OneWater Marine Inc.

Hello, thank you for standing by and welcome to the One Water Marine Inc. Fiscal Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jackie Zell, Chief Financial Officer, please go ahead.

Good morning and welcome to One Water Marine's fiscal third 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'd 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 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 filings with the SEC. 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?

Thanks, Jack, and thank you, everyone, for joining today's call. Overall, we delivered solid results for the third quarter of 2021. Despite industry-wide inventory challenges, which pressured the top line, we grew our operating margin to 16%, and we delivered record-adjusted EBITDA of $66 million. an increase of 33% compared to the prior year. Sales for the third quarter of 2021 were up against an extremely difficult 44% same-store sales comp in the prior period. As a reminder, the prior period benefited significantly from business that shifted from March 2020 to April and May 2020 because of the COVID shutdown. This year, same-store sales for the third quarter were down 11%, all driven by significant inventory shortages across the industry, but partially offset by improvements in service parts and other sales. We believe we would have posted positive same-store sales if we had the inventory. It's noteworthy that same-store sales excludes new and acquired store sales until the end of the store's 13th month of operation under our ownership. Our Tom George Yacht Group and Walker Marine Acquisitions were two of our largest and leveraged our global inventory to meet the red hot west coast of Florida retail environment. We ended up sharing the same store inventory and inventory planning tools with these acquisitions, which ultimately pressured same store sales, but is exactly where we see the power of our network of dealers and show the interconnectivity of our organization. For comparative purposes, same store sales for the third quarter and year to date 2021 when compared to the same periods in 2019 were 14% and 26% respectively. Importantly, we grew our higher margin less cyclical service parts and other revenue by 58% compared to the prior year, which mostly offset the shortfall from new and pre-owned boat sales. Sales activity remains robust, door swings and lead generations continue to be strong, and as a result, our pre-sold inventory is up nearly 400%. I'm very proud of the team's focus on the controllable levers that continue to drive the business forward. Gross margin expanded by a whopping 822 basis points, driven primarily by the mix of boat models sold, and was further bolstered by the sharp increase in service parts and other revenue. We continue to focus on executing our multifaceted growth strategy through strategic acquisitions and growing our higher margin business segments to help us expand our market share and drive long-term shareholder value. As a reminder, we typically pay less than four times EBITDA for a target, and we expect to cut that purchase multiple in half within 24 months. Our strong cash generated from operations fund our acquisitions, and we generally enter into long-term leases on the dealership's real estate. Now let's take a minute to talk about two of our recent announced deals. The first is Naples Boat Mart, a third-generation family-owned and operated business that expands our presence on the west coast of Florida and complements our recent acquisition of Walker Marine Group. Naples Boat Mart represents... premium boating brands, including Grady-White, Hurricane and Key West, while offering factory trained technicians to deliver quality service for its customers, including a full rigging shop and mobile service units. We expect this transaction to close in the fourth quarter of 2021. The second announcement we made was an agreement to acquire PartsView, an online marketplace for OEM marine parts, electronics, and accessories. As I said, part of our long-term growth strategy is expanding our parts and service offerings, which commands a significant margin and helps insulate the company from the cyclicality of both sales. PartsView generated approximately $25 million in sales over the past 12 months and has a history of growing organically doubling sales volume annually since its launch in 2016. We expect this acquisition to close in Q4 of 2021. Our significant margin expansion and earnings growth further underscores our superior execution and efficient operating model. Our strong partnership with our OEMs has proven invaluable, and our proprietary digital inventory and management tools allow our team to continue meeting the needs of our customers and pre-sale and inventory. At the same time, we continue advancing the other parts of our business that support further margin expansion and strengthen our relationship with customers. We feel very confident as we finish our year that we will be positioned well to drive long-term shareholder value. With that, I will turn it over to Anthony to discuss business operations.

Thanks, Austin. Customer demand remains at historically high levels with no sign of slowing down. Our sales team has done an outstanding job driving sales in this dynamic environment, aided by our sophisticated, state-of-the-art inventory management tools that provide the sales team with powerful intelligence and access to our global inventory. Every one of our dealerships, including the two largest acquisitions, have full access to our broader inventory pool, Whether the inventory is in the store or on its way to the store, our sales teams are able to sell it. As a result, our pre-sold inventory is up over 400% compared to the prior year. Customers are coming to us today to order boats for next season. They are no longer waiting for boat shows because they are wanting to ensure they get their boat in time. We don't see inventory normalizing in the near term, and we have adapted quickly and continue to drive sales. In addition, We are focused on levers within our control, including building out the higher margin areas of our businesses. Service parts and other revenues surged 58% to $30 million, with approximately 50% dropping to the bottom line. We see tremendous growth opportunities with these non-boat-related business lines and will continue to expand in these areas. As Austin mentioned, our efficient operating model allows us to do more with less, which is reflected in our industry-leading operating margin of 16%. We remain focused on stellar execution and further expansion of our business. I will now turn the call over to Jack, who will talk about the financials in more detail.

Thanks, Anthony. Third quarter revenue decreased 1% to $404.2 million in 2021. from $408.3 million in 2020, fueled by a decline in same-store sales of 11%. This decrease was primarily driven by the industry-wide supply chain shortages and partially offset by improvements in service parts and other sales. New boat sales decreased 2% to $288.2 million in the fiscal third quarter of 2021, and pre-owned boat sales decreased 9% to $71.1 million. Finance insurance revenue decreased 8% to $15.2 million in the third quarter of 2021, and revenue from service parts and other sales increased 58% to $29.6 million compared to the prior period, mostly offsetting the shortfall in boat sales. Gross profit totaled $127 million in the third quarter compared to $94.7 million in the prior year, driven by an increase in the margin on new and pre-owned sales and a shift in the model mix and size of the boats sold. Additionally, higher margins, service parts, and other sales contributed significantly to the increase in gross profit. As a percentage, our gross profit margin increased 822 basis points to 31.4% compared to 23.2% in the prior year. For the fiscal fourth quarter of 2021, we expect continued elevated margins due to the lack of inventory at higher than historical averages, but is dependent on inventory and model mix. Selling general and administrative expenses increased to $60.5 million from $43.1 million. SG&A as a percentage of sales increased to 15% from 10.6% in the prior year. The increase in SG&A as a percentage of sale was primarily driven by the higher variable personnel costs driven by the increased level of profitability compared to the prior year. Operating income rose to $64.9 million from $50.7 million in the prior year, driven by expanded gross profit, partially offset by higher SG&A. And as a result, adjusted EBITDA rose to $65.5 million compared to $49.3 million in the prior year. Net income totaled $51.6 million, or $3.04 per diluted share. In the fiscal third quarter of 2021, up from $40.6 million, or $2.36 per diluted share in the prior year. As of June 30, 2021, our cash and cash equivalence balance was $113.2 million, an increase of $25.3 million compared to $88 million in the prior year. Total inventory as of June 30, 2021, was $116.9 million compared to $171.3 million in the prior year due to the industry-wide supply chain shortages. Inventory hasn't been this low since 2017. As Anthony mentioned, our pre-sold boats are up 400%, and while customer deposits are not a perfect indicator of pre-sales and can be lumpy at times, As of June 30, 2021, they are up to $43.1 million, more than three times the prior year amount. Total long-term debt currently stands at $115.7 million, and when you subtract the cash and cash equivalents, adjusting for the pending dividend payment yields a very low net debt to adjusted EBITDA ratio of 0.2 times. From a capital allocation perspective, we are focused on reinvesting in the business to accelerate organic growth and strategic M&A opportunities as we have discussed. Looking ahead for the full fiscal year 2021, we are raising our outlook for adjusted EBITDA to be in the range of $150 million to $155 million and diluted earnings per share to be in the range of $6.60 to $6.80 per share. excluding any additional acquisitions that may be completed during the year. However, based upon the continued broad-based inventory challenges in the industry near term, we now expect same-source sales to increase approximately 10% for the full fiscal year 2021. This outlook assumes OneWater's manufacturers can maintain production at the current pace, allowing us to deliver pre-sold units and build inventory in the face of the industry-wide supply chain constraints. 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 one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Drew Crum with Steeple. You may proceed with your question.

Okay, thanks. Hey, guys, good morning. I know you're not providing guidance for fiscal 22 yet, but you mentioned that you don't expect inventory levels to normalize anytime soon. So, you know, given that dynamic and some tough comps, at least over the next couple quarters, how should we be thinking about BAME store sales performance? And then separately, maybe for Jack, you know, the gross margin performance, you cited boat mix and service and parts growth. Sounds like you're anticipating something similar in fiscal 4Q. Should we anticipate a similar gross margin lift beyond fiscal 21? Thanks.

Jack, you want to take that? Jack?

Yep. On the same store sales note, You know, we're doing a lot of work in and around 2022 and projections right now, so not really prepared to speak to that. I think that, you know, we're looking for our manufacturers to provide adequate inventory. I know they're faced with a lot of supply chain constraints, and so I think as we get more and more information out of them, it'll be easier for us to get a better projection on same-store sales. I mean, we do feel like... When you look at the quarters and, you know, there's some, you know, back the March quarter, we were, you know, 57% same-store sales. I mean, that's going to be an interesting comp to go up against. You know, so there may be some variability through the year. I think, though, that there is demand from what we're seeing today that there's demand that will continue to drive a positive same-store sales. So, We've got to work through this inventory challenge and, I think, move that forward. As far as gross margins, I do think so long that inventory continues to be constrained, we're going to do what we have to do, and we think that's going to present a more favorable margin environment. I wouldn't go about modeling things up 822 basis points. But I certainly expect them, you know, to be, you know, elevated as we go forward.

One other thing I'd like to add to that, too, though, is that, you know, we're going to continue to be aggressive on our acquisition platform. And as we noticed in this quarter, that when you take a dealership that we've acquired and you allow it, to pull from the global inventory, that could have an impact on same-store sales if that particular market is hotter and they're able to get additional inventory that in the past they hadn't. So, you know, with the Tom George and Walkers, those acquisitions, you know, they had their inventory that they had ordered for the year, but now they had this global inventory that they could pick and choose from as needed, and they were able to generate some sales. So as we continue to move forward and lay in you know, Stone Harbor and Naples Boat Mart and some other acquisitions, keeping that cadence that we spoke to, that will put a little pressure on same-store sales while the inventory constraint is where it is today.

But, I mean, ultimately, that's just good business, and it's going to drive, you know, additional EBITDA growth for the company.

Got it. Okay.

Thanks, guys.

Thank you. Our next question comes from Mike Swartz with Truist Securities. You may proceed with your question.

Hey, guys. Good morning. I don't think inventory constraints are all that surprising to anyone who covers this industry, but I think when we go back to late April, your last conference call, I don't remember the commentary being maybe as dire from the inventory situation as maybe it is today. So maybe... Give us a sense of what happened over the past few months, whether that was retail demand related or whether that was maybe OEM production related.

Well, I mean, I don't think it was retail demand. I mean, retail demand has remained pretty consistent and strong. I think the bigger issue is the OEMs, and it's kind of like, you know, if you have a load of boats that's coming in that gets pushed two weeks, you know, that can hinder a quarter. But that load getting pushed two weeks pushes the next load two weeks or three weeks, which pushes the next load four weeks. So it's kind of like a domino effect that keeps pushing it out. And I think that we were confident after talking with our manufacturers back in April that they had kind of started to feel they were over the hump. But I think they didn't realize that it was other things that were going to sneak up and bite them. Anthony, you want to add more to that?

Yeah, it's just been a constant, you know, between gel coat and foam and everything else that goes in them has been a shortage of. You know, it started back in February in that storm in Texas that really, I guess we all didn't realize how many things were built out of a gel coat.

You know, another thing, too, though, is, I mean, you know, the consumers themselves have been pretty understanding and patient and So when you get to the end of a month or the end of a quarter, that last seven days can really make an impact because if you don't get what you're suspecting to get, it pushes into the next month or the next quarter. And so we're not losing the sales. It's just getting delayed. And like we spoke of in the opening comments, we really kind of dug into that, and that pre-sold – inventory that we've got coming in is north of 400% of where it was this time last year.

Thanks for the color there. Maybe just for Jack, maybe give us a sense on the new boat side particularly what units versus pricing look like during the quarter?

I would say it's largely driven by price. Units were In the quarter, we're down slightly, but it's what we're able to, in this environment, command from the pricing perspective that we're pushing.

Okay, great. Thank you.

Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question comes from Joel DeVello with Raymond James. You may proceed with your question.

Thanks. Hey, guys, good morning. So first question, just a housekeeping item. The guidance that you gave us this morning for EBITDA and EPS, does that include any contribution at all from the recent acquisitions?

No. Yeah, those will roll in when those acquisitions close. You know, with us being so close to the year end, you know, if we were able to close one or two here before we get to the year end, I don't think it will move the needle much.

Okay, got it. In terms of model year 22, we're hearing some pretty big numbers in terms of price increases. What are you guys seeing in terms of pricing for the new model year? Is there any concern about passing that on to the consumer? And could that put potentially downward pressure on margins, on both margins next year?

I don't think so, Joe. I mean, every year, pre-COVID, we always had 3% to 5% price increases. And a good part of that had to do with content that the manufacturers are doing. So I think the consumers are pretty used to it, and the demand for boating continues on. So I don't think that's going to be an issue.

One thing, Joe, and I've spoke to this once, but one thing I'd like to point out, it seems the consumer, especially in this boating space, has really moved more towards the cost of ownership versus the cost of the purchase or the purchase price. So, you know, we have started really working with our sales associates to really work on kind of pushing the consumer to, this is what it's going to cost you to have this boat for two, three, or four years. And when the pre-owned market is just nonexistent today, it's really driven up the price of pre-owned boats. So when you start looking at a customer or talking to a customer that's looking at a quarter of a million dollar ski boat, and they kind of figure out to own that boat for two to three years, using it at the normal hours is going to cost less than going and buying a Chevrolet Suburban on a monthly basis, it's not hard to get them to pull the trigger. And, you know, so I am very confident because it's been a worry of mine pretty much my whole entire life in this industry. You know, boat prices just go up a ton every year, but it's never been hard to pass that on to the consumer. And I just don't see that being an issue going forward.

Okay, got it. Just one last one if I could. The three acquisitions that you just announced, it looks like the combined revenue is about $90 million or so over the past 12 months. How should we think about the revenue and EBITDA contributions from those acquisitions next year?

Yeah, and I think you hit the revenue number right there. You know, a typical acquisition of this size, you know, will bring, you know, a couple million dollars worth of EBITDA to the company. PartsView is a little bit different. That entity is in significant growth mode, so there's a lot of reinvestment and additional spending to grow that. That one will have good gross margins, but its EBITDA margin will be less than optimal as we continue to push its rapid growth.

Great. Thank you, guys.

Thank you. Our next question comes from Brett Andres with KeyBank Capital. You may proceed with your question.

Hey, good morning, guys. A question, I think, Jack, you mentioned pre-sales were up 300% year over year. Is there any way to kind of frame that up in terms of, you know, I don't know, that one, two, three months of sales, and then I guess how have the pace of those pre-sales been here in July? Any change in cadence or trajectory there?

Yeah, no, it's continuing to, you know, the pace is continuing to grow. It's tough to really, you know, there's a lot of details behind that as to when they'll fall in. You know, we typically need to get the boats from the manufacturers as soon as they're delivered. You know, trust me, customers are chomping at the bit, and we're pushing to get them turned around absolutely as quickly as we can. But we are starting to hear customers say things like, even this late in the season, maybe a customer who would normally maybe come to a boat show and put an order in for next season, they're coming in at the end of this season saying, hey, we want to go ahead and let's get a boat on order so we know for sure it's going to be here next season. So that's helping that backlog to continue to grow. And, you know, we're working with manufacturers to get those boats slotted, built, and, you know, prepared for the customers.

Got it. Okay. And then just on, you know, parts view, I think that was an interesting acquisition there. But, I mean, does that fill a need or give you an advantage in your PS&O business? You know, is there a scarcity of parts out there and, you know, now we all of a sudden have them? I'm just kind of curious how that fits the broader picture here. Sure.

No, I don't think there's a scarcity of parts at all. I think what it does is it gives us the platform that we've been looking for to really, you know, set us up differently. I mean, one, PartsView already has been growing great on its own. The platform's solid. Phillip and his team are really passionate about it, and so we can kind of leave it in his wheelhouse to grow it. I think we bring some buying power, I think that there's some things just by us bringing it in the fold that we can help accelerate not only the top line but the bottom line. But it does give us that platform that I've been seeking in order to really bolster up our P&A to get to where we can get into a meaningful loyalty program, you know, subscription model, you know, keeping the customers in our fold. And so it's a very important piece of the puzzle. And we're super excited about it. And I think what excites me more than anything is the guy that's going to run with it, you know, is super passionate about it. And he's been, you know, incentivized to really help us make that thing explode.

And then just the last one on PartsView is that, I mean, it's a smaller business, but it's growing rapidly. Where's the margin profile of that versus your current PS&O business?

Yeah, I'd say at the gross margin level, it's similar, you know, to parts margins, you know, in the, you know, low 30s. You know, but it's right now as far as from an EBITDA margin, you know, it's lagging a little bit. It's profitable, but it's not, you know, not what you would expect because of that reinvestment in its growth.

Got it. All right. Thank you, guys.

Thank you. And I'm not showing any further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.