Good day, and welcome to the MarineMax, Inc. Second Quarter 2014 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Brad Cohen at ICR. You may begin. .

Thank you, operator. Good morning, everyone, and thank you for joining this discussion of MarineMax's 2014 fiscal second quarter results. I am sure that you've all received the copy of the press release that went out this morning. But if you have not, please call Linda Cameron at (727) 531-1700, and she will then fax or e-mail one to you right away..

Mr. Bill McGill, Chairman, President, Chief Executive Officer; and Mr. Mike McLamb, Chief Financial Officer of the company. Management will make some comments about the quarter and then be available for your questions..

With that, let me turn the call over to Mike McLamb. .

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

These statements involve risks and uncertainties that may 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 Bill. .

Thank you, Mike, and good morning, everyone. I'd like to start by saying that for sure this turned out to be a lot more of a challenging quarter than we had expected. The persistent cold weather that enveloped most of the country affected our industry and many other industries. It also negatively impacted our sales and deliveries in the March quarter.

Thus far, 2014 has turned out to be one of the coldest since records began in 1985, amazing that as we thought last year was cold..

That said, we believe many of our sales we anticipated completing in March will most likely be deferred in later quarters. While the current June quarter started, we had materially more boats contracted for delivery than we did last year, which validates that we deferred some business in the March business and April and perhaps even May.

We realized, very early in this, our historically largest quarter, but the historic provide us with increased confidence that much of the lost March quarter business has the potential to be recovered..

Based on March quarter industry data, which generally reflects double-digit declines for our core segments, we believe we gained share. Similar to last year, we increased our aggressiveness in March to try and drive sales. And to that end, we saw good results in smaller products but mixed results in larger product.

The reasons vary but certainly include the weather and, to a degree, our inability to inspect trades, which are still under winter wraps, preventing us from closing on some new boat sales..

The March quarter was the first quarter in the last 2.5 years to show a decline in same-store sales. Keep in mind that the last 2 March quarters both had double digits on same-store sales increase -- increases.

I am encouraged that even as we increased our aggressiveness to create sales in the quarter, we were still able to produce meaningful improvement in our gross margins as a percentage of revenue..

Our balance sheet is very strong. Our inventory aging is improving. While our ending inventory balance is more than expected due to the shortfall in sales, we believe it is nonetheless -- nonetheless, provides us with a competitive advantage in meeting demand this selling season..

From a category perspective, despite for the shortfall in closing deal of larger boats, we still maintained that larger boats are gaining momentum and should help to drive additional sales for us. We saw strong interest in boat shows and left the Miami show in February with a postrecession record show.

We also continued to see demand in just about anything that is new, somewhat innovative and is priced about right. In some cases, demand for new models is stronger than I've seen in my 41 years in the industry..

From a marketing perspective, we continue to invest and to seek to maximize our return as we try to drive sales. Our advance trips and training classes with our customers are still the best drivers of sales.

In the March quarter, we also increased our online spending and more traditional marketing resources, as we try to drive sales to overcome the weather, which in some markets kept customers from attending roadshows.

And as an example, we had several shows with days closed due to weather or road conditions, and we had canceled flights that prevented customers from attending the shows..

In the quarter, used boat pricing held up well and is leading more people to consider new products. From a supply perspective, late-model used boat remains very low since very few boats were built over the past 6 years..

Our vacation charter business that we launched about 2 years ago showed improvement. In particular, the charters are booking very well. During the Miami boat show in our March quarter, we launched new power catamaran models for sale in the U.S. private market. The boats were well received. Initial sales are encouraging..

We also recently finished the Singapore boat show, where we introduced the catamarans to that vast and growing market, and we sold more boats than we had anticipated. While not a major driver of our sales to date, we are pleased to see our efforts beginning to gain momentum..

We recently announced the addition of Ocean Alexander for our stores in the States from Texas east. Ocean Alexander builds yachts that are traditionally styled from 72 feet to 155 feet in length. We are impressed with their quality and know they are appealing to the American consumer. We look forward to growing this new relationship..

On the expense side, we continue to review every line and challenge ourselves to eliminate costs that do not improve the customer experience..

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

Mike?.

Thank you, Bill, and good morning, again, everyone. For the 3 months ended March 31, 2014, our revenue was $137 million compared to $160 million last year. Our same-store sales decreased by about 16%. As Bill mentioned, the primary reason for the decrease in same-store sales was the adverse weather that affected us and other industries..

During the March quarter, we had more days where our stores were closed than the prior 16-year history of our company. Generally, Southern markets were stronger than Northern markets, but we did see growth in markets such as New Jersey and New York..

New Jersey seems to be rebounding from the losses caused by Hurricane Sandy and New York has been one of our continually improving markets since the recovery began..

Gross profit was about $35 million, down from about $38 million last year due to the revenue shortfall. But our gross margins increased more than 200 basis points to 25.5%. Since 2010, we have generally seen gross margins continue to incrementally increase.

We believe that for the foreseeable future, we have the potential to realize additional modest incremental improvements in gross margins. This is driven by healthy industry inventory conditions and the pent-up demand for new product.

Additionally, our team is generally increasing our higher-margin businesses, like service, parts and accessories and finance and insurance, which helps our consolidated margins..

Our selling, general and administrative expenses decreased slightly year-over-year. In this quarter last year, we experienced a large increase in our health insurance costs. I can report that this year, such costs are getting back in line and reflect a sizable reduction from last year. We did see other insurance costs rise post Sandy.

However, our recent insurance renewal shows these increases should be short-lived..

We incrementally increased our efforts to create sales over and above last year's efforts through increased marketing spend and commissions to our sales team. Unfortunately, we did not see the success that such efforts produced last year in the quarter. But as Bill mentioned, we did start the June quarter with a large increase in our backlog..

Interest expense decreased slightly despite increase in outstanding borrowings. This is due to the June 2013 modification we made to our financing facility, which among other things, lowered our rate and increased the size of our facility..

The company had no income tax expense for the quarter. Our effective income tax rate will remain essentially 0 for the near term, primarily due to the availability of substantial net operating loss carryforwards, which are fully offset by a valuation reserve..

Our net loss for the quarter was just under $2 million or $0.08 per share compared to net income of $344,000 or $0.01 per diluted share last year..

Turning to our balance sheet. At quarter end, we had approximately $31 million in cash, plus a significant amount of liquidity in the form of unlevered inventory. Our inventory level at quarter end was about $260 million.

The increase in inventory is due to a handful of factors, such as the expansion of the brands we have added, but is mostly due to the falloff in March revenue..

Turning to our liabilities. Our short-term borrowings were $160 million, up from the prior year, largely due to the increase in inventory. .

While we always say it's hard to get a good sense of business from our customer deposit trend, they continue to remain strong and grew sequentially. They are down from last year due to the timing of taking trades on last year's future sales. As Bill noted, larger boat activity, which tends to drive customer deposits, is healthy..

Our balance sheet is strong. We ended the quarter with a current ratio of 1.6 and total liabilities to tangible net worth ratio of 0.93. Both of these are very strong ratios. Our tangible net worth stands at more than $220 million.

We own about half of our locations, which are all debt-free, and we have no other debt except for the inventory financing that I mentioned..

While we have become all too familiar with weather reports, we are optimistic that the June quarter this year will welcome spring and summer better than last year. As March ended, we had a significantly greater backlog than we did last year. Certainly, some of that backlog is for boats that we'll deliver several quarters from now.

As we approach the end of April, we believe we will finish the month up with strong double-digit improvement over last year, potentially offsetting the full decline from the March quarter. I mentioned this as a potential data point to illustrate the impact of weather on March.

It is also important to recognize that we have much of the quarter ahead of us. May and June are critical months. .

While the momentum feels good, we have work to do. .

With that update, I'll turn the call back over to Bill. .

Thank you, Mike. We are excited to have started what has historically been our strongest sales period with increased momentum. While it's still early, we believe we are well positioned with the premium brands, numerous prospects and a focused team to capture additional sales and market share.

Our customers are looking forward to the country warming up so they can get back on the water. MarineMax will continue to do our part in building enthusiasm for the sport and getting families out on the water with many of the company-led events that we do..

We are also excited about the fact that our new pricing model that we call one price is being well received by our customers and is improving our margins. Our competitive advantage continues to expand, supported by our broad and deep selection of products and our customer-centric approach and emphasizes the value of getting family out on the water.

MarineMax's one-stop solution for all of our customers boating needs is going to continue to propel us forward and enable us to secure additional market share gains..

As we emerge from the low points in our industry, we have been increasing -- we have been in an increasing discussions with dealers that would like to expand and grow with us. We have always been patient to find and secure the right acquisitions that will enhance the long-term value of the company.

With our current data -- current base of 55 stores, we have significant opportunity in our existing markets and our stores to extend -- expand, but we will continue to look opportunistically to find markets that complement current locations and others that provide accretive opportunities for expansion..

Lastly, I'd like to recognize and thank our team for their hard work and efforts during the quarter and their ongoing commitment to our customers. This commitment is driving our success..

And with that, operator, we'd like to open the call up for questions. .

[Operator Instructions] And we'll first take Jimmy Baker with B. Riley & Co. .

So you mentioned that the number of boats that you had contracted for delivery was up compared to a year ago.

The significant increase in the backlog, can you help us better quantify that gain at all?.

I mean, I commented, Jimmy, that we started April with a materially large improvement in the backlog. And so much so that as April is trending, we have the potential to make up the entire March shortfall just in the month of April, which gives you a magnitude of the uptick in the contracts written. .

And, Jimmy, we still have our 2 largest month ahead of us after April. And based upon what we're hearing from the customers and based upon the backlog that we just talked about and also backlog of boats that are scheduled in delivery in those periods, we believe this will -- going to be a fine quarter.

However, we need spring to arrive up there, understanding they are having some cold weather up north for this weekend, even though we've got a little bit of a break. But -- so we're optimistic that we can get it back on track here. .

Okay. And I'm just curious is the arrival of some of these very innovative new models that are arriving later in the year, is that a factor here at all? It sounds like maybe your customers are not holding off purchases for the arrival of those new models or at least not significantly so and that this is more truly a weather impact.

Is that consistent with what you're experiencing?.

Yes. I'd say by and large through today that would be true that they're not holding off. Now you got to keep in mind, some of the products that we're getting -- or actually a lot of what we're getting is there really isn't an option for a customer to buy today.

Some of the larger products coming from Sea Ray, we don't have a Sea Ray today for that model. And so what it could be doing is locking that customer that could be buying that product versus buying someone else's product even though it may come 6 months from now. .

But our new product is doing very well, thanks to Sea Ray's 350 SLX. I mean, I think we're greater than 50 units sold to date, and we've only delivered maybe a dozen of them today. And so that's all business that will be occurring as the market -- boats start arriving to us.

And they've got some -- they got a new 65 that's out a little bit and they've got some new 58s that are coming and other models, as well as 4 boats that are going to be -- will be very important to us. And some of those customers are waiting for them; in Other cases, take the 350 SLX. I mean, we're selling them 300 SLXs while they're waiting.

So we're doing all we can to keep them -- get them boating this season. .

Okay, great. And then just generally, I understand that your -- that some of your retail deliveries were delayed and your retail sales were deferred. But did you actually delay or cancel any orders from your OEM vendors or anything in size? It looks like maybe you did not, given the inventory increase. .

Yes. We have not, Jim. We don't see any -- through everything we have visibility to today, we don't see a need or a reason to do that. .

We'll now move to Mike Swartz with SunTrust. .

Maybe just digging into the marketing expense, some of the commentary around promotions to stimulate demand in the quarter.

Can we get a feel for maybe how much you actually spent incrementally this year? I know last year was a pretty big quarter for that as well and it actually resulted in incremental orders, but it seems like it didn't necessarily work this year.

So can we just get a feeling for maybe how much more you spent?.

Less than $1 million but not far from $1 million more. If you look at our total marketing expense, some of that is some contest and commissions for our team and so forth as well. .

Okay. Okay, that's great. And then maybe you could also talk about how the quarter trended.

I mean, should we look at it more in line with the reported industry data we get in terms of kind of February was worse than January and March was worse than February?.

Yes. For us, January was up and I think the industry's reports for our segment were up in January. We were up. February was flattish, where the industry was -- for our segment was probably down close to 20. And then -- so we were better than the industry was in February. In March, the industry for our segment is down 12.

But it's down worse for bigger boats, which has an impact on us. And our decline is not going to be down quite that far from March, but it's -- we have a decline in bigger product, which we're now seeing, obviously delivering here in April. But generally, we -- it's kind of hard to totally fight the industry trends.

We've had some quarters where we certainly have fought the industry trends. But generally, as the industry goes, we tend to go just to a lesser degree on the downside, to a greater degree on the upside. .

We just -- we've heard all across the country that -- from all different industries that weather has impacted their business and it impacted ours as well. And the consumers are fighting the snow or they're fighting the winter weather. And then if you take last year in the north, spring was very late coming.

I think a lot of people were scratching their heads saying, "I want to see if spring is going to come." April, we're seeing that they're starting to come out of the woodwork a little bit. However, we've got still have ice up in Minnesota that's pretty thick and snow that I think is occurring today again up there.

So we just need a little help from mother nature, and I think everything will get back on track here. .

And then just a final question, just switching over to gross margin, it was a pretty nice number this quarter, obviously, some from mix. But could you talk about maybe your services piece of the business? I would assume that some of the winter -- or de-winterization activity was probably held off until the June quarter.

I know it's a pretty high-margin business.

Any color around that?.

Actually, I was going to say, Mike, great point. If you remember, last year, we actually talked about that in our prepared remarks, and we didn't have it in our prepared remarks this year, but we actually had a bigger issue with it this year. We had a harder time doing that.

So our service revenue is actually down a little bit, even though service is up slightly as a percentage of revenue because of the falloff in the sales. And so that's potential future revenue income for us in the June quarter. So good question and good insight. .

[Operator Instructions] And we'll move to Joe Hovorka with Raymond James. .

Few quick questions here. Did you comment on the 350 SLX sales? I'm sorry, I missed that. .

I think Bill did. .

Yes, I did. I said they've been very strong and we've got quite a backlog of 350 SLXs sold. And I think we only delivered maybe a dozen of them right now, of greater than 50 that we've sold. It continues to do very, very well. And Brunswick has stepped up production on the product. And so it's good business. It's coming.

And the same thing goes with 650s that are out now and 510s. And so some of that -- this quarter would have looked better if we could have gotten those 50. That's our likely results if delivered, as an example, Joe. .

Right.

And the dozen or so or less than a dozen that you delivered, was that in March? Or that's coming in June?.

No, we delivered in the March quarter. We delivered about half a dozen. It's like 6 or 7 in the 350s in the March quarter. And then the rest of them are beginning to come in here. We'll have more than that. I don't know the number off right here in front of us. But we'll have more on that in the June quarter and then more in the September and so forth. .

Okay. And then the commentary on the April comps. If I do the math, right, you were down about $22 million or so in revenue in the March quarter. Now if you make all that up in April, assuming April is 1/3 of the revenue June, which is obviously less than that, that's like a 40-plus percent comp in April.

Am I doing that math, right?.

You're doing the math right. We're poised to have a very strong April. April is traditionally a kind of a break between March and May. People pay taxes. It's not usually the biggest of months, but it will be a good month for us this year.

And then if spring plays out properly, it sure sets up things a little bit better than last year for May and for June. .

Sure. And then I would guess that the comp probably slows as we go into May and June. You're not expecting that kind of reaction to the whole quarter, but... .

We're sure hoping it doesn't. But I think reality, yes. I think -- obviously, Joe, that would make sense. I think part of April is -- what we didn't close in March is coming into April. .

Yes. We wish we were doing this call in April, that quarter end. But we're not. .

Right. But the bookings or the backlogs still suggest that you got a very strong May and June as well. So we're going to have a, maybe not a plus 40% like in April, but we're going to clearly have plus comps as long as weather cooperates given the backlog that you have. .

Yes. I would not have anybody write down plus 40%, but... .

We'll move now to Andrew Grone with Dougherty & Company. .

Just a couple of questions. You may have provided all you can in terms of the margin front.

But with that 200 basis improvement that you guys have seen on gross margins, any additional detail that you can provide just regarding specific product level margin improvements versus mix shift?.

Yes. I would tell you that mix shift contributed, but the driver was underlying product. Product margins were healthy in the quarter. And those of you who follow the company for a while, you remember last year, as we tried to generate sales, we did it through additional marketing efforts in the March quarter and also gross margins.

We got aggressive with margins. This year, we did not get aggressive with margin, which means this backlog that we're referring to, which is closing here in April and May and June and even in later quarters, has incrementally better margins locked up in that as well, which is good. So even though we had a shortfall in March, which is disappointing.

At least sitting here today on April 24, it looks like it was the right strategic move to keep product pricing where we did. .

And we talked about the one price selling, and the consumers love it. They're happy to get our best price without having to do -- pound-on-the-table-type negotiations. Our sales team as well has embraced it. And we just -- we'll anniversary the launch of this one price selling at the end of this month. So it's not even a year old.

So it continues to help our margins, and we saw it for sure in the quarter. .

And then last, any color that you can provide just on some trends that you're seeing specifically within the sterndrive market going forward?.

It's growing slightly for us, as we see it. We believe that when -- with some of the new models that are coming out -- let's take the 350 SLX Sea Ray that we've talked about a lot today. I mean, that's twin sterndrive. And it's on fire.

So it's as much about -- the new product is there and it's powered by sterndrive, that the success will be there -- right there with it for growth. And so it will come back. There's still a lot of advantages to sterndrive over an outboard, as an example.

And as such, just -- we need a little recovery and consumer confidence in the market, and that business will be there. And the new products surely help us to get there. .

Yes. And the backlog that we're referring to in the April business, I mean, our commentary is -- applies to sterndrive product as well just about everything we sell. .

And from Morgan Stanley, we'll take Shelley Bergman. .

I've had a conversation or 2 offline with some of the boat dealers and possibly your subs.

What makes us all think that a lot of this is more weather-related than anything -- there was a slowdown that started, it seems that December, January, and that coincided with to me, people who were getting a little sticker shock on potential estimated taxes that would have to be paid for the following year due to the tax inclusion in this country.

And then you saw across the board, people are a little shellshocked when they met with their accountant come middle of April to find out how much the tax bill was. So if you have the average $100,000 earner now making $4,000 less, that comes out to about $300 a month.

And whether it's a boat payment or a car payment, why is there nothing in the press or you don't believe that this is having a significant effect on the consumer in both the auto sector and the boat sector? Understand that the hot model out there is demand, but you don't think any of this is tax hike related? Because the behavior that's been taking place, particularly in December and January before the weather got ugly, and now it seems to be somewhat continuing.

And we're hearing about it in the housing industry also. I'd like the comments on that.

And from particular dealers you're speaking to, is there any customers complaining about that?.

Shelley, we're not hearing it from the customers. Is it in the back of the mind of some customers, they don't share it. Yes, I'd say some of it has to be there. But primarily we believe most of what we saw this last quarter and especially in March being sluggish for us with deliveries.

And we talked about we should be able to pick up most -- all of it in the April. It was -- the tax bill didn't seem to impact it. And our average ticket price being in -- around $140,000, it's not as big a factor is that -- as that just a discretionary purchase of somebody buying an automobile and being hit with it.

But we -- I think you're right that it had the impact on our business some, but we do not believe it's the key driver. .

Yes. I would tell you, obviously, we'd love tax rates to be lower. We'd all be in favor of that. But if you just looked through the industry and over an extended period of time or certainly what we're seeing today, I mean, pontoons are up. You know the history. Pontoons are up a little. Aluminum is up.

Center console fishing boats are up, including the expensive ones. Expensive ski and wakeboard boats are up. These are all people paying taxes. We saw a decent unit numbers during this quarter better than what the industry saw. And then with April, we'll have pretty good unit growth.

So while I think it's there, Shelley, I think the lifestyle of boating is going to prevail, and you're a boater, more so. And the replacement cycle strategy and life cycle is going to prevail more than anything else. .

That does conclude the question-and-answer session. So at this time, I would like to turn the call back over to Mr. McGill for any additional or closing remarks. .

Thank you, operator. And in closing, I'd like to thank all of you for your continued interest and support in MarineMax. Mike and I are available today if you have any additional questions. Thank you. .

Once again, that does conclude today's conference. Thank you for your participation..