OneWater Marine Inc. (NASDAQ:ONEW) Q2 2023 Earnings Call Transcript May 6, 2023

Operator: Good day and thank you for standing by. Welcome to OneWater Marine’s Fiscal Second Quarter 2023 Conference Call. [Operator Instructions] I now like to hand the conference over to the speakers for some prepared remarks.

Jack Ezzell: Good morning, and welcome to OneWater Marine’s Fiscal Second 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 on 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 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. We delivered strong second quarter results reflecting revenue growth of 19% on top of a 34% increase in the prior year period. Sales growth in the quarter was driven by a 23% increase in new boat sales and a 28% increase in service parts and other sales. Same-store sales grew 11%, well ahead of industry reports. Additionally, our parts and service business continues to grow at a good pace despite destocking that has been occurring at the big box retailers over the past several months. The demand environment remains healthy. Boat show attendance and store traffic have been good as both new boaters and returning customers are attracted by our invaded offerings.

From our perspective, we are seeing a continued change in customer buying cadence as we return to typical seasonality. Lead times and inventories continue to normalize and the customers are shopping around to find their next new boat. We continue to see market share gains as evident by our unit growth that has significantly outpaced the industry. We are pleased to see a return of balanced growth in both units sold and unit prices. With the backdrop of a questionable macro environment, we are being aggressive as we prepare for the summer selling season. We are focused on having the appropriate boat inventory levels as we exit this selling season and roll into 2024 model year. We believe this approach will position us for continued market outperformance.

With normalization of inventory and pricing, we saw a modest decline in margins as expected. Gross margin for new boat sales decreased to 23%, down from the peak of 28% a year ago, but well ahead of the 17% range of 2019. Overall, we don’t believe margins will return to 2019 levels given the significant progress we have made to strengthen the business over the past few years. Since 2019, we have grown tremendously, both organically and through strategic M&A. We have diversified our offering by building out the parts and service business, which has grown fivefold. The strategic investment we have made to grow and diversify the business will enable OneWater to continue to outperform the industry and maintain our track record of profitable growth.

Finally, the acquisition pipeline remains robust. Deals are starting to look more attractive as sellers become more in tune with the return to seasonality and normalized margins. As always, we will remain opportunistic, yet disciplined as we evaluate any potential transactions. Overall, we feel well positioned to continue driving profitable growth and creating value for our shareholders. With that, I will turn it over to Anthony.

Anthony Aisquith: Thanks, Austin. I also would like to thank our team members for their efforts this quarter. Despite macro uncertainty and industry noise, our sales team remained active and drove same-store growth to 11%. As Austin mentioned, from where we sit, we are seeing a change in customer buying cadence as the industry returns to normal seasonal cycle. With these cycles, we build inventory in winter months in preparation for the summer selling season. It’s also important to note that our inventory has increased due to the acquisitions completed over the past 12 months. I am pleased to report that as expected, inventory peaked in February and has started its decline to the seasonal low, which normally occurs in September.

We believe that carrying higher inventory levels at this point of the year will strategically position us for the summer selling season. Our inventory weeks on hand today is lower than both industry averages and our 2019 metrics. We are taking full competitive advantage of our strong inventory management tools, which we believe will lead us to outpace the industry and further gain market share. Turning to some other trends we are seeing with customers. We continue to see strong interest in larger, more sophisticated boats over smaller value options. The average customer in the smaller boat market is typically more interest rate and price sensitive as they are more likely to be reliant on financing options to purchase their boats. With this said, we are seeing customer credit readily available even though at higher rates, and banks continue to be diligent in underwriting loans as they have been for over the last 10 years.

Our service and parts and other business continues to navigate challenging environment while delivering strong growth. As noted last quarter, our Distribution segment continued to experience pressure from the industry while destocking occurring at big box retailers who built up inventory in response to supply chain delays. We expect inventory across the channel to normalize over the course of the summer selling season, and we are well positioned to capitalize on the return of normalized demand. This area of the business continues to be an invaluable growth driver for OneWater and it’s a key piece of our diversification strategy. Overall, customers are excited about upcoming boat season and getting out on the water with friends and family. We remain focused on customer experience, strong execution from our team, great inventory management and flexible business model to guide us through the turbulent waters that may be ahead.

I will now turn the call over to Jack to review the financials.

Jack Ezzell: Thanks, Anthony. Fiscal second quarter revenue increased 19% to $524 million in 2023 from $442 million in the prior year quarter. This was driven by an 11% increase in same-store sales and revenue from acquisitions not yet included in the same-store base. New boat sales rose 23% to $355 million in fiscal second quarter of 2023 and pre-owned boat sales remained flat at $75 million. We are pleased to see new and used boat sales be comprised of a balance between unit and price growth. The higher margin parts of our business have been a constant contributor to our results. Service parts and other sales climbed 28% to $78 million, driven by our contributions from our recently acquired businesses and solid organic growth.

Finance and Insurance increased slightly, up by 3%. Overall, gross profit increased 3% to $147 million in the second quarter compared to the prior year primarily due to the growth of our higher-margin service parts and other revenue, partially offset by the normalization of gross margins on boats sold. As previously discussed, as boat margins normalize, we fully integrate acquisitions and the distribution segment stabilizes, we expect our overall gross margins to normalize in the high 20s, depending on seasonal sales trends and the mix of products sold. Second quarter 2023 selling, general and administrative expense increased to $90 million from $75 million. SG&A as a percentage of sales was 17%, which was flat compared to the second quarter of fiscal 2022.

Our increased participation in boat shows led to an additional cost during the quarter compared to the prior year as we return to a normalized season of events, promotions and shows. Additionally, higher than historical SG&A costs are anticipated as we continue to grow our parts and service businesses, which has a higher expense structure. These higher costs were partially offset by a reduction in variable expenses like sales commissions that declined due to reduced margins. Operating income decreased 18% to $49 million compared to $59 million in the prior year, and adjusted EBITDA decreased to $52 million compared to $66 million in the prior year. Net income for the fiscal second quarter totaled $27 million or $1.56 per diluted share from $42 million or $2.54 per diluted share in the prior year.

Contributing to this decline was a $10 million increase in total interest expense, which was $14 million in the quarter, up from $4 million in the prior year. This increase is a result of rising interest rates and an increase in the average borrowing on our debt facilities. Turning to the balance sheet. As of March 31, 2023, total liquidity was in excess of $100 million, including cash on the balance sheet, availability under our revolving line of credit and floor plan credit facility. Total inventory as of March 31, 2023, was $593 million. With the return of seasonality, our normal inventory build occurs during the winter months and peaked in February as the summer selling season begins. Total long-term debt as of March 31, 2023, was $463 million, net debt or long-term debt net of cash was 1.8x trailing 12 months EBITDA.

Our liquidity and leverage position remains in a comfortable range, and we are watching the macro environment closely. Moving to our outlook. We are maintaining our guidance range in anticipation of a continued trend towards seasonality. We are 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 diluted share. These projections exclude any acquisitions that may be completed during the year. We continue to maintain our current capital allocation strategy. Operating with limited windows, we did repurchase approximately 63,000 shares during the quarter and may make opportunistic purchases in the future.

As we navigate the markets moving forward, we will maintain the appropriate balance between internal investments, strategic M&A, share repurchases and debt paydowns. As always, we are actively assessing strategic targets, and we’ll be opportunistic for the right acquisition. We intend to stay disciplined in our approach and drive value for our shareholders. This concludes our prepared remarks. Operator, would you please open the line for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Andrew Crum from Stifel.

Operator: One moment for the next question. Our next question comes from Joe Altobello of Raymond James.

Operator: One moment for the next question. Our next question comes from Fred Wightman of Wolfe.

Operator: One moment for our next question. This question comes from Noah Zatzkin of KeyBanc Capital Markets.

Operator: One moment for the next question. This question comes from Craig Kennison of Baird.

Operator: One moment for the next question. [Operator Instructions] Our next question comes from Michael Swartz of Truist Securities.

Operator: Thank you. That concludes our Q&A segment. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.