OneWater Marine Inc.

Standing by, welcome to the One Water Marine, Inc. Fiscal Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jack Ezell, Chief Financial Officer. Please go ahead.

Good morning and welcome to One Water Marine's fiscal second quarter 2021 earnings conference call. I am joined on the call today by Austin Singleton, Chief Executive Officer, and Anthony Asquith, President and Chief Operating Officer. Before we begin, I would like to remind you that certain statements made by management in this morning's conference call regarding One 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 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 on the company's website and in its SEC filings. The company disclaims any obligations or undertaking to update forward-looking information 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? Thanks, Jack, and thank you, everyone, for joining today's call. We delivered incredible results for the second quarter of 2021 with growth across every part of our business. Revenues increased 74% to a record $330 million. Adjusted EBITDA increased 315% and same store sales increased 57%. Importantly, our higher margin finance and insurance revenue also grew significantly by 46% and we doubled our service parts and other revenue. The continued expansion of these businesses emphasize the strength of our strategy to move beyond new and pre-owned boat sales, adding stable revenue streams for our long-term growth. OneWater is firing on all cylinders, and I am extremely proud of our team's ability to remain agile in today's fast-paced, dynamic environment. Our investment in technologies continue to enable us to differentiate ourselves in the market and capture the seamlessly limitless customer desire to get out on the water. These technologies bolster our ability to not only sell boats, but also sell the right boats to the right customers as quick as possible. Importantly, our digital solutions drive operational efficiencies across our business, maximizing profit and extending our competitive advantage throughout the industry. With no indications of slowing down, we believe this level of demand will remain heightened as new and experienced boaters come to OneWater for our arsenal of premium boats and robust service capabilities. During the last several months, we have had a number of exciting announcements and developments. First, we executed the soft launch of BoatsForSale.com, our all-inclusive virtual platform to buy, sell, and compare boats that provides easy access to financing and insurance offerings. Anthony will talk more about this in his remarks, but suffice to say, While a small part of our business today, we see this platform as having the potential to be a big opportunity for us. Further, we announced the creation and expansion of One Water Yacht Group, which unifies One Water's yachting presence and provides a launch pad for further growth. At the same time, we amplified our service and repair offerings at the Rossiola Yachting Center. Additionally, last week we announced that One Water was named the sole U.S. distributor for Sunseeker Yachts. a leading manufacturer of premier yachts based in the U.K. with customers across the globe. One Water Yacht Group has been a key dealer for Sunseeker across most of the eastern seaboard, and under the terms of the agreement, we will now manage the Sunseeker dealer network in other markets throughout the U.S. This first-of-its-kind agreement is a statement to our proven execution and strong partnerships. It is exciting, to say the least, as it will allow us to further enhance our portfolio of premium brands and expand our geographic reach and presence in the luxury yacht market. Finally, the integration of our three acquisitions, Tom George Yacht Group, Walker Marine, and Rossiolis are progressing well and in alignment with our proven playbook. Our disciplined and prudent approach to identify top dealers in high-performing markets is and our flawless integration continues to advance our position as an industry leader. With these integrating well, we now expect to complete four to six typical acquisitions per year for the next several years. As we execute our long-term growth strategy, we are confident that through continued investment in our innovative digital platforms, the evolution of our higher margin business segments, and the integration of our recent M&A activities, we will further extend our market share and generate meaningful value to our shareholders. With that, I will turn it over to Anthony to discuss business operations.

Thanks, Austin. Customer enthusiasm is at an all-time high. The incredible customer demand for votes across all categories continues to drive sales, with our technology investments supporting tremendous lead generation. Our sales team have remained agile by utilizing our state-of-the-art operational dashboards, supporting further performance within the industry. We are focused on providing an exceptional selling experience to keep the veteran and new foundational layer of voters enthusiastic about the voting lifestyle and the OneWater family of dealerships for years to come. Inventories remain at a historically low level as supply chain continues to be pressured. Our inventory planning tools, our strong OEM relations has given us confidence that we will have sufficient inventory to meet the demand throughout the prime selling season. Although we recognize it will be a challenge, we are in constant communication with our manufacturers, and barring any further supply chain disruption, we are expecting a strong finish to the year. As Austin mentioned during the second quarter, we launched BoatsForSale.com. Following the acquisition of the domain in August of 2020, we aggressively developed a new consumer-seller-focused marketplace that serves as an extension of our store footprint, including new pre-owned boats and finance and insurance services. Nearly one million boats are sold per year, person-to-person, and we believe this platform will completely change the way people sell their boats. Utilizing the site, sellers across the country can list their boats for sale and immediately increase the reach of potential buyers. In turn, buyers can search the listed boats, adding and removing parameters for the boat they desire, and even receive what we call a boatification or a notification when a boat is listed that meets their exact parameters. Importantly, the site also enables us to build our pre-owned boat inventories. by bidding on a listed boat and offering the seller a cash offer. While in its early days since the launch, we are very encouraged by the growth opportunities that can be created through this innovative marketplace, including our ability to broaden our customer and geographic reach. As Austin mentioned, the platform is a small piece of the business today, but we believe it will create an additional avenue for growth for OneWater. Near term, our goal is to have over 15,000 votes on the platform by the end of this fiscal year. Therefore, we'd expect to see a modest incremental revenue generating starting in fiscal 2022. I will now turn the call over to Jack, who will talk more about the financials in detail.

Thanks, Anthony. Second quarter total revenue increased 74% to $329.6 million in 2021. from 190 million in 2020, fueled by the increase in same-source sales of 57%. This increase was primarily driven by new unit sales and an increase in the average selling price of new boats sold, and to a lesser extent, an increase in the average price of pre-owned boats sold. New boat sales grew at 81% to 239.7 million in the fiscal second quarter of 2021, and pre-owned boat sales increased 47% to $56.1 million. Finance and insurance revenue increased 46% to $11.8 million in the second quarter of 2021, and revenue from service parts and other sales increased 101% to $22.1 million compared to the prior year. Gross profit nearly doubled. to $88.8 million in the second quarter compared to $44.6 million in the prior year, driven by the increase in margin on new and pre-owned sales, a shift in the model mix and size of the boat model sold, as well as an increase in the average unit price. Additionally, higher finance and insurance service and other sales contribute significantly to the increase in gross profit. Gross profit as a percentage of sales increased 340 basis points to 26.9% compared to 23.5 in the prior year. While selling general and administrative expenses increased to 48.3 million from 32.4, SG&A as a percentage of sales decreased to 14.7% from 17% in the prior year. The decline in SG&A as a percent of sales was primarily driven by the increase in sales across the businesses and the reduction of expenses, including the cancellation of certain boat shows. Operating income rose sharply to $38.7 million from $8.5 in the prior year, driven by the higher sales and expanded gross profit, partially offset by higher SG&A. As a result, adjusted EBITDA rose to $40.1 million compared to $9.7 million in the prior year. Net income totaled $30.6 million, or $1.83 per diluted share, in the fiscal second quarter of 2021, up from $3 million, or $0.18 per diluted share, in the prior year. Turning to the balance sheet, as of March 31st, total liquidity was in excess of $100 million, including cash on the balance sheet, availability under our revolving line of credit, and availability under our floor plan facility. Total inventory at March 31st, 2021 was $186 million, compared to $333 million at March 31, 2020. The substantial decrease was due to the sales increase experienced in recent quarters combined with industry-wide supply chain constraints. From a capital allocation perspective, we are focusing on reinvesting in the business to accelerate organic growth and the strategic M&A opportunities as we have discussed. In addition, we will continue to evaluate other capital allocation strategies that increase shareholder return. Looking ahead, For the full fiscal year 2021, we are increasing our guidance for same-store sales to be up approximately mid to upper teens, given the broad-based outperformance in the first half of the fiscal year 2021. Additionally, we have raised our outlook for adjusted EBITDA to be in the range of $130 million to $135 million, and diluted earnings per share to be in the range of $5.80 to $6.00 per diluted share. This all excludes any additional acquisitions that may be completed during the back half of the year. Our guidance assumes OneWater manufacturers can maintain production at the current pace and meet the elevated demand in the face of industry-wide supply chain challenges. This concludes our prepared remarks. Operator, will you please open the line for questions?

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Brett Andres with KeyBank Capital Markets. Your line is open.

Hey. Good morning, guys. I wanted to ask about the Sunseeker agreement. Just any more details you can share around exactly how the management part of that works? I mean, is the plan to eventually be the only Sun secret dealer in the U S and then separately, I mean, how did the economics of that agreement flow also?

Yeah. So we were, we're the U S distributor. So all the boats coming into the United States will run through one water. Um, you know, I don't, I don't see us in the near or midterm future being the only Sun secret dealer. There's a couple other guys out there that do a really good job. We're kind of still putting it all together. You know, one of the things that we're excited about is, you know, being able to consolidate, you know, and show them at Rossioli's because we have the space to do that and kind of having a base for U.S. operations so a customer that's really interested can come down and see them all. But, you know, we don't really have any stores in the Midwest that might be interested in this. Of course, there's a great dealer out on the West Coast. So we'll be looking for some sub-dealers. but it just gives us a little bit more control on what comes in. I don't really want to get into how it was set up prior to us doing this, but it was a little bit of the wild, wild west. I mean, boats were coming from all over the place. So it just gives a little bit more professional setup in the United States for how the boats come through and flow, and then, of course, we'll be responsible for the U.S. marketing and oversee boat show displays and print marketing if we choose to do that, customer events and all that stuff. So that comes with an expense. So because of that, there is a percentage that comes to one water off of every boat. But it's a good deal just because it really gives the ability to have a complete plan put together for the country. And we can find some really good dealers that we think will be additive to where we already are where we have no intention of going anytime soon. So it's a good overall deal, and we're excited.

Got it. Okay. Makes sense. And then, Austin, just more of a high-level industry question, but as you look at the broader industry and the dealers that you compete with in your markets, I mean, how does their inventory situation look right now compared to yours? I mean, I have to imagine that there will be some pain out there, among the smaller dealers this selling season? And I just wonder if that was one of the drivers behind taking that M&A target up to four to six a year.

No, I don't think that was the change in the M&A strategy. I think, and I spoke to it on the last earnings call, you know, one of our Achilles heels on the acquisition front has been integration. And it's not been integration on our side. It's getting CDK lined up. for the training and moving everything over. You know, if you go and do a deal and they're on the same software, it's a pretty easy move over. But if they're on DocMaster or Control4 or one of the other softwares, getting all that information inputted and mapped correctly and then getting the acquisition, their employees up to speed on CDK, it's just been a little bit of a slow hill because we have to plan so far out so we would have these deal slots. Well, You know, we kind of said this is great, but it's not working exactly the way we want it. So the last couple of deals, we've kind of done all that on our own. You know, we still use them, still have them helping us with integration, but we've gotten to the point where we've taken that issue and basically eliminated it because we're doing it in-house now. So that gives us the confidence and the ability to probably increase this, you you know, our cadence on this, you know, one or two deals a year. Plus the other thing was we always said we wanted to do it with free cash flow, and the free cash flow is a lot better than it, you know, was three years ago or two years ago. So there's just a combination. I think from an inventory perspective, I think the next couple of quarters for all of us are going to be challenging, and I think that where we really can shine on that is just the amount of information and the forecasting and understanding what's coming, when it's coming, when you deal with a single off mom and pop, I mean, they're working themselves to the bone. I mean, they're out there, you know, taking care of customers, fixing problems. They don't have the time to sit in their office and be calling every manufacturer they represent every other day to go, okay, where's this boat? Where's that boat? It's kind of more of a, you know, when the customer's screaming or yelling at them, where's my boat? That's when they kind of follow up. So I think our digital tools, and being able to forecast what we need, know where it's going, is probably the one thing that is going to help us on the inventory deal, but that really doesn't have anything to do with the acquisition cadence increasing.

Got it. Okay. Thanks a lot, guys. Thanks.

Thanks, Brad.

Thank you. Our next question comes from Drew Crum with TESOL. Your line is open.

Hey, guys. Good morning. Good morning. So a lot of moving pieces in the gross margin improvement during the quarter. Can you rank order the importance of the various drivers and those that you see as sustainable going forward? And then separately, you mentioned the ASP being up for both new and pre-owned boats. With inflation and the creation and expansion of the yacht group, how do you see ASP for your boats trending going forward? Is that likely to accelerate, or should we see it rise more in line with the industry?

Thanks. Yep. So on the first question, I would tell you that, you know, new boat sales, because it's such a large portion of revenue, you know, that increase in margin probably had the greatest impact on overall margin. But, you know, we're equally as excited to see improvements in sales of our non-boat business because, you know, we obviously feel like that's that's a lot more sustainable, you know, for the long term. And, you know, the increase in parts and service, you know, with revenue being up 100%, you know, part of that's driven by Rossioli's addition to the results. But, you know, that gives us good, sustainable, recurring revenue streams. You know, as far as, you know, mixed shift, mixed shift will always You know, make margin and projecting margins a little bit of a challenge. You know, even with, you know, Tom George and Walker Marine, the two acquisitions we did in December, we saw a little bit of a mixed shift to some larger boats, you know, which, you know, larger boats typically have a lower gross margin percentage. We feel like there's a lot that we're doing within the One Water Yacht Group that can help us improve overall yacht margins. But, you know, as that mix shifts and as you have large boats come through, it will put some pressure on the margin percentage. I hope that helps answer the question.

Yeah. Yeah, and then just to follow up on the question on ASP, your expectations going forward.

You know, as we project and model, right, we look for, you know, when we put out a same store sales number, we look to get, you know, probably half of it from unit growth, half of it from, you know, ASP growth. And so I think that's how we're looking at things and modeling things internally. Okay. All right. Thanks, guys. Thank you.

Thank you. Our next question comes from Joe Alcabello with Raymond James. Your line is open.

Hey, guys. Good morning. A couple questions, I guess, first on inventory, and I know it's hard to quibble with a 57% comp here, but do you guys feel like you lost any sales because of a lack of inventory in the quarter?

No, sir. Not at all.

Okay.

I mean, obviously, we're outpacing the industry pretty heavily, you know, so... We've been in contact and utilizing all the tools that we have to ensure that we have boats available.

I think it's important, Joe, to also remember, as Austin kind of alluded to earlier, when you're up against a mom-and-pop dealer, they maybe have, let's say, 20 orders with the manufacturer. We maybe have 200 orders with that same manufacturer. And so with our digital tools, having the insight on those 200 orders and our ability to shift it from one location to the other to get it to where the customer wants it is tremendous.

That's helpful. Thank you. I guess in terms of seasonality, Q2 is typically a quarter where you build inventory. Q3 is typically a quarter where you draw down inventory. So it sounds like we're probably going to see that inventory number go even lower in the June quarter. So I'm curious, when do you expect to start growing inventory again, and maybe when do you think it normalizes?

Well, I would jump in. Joe, I won't let Anthony speak, but right after I say this, I would tell you if demand keeps at the pace it is, it's going to be a long time before we can really start building on inventory. Door swings, you know, lead volume increases. All that stuff continues to, you know, to be very, very strong. And the manufacturers, they just don't, like, flip a switch and produce, you know, in the month of June they're going to produce 10% or 15% more boats. It's a slow ramp up for them to get, you know, to where they're doing 1% or 2% more, and it kind of starts to compound over time. So, you know, it's a great dynamic industry. In my opinion, and, you know, Anthony will have a better gauge on this, but from my opinion, it's a great dynamic to be, you know, selling the boats out that are coming in two weeks from now, four weeks from now, six weeks from now, and we're not carrying inventory because inventory cost is way down. Anthony?

Yeah, I would say that we probably, pre-pandemic, probably we're carrying too much inventory. So to get back to those levels, You know, the more we utilize our tools that we have, you know, we want to continue to increase our turns. You know, when the inventory is going to get back to normal, you know, I don't think I – what is normal? It would be the question. So, you know, I would say we're a year or so away from having, you know, lots full of inventory. But, you know, our goal is always to continue to order the right boats and have, you know, timely things done with you know, lower interest for carrying costs and everything else like that. So it's going to be, you know, over a year, I think, before we'll have, you know, normalized whatever the new normal is of inventory.

Got it. Okay. Just one last one for me in terms of, you know, product quality. With OEM struggling to get boats out the door, are you seeing, you know, product quality slip at all? Are you seeing, you know, customers coming back and asking for rework, et cetera?

I wouldn't say that we're seeing poor quality. We've always been the last piece of the build, if you will, with our rigging to finish assembling the boats and all that kind of stuff. I don't see the quality of the boats going backwards or anything like that, no.

I think it's more of a challenge of them getting it complete than a quality issue. It's not like they're building a worse boat today than they were 18 months ago, 36 months ago. It's that they got a boat that's completely finished and it's missing one seat cushion or it's missing, you know, this one thing on it and it's just going to sit up there for a month. So that one thing comes that doesn't hinder the boat. I mean, like, like porta potties. I mean, you know, a customer, if you really go, Hey, look, we can get you your boat next week, but it's not going to have the porta potty in it. They're like, I don't care. I want a boat. So I agree with Anthony. I think it's more of a they're struggling more with getting the boats complete versus a quality issue.

Got it. Okay. Thank you, guys.

Thank you. Our next question comes from Mike Swartz with Truist Securities. Your line is open.

Hey, guys. Good morning. Sorry if I missed this in your prepared comments, but maybe Jack or Austin, any color on the trends you're seeing thus far in your fiscal third quarter, so April, maybe your comparable store sales or backlog or any metrics you can provide?

Yeah, I would say that... Go ahead, Austin. I was just going to say, Mike, that'll get me in trouble, so I'll let Jack talk about that one.

Yeah, I mean, obviously we're up against a really big comp for the quarter in the back half of the year. I think if you look at our same store guide, it's projecting low single-digit comps in the back half. And we continue to have, as Austin mentioned, good retail demand. Customer interest is elevated. Leads coming in. Door swings, you know, are all very positive. So we feel comfortable with that same-store sales increase for the back half of the year and, you know, just with the continued levels of demand just from what we've seen so far.

Okay, great. And maybe just to add on to that, you know, with guidance, I think you called out the 130 to 135, which would basically – imply that EBITDA dollars are flat in the back half of the year, but you're, you're talking about comparable store growth and you've got some acquisitions here that, that, you know, seasonally speaking should be pretty strong in the back half of your fiscal year. So what, I guess, what are the offsets to get to that flat number?

Yeah, I think, uh, I'd have to double check my numbers, but I, I think the, uh, from consensus numbers, the back half is, is up, uh, double digits, um, increase, uh, You know, at that $30,000.

Hit those numbers, correct.

Five, yeah.

Okay, maybe it's just, yeah. That's fair. It's probably just versus my numbers then. Okay.

Just go ahead. No, I was just going to say it might be the stock comp that I think you have in your numbers that we don't put in ours.

Right, right. No, that makes sense. And just final question for me, just you're talking about the new yacht group that you're building out, and obviously with Rossioli and Sunseeker, you're going to have a much bigger presence there. Are there any overhead costs or any investment costs to think about going into that business in the near term?

No, not anything really specific. out of the normal that's really going to make a big impact on our CapEx, because that was the whole thing. Rossiolis was the turnkey. You know, so, Anthony, correct me if I'm wrong, but most of the additional costs that we're going to have getting into this would be put on the boat anyway. Correct.

Yeah. Yeah, I think it goes back to what we originally said on SunSeeker is, you know, we expect to – expand the profitability of the brand over time, you know, with having some incremental, you know, SG&A type costs from a marketing perspective. But, you know, expect those to level off and, you know, and absorb those costs with the increased sales.

Yeah, and the other thing real quick, I mean, you know, one of the beautiful things about Sunseekers, I mean, they build an incredible boat and it's a global, it's globally sold. So it's not like, They're fixing to send us, you know, 32 of these things. I mean, they're going to trickle in. We don't expect to see a huge impact from this. You know, it'll incrementally increase over time as more boats are available and we pre-sell those slots. I mean, if you come in today and want to – I mean, how long is it out on the 90? You know, I mean, are we two years out, six months?

Yeah, 18 months, 18 months.

18 months. So, I mean, it's not like all of a sudden we're going to have all these boats tomorrow. And that's one of the things that intrigues us about it is, you know, we need a place for our customers to continue to move up in size. And this gets us one with the way we look at it with really a low inventory risk. You know, we're not going to have – you know, $150 million worth of this stuff sitting on the ground on our floor plan. A lot of it will be pre-sold slots. You know, we'll have some inventory come in, but, I mean, we're going to share that out through hopefully, you know, an incredible dealer network that we're looking to build out across the whole United States.

Okay, great. That's it for me. Thank you, guys.

Thank you, and there are no other questions in the queue. This concludes today's conference call. Thank you for participating. You may now disconnect.