OneWater Marine Q4 2023 Earnings Call Transcript

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Provided by Quartr
November 16, 2023

There are 10 speakers on the call.

Operator

Morning, and welcome to 1 Water Marine's Fiscal 4th Quarter and Full Year 2023 Earnings Conference Call. Am joined on the call today by Austin Singleton, Chief Executive Officer and Anthony Axluth, 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 Warm Water 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 forward looking statements. Factors that might affect the future results are discussed in the company's earnings release, which can be found in the Investor Relations section on the company's website and in its SEC filings.

Operator

The company disclaims any obligation or undertaking to update 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?

Speaker 1

Thanks, Jack. And thank you everyone for joining today's call. I would like to begin by thanking the One Water team for their solid execution The challenging operating environment despite the return to historical buying patterns and normalized pricing, we delivered 2. Furthermore, the team delivered same store sales growth of 3% for the full year. For the quarter, same store Sales of 14.6% significantly outperformed the industry, which market data indicated was down high Full year revenue from our higher margin service parts and other sales grew 26%, which helped us offset the expected decline in new boat margins as the industry returned to normalized pricing.

Speaker 1

Margins in the Q4 were in line with the Q3, which is encouraging. Overall, we believe that margins will continue to fluctuate with seasonality and model mix, but it does seem to feel like boat margins were stabilizing. Wind Water's proven Track record of managing through various economic cycles surface well during 2023. Over the past year, our proactive and aggressive approach to inventory resulted in inventory levels at 19 weeks on hand compared to an industry average of 25 weeks on hand. We continue to aggressively work down inventory saving on interest expense and other carrying cost.

Speaker 1

This positioned us with a good supply model year 2024 boats compared to 2023, which provides a more compelling sales opportunity. This competitive positioning in a market flooded Despite the difficult banking environment, we were able to increase our floor plan facility by $100,000,000 to a total capacity of $650,000,000 This support the business and recent completed acquisitions. It's important to note that while same store sales inventory hasn't grown in just greater flexibility especially as we integrate the dealers we have acquired over the past few years. We also completed a sale leaseback agreement for Rosioli Yachting Center, which bolstered our cash flow and allows us to sharpen our focus on Sunseeker Yacht sales, warranty and service operations. The proceeds from the sale were used to pay down a portion of our long term debt and to acquire the remaining 20% interest in Quality Boats located on the West Coast of Florida.

Speaker 1

As a reminder, we first acquired a major interest back December of 2021 and have been pleased with Quality's performance in one of the most attractive boating markets in the country. On the M and A front, the deal pipeline continues to be attractive and our strong balance sheet 5, drive power for the right deal. While we are seeing plenty of activity, we are being extremely selective Every opportunity to find the right dealership to add to our portfolio. In summary, I'm proud of our team's With that, we'll turn it over to Anthony to discuss business operations.

Speaker 2

Thanks, Austin. Despite the normalizing sales environment, our team Boat shows, including the Fort Lauderdale International Boat Show, which launched strong deck activity. While we're too early in the boat show season to draw In conclusion, we are off to a good start. Turning to our higher margin businesses, finance and insurance income for the 4th quarter We're getting used to higher interest rates and credit continues to remain widely available and widely used. We Where we sit today, our customers are generally adjusting to higher cost of financing.

Speaker 2

They're both intend to be somewhat insulated from interest rates and economic Overall, we believe our retail strategies position us to continue to outperform the industry. With that, I'll turn the call over to Jack to

Operator

Thanks, Anthony. Fiscal 4th quarter revenue increased 13% to $451,000,000 in 2023 from $398,000,000 in the prior year quarter. New boat sales grew 12% to 2 $4,000,000 in the fiscal Q4, while pre owned boat sales increased 36% to $92,000,000 We are pleased with the pace of boat that have outperformed industry reports despite the challenging macroeconomic environment. Revenue from service parts and other For the quarter increased 1% to $82,000,000 compared to the prior year and finance and insurance revenue grew 2% to $13,000,000 in the 4th quarter. These sales gains generated over 14% same store sales growth for the quarter, which significantly Stacy Industries.

Operator

Gross profit decreased 6% to $119,000,000 in the 4th quarter compared to $126,000,000 in prior year, driven by the normalization of gross margins on boats sold. Gross profit margin appears to be stabilizing when compared to the June quarter that has declined from the Q4 of last year. We now expect margins to fluctuate with Seasonal patterns and model mix. In the pre COVID era, we typically benefited from stronger margins during the summer selling months with a mix shift the higher unit volumes and lower ASP as opposed to the slower winter months where the mix shifts to higher ASPs with 4th quarter 2023 selling, general and administrative expenses increased to $85,000,000 from $80,000,000 SG and A as a percentage of sales was 18.8%, down 120 basis points from the prior year driven by the variable cost structure of the business, cost optimization and integration efforts of the acquired parts and service businesses. In the Q4, the company recorded a non cash impairment charge of $147,000,000 The charge is primarily related to the write down of goodwill and identifiable tangible assets that were recorded in our distribution segment and was largely driven by the recent decline in the segment results, the stock price and the overall We believe there's tremendous value in our distribution segment, which will be realized as part of our long term growth strategy.

Operator

As a result, We posted an operating loss of $117,000,000 compared to income of $40,000,000 in the prior year. Net loss for the fiscal 4th quarter totaled 111,000,000 or $6.89 per share compared to net income of $22,000,000 or $1.28 per diluted share in the prior for the year. Excluding the impairment charge and other adjustments, we reported adjusted EBITDA of $28,000,000 compared to $45,000,000 to $45,000,000 in the prior year. We have also introduced a new metric adjusted earnings per share to assist with the comparability with the results. Accordingly, for fiscal Q4 of 2023, our adjusted earnings per diluted share was $0.42 compared to $1.68 in 20.72.

Operator

Turning to our full year results, total revenues for the year 2023 increased 11% to $1,900,000,000 compared to the prior year, driven by an increase in the average unit price of both new and pre owned boats, an increase in the unit sales of pre owned boats and sales growth from Higher margin businesses, same store sales increased 3% in fiscal 2020. Additionally, service parts and other revenue increased 26% to $322,000,000 for the fiscal 2023, driven by contributions from our recently acquired businesses and dealer operations. Full year 2023 gross profit decreased 3% to $535,000,000 compared to the prior year as a result of industry wide normalization of boat pricing, partially offset by meaningful contributions of acquired parts and services. Gross profit margin for fiscal 2023 was 27.6%, a decline of 4 10 basis points compared to fiscal 2022. Selling, general and administrative expenses in fiscal 2023 increased to $346,000,000 or 17 point 8% of revenue from $302,000,000 or 17.3 percent of revenue in fiscal 2022.

Operator

The increase in SG and A as a percentage of revenue was driven by the return of more traditional promotional environment and higher costs associated with our prior service parts and other businesses. We will continue to moderate costs with for a variable expense structure and bring the higher expense structures of the acquired businesses in line with the legacy business. Full year 2023 operating income fell to $18,000,000 compared to the prior year's operating income of 2 $1,000,000 primarily driven by the $147,000,000 impairment charge reported in fiscal year 20 Net loss for fiscal year 2023 was $39,000,000 or 2.69 per share compared to net income of $153,000,000 or $9.13 per share in the prior year. The business Adjusted EBITDA of $167,000,000 for the fiscal year 2023 and adjusted earnings per diluted share of $5.10 compared to $10.55 per diluted share in 2022. Turning now to the balance sheet.

Operator

On September 30, 2023, the total liquidity continues to be in excess of $100,000,000 including $85,000,000 of cash and availability under our credit facilities. As Austin mentioned earlier, we entered into a sale leaseback transaction disclosed on September 30 that did not fund until October 2, as such, the $45,000,000 proceeds reflected as receivable on our books at the close of the year. While the sale has a slightly negative impact on adjusted EBITDA, Overall, it increases cash flow on an annual basis. Subsequent to year end, we used $25,000,000 of proceeds to pay down long and the balance of purchase and non controlling interest of quality 30 was $610,000,000 compared to $373,000,000 at September 30, 2022. As a result Improved lead times and industry normalization, our boat inventory has returned to pre COVID levels and boat units are up less than 1% compared to fiscal 2019 on a same store basis.

Operator

Long term debt currently stands at 4 $58,000,000 Our net debt to adjusted EBITDA ratio is 2.2 times. We are comfortable with our liquidity and leverage position and we'll continue We monitor the macro environment as we manage our balance sheet. Looking ahead to 2024, we expect demand Margins continue to moderate to more traditional seasonal cycles and are not assuming a major economic downturn or recovery as part of outlook. We anticipate same store sales to be up low to mid single digits. We expect adjusted EBITDA to be in the range of $130,000,000 to $155,000,000 and earnings per diluted share to be in the range $3.25 to 3.75 We will exclude stock based compensation and will remain part of our definition for both guidance and results on a go forward basis.

Operator

We feel this methodology is more in line with industry standards and provides better insight into the company's true performance. Our fiscal Q4 and full year 2023 results are provided under the historical definition, but I'd like to direct our investors to the reconciliation tables in this morning's press release for further explanation of these We will also continue to explore opportunities like the sale leaseback transaction, which improve the balance sheet and We remain disciplined in our approach and unwavering our commitment to drive long term value for shareholders. This concludes our prepared

Speaker 3

Our first question comes from the line of Michael Swartz with Chorus Securities. Your line is now open.

Speaker 4

Hey guys, good morning. There was a lot of static on the line during the prerecorded comments, so I apologize. I missed a few things. But In terms of the I guess the transaction, the sale leaseback combined with the purchase of the non controlling interest in quality, Did you quantify or could you quantify what I guess that actually means to the P and L or to guidance for 2024?

Speaker 5

Yes. When you look at it, right, so when you look at our 2 divestitures we had in late September, That was about a $3,000,000 hit to EBITDA. There's no the purchase of the remaining A portion of quality doesn't impact EBITDA, but it certainly will it impacts cash flow, right, because we were having to pay out earnings of that business through distribution. So it nets out the whole those two transactions end up netting out a positive About a $3,000,000 to $5,000,000 cash flow when you look at the reduced interest cost and the reduced distributions even though we have those lost earnings.

Speaker 4

Okay. Okay, that's awesome. Thanks, Chuck. And then just maybe as it pertains to your broader commentary On fiscal 'twenty four guidance, I mean, I think you said you expect a normalization of, I guess, seasonality and margins. Should we be thinking about on the new boat side, should we be thinking about new boat margins kind of getting back to that high teens, whether that's 18%, 19% level going forward?

Speaker 5

Yes. I think if you look at the last two quarters, that's kind of where we've been. We've been right around 20. So I think in that high teens is kind of where it seems it feels like it's normalizing. Certainly, as we go forward, what that means is the June September quarters, we had that reset on new boat margins.

Speaker 5

So now as we look into Q1 and Q2 of next year, right, we're up against much higher comps in terms of that new boat margin. And so I think that will certainly as you think about modeling and As you lay out the quarters, you got to remember those, we still need those first half of the year kind of to reset on the margin standpoint. And so that means Q1, if we go back many years, I know you've been around a while, Mike, it's We can remember times when the Q1 was a breakeven type quarter. I think we'll be positive From an EBITDA perspective, but certainly as you look at net income, earnings per share, we're probably getting back to that type of environment. But that's just kind of the normal seasonality of the business where in the December quarter things slow and then they pick up With the winter boat shows and into the spring and summer.

Speaker 4

Okay, great. And then just final one for me is, I guess, just with The new store or new comp store sales, sorry, outlook for the year ahead, maybe give us Sense of what the pieces are there in terms of your industry volume outlook versus price versus maybe market share?

Speaker 6

For sure. I mean, look, I

Speaker 5

think we're always looking to exceed the industry and gain market share as we think about the industry. And I don't think anybody is expecting unit volume to be up dramatically. I think we're looking at probably more around a flat unit volume, A little bit of price increase. It's not I think that's probably the best way to characterize it.

Speaker 4

Okay. Thank you.

Speaker 5

Thanks, Mike.

Speaker 3

Thank you. One moment for our next question, please. Our next question comes from the line of Craig Kennison with R. W. Baird, your line is now open.

Speaker 7

Hey, good morning. Thanks for taking my questions as well. It seems like the big story in the last few months has been the rise in interest rates until recently. And I'm just wondering if You see in your consumer profile, a profile that's somewhat immune to those interest rate increases and then a consumer profile that really is reacting to that impact on the monthly payment. Just wondering if you see in your data where that line of demarcation might be?

Speaker 1

Craig, I don't think we really deal The products that we carry don't I think are a little bit more that buyers a little more insulated to the point, I mean, Anthony has a good number. He's kind of been playing around with this. I'll let him jump in. But I think we're a little bit more insulated and it's not affecting our virus Now one thing I do want to point out is, I mean, we spend a lot of time and effort in training and making sure the process that we've had in place for years is the best in the industry that gives us and keeps us in that mid-sixty percent penetration rate on financing, Well, I think the industry is much, much lower than that. And if we didn't work and have a process that we, I mean, enforced with the Iron Fist, I don't think we would be that high.

Speaker 1

And even as high as we are, we still feel the majority of the customers or financing, they're just getting their money from somewhere else. So, Anthony, you want to jump in on that stuff that you kind of played around with?

Speaker 2

Yes. I mean, if you look at it, at $100,000 mark is basically when you take all the noise of the big boats out. From 3 years ago to today, it's about $183 a month difference in the payment. And really we're not seeing people back away from $183 More a month than they did 2 or 3 years ago. So that's really what the math comes down to when you take 3 percentage points over 240 months, it's $183 more a month that the consumer is having to pay.

Speaker 2

So we're not seeing anybody falter or back away from that at all.

Speaker 7

And I think I heard during your prepared remarks, Anthony, something with respect to the F and I penetration rate. And I guess I'm curious, How does the F and I penetration rate change over time? I know it's a very good number for you. I think you said over 60%. But I'm curious if Consumers who have the option to take it or not just based on their own personal situation rather than the need to finance a boat, if you see your penetration kind of slip a little bit?

Speaker 2

No, actually in the quarter, our new boat Penetration was at 70%. We honestly believe that about 90% of all customers finance, just Maybe not all through us. They're borrowing against their own money. They're borrowing against their HELOC on their home or what have you. They're not actually fully paying cash For the boat.

Speaker 2

So we just try to over the years, we've our target has always been 65 plus percent And our new boat finance penetration rate for the Q4 was actually 70%. It's just a process That is in place in our way we sell.

Speaker 1

I think real quick, Craig, one thing like When we talk about this process, it's pretty easy if you train and you've got not only the business manager, but the sales guys, if Talking start setting this up from the beginning, it's not hard to tell somebody, hey, this is a simple interest loan, no prepayment penalty. If you're buying a $200,000 boat, you got $200,000 sitting over here somewhere else, so you can always pay that boat off. You can always pay it off tomorrow, but don't you think that that $200,000 could be used somewhere else at a better use. And so just crafting the way that we script and we talk to people and stuff like that, It's kind of like, yes, I can pay my boat off anytime. It's more of a luxury, but why don't I take the money and put it in the market or why don't I do this with it or why don't I keep it just as fresh liquidity.

Speaker 1

So you kind of build that story through the whole process and that's kind of one of the things that we've done over the last 7 years that's really allowed us to increase that rate. And I think that's why our penetration is higher. It's just again, it goes back to the process starting from the minute you meet the customer and it's just the little things that you add in on as you're going through the sales process to get to closing that boat.

Speaker 7

Great. Thank you.

Speaker 3

Thank you. One moment for our next question please. Our next question comes from the line of Joe Altobello with Raymond James. Your line is now open.

Speaker 8

Good morning. This is Martin on for Joe. Just wondering if we can get a little more color around the EBITDA guidance for next year. And I believe you are now including stock based comps. So I was just wondering if we can get a number or some kind of direction around that as well.

Speaker 5

Yes, no problem. Just on the stock based comp, it's about a $9,000,000 number for next year. When you look at the guide, right, and you look at where we printed this year, you think through the first half of the year And normalizing margins. So I think if you go through a process in calculating kind of what's that margin differential, Then you back out that $3,000,000 that I mentioned before for Rossioli and the Lookout divestiture. It gets you right back to a it gets you to about that $155,000,000 number.

Speaker 5

So while we're cautiously optimistic about next year, I think there are a fair amount of headwinds. We recently got some good Inflationary type news or some moderation of inflation news here in the last day or 2, but it seems like that information is People are really excited about it one day and then something else comes out 2 days later and we're back in a different camp. We're going to control what we can control. We're going to sell as many boats as we can and stay hyper focused on that, stay hyper focused on making sure we have The right inventory at the right locations that it's ready and available for sale.

Speaker 8

Got it. That's very helpful. Just another question. Guidance, does that assume the current trends when it comes to retail throughout the fiscal year or do you think they'll start improving into summer?

Speaker 5

Yes. I think there's a lot of unknowns at this point with the year as we look Towards recent boat shows and most recently with Fort Lauderdale, we're certainly encouraged. But I think it's just a little too early in The year to tell, I think as we get through the winter boat shows, often kind of that boat show season from November, Lauderdale to Miami type timeframe typically gives you a good sentiment for what the rest of the year is going to look like and what the season is going to look like. And so we're cautiously optimistic. The low to mid single digit guide is, Like I said earlier, I was assuming basically a flat unit type environment.

Speaker 5

So we're being cautious, but There's like I said, there's just a lot of unknowns with the macro that could be headwinds against us.

Speaker 6

Got it. Thank you very much.

Speaker 3

Thank you. One moment for our next question please. Our next question comes from the line of Griffin Brian with D. A. Davidson.

Speaker 3

Your line is now open.

Speaker 6

Yes, thanks. This is Griffin on for Brandon. Can you talk about any recent category trends you've seen over the last 45 to 60 days? Anything to call out there as we head into show season?

Speaker 1

Well, I mean, I don't think anything over the last 45 days to 60 days has changed. There's been any significant change. I mean, Obviously, we've had a good coming out of the good Fort Lauderdale Boat Show that's a bigger boat mix. So that's This is not a fair evaluation over the last 45 to 60 days. I think that it's really been the consumer If there's any trend that we're seeing as the consumer is shopping a little bit harder and it's pretty broad across all brands, makes, model, segments.

Speaker 1

I think when you look at the SSI data, it kind of speaks probably to the best generalization of the industry We know where you have certain segments that are doing better than others, but when you look at us, Anthony, If I'm wrong, let me know, but it just seems like everything's kind of toeing the line. It's just it's a hard fought battle out there, but I don't have we don't have any shining Or is there anything that we're like, oh my gosh, we got to get rid of these things?

Speaker 2

No, not at all. There's nothing, But we still have several of our manufacturers that continue to be very innovative that make people want to buy the boat. So there's new boats that continue to come out that are doing very well.

Speaker 6

Okay, great. And then can you just give any color on OEM promotions you've seen as of late and how those promotions may compare versus previous years? Yes.

Speaker 2

We really didn't have them in previous years. And yes, they're plentiful now. The manufacturers are Standing behind the dealers and making sure we're moving through inventory.

Speaker 1

I think the manufacturers, Going into that the month of June, I think they were we're not going to have to do this, we're not going to do this. And I think it was just that last couple of weeks of June Was a reckoning for us all and I think they understand that dealers are nervous about inventories building. They're not ordering as many 2024s And so they came out and got pretty aggressive into that into the summer. And I think they're continuing that knowing that

Speaker 9

we've got to get the inventory in

Speaker 1

the field right. I mean, and we're actually you in the field, right? I mean, and we're actually today, I'm much more positive about the industry than I was at the end of last quarter. Having a lot of conversations with Wells Fargo and how their book of business on the floor plan looks, it's looking a lot better. And if we can continue that momentum And that trend through the end of the year, Lauderdale was a good sign.

Speaker 1

Everybody was feeling really good coming out there. If that continues through the end of the year, we could go into next selling season With a very healthy industry, compared to what we thought 90 days ago. So that could be a little shining star or a bright Like that we just kind of got to wait and see what happens over through the end of the year through January.

Speaker 6

Great. That's all for me. Thanks.

Speaker 3

Thank you. Thank you. Our next question comes from the line of Noor Zascon with KeyBanc Capital Markets. Your line is now open.

Speaker 9

Hi, thanks for taking my questions. Maybe just one on the same store sales strength during the quarter. How much of that would you attribute to your customer relative to the broader industry consumer versus inventory versus operating differently than maybe the broader industry dealer base? Just any thoughts around the strength relative to the industry would be helpful. Thanks.

Speaker 1

Well, I mean, of course, we want to jump in there and talk about how our CRM system we feel gives us a leg up over Tish, our processes and the things that we do or why we're able to continue to take market share and grow. I mean, but I think a little bit of it is The consumer is still active. I'm still going to beat on the drum that it appears that a lot of people are still moving on or near water. And when people move on or near water, they want to vote. And then so that's still happening.

Speaker 1

And then you've got the churn of the what I would call the professional boater that's own several boats that kind of was out of the market during COVID because They didn't want to wait that long. They didn't want they knew the pricing wasn't going to be there forever. So I mean, it's just it's an overall good market. And I just think that our processes and our procedures help us along with that. And then we're out there for the first time, what in like 3 years With promotional rebates coming from the manufacturers as incentives, so that helps a lot too.

Speaker 1

So I think that Those two things are helping One Water kind of buck the industry and gain market share.

Speaker 9

Really helpful. And maybe kind of relatedly, I know you touched on this, but just in thoughts In terms of your thoughts around M and A, just given relative outperformance taking share, like Is the pipeline more full than it was 3 months ago or how do you think about the opportunity into next year?

Speaker 1

No, I think the pipeline is kind of held steady, just like it didn't jump up, it didn't decrease. It's just kind of been steady. I think when you look at the pipeline, the main driver behind the pipeline, which is what we said since day 1, it's In an aged industry with no exit strategy. And so as every day that goes by, things change. For us, as we look at the pipeline, We are a little bit more probably cautious right now than we should be because we feel like there's still some room for some other For the dealers that we're looking at to normalize, these next two quarters like Jack spoke about earlier, we need to adjust those margins to what They are today because they were higher in the 1st 2 quarters last year of what we would the way we look at it and some dealers are just still convinced in their head, oh no, they'll hold.

Speaker 1

They're going to come back or whatever. So there's all these little things that kind of really need to normalize. And so we do have a couple of guys We're talking to that have kind of come to the realization that, hey, yes, I'm not going to have as much EBITDA. So our approach is our multiple really hasn't changed. We're trying to get to a normalization and make sure that everybody's comfortable with how we look at what we're paying a multiple loan.

Speaker 1

And that's normalizing the higher interest rates on floorplan and across the board, making sure the margins and stuff are in line with what they're going to be on a yearly basis. So that brings their number down even further than they are. And then the biggest issue that we're wanting to make sure is we don't want to go buy somebody and have to clean up 27 weeks on hand of outdated inventory. So that inventory thing has got to kind of flush through and I think that's what's given us a little bit more of a Pause right now or continuing the pause that we've been on is, we know that 3 months from now, 6 months from things are going to look a lot different and that money that's going to come back, the EBITDA is going to continue to kind of normalize on a year to year trailing 12. So we're looking at some stuff and we're just not rushing out there to just jump in and do anything right now.

Speaker 9

Very helpful. Thank you.

Speaker 3

Thank I'm not showing any further questions at this time. I'd like to hand the Back over to Mr. Austin Singleton for closing remarks.

Speaker 9

Well, I don't really

Speaker 1

have any closing remarks. We just appreciate everybody on the call and Thank you all.

Speaker 3

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone, have a wonderful day.

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Earnings Conference Call
OneWater Marine Q4 2023
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