Earnings Call Transcript - HZO Q1 2022

Operator, Operator

Good morning and welcome to the MarineMax Inc. 2022 Fiscal First Quarter Conference Call. Today's conference call is being recorded. At this time, I'd like to turn the call over to Dawn of ICR, Investor Relations for MarineMax. Please go ahead.

Dawn Francfort, Investor Relations

Thank you, operator. Good morning everyone and thank you for joining this discussion of MarineMax's fiscal first quarter 2022 conference call. I'm sure that you've all received a copy of the press release that went out this morning. But if not, please call Linda Cameron at 727-531-1712 and she will e-mail one to you right away. I now would like to introduce the management team of MarineMax. Mr. Brett McGill, President and Chief Executive Officer, and Mr. Mike McLamb, Chief Financial Officer of the company. Management will make a few comments about the quarter and then be available for your questions. And with that in mind, let me turn the call over to Mike. Please go ahead Mike.

Mike McLamb, CFO

Thank you, Dawn. Good morning everyone and thank you for joining this call. Before I turn the call over to Brett, I'd like to remind you that certain of our comments are forward-looking statements as defined by the Private Securities Litigation Reform Act. 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, 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 Brett. Brett?

Brett McGill, CEO

Thank you, Mike. And good morning everyone and thank you for joining this call. Let me start by thanking the MarineMax team for their continued focus and commitment, which drove record sales, record cash flow, and record earnings growth in the quarter. On top of these great financial results, our Net Promoter Customer Satisfaction level hit another new record. This is the most important achievement of all, as it will drive many years of future sales and profitability. Today, I'd like to share highlights from our first quarter, touch on how we are strategically approaching the important peak selling season, followed by a discussion of the results of our strategic growth plan. Then, Mike will discuss our financial results in greater detail and provide some color on the balance of the year. Q1 results were a great achievement given the extremely lean inventory and well-documented supply chain issues. With the peak selling season ahead we expect to build on the strong start to our fiscal year and remain confident that we will continue to enhance long-term shareholder value. Let me touch on the December quarter where we generated 15% revenue growth, record gross margins of 35% and record earnings per share of $1.59. I'm extremely pleased that our diversified model enabled us to again exceed expectations as we produce robust margins and earnings growth. For the quarter, we are particularly pleased with our strong same-store sales growth, which rose to 9%. It's important to note that our same-store sales growth was primarily driven by an increase in unit sales, which is notable given the industry-wide supply chain challenge. Additionally, we drove meaningful expansion across essentially all brands categories and geographic regions. The marine industry continues to experience consumers embracing the boating lifestyle. This strong demand environment is highlighted by customer deposits that exceeded $144 million and grew sequentially on top of our strong same-store sales growth. Our team continues to capitalize on consumers actively seeking the boating lifestyle as we leverage our scale, broad geographic presence, product diversification, and digital platform. Based on available industry data, we believe we continue to gain share. From a cadence perspective, the supply chain headwinds improved as we moved through the quarter, benefiting our ability to fulfill customer orders. As many experts in the industry are forecasting, the supply chain environment will most likely stay choppy and not improve materially until late in fiscal 2022. Accordingly, we continue to work closely with our manufacturing partners for the best up-to-date information while working to satisfy the strong demand. Now, let me turn to how we are approaching the important peak selling season. We are well-positioned and prepared to serve our customers. COVID has changed all aspects of customer expectations including boat shows. Our team has adapted with greater digital capabilities and a refocused marketing spend that leverages our stores and our online experience generating exceptional results. Our deep manufacturing relationships and nationwide shared inventory continue to give us a competitive edge. Many of our brand expansions continue to mature and accelerate within our retailing model, which should keep driving future incremental growth. With the largest selling season ahead, we expect to build on the strong start to our fiscal year and deliver exceptional customer experiences. I also want to underscore our strategic growth plan and how it propels sustained market share gains, revenue growth, and expanding company-wide margins. This quarter we increased our operating margin by 220 basis points over last year's record to 10%, quite an accomplishment in our historically smallest quarter. This performance is directly attributable to our ability to execute our strategy of growing our higher gross margin businesses. To that point, many of our recent acquisitions have had a higher gross margin profile than is typical in our industry. These strategic acquisitions, combined with improvements in finance and insurance, service, brokerage, and the expansion of our substantial storage operations, have resulted in structural enhancements to our gross margin profile. Additionally, as we integrate our acquisitions, they continue to perform very well and are aligned with our strategy of contributing to MarineMax's record margin expansion. From a profitability perspective, one of the best elements of the quarter was once again our strong gross margins at over 35%. The meaningful margin expansion in the quarter was bolstered by increased product margins and our higher margin businesses that drove significant operating leverage in the quarter. To that point, the margin expansion and controlled SG&A levels produced an impressive 26% operating leverage in the quarter. The combination of gross margin expansion and focused expense management resulted in a record $1.59 of EPS for the quarter. In the December quarter we added Texas MasterCraft and Intrepid Powerboats to our family. These acquisitions combined generated over $100 million in revenue in 2020. We are seamlessly integrating these businesses into MarineMax and believe many opportunities exist for sharing best practices and resources to drive even greater growth in the years ahead. Now, let me discuss the confidence we have that our strategy will continue to create sustained growth and long-term shareholder value in 2022 and beyond. We continue to make significant progress on our vision of creating exceptional customer experiences through best services, products, and technology. This is evidenced by our record Net Promoter Customer Satisfaction scores that I mentioned in my opening comments. Our team remains focused on these initiatives resulting in strong demand and margin. We will accomplish this through our global market presence, premium brands, valuable real estate locations, exceptional customer service, technology investments, strategic acquisitions, industry-leading inventory management, and finally, our unwavering commitment to build on our strong company culture. Supported by one of the strongest balance sheets in the industry, we will actively make strategic accretive acquisitions in a disciplined manner. Our broad global geographic presence has allowed and will continue to allow us to grow by adding additional dealers, marinas, storage, service-related offerings, manufacturing, and asset-light businesses. We believe the combination of driving operating leverage and generating significant cash flow coupled with strong consumer demand will result in sustained growth well into fiscal 2022 and beyond. And with that update, I'll ask Mike to provide more detailed comments on the quarter.

Mike McLamb, CFO

Thank you, Brett. And good morning again everyone. I'd like to also start by thanking our team for producing another record quarter driven by strong same-store sales growth, gross margin expansion, and great operating leverage. For the quarter, revenue grew 15% to $473 million largely due to same-store sales growth of 9% and the contribution from our various recent acquisitions. Our 9% same-store sales growth was driven primarily by unit growth, which is impressive given the continued industry-wide supply chain challenges. Overall, our growth has been demand-driven across nearly all segments of products and every global market. A big takeaway from our results this quarter is our ability to post very strong comps on top of already strong comps. Our 9% growth this quarter was on top of 20% and 24% the last two years, which were also largely unit-driven. Our gross profit dollars increased over $43 million, while our gross margin rose 540 basis points to over 35%. Our record gross margin was due to several factors. Among these are improving margins on new and used boat sales, impressive service parts and storage performance, expansion in a higher margin finance, insurance, and brokerage business as well as growth in our global superyacht services organizations of Northrop & Johnson and Fraser Yachts. Our higher margin businesses have been a focus of ours for some time including our acquisition strategy. Only about a third of our margin improvement in the quarter came from growth in new and used margins. The remainder was expansion of our higher margin businesses. Regarding SG&A, the majority of the increase was again due to the increase in sales and related commissions combined with the recent acquisitions. We believe SG&A overall is generally on track on an annual basis, but we will watch the inflationary pressures carefully. Our operating leverage in the quarter was about 26%, which drove very strong earnings growth setting another quarterly milestone with pre-tax earnings of over $46 million in historically our smallest quarter. Our record December quarter saw both net income and earnings per share rise over 50% generating a $1.59 in EPS versus a $1.04 year ago. These results include a limited contribution from the two acquisitions we completed in the quarter. Moving on to our industry-leading balance sheet, we continued to build cash with over $216 million at quarter end versus $121 million a year ago. Our inventory at quarter end was down 14% to $325 million from last year, but excluding the acquisitions, our inventory is down closer to 25%. Looking at our liabilities, short-term borrowings decreased 31% due to lower inventory and related financing, as well as the increase in cash generation. Customer deposits, while not the best predictor of near-term sales increased sequentially around 50% from September to over $144 million due to the timing of orders and strong demand along with a contribution from Intrepid. Our current ratio stands at 1.57 and our total liabilities to tangible net worth ratio is 1.40. Both of these are very impressive balance sheet metrics. Our tangible net worth is $386 million. Our balance sheet has always been a formidable strategic advantage and today more than ever it continues to protect us in uncertain times while providing the capital for expansion as opportunities arise. Turning to our outlook for fiscal 2022. The December quarter certainly exceeded expectations and industry demand trends remain strong. The challenge in 2022 remains around the assumptions for the supply chain. Today, given what we are being told from our various manufacturing partners, we continue to expect retail unit growth in 2022. However, it is also clear that uncertainty exists in the ultimate visibility due to the supply chain challenges. As such, we think it's prudent to continue to expect flat unit growth until we are able to successfully move through more seasonal quarters. This, combined with increases in our average unit selling price, should provide annual same-store sales growth around the mid single digits, including the remainder of the Cruisers and Nisswa acquisitions along with Intrepid and Texas MasterCraft, we expect total annual revenue growth in the mid-teens. We do hope the supply chain will improve and allow us to have upside as we move through the coming quarters. Given the inflationary pressures in the marketplace as noted on our last call, we do expect modest gross margin pressure. We have leverage to mitigate these pressures, but believe it's prudent to include them in our expectations for now. Our guidance is also before any other acquisitions that we may complete. Using the low end of our historical leverage range plus a modest share increase in a tax rate of 25% results in an earnings per share guidance range of $7.60 to $8. This implies fiscal 2022 EBITDA of over $260 million. Turning to current trends, January is forecasted to end with positive same-store sales growth and our backlog is at record levels. As we have said, industry demand remains strong and we are generally outperforming these elevated levels. With those comments, I'll turn the call back over to Brett for some closing comments.

Brett McGill, CEO

Thank you, Mike. MarineMax continues to benefit and capitalize on the surge in demand and the desire of consumers to embrace the boating lifestyle. Our team's performance to start the fiscal year has shown continued excellent execution, even on top of very impressive same-store sales a year ago. The original vision for the creation of MarineMax was to create a better customer experience by building a team that is dedicated to the passion and lifestyle of boating. We continue to work hard to deliver on this and this is the success of our model. We remain committed to the long-term financial strength of the company and will pursue additional brand expansions and higher margin businesses to support our strategy to create long-term shareholder value. And with that, operator, let's open up the call for questions.

Operator, Operator

Thank you. Our first question comes from Fred Whiteman with Wolf Research. Please go ahead with your question.

Fred Whiteman, Analyst

Hey, good morning. Thanks for the question. To start, could you address the unit delivery cycle? I understand it's difficult to predict. Can you provide details on the unit number included in the January same-store sales commentary that you expect to be positive? There have been many changes, so how should we approach that?

Mike McLamb, CFO

Yes. Good question, Fred. We don't really give on a month-by-month basis. I know we do say that we're going to have same-store sales growth as January closes up. And actually I don't recall right now if it's going to be up or down. But I would tell you that in the December quarter we had some good supply chain activity positive, which is how we had the unit growth in the quarter. However, I think the message is that there's still some choppiness out there and it seems like it's a different problem on any given day with each different manufacturer. So, I think until we move more through these seasonal quarters, I think our guidance number of flat until we get further into the year probably makes the most sense with the uncertainty.

Fred Whiteman, Analyst

Okay. That makes sense. And you guys both had positive comments on sort of the medium and the long-term outlook for the business. And I know that you guys have historically been active on the M&A front. But could you just sort of touch on the potential to lean into the buy-back here just given the valuation and sort of how the stock has performed, especially since I think that's set to expire in March of this year. So any thoughts that would be helpful?

Mike McLamb, CFO

Yes. You can imagine we have a 10b5 plan in place that would be buying it as prices drop. And we're aware when the current plan expires. And we would be at least talking to our board about reactivating that plan before it expires. So, we're aware of those dates. I'd say that, we've been public for a long time and there's been other times where the valuation of the company gets dislocated from what it should be in reality. And in those time periods we've always been a little more active in our share buybacks. We do continue however to look at into the long term and about good strong businesses to bring into the company with good strong management teams. So, it's a balance of what's happening right now from a valuation perspective, as well as where we're trying to take the company long-term. So, I think we'll be looking at both avenues. Obviously, buy back some stock going to makes sense and continuing our discussions with different opportunities to expand the business and grow it for the long term.

Fred Whiteman, Analyst

Great. Thanks guys.

Mike McLamb, CFO

You're welcome.

Operator, Operator

Our next question comes from the line of Eric Wold with B. Riley Securities. Please proceed with your question.

Eric Wold, Analyst

Thank you. Good morning, Brett, Mike. Obviously, great same-store sales, which obviously can be influenced somewhat by satisfying past orders getting delivered to OEM, by OEMs as kind of a supply chain opens up. Maybe it gave great deposit numbers and growth sequentially. Maybe just kind of anecdotally, anything you're seeing kind of real-time in terms of dealer traffic, the mix of first-time boaters coming into dealerships, stock market choppiness, requests around deposits. I mean, anything that kind of would give you pause in terms of where we are in kind of the demand cycle?

Brett McGill, CEO

Yes, Eric, it's Brett. That's a great question. We monitor nearly all the items you mentioned on a daily basis, including website traffic and lead generation, and those numbers remain very strong. We're keeping a close eye on whether things will stabilize soon. Demand is still high, and we track the percentage of first-time buyers coming to MarineMax to purchase boats, which remains strong. This is positive news for the industry as new people enter boating. The only noteworthy concern is that some very popular boat models have an exceptionally long wait time, which I would categorize as cooled off. However, we still see significant activity around these models, which is impressive. In summary, demand and traffic continue to be very strong.

Mike McLamb, CFO

I'll add one comment to what Brett is saying. And I said it during my prepared remarks that our customer deposits are up 300% from a year ago and the 12 months leading from then till now were a pretty good 12-month period for the marine industry and for us, and our deposits are up 300% going forward. Our deposits are up about 50% from September. So just from three months ago, our deposits are up 50%, during a quarter where we actually produced same-store sales growth. So we think about how that math works. Deposits are leaving the balance sheet as we're delivering the boats. We're adding deposits to actually build the deposit line by 50% in one quarter and also have 9% same-store sales growth. I think should let people know demand is still pretty good in the recreational marine retail environment.

Eric Wold, Analyst

Perfect. And then just final question. Inventories up 40-ish percent sequentially. Are you getting stock inventory back on the floor? Is that kind of transitory inventory that kind of hit your balance sheet that was kind of going out to already purchased boat buyers kind of in this quarter? How would you kind of frame where your floor inventories are maybe on a percentage basis versus kind of where you'd like them to be?

Mike McLamb, CFO

I was actually expecting a question about that sequentially. There has been some very modest growth in inventory across all our locations. We currently have a bit more inventory on hand due to seasonal factors. Included in that total are deposits, as our customers provide us with deposits, and we in turn pay some manufacturers deposits for boats that will arrive in a year or 18 months. This is reflected in the numbers, so it's not inventory we can deliver today. Additionally, during the December quarter, we had boats coming from international suppliers that are currently in transit, expected to arrive for delivery hopefully during the March quarter. These are products we can't deliver immediately since they are still on the ocean. Overall, these factors contributed to the appearance of increased inventory in our stores, but our inventory levels remain fairly lean in the store environment.

Brett McGill, CEO

Yes. When you analyze the situation and consider what's showcased on the showroom floors, aside from some entry-level pontoon boats in the northern market, I would say there are fewer boats available for sale in each store.

Eric Wold, Analyst

Very helpful. Thanks guys.

Brett McGill, CEO

Thank you, Eric.

Operator, Operator

Our next question comes from the line of Joe Altobello with Raymond James. Please proceed with your question.

Joe Altobello, Analyst

Thanks. Hey, guys. Good morning. First question is the follow-up on Eric's regarding inventory. Given your revenue guide for 2022, can you guys expect to end the year with inventory up versus 2021 or flattish?

Brett McGill, CEO

It's a good question. I've been following what the industry is saying and what people are discussing. The expectation is that the supply chain issues will improve sometime during the summer, although I'm not sure if anyone really knows for certain. Everyone seems to be searching for answers until the end. If the supply chain improves, we might have some more inventory, but it will still be very limited. If you visit any of our locations, you'll see that with the backlog, inventory is moving out as quickly as it arrives. However, if the supply chain does get a bit better and we experience stronger unit growth than our guidance suggests, then there could be somewhat more inventory available.

Joe Altobello, Analyst

Okay. In terms of the EPS guide you raised the midpoint by about $0.45. What's baked in for Intrepid and Texas MasterCraft in that number? Does that wasn't in the old guide?

Brett McGill, CEO

Yes. Good question. There's a couple analysts that have come out there and they put numbers out from $0.15 to $0.25. And I think when you look at the cash that was used to make the two mergers, we've baked in around $0.20 for both those for the full year. Both businesses are performing well. Texas MasterCraft's a little more seasonal. So we had it for two months in the quarter. Intrepid's doing great and certainly glad to have them on board. But yes, thanks for asking that. And in the quarter, I did comment there was a little bit of contribution from both, less than a nickel, just given some of the costs to acquire them that also were in the quarter, but thanks for asking that Joe.

Joe Altobello, Analyst

Got it. And just one last one if I could. You guys own a fair amount of Florida waterfront real estate. And as you're well aware it's done very well from a price standpoint. I know you've started to monetize a portion of that. But do you have any plans to do more of that in 2022 and beyond?

Brett McGill, CEO

We continuously assess our balance sheet to determine the best ways to leverage the company, always exploring various ideas. While there isn't a concrete plan, your observation is correct. We own significant real estate and actually made additional purchases this quarter. We believe the fair value of this real estate greatly exceeds its book value. We consider this a strong long-term strategy for our business. Moving forward, you can expect us to acquire more unique waterfront properties, particularly those where we can also implement storage solutions. We will focus on purchasing properties that are not necessarily at the peak of the market, aiming for the right valuations, which has been our approach. There is indeed a substantial amount of capital tied up in our real estate.

Joe Altobello, Analyst

Okay. Got it. Thank you guys.

Brett McGill, CEO

Thank you.

Operator, Operator

Our next question comes from the line of Mike Swartz with Truist Securities. Please proceed with your question.

Mike Swartz, Analyst

Hey, guys. Good morning.

Brett McGill, CEO

Hey, Mike.

Mike Swartz, Analyst

Mike, maybe just on guidance, I think you had mentioned your guidance is predicated upon operating leverage kind of in that more historical range. I think you've talked about maybe 12 to the mid-teens historically. You did 26% this quarter. I think over the past five or six quarters you've averaged something around 20%. So, I think it's just a sense of why you think that 12 to maybe mid-teens is more correct going forward relative to what we've seen of late?

Mike McLamb, CFO

Your observation is spot on. Recently, our flow-through has been quite robust, registering at 26% this quarter. Last year marked a significant turning point for our model, as margins improved. We hope to revise our guidance as this year progresses and enhance the overall flow-through of the business, which should increase with rising margins. We are currently exercising some caution early in the year, but we anticipate updating that target throughout the year. As we approach the end of 2022, if we continue to achieve strong margins and assess our various acquisitions, we need to consider whether the previously projected range of 12% to 17% has shifted. The company's margin profile appears to be evolving. Even excluding the recent gains from new and used products, about a third of our margin improvement has stemmed from those products, while two-thirds have resulted from the strategic changes we've implemented in the business, such as advancing high-end storage and making higher-profile acquisitions. We're evaluating all these factors to provide guidance on how the model is changing, including whether we can sustain the 26% flow-through moving forward. Some of this analysis is still in the early stages regarding recent acquisitions, and we look forward to providing updates as we move through this year and into the next.

Mike Swartz, Analyst

Okay, great. And maybe on a related topic in very near term, just the current quarter, the Miami shows a couple of weeks away, and obviously that didn't occur last year. So, I'm just wondering how we should think about maybe adding some costs back relative to last year just from that show?

Brett McGill, CEO

It's a good point. I mean, there would be some incremental marketing costs, but yes, I think for that we also have a lot of shows going on right now around the country that we're not attending. So, I think we've tried to put a different balance on things on what we're going to. So, a lot less shows that we're going to this year because there's no inventory and pipelines full, all the reasons you know.

Mike Swartz, Analyst

Okay, great. Thank you.

Brett McGill, CEO

Thank you, Mike.

Operator, Operator

Our next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please proceed with your question.

Gerrick Johnson, Analyst

Great. Thank you. Good morning. I was interested in model year price increases, like-for-like price increases on existing models. And then, if that is up, I assume it is. How confident are you about consumers' ability to pay higher prices going into 2022?

Brett McGill, CEO

It's a great question. We've discussed this a few times in past calls. I would say we see high single-digit increases in some cases, and possibly even double-digit increases when comparing sales from June 2022 to June 2021. The demand remains strong, as reflected in our backlog, and we're currently writing contracts for products that have price increases. The interest in the boating lifestyle and the desire to enjoy activities with family and friends is currently stronger than the effects of the price increases we've observed. So, demand continues to be robust.

Mike McLamb, CFO

Yes. We monitor it very closely and are very attentive to our pricing. We observe any volume changes as some prices rise. The good news is that the brands and models we offer have many options that can meet the same boating needs for customers. For instance, if two years ago someone wanted a 35-footer, a 31-footer also comes with many great features and benefits. As time progresses, we have enough products to appeal to whatever price point the consumer is comfortable with. We are keeping a close watch on it.

Gerrick Johnson, Analyst

Okay. Then, I realize this might be overly simplistic. But if your same-store sales are up 9% and basically units, you're seeing high single-digit price increases. So, it would be safe to assume you're selling more lower-priced boats in the fourth quarter?

Brett McGill, CEO

What it is, is a mix. In the fourth quarter, we confirmed that we delivered a greater percentage of smaller products, which is mainly due to customers waiting for their boats and when we received them from the manufacturer. Year-over-year, we indeed delivered a higher percentage of smaller products than usual. The December and March quarters are typically influenced by larger products primarily from Florida as northern markets cool down. However, it doesn’t matter where the consumer is, whether in Minnesota or Florida. If their boat is available and ready from the manufacturer, they take delivery and we recognize the sale. This has smoothed out some of the seasonal patterns as boats come off the line.

Gerrick Johnson, Analyst

Okay. I see. Great. Thank you very much.

Mike McLamb, CFO

Thanks.

Operator, Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Brett McGill, CEO

Thank you all for joining the call today. And both Mike and I are available all day. If you have any questions, feel free to reach out. And we look forward to talking with you at our next call. Have a great day.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.