OneWater Marine Inc.

We believe that our strategic approach to exiting the season with clean inventory positions as well for the quarters to come. Additionally, the M&A deal pipeline is getting more and more attractive, and there could be some steals to be had in the future. We are looking at all levels of the business and are confident that by accepting the short-term pain of the industry adjustment, we have set course for a solid future and attractive free cash flow generation. And with that, I will turn it over to Anthony.

Thanks, Austin. Our teams remain active during the selling season to drive solid revenue growth in a challenging market. Results were driven by double-digit growth in pre-owned boat sales, supported by increased trade-ins over the last few quarters. For customers looking to finance their boat purchases, credit remains widely available, in line with what we've been seeing throughout the year. As rates go up, the average customer does become a little more interest rate sensitive, which led to the flat finance and insurance income year over year. Our parts and service business continues to grow nicely, and sales are up 23% in the quarter and 38% year to date. Our dealerships are executing well, and the distribution business is starting to turn the corner on the destocking that has occurred at big box retailers over the last several months. While it has not had a material impact on our results this quarter. We are beginning to see orders from these retailers trickle in and expect them to ramp up this winter. Moving to inventory, as Austin mentioned, we are hyper-focused on carrying appropriate inventory levels through the end of the selling season and into the seasonally slower winter months. Inventory as of June 30th, 2023, is down modestly compared to the end of Q2, and we expect the seasonal decline further. We are continually operating at a 17 weeks of inventory on hand compared to an industry average of 28 weeks. We will enter the 2024 selling season with a fresher inventory mix than many of our competitors. This coupled with a more moderate price increase from the manufacturers, we can be extremely competitive as the 2024 models will be easier to sell than prior year models. While we are comfortable with our inventory position, some industry information suggests that inventory and overall dealer channel has built up past 2019 levels. As we move forward, we believe this will give us a competitive advantage against the other dealers. The higher carrying costs and the interest expense for dealers with aged and non-current inventory creates a significant drag on their earnings and cash flows. Thus, we believe our proactive approach will benefit us significantly in the long term. As we have said before, there are many levers to pull. as we adjust to the new sale levels and margin expectations. We are focused on adapting our SG&A expenses to support the current operating environment. We also expect the SG&A expenses to continue moderating as we further integrate acquired parts and service businesses. We remain focused on executing our playbook and positioning OneWater for continued success in any environment. I will now turn the call over to Jack to review the financials.

Thanks, Anthony. Fiscal third quarter revenue increased 4% to $594 million in 2023 from $569 million in the prior year quarter, yielding same-store sales that were flat for the quarter. New boat sales decreased 1% to $372 million in the fiscal third quarter of 2023, and pre-owned boat sales increased 14% to $111 million. Service parts and other sales continue to positively impact our results, climbing 23% to $92 million, driven by the contributions of our recently acquired businesses and dealer operations. Overall, gross profit decreased 13% to $159 million in the third quarter compared to the prior year, driven by the normalization of gross margins on boats sold. Gross profit margin fell to 27% as a percentage of total sales, As expected, the investments made in service parts and other businesses have softened the decline in overall gross margins as boat margins normalize. Third quarter 2023, selling general administrative expenses increased to 93 million from 88 million in the prior year. SG&A as a percentage of sales was 16%, which was flat compared to the fiscal third quarter of 2022. The increase in SG&A Expense on a dollar basis was primarily driven by higher expense structure of our acquired parts and service businesses, as well as higher advertising expenses compared to the prior year, which supported our increase in sales. These increased costs were mostly offset by a variable cost structure where expenses have started to adjust down with the declining gross margin. As the industry normalizes, our flexible SG&A expense structure is a lever we can pull to drive future profitability. Operating income decreased to $60 million compared to $88 million in the prior year, and adjusted EBITDA was $60 million compared to $95 million in the prior year. The decline in adjusted EBITDA was due to the reduction in both gross margins in same-store sales being at the bottom of the expected range, combined with higher floor plan borrowings and related interest costs. Net income for fiscal third quarter totaled $33 million, or $1.95 per diluted share, from $64 million, or $3.86 per diluted share in the prior year. Contributing to this decline was an increase in interest expense, which was $17 million in the quarter, up from $4 million in the prior year. This increase is the result of rising interest rates and increased average borrowings on our debt facilities. Turning to the balance sheet, as of June 30th, 2023, total liquidity continues to be in excess of 100 million, including cash on the balance sheet, availability under a revolving line of credit, and floor plan facility. Total inventory as of June 30th, 2023, was 573 million and has increased year over year as the supply chain has come back online and as we integrate our recent acquisitions. Our inventory remains healthy at approximately 17 weeks on hand, and we expect inventory will continue to decline sequentially until we begin the seasonal build in the fall. Total long-term debt as of June 30th was $458 million. Adjusted net debt, or long-term debt net of cash, was 2.2 times trailing 12-month EBITDA. Our liquidity and lever position remained in a comfortable range, and we continue to use cash to pay down our floor plan, which has the highest interest rate, providing us with financial flexibility as needed. Moving to our outlook, we're updating our guidance as a result of the accelerated normalization of the industry. We're guiding same-store sales to be flat to the prior year and expect adjusted EBITDA to be in the range of $160 to $170 million. with earnings per diluted share to be in the range of $4.45 to $4.70 per diluted share. These projections exclude any acquisitions that may be completed later this year. We will continue to maintain our current capital allocation strategy supported by our strong free cash flow generation. The M&A pipeline is robust, and deals are beginning to look very attractive. As we continue to navigate this dynamic environment, We remain focused on positioning OneWater for the continued long-term success and maximizing value for our shareholders. This concludes our prepared remarks. Operator, will you please open the line for questions?

Yes, thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question comes from the line of Joe Altebello of Raymond James. Please proceed.

Thanks. Hey, guys. Good morning. I guess the first question for you, Austin, and sort of a big picture question, maybe where do you see pricing change? and margins going next year across the industry, particularly if inventory continues to build. If I look at your new boat margins today, yes, they're down, but they're still above where we were pre-COVID. So I guess, do you think we ultimately go back there at some point?

Yeah, thanks, Joe. Pricing, that's one thing we're encouraged about. Pricing doesn't seem to have risen that much from the manufacturers this year. So it's a pretty modest price increase from the majority of our manufacturers, probably 3% or less, and a lot of that is content or engines. So we're super optimistic that the 2024, as far as the price increase, is going to give us a little bit of running room and let us be a little bit more competitive if this inventory stays as high as it is on the 2023s. you know, margins, we didn't expect this, what we, you know, what we saw in this last quarter, it really started right before Memorial Day. And I kind of have set back and go, you know, why did it happen so fast? And I think the realization kicked in for the majority of the industry when they got that April interest bill from, you know, the floor plan manufacturers in late May, and they saw how much they were going to be spending every month on inventory and carrying it through you know the summer and into the fall and that's when deep discounting came now what we have seen is some promotional activity from some manufacturers which is starting to come on board which will help maybe ease some of that downward trend of margins but you know i would say our comfort level where they maintain where they are right now is kind of low i mean i i would suspect that margins are going to deteriorate a little bit more and you know the the hope would be that for us is that you do get some promotional activity out of the manufacturers, but also that we get this inventory cleaner and then we start selling 2024s at a higher margin against 2023s because that's a pretty easy sell when you match those two up with the customer. Inventory is still extremely scary. We're comfortable with where ours is. The industry is high and it's going to take a while for it to flush through. You know, but there's positive trends for July. You know, we had a good July. We're hearing some preliminary results from out of Wells Fargo for what the industry did in July. So maybe it'll trend down. It's just going to be a thread in the needle. It's going to be kind of what we're going to have to do over the next, you know, six to nine months.

Got it. Very helpful on that. And maybe a second question on M&A. You sort of alluded to, you know, a very attractive pipeline. It's been a while since you've done a deal or acquisition, for example. So help us understand how you're thinking about, you know, your M&A strategy, you know, here in late fiscal 23 and maybe into fiscal 24.

Yeah, so we've gone back and kind of looked at our deals. And I mean, it's kind of a math equation that's so high level. But if you go back and look at the deals that we've done in the past, and you just took them for what they were before we did them, and you adjust their pricing accordingly, just the revenues up for the price increases that we've seen on new boat sales now remember the majority of the deals that we end up doing we we're looking at a mom and pop 90 95 85 of their revenues coming from new boat sales so it's very new boat sales dependent they're really really good at that and everything else just kind of kind of all the other business operations get drug along with that so when we went back and looked at that and adjusted sales with old margins You kind of put in what the curtailments were going to be, what the interest carry was going to be. If you weren't making north of 5% as a net profit, you're going to run out of cash. And so we're kind of sitting back going, okay, well, this is not good. So there could be some good deals. And we've already started to look at a couple of deals where it's almost like tossing the keys. It's like, if you'll take over my inventory obligation and give me a lease, it's yours. and we think that'll become a little bit better you know a little bit more available to us as we work through this winter because we haven't seen you know we're around eight percent i think on our floor plan jack is that right yep that's correct yeah and the majority of the industry is north of 10. and you know so that's going to eat pretty good as we go through the winter so you're going to have some of these dealers that have already you know thinking about selling that are, you know, I hate to use the word aged out, but, you know, have great businesses. I don't know if they're going to really want to fight through another, what cycle we're going to go through. And so it's going to be interesting, interesting over the next six months from an M&A perspective, but we're already starting to see those deals where, Hey, you take the inventory obligation and, you know, give me a lease and here's my business. And so, That's going to come our way, so maybe there's a way that we can start working with some manufacturers because I don't want all that old inventory. So hopefully we can partner up with some manufacturers that help us do that, especially if the dealer's in trouble. So next 59 months on the M&A side might be interesting.

Thank you. One moment for our next question. This question comes from Michael Schwartz of Truist Securities. Please proceed.

Hey, guys. Good morning. Maybe just one for you, Jack, quickly. The flat comp store sales in the quarter, what was the composition of that units versus pricing?

Yeah, so that was units were just ever, you know, slightly negative. Price was slightly positive.

Okay. So, it does sound like you gained market share. It also sounds like, at least directionally, you're talking about things getting worse in the quarter, and particularly since when you gave guidance in early May. But, I mean, we've obviously seen the SSI for May, June, and your commentary for July seems pretty positive. So, I guess, is this just more of a, you know, one, you know, pricing promotion's gotten worse. Two, you guys are planning to take it on the chin a little bit more than you maybe thought and reduced inventory, right? so that you're in a better environment going into fiscal year 24. Did I frame that okay?

100%. This is a – the competitive landscape going into Memorial Day, you know, you could feel it. And then by the time we got into June, you were fighting. You were scratching for every deal. And it got to the point where a customer would come in, You would talk to them, build a relationship, give them a price. They'd leave. They'd come back three days later with a competitor with a much better price. You would try to work them on increases and benefits and sell them and give them a new price. They'd leave for four or five days. They'd come back with a cheaper price. I mean, it was really you worked every deal until there was no blood left, and that's 100% what we saw.

Yeah, Michael, I would also say, you know, as we exited last quarter, right, we had a double-digit same sort that we achieved in the quarter, you know, and felt it was going to also pull back. I think coming in flat was, you know, below our expectations at the time. And like Austin said, I mean, the market slowed, price sensitivity escalated, and, you know, we were fighting to – keep it, you know, unit sales roughly flat. Okay.

And it sounds like in terms of overall inventory, it doesn't sound like you're uncomfortable with where you sit necessarily today with 17 weeks on hand, but it sounds like you're more kind of targeted on or concerned around maybe model mix within that inventory. So do you have any metrics or targets, you know, by the end of your either fiscal year end or calendar year end of, you know, where you want to be in terms of maybe either weeks on hand or just percentage of your new inventory that's, you know, model year 23?

Yeah, that's what we're focused on. Let me say this real quick. Inventory weeks on hand is not really, that's the metric that we measure to compare to the industry. But we are getting truckloads of 20-24s from the manufacturers already. Manufacturers are screaming for orders. And we're already getting a lot of 20-24s. And so that 17 weeks on hand, if you look at the inventory that's actually crusting up money, that's the 20-23 inventory. And so as long as that continues to run down fast, and the weeks on hand say it's 17, but it's because we're receiving 20-24s. That's fine with me because that really doesn't have a carry across to us. Jack, do you want to fill in anything there?

Yeah, no, I'd say we're very comfortable in the mix of that inventory. 23 versus 24 is really key because what happens as we roll out the rest of this calendar year, right, the 23s are still still feel very current when I'm selling it in 2023. But when we get into the springtime, a lot of dealers are going to be carrying 2023s into the spring boat shows, some of the winter boat shows. We're going to have our 23 inventory pretty lean as we work through it over the next several months. So it's that composition that makes a huge difference. You know, and multitude as well, right? When Austin was talking earlier about pressure on other dealers, as that inventory gets older, they're having to pay down the floor plan balance on that boat in a period of time where there's low cash flows and having to pay that 10 plus percent interest plus curtailments on that boat in November and December when sales are seasonally slow. You know, we'll put pressure on them to you know, to liquidate those at lower prices. So we're comfortable with our position. We just, you know, not 100% sure where the industry will be.

Okay. That's super helpful. Thank you.

Okay. Thank you. One moment for our next question. This question is from Kevin Condon of Baird. Please proceed.

Hi, good morning, everyone. Thanks for taking my question. I wanted to ask a little bit about if you're seeing anything across different categories or, I guess, value versus premium parts of your offerings. I think earlier this year you noted that the premium end was faring a little bit better, and I just wanted to ask if that was still the case. And then on a related note, if you've been seeing any pushbacks from customers around just the affordability aspect of boats given the last two, three plus years of price moves and just if there's anything that manufacturers or dealers are doing to try to address those affordability concerns. Thanks.

Yes, I'll jump in on the price. As far as categories go, the SSI data I think is the best way to look at that. We're not seeing anything that's different than what the SSI that is showing from, you know, a category. I mean, you know, you can look at it and say, you know, one thing I would say is we're a big pontoon dealer. So, pontoons have been very good for us. Well, I think the SSI data shows that down a little bit. So, you know, you just look at the SSI data and we're kind of in line with that from a segment perspective. The premium value, that's a really tricky deal because What is considered premium? We consider the majority of our brands premium for where we're selling. But then there's also this thought that premium is just bigger. You know, it's just like, you know, it's premium 80 feet and bigger or 60 feet and bigger size. But when you look at a 25-foot pontoon boat that's, you know, 200 grand, we consider that premium. So premium has held up well, but really what's held up better than anything is the boats that have a longer build time. So if you can build a boat in eight weeks versus a boat that takes 22 weeks to build, because it's a more complicated build, there's less supply. So that demand is still there. And those are the units that are still sold out into the future. We still have that. It's the ones that they can build quickly. And I don't even know if quickly, it's the ones that they can, you know, that are really kind of like production instead of, you know, the shorter build time that are still premium. but they're the ones that we've got more inventory on. So premium is definitely holding up because you got a longer build time on the bigger stuff. But I mean, you know, we're not seeing Anthony, I mean, it's just kind of generic across all brands and segments right now. I mean, it's not, not easy.

I would say the premium stuff is holding up to answer this question. The premium stuff is holding up very well. The entry-level stuff and the people that are more conscious for financing are being – they didn't go away. They're just being a little more cautious with the rates that have risen quite a bit. But they're still selling. They haven't shut off by no means, but our premium inventory is still selling very well.

And real quick on the pricing, I think we're seeing the manufacturers understanding that by the price increases we got this year. You know, like I said, we have the majority of our manufacturers are sub 3% and there's content in on that 3%. So we almost feel like the majority of them are flat or close to flat. And that's a good thing, you know, but yeah, low prices over the last three years, that's tough.

Thank you. Thank you.

Our next question, please. One moment. This is our last question coming from Griffin Bryan of D.A. Davidson. Please proceed.

Hi. This is Brandon Rollet with D.A. Davidson. Just one question. You had talked about seeing increased promotional activity from the OEMs. Could you talk about, you know, what you're seeing in terms or how that's evolved maybe from, you know, beginning of the summer to where we're at right now? maybe from both a retail and wholesale incentive perspective, given, you know, what's going on in terms of dealer inventories?

Yeah, I mean, I think they've all kind of come out with their saying, you know, stuff they've done in the past. I mean, it starts off with, like, hey, here are special rebates for boats, but if you sell one, you've got to buy one. And so, like, you get this discount, but it's on the ordered boat. So if you have a 333 in stock, and you sell it and you order another 2024 to replace that, you get a $2,000, $5,000, $8,000 discount off for 2024. That's kind of where it starts. And then we've seen it morph into the more incentives just to move current inventory. I think Malibu came out with their, it's not a layaway program, but similar to that, I think it's been super successful. But they're all starting to kind of go back to where they were pre-COVID when inventories were built and they needed to move that up. And there's just kind of a transition where it starts off light and it's kind of like you sell one, you buy one, and then it's like, okay, we need to accelerate that. So then it's just discounts. And I expect that to continue to ramp up as we get into the fall and winter season. I think a lot of the manufacturers' orders are lean right now and it's because people are looking at that interest statement from the floor plan companies going, oh my gosh, you know, that's a big number and we've got to get rid of this in the board.

Okay, great. And just one follow-up. I know you have exposure to the pontoon industry, but also the ski slash weight category. And I know the SSI data there has been a little weaker. Could you comment on what you think has been, you know, going on in that portion of the industry?

Yeah. I mean, I think a little bit of it's price driven. They've gotten, they've gotten pricey. Um, but I also think the reverse draft, um, You know, when you go and you look at, you know, a Malibu or a Mastercraft or a Correct Craft, you know, I'm just making up numbers, it's 300 grand, and you can go buy a Cobalt with a reverse drive that has, you know, a lot of the same abilities. It's not a competitive ski boat. So if you're going to be wakeboarding, surfing, skiing, you know, 85% of your time, that buyer is still buying the inboards, the towboats. But if you're only doing it 20% or 30% of the time, or 40% of the time, and everybody likes it, those reverse drives are really kind of starting to kick in and really are related to consumers because there's different, you know, it rides a little bit better in rough water, it's a little bit faster on the top end, and it's less expensive. So when you, like, look at the Cobalt reverse drive, I mean, we're doing, those boats are almost, they're hard to keep in stock right now. And so, you know, that's been a little bit, I think, of a decline, and new pricing has a little bit to do with it also.

Austin, I just would also add on the pontoon segment, right, that's a really wide segment with, you know, a lot of units and value units that we don't necessarily participate in. And so I think our higher-end pontoon consumers are probably a little more resilient, and we're doing a little bit better in that category than maybe the SSI number suggests.

Okay, great. Thank you.

Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.