OneWater Marine Inc.

Ladies and gentlemen, thank you for standing by and welcome to the One Water Marines fiscal fourth quarter and full year 2022 conference call. At this time, all participants are on 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 need to press star 1-1 on your telephone. I would now like to turn the call over to Jack Ezell, Chief Financial Officer.

You may begin.

Good morning and welcome to One Water Marine fiscal fourth quarter and full year 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 would cause actual results and events to differ materially from those described in the forward-looking statements. Factors that might affect future results are discussed in the company's earnings release, which can be found on the investor relations section of the company's website and in its filings with the SEC. The company disclaims any obligation or undertaking to update the 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. We are proud to deliver another year of record results highlighting outstanding execution of our proven growth strategy. I would like to thank our team for their relentless efforts throughout all the challenges facing our industry, including a challenging supply chain and the devastation caused by Hurricane Ian late in the quarter. The storm hit very close to home for OneWater, as we have 43 stores in Florida and 12 in Southwest Florida. Of our stores impacted by Ian, three remain closed but are expected to reopen in the December quarter. Our thoughts and prayers are with everyone impacted and we are working tirelessly to help these communities rebuild. Full year 2022 revenue increased 42% to 1.7 billion on top of 20% growth in 2021. Same store sales growth for the full year was 12% in line with our expectations. We made tremendous progress on our diversification strategy during the year. Service parts and other sales increased 164% compared to the prior year, and finance and insurance revenues expanded by more than 30%. These higher margin revenue streams will remain a key focus area as we see significant room for growth in the years ahead. Our full year of 2022 adjusted EBITDA of $248 million grew nearly 60% in line with our guidance. due largely to our strong execution and diverse business model, supported by robust and steady demand throughout the year. Propelling this growth is our acquisition engine, which was running at full steam, highlighted by our consistent cadence of acquisitions during the year. To that end, we completed four dealership acquisitions during full year 2022 and announced last month we closed the acquisition of Taylor Marine. an award-winning dealer with a strong reputation that complements our presence in the mid-Atlantic U.S. We also announced a definitive agreement to acquire Harborview Marina, a family-owned and operated business that brings aboard a suite of brands, prominent locations, and a loyal local Gulf Coast following. We expect this transaction to close in the December quarter. In addition to these dealership acquisitions, We also completed four parts and service acquisitions during the year as we continue to build out this important component of our growth. We significantly expanded our parts and service business with the additions of TH Marine, Ocean Biochem, Yat Gear, and Jif Marine. We are excited about compounding growth in this area and the higher margin profile it adds to our business. As evidenced by our acquisition activity, The opportunities have been plentiful. Going forward, we remain opportunistic, yet very disciplined in our approach while we monitor the macroeconomic environment and apply thorough analysis to any potential transaction. Finally, I'd like to discuss some important partnerships recently announced. In August, we entered a distribution agreement with Forza X1, creating an opportunity for our customers to design order, finance, and take delivery of Forza X1 boats purchased through OneWater. We are proud to partner with an innovative team advancing the adoption of sustainable recreational boating. Additionally, in October, we signed a strategic partnership with the Sport Fishing Championship. We joined their mission in showcasing the sport of saltwater fishing as a corporate champion, providing OneWater with an opportunity to connect with fishing, boating, and yachting enthusiasts around the world. In summary, we are incredibly proud of our performance and we are excited for the opportunities ahead. We will continue navigating a challenging supply chain environment to meet the healthy demand from our customers while executing on our strategic priorities. We believe these efforts will continue to propel us forward and drive value for our shareholders. With that, I will turn it over to Anthony to discuss business operations.

Thanks, Austin.

The strong demand that we've experienced over the past year continued in the fourth quarter. Now the boat show season has officially kicked off with great results coming out of the first few shows. At the recent Fort Lauderdale Boat Show, we experienced record-setting results. We saw continued demand for boats in all categories, but the 40-foot-plus range remains especially strong. These larger items carry longer lead times that will deliver over the next year or more, providing strength to our already sizable backlog. Further, we have started to see pockets of easing within the supply chain, which supported improved inventory levels in some categories, though they have remained far from pre-COVID levels. Inventories for smaller boats are starting to normalize, but we expect restocking to continue into 2024 for larger boats. That said, we do anticipate making further improvements in the winter months. where we have traditionally been able to build our inventory. As we have highlighted before, our sophisticated inventory tools have enabled our dealers to navigate the environment and pre-sell inventory efficiently and effectively. We are able to keep our fingers on the pulse of the inventory and redirect or adjust orders in response to changing market dynamics. Pre-sold inventory and customer deposits remained elevated compared to the prior year and prior quarter. We anticipate supply chain constraints easing throughout next year and look forward to an enhanced visibility and ensuring more timely deliveries to our customers. As Austin mentioned, we are incredibly excited about our revenue from our higher margin service parts and other sales, which increased more than 200% in the fourth quarter and over 164% compared to the prior eight periods. Our efforts to build this revenue stream lays the foundation for our higher gross margins in our future. We are impressed with the performance of our recently acquired Ocean Biochem, which we believe is well-positioned for continued growth. Our parts and service business is a staple of our diversification strategy and, as expected, contributed significantly to both the top and bottom line of fiscal 2022. Our fiscal year ended on a somber note. as preparation for Hurricane Ian closed most of our Florida locations in the last week of September. Dealers stopped receiving inventory, retail insurance markets closed, and customers were unable to take delivery of their new boats. We estimate this resulted in a $25 million of revenue that was delayed in future quarters until homes, docks, and storage facilities can be repaired and rebuilt. In addition, we expect additional volume in the coming months as boaters seek to replace boats lost in the storm. We expect these sails to be recovered. However, some may be delayed 12 to 18 months. Most importantly, I would like to take a moment to thank our teams for their tremendous efforts in response to the hurricane. Many of our employees and locations were in the path of the storm, but we are relieved to report that everyone is safe and we will continue to support our employees, some of which lost their homes and belongings. the rebuild is well underway, and I could not be more proud of how our team has responded. And with that, I'd like to turn the call over to Jack to go over the financials in more detail.

Thanks, Anthony. Fiscal fourth quarter revenue increased 42% to $398 million in 2022 from $280 million in the prior year quarter. New boat sales grew 22% to $236 million in the fiscal fourth quarter of 22, while pre-owned boat sales increased 33% to 67 million. As Anthony mentioned, we experienced a softer than expected close to September due to the impact of Hurricane Ian as we were unable to close deals in the last week of the month for most of our operations in the Gulf Coast region. We anticipate approximately 25 million in sales to carry over to the coming quarters as communities rebuild. With respect to our diversification strategy, our higher margin businesses contributed meaningfully to our results in the quarter. Revenue from service parts and other sales increased 201% to $81 million compared to the prior year driven by contributions of our recently acquired businesses. Finance and insurance revenue increased 32% to $13 million in the fourth quarter of 2022. Gross profit increased 41% to $126 million in the fourth quarter compared to 89 million in the prior year driven by the increase in the higher margin service parts and other sales as well as the shift in the mix of the size of the boat sold. Gross profit margin decreased by 20 basis points to 31.7% compared to 31.9% in the prior year. Fourth quarter 2022 selling general and administrative expenses increased to 80 million from $55 million or 20% of sales in both periods. Operating income grew 36% to $40 million compared to $29 million in the prior year. And as a percentage of sales, operating income margin was 10% in the quarter. As a result, adjusted EBITDA increased to $45 million compared to $34 million in the prior year. Net income for the fiscal fourth quarter totaled $22 million or $1.28 per diluted share, which is flat compared to $22 million or $1.35 per diluted share of the prior year. Costs associated with non-recurring items including Hurricane Ian, transaction costs, and contingent consideration negatively impacted the fourth quarter diluted earnings per share by approximately 17 cents. Now turning to the full year results. Total revenue for the full year 2022 increased 42% to $1.7 billion compared to the prior year, driven by an increase in the average selling price on new boats and higher volume of pre-owned boats sold. Same-store sales increased 12% in fiscal 2022, marking our fifth consecutive year of double-digit same-store sales growth. Additionally, service parts and other revenue increased 164%, to $255 million for fiscal 2022 as a result of our strategic focus and growth of these higher margin less cyclical aspects of our business. Full year 2022 gross profit increased 55% to $554 million driven by the shift in the mix of size of the boats sold as well as significant increase in the higher margin service and parts and other sales. Gross profit margin for fiscal 2022 was 32%, an increase of 260 basis points compared to fiscal 2021. Selling general and administrative expenses in fiscal 22 increased to 302 million or 17% of revenue from 199 million or 16% of revenue in fiscal 2021. The increase in selling general administrative expenses as a percentage of revenue was due mainly to the higher variable costs driven by the increased level of profitability in the fiscal year and an increase in cost given the current personnel and supply chain environment. Full year 2022 operating income surged to $218 million, a 46% increase from prior year operating income of $149 million. As a result, adjusted EBITDA climbed 59% to $248 million. Net income for fiscal year 2022 increased 31% to $153 million, or $9.13 per deleted share, compared to net income of $116 million, or $6.96 per deleted share in the prior year. Costs associated with non-recurring items, including Hurricane Ian costs, transaction costs, and consideration negatively impacted deleted earnings per share by approximately 90 cents. Now turning to the balance sheet, on September 30th, 2022, total liquidity was in excess of $100 million, including $42 million of cash and availability under our credit facilities. Total inventory on September 30th, 2022 was $373 million, compared to $269 million at June 30th, 2022, and $144 million at September 30th, 2021. As Anthony mentioned, industry-wide supply chain constraints began to ease during the fourth quarter. Total long-term debt currently stands at $443 million. Our net debt to adjusted EBITDA ratio is 1.6 times. While we are comfortable with our liquidity and leverage position, we continue to monitor the macro environment and are being prudent on our capital allocation. Looking ahead to 2023, we expect a robust demand environment to moderate. to more traditional seasonal cycles. We anticipate same-store sales to be up low to mid-single digits despite the ongoing inventory challenges. We expect adjusted EBITDA to be in the range of $250 million to $260 million, and earnings per diluted share to be in the range of $9.25 to $9.75 per diluted share. These projections exclude previously announced Harborview Marine Acquisition and other acquisitions that may be completed during the year. With regard to our capital allocation, we will remain focused, amplifying organic growth while patiently monitoring strategic M&A opportunities. We always consider market dynamics and will evaluate strategic targets and now is no different. As always, we will be prudent in our approach and put our cash to work when we drive the long-term value for our shareholders. This concludes our prepared remarks. Operator, will you please open the line for questions?

Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your touch-tone telephone. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Joe Altabello with Raymond James. Your line is open.

Thanks. Hey, guys. Good morning. First question is on product mix. You mentioned it and called it out as a headwind on gross margin. Was that size or content or both?

Joe, it's entry level, you know, what we would consider premium entry level for us. So it's, you know, Anthony spoke of 40 feet and larger space. being in extreme demand still. And so as you start coming down in foot, it starts to ease up a little bit. So we start talking about 30 to 40 foot that there's a higher demand because there's a larger backlog on that than there is on the 20 to 30 foot. So as you creep down in feet, you're starting to see a little bit of an ease in inventory build just because that cycle, the build cycle is much shorter. um than um than the larger boats and the backlog is not as it's sold out as far got it okay just to follow up on that in terms of inventories obviously up uh significantly year over year where do you guys stand on a same store basis versus 2019. yeah we're so so i'd i'd go ahead jack go go ahead and then i want to jump in after you go yeah i would say we're still behind um

you know, when you look at the numbers, obviously, they're a bit difficult to compare with all the acquisitions that we've done. But, you know, going back to 2019, I went and did some weeks on hand analysis. And, you know, back then, we were averaging around 20 to 22 weeks on hand, and we're currently around, you know, 11 to 12. So, We still have some room to grow on, you know, from that perspective. You know, acquisitions contribute about 40%, 30%, 40% to the growth of our inventory year over year. So it's a meaningful number, and there's still room to go. I'd say, as Austin was highlighting, you know, some of the smaller boats are starting to normalize, but we have a ways to go with the larger boats.

And then going back, Joe, going back to what Jack just said about days on hands, we were playing around with some back of the national numbers and talking with our floor plan providers also. And what was funny is, or what I thought was really neat is if you look at September of 2019, the industry was about 22 weeks, days on hand as an industry, as a whole, we were around just north of 20. So a little bit better than the industry, but not significantly better today, September of this year, the in the the inventory for the industries at 16 weeks as a whole and we're like jack just said around between that 11 and 12 week so you know inventory is still still pretty depleted and the bigger the boat is the the longer it's going to take for that to normalize that's very helpful austin maybe one more if i could squeeze it in in terms of acquisitions how are you guys thinking about the m a market for 23 are you still thinking about you know four to six

fuel or acquisitions and two to four parts and service?

Well, I think we're going to monitor the macro over the next, you know, several months and kind of look at that. This is really the wrong time of the year for us to be doing acquisitions. If you look at the way they layer in, the harbor viewing is a great one for us because it gives us some lease security in the panhandle that we didn't have at our Pensacola location. So that's a really good small deal for us. But the bigger deals we're going to look at probably a little bit harder than we have in the past because we don't think margins are sustainable. You know, new boat margins, we've been saying this for the last couple of quarters. We feel if somewhat peaked or, you know, sub 40 feet, they're not going to get any better. They're probably going to start to erode as we move into next year. Now, how much of that erosion we have to take on as a dealer versus the manufacturing starting to do rebates is yet to be seen. but we're going to be, we're going to be extremely prudent. You know, we've got a lot of deals in the pipeline and a lot of deals that look really good, but if it's not something that we see a gigantic upside in, you know, like if we can't look at it within 30 seconds, say, okay, this deal is an easy double inside 24 months because it's not taking care of all the components that becomes enticing. But for the, for the short term right now, we're probably just going to sit back and watch a little bit. But we will be doing some M&A. I just don't know if we'll get four in this year. I think we're just going to be really prudent and make sure whatever we do has tremendous upside because we're going to have to let these new boat margins normalize for a little bit. Got it. Thank you, guys.

One moment for our next question. Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your touchtone telephone. Our next question comes from Michael Swartz with Truist. Your line is open.

Hey, guys. Good morning. This is Lucas on for Mike. Just had a question on going back to Ian real quick. You gave out the revenue impact, but I was wondering if you could also talk about any costs associated with it.

Yeah, we have about a couple million dollars as expense in the P&L right now. you know, as our kind of estimate and some of the costs we incurred with respect to cleanup and some things like that or preparation. You know, it kind of remains to be seen what's going to happen with insurance claims and recoveries and things like that. But, you know, not a ton of charges at this point. We do have, you know, three locations, Fort Myers Beach, Fort Myers, and Englewood that were a little more impacted. So there's some recovery efforts and rebuilding we're having to do, but we expect those locations to be back online here in the coming days and ready for business. Okay, perfect.

That's all I had. Thank you.

Thank you.

One moment for our next question. Our next question comes from Brandon Rowe with DA Davidson. Your line is open.

Good morning. I just had a question on promotional activity, what you're seeing out there right now, and your expectations for how that evolves over the next three to six months. Thanks.

Yeah, I mean, there's not a whole lot of it out there right now. What you're seeing is you're seeing some dealers that are discounting what we would call last year's models. So now that we've had model change and we're rolling into you know, winner, anybody that's got a 22 model year is doing a little bit of discounting just to make sure that thing gets across the curb. You know, our inventory is in really good shape. We're just not seeing that. So what we don't know is how long it's going to take for the manufacturers to feel like they need to come in with rebates. And what typically happens is there's a set number of manufacturers out there that have a dealer network that really have nothing to offer but price. And as we've gone through these great years with this high demand and some supply chain issues, you know, those dynamics have allowed them not to have to really do any of that, but at some point in time, that's the only way they can compete. So they'll, they'll slide in, start doing some discounting, some manufacturing rebates. It won't affect the dealers. Then the other manufacturers will start to follow suit. And then what it does is just eventually snowballs into where everybody's doing it. I still, you know, extremely comfortable. I would say north of 30 feet, we're going to be able to hold really good margins. It's that sub 30% of the sub 30 feet that over the next year, I do believe we'll start seeing some margin erosion because the dealers will discount on top of what the manufacturing rebate is. Good thing for us is we put a lot of effort into that higher margin business. And, you know, as we sit down and Jack and Anthony and I look at this, we're starting to get a little bit more comfort to be able to hold that gross margin in that high 20s, 30% range, which will impact or leave us with a double digit EBITDA margin as we go forward. So we made the moves and I think every day we're getting closer and closer to be able to adapt and to offset any margin erosion on the new boat sales, which we know is coming.

Great. And just one follow up if possible. You know, any comments on, you know, the used boat market, what you're seeing in terms of pricing or inventory availability? Thanks.

Yeah, I mean, Anthony, you want to jump in on that? I mean, it's tight and there's nothing out here. So, go ahead.

The used boat market continues to be very tight. We continue to try to, you know, we employ several buyers all over the country just trying to add used boats to our mix. So, it's still very robust.

Great, thanks.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your touch-tone telephone.

And I'm not showing any further questions at this time. I'd like to turn the call back over to management for any closing remarks. Thank you, everybody, for joining the call. And at this point, we will disconnect.

Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.