Good day, ladies and gentlemen, and welcome to today's MarineMax Fiscal First Quarter 2018 Earnings Call. As a reminder, today's conference is being recorded. And at this time, I'd like to turn the call over to Brad Cohen at ICR. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining this discussion of MarineMax' 2018 fiscal third quarter results. I'm sure that you've all received a copy of the press release that went out this morning. If not, please call Linda Cameron at 727-521-1712, and she will e-mail one to you right away. I would now like to introduce the management team of MarineMax, Mr. Bill McGill, Chairman and Chief Executive Officer; Mr. Brett McGill, President and Chief Operating Officer; and Mr. Mike McLamb, Chief Financial Officer of the company. Management will make a few comments about the quarter and then will be available for your questions. And with that, let me turn the call over to Mr. Mike McLamb. Mike?

Hey. 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 could cause actual results to differ materially from expectations. These risks include, but are not limited to, the impact of seasonality and weather, general economic conditions and 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. Let me start by thanking the entire MarineMax team for producing the most profitable December quarter we've ever had, and that's for our 20-year history. As we have said over the years, with the brand and segment expansions we completed following the downturn, we could and should achieve greater profits at lower industry unit levels. With industry units still 35% to 40% below the prior 20-year average, we have produced another quarter that supports that statement. Our record profits this quarter are especially noteworthy as our recent, more northern acquisitions have increased our seasonality, which in theory makes it even more challenging to be profitable in the December quarter. Additionally, the weather in this quarter certainly seemed a lot less friendly than in prior December quarters. The quarter is also the fourth consecutive year MarineMax has produced a profitable December quarter. The combination of our team's continued commitment to our customer-centric approach and relentless work effort allowed us to outperform. Generally, each month in the quarter was productive. Our sales in the quarter include a healthy mix of everything we sell, including our higher-margin businesses, which generally expanded in the quarter as our team executed well in these areas. We also maintained our discipline on our strategy of regional pricing, which resulted in the fifth consecutive quarter of incremental new boat margin growth. All of these factors contributed to our strong 150 point plus -- basis point increase in our consolidated margins. What is most exciting is that we drove very strong flow-through that created record cash flow and earnings in the quarter. We made good progress towards our goal of operating with a more tightly managed expense structure that, combined with improved gross margins, led to the operating leverage we achieved. While we…

Thank you, Bill, and good morning, everyone. I also want to thank and congratulate our team on producing an impressive record December quarter, a great way to start fiscal 2018, which holds much promise. To build upon Bill's comments, another positive is that we are seeing a continued gradual improvement in larger boat sales. If you recall, larger boats began to be challenged midway through our prior year. However, in the December quarter, we sold more boats over 40 feet than we did a year ago. As each month passes, the industry data shows more stability, but we certainly would prefer a faster return to historic levels. As we said in the last call, the choppiness in large boats led us to elevated inventory levels. This remains a key area of focus for our team. And we will continue to work with our manufacturing partners to align our inventory with our sales, which may take a few quarters, given seasonality. As we look ahead, we are encouraged that our manufacturers continue to innovate, utilize new technology and have enhanced product design to give boating enthusiasts the desire to trade up or buy a new boat. To that point, we are now in the early portion of the important boat show season at many of the -- and we have many of the latest models on display. Today, the New York Boat Show starts, and the early indication is that there are a lot of building interest. And other markets shows have generally experienced increased traffic and improved sales results over last year, which was a good boat show season as well. Product-wise, outboard-powered models contributed to our strong results at a greater rate in terms of units and is expected to continue. Furthermore, as we saw most of last year,…

Thank you, Brett, and good morning again. It's certainly impressive in our 20th year being public that we produced our best December quarter ever. It's truly a great feat. For the quarter, our revenue grew to a December quarter record of almost $237 million. Same-store sales were flat, but we were up against 28% same-store sales growth last year, which concluded an 81% 3-year stacked same-store sales growth period. On a same-store basis, we saw unit growth of around 6%, which was largely offset by a decrease in average unit selling price. The change in average unit price was solely due to mix. To that point, last year, we noted that about 2/3 of our same-store sales growth was due to larger product. As for gross profit, we build upon our September quarterly margin expansion with new boat gross margins now up for the fifth quarter in a row. Due to higher product margins and mix, we grew consolidated margins almost 160 basis points. Selling, general and administrative expenses were $50.2 million for the quarter. Most of the year-over-year increase is due to the Hall Marine acquisition Brett spoke of earlier. Absent that, our team did a great job controlling costs. Interest expense increased $973,000 as a result of increased borrowings from higher inventory levels, our September quarter share repurchase and a rise in interest rates. Our well-executed strategy of increasing gross margins, combined with improved expense control, allowed us to produce great flow-through in the neighborhood of about 20%. This resulted in pretax earnings growth of 44% to a record $6.5 million. With the recent tax legislation that went into effect January 1, the tax accounting rules required companies to remeasure their deferred tax assets and liabilities. For MarineMax, this resulted in a onetime noncash charge of $889,000 or…

Thank you, Mike. As Brett alluded to earlier, we are inning the busiest boating season, and we once again started the fiscal year quite strong. With the recent tax changes, growing global optimism and confidence levels still rising, combined with consumers looking to find activities entire families can participate in, boating continues to find much enthusiasm. With our manufacturing partners making it easier and easier to operate and navigate boats, as well as educated and an energized team in place, we look forward to getting even more boaters out on the water in the upcoming quarters. Again, we thank our team for their strong efforts and believe our customer-centric approach that delivers the boating dream will continue to resonate and create the long-term value for our shareholders. With that update, operator, we'll now open it up for questions.

[Operator Instructions]. And with that, we will take our first question from Scott Stember with CL King.

Can you maybe talk about the timing of hurricanes? I know there were some lost sales in the September quarter. Is there any way of telling how much recapturing of lost sales took place in this quarter? Or is it your opinion that this was just a nice, steady improvement throughout the quarter?

Well, Scott, we don't really believe there was very much at all that happened as a result of the hurricane for the quarter. We do believe there is some coming and will come, but the quarter was also a time period where people were repairing their docks, rebuilding their facilities and infrastructure to get that going in some of the southern markets. The BDI said it's still too early. We're operating and -- but we're -- it's at a reduced pace. It's going to be a while before the hurricanes start to happen. And it if you take the Keys, which was probably the heaviest hit from the hurricane in the continental United States, there's still a lot of infrastructure that's recovering at this period.

Got it. And my follow-up has to do with the composition of big boats. You talked about how you're seeing a steady improvement. And I know we could talk about 40 to 66 feet and then 60 feet and over. Can you maybe just parse it out a little bit about where the recovery is? Is it on the ultra-expensive stuff? Or is it just across the board?

I think the comments that Brett was talking about was 40 to 65 feet or 66 feet we sold more boats this year than last year. And that's really for the entire industry. That's the big part -- the stuff that's much further above that pertains sometimes to us, but not as much to the overall industry. But 40 to 66 seems to be gaining stability.

And moving on, from Citi, we have Greg Badishkanian.

This is actually Jesse Alpena [ph] on for Greg. so last quarter, you said that the used boat market was pretty healthy. Can you maybe provide some color on what you're seeing in the used boat market today? And are you still seeing favorable margins from short supply and things you mentioned in the last quarter?

Yes. This is Brett. We are still seeing a great demand for used boats, current -- fairly current boats. Margins are holding strong. And the ability to get a hold of good trade-ins, our used boats, it's still a high demand out there and the supply is not overwhelming.

Okay, great. And then on your guidance, I don't think you gave this, but could you maybe break down for earnings, how much of your earnings raise was from the recent tax reform.

Yes, I'd say something like 95% of the guidance raise is the tax reform. There are a handful of pennies on either the low or high end that came from the strength of the December quarter and some incremental growth from Island Marine. But the bulk of it is the tax law which -- what drove the guidance increase.

And our next question will come from James Hardiman with Wedbush.

Sean Wagner on here for James Hardiman. Kind of piggybacking off that last question. I guess, even -- what -- did you mention what the -- I think I missed what the kind of revenue and gross margin assumptions in that 2018 guidance are.

Yes, so we've not changed anything from when the annual guidance started. So it's 5% to 10% same-store sales growth. It's similar margins in the last couple of years, gross margins, so not a significant improvement, and flow-through similar to the last few years, which has been in that mid- to high-single-digit range, which -- it's something obviously we're trying to address and we definitely addressed it in the December quarter. But we haven't tweaked those assumptions yet. We think the December quarter, as I said, is the smallest quarter of the year for revenue and typically earnings perspective. And we'll need to get through the rest of the March quarter. We have a business that doesn't have a 12-month order backlog. We're out there creating it every day. And so we want to get it to a more meaningful quarter, like March, before we start revisiting guidance.

Okay, fair enough. And the Island Marine acquisition, how should we think about that from a same-store sales perspective for the year? Any help you can give us with the phasing of those quarterly revenues?

Yes, it won't count in our same-store sales base to a year from now. So once -- January of '19 closes when it goes in. So it will not be in. They do about 10 million on an annual basis. Obviously, their June quarter is going to be something like 60% of their revenue. The December quarter will be very small. March would be probably 20%. And then September is probably 25%, something like that.

And moving on, we have Eric Wold with B. Riley.

So I have a follow-up question to the last one. On Island Marine, could you give us the price that was paid for that? And then in general, a sense of the acquisition environment out there. Do you see -- still see a fair number of opportunities out there? And are sellers fairly reasonable in valuations you're looking for?

Yes, we did not disclose the price that we paid, which, overall, for our balance sheet or from MarineMax, would mean it's not material for the size of our company, so we have not disclosed that. I don't know if Bill -- Brett wants to comment on the aggregate...

Yes, Eric, there's still a pretty good pipeline of dealers that want to join our family and -- but as we've stated in the past, we take our time. We make sure the cultures are right. We got some that have very similar cultures that we believe that makes sense in the future. So we're working on it and we'll continue to do it. And when they make sense for the company joining us and for us, then we'll of course move forward on it. But the pipeline is there, and we'll continue to find the right people because that's really -- at the end of the day, it's more about the people than it is the market. And so it's still a focus, but it's not baked into our guidance at all.

And then, if I -- the follow-up question, I guess, with the sale of Sea Ray kind of still out there, I know you'll be involved in the process and encouraged kind of our -- how that's going to turn out. I guess, have you seen any change at all in demand trends around Sea Ray since this came out from buyers or consumers may be a little hesitant, may be staying in the sidelines until they find out what the resolution is? Or are they pushing you through kind of regardless?

Well, just looking at our sales through -- since that announcement through now, the results have been good. Our early boat shows this month with many of our brands all to be -- look to be up and trending well. So no, we're not seeing that in the data right now.

But the competition takes every chance they can to take a swat at you. And so there is some uncertainty there. But with MarineMax and everything we deliver for the customer and the values that we profess daily and the reputation that we have, we're getting around that without a lot of hiccups. But it is a concern in some people's mind. And the competition will probably continue to use it through the boat show season until something definitive is determined on the future of the brand. So -- but we know how to deal with it. We deal with obstacles all the time and we make opportunities out of them. So we're getting there.

Our next question comes from Mike Swartz with SunTrust.

Can you hear me?

We can hear you, yes, Mike.

Sorry about that, technology. Just wanted to ask around SG&A and a lot of leverage this quarter. That's one of the sticking points over the last several years. So maybe just give us a little sense of, I guess, what you've done to rein in costs or align costs, I guess, to revenue. But then also, I guess, how does that influence guidance? And how are you thinking about the leverage on just the operating costs?

We haven't baked in and materially changed guidance over fiscal '16 or '17 over -- we haven't baked in any improvement to our leverage in '16 and '17 into our guidance. Last year, we have built the company to be a bigger company, the choppiness in the big boat business, ended up surfacing in our sales. But we still -- we have the expense structure in place. So I think this year, when we set the year out, we had time to dig deep really through every line item, every store, every manager, just kind of get everybody focused on it. We're able to get some costs out of the business. Sometimes you can't get them out overnight, especially in the summertime when we're trying to deliver all those boats. So we've made some progress around the expense side of the business as part of our 2018 operating plans and strategy. We haven't baked into our guidance yet our success rate with the efforts that we believe we're putting in place. Time will tell how well we execute on those strategies and how well we'll exceed on the strategies at gross margins, which is another big contributor to the leverage in the quarter. So we're very excited to have one quarter done in a very effective way. We need to get out there and produce a couple more quarters.

Okay, that's great. And then just a follow-up. I guess, I'm trying to understand the comments around -- it sounds like larger boats did a little better in the quarter. And I think Brett, you made the commentary that you're trying to align inventory for some of the bigger boats to what you're seeing demand like. So maybe just put those two comments.

Yes, the stocking level and the timing of big boats has always been our challenge. It will continue to be a challenge. So sometimes when you get 40 to 60 feet, was choppy in recent quarters, and that's more of an inventory where you kind of build a good cadence with, then we took a big chunk of that by selling more in that quarter. But larger than that, that timing of those boats becomes very challenging. So that's some of the alignment thoughts as we probably -- we've adjusted future orders to help us keep in line our inventory in the coming quarters.

So it sounds like if demand kind of stays where maybe you saw it in the December quarter that, that inventory pipeline, I guess, of larger boats will be more where you need it to be by midyear or the summer?

That's what it looks like, yes.

Well, I mean, to give you an example, on -- in the 2017 December quarter, we had a couple of real large yachts that came through. We did not have them this quarter. So it is a big contributor to the performance in 2017. It was not a contributor, but does it contribute this quarter? We'll have to wait and see. Those things -- there's a lot of activity around these real large yachts. But the timing is always -- that's something that you just -- you got to wait and see and work it hard. But that being said, you almost have to have the inventory because a lot of the consumers, when they want it, they want it now. And so they're not willing to wait a year, 2 years to have a boat built in most cases.

Next from Raymond James, we have Joe Altobello.

So quick question, and I think Bill, you just answered my question for me. But I was a little confused about the commentary regarding the stabilization in larger boats, yet ASPs were down 6% this quarter versus being up 13% in the prior quarter. Is it all due to those big yachts and the timing of those sales?

Yes, that's exactly right, Joe.

If you go back and look at our prepared remarks last year in the December quarter, we said 2/3 of our same-store sales growth came from larger product. And to have that big 2/3 of 28%, we sold product over 80 feet. And when boats like that hit in a small quarter, it's great. It increases profits and all that stuff, but it throws off some ratios. But that's what the impact to the December quarter was a year ago.

But it also has the tendency to reduce margins. So real large product doesn't have the same margin as the rest of our products.

Yes, exactly. And then secondly, the Tampa show, I guess, shifted from September to October. I know it's a fairly big show for you guys. How much of an impact did that have on the quarter?

It was positive for sure. But when I -- when we look at Florida, I think Florida started the quarter with a little bit of a, call it, Irma hangover, just as we were still a little bit in shell shock and still trying to realize what happened down here. So when I think geographically around the country, Florida did okay, but it didn't do great. And I attribute that a little bit to the timing of big boats, as Bill said, but also to Irma. Florida gained strength as the quarter was wrapping up, which was good to see, which to me, you're trying to figure out kind of trends, part of that is probably from the store. But we had good contributors in other parts of the country, New England, Midwest, Texas, other places that just showed real good fundamental strength, which is what you want to see.

Our next question, we'll take from Steve Dyer with Craig-Hallum.

Most of mine have been answered. I guess, you guys have had a strong balance sheet that only gets stronger here with the tax rate changes. Any sort of updated thoughts on capital allocation? And I guess, second, do you anticipate that the tax changes shake up or change anything in the acquisition environment?

I think our capital allocation change -- or strategy is going to be pretty consistent with what has been. We just have more of it to allocate. We for sure want to keep a strong balance sheet. We want to make sure ratios and things are in check. We have an opportunity to make acquisitions, as Bill talked about, from time to time. Although I still think most of our earnings growth in the near future is going to come from the branded segment expansions that we've started on in 2008. And then where we can make smart acquisitions in marinas and properties to help our markets, we'll do that. They've got to be at the right return. There are some people out there chasing marinas right now paying pretty hefty prices for them. As -- how does the tax law impact the acquisition market? I think it lowered -- well, I'm not exactly sure if it's going to -- if it will prompt more people to come to the table or not, it may. The way the rules can be applied and how you can deduct assets that you acquire faster make it even more attractive for an acquirer from a cash flow perspective. It doesn't necessarily change your GAAP to answer all that much, but it makes it much more attractive from a cash flow perspective. So that's one thing that I can talk about as much. And then obviously, I may not have mentioned this, but looking at share repurchases, when it makes sense, we'll clearly be in the market doing that, like we've done over the years.

Moving on from Longbow Research, we have David McGregor.

This is Brandon Rolle on for David McGregor. A lot of our questions have been asked already as well. I guess, just to piggyback on the geographical questions, kind of looking at the Texas market, could you comment on kind of the growth that you were seeing there and hurricane-impacted area, and then kind of also break out kind of what you're seeing in freshwater versus saltwater in terms of unit growth?

Yes. Thank you, Brandon. Yes, in the Texas market, clearly, our Houston area has seen some slowness from the hurricane and the flooding and everything that took place. And we had a good boat show in Houston, which kind of supports some excitement. But it took a toll on Houston. And our Dallas market still seems to be strong and doing well.

And freshwater?

Yes, and freshwater. Clearly, the saltwater segment continues to drive -- I mentioned the outboard-powered segment, and that includes some end markets that are taking off with outboard-powered. But that saltwater segment continues to grow and accelerate.

But looking at shows, we had a great Atlanta show, a Cleveland show, Minneapolis show, Kansas City show. So those markets are still very active, and the consumers out there are buying for springtime.

So those were all shows that just completed here in this January [indiscernible]

Yes, with strong pontoon results at those shows and strong inboard ski boat results, so very strong there.

Okay. And one follow-up question, just on Galeon yachts. I know we haven't really touched on this recently. But with the stronger, bigger boat demand, have the Galeon brand benefited any?

We had excellent results with Galeon in the quarter. With some strong sales, we're actually starting to get a good level of inventory in the field of the Galeon. Where we first took it on, it was hard to keep them in stock. And now we're getting a good level. A lot of our markets, a little up north when they come into the spring. They'll have some boat in stock to display the consumers who've really never seen the product if they haven't been to Miami or Lauderdale. So we're excited about that in many markets.

And we're doing very well with Azimut, great product, lots of innovation and continues to be a very important brand for us.

And the larger Sea Ray as well in the quarter.

Correct.

Our next question comes from James Hardiman with Wedbush.

Sean Wagner here again. Just a couple of quick follow-ups. As you talked to consumers, is there any evidence that the tax cuts are going to impact boat spend, particularly on bigger boats?

I think anecdotally, the answer is yes to that because the -- if you look at who we're selling to and we're average unit selling prices, it's a big benefit to small business owners or executives, not to mention what it's doing to the economy and the stock market. I don't know. Brett and Bill can comment more specifically here when customers come in because of the tax law and buy a boat. I don't -- you guys have been out there [indiscernible]

Just in general, at the recent boat shows, it's an upbeat positive atmosphere. Customers are talking. And like Mike said, small business owners are in very good spirits. They're excited to get out boating. So it lends to be a positive environment.

Okay. And I guess, back on the Sea Ray thing real quick. I know you said you'd be heavily involved with the kind of the transition and all that. What are you kind of hoping to see or hear from the eventual buyer? I know you kind of talked about maybe a lack of investment in the Sea Ray brand over the years. Is there anything specific you'd like to see there?

I think, Sean, the biggest thing we're looking for is an owner of the brand that is passionate about it and willing to give it all towards not only the brand, but also to the customers. And so I think it will be a very positive thing. All options are on the table. As far as we're concerned, we will have a, I think, a big say in who that buyer is with the percentage of business that we're doing and also the dealer agreement that we have with Brunswick. So we're optimistic it will be a great thing, and it will be the right buyer at the time with every option as a possibility.

Okay. And is there anything specific you're hoping to see maybe from a technology standpoint or specifically with the boats?

This is Brad. I think we're seeing some great new models from Sea Ray coming off the line. And we're just encouraged and hope that whatever direction it goes, they'll continue to build enough of those boats for us because there's a good demand for a lot of the new hot product.

But the secret to what I think almost any business is, is called passion. And seeing Ray, when he created the business, the passion was there and so much, it was just incredible of what we can do for you as a dealer, what can we do for the customer. It's -- and a lot of that is there with Sea Ray, but it needs to be there, I think, to a greater extent, where it's really the most important part of the manufacturing business versus just an ancillary part of the business, which is it is right now. And so we see it as a very, very positive move, and you better believe we're going to be there, making sure it's the right thing for the brand.

Our next question comes from John Lawrence with Coker & Palmer.

Just a couple of things. Most of my questions have been answered. But just digging in on the gross margin just a little bit obviously. Can you talk about some of those higher-margin services, where you're seeing that? And obviously, it looks like it's a pretty strong initiative to drive some of those initiatives to help with this margin mix.

Yes, big ones were financial insurance. I think Brett mentioned it, service, brokerage, marina. So marinas, we've been investing in of late. So that's growing nicely. F&I is a very important part of an ideal business, and we've -- we always do a good job there. We're just trying to up our game in all these areas. Same with service with the Hall Marine acquisition. They're a heavily focused service organization, actually, as is Island Marine. So some of the acquisitions we've done have helped. But just the training and the focus and the efforts that we've put into those higher-margin businesses. In a smaller quarter, you get it -- they're on display better, and so it really helped to drive some of the gross margin growth. Along with product margins, product margins did well in the quarter as well. So it's a 2-pronged approach, really.

So obviously, it's just a focus on conversion rates or add on to those when you sell a boat, those types of things?

Yes, yes, I will say another thing. I mean, when you have -- when you're growing at 28% same-store sales growth or we've been at 44% growth quarters, it's hard for those higher-margin businesses to keep up. And so when you have a quarter that -- with a more reasonable -- a normal rate of growth, it's -- those businesses catch up. And this is the quarter where we were flat in same-store sales. So that's part of it. But the bigger part, I think, is the efforts we put around those areas, the investments we've made in those areas, whether it's marinas or acquisitions and then also product margins.

So is it -- not to belabor the point there, but is it fair to say that the sales people and people involved in those categories, once they have the training and then [indiscernible], it's easier to put those out there?

Absolutely.

And then last question for me. Just Bill, what do you see as far as timing on Sea Ray? Do you think that can stick to the first half from what do you hear and what you see at this point?

That's what they have indicated is -- what they would like to see happen was -- is within the first half. And I believe that's achievable, but we'll have to wait and see. It's really under their control.

For our final question, we'll move back to Scott Stember with CL King.

Just to clarify, the guidance of $1.30 to $1.40 includes $0.23 from the first quarter?

Yes, that's correct. So you ignore the $89,000.

All right. Ladies and gentlemen, that does conclude today's question-and-answer session. I'd like to turn the floor back to Mr. Bill McGill just for any additional or closing remarks.

Yes. Thank you, Operator. And in closing, I'd again like to thank all of you and for your continued support and your interest in MarineMax as well as our team. We are available today if you have any additional questions. If not, we hope to see many of you at the New York Boat Show, which starts today. Thank you.