continue to rise. Although we may have caused some confusion regarding the units, we typically discuss industry expectations. We anticipate that industry unit sales will drop by double digits this fiscal year, while we expect our same-store sales growth to be in the mid-single digits. Consequently, although we will not decline as significantly as the industry in terms of units, we will see continued growth in our average unit selling price as we focus on larger products.

James Hardiman, Analyst

Got it. And then lastly, to the July commentary, it sounds like you expect it to be up on a same-store sales basis. Can we say the same? Were units actually up into July? Or was that primarily a pricing method?

Michael McLamb, CFO

You know what, the month is not over, so I can't really comment specifically on units or AUP, but just right now, it is forecasted to be up over the prior year.

Operator, Operator

Our next question is from indiscernible with Stifel.

Unidentified Analyst, Analyst

Mike, can you comment on how you're looking at the inventory build across your stores over the next few quarters? And if there's any deviation from the historical trend line? And then maybe, Brett, you mentioned the partnership between IGY and NEOM. Beyond plans for a destination at Sindala, what does the pipeline for new marinas look like? Just trying to get a sense as to what the opportunity set is here for the longer term?

Michael McLamb, CFO

Thank you, Drew. Regarding the inventory question, it's a relevant one, particularly as the industry seeks the right inventory levels. From a unit perspective, we are still about 35% down year-over-year at the premium end. The most unusual trend occurred in the recent quarter, where we saw modest inventory growth in June. Typically, inventories decrease during this quarter, as seen in previous years, but they generally either decline slightly or remain flat by the end of September. I anticipate a modest build in inventory by the end of September, given our current unit situation. As we approach December, with expected seasonal activity in the industry, inventories typically increase and continue to do so until the end of March. The strength of the March quarter can influence this, as it may lead to sustained builds, particularly since the March quarter can be significant for retail. Following that, we usually see a substantial drop in inventory by the June quarter. If we expect more seasonal trends next year, I believe inventories will increase from now through December and possibly into March before seeing a significant reduction in June.

William McGill, CEO

Yes. Andrew, I'll comment. Thanks for the question about IGY and the growth there. Yes, we view it as a growth platform. That's part of why we did it. We also looked at it with the network effect of, like you've recognized there, adding Sindala and Marina in the future here. Another destination point for our superyachts, pretty, pretty exciting. But as it relates to the growth platform, a lot of opportunities out there. It's an active pipeline of varying destinations and marinas clearly, the cost of capital right now and the things that are going on in the world do have an effect on that, but we're trying to be opportunistic and continue to look.

Operator, Operator

Our next question is from Joe Altobello with Raymond James.

Joseph Altobello, Analyst

I guess, sort of a big picture question, maybe a little bit more color on what's driving the improved retail trends over the past couple of months, both for yourselves and the industry. It doesn't seem like the macro backdrop has gotten much better. Is this just more normal seasonality? Or is there something else that's helping to drive that?

William McGill, CEO

Yes, Joe, I believe it's clear that after Q1 we mentioned some seasonality and softness. We can't quantify how much of each is impacting us. This past quarter, we faced challenges in retail during the March period. We implemented several initiatives, collaborated with our manufacturers, and increased discounting and promotional activities, which helped improve our performance. However, not all of this growth was organic; the demand is present, but it necessitated additional promotional efforts. It was encouraging to see our team develop and execute plans in light of seasonality, especially with the onset of boating season in northern markets. Nonetheless, you are correct that there are still challenges, such as high interest rates and the costs associated with obtaining boat loans, which are exerting pressure on sales not just in the small boat segment, as we reported last year. This has required significantly more effort to achieve sales across the board.

Joseph Altobello, Analyst

Got it. Okay. And then I guess on that point, in terms of pricing, there's been a lot of discussion about affordability in this industry and others as well. How do we think about pricing for model year '24? I guess, on a gross basis, and maybe net emotions?

Michael McLamb, CFO

When you say pricing, do you mean like the inflation-based pricing and lectures?

Joseph Altobello, Analyst

Yes. Yes.

Michael McLamb, CFO

I'd say the industry is very close to what it historically saw from an inflationary-based environment for model year 2024 low single-digit increases with very few exceptions, is what we're hearing from most manufacturers, which is nice relative to the last couple of years.

William McGill, CEO

We're definitely working with all our manufacturers to try to find a way to kind of slow down the growth of the inflation on the newer models. They're doing what they can, but it's clearly a concern for the industry that we're working on.

Operator, Operator

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

Eric Wold, Analyst

Two questions. I guess one, you talked about some of the weakness in the quarter recently around specific boating categories, you called out pontoon and towboat. that mainly driven by the price point of those categories and kind of the income demographic the target? Or is there something else you've been going on within those segments?

Michael McLamb, CFO

Yes, I believe that regarding the different categories, about a year ago, the entry-level and lower-priced boats began to feel pressure sooner due to factors like payments and insurance, which affected those buyers more quickly. However, when examining other segments that have declined, it’s not solely the lower end that is impacted. For example, in the pontoon category, much of the product we sell consists of pontoon boats priced at $100,000, making them quite expensive. Therefore, the situation is somewhat related to specific segments rather than just the entry-level or lower-priced boats.

Eric Wold, Analyst

Yes, it does. That's right. And then on the margin, I know you talked a little bit about recently. Do you just give us a better sense of the gross margin delta this quarter versus last year's quarter for just the new and used boat sales? I know you kind of talked about doing some new things in marketing and promotions to try to drive sales and kind of the seasonally stronger period. Are you at a point where whatever margins are right now for those new news boats? Where you think it's sustainable to kind of incorporate everything you're seeing to a more normalized environment, or there is room for those to decline further from there?

Michael McLamb, CFO

I can provide some insights. New and used margins remain historically high. While they have decreased from the same period last year, they are still quite robust. In terms of our overall margins, we have IGY contributing significantly this year, which adds over 100 basis points to our year-over-year change. Last year, we faced a quarter of negative same-store sales growth, so other high-margin businesses represented a larger share. This year, however, we have seen sales growth, which has slightly reduced the percentage of high-margin businesses. Regarding pricing and margins through 2024, we have not finalized our guidance, but I do anticipate some level of moderation in product margins as inventories increase. Brett, what are your thoughts?

William McGill, CEO

Yes. I think we need to reconsider our approach to seasonality. Currently, we run promotions during a busy seasonal period, and we see positive results. However, as we enter the off-season, we need to think about how to drive sales and what we can do with new products. We'll have to see how this unfolds as we move into the fall.

Operator, Operator

Our next question is from Fred Wightman with Wolfe Research.

Frederick Wightman, Analyst

Just on the implied fourth quarter guidance, it seems like a pretty big range. Wondering why you feel like such a wide range is appropriate and maybe what the biggest swing factors would be to get to the high end versus the low end?

William McGill, CEO

I'll just start quick. I mean some of it we've just come off a few years of having massive backlogs, which never were the case in the industry. So every quarter, you're kind of creating new business. So some of it today or Mike, go ahead.

Michael McLamb, CFO

We had two quarters where we adjusted our guidance downwards, and there's still a lot of uncertainty. We believe the range we've provided is sensible given this uncertainty. The challenge lies in determining how much is due to a return to seasonality versus macroeconomic events. Therefore, we thought it wise to keep the range broad for Q4, Fred.

Frederick Wightman, Analyst

Okay. That's fair. And if you think about some of the promo activity that you've touched on a few different times, are you seeing competitors and other dealers across the industry sort of match and mirror that? And then when you look at just the level of channel inventory from peers in the overall industry, are you worried about that, just sort of where we are in the season? Or do you think everybody is sort of picking up promos and will clear through the inventory as we move into the off-season?

William McGill, CEO

Well, I think worried isn't the right word, concern watching, keeping an eye on things, making sure we stay on our game as the competitors do, inventories will probably continue to build through the industry, which could create some pressure there. It depends on how the manufacturers that each of us deal with. But we're watching the competitive pressures because that will have an effect for sure.

Operator, Operator

Our next question is from Michael Swartz with Truist Securities.

Unidentified Analyst, Analyst

This is Lucas on for Mike. I was just wondering if you could talk about your plans to market and invest in boat shows in the year ahead. Anything changing from previous years?

William McGill, CEO

Yes, it's been quite a journey with boat shows. Before the pandemic, everything was normal, then during the pandemic, many shows were canceled. As shows started to come back, we chose carefully which ones to attend. We'll continue to be disciplined in our approach, but due to inventory and competitive pressures, we may participate in more shows, which will lead to increased attendance costs. We're being cautious and monitoring the situation, but I anticipate that we'll likely go to more shows than last year, although not necessarily reaching historical levels. We'll see how it unfolds.

Operator, Operator

Our next question is from Brandon Rolle with DA Davidson.

Brandon Rollé, Analyst

Congratulations on the strong quarter. I just had a quick question on the used market right now. Could you talk about what you're seeing in terms of used inventory availability and pricing within the market? And then I had a quick follow-up as well.

Michael McLamb, CFO

Our real visibility to use is obviously the trades we take. Late model trades continue to be highly sought after pricing on them and our margins on them are pretty darn good. Our view, the industry overall is kind of similar that there doesn't seem to be any real big issues out there on used product. Late models are always highly sought after really from an industry perspective. And keep in mind, ours are just the trades we're taking.

Brandon Rollé, Analyst

Okay. Great. And then just on the promotional activity. Could you talk about what you're seeing in terms of OEM promotional support versus maybe incremental promotional support you're providing to help retail?

William McGill, CEO

Yes. Great question, Brandon. I think that was kind of the magic in the quarter for us as we got with all of our manufacturers market by market, what's needed, how can they help, how can we help partnering together to achieve every manufacturer and saying, what do we need to do to selectively market promote and maybe discount, obviously, the right models to move through? So that was a good partnership, shared costs, so to speak, and that seemed to work.

Operator, Operator

Our next question is from John Healy with Northcoast Research.

John Healy, Analyst

Just kind of wanted to ask kind of a question outside of the operations of the business. I think it was in late May, there was a 13D filed, and I know there hasn't been a ton of disclosure on the topic, but to the degree you can, I understand there's probably elements of confidentiality if I think of. But can you help us think about kind of maybe the dialogue there, openness to either reviewing kind of capital structure or M&A strategy? Or maybe what some of the topics might be there that you guys are kind of thinking through and how we might kind of think about getting updates on kind of that dialogue?

Michael McLamb, CFO

Yes, I will comment on that. You can refer to the 13D filing. Our discussions with that investor are similar to the conversations we have with any other investor. Aside from the filing, there is really no difference in our interactions with them and their inquiries compared to what we experience with all other investors.

John Healy, Analyst

Okay. I appreciate that. And I just wanted to ask just any way you could give us some color just in terms of the magnitude, how difficult April was and maybe the magnitude of the bounce back in May and June?

Michael McLamb, CFO

Yes, I did comment on the call in April that April is going to be down, which it was. I don't have in front of me right now or recall exactly how far down it was, but it was negative. Keep in mind, last year, our same-store sales for the quarter were negative, and I don't really remember year-over-year, but just assume we were negative on top of the negative or something like that, that kind of tells you the magnitude. And then obviously, now we're flat for the quarter. So May and June were pretty good months. You can see the industry data, which I think generally reflects an improving industry during that time period also.

Operator, Operator

As there are no further questions at this time, I would like to turn the floor back over to Mr. Brett McGill for closing comments.

William McGill, CEO

Well, great. Thank you for everybody for joining us today and all the great questions. Have a great day, and we'll talk to you on the next call.

Operator, Operator

This concludes today's teleconference. Thank you for your participation. You may now disconnect your lines.