OneWater Marine Q3 2023 Earnings Call Transcript

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August 3, 2023

There are 9 speakers on the call.

Operator

Good day,

Speaker 1

and thank you for standing by. Welcome to the One Water Marine Fiscal Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today.

Speaker 1

Please go ahead.

Speaker 2

Good morning, and welcome to 1 Water Marine's fiscal Q3 2023 earnings conference call. I'm joined on the call today by Austin Singleton, Chief Executive Officer and Anthony Asquith, 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 1 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 the 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 filings with the SEC.

Speaker 2

The company disclaims any obligation or undertaking to update the forward looking statement to reflect And with that, I'd like to turn the call over to Austin Singleton, who will begin A few opening remarks. Austin?

Speaker 3

Thanks, Jack, and thank you everyone for joining today's call. I would like to start by commending our team for doing a tremendous job driving increased sales and maintaining flat same store sales in this dynamic and changing environment, especially as we lap a comparable period of double digit same store sales growth in the biggest quarter of the year. The selling environment deteriorated in the Q3. However, our team rose to the challenge. In the face of double digit declines In industry unit sales, we delivered flat unit sales and same store sales.

Speaker 3

With our sales pace outperforming the industry, We believe this results in increased market share for One Water. We also maintained a very healthy inventory level of 17 weeks on hand. The industry average is approximately 28 weeks and as it continues to build, Some believe the industry inventory levels will grow to 35 to 40 weeks on hand. This will undoubtedly lead to a more promotional environment and put further pressure on new boat margins. Our proactive approach of reducing inventory early will pay dividends in future quarters by reducing floor pan cost and other carrying costs.

Speaker 3

More importantly, going forward, we will have a good supply of 2024 inventory, which had a very modest price increase this year. We believe this puts us in a competitive position compared to an industry overloaded with 2023 models headed into the fall and winter. We are increasingly cautious as demand signals are pointing towards a retail slowdown. Traffic at the height of the season slowed as evidenced by declining industry units in what is considered the prime selling season. As we move out of the summer into the fall, customers may delay their purchases, especially because inventory is plentiful And there may be better deals to be had in the spring.

Speaker 3

In addition, with interest carrying costs continuing to rise and expected to stay higher for longer. This will cause a significant headwind for certain industry participants. As margins and interest rates are starting to settle into the new normal, we must start to look inward, mainly at SG and A To get back to our target EBITDA goal, while our SG and A costs as a percentage of revenue are reasonable at 16%, We have identified several areas to help offset these gross margin declines and outsized interest costs. Given all those factors, we are taking a very cautious approach to our outlook and are lowering our full year guidance. Our business is resilient and we are taking prudent action to ensure that we can capitalize on the new normal and emerge stronger.

Speaker 3

We believe that our strategic approach to exiting the season with clean inventory positions us well for the quarters to come. Additionally, the M and A deal pipeline is getting more and more attractive and there could be some steals to be had in the future. We are looking at all levels of the business and are confident that by accepting the short term pain of the industry adjustment, We have set course for a solid future and attractive free cash flow generation. And with that, I will turn it over to Anthony.

Speaker 4

Thanks, Austin. Our teams remain active during the selling season to drive solid revenue growth in a challenging market. Results were driven by double digit growth in pre owned boat sales, supported by increased trade ins over the last few quarters. For customers looking to finance their boat purchases, credit remains widely available in line with what we've been seeing throughout the year. As rates go up, the average customer does become a little more interest rate sensitive, which led to the flat finance and insurance income year over year.

Speaker 4

Our parts and service business continues to grow nicely and sales are up 23% in the quarter and 38% year to date. Our dealerships are executing well and the distribution business is starting to turn the corner on the destocking that has occurred at big box retailers over the last several months. While it has not had a material impact on our results this quarter, we are beginning to see orders from these retailers Triple in and expect them to ramp up this winter. Moving to inventory, as Austin mentioned, we are hyper focused on carrying appropriate inventory levels through the end of the selling season and into the seasonally slower winter months. Inventory as of June 30, 2023 is down modestly compared to the end of Q2 and we expect the seasonal decline further.

Speaker 4

We are continually operating at a 17 weeks of inventory on hand compared to an industry average of 28 weeks. We will enter the 2024 selling season with a fresher inventory mix than many of our competitors. This coupled with a more moderate price increase From the manufacturers, we can be extremely competitive as the 2024 models will be easier to sell than prior year models. While we are comfortable with our inventory position, some industry information suggests that inventory and overall dealer channel has built up past 2019 levels. As we move forward, we believe this will give us a competitive advantage against the other dealers.

Speaker 4

The higher carrying costs and the interest expense for dealers with aged and non current inventory creates a significant drag on their earnings and cash flows. Thus, we believe our proactive approach will benefit us significantly in the long term. As we have said before, there are many levers to pull as we adjust to the new sale levels and margin expectations. We are focused on adapting our SG and A expenses to support the current operating environment. We also expect the SG and A expenses to continue moderating as we further integrate acquired parts and service businesses.

Speaker 4

We remain focused on executing our playbook and positioning One Water for continued success in any environment. I will now turn the call over to Jack to review the financials.

Speaker 2

Thanks, Anthony. Fiscal third quarter revenue increased 4% to $594,000,000 in 2023 from $569,000,000 in the prior year quarter, yielding same store sales that were flat for the quarter. New boat sales decreased 1% to $372,000,000 In the fiscal Q3 of 2023 and pre owned boat sales increased 14% to 111,000,000 Service parts and other sales continued to positively impact our results climbing 23% to $92,000,000 driven by the contributions of our recently acquired businesses and dealer operations. Overall, gross profit decreased 13% to $159,000,000 in the Q3 compared to the prior year, driven by the normalization of gross margins on boats sold. Gross profit margin fell to 27% as a percentage of total sales.

Speaker 2

As expected, the investments made in service parts and other businesses have softened the decline in overall gross margins as boat margins normalize. Q3 2023 selling, general and administrative expenses increased to $93,000,000 from $88,000,000 in the prior year. SG and A as a percentage of sales was 16%, which was flat compared to the fiscal Q3 of 2022. The increase in SG and A expense on a dollar basis was primarily driven by higher expense structure of our Parts and service businesses as well as higher advertising expenses compared to the prior year, which supported our increase in sales. These increased costs were mostly offset by a variable cost structure where expenses have started to adjust down with the declining gross margin.

Speaker 2

As the industry normalizes, our flexible SG and A expense structure is a lever we can pull to drive future profitability. Operating income decreased to $60,000,000 compared to $88,000,000 in the prior year and adjusted EBITDA was $60,000,000 compared to $95,000,000 in the prior year. The decline in adjusted EBITDA was due to the reduction in boat gross margins and same store sales being at the bottom of the expected range combined with higher floor plan borrowings and related interest costs. Net income for fiscal Q3 totaled $33,000,000 or $1.95 per diluted share from $64,000,000 or $3.86 per diluted share in the prior year. Contributing to this decline was an increase in interest expense, which was $17,000,000 in the quarter, up from $4,000,000 in the prior year.

Speaker 2

This increase is the result of rising interest rates and increased average borrowings on our debt facilities. Turning to the balance sheet. As of June 30, 2023, total liquidity continues to be in excess of 100,000,000 including cash on the balance sheet, availability under our revolving line of credit and floor plan facility. Total inventory as of June 30, 2023 was $573,000,000 and has increased year over year as the supply chain has come back online and as we integrate our recent acquisitions. Our inventory remains healthy at approximately 17 weeks on hand and we expect inventory will continue to decline sequentially until we begin the seasonal build in the fall.

Speaker 2

Total long term debt as of June 30 was 458,000,000 Adjusted net debt or our long term debt net of cash was 2.2x trailing 12 month EBITDA. Our liquidity and lever position remained in a comfortable range and we continue to use cash to pay down our floor plan, which has the highest interest rate, providing us with financial flexibility as needed. Moving to our outlook, we're updating our guidance as a result of the accelerated normalization of the industry. We are guiding same store sales to be flat to the prior year and expect adjusted EBITDA to be in the range of $160,000,000 to $170,000,000 with earnings per diluted share to be in the range of $4.45 to $4.70 per diluted share. These projections exclude any acquisitions that may be completed later this year.

Speaker 2

We will Continue to maintain our current capital allocation strategy supported by our strong free cash flow generation. The M and A pipeline is robust and deals are beginning to look very attractive. As we continue to navigate this dynamic environment, we remain focused on positioning One Water for the continued long term success and maximizing value for our shareholders. This concludes our prepared remarks. Operator, will you please open the line for questions?

Speaker 1

Yes, thank Our first question comes from the line of Joe Altobello of Raymond James. Please proceed.

Speaker 5

Thanks, guys. Good morning. Yes, first question for you Austin and sort of a big picture question. Maybe where do you see pricing and margins going Next year across the industry, typically if inventory continues to build, if I look at your new book margins today, yes, they're down, But they're still above where we were pre COVID. So I guess, do you think we ultimately go back there at some point?

Operator

Yes. Thanks, Joe. Pricing, that's one thing we're encouraged about. Pricing doesn't seem to have Risen that much from the manufacturers this year. So it's a pretty modest price increase from the majority of our manufacturers, probably 3% or less and a lot of that is content or engines.

Operator

So we're super optimistic that the 2024 as far as the price increase It's going to give us a little bit of running room and let us be a little bit more competitive if this inventory stays as high as it is on the 2023. Margins, we didn't expect this what we saw in this last quarter. It really started right before Memorial Day and I kind of have set back and go, why did it happen so fast? And I think the realization kicked in for the majority of the industry when they got that April enters bill from the floor plan manufacturers in late May and they saw how much they were going to be spending every month on inventory Carrying through the summer and into the fall and that's when deep discounting came. Now what we have seen is some promotional activity from some manufacturers, Which is starting to come on board, which will help maybe ease some of that downward trend of margins.

Operator

But I would say Our comfort level where they maintain where they are right now is kind of low. I mean, I would suspect that margins are going to deteriorate a little bit more. And the hope would be that for us is that you get some promotional activity out of the manufacturers, But also that we get this inventory cleaner and then we start selling 2024s at a higher margin against 2023s because That's a pretty easy sell when you match those 2 up with the customer. Inventory is still extremely scary. We're comfortable where ours is.

Operator

The industry is high and it's going to take a while for it to flush through. But there's positive trends for July. We had a good July. We're hearing some preliminary results From out

Speaker 6

of Wells Fargo for what

Operator

the industry did in July. So maybe it will trend down. It's just going to be a thread in the needle. It's going to be kind of What we're going to have to do over the next 6 to 9 months.

Speaker 5

Got it. Very helpful on that. And then maybe a second question on M and A. You You alluded to a very attractive pipeline. It's been a while since you've done a dealer acquisition, for example.

Speaker 5

So help us understand How you're thinking about your M and A strategy here in late fiscal 'twenty three and maybe into fiscal 'twenty four?

Operator

Yes. So we've gone back and kind of looked at our deals. And I mean, it's kind of a math equation that's So high level, but if you go back and look at the deals that we've done in the past and you just took them for what they were before we get them And you adjust their pricing, just the revenues up for the price increases that we've seen on new boat sales. Now remember, the majority of the deals What we end up doing, we're looking at a mom and pop, 90%, 95%, 85% of their revenue is coming from new boat sales. So it's very new boat sales dependent.

Operator

They're really, really good at that and everything else just kind of all the other business operations get dragged along with that. So when we went back and looked at that and adjusted sales with old margins, you kind of put in what the curtailments were going to be, what interest Carrie was going to be, if you weren't making north of 5% as a net profit, you're going to run out of cash. And so we're kind of sitting back going, okay, well, this is not good. So there could be some good deals and I've already started to look at a couple Deals where it's almost like tossing the keys. It's like, if you'll take over my inventory obligation and give me a lease, it's yours.

Operator

And we think that will become a little bit better, a little bit more available to us as we work through this winter because We haven't seen we're around 8% I think on our floor plan, Jack. Is that right?

Speaker 2

Yes, that's correct.

Operator

Yes. And the majority of the industry is north of 10. And so that's going to eat pretty good as we go through the winter. So you're going to have some of these dealers that have already Thinking about selling that are I hate to use the word aged out, but have great businesses. I don't know if they're going to really want to fight through another What cycle we're going to go through.

Operator

And so it's going to be interesting over the next 6 months from an M and A perspective, but we're already starting to see those deals where, Hey, you take the inventory obligation and give me a lease and here's my business. So that's going to come our way. So maybe there is way that we can start working with some manufacturers is I don't want all that old inventory. So hopefully, we can partner up with some manufacturers that help us do that, especially if the dealers can So next 6 to 9 months on the M and A side might be interesting.

Speaker 1

Thank you. One moment for our next question. This question comes from Michael Swartz of Truist Securities. Please proceed.

Speaker 7

Hey guys, good morning. Maybe just one for you Jack quickly. The flat comp store sales in the quarter, What was the composition of that units versus pricing?

Speaker 2

Yes. So that was units were just Slightly negative, price was slightly positive.

Speaker 7

Okay. So it does sound like you gained market share, It also sounds like at least directionally you're talking about things getting worse in the quarter and particularly since when you gave guidance in early May. But I mean, we've obviously seen the SSI for May, June and your commentary for July seems pretty positive. So I guess, is this just more of a, 1, pricing promotion has gotten worse. 2, you guys are planning to take it on the chin a little bit more than you maybe thought and reduced inventory So that you're in a better environment going into fiscal year 2024.

Speaker 7

Did I frame that okay?

Operator

100%. 100%. This is a the competitive landscape going into Memorial Day, You could see it and then by the time we got into June, you were fighting, you were scratching for every deal. And it got to the point where We would talk to them, build the relationship, give them a price, they'd leave, they'd come back 3 days later with a Competitor with a much better price. We try to work them on increases and benefits and sell them and give them a reprice.

Operator

They leave for 4 or 5 days, they come back with a cheaper price. I mean, it was really we worked every deal till there was no glove left And that's 100% what we saw.

Speaker 2

Yes, Michael, I would also say, as we exited last quarter, right, we had a double digit Same store that we achieved in the quarter and felt it was going to also pull back. I think coming in flat was below our expectations at the time. And like Aslan said, I mean that The market slowed, price sensitivity escalated and we were fighting to Keep it unit sales roughly flat.

Speaker 7

Okay. And then it sounds like In terms of overall inventory, it doesn't sound like you're uncomfortable with where you sit necessarily today with 17 weeks on hand, but It sounds like you're more kind of targeted on or concerned around maybe model mix within that inventory. So Do you have any metrics or targets by the end of your either fiscal year end or calendar year end of where you want to be in terms Maybe other weeks on hand or just percentage of your new inventory that's model year 2023?

Operator

Yes. That's what we're focused on. Jack, can you take that? Yes. No, I'm sorry.

Operator

Let me take this real quick. Inventory weeks On hand, it's not really the that's the message that we measure to compare the issue. But we are getting truckloads of crews going forward to the Manufacturers are screening for orders and we're already getting a lot of 23, 24, so that's 17 weeks on hand. If you look at the inventory that's actually costing us money, that's the 2023 inventory. And so as long as that continues to Run down fast and we can't say 2017 that it's because we're receiving 2024s.

Operator

That sounded me because that really doesn't have a carry cost to us. Jack, you were feeling anything there?

Speaker 2

Yes. No, I'd I say we're very comfortable in the mix of that inventory, 23 versus 24 is really key because what happens As we roll out the rest of this calendar year, right, the '23s are still still feel very current when I'm selling it in 2023.

Operator

But when

Speaker 2

we get into the springtime, which a lot of dealers are going to be carrying 2023 into The spring boat shows, some of the winter boat shows, we're going to have our 2023 inventory pretty lean And as we work through it over the next several months. So it's that composition that makes a huge difference. And most As well, right, when also I was talking earlier about pressure on other dealers, as that inventory gets older, they're having to make Pay down the floor plan balance on that boat in a period of time where there's low cash flows and having to pay that 10 plus percent interest Plus curtailments on that boat in November December when sales are seasonally We'll put pressure on them to liquidate those at lower prices. So we're Our position, we just not 100% sure where the industry will be.

Speaker 7

Okay. That's super helpful. Thank you.

Speaker 1

Okay, thank you. One moment for our next question. This question is from Kevin Condon of Baird. Please proceed.

Speaker 8

Hi, good morning, everyone. Thanks for taking my question.

Speaker 5

I wanted to ask

Speaker 8

a little bit about if you're seeing anything across different categories or I guess value versus premium parts Of your offerings, I think earlier this year, you noted that the premium end was faring a little bit better. And I just wanted to ask if that was still the case. And then on a related note, if you've been seeing any pushbacks from customers around just the affordability of boats given the last 2, 3 Plus years of price moves and just if there's anything that manufacturers or dealers are doing to try to address those affordability concerns. Thanks.

Operator

Yes. I'll jump in on the price. I mean, storage categories, though, I mean, the SSI data, I think, is the best Way to look at that, I mean, we're not seeing anything that's different than what the SSI data is showing from a category. I mean, you can look at it and say One thing I would say is we're a big pontoon dealer. So pontoons have been very good for us.

Operator

I think the SSI data shows that down a little bit. You just look at the SSI data and we're kind of in line with that from a segment perspective. The premium value, that's a really tricky deal because What is considered premium? We consider the majority of our brands premium for where we're selling them. But then there's also this thought that premium is just bigger.

Operator

It's just like it's premium 80 feet and bigger, 60 figures bigger success. So when you look at the 25 foot pontoon boat that's $200,000 we consider that premium. So Premiums have held up well, but really what's held up better than anything is the boats that have a longer build time. So if you can build a boat in 8 weeks versus a boat that takes 22 weeks to build because it's a more complicated build, there's less supply. So that demand is still there and those are the units that are still sold out into the future.

Operator

We still have that. It's the ones that they can build quickly. I don't even know quickly, it's the ones that they can that are really kind of like production instead of sort of build time that are still premium, But they're the ones that we've got more inventory on. So premium is definitely holding up because we've got a longer build time On the bigger stuff, but I mean, we're not seeing Anthony, I mean, it's just kind of generic across all brands and segments right now. I mean, it's not

Speaker 4

Yes, I would say the premium stuff is holding up to answer this question. The premium stuff is holding up very well. The entry level stuff and the people that are more conscious for financing are being they can go away, they're just being a little more cautious With the rates have risen quite a bit, but they're still selling. They haven't shut off by no means, but Our premium inventory is still selling very well.

Operator

And real quick on the pricing. I think we're seeing the manufacturers understanding that by the price increases we got this year. Like I said, we have the majority of our manufacturers accept 3% and there's content in on that 3%. So we almost feel like the majority of them are flat or close to flat. And that's a good thing.

Operator

But yes, low prices over the last 3 years,

Speaker 2

Thank you.

Speaker 1

Thank you. Our next question please. One moment. This is our last question coming from Griffin Bryant of D. A.

Speaker 1

Davidson. Please proceed.

Speaker 6

Hi, this is Brian Rolle with D. A. Davidson. Just one question. You had talked about seeing increased promotional activity from the OEMs.

Speaker 6

Could you talk about what you're seeing in terms or how that's Evolve maybe from beginning of the summer to where we're at right now and maybe from both a retail and wholesale incentive perspective given What's going on in terms of dealer inventories?

Operator

Yes. I mean, I think they've all kind of come out with it when they're saying Stuff they've done in the past. I mean, it starts off with like, hey, there are special rebates for boats, but you sell 1, you got to buy 1. And so like you get this discount, but it's only ordered both. So if you have a 2023 and you sell it and you order another 2024 to Place that, you get a $2,000 $5,000 $8,000 discount off for 2024.

Operator

That's kind of where it starts. And then we've seen it morph into the more incentives just to move current inventory. No, I think Malibu came out with their it's not a layaway program, but similar to that, I think it's been super successful. They're all starting to kind of Go back to where they were pre COVID when inventories were built and they needed to move that up and it's just kind of a transition where it starts off light It's kind of like you sell 1, you buy 1 and then it's like, okay, we need to accelerate that. So this is just discount.

Operator

And I accept that and continue to ramp up as we get into the To the fall and winter season. I think a lot of the manufacturers orders are leaning right now and it's because people are looking at that interest statement the pork wing companies going, oh my gosh, that's a big number and we've got to get rid of this inventory.

Speaker 6

Okay, great. And just one follow-up. I know you have exposure to the pontoon industry, but also the skiweight category. And I know the SSI data there has been a little weaker. Could you Comment on what you think has been going on in that portion of the industry?

Operator

Yes. I mean, I think a little bit of it's price driven. They've gotten pricing. But I also think reverse drive. When you go and you look at a Malibu or MasterCraft or CorrectCraft, We're making that number to $300,000 and you can go buy a cobalt with a reverse drive that has a lot of the same abilities.

Operator

It's not a competitive So if you're going to be wake boarding, surfing, skiing 85% of your time, that fire is still buying The inboards, the towboats. But if you're only doing it 20% to 30% of the time or 40% of the time and everybody likes it, Those reverse straps are really kind of starting to kick in and really are related to consumers because There's different it rides a little bit better in the left water, it's a little bit faster on the top end and it's less expensive. So when you like to look at the cobalt reverse drive, I mean, we're doing those folks are almost they're hard to keep in stock right now. And so that's been a little bit, I think, of a decline. And it actually has a little bit to do with it also.

Speaker 2

Austin, I just would also add On the pontoon segment, right, that's a really wide segment with some a lot of units and value units that we don't And so I think our higher end pontoon consumers probably a little more resilient and we're doing a little bit better in that category than The SSI number suggests.

Speaker 6

Okay, great. Thank you.

Speaker 1

Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.

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Key Takeaways

  • Q3 revenue rose 4% to $594 million with flat same-store sales, as new boat sales dipped 1% but pre-owned boats grew 14% and parts & service climbed 23%.
  • OneWater delivered flat unit sales against double-digit industry declines, signaling an increase in market share despite a challenging selling environment.
  • Inventory was proactively trimmed to 17 weeks on hand (versus a 28-week industry average), focusing on fresher 2024 models with modest price hikes to stay competitive amid anticipated promotional pressure.
  • Gross profit fell 13% to $159 million (27% margin) and adjusted EBITDA dropped to $60 million, driven by normalized boat margins and higher interest expense, while SG&A remained a flexible 16% of sales.
  • The company lowered full-year guidance (adj. EBITDA $160–170 million; EPS $4.45–4.70) and is optimizing SG&A, confident in free cash flow and eyeing attractive acquisition opportunities as dealer stress creates potential bargains.
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Earnings Conference Call
OneWater Marine Q3 2023
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