OneWater Marine Inc (ONEW) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the OneWater Marine, Inc. Fiscal First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jack Ezzell, Chief Executive Officer. Please go ahead.

Good morning, and welcome to the OneWater Marine 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 could 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 in the Investor Relations section of the company's website and in its SEC filings. The company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date of 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?

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, stocks 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 fill the urgent need to preorder their boats months in advance of the season.

That said, overall demand remains healthy as evident 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 return to 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 Harborview Marina. Taylor Marine is an award-winning dealer with strong reputation and complements our presence in the Mid-Atlantic U.S., while Harborview 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 macroeconomic environment and imply a thorough analysis to any potential transaction. Based on where we stand today, all signs are point to an upbeat selling season in 2023. Boat shows today 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 is considerable macroeconomic uncertainty and although 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 if consumer settlement 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 that 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 [ICO] 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.

Thanks, Austin. During the quarter, we experienced a change in customer buying cadence, rising interest rates and a decline in the macroeconomic 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 where inventory has normalized.

However, there are still extended wait times for larger, more sophisticated boats 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 build and acquired businesses. While we remain optimistic about the future, we are 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. I've said it several times, we have not seen a material shift beyond return to seasonality. Retail and boat show demand remained robust, but we continue to keep our fingers on the pulse of the consumer activity to identify and make any necessary changes. Our service and parts and other business contributed significantly to the sales and gross margins in the quarter. Despite macroeconomic pressures and seasonality, our service parts and other businesses was also challenged by the de-stocking that occurred with big box retailers that had to build up 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 both sales, we will rely on the stability of this business to smooth out our overall gross margins.

In summary, the 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.

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-owned 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 boats 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 increased 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 rates and an increase in the average borrowing on our debt facilities.

Turning to the balance sheet. As of December 31, 2022, total liquidity was in excess of $100 million, including cash on the balance sheet, availability under our revolving line of credit and for planned credit facilities. Total inventory was $527 million as industry-wide supply chain constraint continue to ease in the first quarter. I would like to remind you that we are currently approaching the peak of the seasonal inventory build that typically occurs in February or March.

Long-term debt as of December 31, 2022, was $464 million, adjusted net debt or long-term debt net of cash was 1.8x trailing 12-month 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 an appropriate levels of leverage. As always, we are 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.

(Operator Instructions) And our first question comes from the line of Joe Altobello with Raymond James.

I guess first question, maybe a housekeeping item for Jack. The comp number, could you break that out between units and price in the quarter?

Yes. I would say that during the quarter, we saw some increase in price and then a decline in units. It was -- I'd say units would be down in the mid-single digits.

Okay. That's helpful. And then, I guess, in terms of the guidance in the quarter, you mentioned the quarter was in line with your expectations, talked about a strong selling season, positive boat show activity and healthy demand. You're cutting your guidance fairly dramatically. And I know you talked about the macro and the cloud of your outlook. But is it that much cloudier versus 3 months ago? Or are you concerned that there may be more than just seasonality going on here?

Well, I mean, I think it's too early to know that, Joe, and I think that's a little bit of our issue. I think if we were to come out today and raise our guidance or left it like it was or lowered it, I still think there's a lot of doubt out there on what we're saying. So if we have taken it to $12, people just say we were crazy, if we had left it alone, the naysayers would have still said that we're wrong. And so we went back to the model and really line items, spend a lot of time on going through.

We know there's going to be more new boat compression, margin compression, and so we kind of factored that in and just went and said, "Hey, look, let's take a conservative approach based off what we know and let's get this Friday and get it in line so that we don't have to come back next quarter or in the last quarter and adjust down again." And so I think we're just taking a little bit more conservative approach. We just don't know today -- we feel like it's seasonality because of the demand as far as Internet leads, door swings things backed up at the manufacturers, just where everything sits, it feels like seasonality, but we just can't answer that just yet. I mean, I think we'll have a lot clearer picture in 3 weeks.

Okay. So the guidance -- more than seasonality, it sounds like.

It could be, yes. I mean, jeez, we've been beat on for the last 1.5 years that we're in a recession. So I think we kind of looked at it and said, let's get this right so we don't have to keep coming back to it and make an adjustment. And so we really spend a lot of time on the model going to table what if margins compressed to this. And we kind of looked at it and took a pretty conservative approach to it just because we don't want to have to come back again.

Got it.

The only thing Joe, I'd tell you, too, on the models and just kind of looking out there at consensus. Looking at consensus, most people have Q2 higher than Q4. And again, that's not our typical seasonal cycle, right? Our typical seasonal cycle is Q1 and Q2 are the smallest quarters of the year. Q3 is the largest, and then Q4 is a little bit bigger than Q2. So there's some of that cadence out there and that I just want to point that out.

And our next question comes from the line of Drew Crum with Stifel.

So on the same-store sales, and obviously, several factors that contributed to it being down 14% in fiscal 1Q. The updated guidance would suggest that you think that metric improves over the course of fiscal '23. I just want to confirm that and understand what's driving confidence behind that assumption?

Yes, definitely, the backlog gives you some confidence to it, but it's the seasonal change, right? I mean we had a 28% and a 38% December comp the last 2 years. And so in order to return to a normal seasonal cycle, that dynamic has to change. And so we would -- I'm not surprised that it was where it was at. I think next quarter is we're up against some pretty heavy comps in the second quarter. Last year, we were 8%. We were 57% the year prior to that. So there's some tougher comps there. But I think if you look at trends were softer comps in the back half of the year in those larger quarters, I also think that in prior years, as we worked our way through the season, inventory availability became a lot leaner. And I think what you see today as you see the traditional seasonal build, we'll have boats now for the start of the selling season. And then as manufacturers send us more product and replenish, we'll have product to carry us through the end of the season versus inventory supplies falling short as we get to the September quarter.

Jack, also -- I mean January is a positive comp, isn't it?

Yes. January was positive. And again, that's -- again, we're cautiously optimistic with the data out there. I think if you look at some of the -- SSI data in December quarter, I think it averaged being down around 28%, 30%. So us being down 13% is considerably better than them. But it's just -- there's just a lot of unknowns out there, a lot of cloudiness in the forecast.

Got it. Okay. That's helpful. And then, Austin, in your preamble, you talked about M&A a little bit. I think -- just want to get a better understanding of what the current thinking or stances on that a few months ago, you decided to hit the pause button and we're going to rely on some of the January boat shows to gauge the health of the industry. Are you at a point now where you can share more definitively what the company's plans are for the balance of fiscal '23? And if so, what is the strategy?

Yes. We're probably going to end up holding tight, so there's more clarity in the macro. Like we've all said through the -- our opening remarks, answering the questions. I mean, the boat shows were good. We're hearing that not only the boat shows that we're in, but we're hearing that from other people in the industry that are doing shows that we're not in Milwaukee. Some of the other bigger shows have been pretty good and sentiment remains strong, but we're still dealing with a big inflated in our opinion, new boat margin out there. So that needs to normalize somewhat.

And I think right now, just with the overall macro for us to hold steady for the next 90, 120, maybe 180 days and kind of watch and see how this unfolds. And we're watching it on a daily basis. I mean things can change pretty quick. But I don't think we're in any hurry to go out there and do a deal just to do a deal. I think it's prudent for us to continue to build cash on the balance sheet, but we are going to be opportunistic if something that's just too good at the right price comes along. But getting back into our normal cadence is not something that we're ready to do just yet.

Our next question comes from the line of Michael Schwartz with Truist.

Just maybe a few follow-up questions on the guidance. And it doesn't look like you took down your comparable store outlook too much in the update here. Maybe give us a sense of how you're thinking about the bottom-up build with that comparable store outlook. Just in terms of your industry outlook today maybe versus where it was when you first gave guidance, pricing, mix, share gains, anything of that nature that you can kind of help us with?

Yes. I would say if I think about the December numbers, December quarter, SSI data that may -- and everything that's come out kind of related to that probably has been a little bit more negative than it was as of September. I think that all the feedback that we're seeing, like Austin mentioned, with respect to floor traffic and leads generation, et cetera, has been positive. So we're trying to be cautiously optimistic. And so I think that leads us to outperforming the industry, I think it's going to be -- I think we'll start to see unit volumes level off. And I think price will still be a factor but too much less degree than the recent years.

Okay. That's helpful. And then I think you had made -- often, you made the point that you expect new boat margins to thin, which is, I think, what most people have expected, but maybe give us a sense of as it pertains to your guidance, maybe what you're -- how you're thinking about that now maybe relative to pre-COVID or prior to -- or versus maybe some of the elevated margins we've seen in the mid-20s the past 2 years or so? Like how should we actually think about boat margins this year as it pertains to the guidance?

Yes. I'll let Jack speak to that. I mean, we threw around a bunch of numbers. I don't know what he ended up putting in the model to kind of get us to the number, what we ended up settling on or what he ended up settling on in the model. But me, Anthony and Jack, once we got done with the Atlanta boat show, we spent a lot of time talking about Lauderdale, what we've seen since Lauderdale through these first boat shows in January. And 1 thing that was pretty evident is there was a lot of promotional pricing for manufacturers, a lot more than we expected right off the bat.

We expected them to kind of ease into that, which, in a way, is good because it allowed us to maintain our margins and use those promotions as the discount. But that's like Phase 1. And so it just continues to go from there. I've said many times, 1/3 of the dealer network out there has 0 to offer the consumer but price, and they usually sell, they can usually get a sale on price the first time, and then they never sell that customer another boat because they don't have anything else to offer them.

So you'll continue to see that erode. Promotional pricing from the manufacturer usually leads the way. Once that doesn't work anymore then these I will just say these lower side dealers will start discounting on their own, so they'll start working on their margins, and we have to kind of follow suit. So when you start thinking about, let's say, 30 feet down, 35 feet and down, that will move a lot quicker than what Anthony was speaking about earlier in his opening remarks about the bigger stuff that's still got the longer build times, they still got a backlog. So we'll start to see that erode. But Jack, I don't know what you ended up putting into the model, what you ended up settling on.

Yes. I think as you look at how we ended up this quarter, obviously, as you work through the quarters throughout the year, we'll see margins fluctuate quarter-to-quarter as you sell different types of boats, different parts of the year. But I think that we're definitely discounting and bringing margins down a bit, again, not drastically, but certainly taking a haircut on them. And again, that's what we've seen to date. And that's where we're modeling it. The other thing I'll point out, right, is just to reemphasize your point, we've made a handful of times. Despite this, haircut on the new boat margins, we're seeing used boat margins hold up well. We're also seeing that our expansion into parts and service those expansions, that higher-margin business really supporting our overall margin and keeping it at that 30%.

And so I think the likelihood of us staying at that 30% plus are in and around there. 29%, 31% is a likely range.

Yes. And 1 other thing real too, we said this a lot in the past. Boat shows are our largest -- our lowest margin business. That's why we've never really liked them, I mean you got to be competitive, you got to go in there and make it worth the money in an effort that you spend on that. So you end up coming out of the boat show with some of your lowest margins. So we've got some meaty deals still in the pipeline that are coming in that are sold. We're still working as hard as we can to get every dollar out of the consumer. And that's 1 of the things that I would say that the takeaway was -- I mean, we've got to get back into the true discipline of selling and not just order taking. And we're really working hard with the team, and the team has really stepped up. I think the whole entire sales staff saw coming out of the boat shows that, hey, it's not like it used to be. We have to get back to be the elite sales team that we were and we're going to step up our game because nobody is going to beat us. But this quarter, coming out of those boat shows, that's always been our lowest margin business.

Okay. And then just 1 last question for me, maybe for Jack. I think you said inventory was at $500 million in the quarter. Is there any way to look at just in terms of the new boat inventory, maybe what that looks like on an apples-to-apples or same-store basis relative to pre-COVID? Just to give us a sense for excluding the acquisition?

Yes. We have dug into -- we've tried -- I don't have a same-store inventory number per se. And again, we've been looking at weeks on hand, we're currently at 16, 17 weeks on hand, which is influenced a little bit by acquisitions. But if I go back to '18, '19, which is -- influenced by acquisitions, we were at 24 weeks. So it's -- again, we're at that seasonal peak, right? So you'll see it at the highest as we -- from now into February, March, a lot of times, it depends on the weather as to exactly when that spring season kicks off and the volumes we get out. But I think we're close to the peak then we expect to see things go out. But I think on a comparable basis, I think the other piece, I think, that you're getting that too, right, is there's a good chunk of our inventory related to the parts and service business. And I don't have that number in front of me, but I'll work to get that out to you, maybe get it into some of the future releases.

Our next question comes from the line of Craig Kennison with Baird.

Just wanted to follow up on Hurricane Ian. I'm wondering if there's a way for you to look at markets affected by the hurricane versus markets that looked -- were unaffected by that catastrophe and maybe parse the same-store sales environment in that context?

Yes. I mean we looked at it a little bit. I looked at it more on the, I guess, I'll say the EBITDA side and those stores were down about $2 million of EBITDA, and it's -- you had a lot of -- we're still carrying a lot of expenses, paying our people, rebuilding. So I think it's certainly contributed to it. But again, I didn't want to go through a lot of effort to try to say, oh, the hurricane caused this much revenue because it just isn't something that is easy to track. And then as we move forward, right, it gets even more complicated as to when do customers come back in the market and that replenishment cycle hit. So it certainly is impacting the numbers. Like we said many a times, if we miss a truckload of deliveries the last day of the month, that could also -- a big boat or 2 can also impact same-store sales a couple of points.

Good stuff. Sorry Anthony. No, I was just saying we're seeing a lot of consumers in those markets still without docks and things like that. So there's still a lot of business to be had there.

And our next question comes from the line of Griffin Bryan with D.A. Davidson.

I was just wondering if you could talk about the availability of these boats and what the current demand looks like for them?

Yes. I'd say availability has gotten a little bit better. I think you see that a little bit in our results where pre-own was up. And I think the market continues to be strong for pre-owned. Anthony, if you have a different sense.

Yes. I mean it's something that we continually go after. I mean there is a great market, and we continue to grow the business in that direction where we have -- we're employing buyers, and that's all they do is trying to source boats and things like that. So it's -- there's a tremendous amount of upside that we continue to go after and focus on and there hasn't been any slowing of it whatsoever.

Okay. Great. And then can you just talk about demand trends you're seeing in the value segment compared to the premium segment right now?

Well, I think that as we've been talking about the seasonality, a portion of it where the value segment for the last 2 years, it didn't matter what people were buying. And I think we're going back to more of a seasonal type thing. That's why we're seeing the build in those type of boats. But at the recent Atlanta boat show a few weeks ago, the value boats were selling as good as they did in the past. So I think it's -- our business is just turning more back to seasonality...

Yes, that value customer tends to be the person who comes in on a Wednesday, and they want to be in their new boat by the weekend and a hook and roll almost. And so those are the people who -- it was pretty abnormal for those people to be customers in the December and March quarters versus coming in April 1 looking to get out of the water of the first sunny day.

Thank you. And I'm showing no further questions. So this is going to conclude today's question-and-answer session. Ladies and gentlemen, this is also going to conclude today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.