OneWater Marine Inc.

Good day and welcome to the One Water Marine Fiscal Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jack Ugo, Chief Financial Officer. Please go ahead.

Good morning and welcome to One Water Marine's fiscal second quarter 2022 earnings conference call. I'm joined on the call today by Austin Singleton, Chief Executive Officer, and Anthony Askwith, 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. Across the board, we delivered exceptional results for the second quarter of 2022 and outperformed the industry. Bank Store sales increased 8% on top of an incredible 57% comp in the prior year. Our results reaffirm the strength of our proprietary technology, scale and access to our global inventory pool, and proven acquisition model that allows us to outperform. But most importantly, the enthusiasm and persistence of our team to leave no stone unturned led to this record quarter. Revenue for the quarter increased 34% to 442 million, despite the industry-wide supply chain bottleneck impacting OEM production. Importantly, we saw this flow through to the bottom line with adjusted EBITDA growing 65% to 66 million for the quarter. Contributing to those amazing achievements, I want to highlight the significant increase in our higher margin service, parts, and other revenue, which was up a whopping 178% versus the prior year period. Our emphasis on building out the higher margin, stable revenue streams is really coming to light with the addition of TH Marine. As this portion of our business grows, we become less exposed to typical cyclicality of the new boat market. While we are not seeing any signs of the demand abating, we believe One Water is in a strong position regardless of where we are in any given cycle. As aggressive as we have been with our acquisitions, we hold less than 4% of the total market share. In such a fragmented market, we have a long runway to capitalize on our winning strategy and post-acquisition synergies. This proven strategy and synergies gives us a very healthy run rate EBITDA of 240 million that could easily grow in excess of 275 million as synergies take form over the next 24 months. Looking at the larger recreational sector, the marine industry stands to benefit from the migration of populations moving on or near the water. When someone sells their waterfront home and consequently their pre-owned boat, someone else swoops in and buys the home and of course a new boat. In the end, we see this churn as a net positive as more boaters enter the lifestyle. In the more immediate term, we are preparing for the summer selling season as demand continues to accelerate alongside the warmer weather. April was another great month with positive same store sales and we are encouraged by a strong start. Turning to some of our more recent acquisitions, We closed two tuck-in parts and accessories deals this quarter and closed a large dealership transaction in early April. Denison Yachting ranked number one in super yacht sales for three consecutive years is an outstanding addition to our list of strategic acquisitions. With Denison, we significantly extend our customer reach in the super yacht category, as well as improve our service offerings, such as Denison's yacht charter and management services which have experienced record growth since 2019. These services coupled with the brokerage sales will continue to support our higher gross margin profile in the future. As a new boat margins find a new normal, which we expect to happen in the next couple of years, Denison has an exciting opportunity for us, and we look forward to bolstering our combined leadership position in the space. As a part of our corporate acquisition and diversification strategy, we have established a target to complete two to four parts and service acquisitions per year, primarily through our acquisition engine, TH Marine. In addition, we are also targeting to complete four to six dealership acquisitions per year. These transactions continue to add significant shareholder value and are a key ingredient to OneWater's competitive strengths. The quality of our acquisition platform, robust pipeline, and the ability to add true synergistic value is truly unmatched. These transactions will continue to leverage OneWater's expertise and platform to efficiently scale, yielding a true remarkable shareholder return for years to come. In addition to acquisitions, we recognize an opportunity to return cash to shareholders and make strategic investments and what we view as a very undervalued asset, OneWater. This quarter, we announced our first ever stock repurchase program with an authorization of up to $50 million. Considering our current market valuation against our growth outlook, on a cash return perspective, stock repurchasing can be as accretive as a dealership acquisition with no integration or operational risk. With the program in place, we can now weigh the opportunity against deals giving us another tool in our tool belt to drive value to our shareholders. With that, I will turn it over to Anthony to discuss business operations.

Thanks, Austin. Strong demand from the beginning of the year carried into the second quarter, despite typical winter seasonality. While SSI data showed a decline for the industry, our customers are out in our stores shopping for their next boat, with no signs of slowing down. Boats are flying off the lot, in many cases before they even arrive. Our team is doing an excellent job leveraging our technology to pull boats in every which way to satisfy customer demand. In fact, pre-sold inventory remains elevated at almost double the level in the prior year period. At the same time, we are continuing to add amazing dealers to our portfolio that are utilizing our global inventory to help fuel their outperformance. For example, Walker Marine, which we acquired in December of 2020, has more than doubled its pre acquisition EBITDA in the last 12 months. While recently acquired dealers are doing an extraordinary job in pulling from our global inventory, this does put some pressure on the same store sales calculation, which could cause some choppiness over the next two quarters. However, We have an incredible business model with proven performance and a great position within our sector. And we're very confident in our yearly same store sales guide. Our advanced inventory tools allows us to work efficiently around the low inventories. We can hold less assets in the store, reducing our floor costs and supporting a higher margin profile while still providing for our customers. The business model drove a 530 basis point increase in gross margins for the quarter compared to the prior year. Over the last two quarters, we have focused on building inventories in preparation for the summer selling season. At the end of the second quarter of 2022, we held 293 million of inventory, an increase of 107 million compared to the prior year period. The increase in our global inventory was partially driven by many of our acquisitions coming online. tempered by some of our highest performing dealers, which are able to pull from our global inventory to help meet the strong demand in the quarter. This seasonal increase was expected, but it does not take inventory back to the levels needed for the upcoming selling season. Of course, the industry continues to face challenges in supply chain, but as we have demonstrated over the last several quarters, our exclusive technology and strong vendor relations will allow us to navigate the environment in an efficient manner. While we still expect macro and challenges to persist, it is unclear when the supply chain environment will normalize. In either environment, we feel confident about our position to continue our outperformance with these tools at our disposal. We also stand to benefit from our emphasis on growing the high margin, less cyclical parts and service businesses. which should continue to provide stable and enhanced profitability moving forward. Moving on to our marketing activities, we continue our balanced strategy between boat shows and local dealer sponsored events. This quarter represented the second year when most regional and local winter shows were canceled. Based on our results year to date, it appears our customer engagement, marketing, and local events are more than compensating for the cancellations. Moving forward, we will continue to be innovative with our marketing in the midst of elevated demand. Customers are out, they're shopping, and we're getting them both as fast as we can. And with that, I'll turn the call over to Jack to go over the financials in more detail.

Thanks, Anthony. Second quarter revenue increased 34% to $442 million from $329.6 million in the prior year quarter, fueled by a significant increase in parts, service, and other revenue from and an 8% increase in same-store sales. New boat sales grew 21% to $290 million in the fiscal second quarter of 2022, and pre-owned boat sales increased 35% to $75.9 million. We continue to benefit from our diversification strategy in growing the higher margin parts of our business, which contributed substantially to our results in the quarter. Financed insurance revenue increased 27% to 14.9 million in the second quarter of 2022. Service parts and other sales climbed 178% to 61.3 million, driven by the contributions from our recently acquired businesses. Gross profit increased 61% to 142.5 million in the second quarter, compared to 88.8 million in the prior year. primarily driven by the increase in gross margin of new and pre-owned sales and the fundamental mix shift toward the higher margin service parts and other sales. Gross profit margin increased 530 basis points to 32.2% compared to 26.9 in the prior year. Second quarter 2022, selling general administrative expenses increased to $75.5 million from $48.3 million. SG&A as a percentage of sales bumped up to 17% from 15% in the prior year. This increase in SG&A as a percentage of sales was due mainly to higher variable personnel costs driven by the increased level of profitability compared to the prior year quarter. Operating income increased 53% to $59.4 million compared to $38.7 million in the prior year. driven by an increase in gross profit primarily offset by SG&A expenses. As a result, adjusted EBITDA increased to $66.1 million compared to $40.1 million in the prior year. Net income for the fiscal second quarter totaled $42.4 million, or $2.54 per diluted share, up 38% from $30.6 million or $1.83 per diluted share in the prior year. For our fiscal second quarter of 2022, charges related to transaction costs and contingent consideration adversely impacted diluted earnings per share. These amounts tax affected at 25% were 13 cents per diluted share in the second fiscal quarter of 2022. Looking ahead for the full fiscal year 2022, we are raising our outlook for adjusted EBITDA to be in the range of $230 to $240 million and earnings per diluted share to be in the range of $8.60 to $9 per share. We maintain our anticipation for same-source sales to be up high single digits despite ongoing inventory challenges. These projections include acquisitions completed during the second quarter and the recently completed Denison Yachting transaction but exclude any additional acquisitions that may be completed during the year. With regard to our capital allocation, we remain focused on driving shareholder value by accelerating organic growth, executing on strategic M&A opportunities, and returning value to shareholders through our share repurchase program. As Austin mentioned, we view the new program as another opportunity to drive returns for our shareholders, and we will repurchase stock opportunistically. To conclude, we are progressing well towards our long-term goals, integrating market-leading dealers and growing our higher margin revenue streams. With our proven strategies, we look forward to generating even more profitable growth and unlocking value for our shareholders. This concludes our prepared remarks. Operator, will you please open the line for questions?

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Craig Kennison with SPYRD. Please go ahead.

Hey, good morning. Thanks for taking my questions. So we're in a rising rate environment. We saw the Fed move yesterday. I'm curious what the average rate your consumer pays and whether you're seeing any change in behavior as rates rise, whether they put more money down, cancel deals, or change their behavior in any way because of rising rates.

Craig, thanks for that. I'll let Anthony kind of maybe jump in on this, but I'll just start off by saying, you know, we have continuously had to fight for F&I. It's not something the majority of our customers come in planning on writing a check, and it's conversion that we've really had to work on. So, you know, I don't think there's been a shift of that at all. The rates haven't moved significantly. You know, one of the things I'll point out that as rates continue to go down, boat financing rates did not. You know, they kind of hung out in that, you know, low fives, mid-fours to low fives. And so they haven't seen the increase as fast as or as quick as like mortgage rates. But Anthony knows better than that on the day-to-day, especially over the last couple of weeks.

Yeah, I mean, the rates, we've always operated at a bit higher rate, if you will. And we continue to echo exactly what Austin said. We continue to, you know, fight to get people to finance. So it has zero effect on us at this point.

Okay, great. And then, Jack, just to follow up on your share repurchase program, can you give us a feel for what your diluted share count is? could be for the full year, at least based on your guidance?

Yeah, I think at this time we're not projecting in our guidance a material change in the number of shares. I'll remind you that we did indicate that we were going to wait until after the earnings release got out there before we were in the market buying shares. And so we'll be opportunistic and certainly update you as the program goes along.

Great. Hey, thank you.

Thanks, Greg.

Our next question comes from Joe Altabello with Raymond James. Please go ahead.

Hey, guys. Good morning. A couple questions for me. I guess, first of all, you know, there's no doubt more macro uncertainty today than there was, call it, six months ago. And given the longer lead times in terms of delivery throughout the industry, and I think you guys are seeing that as well, Is a customer less likely to commit to a purchase today for delivery three to six months out or even longer if they don't know what the macro is going to look like? I mean, it sounds like you guys are not seeing that, but we heard from Camping World, for example, yesterday mentioned some softness starting in February. And I'm curious if you guys are seeing that at all in your business.

Zero. Nothing.

Zero. Nothing. Nothing.

Joe, the other neat thing I spoke about before is our manufacturers is so unlike 20 years ago. The manufacturers continue to come out with innovative products that everybody wants and they're willing to wait for it. 20 years ago, they changed the color of the boat from year to year. Every one of our manufacturers has a minimum of two up to seven different models they're coming out with that are just, oh, my gosh. So people are willing to wait for it because they are that spectacular.

Okay, that's very helpful. And maybe a second question on capital allocation. You talked about doing two to four parts and service acquisitions, four to six dealer acquisitions, and then the $50 million buybacks. Could you do all of that together, or would the $50 million of buybacks potentially cause you to do fewer M&A deals?

Well, I mean, I think it would be based off the size of the M&A deals. You know, this year, if you look at the sheer size of Denison, if you look at quality, I mean, those two deals alone are bigger than, you know, if you go back several years ago, six deals we did in one year, just those two. So it really is going to depend on the size of the deal. We do have some bigger deals in the pipeline right now. I mean, I think that, you know, we're just going to look at it, you know, as where are we – what's the price of the stock at the time that we're ready to allocate capital, and where's the timing of the deals. But, yeah, we can do them all if they were on the smaller side. If they were on the bigger side, you know, we can't do two to four and four to six just on the acquisition side if they're all really big. And so, you know, the guide for the number of deals, you know, is just kind of where we know our pipeline is. But if a bigger deal comes along, we might only do one P&A deal It gets big. And we might only do, you know, three, you know, dealership deals if they're big because they're going to, you know, be the same as doing six. So it's really going to be just what's out in front of us from a timing perspective of when we can get deals closed. But, yeah, we could do it all at one time if we wanted to. If they're the right size.

And with that said, I mean, we've already completed four dealership acquisitions this year and two P&A acquisitions this year. Typically, the June quarter is, because it's season, it's typically a quarter that we don't close a lot of acquisitions traditionally, but it also is a quarter where we generate significant cash flow. And so we've done a number of acquisitions in periods of slow cash flow, and now we're ending peak cash generation season.

Okay, great. Thanks, guys.

Our next question comes from Michael Schwartz with SunTrust Robinson Humphrey. Please go ahead.

Hey, guys. How are you? Good morning. I guess starting off maybe for Jack, just trying to, I guess, better understand the moving pieces to the comparable sales, the plus eight in the quarter. I guess I'm just trying to back into unit volume versus price mix, and then maybe how that compares to how the industry performed on a unit basis in the first quarter.

Yeah, from what I recall, we performed ahead of what the industry did from a units perspective, but a lot of the increase was due to price and mix.

Okay, thank you for that. And then just on guidance, I'm just trying to make sure I'm thinking about this correctly. You raised the range on EBITDA by about $20 million. And I think the kind of partial year benefit from Denison and YAC was maybe somewhere in the, you know, call it $10 million range. I guess, am I thinking about that right? And if so, then... it seems like you took up guidance by another 10 million on the base business. Is that just because you performed better in the second quarter than you had previously anticipated, or am I thinking about that wrong?

Yeah, no, it's because we performed better in the quarter than we anticipated.

Okay, great. Thank you.

Our next question comes from Fred. Whiteman with Wolf Research. Please go ahead.

Hey, guys. Good morning. Maybe just to follow up on that quarterly comment for the comps, I think you had talked about sort of being close to flattish this quarter, but you came in ahead of that. Was that just better price recognition? Did you actually see better deliveries than you had planned? Where was sort of the disconnect?

I think we've been pretty consistent over the last year, Fred, that, you know, when you go into the end of the quarter, that last 14 days of the quarter really can change it or make it better or worse or whatever. And I think that, you know, the manufacturers, for whatever reason, first quarter this year, they did really well as far as getting deliveries out and getting the votes to us. I know that April has been a pretty good struggle for most of our manufacturers from a production or supply chain, you know, issues and challenges they were having. But it just – You know, the quarter came together. Anthony, if I'm wrong, let me know. But it just really came together, you know, the last couple of weeks. March was a good month, as we've seen April to be a good month also. It's just deliveries. It's just the season.

Makes sense. And the other thing that you guys have sort of talked about is just the impact on reported comp sales as you integrate some of these dealers and they have access to a wider portfolio. Inventory suite, right? So even though reported revenues benefit from that, the actual comp impact is a little bit detrimental. Could you sort of talk about how to think about that into the back half of the year? Is that impacting sort of this implied slowdown on the two-year and three-year basis for comps in the back half of the year? Or are you more skittish on the consumer, more skittish on sort of deliveries? Like how does that all work out into the guidance that you've outlined?

Yeah, we're definitely not skittish on the consumer. You know, same-store sales, you know, we talked about this at year-end, and we've talked about this a pretty good bit. It's going to be choppy, and it really goes in, like I just said, the last 14 days of the quarter can swing it. But also, you know, we're looking at quality, you know, with a huge dealership that's never had enough inventory. You know, they haven't had enough inventory for the last three to five years with certain brands, and now they can pull from the global inventory that we have. So you can look at Grady or Pursuit. They can sell more bigger Grady whites, more bigger Pursuits than they've been able to in the past because we have more allocation because of the total network. And so let's say we're supposed to get a big Grady-White up in Ohio. Well, if we can sell it in Florida beforehand, they'll take that production spot and it can skew same-store sales. I don't see it being significant. It's not like we're guiding to a high single digit and it's going to be negative or it's going to go jump up to 20, but it can swing this. the pull from the global inventory for stuff that's not counted in same-store sales. It could swing at, Jack, what, 2% to 4%?

Yeah, it definitely could move at a percent or two.

Yeah, just with the dollar volumes, it doesn't take a lot of units. So we're kind of keeping an eye on that. I mean, I think we've never really given out or never really worried about quarterly same-store sales comps versus the yearly guide. We're very comfortable, like Anthony said in his side of the release, that the high single digits is what we're pretty confident in that. But just to say this, there is no slowdown in the consumer right now. We're not seeing that at all.

Yeah, I think if anything, there's some conservatism built in about concerns with some of what we've heard a little bit from some of the manufacturers with supply chain hitting some bumps in the road here recently. Hopefully, they're able to work through those quickly, but that would probably be the area of concern.

Awesome. Super helpful, guys. Thank you.

Again, if you'd like to ask a question, please press star then one. Our next question comes from Drew Crum with Stiegel. Please go ahead.

Okay, thanks. Hey, guys. Good morning. So the past several quarters new boat growth has outpaced pre-owned, but that was not the case this quarter Can you talk about what some of the dynamics were behind that and then have a follow-up?

You know we have continued our strategy as we talked about in the past of you know running our five business groups together and We've added multiple used boat buyers, if you will, just going out on the market. And that's what their job is to do is to buy and grow our used boat business. I mean, there's a lot of growth ahead of us with our pre-owned market. No matter what's going on in any environment, there's always, you know, there's that statistic out there, there's a million used boats a year that change hands and the majority of it's person to person. And we are working feverishly trying to get in the middle of that.

Got it. Thanks for that, Anthony. And then, Austin, in your preamble, you suggested adjusted EBITDA of $275 million. I think you said it was easily achievable over the next 24 months. I think last quarter you guys talked about a $300 million-plus number. I just want to make sure I'm understanding those two correctly, if you could reconcile the two figures.

Thanks. Yeah, I would say those are a little bit of an apple and an orange. what Austin was kind of referring to was just kind of where our run rate is at today and our ability to synergize that number. The previous number we got at was just talking about if you look at our adjusted EBITDA and you layer in growth, you know, 10% to 15% growth from acquisitions and 5% to 10% from the base business, that gets you to a 300 million number by 2024 without any sort of synergies. And so I think we're just trying to, you know, just provide some color around the different ways that how we look at the business and what we see ahead of us with growth opportunity and how our EBITDA can increase over time, you know, just as we continue to run the business. Got it. Thanks, guys.

Thank you. That will conclude our Q&A session and the conference call today. Thank you for your participation. You may now disconnect.