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OneWater Marine Inc. (NASDAQ:ONEW) Q1 2023 Earnings Call Transcript

OneWater Marine Inc. (NASDAQ:ONEW) Q1 2023 Earnings Call Transcript February 2, 2023

Operator: Good day and thank you for standing by. And welcome to the OneWater Marine Inc. Fiscal First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jack Ezzell, Chief Executive Officer. You may begin.

Jack Ezzell: Good morning, and welcome to OneWater Marine's fiscal first quarter 2023 earnings conference call. I'm joined on the call today by Austin Singleton, Chief Executive Officer; and Anthony Aisquith, President and Chief Operating Officer. Before we begin, I'd like to remind you that certain statements made by management in this morning's conference call regarding OneWater Marine and its operations may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many of which are beyond the company's control, which would cause actual results and events to differ materially from those described in the forward-looking statements.

Factors that might affect future results are discussed in the company's earnings release, which can be found on the Investor Relations section of the company's website and in its filings with the SEC. The company disclaims any obligation or undertaking to update the forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. And with that, I'd like to turn the call over to Austin Singleton, who will begin with a few opening remarks. Austin?

Austin Singleton: Thanks Jack and thank you everyone for joining today's call. Before we get into the quarter, I want to thank our team for their continued efforts in response to Hurricane Ian. We continue to help our communities impacted by the storm to rebuild, but the process is far from over. As of today, all of our stores are open, but several are operating in limited capacity. We expect sales activity in areas heavily impacted by the storm to remain lean until homes, docks, and storage facilities can be repaired. Lost volume has yet to be recovered, as many customers still do not have anywhere to put their boats. The timing of this recovery demand is difficult to project, but we will continue to support our team and the community.

Turning to our quarterly results, the first quarter played out largely in line with our expectations. We once again delivered record revenue in the quarter and gross margins of 30%. Importantly, we saw an 86% growth in our service parts and other businesses, which is demonstrating our evolving business model that is diversifying us away from the more cyclical boat buying cycles. As we discussed last quarter, our customers are returning to normal pre-COVID buying patterns. With the supply chain improving and lead-times decreasing, many customers no longer feel the urgent need to preorder their boats months in advance of the season. That said, overall demand remains healthy, as evidenced by our backlog that is up over the prior year, strong store traffic, and robust activity at the boat show so far this season.

I want to spend a few minutes discussing quarterly results. And what a returns historical seasonality means for OneWater. Sales for the first quarter grew 9% on top of a 57% increase in the prior period. Same-store sales were down 14% in the quarter, following same-store sales growth of 28% and 38% in the first quarter of 2022 and 2021 respectively. In a typical seasonal environment, we have realized lower sales and higher levels of inventory in the first quarter, which is typical of the smallest quarter of the year. Looking back to the 2017 to 2019 period, the December 31 quarter represented about 15% of our annual sales and 10% of our annual EBITDA. Our parts and service business continues to grow organically and has also benefited from a number of strategic acquisitions over the last 18 months.

The diversification of our businesses supported gross margins in the quarter and will enable us to maintain our track record of profitable growth regardless of industry or economic cycles. During the quarter, we also completed the acquisition of Taylor Marine centers and Harbor View Marine. Taylor Marine is an award-winning dealer with strong reputation and complements our presence in the mid-Atlantic US. While Harbor View fortifies our presence in the Florida Gulf Coast market. The acquisition pipeline remains robust and going forward, we will remain opportunistic, while we monitor the macro economic environment and imply a thorough analysis to any potential transaction. Based on where we stand today, all signs are pointing to an upbeat selling season in 2023.

Boat shows to-date have been strong, traffic is good, and demand remains intact. Additionally, gross margins are holding up and customers are not resisting the current interest rate environment. At the same time, there's considerable macro-economic uncertainty and all the recent industry data is down. It is not clear if it is the impact of historical seasonality or consumer demand. With so many unknowns, we think it is prudent to revise our outlook for the fiscal year. However, we believe consumer sentiment holds interest rates level out and macro conditions improve, we have an opportunity to outperform. While we know there are a lot of questions out there around the health of the consumer and the current demand levels, we will be back here in a few months with a bit more clarity on the peak selling season.

Finally, we announced last month and Mitch Legler will retire as Chairman of the Board. I would like to thank Mitch for his tremendous contribution and guidance to OneWater over the last several years through the IPO and a period of rapid growth. In line with our succession plan, John Schraudenbach, currently serves as Vice Chairman of the Board, and we expect John to be elected as Chairman at our upcoming annual meeting. I look forward to working with John in his new capacity and ensuring the continuity of leadership and governance. With that, I will turn it over to Anthony.

Anthony Aisquith: Thanks Austin. During the quarter, we experienced a change in customer buying cadence, rising interest rates, and a decline in the macro economic environment and the impacts from Hurricane Ian, yet we still capitalize on the solid demand to drive growth. We were able to key in on consumer trends at several boat shows during the quarter, where we logged strong activity. Manufacturer rebates and discounts made a return to boat shows, resulted in a more normalized pre COVID pricing environment. Additionally, customers did not seem to be deterred by higher interest rates. In fact, a vast majority of the sales made at the Atlanta Show were financed. As Austin mentioned, with the normalization of certain parts of the supply chain, many customers no longer feel the sense of urgency to lock in a deal months in advance.

This is especially true for the smaller standard units for inventory has normalized. However, there are still extended wait times for larger, more sophisticated votes in excess of 30 feet. Fortunately, we have the right portfolio of innovative products, a strong sales team, and the right tools to get customers across the finish line into the boat of their dreams. Total inventory at the end of the first fiscal quarter increased 112% to $527 million compared to a year ago, driven by the return of seasonal inventory built and acquired businesses. While we remain optimistic about the future, we're also closely monitoring our inventory levels in relation to retail sales. Should trend shift beyond expected seasonality, our proprietary tools will allow us to adjust our orders and inventory stocking levels.

Furthermore, our flexible operating model enables us to swiftly align our cost structure with the new levels of demand. We have said it several times, we have not seen a material shift beyond return to seasonal -- seasonality. Retail and boat show demand remains robust, but we continue to keep our fingers on the pulse of the consumer at activity to identify and make any necessary changes. Our service parts and other business contributed significantly to the sales and gross margins in the quarter. Despite macro-economic pressures and seasonality, our service parts and other businesses was also challenged by the destocking that occurred with big box retailers that had a buildup inventory in response to the supply chain delays. This area of the business continues to be an important growth driver for OneWater and now accounts for 16% of the total revenues and 22% of the gross profit on a trailing 12-month basis, consistently growing over the last few years.

This contribution remarks a significant shift in our diversification, offering a stable high margin revenue profile to OneWater. As we return to a more cyclical environment for boat sales, we will rely on the stability of this business to smooth out our overall gross margins. In summary, demand remains healthy as the industry returns to traditional sales cycle and the supply chain continues to recover. Our flexible business model allows us to adapt to the dynamic operating environment to continue providing excellent service to our customers, while driving value to our shareholders. I will now turn the call over to Jack to review the financials.


Jack Ezzell: Thanks Anthony. Fiscal first quarter revenue increased 9% to $367 million in 2023 from $336 million in the prior year quarter despite a 14% decrease in same-store sales. New boat sales fell 2% to $232 million in the fiscal first quarter of 2023 and pre-own boat sales increased 4% to $56 million. We continue to benefit from our emphasis on growing our higher margin parts of our business, which contributed substantially to our results in the quarter. Service parts and other sales climbed 86% to $70 million, driven by contributions from our recently acquired businesses. Finance and insurance revenue continues to pace with new and pre-owned boat sales. Gross profit increased 9% to $110 million in the first quarter compared to the prior year, primarily driven by margin insulation offered by our service, parts, and other revenues, partially offset by a shift in the mix of the size of the boat sold.

Gross profit margin remained flat at 30% compared to the prior year. First quarter 2023 selling, general, and administrative expenses increased to $78 million from $59 million. SG&A as a percentage of sales was 21%, an increase from the fiscal first quarter of 2022. In a normal seasonal environment, SG&A is typically higher in the December quarter related to the level of sales and marketing activity associated with boat show participation. In addition, this year the average cost per show increase when compared to boat shows we attended in prior years. We expect these levels of promotional activity to return as we revert to a more traditional sales cycle. Additionally, we expect our SG&A to be higher than historical levels as we integrate acquired parts and service businesses.

Operating income decreased 15% to $27 million compared to $31 million in the prior year, driven by higher SG&A and expenses associated with our acquisitions. Adjusted EBITDA decreased to $28 million compared to $41 million in the prior year. Net income for the first fiscal quarter totaled $11 million or $0.61 per diluted share, down 51% from $23 million or $1.45 per diluted share in the prior year. Contributing to this decline was also a $10 million increase in interest expense, which was $12 million in the quarter up from $2 million in the prior year. This increase is a result of the rising interest rate and an increase in the average borrowing on our debt facilities. Turning to the balance sheet, as of December 31st, 2022, total liquidity was in excess of $100 million, including cash on the balance sheet, availability under our revolving line of credit, and floorplan credit facilities.

Total inventory was $527 million as industry-wide supply chain constraints continued to ease in the first quarter. I would like to remind you that we are currently approaching the peak of the seasonal inventory bill that typically occurs in February and March. Long-term debt as of December 31st, 2022 was $464 million. Adjusted net debt or long-term debt net of cash was 1.8 times trailing 12 months EBITDA. We are comfortable with our liquidity and leverage position and continue to monitor the macro environment as we manage our capital allocation. Looking ahead, we believe it's prudent to reduce our annual guidance to reflect the uncertainty around the macroeconomic environment and the potential impacts on the marine demand. As a result, we are now guiding same-store sales to be flat to up mid-single-digits compared to the prior year and expect adjusted EBITDA to be in the range of $200 million to $225 million, with earnings per diluted share to be in the range of $7.50 to $8 per share.

These projections exclude any additional acquisitions that may be completed during the year. Our strategy from a capital allocation perspective has not changed. We are focused on reinvesting in the business to accelerate organic growth, pursuing strategic M&A opportunities, paying down debt, and repurchasing shares, while maintaining appropriate levels of leverage. As always, we're methodical in our approach and we'll put our cash to work where it will drive long-term shareholder value. This concludes our prepared remarks. Operator, will you please open the line for questions.

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