Good day, and welcome to the MarineMax, Inc. Third Quarter 2015 Earnings Conference. Today's conference is being recorded. .

At this time, I'd like to turn the conference over to Brad Cohen of ICR. Please go ahead, sir. .

Thank you, operator. Good morning, everyone, and thank you for joining this discussion of MarineMax' 2015 Third Fiscal Quarter Results. I'm sure that you have all received a copy of the press release that we announced this morning. But if you have not, please call Linda Cameron at (727) 531-1700, and she will then fax or email one to you right away. .

I would now like to introduce the management team of MarineMax, Mr. Bill McGill, Chairman, President and 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.

Mike?.

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 by 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. In our traditionally largest quarter of our fiscal year, our teams produced same-store sales growth of 10% while controlling costs. The net result of our efforts produced the third straight quarter of margin improvement and our year-to-date profitability has more than doubled.

Our 10% same-store sales growth was on top of a strong 22% increase last year, which was on top of 16% the year before, making this the third June quarter with double-digit growth. It also follows back-to-back large double-digit same-store sales improvements in the March and December quarters.

Certainly, our growth points to an upward trajectory for the long-term marine industry recovery. .

Having said this, the data for the industry in April was generally negative in mix, but improving for the rest of the quarter in the key segments in which we operate. The segments that are most meaningful for us are recreational day boats and inboard boats, both of which showed mixed performance.

Center console outboard power boats are becoming more important to our results, and they generally performed well in the quarter. Unfortunately, this segment is still less material to us than the day boats and the inboard boat segments. .

Many factors came into play which impacted the industry results, including weather and choppy economic news. Our generally more positive results lead us to believe that our market share gains are continuing.

This is the second consecutive year in which we began our June quarter with our larger backlog, presumably from sales that carried over from the March quarter due to weather. This year, in the June quarter, we worked hard to achieve our sales growth without accelerating our investment in marketing as we stayed focused on controlling cost.

Thus, we still grew sales, albeit at a lesser rate given the comp growth we were up against. .

During the quarter, we sold a large volume of used boats which weighed on our margins. The big growth we had in December and March quarters resulted in increased late-model trade-ins. This translated into a larger increase of trades sold by our team this quarter.

This mix shift did incrementally impact our consolidated margins year-over-year since used boats carry a lower margin than new boats, but it did not affect our sequential margin improvement. .

Having said this, I'm happy to report that our new boat margins did expand in the quarter. As we've been indicating, we do believe as we get a fresher inventory mix due to newer models from key manufacturing partners, we should have the potential for a tailwind at the margin line, and we're beginning to see some of those benefits. .

While the industry saw mixed performance in our key segments, we remain confident that recreational day boats will recover given the strength we are seeing in the demand for the newer models, including outboard powered models. We are also pleased to see positive contribution from brands and segments we expanded with throughout the downturn. .

Another area of improvement, while still small, is our charter business in the BVIs. The business continues to benefit from our marketing and brand awareness efforts and our ongoing investment into the fleet. Our bookings are slowing -- are showing significant year-over-year growth and while still a small business, it is now profitable and growing.

Our related business of selling for private use, the Aquila brand of power catamarans, which we contract manufacture, is also showing nice steady growth and is likewise profitable. Overall, our team worked hard to close sales and satisfy the needs of our customers, while overcoming the mixed industry segment performance we experienced in the quarter.

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

Mike?.

Thank you, Bill, and good morning, again, everyone. For the third quarter, our revenue increased to almost $232 million, primarily from strong same-store sales growth of approximately 10%. As Bill mentioned, this is on top of very strong double-digit growth the last 2 June quarters.

The increase in same-store sales was fueled about 50-50 from units and an increase in our average unit selling price. While we started the quarter with a good backlog, we did not completely escape the challenges the industry experienced in the key segments we operate within.

Having said this, the quarter did finish well with a strong second half of June, particularly in the markets that had faced adverse weather longer than normal, like Texas, the Midwest and the Northeast. .

We increased gross profit dollars over $2.8 million to $57 million for the quarter. Gross margins were 24.6% compared to 25.3% last year. The decrease in gross margin was due to a mix shift to greater used boat sales as compared to last year. New boat margins did experience an increase year-over-year.

As a general rule, the industry is not in a heavy competitive discounting environment. .

Selling, general and administrative expenses, net of the $1.6 million gain from the sale of our former Tempe, Arizona, store, were up modestly year-over-year. Of the SG&A increase, about $450,000 relates to increased benefit costs as we alluded to on our last call.

Excluding the increased benefit costs, we obtained pretty good leverage from the operating cost structure of the company. As mentioned last call, I would add incremental benefit cost for the next few quarters until we see how our actual experience performs. .

Interest expense was up slightly year-over-year as a result of increased borrowings which financed our inventory. 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. However, as the economy improves, and assuming our industry keeps making progress, we will eventually be recording a tax provision.

In the future, we would expect that our tax rate would be in the 38.5% to 39% range, which is similar to what it was before. Having said this, we will not pay meaningful taxes until we absorb our net operating losses of about $60 million, and thereafter, we have sizable deductions which will be available, reducing what we actually pay. .

For the quarter, excluding the real estate gain, our earnings were up about 16% to $13.3 million or $0.52 per diluted share as compared to $0.47 per diluted share last year. As for our year-to-date results, our same-store sales growth is very strong at approximately 23% for the first 9 months.

Comparable pretax earnings have more than doubled from $6.2 million to $13.8 million. And adding back our meaningful increase in benefit costs, which is about $1.6 million now for the 9 months through June, our 2015 earnings would be about $15.4 million. So far, the fiscal year has seen strong growth with another important seasonal quarter underway. .

Turning to our balance sheet. At quarter end, we had approximately $47 million in cash, plus a significant amount of liquidity in the form of unlevered inventory. Inventory was up about 10%, which is less than our same-store sales growth, meaning our turns are modestly improving.

Furthermore, given our sales growth, we believe we are well positioned inventory-wise. .

Looking at liabilities, our short-term borrowings increased modestly given the increase of inventory. While not the best predictor of near-term sales, customer deposits continue to be up meaningfully year-over-year, which is nice to see. Generally, we believe larger boat sales are strong and will remain so for the foreseeable future.

We ended the quarter with strong ratios, including a current ratio of 1.80 and total liabilities of tangible net worth ratio of 0.72. Our tangible net worth grew to more than $257 million or $10 per diluted share. .

Lastly, the sale of our Arizona store provides a point of evidence regarding the potential value of some of our real estate. The property sold for about twice book value. Now obviously, we don't want to imply that our upside on every property is such, but we do believe we have upside.

Further to that point, we own over half of our locations, which are all debt-free. .

As for current trends, last September quarter, we had strong same-store sales growth of 10% on top of a 7% increase in the prior year. So we're up against a tough comparison. Typically, July and September are the largest months of the quarter.

July started off softer than last year in terms of backlog, but momentum has grown and the month will finish ahead of the prior year with sales growing every day. Of particular note, we are seeing very strong unit growth as all areas of the country are now enjoying summer.

We are confident in the continued long-term recovery and are convinced that future sales revenue and profits will greatly exceed those we're producing today. .

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

Thank you, Mike. Progress is the mantra I want to leave you with. The industry recovery is continuing to move along in generally the right direction, and we are making progress in gaining our fair share of the market.

It's worthy of reflecting that for the first 3 quarters of the year, we have seen substantial improvement over 2014 with revenues up 22% and 2.5x last year's earnings, not to mention growing strength in our balance sheet. .

We are making progress on increasing the sales of new products we have been investing in and adding to the mix. These brands resonate with our customers, and we believe we are finally building the inventory levels we need to support the growing demand.

As our manufacturing partners make progress in developing new innovations and in delivering us these new models, it will help us drive additional sales as we move ahead. Our discussions with potential acquisition candidates continue with increased interest on both of our parts as their earnings improve. .

We have the financial capacity and flexibility, along with a strong team and leading products, to support future growth with our one-stop solution for all of our customers' boating needs. This significant competitive advantage makes us confident we can further fortify our position as the leading boat dealer in the country. .

In closing, I'd like to thank our team for their efforts, and also thank our customers, who at the end of the day drive our passion for them and the boating lifestyle. .

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

[Operator Instructions] And we'll take our first question from James Hardiman with Wedbush. .

So obviously, you guys don't give guidance, but I was hoping you could maybe flesh out sort of the commentary with respect to July and, I guess, even the second half of June. I guess, are you seeing trends accelerating or decelerating versus sort of the third quarter levels? I'm assuming the backlog issues have already run through the system.

But as we think about July, is it getting better? Is it getting worse? And is that a clean number? Or are we still playing catch-up versus some of these states where weather was still bad earlier on?.

Well, business is -- the way to say it is probably business is good all the way across the country, James. Weather is -- has returned in a lot of the markets. Oklahoma, as an example, and part of Texas were a real challenge for us in June.

As you know, a lot of the marinas were still closed from the flooding and the rain, and we had a lot of rainy weekends. But I'd say the business continues to be very strong through July. And it -- for sure, it accelerated in June almost daily. And as some of the obstacles that we are running into like marinas that were closed and all changed.

But we're feeling pretty good about the business right now and the activity is -- everybody is into the peak of the season. .

And so I guess that sort of sounds like you saw some acceleration as you sort of unwound some of the early season issues, but that July is up maybe not quite as strong as June.

Is that how I should take that?.

I think July units are going to be very strong. Dollars should be a nice increase as well for July. We're still -- we still got a week left or thereabouts in the month and momentum is building. I do think that what we're seeing is probably some delayed reaction in some of the markets that had maybe not the best weather to start the summer with.

I think that's part of it. And I also think, as we get more fresher product in our stores and the stores are getting the proper level of inventory of the fresher product, that's certainly helping sales. Whereas maybe in the June quarter for some of the models, we'd get one, it would sell and you'd wait a week or 2 to get another one.

I think we're starting to get more product in, which is helping from a unit sale perspective also. .

And some of the new product, James, take the Sea Ray's new 59, we're just now getting them. And so they've been late coming but they're being well accepted. The new -- the 65s are still -- there's quite a few of them sold that are -- we haven't got yet.

And the new SPX series from Sea Ray is doing very, very, very well, so much so that we've got a shortage. So as the new products start to roll in and we get the quantities that we need plus the newer products that are coming for next year, that's where you'll see our gross margin start to really take off. .

And Mike, the commentary you're making about units being stronger than dollars, is that just a function of states that have smaller boats accelerating more quickly as they're playing catch-up? Or was there something else rolled into that sort of ASP commentary?.

No, I think -- James, I think you're right. I think there's 2 things. If you look at some of the states that had challenges, whether it's Texas with the rain or some of the Midwest markets that had maybe a longer or a prolonged winter, those are high-volume states in terms of smaller boats.

And you couple that with the launching of new models from our largest supplier Sea Ray, and they're launching a lot of new smaller models or they did this year. You kind of get the combination of the product hitting the store at the time the sun is shining, which is driving some strong unit growth. .

Got it. And then lastly, you guys have talked about sort of a leverage number in that -- operating leverage number in that 15% range.

What's it going to take for you to get back there? And how should we think about the timing of getting back there?.

I'd tell you, in the current quarter, we were pretty close to that. Granted, margins are down 70 basis points, gross margins. But if margins were down 25 basis points, we probably would have been north of 15% leverage in the company. 2014, we exceeded that. I think the business is set up to be in that range.

It won't always be 15, it may be 12, it may be 17. But I think that the operating expense structure is there, absent if we had -- unfortunately, we talked about the large spike of health care costs last March quarter or last quarter, but if we can avoid things like that, we're in a position to have pretty good leverage in the business. .

We'll take our next question from Ben Bienvenu with Stephens Inc. .

Bill, you touched on acquisitions. You're continuing to look through opportunities there. Are there any particular parts of the U.S.

that you're more focused on or you see the most opportunity?.

Ben, primarily the coastal markets has been our big focus, and we'll continue to do that. So we've been in some pretty serious discussions with several for quite a while now. And it's, as I stated on the call this morning, it's a matter of their earnings being there to justify that it's an okay deal for them.

And at the same time, we don't want to overpay or stretch, so the earnings have to be there to give them what they want. So I'd say it's -- the pipeline is strong and there's others behind it as well. And so as the business starts to improve even more, we'll have more and more opportunities to bring others into the family. .

Okay, great. And then you talked about a lot of the new units, Sea Ray product that's coming out.

To the extent that you can, can you talk about the cadence of that? Do you expect that to be fairly balanced in terms of rollouts over the course of the next year? And if not, and to the extent that you can talk about it, when do you expect to see the lion's share of those units starting to hit your stores?.

Well, if you look at 2015 year-to-date for us, I mean, it's been pretty slow coming. But it's -- that being said, they're now in a position where we're starting to get them in greater quantities. Now understand only about 1/3 of the product lineup was refreshed or with new product. And so there's more new product coming.

But in some cases, it's -- it'll be spring next summer before we get some of them or even fall. .

Yes, I'd say it's going to be back-half loaded. By the time we get them into our stores and have the ability to retail it, it's going to be some in the March quarter and heavier in the June quarter. .

But the good news is margins go way up on those products. And so that's where we can really start getting more leverage in the business and our inventories are in the best shape that they've been in, in many, many, many years. And so we're setting up for a strong 2016. That would be probably the best way to say it. .

Okay, that's helpful color.

Maybe piggybacking on your comment about inventories in my last question here, do you feel like you're -- if you think about it, in what inning you're in, how far along do you think you are in terms of selling through older inventory? How fresh do you think it is, and how much longer? I think you guys have talked about end of 2015, you felt like you would flush through most of that.

Where do you think you are on that time line?.

I would say by 2015, most of it will be flushed through. There are still some older products that we will be buying because we need them for our stores that are not getting refreshed until, as we discussed, the end of -- towards the end of next year. But they're still good products.

It's just a little harder to make the margin on them than it is some of the newer product, but a lot of progress being made by the end of this fiscal year. I'd say we're going to be in a lot better shape. .

And Ben, so you understand that? So if our largest supplier has refreshed 1/3 of their models, what Bill is saying is the models that have been refreshed, those -- the ones they replaced will be out of our inventory by the end of this year.

But then, the next 1/3 starts coming next year, so you'll still hear us talk a little bit about we got new models coming in that are replacing old -- I shouldn't call them old models, but to-be-replaced models. That's going to happen all the way until we get really into 2017.

The question then becomes is when do we have enough of the new models to offset any pressure from the older models that maybe being discounted. And we would think we're certainly a lot closer to that than we were a couple quarters ago, but you still have that going into this 2016. .

But if you go back a 1.5 years ago, we didn't have new models from Sea Ray. .

And the new models are well received. .

So that's the good news. .

We'll take our next question from Mike Swartz with SunTrust. .

Could we -- just to tie something up for clarification, I think, Bill, you had mentioned that you guys kind of held back on some of the promotion or marketing expenses to really drive same-store sales during the quarter. And now you're talking about kind of an acceleration in late June and some pretty nice trends in the July.

And are we to read that you've maybe stepped up marketing in the fourth quarter? Or is this just quite simply a turn in some of those weather-impacted markets?.

It is a turn in the markets, Mike. We have not picked up the promotions this time of year. .

It's also -- I do think -- I don't want to gloss over it. We do have product in the stores now where we had some of the product in the June quarter for sure. But we now have the availability to sell some of the new stuff in these stores.

And that is what I think is -- that combined with the nice weather in the whole country is really what's probably popping the units right now. .

Okay, great. And then just I think you had mentioned in the preamble that some of the used product and then taking trades over the past couple quarters weighed on gross margin in the June quarter.

So maybe over the next 2 or 3 quarters, how should we think about that? And maybe just give us a sense of the margin differential between a new boat sale and used product. .

Look, the -- first of all, the reason that used primarily impacts -- the margins get impacted with used is if it's older trades. So if it's a boat that's 10 years old, as an example. In a lot of cases, we wholesale it out rather than -- we trade it, but then we wholesale it out which is 0 margin.

And so -- and because for us to be able to deliver on the experience for a boat that's 10, 15, 20 years old is very difficult for our team because they're loaded with problems and issues in a lot of cases, so we wholesale them. That's the primary driver of why our margins are less on used.

We do take the trade though, that's the important thing to understand. .

So if you look at used versus new margins, Mike, new -- most new boat sales that we sell are going to transact in the low 20s and used are going to be in the mid to high teens. So you get a little inflection point there. When you have the growth that we had in the December quarter and the March quarter in top line.

That means we're taking trades, and not necessarily all the wholesale ones that Bill talked about. We certainly had some wholesale ones, but as you have more inventory and stock of used, it's hard to predict when they're going to sell. And we sold more -- it's important to hear what we're saying.

We're saying we sold more as it relates to last year's June quarter. We had a greater increase of used versus last year's June quarter. I'm not sure if on an annual basis where we'll end up. We tend to be in 16%, 17%, 18% of total revenue as used. In the current quarter, it jumped to closer to 20%. And so that pressure is the consolidated margin. .

We'll take our next question from Greg McKinley with Dougherty. .

Same-store sales grew above total revenue growth.

Is that simply the Tempe, Arizona, store sale?.

It's Tempe and it's one other. We closed a store in Walker, Minnesota, at the end of last fiscal year, which would still be in the June numbers. I think it's just those 2 stores, Greg. .

Okay.

And so is your store count what now, 54 or 53?.

It's staying around the same number because we also opened another retail location in Northern Houston during -- I think that was during this quarter, so that they offset each other.

But I think, by and large, we're going to be in -- subject to making an acquisition, we've stated for a long time, we don't think we need to add to our fixed cost in our given markets. With a few tweaks here or there, I think we're going to be around that 50 to 55 store range until we start ramping up some geographic acquisitions. .

Okay. And maybe I missed it a little bit on the last question, but within new boats, so it sounds to me like you've sold very successfully the 19 and 20-foot -- 21-foot new Sea Ray boats. You've talked about very limited or not available quantities on the 59- and 65-foot.

Within new boats then, what is the margin profile there? Do those 19 and 21-foot tend to have -- it would seem to me to serve a broader audience, more competitive market? So is that a lower-margin sale than when you get into some of your more differentiated product?.

It would be -- yes, it would be a little lower than a more differentiated product, like a 65 or a 59 or 27 but years ago, Sea Ray had a 19. And so if you compare the margins we're making on the current product to what we used to make on the previous product, we're making higher margins. .

Yes, quite a bit higher. .

So relative to what we once had, we're doing fine. And that's, we believe, that's going to be the case throughout the lineup. So when the new x-sized boats come out, whatever that is, the incremental margin, at least in the near term -- or the gross margin should be higher than whatever we may have once had with Sea Ray.

And then the other thing that's happening, and I think Bill alluded to it, but we have more and more outboard powered product coming from really all of our suppliers. But let's just say Sea Ray for a minute that 10 years ago, we had none.

And in the coastal markets, which is where we have a big presence, we're certainly big in some of the inland states, too, but if you look at the coastal markets, coastal markets are dominated by outboard powered product.

And so while we're still doing good with stern drives in these markets, we are seeing a certain -- certainly a strong demand for the outboard powered new models from Sea Ray. .

And what is that outboard mix mean for you in terms of margin?.

It's about -- the margins are the same, yes. Yes. .

They're similar to an inboard?.

Yes, think of it as the same.

But the big part is it should allow us to have incremental growth because if we're in a heavily dominated outboard market and if we didn't have outboards before even 10 years ago when we were $1.2 billion or $1.3 billion, you would think there's an opportunity down the road to have even greater sales because now we have another power choice that people prefer in certain markets.

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I see. I got you. Okay. And so looking into, I guess, your crystal ball, if you will, you know that larger, more differentiated product should become increasingly available through next fiscal year. You just talked about superior margins versus what you used to have on the 19- to 21-foot.

So at a product margin basis, how big of a shift are you seeing? And the reason I ask, I'm just trying to get a sense for what does this mix do for our margin visibility to next year in terms of -- actually trying to take a reasonable stab at quantifying the growth opportunity on margin rate. .

Well, we -- I'm sitting here looking at Bill. I mean, we had thought that by the March quarter, last quarter, that we'd be seeing enough of the new models to offset some of the pressure from the olds, and we were wrong. Our margins were down. And our margins are down now because of mix of use, but new margins are up.

I would think like when we're sitting on this call next year, we will be talking about increased margins. I'd hesitate in telling you what's that mean today. Is it 25 points? Is it 100? What is it? I would hesitate until we plow through a couple more quarters, make sure we're getting the models from all of our suppliers, and then address it then.

I'd probably lean towards being conservative until we show otherwise, quite frankly. .

I'm sorry, Greg. We talked a lot about Sea Ray in new product, but we're getting a lot of new product from Azimut and from Boston Whaler. And we've got the Scarab jet boats that are starting to really take off across the country. So there's a lot of new product that's coming, so I think all of the ships are going to be rising with the tide here. .

Okay. And then from a trade-in standpoint, you have those big same-store sales gains in December and March, so you're selling those trade-ins here in June.

Is that still going to be a relatively high component -- higher component of mix in the September quarter, given how you think things are shaping up?.

Yes, we have the inventory to have it be a higher component. It's just it's so -- because we don't operate from a backlog, our team is out there working hard and creating the business every day. It's hard to say what the mix is going to be.

Because we've got some increased inventory of used, I would probably say it makes sense to think that we may have a skew towards used in the September quarter as well. At the same time, we're selling a lot of new right now also. So it's hard to tell how the quarter ultimately wraps up. .

Okay. So I'm wondering, we talked about 1/3 of this product has been refreshed. I think that's the XPS (sic) [ SPX ] line, 19- and 21-foot boats.

But just from an order of magnitude standpoint, if we look at revenue opportunities for your company, given what new product has come so far versus what you expect next year and the size of the addressable market that will come with new product next year versus what you have so far, is there any way you can help us quantify the size of that addressable market that's been addressed with new product in '15 versus what you think it'll -- that addressable market addressed will be next year?.

I'm just sitting here thinking. I think it's probably 1/3 of the dollars probably. I mean, you got the 2 big models, which each have a Fly and a Dancer, a 59 and a 65, which we really weren't able to deliver a 59 until now.

But if you think of what that revenue would be and then what's coming, it's 1/3 of the units, probably 1/3 of the dollar is about, I'd bet. .

We not only got the SPXs this year, we also got the 270 and the 290 and the 59 and the 65s. And so there'll be some, some other product in there for next year that will all be refreshed to new, and it's probably equal to about 1/3. .

Okay.

And 1/3 was this year and you'd say a similar amount next year? Is that -- I heard you correctly?.

Correct. Correct. .

We'll take our next question from Jimmy Baker with B. Riley & Co. .

I apologize if any of these are duplicative. I jumped on a little late, but I did hear you say that you were close to 20% used as a percent of mix here in the June quarter.

Can you just compare that to, let's say, your current inventory mix? And then I understand that used boats are a headwind to margins from a mix perspective, but can you just -- or that used boats are rather.

But when you're, let's say, retailing not wholesaling, how are used margins trending if you looked at it year-over-year sequentially?.

Margins -- used margins generally have improved as the availability of late-model used boats has been relatively scarce, and that's been a trend of the last several years. Jimmy, I'm going to have to go from memory. Our used inventory as a percentage of our overall -- it's going to be -- I can answer it this way.

I know it's going to be inflated over what it normally would be like what it was last June quarter, but it's not dramatically inflated. And I don't -- I just don't have my inventory in front of me to answer that. That's why we have the potential to still have an increase in used boat sales here as we go through the September quarter as well. .

Okay. And then am I understanding Bill's wholesale used commentary to mean that, let's say, you take a trade-in that's beyond a certain age threshold that you'd just pump that out into the wholesale market.

But if it's a late-model used, you generally inventory that and resell it back at retail?.

That is correct, Jimmy. And the logic there is, is what we do for our customers is -- they're part of the family and we bend over backwards to make sure that we take care of them to the fullest extent we had.

So when you take a boat that's, call it, 15 years old and the manifolds are ready to go and maybe the stern drives got problems or the inboard engine generator is acting up or whatever, we wholesale it out in a lot of cases to brokers and other wholesale dealers who can basically sell it as is.

For us, to sell it as is, is a challenge because it's damaging to our brand because people expect MarineMax to stand behind it. So if that generator fails after a month of use, it's hard for us to say to the customer, "Tough, you bought the boat as is." So that's the reason we wholesale.

But it doesn't take many older boats to really dilute your margins. But the truth is we're just passing it through, but we recognize the revenue. .

Okay, understood. And then maybe you could just talk a little bit about shifting consumer preference in terms of product mix and how that affects the mix kind of by segment within your used portfolio versus what you'd sell it new.

So I guess maybe the question is, if you look at outboards, obviously that's been increasing in preference in recent years at the expense, to some extent, of stern drives. And I'm sure you're aware that there's also a view out there that the tournament towboat market is benefiting from this exodus in stern drives.

I know Bill you know that market very well.

When you look at the buyers, let's say, that are coming into your stores for new Nautiques, are those buyers trading in stern drives? Would you say that, that's kind of the driving force there? Or it's more about the tournament towboat market recovering on its own, and not so much really a shift in mix?.

I'd say for sure there has been some shift in the tournament boats, inboard boats by consumers that perhaps owned a stern drive. But the bulk of it is buyers that are getting in, some of them are new to boating. Families that are getting in and others have owned existing towboats.

So I'd say it is a recovery more of the towboat market than it is stealing from the stern drive market. Outboard, you stated that perhaps some of the business from stern drive is now outboard, that is true also.

But however, most of the outboard is just a different mindset with the customer, people who are more having affinity towards the outboard powered product. And so we're seeing its incremental business, as Mike mentioned before, a lot of it with Sea Ray now finally giving us outboards in 19 through 27 feet.

And so the stern drive business is still there. It's there in a big way in the northern markets, is in fact, the power of choice for a lot of those markets versus outboard. But when you look at the coastal market, there's a lot of people that's just they're attuned to, hey, it needs to be an outboard.

But -- so I don't think we're taking a lot of rob Peter to pay Paul with the outboard. .

And it doesn't sound like that you're experiencing any sort of an issue where you're taking in a bunch of stern drives in on trade that maybe you're in lower demand than, let's say, the outboards or inboard boats that you're selling it new.

And then your -- there's risk of you holding a stern drive product that's going to be more heavily discounted to move. .

I think they're different buyers. The affinity for the stern drive, there's pluses and minuses to both, Jimmy, and customers recognize that. And a lot of people don't want the outboard hanging on the back, and others prefer the stern drive that's tucked under. And so -- with the sun pad and more access to the water off the back.

So there's pros and cons to both. But at the end of the day, they are really 2 different buyers and our comment about the used is more related to potential issues with the used that we just don't want to accept to -- that could damage our reputation or create issues with what we're trying to deliver to the customer. .

And Jimmy, I think the scarcity of late-model used anything would help offset any risk that could occur if there's a bigger shift to outboards. .

And that scarcity is still there, Jimmy. There's not a glut of late-model used boats out there because they weren't being produced over the last 7 or 8 years. .

Sure, very helpful.

So just lastly, in terms of the Azimut inventory you're holding, have you turned that over sufficiently such that you and your customers can begin to benefit from the stronger dollar on future sales?.

We're working with Azimut right now on future orders so we still have product, and I think I've said to you before, I mean we've always bought that product in dollars. We know what the product should sell for in the marketplace and so we really -- when the euro was 1.30, we didn't necessarily buy the boats substantially higher.

We just wouldn't bring them into the marketplace if we couldn't stock them safely and make a good margin. So we're doing the same thing.

I suspect that what's going to happen with all European manufacturers is they're going to look at this as an opportunity to make a little bit more money themselves because they've all been aggressive getting product into United States. I think dealers, ourselves included, may try to take it as an opportunity to make a little bit more money.

But the net-net to the consumer, there probably will be some type of a price reduction but it would not be what the full euro has fallen. I don't think the European manufacturers can afford to do that. .

Well, and a lot of the content is U.S. So it's tied to the dollar. .

I think the bigger thing with a brand even like Azimut, Jimmy, and you know the brand well, is no different than what Sea Ray is doing. Azimut is also refreshing all of their models. And I was just at an Azimut event where we probably had 40 customer families there that were just over-the-top excited about the new models that are coming from Azimut.

And it speaks to everything that we've been saying that new product sells. And actually, I think that's what's driving the ski and the wakeboard market more than anything. You look what's happened in that product in the last 5 years, I mean it is unbelievably innovative and exciting and all of that stuff. As Sea Ray launches new models, they sell well.

As Azimut launches new models, they sell well. And it really isn't so much about price. I mean, yes, price comes into play, but it's the consumer wants the new models. That's what's exciting. .

And our final question comes from Seth Woolf with Northcoast Research. .

So couple things here real quick with the balance sheet. Looking at the customer deposits, I know there's a lot of noise with that line item sometimes. But it did show a nice acceleration in the growth. And I was wondering if you could speak to whether or not that's being driven by some of the smaller boats.

Or should I say that's being driven by the lackluster performance during the quarter in some of the challenged markets.

Or is that a function of some of the bigger boats in your core Florida market?.

I think, in general, it's nice to see. Like I said on the call, it's nice to see that it's up. We take deposits on just about everything we sell. And so I think it's indicative of a decent marketplace to begin with. But it does tend to get skewed by large boat orders whether it's a 70 or an 80 or something like that. And so... .

It also gets skewed by trades. The trade as the deposit. .

Right. So I think Bill said it before. If someone is buying an 80 and they're trading in a 70, well, they're going to use their 70 till their 80 comes. And so there may be a small deposit on that boat until the day that the 80 comes, and then we take a trade-in. It's -- I think the way I'd read it for everybody on the call is it's nice to see it.

It probably means most of -- the one thing to point to is that bigger boat activity is -- continues to be healthy, and that's what I'd take away from it. .

Right. .

Okay. And then just secondarily, you look -- I know we talked about acquisitions a number of times during this call and it's been a topic that's come up in recent calls more than it had over the last couple years.

But when we look at the cash balance, I would say that it's -- you guys have been carrying around a lot of cash in recent quarters, and this goes back to a time when you were even much bigger company.

So is there anything that we can read from that? The way you're thinking about capital allocation? Or is, you're really close to some deals that you just haven't been able to pull the trigger on yet?.

Well, we never -- the thing we're not going to deviate from is we're not going to do an acquisition for just for the sake of doing it and stretch to get there. And so we're not stretching, so it's got all the cards have got to align for us to do that. But we've also been using some of the cash, and we'll keep looking for that.

We just bought a big marina down in Fort Myers, Florida, as an example. And we just opened up a new store in North Houston, up on Lake Conroe. And so as the acquisitions make sense for the seller and also for us, we will execute them.

But we got to get it all lined up to where it's right for both, and we're just not going to take any big risk in doing any of this. .

I think the capital allocation of the company is going to be similar to what it was in the past, Seth. We'll do acquisitions and we'll buy back some shares, and we did announce the buyback at the end of April.

So we didn't have a full quarter, but we did buy back some shares during the June quarter and we will continue throughout the coming quarters as well. .

And that concludes the question-and-answer session. I'd now like to turn the call back to Mr. McGill for any additional or closing remarks. .

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

And this does conclude today's conference. Thank you for your participation..