OneWater Marine Inc. (NASDAQ:ONEW) Q1 2024 Earnings Call Transcript

OneWater Marine Inc. (NASDAQ:ONEW) Q1 2024 Earnings Call Transcript February 1, 2024

OneWater Marine Inc. beats earnings expectations. Reported EPS is $0.42, expectations were $-0.3. ONEW isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the OneWater Marine Fiscal First Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn to the conference over to Jack Ezzell, Chief Financial Officer. Please go ahead.

Jack Ezzell: Good morning and welcome to the OneWater Marine’s fiscal first quarter 2024 earnings conference call. I’m joined on the call today by Austin Singleton, Chief executive officer, and Anthony Aisquith, President and Chief Operating Officer. Before we begin, I’d like to remind you that certain statements made by management in this morning’s conference call regarding OneWater Marine and its operations may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many of which are beyond the company’s control, which would cause actual results and events to differ materially from those described in the forward-looking statements.

Factors that might affect future results are discussed in the company’s earnings release, which can be found on the Investor Relations section of the company’s website and in its SEC filings. The company disclaims any obligation or undertaking to update the forward-looking statements to reflect circumstances or events that occur after the date that 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 a solid quarter despite the industry-wide return to seasonal selling patterns and moderated pricing. In an increasingly competitive environment, our team remained active, closing deals and driving same-store sales growth of 2%. We continued to outperform the industry, which market data indicated was down about 4% for the quarter. With the anticipated return to historical seasonal mix, demand softened as expected and customer preferences turned towards our larger boat offerings. Unit sales were flat in the first quarter, reflecting the effectiveness of our sales team and our strategic approach to inventory management. As expected, we continued to operate in a more competitive environment.

Boat margins across the industry continued to reset during the quarter, and we expect this to continue through the first half of the year. Additionally, quarterly margins will continue to fluctuate with seasonality and model mix, similar to traditional pre-COVID year. As a reminder, we typically benefit from stronger margins during the summer selling months with a mixed shift to the lower ASPs with higher margins and increased unit volumes, compared to the slower winter months with the mixed shifting to higher ASPs with lower margins. Before I turn this over to Anthony, I would like to emphasize our strategy and our path to get to where we are today. When we went public in February of 2020, we had a solid growth strategy consisting of steady organic growth, coupled with a battle-tested M&A.

COVID created a lot of disruptions, both good and bad. The transition back to historical trends has been challenging, but we believe we are approaching the new normal. As we move forward, OneWater is a fundamentally stronger company, having grown significantly with a more robust and diversified product offering. Compared to where we were pre-COVID, our baseline has been reset higher and we are off to a great start in 2024. Adding to that, we are encouraged by what we’ve seen at the boat show so far, giving us confidence in the coming year. Even as we navigate the challenging macro environment and inventory overhang in the industry, we are still very confident in our ability to deliver on our growth strategy. We are excited about the future as we continue to grow market share, optimize costs, enhance profitability through our higher margin businesses and pursue M&A opportunities to amplify shareholder return for years to come.

With that, I will turn it over to Anthony to discuss business operations.

Anthony Aisquith: Thanks, Austin. Our team delivered first quarter same store sales growth of 2% supported by higher average unit prices as customers shifted their preferences to our larger boat offerings. We are excited about the boat shows we have participated in so far this year and are seeing strong demand for our manufacturer’s newer models, which is a positive sign given our inventory strategy. We are pleased to report growth in customer orders at the boat shows that were not impacted by inclement weather. We are looking forward to the Miami International Boat Show in a few weeks, which is an important event for us and the industry. Our aggressive inventory management approach has positioned us well in an industry flooded with non-current models.

We opened the year with a healthy model mix and will continue to work down non-current inventory where we can favor newer models. Inventory levels were up sequentially as is standard in the winter build months in preparation for the selling season. That said, our 24 weeks on-hand inventory continues to outperform the industry at approximately 38 weeks on hand. While boat sales are up year over year, total finance and insurance revenue was down moderately as we faced the challenges of higher rates. However, finance penetration during the quarter tracked consistent with our target of 60% of new boat customers financing a portion of their purchases directly with us. Credit availability and the use has remained strong and we feel good about where we stand today.

And with that, I’ll turn the call over to Jack to go over the financials in more detail.

Jack Ezzell: Thanks, Anthony. Fiscal first quarter revenue decreased 1% to $364 million in 2024 from $367 million in the prior year quarter. New boat sales grew 4% to $241 million in the first fiscal quarter of 2024, while pre-owned boat sales decreased 4% to $53 million. The increase in new boat sales was primarily driven by an increase in the average selling price of customers gravitated towards larger boats in the quarter. The decrease in pre-owned boat sales was due to a drop in brokerage consignment sales, partially offset by an increase in pre-owned sales from trade-ins. Revenue from service parts and other sales for the quarter decreased 10% to $62 million compared to the prior year. As a reminder, we sold Roscioli Yachting Center and Lookout Marine in our fiscal fourth quarter of 2023, which primarily drove the decline.

Additionally, we saw a reduction in parts and accessory sales to original equipment manufacturers. These OEMs have reduced production of boats as a result of the elevated industry inventory levels. Finance and insurance revenue fell 18% to $7 million for the first quarter, primarily due to a decline in income earned on loans given the current high interest rate environment. Overall, gross profit decreased 17% to $91 million in the first quarter compared to $110 million in the prior year, driven by the normalization of gross margins on those sold. Gross profit margin fell sequentially with expected seasonality and a preference towards larger boats, partially offset by increases in margins on our service parts and other sales. We anticipate gross margins to continue to stabilize through the first half of the year as the cycle returns to normal.

Though we anticipate this new normal will level off higher than what we saw prior to the pandemic, given structural changes in our business and the industry. First quarter 2024 selling, general, administrative expenses increased to $80 million from $78 million. SG&A as a percentage of sales was 21.9%, up 70 basis points from the prior year period. SG&A as a percentage of sales is typically higher in the first quarter, which is historically the slowest quarter as lower revenues reduce our fixed cost leverage. We continue to monitor the sales environment and proactively manage costs to optimize the business. Operating income decreased to $6 million from $27 million in the prior year period, and adjusted EBITDA was $7 million compared to $30 million in the prior year period.

The decline in adjusted EBITDA was primarily due to lower gross profit and heightened floor plan borrowings and related interest costs. Net loss for the fiscal first quarter totaled $8 million or $0.49 per diluted share compared to net income of $11 million, or $61 per diluted share in the prior year. In the fiscal first quarter, adjusted loss per diluted share was $0.38 compared to adjusted earnings per diluted share of $0.73 in 2023. Turning now to the balance sheet. On December 31, 2023, total liquidity was in excess of $65 million, including $45 million of cash and additional availability under our credit facilities. Total inventory on December 31, 2023 was $707 million compared to $610 million at September 30, 2023. This inventory build is reflective of our preparation for peak selling season, and we expect inventory levels throughout the remainder of the year to mirror the seasonal patterns we have historically experienced.

Total long-term debt currently stands at $440 million. Our net debt to adjusted EBITDA ratio is 2.6 times. Our liquidity and leverage position remain in a comfortable range and we are utilizing our cash to pay down our floor plan which carries the highest interest rate. Looking ahead, we are maintaining our fiscal 2024 guidance and expect margins to stabilize with seasonal norms. We anticipate same-source sales to be up low to mid-single digits, and we expect adjusted EBITDA to be in the range of $130 to $155 million, and adjusted earnings per diluted share to be in the range of $3.25 to $3.75. On capital allocation, our priorities remain unchanged, and we are focused on delivering organic growth and increasing our footprint through strategic M&A of top-performing dealers in the best boating markets in the country.

As always, we are prudent in our approach and will allocate cash where we believe it will provide the most value for our shareholders. For our M&A deals, we look to utilize free cash flow as our funding source, which has historically given us the best return on our invested capital. As always, we remain disciplined in our approach when evaluating acquisition targets, and the pipeline remains active, and we are poised to act when the right deal comes along. This concludes our prepared remarks. Operator, will you please open the line for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. The first question comes from Drew Crum with Stifel. Please go ahead.

Drew Crum: Okay, thanks. Hey guys, good morning. On same-store sales, can you address how the plus 2% performed versus your expectations and the level of promotional spend you deployed relative to plan in order to achieve that figure? And I guess, will you need to be more aggressive here in order to hit your same store sales target for the year? And then I have a follow-up.

Austin Singleton: Jack, you want to take that or you want me to?

Jack Ezzell: Yeah, I would say we’re fairly close to plan, where we expected it to come in during the quarter. I would say from a promotional activity, I would say it continues to be elevated similar to that we saw in the fourth quarter. I don’t know that trends have really changed a lot. I think we continue to be very aggressive in the marketplace. Customers are still coming through doors. Initial boat show activity has been good, and we continue pushing on.

Drew Crum: Okay, perfect. And then on the service parts and other business, you mentioned the sales leaseback transaction contributing to the down 10%. Do you see the year-on-year declines moderating going forward? I think with lapping the retailer de-stocking, the comps would get a little easier, but you also have the cuts in production by OEMs, which you flag. So curious as to how you see this business trending over the next few quarters. Thanks.

Jack Ezzell: Yeah, for sure. I mean, it’s going to be challenged for the year. I would expect the decline, right, because the December quarter is such a small quarter, I would expect that percentage decline to moderate some, like you suggest. But I do expect it probably to be, service parts and other for the year to be down, I don’t know, if we’re in that 5% to 7%, but it’s going to be an impact, right, because we closed on the transaction right at September 30th, so you have a full year that you have to bake out.

Drew Crum: Okay. Got it. Thanks, guys.

Jack Ezzell: Thank you, Drew.

Operator: The next question comes from Craig Kennison with Baird. Please go ahead.

Craig Kennison: Hey, good morning. Thanks for taking my question. I think you mentioned the acquisition environment. I’m just, I’m curious. I imagine there are some dealers on your target list that are ready to get out in the current environment. Is it a more active environment today and how aggressive could you be if those who want to sell are ready to sell?

Austin Singleton: Well, like Jack stated earlier, Craig, we’re going to use free cash flows. So that will put some limitations on it if the spigot just opened wide open. But we want to be strategic about what we’re looking at doing. And so when you kind of look at the environment right now, one of the things is still trying to pinpoint what a true, not that multiple’s easy, because we have that set, but what we’re paying a multiple on, we’re expecting to see some margin decline. I don’t know what — how much more a dealer can absorb right now with inflated floor plan interest costs. There’s a lot of dealers. I think where something that we thought was going to happen last fall is probably fixing to start happening more now because dealers have gone through the winter.

Not only are they paying in a pretty double-digit floor plan interest rate cost, margins are continuing to drift down a little bit, but also cash flow is tight because of curtailments. And so it is kind of like the perfect storm. So I just, I wouldn’t say that it’s picked up any more than it was. Even the good and bad parts of COVID, we tended to add a deal or two to the pipeline a month. That was something that we would really consider. I mean, we get incoming calls and emails and stuff, probably a couple — half a dozen to a dozen a week. And a lot of those is just stuff we’re not looking at or even have any interest in. So I’d say it’s pretty much the same. I wouldn’t say it’s increased. I think we might see some increase and there might be some strategic deals that we could pick up on somebody that’s just throwing in the towel as they go into the early spring months and say, hey, I just don’t want to do this again.

Because I do think people are going to have to start reaching into their pockets, i.e., leveraging up real estate or whatever to cash flow to get to the earning months of April, May, and June. And then if we have a bad weather spring, that can even push it to where they really don’t start to see that income and cash flow to build back what they put out till May, June, and July. So it’s kind of like we’re just — we’ve got some things we’re working on, but we’re going to be very opportunistic as we move forward.

Craig Kennison: Yeah. Thanks, Austin. And then I’m trying to reconcile a weird dynamic in my mind, which is, retail looks to be somewhat in line with your own expectations, but it feels like every OEM has agreed it’s actually time to cut production and help you and other dealers get right with inventory. It was just like a realization on the OEM’s part that it’s things are different or the pain is so severe for some dealers on floor plan expense that they had to do it. What do you think changed in the minds of OEMs when frankly retail is about what you thought it would be?