Earnings Call Transcript - HZO Q2 2022

Operator, Operator

Good morning, and welcome to the MarineMax 2022 Fiscal Second Quarter Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Dawn Francfort 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 second 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. And now I 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 tell 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 amazing MarineMax team for their performance in the quarter. We are proud to have one of the finest and most tenured management teams in the industry. Generating 7% same-store sales growth on top of a 45% comp a year ago is outstanding. This is quite an achievement given the lean inventory environment and continued supply chain challenges. But an even greater accomplishment is that our team delivered these results while also providing exceptional customer service as affirmed by our record Net Promoter Customer Satisfaction levels, which is ultimately the key to driving sustainable future sales and profitability. Let me start by touching on the March quarter where we generated 17% revenue growth, record second quarter gross margins of 33.7% and earnings per share of $2.37. Our diversified model enabled us to again exceed expectations as we produced robust earnings growth and cash flow. As I mentioned, we are particularly pleased with our strong same-store sales growth for the quarter. This quarter's comp and the size of our backlog makes it clear that the overall demand for the boating lifestyle remains strong. Additionally, we drove meaningful expansion across essentially all brands, categories and geographic regions, only limited by product availability. We anticipated two years ago that boating would be one of the beneficiaries of a changed world. This quarter is evidence of the sustainability of that trend. This strong demand environment is highlighted by our customer deposits, which exceeded $164 million and grew sequentially on top of our strong same-store sales growth. We are leveraging our scale, global presence, product diversification and digital platform to generate these results. Based on available industry data, we believe we continue to gain market share. From a cadence perspective, the supply chain headwinds did not improve much in the quarter. However, we continue to work closely with our manufacturing partners to ensure we are properly communicating with our customers and getting them into their boats as fast as possible. Many experts in the industry are forecasting that inventory will likely remain historically low into 2024. To that point, most manufacturers and dealers agree that the future level of inventory is likely to be leaner than in the past, given the benefits that leaner inventory creates across the industry. From a six-month perspective, we delivered almost $1.1 billion in revenue, with same-store sales growth of 8% on top of 33% a year ago. Gross margins grew to a mid-year record, and we delivered almost $90 million in net earnings and $4 in earnings per share. It's quite an accomplishment. Now let me turn to the important peak selling season. Demand is strong, and we are well-positioned and prepared to serve our customers. To that point, the success of recent boat shows in Miami and Palm Beach reaffirmed our confidence. Our team continues to leverage our stores and our online platform, generating exceptional customer experiences. Our deep manufacturing relationships and nationwide shared inventory 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. As we mentioned before, because of the size of the territories we have for many of these brands, we are not limited by physical facility in terms of our ability to sell and expand. I'd like to underscore our strategic growth plan which propels sustained market share gains and revenue growth while expanding companywide margins. This quarter, we increased our operating margins by 170 basis points over last year's record to 11.8%. This performance is directly attributable to our ability to execute our strategy of growing our higher gross margin businesses. To that point, our growth strategy has been focused on seeking and acquiring great companies with strong management and generally a higher margin profile. These strategic acquisitions, combined with improvements in finance and insurance, service, brokerage, and the expansion of our substantial storage operations have resulted in structural increases to our gross margin. Additionally, as we integrate our acquisition, they continue to perform very well and are aligned with our margin expansion strategy. We have seamlessly integrated these businesses into MarineMax and believe opportunities exist for continued sharing of best practices and resources to drive even greater growth in the years ahead. We recently announced the addition of a Superyacht Management Company to our Northrop & Johnson operation. SYM, which is located in the south of France complements MarineMax's ongoing diversification into a higher margin and global business and strengthens our commitment to providing exceptional customer experiences across all Superyacht service offerings. Superyachts are a growing segment of the industry, and we will continue to aggressively grow this segment of our business. Now let me discuss the confidence we have in our overall growth strategy. We start the second half of the year with very strong visibility in terms of backlog and are well-positioned to serve our customers. The foundational pillars of our strategy are creating exceptional customer experiences through the best team, services, products and technology. With regard to technology, we recently invested in Boatzon, the only totally online marketplace platform in the industry. The partnership aligns well with our higher-margin business growth and diversification goals. We believe the combination of our team's expertise and our history of success will enable us to leverage this leading innovative technology, enhancing the customer experience. Our team remains committed to our mission, which is resulting in strong execution, delivering high Net Promoter Scores and increased sales and margins. We continue to accomplish this through our global market presence, premium brand, valuable real estate locations, exceptional customer service, technology investments, strategic acquisitions, and finally, our unwavering commitment to build our strong company culture. Supported by one of the strongest balance sheets in the industry, we will actively make strategic acquisitions in a disciplined manner. Our broad global 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. The combination of robust operating leverage, significant cash flow and strong consumer demand led to record results in the first six months of 2022 and we believe will drive sustainable growth for the remainder of 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 also like to start by thanking our team for their strong efforts that produced record revenue and earnings in the first six months of the year. For the quarter, revenue grew 17% to $610 million, largely due to same-store sales growth of 7% and contributions from our various recent acquisitions. Our same-store sales growth was driven by an increase in our average unit selling price as units declined due to the lean inventory environment. Keep in mind, absent the acquisitions we have completed, our inventory is below last year's level. A big takeaway once again this quarter is our ability to post strong comps on top of already strong comps. Overall, our growth is only limited by product availability. Our gross margin rose 370 basis points to 33.7%. Our record second quarter 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 our higher-margin finance, insurance and brokerage business, as well as growth in our global Superyacht services organizations of Northrop & Johnson and Fraser Yachts. Less than half 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 once again due to rising sales and the 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 over 22%, which drove very strong earnings growth, setting another quarterly milestone with pre-tax earnings of over $71 million. Our record March quarter saw net income increase 37% and earnings per share rise over 40%, generating $2.37 versus $1.69 a year ago. Moving on to our industry-leading balance sheet. We continue to build cash with over $219 million at quarter end. Our inventory shows a 9% increase, but excluding the acquisitions, it's down in the high single digits year-over-year. Our balance sheet reflects an increase in property. Over the past several months, we have purchased three formerly leased marinas in New Jersey and also purchased a marina in Fort Walton Beach, Florida. The Fort Walton property will require some development. In the same context, we are developing a marina in Stuart, Florida on our own property adjacent to our retail location. As we have indicated, we have found that where we can own and control storage locations, coupled with our retail strategy, it results in great earnings and cash flow and increases the stickiness with our customers. Looking at our liabilities, short-term borrowings increased $23 million due to inventory and the timing of payments. Customer deposits, while admittedly lumpy, increased sequentially from December to over $164 million and are double the elevated level from last year. Our current ratio stands at 1.70, and our total liabilities to tangible net worth ratio is 1.24. Both of these are very impressive balance sheet metrics. Our tangible net worth is $428 million. Our balance sheet has always been a formidable strategic advantage and today, more than ever, it continues to protect us at uncertain times while providing the capital for expansion as opportunities arise. Now turning to our outlook for fiscal 2022. The March quarter certainly exceeded expectations and industry demand trends remain strong. The challenge in 2022 remains the supply chain. Today, given what we are being told from our various manufacturing partners, we continue to expect unit growth in 2022. However, given the recent supply chain issues caused by the lockdowns in China and the war in Ukraine, we think it's prudent to continue to expect flat unit growth until we have better supply visibility. This, combined with increases in our average unit selling price should provide annual same-store sales growth around the mid-single digits. Including all recent acquisitions, we expect total annual revenue growth in the mid-teens. We continue to hope that supply chain improvements will provide upside as we move through the rest of the year. Accordingly, we are raising our earnings per share guidance to the range of $7.90 to $8.30 for 2022 from $7.60 to $8. Our guidance excludes the impact from any additional acquisitions that we may complete. Our guidance uses a share count of about 23 million shares and an effective tax rate of 25%. Regarding EBITDA, we expect fiscal 2022 EBITDA to be over $260 million. Also, as appropriate, as we progress through the year, we will provide updates. Turning to current trends. We expect April will end with positive same-store sales growth and our backlog remains at record levels. As we have said, industry demand remains strong, and we are generally outperforming these elevated levels. I'll now turn the call back over to Brett for some closing comments.

Brett McGill, CEO

Thank you, Mike. As I stated at the beginning of this call, our team's performance the first six months of fiscal 2022 continues to show excellent execution as our diversified model and exceptional customer service generate sustainable growth. 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 the boating community. This is the basis of the success of our model, and we continue to work hard to deliver. We remain committed to the long-term financial strength of the company and will pursue acquisitions, additional brand expansion and higher margin businesses with a focus on recurring revenue, which will support our overall growth strategy, all with the view to create long-term shareholder value. And with that, operator, let's open up the call for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Thank you. Our first question is from Joe Altobello with Raymond James. Please go ahead with your questions.

Joe Altobello, Analyst

A couple of questions on the outlook. You raised your EPS guidance, obviously, kept your top line guide unchanged. So I guess first question is, what was the biggest surprise on the margin front that you've seen so far in the first half of the year?

Mike McLamb, CFO

There has been a bit of a surprise. We believe that we have structurally changed the company's margin profile through various acquisitions over the years. Therefore, we are expecting healthy margins. Both new and used margins remain strong. I would mention that our capability, and that of our team, to implement price increases from manufacturers has been met with considerable hesitation, which might be a slight surprise regarding EBITDA margins this quarter. However, this trend has persisted over the last several years. There are no other major surprises concerning margins. The mix of our business is continuing to shift toward higher-margin sectors, including service, financing and insurance, storage, and our Superyacht services, which are performing exceptionally well. The manufacturing operations of cruisers and Intrepid also did well in the quarter. Overall, everything came together quite positively. The only ongoing challenge we face is with the supply chain and the volume of product we can obtain.

Joe Altobello, Analyst

Got it. And then just secondly, I think on the last call you mentioned mix on the boat side trended towards smaller boats. Was that still the case this quarter? And is that an indication that maybe some customers are starting to balk at some of these higher prices?

Mike McLamb, CFO

No, what we discussed for the December quarter is that it's typically a time when fewer smaller boats are delivered due to winter conditions. However, we experienced strong unit growth during that quarter as customers generally want to receive their boats as soon as they arrive. There was a notable number of smaller boats relative to the December quarter. As for this quarter, nothing stands out to me in terms of mix; it's been a healthy quarter. We have a good variety of smaller, midsize, and larger products, resulting in a solid overall mix.

Joe Altobello, Analyst

Okay. Just one last one for me in terms of the model. Last year, gross margin in the second half bounced around a lot. You did 31% in Q3, and then I think jump up to 38% in Q4. How do you guys see the second half of this year? Is it going to be lumpy? Or is it a little bit more flattish versus the first half?

Mike McLamb, CFO

We said on last quarter's call to expect in our guidance that we were having a little bit of margin pressure baked in. I didn't really address it this time. I think mathematically to get to the numbers, you would have a little bit of margin pressure baked into the back half of the year. We don't have anything today telling us that, but I think it's prudent just given inflation and so forth that there could be some.

Brett McGill, CEO

Yes, I'll add to that. Supply chain and transportation and shipping could put pressure on those margins. So we're probably a little cautious there.

Joe Altobello, Analyst

And are Q3 and Q4 going to be similar or big jump before, again like we saw last year?

Mike McLamb, CFO

We look, we do this as a back half of the year. Joe, we don't really get caught up from a quarter-to-quarter perspective. We look at it as just the back half of the year.

Operator, Operator

Our next question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question.

Fred Wightman, Analyst

Hey guys, good morning. I was just wondering if you could dig into the outlook again. I mean you beat pretty materially, you increased the midpoint of the full-year by a little bit less than that beat. Is that just conservatism or is there something that you're actually seeing in the market today that's making you a little bit more cautious as you look into the back half of the year?

Mike McLamb, CFO

Yes, there isn't really anything on the demand side that concerns us. We've just completed over 24 months of exceptional sales, and our customer deposits have increased sequentially, more than doubling compared to last year. Our commentary indicates that demand trends should remain strong. The only thing we’ve mentioned a few times is the challenge of securing enough product. However, based on what our manufacturers are currently communicating, we believe we'll be able to obtain the product. The supply chain remains somewhat inconsistent, so we want to be cautious in our expectations. I hope to provide further updates as we progress through the latter half of the year.

Fred Wightman, Analyst

Make sense. And then just in terms of geographies, a couple of different references to a slower start in the Northeast. Is that something that you guys are seeing as well? Do you feel like you'll be able to make that up just as weather normalizes? Or is that not really something that you're seeing?

Brett McGill, CEO

Yes, Fred, this is Brett. I think what we're observing right now is fairly detailed and likely influenced by weather conditions, but there’s nothing significant to mention regarding inbound demand, traffic, or deal writing. It seems like the only factor affecting us is some weather patterns delaying boat deliveries.

Operator, Operator

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

Eric Wold, Analyst

Thanks. Good morning everyone. I have a couple of questions. First, I want to follow up on the gross margin discussion. I'm not specifically talking about the second half of the year or any particular base, just in general. Considering all the changes you've implemented through diversification, acquisitions, and moving more into the marina sector, how likely is it that you can maintain gross margins above 30% long-term if the traditional new and used boat business normalizes?

Brett McGill, CEO

Certainly, Eric, I'll start. Before the pandemic, we developed a multi-year strategic plan, which is evident in our acquisitions. Our goal was to raise our margin profile to around 30%. This was based on the expectation that our margins would stabilize at historical levels. This indicates our focus on building higher margin businesses through targeted acquisitions. Recently, we have also benefited from favorable margins in both new and used boats. The sustainability of these margins over the long term remains to be seen. However, with the new levels of inventory that dealers will hold, I believe there will be a fresh perspective from both manufacturers and dealers that could help maintain margins, potentially at levels better than what we have historically experienced. Mike, would you like to add anything?

Mike McLamb, CFO

Yes, I've mentioned this before, but if you listen to our comments each quarter about margin trends, typically around a third or 40% or less than half of margin growth comes from new or used expansion. So if you consider our margin growth and take a third or 40% off of it, today you'd find something over 30%. This is certainly the goal we've set over the years to structurally change the business, and it seems we've made significant progress. That's what we are aiming for, and once we achieve that on a long-term basis, we will explore how to exceed that further.

Eric Wold, Analyst

Perfect. And then last question. Looking at the floor plan balance over the past call it 18 months, it's bounced around a fair amount, kind of quarter-to-quarter. What's your general philosophy on using the floor plan financing to finance the inventory? Do you want to keep more on hand for some of these marine activities you're looking at, acquisition options that are out there? Is it more just you've got the cash, why spend the interest on financing? Just what's the general philosophy on where that should trend, as inventory maybe improve?

Mike McLamb, CFO

Our floor plan is distinctive, allowing us to borrow and repay against it, which is uncommon in the industry. We aim to keep it as low as possible. Although interest rates are beginning to rise, they remain quite low. This has not hindered our ability to execute our growth initiatives, such as acquiring marina properties and reinvesting in our facilities or obtaining top-tier companies with strong management teams. We also have a share repurchase plan in action and have reinforced our balance sheet. This positions us advantageously to achieve our goals while maintaining a relatively low floor plan debt.

Operator, Operator

Our next question is from the line of Michael Swartz with Truist Securities. Please proceed with your question.

Lucas Servera, Analyst

Hey guys, good morning. This is Lucas on for Mike. I was wondering if you could give any more color as to how much you expect the superyacht and Boats Own investments to add to the annual sales?

Mike McLamb, CFO

Yes. Boats Own is an investment we've made, and it won't directly contribute to sales due to the accounting method we use—it falls under the equity method of investment. This means it won't impact our top-line revenue. However, it is a strategic investment for us, and the organization has great people and technology. In terms of the superyacht services organization, it's a highly competitive market, and we haven't disclosed their size since we acquired them, but they are growing and contributing to our overall growth. They are still relatively small compared to MarineMax, which now exceeds $2 billion in size. Nonetheless, this segment is important, and as Brett mentioned, we aim to grow it further. Eventually, our goal is for it to become large enough that we can report it as a separate segment. This part of the industry is quite resilient and offers high margins as well.

Operator, Operator

The next question comes from James Hardiman with Citi. Please go ahead with your question.

James Hardiman, Analyst

Good morning. I have a housekeeping question first. You mentioned that units are down while pricing is up. Can you provide more detail on those contributions? Also, could you share insights on momentum in the quarter, particularly regarding units? Is April showing improvement or decline, especially considering the dependence on inventory? Any commentary on that would be appreciated.

Brett McGill, CEO

I'll start off. In the March quarter, the industry faced a significant decline of 11%. However, when examining the key categories we operate in, the drop was closer to the high teens, around 18% to 19%. This downturn is primarily due to inventory availability rather than a lack of demand; there simply isn't enough product available, which is consistent with feedback from others in the industry. Our units experienced a decrease in the mid to high single digits. When we consider everything together—new, used, and our brokerage business—we were much nearer to being flat. Regarding the progression throughout the quarter, it’s not really tied to demand since demand remains strong; it’s more about product availability. Reflecting on our January quarterly call, we had a more optimistic outlook on the supply chain, following a strong growth period in December. However, just weeks after that call, the Ukraine war began, followed by the China lockdowns, which made the supply chain situation feel a bit more unstable as we approached the end of the quarter. That's how I would summarize it: supply chain inventory has been slightly constrained, but our manufacturers assure us that we are receiving the product.

Mike McLamb, CFO

When we analyze sales units, the trend we've observed over the past couple of years remains unchanged. The sales are not driven by demand; they are influenced by supply, whether slightly increasing or decreasing, and how that affects the month and quarter.

Brett McGill, CEO

Yes. For April, we expect to see positive same-store sales growth. I don't have the specifics on how that will break down between average unit price and units, but we have been tracking fairly well from a unit perspective. Despite my earlier comments about the supply chain, time will tell how much product we receive from manufacturers and how much we can get out the door.

James Hardiman, Analyst

Understood. Regarding the decline in units during the March quarter, the annual guidance suggests flat units, which implies there needs to be an increase moving forward. It appears that April is showing promising signs. What reassures you about this, considering it likely pertains to supply chain issues? The improved availability of units could help accelerate growth, especially as we approach larger quarters. If we continue to struggle with inventory, it may significantly hinder retail performance.

Mike McLamb, CFO

Yes. Our unit sales year-to-date for the quarter are indeed down. However, they were up in the December quarter. Year-to-date, our units are down slightly, but not significantly. In the latter half of the year, as we've mentioned in previous calls, manufacturers tend to increase production, which can take some time due to hiring and training challenges, as well as getting the product delivered. They have mentioned that as we progress into 2022, their capacity to supply us with product will improve. We expect better product availability as we approach the summer months, which is positive for us. Ultimately, this improvement will help against our easier comparisons, and we need to ensure they are able to provide us with the product necessary to compensate for the slight decline we've seen through the March quarter. They are indicating that they will be able to do so, and we just need to wait and see as we move forward into the upcoming quarters.

James Hardiman, Analyst

Got it. That's really helpful color. Maybe one more question. It seems like maybe I'm towards the end of the queue. But I am getting more questions on real estate monetization that I've gotten really since the depths of the great recession. I remember what your stance was then, maybe revisit that. Is there any scenario in which you would look to maybe creatively create value via real estate?

Mike McLamb, CFO

It's a great question. Having worked together for many years, including during the great recession, I recall having mortgage debt on our properties when Lehman collapsed. Just a couple of quarters later, we generated enough cash to pay off that debt without needing to enhance our real estate value. We take pride in our real estate holdings, believing it's wise to own property in a cyclical business. During challenging times, rather than paying rent to a landlord, you essentially pay it to yourself. This strategy proved to be effective back then, and I believe it remains sound for any future periods. There is significant value in our real estate, most of which we acquired many years ago, and we continue to purchase under favorable terms. We invest considerable effort into this aspect, making it a crucial part of our philosophy and balance sheet. We don't plan to engage in a sale leaseback as we aim to maintain control over these properties. However, if necessary, we could leverage them, as we've successfully navigated past periods without needing to do so due to our strong cash generation.

Operator, Operator

Our next question is from the line of David McGregor with Longbow Research. Please proceed with your questions.

Joseph Nolan, Analyst

This is Joe Nolan on for David. I just had one quick question for you guys. Just on what you're seeing in terms of dealer traffic and lead generation. And also, you mentioned that the Miami and Palm Beach boat shows went pretty well. So just wondering how foot traffic was there as well? Thanks.

Brett McGill, CEO

Yes, we closely monitor our performance. Our primary focus is on deals, and we track contracting day by day and month by month to ensure positive trends. We analyze inbound web traffic, including conversion rates to leads, the number of new customers, and the number of existing customers. This is something we keep an eye on daily and weekly, and so far, the demand and traffic look strong. While we do track floor traffic, we don't place as much emphasis on it due to variability across different locations. In contrast, web traffic and web leads are more reliable indicators, and those metrics are performing very well. The boat shows were successful as well, and Mike might have further details on the traffic comparisons, but overall, they were good for us.

Mike McLamb, CFO

I don't remember what the promoter said. I got to believe just being there that they both were above. And there wasn't really a comparison with like the prior year, depending on the show because it may not have happened. But generally, the industry would reflect on those shows as being very good shows and so would we.

Operator, Operator

Thank you. At this time, we've reached the end of our question-and-answer session. I'll turn the call back to Brett McGill for closing remarks.

Brett McGill, CEO

Well, thank you everybody for joining the call. Both Mike and I are available anytime if you have any questions and look forward to updating you on our next quarterly call. Have a great day.

Operator, Operator

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.