MarineMax, Inc. (NYSE:HZO) Q1 2023 Earnings Call Transcript

MarineMax, Inc. (NYSE:HZO) Q1 2023 Earnings Call Transcript January 27, 2023

Operator: Good morning, and welcome to the MarineMax, Inc. Fiscal 2023 First Quarter Conference Call. Today’s call is being recorded. All participants have been placed in a listen-only mode. We will have a question-and-answer session at the end of today’s prepared remarks. At this time, I would like to turn the call over to Scott Solomon of the company’s Investor Relations firm Sharon Merrill. Please go ahead, sir.

Scott Solomon: Thank you, and good morning, everyone and 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 issued today. If not please e-mail our IR team at hzoinvestorrelations.com and a copy will be e-mailed to you. With that, I’ll turn the call over to Mike McLamb. Mike?

Mike McLamb: 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?

Brett McGill: Thank you, Mike. Good morning, everyone, and thank you for joining this call. Let me begin by thanking the entire MarineMax team for driving record December quarter revenue and gross margins, while maintaining our commitment to customer service. Our team continues to deliver despite industry choppiness caused by a return to seasonality and by a more challenging economic environment. We executed well in the first quarter delivering revenue of nearly $508 million and gross margin of 36.8%, a significant increase over last year’s December quarter record. The margins were certainly aided by IGY, but new boat margins and our higher-margin businesses generally demonstrated resiliency and contributed to the performance.

This shows the success of our long-term growth strategy of adding high-quality higher-margin businesses to our portfolio. And to that point, it has been less than four months since our acquisition of IGY Marinas and the business is performing on plan. IGY has a great team and they do an exceptional job building long-standing relationships with their clients by consistently delivering a world-class customer experience. In December, IGY hosted the Caribbean Charter Yacht Show at our incredible Yacht Haven Grande property in St. Thomas. The event was met with an outstanding response from charter brokers and managers who attended the show and the turnout exceeded expectations. Plus the IGY team is currently in discussions with respect to several potential growth opportunities.

IGY is the leading global brand for marinas and we will work to expand using this new growth platform. We are already starting to see strong synergy with Fraser Northrop & Johnson with the exclusive IGY Trident program. We are continuing the IGY integration and look forward to capitalizing on the best practices and resources to drive growth. It is clear from industry data and trends that the seasonal patterns of the industry have returned. It is also clear that the increased economic challenges are impacting buyers. Buyers of premium and larger products still seem less impacted, which has been the historical pattern as well. Admittedly, it is difficult to get a precise gauge on the granular market trends between what is seasonality and what is softness, but both are impacting the industry.

Our comparable store sales declined about 1% in the first quarter, which when compared to strong comps last year, is great to see. While our unit volume was down more than we had expected, the strength of the premium segment continues to insulate us from the majority of the unit pressure affecting the overall industry. And our backlog, by historical measures, remains very strong. From a supply chain perspective, there is clear improvement in smaller less complicated product. And that type of inventory is building. But some of the larger more complicated international product still has various issues, which should keep overall inventory levels for that type of product reduced as we move through 2023. Inventory is up both on a sequential and year-over-year basis, driven largely by smaller product growth.

Overall, I am proud of the strong earnings and cash flows generated in the first quarter. Adjusted EBITDA is close to flat to last year’s record quarter, despite the more challenging environment. Plus our team is focused and working to drive further improvements to our operations as we progress through 2023. While I am proud of our financial results, I continue to be most impressed with our team’s ability to take excellent care of our customers. This has always been a critical strategy of ours and it has never been more important. This strategy is what leads to future business and market share gains. Turning to our recent highlights since our year-end earnings call. We have continued to focus on strategy growth initiatives. In the first quarter, we completed the acquisition of Midcoast Marine Group, a full-service marine construction company based in Tarpon Springs Florida.

The addition of Midcoast Marine benefits us two ways. First, we gained both the skilled team and equipment to cost effectively address our own marina construction needs and new service offerings. Second, the acquisition includes waterfront real estate along the Anclote River in Tarpon Springs, property that has multiple benefits for us in the important West Florida market. We also continue to build our digital capabilities. We recently launched New Wave Innovations, a new business developed to invest in and grow our technology-related products and services. Innovation and technology are the centerpiece of our strategy, to be an integrated leader in marine products, services and experiences. New Wave Innovations is the engine designed to enable us to achieve that vision.

To help fuel that technology engine, we recently acquired the remaining interest we did not already own in Boatzon, the world’s only 100% online boat and marine digital retail platform. By giving consumers the ease and convenience to browse for, finance, purchase and insure a boat online, Boatzon has the potential to dramatically improve the boat buying experience. We are also excited about the momentum of our manufacturing businesses, Intrepid Powerboats and Cruisers Yacht. Both are continuing to perform well and have been great additions to MarineMax. We look ahead with confidence that our resilient business model will enable us to continue to deliver strong results for our shareholders. Our strong balance sheet provides the flexibility to capitalize on attractive opportunities, while continuing to invest in and drive organic growth.

And with that update, I’ll ask Mike to provide more detailed comments on the quarter. Mike?

Photo by Lux Charters on Unsplash

Mike McLamb: Thank you, Brett, and good morning, again, everyone. I’d also like to start by thanking our team for producing a strong start to fiscal 2023. For the quarter, revenue grew to a new December quarter record of $508 million. The increase was largely due to the October acquisition of IGY, as well as revenue from both Intrepid and Cruisers Yachts, which are excluded from the same-store sales calculation. Same-store sales declined modestly by 1%. But due to a combination of a return to seasonality, as well as a more difficult economic environment, our units declined double digits. Our unit decline, while substantial, was less than that of the industry, indicating share gains. Our average unit selling price expanded significantly, mostly driven by a greater mix of larger more premium product.

Most in the industry believe a lot of the unit decline is evidence of a return to seasonality. That appears to be supported by generally positive trends at Northern boat shows. I would add our same-store unit trend is about flat to our unit trend in the December quarter of 2019 with premium product generally showing growth. Gross profit dollars increased to $187 million, an increase to a new December quarter record of 36.8%, up 140 basis points. The growth was driven primarily by the acquisition of IGY, reflecting our strategy of adding higher-margin high-quality businesses to our portfolio. Absent IGY our margins were flat to last year’s record, which is encouraging in this environment while also reinforcing our focus on the premium segment of the market.

Total SG&A expenses rose about $20 million when removing the unusual costs in the quarter. Well over half of that increase was due to the acquisition of IGY and most of the remainder was likely due to our infrastructure being built greater sales than we delivered seasonally. SG&A also was impacted by the timing of internal sales of Cruisers Yachts to our stores versus to retail buyers. In essence that results in SG&A expenses with no benefit of revenue or gross profit until a sale to a third party by our stores. Having said that our team is focused on aligning costs where we can, while still ensuring we are taking care of customers. As mentioned on our October call and as noted in the release because of the IGY acquisition, we are expanding our financial disclosures to include adjusted EBITDA and adjusted net income.

In addition to non-floor plan interest, taxes, depreciation and amortization, adjusted EBITDA excludes stock comp expense, acquisition costs, the change in fair value of contingent consideration, hurricane expenses and foreign currency changes. We think it’s a better measure to see how the company is performing. For the quarter, adjusted EBITDA was $53.2 million compared with $55.3 million in the same period last year. Ignoring currency, adjusted EBITDA for the quarter was $55.6 million. Interest expense for the quarter was $9.5 million or 1.9% of revenue, up $8.8 million due to rising rates increased inventory and the long-term debt related to IGY. On the bottom line, we generated GAAP net income of $19.7 million or $0.89 per share. On an adjusted net income basis, excluding acquisition costs, Hurricane Ian expenses, the change in fair value of contingent consideration and intangible asset amortization, net income for the first quarter was $27.3 million or $1.24 per diluted share.

Moving on to our balance sheet. We ended the quarter with cash of $178 million, down from the same period last year due primarily to the acquisition of IGY. Our inventory at quarter end was up 86% to $605 million from last year. Close to 20 points of that increase is due to an increase in boats in transit that can’t be delivered as well as greater deposits with manufacturers than a year ago. But as mentioned earlier industry inventory as well as ours has built back quicker than expected. Most of the build is in smaller more seasonally-sensitive product. It is nice that our stores finally have some product to show customers to help get them into the boating lifestyle quicker and easier than the last few years. Consistent with the comments we made on our year-end call in October, we continue to expect leaner inventory on larger more complicated product.

Compared to December 2019, we now have about 58% of what we carried then in terms of units on a same-store basis. Our balance sheet at December 31st reflected over a $280 million increase in property. The increase is primarily related to the purchase of IGY and a couple of smaller acquisitions. Looking at liabilities, our short-term borrowings rose more than $225 million largely reflected in the increased inventories and timing of payments. Customer deposits not surprisingly decreased sequentially from September and also versus last year. However, the level of deposits and our backlog are historically very high. Consistent with the guidance on our fourth quarter earnings call, debt to EBITDA net of cash was less than one times at quarter end.

Our balance sheet reflects the $400 million of term debt used to finance the purchase of IGY. Available borrowings at December 31 totaled about $250 million. Turning to guidance. Based on our first quarter results and the most recent industry data showing greater softness in new boat registrations, than we had anticipated, along with building inventory faster than expected, we believe that it is prudent to lower our 2023 guidance. In general, the retail registration data suggests the industry has returned to its historical seasonal buying patterns, combined with tougher economic trends given the Fed’s continued interest rate hikes, although admittedly it is hard to determine the difference between softness and seasonality. Where we originally thought the year would see mid-single-digit unit declines, we now believe it is prudent to think that a high single digit unit decline is more likely for the industry.

Likewise, where we originally expected our same-store sales to be flattish, we now anticipate a modest decline. We do believe our SKU to premium product will help protect us from the larger industry trends. We expect margins to be consistent with our past guidance, which was a modest decline from 2022, but still in the mid-30s. SG&A will be slightly elevated, but should improve seasonally. We also are assuming interest expense remains elevated due to increased inventories, as well as rates. We assume a share count of 22.7 million shares and a tax rate of just over 26%. The tax rate increased due to assumptions around geographic sources of income, certain rate changes and fewer deductions from stock-based compensation. On the bottom line, we now expect our full year 2023 adjusted earnings per share guidance to be in the range of $6.90 to $7.40.

In addition, we are forecasting 2023 adjusted EBITDA to be in the range of $275 million to $300 million. Looking at current trends, January was strong last year and this January looks like it will be later last year, but in line with our guidance overall. Those who follow the industry will recall that March is by far the biggest month of the quarter, and historically has been as big as January and February combined. Boat show season has started and early reports are encouraging. Lastly, underlying demand remains healthy especially for the premium segment. With that, I’ll turn the call back over to Brett for some closing comments.

Brett McGill: Thank you, Mike. At MarineMax, our mission is clear to provide the world’s best pleasure boating experience by consistently exceeding the greatest expectations of our customers, our team members and our shareholders. Across our organization, we continue to capitalize on the significant surge in people enjoying the boating lifestyle that has happened over the last few years. It’s why we are so focused on service and why I am so proud of our team’s performance at keeping our customers happy, which ultimately yields greater future business. This combined with our strategy focused on gross margin expansion will continue to yield significant cash flow growth. Recreational boating is a $57 billion industry in the US alone.

And as a global company, MarineMax is just beginning to tap into the full potential of this fragmented market. We continue to execute on our strategic growth plan to drive sustainable value for stakeholders through a diversified business model built on premium brands, global marinas, world-class services and innovative technology. We are well positioned for 2023 and beyond. And with that, operator, please open up the line for questions.

See also 12 Cheap Bank Stocks To Buy and 11 Most Undervalued Natural Gas Stocks To Buy.

Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. Thank you. Our first question comes from the line of James Hardiman with Citi. Please proceed with your question.

James Hardiman: Hey good morning. Thanks for taking my call. Good morning. So, I just want to get sort of an order of magnitude of the ASP benefit that you’re getting here. I know Mike you said, units, I think you said were down double digits, but better than the industry, which I think was down I don’t know 30% somewhere in there. Can we sort of narrow that range down a little bit? Just trying to get a feel — it seems like there was a big ASP benefit in the quarter just trying to triangulate that?

Mike McLamb: Hey, thanks, James. Actually I think if you look at the segments that we primarily operate in the industry is probably down something like 35% or more in the December quarter. And if we’re at a negative 1% same-store sales and I said that our unit growth was a heck of a lot better, if you assume we’re maybe in the mid-20s in terms of units down, we had a very significant increase in average unit selling price in the quarter. It reflects really the migration to larger product more premium product, which is really the — how MarineMax has changed over the years. That’s kind of how our business model is these days.

James Hardiman : Got it. And then you basically lowered guidance by about $1. We didn’t actually have what your expectation was for the first quarter, but I’m just trying to figure out how I should think about how that $1 is distributed between what’s already happened and how you’re thinking about the rest of the year?

Mike McLamb: Yes. It’s basically the miss if you will from last year deflated a little bit for the revised guidance that we had when this year started. Plus as I mentioned we had some elevated costs, although, seasonally they should align a little bit better. Plus we are expecting inventories to be higher this year just given how fast the supply chain is built back and then a little bit softer retail expectations. And then our tax rate changed from 25% to just in the low 26s has an impact also. So when you factor in those different variables along with the same-store sales decline that I mentioned in our prepared remarks versus flattish being down just a little bit has an impact on EPS. You should get right into our range that we gave in this year — in this quarter’s release.

James Hardiman : Got it. And maybe a follow-up on the inventory piece. I think you said that versus 2019 you’re down what 42% right, 58% of 2019 units?

Mike McLamb: Correct. On a same-store basis that excludes all the

James Hardiman : On a same-store basis.

Mike McLamb: Correct. Yes that excludes all the acquisitions. And dollar-wise we’re probably down I don’t know it’s probably 30% or something like that due to inflation and a larger product and so forth. But units are down and dollars are down.

James Hardiman : But what’s the — what is — I’m assuming you’re not looking to get back to 100%. It seems like most boat dealers are looking to get a little bit more leaner have more turns over the course of the year. What do you think target is for that number relative to 2019? And when do you think you’ll get there?