OneWater Marine Inc.

Thank you for standing by and welcome to One Water Marine Fiscal Third Quarter 2022 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 will need to press star 1 1 on your telephone. I would now like to hand the call over to Chief Financial Officer Jack Gazelle. Please go ahead.

Good morning, and welcome to One Water Marine's fiscal third quarter 2022 earnings conference call. I'm 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 on 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. 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. Our exceptional third quarter results reflect broad-based strength across the business, the diversity of our business model, and the power of our acquisition engine. We delivered another record quarter with revenue increasing 41%, to $569 million and adjusted EBITDA rising 45% to $95 million compared to the prior year. Same-store sales increased 12%, reflecting our continued outperformance of the industry. Importantly, as the quarter progressed, we shifted to both unit growth as well as price increases continued to drive sales growth. This momentum continued in July as we saw a double digit increase in same store sales and continued unit growth during the month. All at a time when OneWater and the industry are at a record low field inventory. Our same store inventory compared to 2019 is down 10 plus percent in terms of dollars and an excess of that in terms of units. We do not see inventory returning to a new normal for 24 months with the current demand. Growth during a time when one water in the industry are at record low levels of inventory is a testament to the dedication of our team and the resilience of our business model. Our results through the first nine months of the fiscal year have already outpaced all of last year. We expect a strong finish to the year as demand remains robust. This coupled with the strength of our OEM partners and our leveraging our inventory footprint gives us confidence we will be able to get our customers the boats they want, supporting our increased full-year outlook. Our record results in the quarter clearly highlight the power of our aggressive acquisition strategy, which accelerated organic growth in the quarter. For example, our recent acquisition of Denison Yachting contributed significantly to a 38% increase in pre-owned sales and a 390 basis point improvement in pre-owned margins. The addition of our parts and service acquisition engine, TH Marine, propelled a more than 150% increase in service, parts, and other sales. We continue to use our acquisition platform to fuel the expansion of our higher margin revenue streams, including our recent announced agreement to acquire Ocean Biochem. is a leading supplier and distributor of cleaning and maintenance products for the marine industry, as well as the automotive, power sports, recreational vehicles, and outdoor power equipment markets. We see tremendous synergies and expect to significantly advance growth in our parts and accessories businesses. Our integration playbook continues to drive best-in-class results and support significant top-line growth while enhancing our margin profiles. Our ability to significantly improve EBITDA of our acquired companies has been a meaningful contributor to growth over the past two years and will continue to be our secret sauce in the coming years. For the fiscal year, we have already completed our acquisition guidance of four to six dealerships and two to four parts and service acquisitions per year. With that said, the pipeline remains robust. and we will maintain our track record of disciplined strategic acquisitions as we evaluate our next opportunity. Since becoming a public company just over two years ago, we have continuously delivered for our shareholders, and we believe that we have the strategy, scale, the expertise to position us for continued outperformance. And with that, I will turn the call over to Anthony to discuss business operations.

Thanks, Austin. As Austin mentioned, we continue to outperform the industry. During the quarter, same-store sales increased 12%, reflected of solid organic growth. As Austin mentioned, we are starting to see growth in both units and average prices. This compares to the industry, which is reportedly down 10% to 20%. Demand continues to be strong. Pre-sold inventory remains elevated. Customer deposits in the quarter increased nearly 50%. compared to the prior year and are also up compared to the prior quarter, while our backlog is at record levels reflecting continued customer demand. While the industry continues to face a challenging supply chain, we are benefiting from the scale and quality of our dealerships as they leverage the available inventory across the network. At the end of the third quarter of 2022, inventory totaled $269 million, which includes our recently acquired dealerships. Compared to the fiscal second quarter of 2022, inventory was down 24 million. As the summer selling season ramped on a same-store basis, inventory is down approximately 10% in terms of dollars and an excess of 20% in units compared to 2019. Utilizing the flexibility and the sophistication of our inventory tools, our team has done an excellent job of not only pre-selling the boats that our customers want, but also using the tools to make sure the boats are delivered efficiently as possible. At our recent dealer meetings, we've got a sneak peek into some of the incredible new products coming to the market. Manufacturers are introducing innovative new products that are selling out well into 2024. Our customer engagement remains high, and the team continues to provide excellent service for all their boating needs. As we have discussed before, our exclusive technology and powerful inventory tools combined with our strong vendor relationships enable us to navigate the environment efficiently and effectively. With our proprietary tools and technology at our disposal, we feel confident in our ability to continue to outperform the industry, regardless of the persistent macro and challenges. In summary, our processes and procedures across all aspects of the business continue to drive market-leading results. Our team continues to deliver strong growth quarter after quarter, further positioning OneWater as a leader in the industry. I will now turn the call over to Jack to review the financials.

Thanks, Anthony. Physical third quarter revenue increased 41% to $569 million in 2022 from $404 million in the prior year quarter. This is a result of a 12% increase in same-store sales and revenue from recently acquired businesses. New boat sales grew 31% to $377 million in the fiscal third quarter of 2022, and pre-owned boat sales increased 38% to $98 million. We continue to benefit from our diversification strategy in growing the higher margin parts of our business, which contributes substantially to our results in the quarter. Service parts and other sales climbed 153% to $75 million, driven by contributions of our recently acquired business Finance and insurance revenue increased 25% to $19 million in the third quarter of 2022. Gross profit increased 45% to $184 million in the third quarter compared to $127 million in the prior year quarter. This is primarily driven by our strategic acquisition of higher margin, less cyclical service parts and other revenues, as well as the shift in our mix and size of those sold and our dynamic pricing. Gross profit margin increased 90 basis points to 32.3% compared to 31.4% in the prior year. Third quarter 2022 selling general administrative expenses increased to 88 million from 61 million. SG&A as a percent of sales was 15% and in line with the prior year. Operating income increased 35% to 88 million compared to 65 million in the prior year driven by the increase in gross profit. As a percentage of sales, operating income margin was 15.4% in the quarter. And as a result, adjusted EBITDA increased to $95 million compared to $66 million in the prior year. Net income for the fiscal third quarter totaled $65 million, or $3.86 per diluted share, up 25% from $52 million, or $3.04 per diluted share in the prior year. For the fiscal third quarter of 2022, charges related to transaction costs and continued consideration adversely impacted Duluth's earnings per share. These amounts tax-effected at 25% were $0.20 per Duluth's share in the third quarter of fiscal 2022. Turning to the balance sheet, as of June 30th, 2022, total liquidity was in excess of $125 million, including cash on the balance sheet, availability under our revolving line of credit, and floor plan facility. Total inventory as of June 30th, 2022 was $269 million and remains constrained as evidenced by our same store inventory being down approximately 10% in dollars compared to June 2019. This despite the price increase that occurred over the past three years. Total long-term debt as of June 30th, 2022 was $336 million. Adjusted net debt or long-term debt net of cash was one times trailing 12-month EBITDA. While we are comfortable with our liquidity and leveraged position, we continue to monitor the macroeconomic environment and are being prudent in our capital allocation. Our strategy for capital allocation perspective has not changed. We are focused on reinvesting in the business to accelerate organic growth, strategic M&A opportunities, and as we have discussed, a potential share repurchase. To that end, last quarter we announced that the Board authorized a share repurchase program of up to $50 million. As indicated in the release, we were blacked out from making purchases until the March quarterly earnings were released. During that blackout, our conversations with OBCI accelerated and our governance guidelines prevented the blackout from lifting. As such, we were unable to make any repurchases during the quarter. We remain committed to opportunistically repurchasing shares and believe this to be another strategic avenue to return value to shareholders and make strategic investments in what we view as a very undervalued asset. Looking ahead for the full fiscal year 2022, we are raising our outlook for adjusted EBITDA to be in the range of $240 million to $250 million and earnings per diluted share to be in the range of $9.20 to $9.60 per diluted share. We now anticipate same-store sales to be up low double digits for the year, despite the ongoing inventory challenges. These projections include acquisitions that have been completed during the third quarter, but exclude any additional acquisitions that may be completed during the year. To conclude, we continue to rapidly expand the business and position One Water for sustainable growth. We remain committed to successfully executing on our strategic growth strategy and returning value to our shareholders. This concludes our prepared remarks. Operator, would you please open the line for questions?

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question. comes from the line of Drew Crum of Stiefel. Drew Crum, your line is open.

Guys, good morning. So the comments around dealer inventory not normalizing for another 24 months, how much of a factor supply chain where others have suggested some easing more recently, or is this more related to the consumer demand you're seeing or anticipating? And then I have a follow-up.

Well, I mean, I think it's a combination of the two, Drew. I mean, you know, we're still – the manufacturers seem to be getting a better footing and getting a little bit more consistent than they were back in April and the first part of May. So, you know, we're getting a little bit more visibility on when boats are coming in. But, you know, as we talked about earlier in the script, you know, that, you know, demand has not waned at all. I mean, we saw unit increases in June and July. And, you know, that's something we hadn't seen for a while. It's mainly been price. So, I think it's just a combination of the two, and I don't know how to weigh one over the other right now.

Okay, fair enough. And then, Austin, you highlighted your acquisition strategy. I think Jackie mentioned in your prepared remarks some prudence around capital allocation. Is the four to six dealer acquisitions per year and two to four on the service and parts side still a reasonable cadence, or would you look to slow the pace in this environment and alternatively do buybacks? Thanks.

Yeah. I mean, I, I think, you know, we're going to look at what is the best, you know, return on capital. Um, you know, when, when you look at where the stock price was yesterday versus where it was, you know, three months ago, it's a, it's a, it's quite a bit different. I think we just have to, you know, look and manage kind of both. I mean, I don't know why we can't find a fair balance between the two. I think that, you know, since we've already kind of completed the cadence for the year, With all the macro that's out there, I think we're just going to be a little bit slower on the pedal for the next, you know, 30, 60 days, 90 days, kind of wait and see how things shake out. But I think that, you know, we're not going to lower our cadence on the acquisitions. They're just too accretive. But we're also going to, you know, be mindful of what, you know, the return is on a stock repurchase depending on when the time is right to do that. Got it. Thanks, guys.

Thank you. Our next question comes from the line of Joseph Altebello of Raymond James. Joseph Altebello, your line is open.

Good morning. I guess the first question I want to delve into the 12% comp increase you saw in the quarter. I think you mentioned you saw unit growth in June and July. How much of that 12% was units in the quarter?

Yeah, I'd say units in the quarter were essentially flat. So, you know, it really was more in the back end, started to see that trend increase. you know, the tide turned there. Okay.

Thanks, Jack. And then maybe more of a broader question, you know, why do you guys think your customer is being less impacted by macro headwinds as we're seeing a number of companies warn, you know, so far this running season on, on slowing demand? Yeah.

I mean, I, I think that, you know, it's, you know, we're selling a, a high end premium product. I think, you know, we've mentioned this in a couple other calls, um you know actually last quarter that you know i think there's been a a pretty good push to honor near water as a secondary or a primary home over the last you know two years and i think that's leading a lot of it but it also goes back to you know what anthony talked about earlier that you know the manufacturers are continuing to come out with with really good innovative um you know uh stylish you know new product that keeps the consumer excited And, you know, when you look at just the churn, the growth that we had in the industry because of COVID and now that growth is churning into new products as, you know, pre-owned is holding a really good, you know, dollar. I mean, you can sell pre-owned real good. So the churn is just there because of the excitement. Yeah. That's the best thing I can put at it. I think there's just been a great flight to water or on water, near water, and then just the innovation and the technology that's out there is just keeping the consumer excited.

It's helpful. And then maybe one last one for me in terms of price increases that you're seeing on model year 23. What does that look like and what does that look like versus model year 21 and 22, for example?

I'm going to have to default that one to Anthony. I haven't really looked at the – across the board yet.

Yeah, they're continuing to go up. You know, we used in the past to get price increases, you know, at the beginning of the year. And now, unfortunately, with some manufacturers, it's two to three of them. But again, like Austin said, it's not the same old boat, but a different color. I mean, there's things that they're putting in the boats that are making people, they've got to have kind of things.

Is pricing stabilizing, though, Anthony, at all?

Yeah, it's starting to.

OK. All right. Thanks, guys.

Thank you. Our next question comes from the line of Fred Whiteman of Wolf Research. Fred Whiteman, your line is open.

Good morning. Could we just touch on the new boat margins in the quarter? It was up year over year but down a little bit sequentially. I think you guys had signaled that you were expecting that to find a new normal last quarter, but how do you sort of see that trending going forward?

Yeah, I'd say what you see there is a little bit of seasonality that, you know, different seasons, different types of boats, you know, we do see some variation. You know, I think the margin environment remains robust or was not, you know, significant discounting at all in the quarter, so I don't want that number to suggest that there was. But we continue to go to market with a dynamic pricing approach where we're looking at what are the market dynamics, what is in each individual market, and adjusting price accordingly. So I think that's more a function of mix than really any other sort of indication.

Okay, that makes sense. And you guys have also talked about some potential same-store sales headwinds from inventory sharing, just with some of these dealerships that have been acquired but haven't come into the comp base. I mean, is there any – did you see any of that in the quarter? Is there any way to sort of size what that impact was just on, you know, what looks like a pretty strong comp number? I guess, could this have been better if we sort of reflected some of those units on those acquired deals?

You know, you have pockets that are hotter than others. That west coast of Florida is really hot. You know, the quality deal was a large deal. They run a lot of volume through there. You know, I don't think it was super meaningful, Fred. It's not like the 12 would have been an 18 or 16. You know, the 12 could have been maybe a 12 and a half or 13. You know, so we've done a really good job in most of the stuff. you know, that came in in this past quarter with stuff that was, you know, on order or that it was already in stock at that dealership and it was the quick turn. So I don't think it's a meaningful move at all. Perfect. Thank you.

Thank you. Our next question comes from the line of Michael Schwartz of Truist. Michael Schwartz, your line is open.

Good morning, Eric. A few questions for me. First of all, just a point of clarification on the guidance, Jack. I just want to confirm that your new guidance does not include the Ocean Biochem acquisition, correct?

That is correct. And, you know, as you think about that, we indicated before that we expect that to close here in our fiscal fourth quarter. And, you know, it will not have a meaningful impact to the quarter, you know. you know, maybe a million a month of EBITDA out there. But, you know, with this type of transaction, we're going to have some pretty substantial transaction costs associated with it. So we'll be looking forward to that. But then we'll update the guidance post-close.

That's helpful. Thank you for that. And then I know, Austin, your comments suggest you're not seeing any change in the consumer backdrop, consumer dynamics. Are you seeing any changes in trends or disparity in trends? I know you're predominantly in the southeast, but any changes in trends amongst geographies, any changes in demand across different boating segments?

Not yet. I mean, you know, that might raise its head once you get further into the, you know, what we would call the slower time of the year. But right now, I mean, we're in the middle of the season, and Anthony's really better equipped to answer that. I'm not seeing it, so I'm sure he's not seeing it. You know, you don't have anywhere that's hotter. You know, once the weather gets cooler up north, it'll slow down, but that's, you know, expected and seasonal like we're used to dealing with. Anthony, you want to add anything to that? Yeah, I think you hit it directly on, Austin.

I mean, I think that each one of those segments that we play in have some pretty incredible stuff, and none of it seems to be slowing, some of the stuff. is still sold out until 2024.

Great. Last question for me, and I think you kind of touched on it earlier, but I didn't fully understand it, on the pre-owned margins in the quarter jump pretty significantly, both year over year and, more importantly, sequentially. So I'm just wondering, and I think you called out Denison as part of that, maybe just help us understand what that quarter over quarter jump stemmed from, and is that a sustainable level going forward?

So, yeah, so what that has to do with is the mix within pre-owned, right? Pre-owned is made up of three components. One is going to be used boats that are traded in. Second is going to be consignment boats that we deal. And third is going to be brokerage. And Denison has a very significant brokerage operation. Brokerage is one of those types of transactions that you record on a net basis. you know, so that it has the ability to move margin on low revenue dollars. So it certainly helped, you know, generate that significant increase in revenue, but then also definitely impacted the margins. And, you know, I think there'll be some variability amongst the mix, but I do think going forward, we will have an elevated margin on that pre-online.

That's extremely helpful. Thanks, Jacqueline. Thank you. Again, to ask a question, please press star 1-1 on your telephone at this time. Again, that's star 1-1 on your telephone to ask a question. Our next question comes from the line of Kevin Condon of Baird.

Kevin Condon, your line is open. I think a lot of my questions have been addressed, but I did want to ask about the unit and ASP commentary you gave in disaggregating that same store sales growth. When you say unit growth was positive in June and July, is that total units, or does that also apply to new, or are you seeing, like, better strength in used relative to new?

Yeah, that was more on a same-store basis, right? So, I mean, we've been having significant unit growth just because of the acquisitions, but when you peel it back and look at it on the same-store basis, that would be a combination of both new and pre-owned.

Okay, are they fairly similar in terms of same store unit growth or is one category?

I don't have that number broken down, but I would suspect they're trailing fairly similar. If anything, maybe pre-owned may be lagging a little bit just because throughout, while new boat inventory has been tough, pre-owned has been even more difficult to get your hands on. So we've had now throughout this year, you know, challenges on the pre-owned line just because of the limited inventory. And so, I would maybe suspect that maybe fell a little bit behind.

Got it. Thank you. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.