Q1 2020 Earnings Call
Good morning, and welcome to the Marine Max Inc. 2020 fiscal first quarter Conference call Today's conference call is being recorded.
This time I would like to turn the call over to Brad Cohen of RCR and Investor Relations Marine Max. Please go ahead Sir.
Thank you Gary good morning, everyone and thanks for joining this discussion marine matches, it's Scott first quarter 2020 conference call I'm sure that you've always seems a copy of the press release. It went out this morning, but if not please call winter Cameron at 77.
Hi, everyone 17, 12, and she will you know when do you immediately I'd now like introduced a management team Marine Max Mr., Brett Mcgill President and Chief Executive Officer, Mr., Mike Mclamb, Chief Financial Officer of the company.
Well make a few comments about the corridor and then be available for your question.
Let me turn the call over to Mike Mike.
Thank you Brad good morning, everyone and thank you for joining this call before I turn the call over to Brett I'd like to tell you that certain of our comments are forward looking statements as defined by the private Securities Litigation Reform Act. These statements involve risks and uncertainties that could cause actual results to differ materially from expectations.
These risks include but are not limited to the impact of seasonality in 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, let's turn the call over to Brett right.
Thank you, Mike and good morning, everyone.
Let me start by thanking the marine Max team for their focus and commitment which contributed to our record setting results to start fiscal 2020.
It's great to see the benefits from the investments we've made over the past few years and new brand New technology, the global expansion of our brokerage business and our ongoing commitment to growing our other higher margin businesses. Additionally, we're reaping the rewards the great people and locations we have added via the.
Acquisition.
I'm very proud to announce 24% same store sales growth driven entirely by increased units, which is attributable to our proven strategies and the highly desired brands we represent.
Based on industry data, our unit growth was meaningfully better, especially in the categories in which we operate more heavily.
Our growth this quarter built on the improving trends we saw as we ended our fiscal 2019.
As we discussed previously it seem that the industry had started to find stability toward the end of September for and the data in the December quarter generally reflects improving trends, but it's still shows some choppiness.
Generally it appears the rising consumer confidence has been able to overcome the ongoing political uncertainty and global trade wars, whether it was also a milder not much of a factor in the December quarter.
In the quarter, we saw strong growth across most brands and categories.
Last year in the December quarter, we commented that we saw strength in larger boats and that trend continue power units accelerated more.
During the quarter, we also leveraged our investments in technology, we have been successful holding proprietary exclusive online selling events, which have proven to be another good source of leaves an activity with voting and easiest.
We also updated and relaunched the marine Max mobile App as a better communication tool for our customers.
We continue to make investments an industry, leading customer engagement tools as well as back office advancements that improve our teams efficiency and effectiveness.
We've now completed our second quarter since the merger of what Frazier the Premier Global Super Yacht Services company, we could not be happier with the integration and the performance Frazier provides brokerage charterer charter management yacht management and crude placement services to yacht owners around the world.
What Fraser's 21 offices around the globe, we look forward to continuing to grow while expanding our resources and capabilities over time.
This is a global high gross margin business. They clearly supports our strategic plan.
As we commented the last two quarters of fiscal 2019, given softer industry conditions inventories were higher than retail trends would require.
We said, we were reducing orders and would likely experienced some reasonable gross margin erosion as we work through the first few quarters a fiscal 20 twond.
We did we did feel some pressure, but it was more than offset by Frazier.
Turning to SDMA, given the choppy trends last year, we increased our efforts to better align costs, which among other actions resulted in effectively optimizing our store footprint in September of 2018.
In the December quarter, we saw great benefit from all our efforts as our flow through to operating income was about 11%.
This was great to see but even more impressively when you consider that the Frazier in sale in ski acquisition seasonally produce losses in the December quarter, our flow through absent those mergers was even higher.
As for inventory the strata yet the strategy I, just mentioned allowed us to make great progress in the December quarter, especially given the dollars and number of units we deliver.
We're still expecting some modest margin pressure as we move into the larger seasonal quarters as everyone in the industry seems to be rationally managing inventory to better levels.
Turning to earnings we produced record earnings per share a 41 cents for the quarter that was almost double our results in the prior year and was a record December quarter for Marine Max.
We further strengthened our balance sheet, which supports our strategic growth plan.
And with that update I'll ask Mike to provide more detailed comments on the quarter, Mike. Thank you Brett and good morning, again, everyone I need to start by also thinking our team for their tremendous efforts that produced record revenue and earnings to start fiscal 2020.
For the quarter revenue grew 26% to 304 million.
Mostly on the strength of very strong same store sales growth of 24%.
As Bret mentioned this was entirely driven by unit growth.
The strong unit growth this quarter follows a pretty good unit trend in the September quarter, which was due to the strike we saw in the month of September .
Based on industry data, we believe we continued to gain share in most of our markets for the brands in segments, we carry.
By region.
Florida seasonally was a leader in terms of trends, but we saw generally good trends in most markets.
Overall gross margins improved year over year, primarily due to the July merger with Frazier.
Without Frazier margins as expected would have been down in the range of 180 basis points, driven roughly 60% by the mix shift to a much greater boat sales and 40% based on expected boat margin pressure as we in the industry work to align inventory with trends.
We are focused on growing our higher margin businesses, such as service been answered in shirts parts and our marine operations not dimension brokerage and we did make progress this quarter.
It's just tough for all of them to grow as fast as we grow boat sales.
Regarding SGN aid the majority of the increase was due to Frazier.
Absent Frazier, we had a modest increase which resulted in fairly good flow through to operating income.
For the quarter interest expense increased to increased borrowings from additional inventory.
Onto our balance sheet at quarter end, we had 36 million in cash, but as a reminder, we have substantial cash in the form of Unlevered inventory.
Our inventory levels were up 11% year over year, but without the sale and ski merger the increase was about 7%.
Our rolling 12 month same store sales growth is tracking at 6%.
This would imply that in a very short period of time, we have dramatically improved our inventory.
We accomplished this by closely working with our manufacturing partners to align orders what trends as well as the tremendous efforts of our team to drive shales.
We will work to improve inventory in our turns as we move through the selling season ahead.
Our short term borrowings were up to 334 million, which increased year over year due to the mergers we completed as well as the share repurchases in fiscal 2018.
Customer deposits, while not the best predictor of near term sales because they can be lumpy due to the size of deposits and whether trade is involved or not are relatively flat to prior year.
Briefly I will comment that this is the first quarter that the new lease accounting standard applies for Murray backs.
While there is no piano impact like all other retailers our balance sheet now has the right abuse lease asset and the present value at the related lease obligations, which is now a liability.
Our current ratio stands at 1.39, and our total liabilities to tangible net worth ratio was 1.4 for both of these are strong balance sheet metrics, our tangible net worth was 316 million or about $14.45 per share.
We own over half of our locations, which are all debt free and we have no additional long term debt.
Our balance sheet is a formidable strategic advantage that allows us to capitalize on opportunities as they arise.
Turning to guidance as fiscal 2020 started it was on the heels of a pretty choppy 29 team.
Clearly the December quarter was much stronger than we originally expected and we do feel better for many reasons, including our improved inventory position.
However, the December quarter is also traditionally the smallest quarter. So while it does appear that the industry is taken steps toward stability and improved trends in our view, we believe we need to be thoughtful in our approach to guidance and get more visibility before we really started feeling a lot better.
Things continue to improve we can revisit our guidance.
Thinking through the next several quarters, our March quarters, arguably the toughest comparison, and we have easier comps in June and September .
Also as I said last quarter, adding in the remainder of both Frazier and sales ski for the portions of the year that we have not own them does not produce meaningful EPS growth as combined for those periods, there will be close to breakeven.
Given these assumptions, we now expect annual same store sales growth to be solidly in the mid single digits due largely to the strength of the December quarter. This is up from the low single digits, we guided to start the fiscal year.
Our guidance assumes operating leverage in line with the last few years.
We are raising our guidance to the range of $1.82 to $1.92 for 2020 from our earlier guidance of $1.58 to dollar 68.
Our guidance excludes the impact for many potential acquisitions at the company may complete.
Our guidance uses the share count of approximately 22 million shares at an effective tax rate of 27%.
Turning for a moment to current trends January will close with positive same store sales and our backlog is higher than last year, both encouraging trends, we continue to feel better about how the industry's position, but we have a lot of work to do in front of us with those comments I'll turn the call back over to Brett personal closing.
Comments Brett.
Thank you Mike.
It was very rewarding to see many of the initiatives we have put into place. The last few years contribute to our performance not only our we'd leveraging our investments in technology to reach our current and potential customers, but now we are doing this on a global basis. We also made progress in the alignment of costs, which led.
Nice leverage in the December quarter.
We saw our asset light higher margin businesses continue to grow and perform while we further enhanced the financial strength the company driving cash flow growth.
Finally, we continue to connect with our customers by hosting events to keep them on the water with their family and friends, which drives future business and market share gains.
We are in full swing with all the seasonal boat shows and so far early resort results have shown fairly positive trends, which is encouraging.
Yes, the New York Boat show opened yesterday, we hope that many of you will join us that the shows to feel how marine Max provides a unique approach to experience the boating lifestyle.
With that operator, let's open up the call for questions.
Thank you at this time, we will be conducting a question and answer session.
To ask a question. Please press star one on your telephone keypad.
The confirmation total indicate your line is in the question Q you May press star to if he would like to remove your question from MCU for participants using speaker equipment and may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for questions.
Our first set of questions come from the line of Greg Bad is gaining in of Citi. Please proceed with your question.
Hey, guys. Good morning gets Fred Whiteman on four on for Greg just to start off could you help us understand.
Given the strong earnings diesel in the quarter why aren't you flowing more of that into the P.S. Guard I know that March compared to talk but you do have some easier comparison in the back half of fiscal year. So what are you sort of waiting for looking for before you get more optimistic on full year outlook.
You know the December quarters, the smallest quarter of the year traditionally and you know we often get asked a question do we pull business forward or not and that it's possible. I think we just are taking more of a cautious and prudent approach to guidance. We gave over two thirds of of the beat.
The increase in the annual guidance and just waiting to get more to boat shows and share the March quarter plays out and if warranted, we'll revisit guidance at that time.
Okay. That's fair and then just from a promotional side you guys did call out some some gross margin pressure there I think it was sort of 70 ish.
Sports in terms of the headwind.
Do you think this past quarter was sort of the peak for both you guys any industry in terms of promotional activity or do you think that that's going to continue into sort of the next few quarters here.
I can speak I can't speak a whole lot about the industry.
I believe that we've done a better job rightsizing inventory faster than the industry.
We're still planning to be incrementally more aggressive that we are right now as we head into shows just again tried to see exactly what's happening at retail.
It's possible that deal that the margin pressure would have peaked in the December quarter, what we'll have to really see how retail plays out as we worked in March Yeah, we'll have to just look and see where kind of the industry inventory levels and up over the next couple of months.
Okay, and then just one quick follow up sorry, when you guys talking about getting incrementally more aggressive on the commerce side are you talking about versus the December quarter are you talking about on a year over year basis.
Year over year basis.
Perfect. Thank you.
Sure.
Our next set of questions come from the line of Joe Altobello of Raymond James. Please proceed with your question.
Hey, guys good morning.
A follow up on the on the line of questioning regarding promotion that it's been pretty rational so far but given the market share gains a sizable market share gains that you guys realized in the quarter.
Compared to some other competitors you're seeing in the marketplace relative.
Yes.
No I can comment in the Brexit and add to it I mean, no one out there is.
Is doing deep discounting or desperation type activity at all we don't want to imply that I think everybody is is incrementally more aggressive I think everybody all the dealers at the.
At the beginning of the model year last summer ordered less product for 2020, along with their manufacturing partners.
To work together closely and so everybody believes will work on the industrial working their way through the inventory position that it was that as we get to the seasonal larger quarters and so given that no ones.
Having any deep discounts, it's a very rational environment is the best way to describe it in terms of inventory of discounting, yes, I would just agree with that nothing irrational out there are nothing alarming that we're seeing it shows only look at pricing and our competitors. It seems seems seems decent.
Got it got outliers in that respect.
Promotion level.
No.
Okay.
My second question.
In terms of order activity. This year, you guys, making on the last call you work or feel like have ordered for 2020, given the strong start to the year.
Mike that did you may revisit that point, if demand continues to be strong, but I guess.
Is there a chance were concerned that factors may not be able to.
Keep up about the bad.
Start to look at the rate order.
<unk>.
We are talking to manufacturers and we have than we were very communicated with ours, our partners and Theres certainly product that we need there's still some pockets of opportunities where we got to keep the pressure on to get inventory better aligned but.
Clearly if 24% same store unit growth continues through the fiscal year.
Factors will be challenged to keep up with that we let me stay in tight communication on a on a monthly basis with them to try to make sure. They see what we're seeing and.
Just manufacturing accordingly right.
It's a high class problem I suppose.
That's right.
Okay, Alright, thanks, guys.
Thanks, Joe.
Our next set of questions come from the line of James Hardie of Wedbush Securities. Please proceed with your question.
Hi, Good morning, Thanks for taking my call, obviously in an unbelievable quarter and congratulations on that.
But in quick follow up to you welcome a quick follow up to one of the previous question I mean, obviously.
You were warning us with the first quarter might actually be a loss.
You put up 40 plus.
So the implied guidance for the remainder of the year down Mike I think you mentioned.
That there might be a possibility that youve pulled forward some.
Some demand is that actually grounded in anything or is that just you're being conservative like you would normally be.
You know what James we get asked the question a lot every time, we have the real strong same store sales growth quarter in our data.
You know I commented that are that our backlog is up that January looks like it's going to be a good month. So purely from the data perspective, it's real hard to say, we pulled business forward because both those are up if they were down that maybe you would you would you would say sell but but you don't know to your work more into the selling season and the fish.
School years, I think we're trying to say, it's traditionally a small quarter, let us get into the March quarter trends are going and a more meaningful months, particularly like March which is huge.
If trends are still go well then we'll revisit guidance at that time.
Got it that's helpful. And then I wanted to dig into the inventory situation a little bit more obviously coming out of the fourth quarter. There was a pretty big imbalance their inventories are up 27%.
Sales were up call it mid single digit.
Now I think you pointed out inventories up seven.
Ex the failing ski and same store sales up 6% trailing 12 month seems great, but maybe walk us through you had called out three factors last time, one would be acquisition.
Which I think you sort of sort of how to think about that but then you had the sea ray situation, where you drawn down inventories, but hadn't yet got me medallion and the incremental Azimut boats and then the timing of of inventory build ahead of the two boat shows Tampa and Orlando or we now pass those ladder.
Two factors such that you only noncomparable team. These acquisitions, how should we think about all of that.
[noise] largely I think I think I'm kind of look at a breadth with your question Great question I think.
I think we still have pockets of opportunity believe it or not to get stores galleon product.
And potentially some azimut product.
Well, we've done a pretty darn good job working with those manufacturing partners to get the product increased.
I think largely the answer to your question is yes other than acquisitions. We're we're starting to anniversary are all those all those other things that we had talked about.
Previous calls.
Okay. That's helpful and then just.
How should we think about I mean, it sounds like you still want to bring inventory down to some degree during the remaining three quarters of the year, but as I think about you know again inventories being up 7% ex the acquisition.
And same store sales being up six full year, you're calling for for mid single digit strong mid single digit same store sale is it is it right to characterize it as is.
Just small tweaks here and there to inventory as opposed to the real work that you had to do over the course of the first quarter.
Yes, I would say that say exactly how I would look at it segment by segment brand by brand.
Adjustments.
By model to get things lined up so we can get that fresh new stuff coming in later in the spring here.
Okay, Great. That's all for me thanks, guys.
Our next set of questions come from the line of Mike Swartz with Suntrust Robinson Humphrey. Please proceed with your question.
Hey, guys good morning.
Just wanted to.
A follow up on from the inventory questions I think Mike into one of the you respond to questions when theres still areas that kind of stand out as far as where you need to clean up without a comment around regions or was that segment.
Oh product can you just give us a little more color there.
It's more just when when you when you open up the inventory and if you look closely at it we've got a couple different pockets of opportunities to continue to.
No.
Right size the brand inventory with the brand performance, we track everything down at the store level brand level and we have.
Nothing really that's alarming just trying to make sure that all that everything's moving in sync together, but inventoried order perspective.
Okay, but the mid mid by category. There is nothing that kind of stands out as soon as something that needs to be more aggressively managed over the next quarter too.
Not by CAD now not in that scale.
Okay. Okay.
Then just with regards to the corner.
Store sales up 24% and I think Mike you said without the acquisitions SGN a would've been up modestly.
Can you give us sense of maybe how much cost reduction you saw in the quarter from the closure of the eight stores that you did last year and maybe how to think about those savings over the next couple of quarters as we as we Oh calendarized that.
Yes, it's.
Don't have my numbers right in front me right now Mike that.
I think the most telling point as the operating leverage that we got in the quarter, which is double digit and absent Frazier in sales gains even actually higher than that I don't think it's several million dollars, it's over a million less than $2 million I hate to be vague like that I. Just I just didn't have that the numbers right in front of me.
But it's it's certainly helped in the in the quarter and if you look to the guidance that we put in place.
We're using leverage in line with the last few years. If you if you listen to high described guidance or not using the operating flow through of the December quarter.
Obviously, if we if we continue which is our goal if we continue to get improved leverage in the business. We can we can re adjust guidance at that time as well.
Yes, that's kind of where I was going to go into next question because I think when you gave your fiscal year 20 in guidance. Initially you said it wasn't embedding any of the cost savings.
Or the the store closures in in a the flow through and I'm. Just wondering now its with the new guidance are you are you embedding some of the flow through or are you, saying, you're not still not embedding any of the maybe incremental pickup from from closing some of those stores.
But we're betting it to the extent of the December quarter of what we were talking to the to the improvement but for the future quarters, we're not yet.
Okay. That's helpful and maybe just a clarification question as well when you're talking about you know stepping up.
Promotion incrementally for the March quarter, and as I recall, you had stepped it up pretty dramatically in the last March quarter. What are you talking about are you talking about price promotion or are you talking about marketing sales and incentive to the salesforce I'm trying to understand that a little more.
Yes, it's a good question its kind all of those and it's a different lever depending on which segment, but you know sales team promotional activity marketing advertising and some price you know strategic market pricing.
It's really a little bit of all of that and may be one market, it's more of one than the other.
Okay. That's helpful. Thanks, guys.
Thank you.
Our next set of questions come from the line of Ryan said Craig Hallum. Please proceed with your question.
Good morning, guys and congrats on the impressive quarter.
Thank you.
So it's a break out what the same store sales benefit was from the store consolidations last quarter and it will be most stores.
From the prior year comp retaining much that business at nearby stores and then secondly from mix shift in the capital.
Can you can you.
That's the first questioning it I'm not sure I, followed with what you're asking right sorry.
Yes, you closed down I think it was eight stores basically under the assumption that you can remove some costs but.
Retain a lot of that business business that nearby stores. So presumably in the same store sales comp you remove those eight stores from the comp last year, making what retained a lot of that business. This year.
Talking about that right from a same store sales perspective.
You are your 100% right. So that's that's exactly right and.
Based on our results you can tell it sure looks like we did not lose a whole lot of revenue if any of those and those in those markets, where we closed those duplicative stores that's correct.
Anyway to quantify I guess, how much same store sales boost came from that consolidation.
Because they were smaller stores generally and many of them were northern markets. They don't sell a lot of product. This time here it would be single digit millions I don't think it hit double digit millions it would be.
For four or 5 million something like that have added up all those stores and that's an educated.
Thought for me right now that's not far from what the real results would have been.
Got it.
And then from the Tampa boat show anyway to quantify that botanical boat shows interesting. So we talked about have moved from September into October .
When it did move to later on in October the show technically head down contracted revenue on a year over year basis, largely because of the change in timing a lot of the deals from the show did not close the December quarter. Some did.
But as is typical with the boat show they they'll close in future quarters and in some cases from that show they'll close next next fiscal year. So the the benefit of the show move into the December quarter net net there is an incremental benefit but it's not very significant relative the success, we had in the December quarter.
Great.
Switching over you mentioned stream and online sales what portion of your overall business and whether you want to target talk in terms of sales would be kind of whatever metrics.
Right Okay.
Yes, the the online pieces.
Bobby made investments in that and it seems to be growing we.
Really we don't track the sales of those online lead because they take we track them, but they take awhile. So they generate the lead they generate interest they come to a show they come to our showrooms in it might take several visits over time, and we're tracking that whole lifecycle, but I guess I would just comment by saying our lead activity.
Has grown tremendously because of some of these customer engagement activities, including our online both sale, which is a lead generator. So it's growing incrementally each month.
And then last one for me and then I'll turn it over but where did you see most of the unit growth either new or usage can break that out and then how are you feeling about that breakout between those over the remainder of the year.
I can tell you knew was stronger than use that's just sort of a function of other businesses you take trades.
And so you don't have as long to sell the trade in the quarter because you haven't had it for all 90 days of the quarter, where most of the new product you do.
We felt pretty good about them the business mix, whether it's new use an end use with strong used was.
Very strong just not not at the same level that the new us.
[noise] that help.
Yes.
For me good luck.
Thank you.
Our next set of questions come from the line of David asked the greater of Longbow Research. Please proceed with your question.
Good morning.
Just on here for David Macgregor, Thanks for taking my questions.
Yes. Thank you so I guess to start off in terms of mix. During the quarter. You said that you saw some strength in larger boats would you expect us to continue even as we get closer to the election since that buyer tends to be a little bit more impacted.
Yes, I think where we talked about choppiness and uncertainty and we watch it closely but yeah. We don't really have a prediction for that other than we watch it really closely.
I'll comment.
Also just on election years. So we we've gone back you know we've been public for over 20 years, now, which is the number of different election cycles.
We've gone back and looked at the.
Years, leading up to the election, so like our fiscal 20, right now and similar years historically and in election years, our revenue in our units have grown every single year, except for 2008, when there was other things going on in 2008, Besides just the election.
We further then looked at the December quarters themselves a great right in the heat of all the battle the election.
And the noise is probably at its greatest and again in every year.
Except for Oh eight.
Our revenue and units increased actually I think in Oh.
Oh, the December quarter, Oh trends were flattish, but.
Generally doesn't look like for our business that election years ended up themselves.
Our telltale signs that things are going to be softer now clearly we're in unique unique times right now when it comes to elections, but.
Based on our own historical data.
Election years aren't supposed to be fearful of.
Okay. Thanks for that and then can you provide some color on customer deposits for the quarter I think in the call. You said they were about flat I'm doing the math it looks like they're down about 4%.
After being positive the last three or four quarters kind of what's what's baked into that.
Yeah, I comment off and that looking at that line item on the balance sheet, which I understand what everybody does its it can be I used the word lumpy. It all depends on the size of the deposit that we take from customer a versus customer b and whether trade is involved or not that makes those numbers move all around.
I think the more telling comment is my comment around you know is January going to be up or down I think a comedy January should finish up and then what's our we caught our backlog so how many boats or under contract today. So instead of looking to deposit dollars, how many boats or under contract today for future to labor.
And our backlog is up year over year. So the deposit line, we get questions on it it can be lumpy as I say.
But.
Generally the our comments around backlog in the current month are probably a little more.
Indicative of what's going on.
Okay, and then can you comment on the cadence of same store sales within the quarter.
Industry data would suggest that October was probably the strongest month of the year in terms of retail are you seeing something similar.
Got you once they spread or no I think we add three good months in a row I think the industry that we saw probably similar trend, but obviously higher.
Results.
Right.
Okay, and then I guess lastly are you able to comment on what segments performed better than others in terms of sales, whether its pontoons cruisers et cetera.
You know I honestly, we saw pretty darn good strengthen in all segments.
In order to produce yes.
That type of growth you kind of have to have almost all those cylinder sit and so it really was a growth across the board, which is as the exciting part of it for US it's traditionally not a real big quarter for aluminum for us because all of our aluminum stores are mostly in the northeast.
But.
We had.
Generally good growth in just about all segments.
Okay, great. Thank you and congrats on a good quarter.
Thank you very much yes.
Thank you we have reached the end of the question and answer session I will now turn the call over to Brett Mcgill for any closing remarks.
Well. Thank you all for joining the call today, both Mike and I are up here at the New York boat show today, but will be available for your call. If you have any questions and we look forward to updating you on our next call.
This does conclude todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great.