Good day and thank you for joining us. Welcome to OneWater Marine's Fiscal Second Quarter 2023 Conference Call. I will now turn the call over to the speakers for their prepared remarks.

Good morning, and welcome to OneWater Marine's Fiscal Second Quarter 2023 Earnings Conference Call. I'm joined on the call today by Austin Singleton, Chief Executive Officer; and Anthony Aisquith, 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 OneWater 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 SEC filings. 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. We delivered strong second quarter results reflecting revenue growth of 19% on top of a 34% increase in the prior year period. Sales growth in the quarter was driven by a 23% increase in new boat sales and a 28% increase in service parts and other sales. Same-store sales grew 11%, well ahead of industry reports. Additionally, our parts and service business continues to grow at a good pace despite destocking that has been occurring at the big box retailers over the past several months. The demand environment remains healthy. Boat show attendance and store traffic have been good as both new boaters and returning customers are attracted by our innovative offerings. From our perspective, we are seeing a continued change in customer buying cadence as we return to typical seasonality. Lead times and inventories continue to normalize, and customers are shopping around to find their next new boat. We continue to see market share gains, as evident by our unit growth that has significantly outpaced the industry. We are pleased to see a return of balanced growth in both units sold and unit prices. With the backdrop of a questionable macro environment, we are being aggressive as we prepare for the summer selling season. We are focused on having the appropriate boat inventory levels as we exit this selling season and roll into the 2024 model year. We believe this approach will position us for continued market outperformance. With normalization of inventory and pricing, we saw a modest decline in margins as expected. Gross margin for new boat sales decreased to 23%, down from the peak of 28% a year ago, but well ahead of the 17% range of 2019. Overall, we don't believe margins will return to 2019 levels given the significant progress we have made to strengthen the business over the past few years. Since 2019, we have grown tremendously, both organically and through strategic M&A. We have diversified our offering by building out the parts and service business, which has grown fivefold. The strategic investment we have made to grow and diversify the business will enable OneWater to continue to outperform the industry and maintain our track record of profitable growth. Finally, the acquisition pipeline remains robust. Deals are starting to look more attractive as sellers become more in tune with the return to seasonality and normalized margins. As always, we will remain opportunistic yet disciplined as we evaluate any potential transactions. Overall, we feel well positioned to continue driving profitable growth and creating value for our shareholders. With that, I will turn it over to Anthony.

Thanks, Austin. I also would like to thank our team members for their efforts this quarter. Despite macro uncertainty and industry noise, our sales team remained active and drove same-store growth to 11%. As Austin mentioned, from where we sit, we are seeing a change in customer buying cadence as the industry returns to normal seasonal cycle. With these cycles, we build inventory in the winter months in preparation for the summer selling season. It's also important to note that our inventory has increased due to the acquisitions completed over the past 12 months. I am pleased to report that as expected, inventory peaked in February and has started its decline to the seasonal low, which normally occurs in September. We believe that carrying higher inventory levels at this point of the year will strategically position us for the summer selling season. Our inventory weeks on hand today are lower than both industry averages and our 2019 metrics. We are taking full competitive advantage of our strong inventory management tools, which we believe will lead us to outpace the industry and further gain market share. Turning to some other trends we are seeing with customers. We continue to see strong interest in larger, more sophisticated boats over smaller value options. The average customer in the smaller boat market is typically more interest rate and price sensitive as they are more likely to be reliant on financing options to purchase their boats. With this said, we are seeing customer credit readily available, even though at higher rates, and banks continue to be diligent in underwriting loans as they have been for over the last 10 years. Our service and parts and other business continues to navigate a challenging environment while delivering strong growth. As noted last quarter, our Distribution segment continued to experience pressure from the industry while destocking occurring at big box retailers who built up inventory in response to supply chain delays. We expect inventory across the channel to normalize over the course of the summer selling season, and we are well positioned to capitalize on the return of normalized demand. This area of the business continues to be an invaluable growth driver for OneWater, and it's a key piece of our diversification strategy. Overall, customers are excited about the upcoming boat season and getting out on the water with friends and family. We remain focused on customer experience, strong execution from our team, great inventory management, and a flexible business model to guide us through the turbulent waters that may be ahead. I will now turn the call over to Jack to review the financials.

Thanks, Anthony. Fiscal second quarter revenue increased 19% to $524 million in 2023 from $442 million in the prior year quarter. This was driven by an 11% increase in same-store sales and revenue from acquisitions not yet included in the same-store base. New boat sales rose 23% to $355 million in the fiscal second quarter of 2023, and pre-owned boat sales remained flat at $75 million. We are pleased to see new and used boat sales be comprised of a balance between unit and price growth. The higher margin parts of our business have been a constant contributor to our results. Service parts and other sales climbed 28% to $78 million, driven by our contributions from our recently acquired businesses and solid organic growth. Finance and Insurance increased slightly, up by 3%. Overall, gross profit increased 3% to $147 million in the second quarter compared to the prior year primarily due to the growth of our higher-margin service parts and other revenue, partially offset by the normalization of gross margins on boats sold. As previously discussed, as boat margins normalize, we fully integrate acquisitions and the distribution segment stabilizes, we expect our overall gross margins to normalize in the high 20s, depending on seasonal sales trends and the mix of products sold. Second quarter 2023 selling, general and administrative expense increased to $90 million from $75 million. SG&A as a percentage of sales was 17%, which was flat compared to the second quarter of fiscal 2022. Our increased participation in boat shows led to an additional cost during the quarter compared to the prior year as we return to a normalized season of events, promotions, and shows. Additionally, higher than historical SG&A costs are anticipated as we continue to grow our parts and service businesses, which have a higher expense structure. These higher costs were partially offset by a reduction in variable expenses like sales commissions that declined due to reduced margins. Operating income decreased 18% to $49 million compared to $59 million in the prior year, and adjusted EBITDA decreased to $52 million compared to $66 million in the prior year. Net income for the fiscal second quarter totaled $27 million or $1.56 per diluted share from $42 million or $2.54 per diluted share in the prior year. Contributing to this decline was a $10 million increase in total interest expense, which was $14 million in the quarter, up from $4 million in the prior year. This increase is a result of rising interest rates and an increase in the average borrowing on our debt facilities. Turning to the balance sheet. As of March 31, 2023, total liquidity was in excess of $100 million, including cash on the balance sheet, availability under our revolving line of credit, and floor plan credit facility. Total inventory as of March 31, 2023, was $593 million. With the return of seasonality, our normal inventory build occurs during the winter months and peaked in February as the summer selling season begins. Total long-term debt as of March 31, 2023, was $463 million, net debt or long-term debt net of cash was 1.8x trailing 12 months EBITDA. Our liquidity and leverage position remain in a comfortable range, and we are watching the macro environment closely. Moving to our outlook. We are maintaining our guidance range in anticipation of a continued trend towards seasonality. We are guiding same-store sales to be flat to up mid-single digits compared to the prior year and expect adjusted EBITDA to be in the range of $200 million to $225 million, with earnings per diluted share to be in the range of $7.50 to $8 per diluted share. These projections exclude any acquisitions that may be completed during the year. We continue to maintain our current capital allocation strategy. Operating with limited windows, we did repurchase approximately 63,000 shares during the quarter and may make opportunistic purchases in the future. As we navigate the markets moving forward, we will maintain the appropriate balance between internal investments, strategic M&A, share repurchases, and debt paydowns. As always, we are actively assessing strategic targets, and we'll be opportunistic for the right acquisition. We intend to stay disciplined in our approach and drive value for our shareholders. This concludes our prepared remarks. Operator, would you please open the line for questions.

Our first question comes from Andrew Crum from Stifel.

The same-store sales performance, you posted feels better relative to the industry data and commentary from some of the other marine names we heard from last week. Where do you think the business outperformed? And any color you can share on how fiscal 3Q has started? And then I have a follow-up.

Yes, I believe the team executed very well. We are focused on ensuring our inventory is properly positioned as the season ends. As we begin this season, we launched strongly. The team was attentive and did not miss any opportunities. We were proactive in the marketplace, which is reflected in our gross margins. Customers are present, but it takes effort to gain their trust and business.

Okay. And any thoughts on April, how it's gone?

Yes, I apologize for that. For April, I don't think we expect to see a double-digit increase in same-store sales this quarter. We're anticipating flat to mid-single digits. So far, things are looking good, but we are just a month in, so I don't have a same-store sales figure for April yet. Historically, April has sometimes been slower than March, but I will say we experienced a decent April.

Okay. Good. And then just a quick follow-up. The service parts and other was just under 17% of sales for the first half of fiscal '23. Is that a reasonable threshold for the fiscal year? Or would you expect to be above or below that in light of the destocking headwind that you noted in your preamble?

Yes. I'd like for it to be higher than that. And I think it was firing on all cylinders, it would be higher than that. So we continue to make adjustments to the marketplace and working through that. But it's a strong business. It just kind of has a little bit of this supply chain, COVID, kind of hangover, if you will, that we have to work our way through.

One moment for the next question. Our next question comes from Joe Altobello of Raymond James.

This is Martin on for Joe Altobello. A quick question. I mean you mentioned that in the same-store sales growth of 11%, that was fairly balanced, but can you give a little bit more color? Was unit growth higher or lower of that mix?

Yes, unit growth was about a mix. I don't have the exact number, but it's roughly half driven by units and half driven by price. Typically, we prefer to see that balance in a same-store figure during normal times. We're encouraged that this is one of the first quarters in some time where we've observed decent unit growth, which is positive. However, we continue to strive to maintain that balance as best we can.

And you mentioned that part of the reason you're still meaningfully outperforming the industry is that you're not missing deals and you're being aggressive in the marketplace. And it's reflected in the gross margins. Should we see that the gross margin decline is because of promotional activity? Or what else can we read into that?

I think there are several factors that contribute to the margins. There's also a mix at play. This time of year, we may be selling larger boats and fewer smaller ones, and typically, larger boats have a lower profit margin percentage. However, the team is focused on surpassing the industry's performance in everything we do. So, if we're ahead of the industry, I don't believe that's unusual. It's certainly something we strive for every day.

Jack, I think one thing that we ought to mention too, though, is that we took the proactive approach. As we started to see industry inventories build, I mean, Brunswick came out and I said they either said 37, 34, we're hearing from Wells. It's closer to 36 weeks on hand as an industry. And Jack, what is our same-store sales weeks on hand like, 18?

Yes. Yes.

Yes. We decided to take a proactive approach to ensure we are clear of inventory by the model year change in July. To achieve this, we opted for a more aggressive strategy on new boat sales margins, allowing us to enter the model year change with minimal inventory, significantly better than the industry average. This strategy is crucial as we move into 2024, as it eliminates the need for deep discounts on older units. Additionally, we are confident in our ability to maintain gross margins in the high 20s, close to 30%. The drop in new boat margins to 28% is acceptable, and as mentioned earlier, our Parts and Accessories segment is performing well but can improve further, which will help boost our margins. Maintaining a double-digit EBITDA margin is important to us, and seeing a reduction in new boat sales margins is manageable. We’re willing to further lower them if needed to keep inventory levels down, especially given the significant difference in inventory costs between 7.5% and 2.5%. Our goal is to ensure we have minimal inventory as we approach the 2024 model year.

Got it. It's very helpful, and congratulations on a great quarter.

One moment for the next question. Our next question comes from Fred Wightman of Wolfe.

I just want to follow up on that last line of questioning. I mean if you look at, call it, mid- to high 30s weeks supply across the industry, unusual seasonality, do you think that the industry is being as diligent about inventory? How did the model year changeover later this summer, early fall? Or is that something that you guys are worried about?

I don't think we have any concerns about it. Coming out of the boat shows, some people were focused on maintaining those COVID margins, and now they might be realizing that being a bit more flexible and securing some deals would have been wiser. It's hard to say for sure. However, if you look at 2019, the industry's inventory levels are still below where they were then. The reassuring part is that the inventory is current, with not much outdated stock available. I believe if we have a good spring leading into summer, the industry will find itself in a strong position. As Jack mentioned earlier, it’s not just us; we are confident that everyone hit their peak inventory around February and early March. Now, inventory levels will start to decrease, and we aim to perform better than the competition.

That makes sense. And if you just look at some of the public comments from OEMs and retailers and you guys as well, there just seems to be this real divergence in terms of market outlook, both in terms of what happened as you progressed throughout 1Q or your guys second quarter and even into April as well. Does that level of I would say, maybe disagreement? Is that surprising to you? Or do you think that it can kind of be explained by differences in mix and geographic exposure?

No. I mean I think when you look at it, like I follow some of that stuff. I didn't see a whole lot of agreement. I think everybody is somewhat on the same pace that we are. Brunswick was very positive. Malibu seems very positive. Same with Polaris. When you refer back to MarineMax, they might have a different outlook than we do going forward, and that might be a little bit of the model mix. We don't know that, but it could be that our focus is on boats 40 feet and down, while their focus tends to be above that. So that forecast might not be as good as what we're seeing currently in the industry. Our big boat segment is doing really, really well right now. But Jack, what is it? Less than 10% of our boat sales revenue?

Yes, it's smaller compared to the overall.

And so we feel that it's not as interest rate affected if you're buying a $150,000 boat or if you're buying a $700,000 boat.

Well, so I think that's the key I was just going to say, right, is I think we tend to be in the premium space with the brands that we sell and represent. And that customer is a little more resilient, a little less price and interest rate sensitive.

That's fair. And I guess, just to summarize it, right, as you guys move throughout the fiscal second quarter, is it safe to say that you are more optimistic on calendar '23 retail? Or is it kind of in line with how you thought the year would shake out?

I believe this aligns with what we mentioned at the end of last quarter. We think we are entering a seasonal period, but we cannot control or predict the macroeconomic factors. People have been talking about a recession for years, and while we anticipate some slowdown, as we approach boating season, it’s difficult to disrupt the momentum, especially given the brief duration of the season. The boating season is relatively short, spanning from Memorial Day to Labor Day or depending on school schedules. We're at the beginning of that period, and it would take a significant shift to affect our momentum. However, we are more concerned about what will happen in the latter half of the year, particularly after mid-June or July, when we transition from the peak season to the off-season. We are watching closely to see how demand is influenced by factors beyond our control.

Yes, Austin, that's exactly why we are doing what we're doing with our inventories and making sure it's clean.

One moment for our next question. This question comes from Noah Zatzkin of KeyBanc Capital Markets.

This is Alex on for Noah. Just wanted to loop back to gross margins real quick, maybe more specifically on the pre-owned side. Can you help us understand the sequential step down versus the first quarter? Is that all a function of the consignment softness there? Or is there something else to consider?

Yes. Yes, I'd say within pre-owned, there definitely was some mix shift that was driving margins down, like you mentioned, a reduction in consignment as well as some reductions in brokerage. And so this kind of affected that overall pre-owned margin a little bit. When we look at pre-owned, right, we tend to look to target a similar margin on trade as we do new boats and keeping it within, I'll say, a couple of points. And to some degree, we did that with our trade, but then that mix shift kind of caused that total pre-owned margin to be a little bit further off, if you will.

Got it. And then maybe switching gears here. Just curious if you can add any color on where we're at in the distribution destock with retailers? Is that something that you see taking another quarter or 2? Or have you seen activity pick up a little bit? Just curious where that's at.

I think it will flush out over the next 60 to 90 days. That destocking is going to come in when people start really using their boats. So when you get to whatever the season is in particular geographies, is it Memorial Day to Labor Day, is it when the kids get out of school, when the kids go back, people are starting to prepare now. If they're not already boating, they're in the boating mindset to be getting ready so that when the weather breaks, I mean, we've had an extremely cold and wet, snowy Midwest, cold, rainy, and windy in the Southeast. So about the only boating market right now that is probably kicking on all cylinders from a weather perspective is Florida. So that really should start to shake out over, I would say, the next 60 to 90 days. So the hope is that this kicks in by the time we get into our Q4 of the year.

One moment for the next question. This question comes from Craig Kennison of Baird.

Austin, I think you mentioned this earlier. I just want to ask you to reiterate what is the rate or the cost to finance inventory today versus what it was maybe last year?

Yes, Craig, this is Jack. I'll jump on that. I mean, I'd say we're right now at about 7%, a year ago, we were probably around 3%. I mean it's more than doubled year-over-year. That combined with, obviously, inventory normalizing in larger outstanding balance.

And maybe the same question on consumer rates, what's the typical rate a consumer might be today versus last year?

Yes, there are many factors involved, but I would estimate that it's not quite doubled, but it's close. You might be looking at around the mid-4s a year ago to the low to mid-7s now, depending on the dollar and credit.

Yes. Most of it is around 8% now at the beginning is correct.

Okay. That's helpful. And then I guess we're hearing about tighter credit conditions across the economy in the wake of these bad bank headlines. But why don't you think you're seeing tighter credit in your markets, if that's the right interpretation of what you said?

We primarily work with four major banks for our financing, although we have nearly 14 different lenders. These four banks handle the bulk of our financing because it provides them with strong returns and is considered good business. While we’ve been concerned about the possibility of financing credit diminishing, the underwriting process has not become any more difficult than it was a year ago. The standards put in place following the financial crisis are still in effect today. The banks are quite favorable towards this business, evidenced by our average Beacon score, which is over 790 out of $800 million in financing, along with a delinquency rate of just 0.1%. This indicates strong, quality loans that banks prefer to keep on their balance sheets rather than package and sell off. The margin spread for marine financing is reportedly very favorable, so there isn’t significant worry about banks pulling back on financing boats. Our concerns are more focused on consumers opting not to pay higher amounts, which has impacted our profitability in the finance and insurance segment, where we’re seeing reduced spreads compared to before. We are adjusting to this situation.

I think the other piece, Austin, is the customer, right? This is a highly fluid customer who has a FICO score of 790, 800. And so those are the people who they want to give credit to.

One moment for the next question. Our next question comes from Michael Swartz of Truist Securities.

I would like to clarify some of your comments regarding both new and pre-owned boat margins in the fiscal second quarter. It seems like there were some factors related to boat show incentives and the specifics of the pre-owned mix during the quarter. Should we anticipate some improvement as we move into the third quarter, or am I overinterpreting that?

Yes, you're probably reading too much into that. I mean, typically, this Q1 calendar, our Q2 second boat show season is usually our lowest margin for the year when you get into those boat shows. I think that we looked at it and decided, and we will continue to push this. It's more important for us to have really good inventory levels, the correct inventory levels, the correct inventory as we roll into 2024. And so if we can maintain the new boat margins or even slightly go down in new boat margins and maintain that high 20s gross margin as the P&A continues, maybe that destocking comes back and we can get a little bit more aggressive. It's important to us to get to that double-digit EBITDA margin as close to 30% gross margin as possible. And we'll work new boat margins in order to try to maintain that and keep that with being as aggressive as we can because we don't want carryover inventory. Inventory expense is much higher than it's been in the past as we've just talked about. And now it starts to eat. I mean we're rolling off a free floor plan as we roll into the month of May. And so it's going to get to where it eats. We want to be clean. So I wouldn't read into margins going up. I mean it may be stabilizing where they are, give or take 0.5 points up or down.

Okay. Perfect. Regarding M&A, we've noted an increase in inbound traffic and a greater willingness from sellers in the RV sector. Considering the condition of that market, which seems more robust than the marine market, are you observing any indications of sellers becoming more engaged over the past few months, possibly more than before?

No. It's all driven by the same thing that when we did the IPO, we're talking about an incredible industry. We're the best of the best, having to exit strategy and are starting to get into those years where they're starting to look for what's possible. I would say the marine industry overall seems to be a lot stronger than the RV. I mean I think RV has already reverted to pre-'19 margins, where we're still seeing elevated margins and I think we will continue to see elevated margins over '19. So it hasn't picked up any more or less. Our pipeline is decades deep. So adding to it is really something we want to do. It's one of the biggest issues, Mike, I have is how do you tell somebody that's 68 years old, we love this idea, can we talk to you in about 10 years? I mean that's not very comforting. But that's where we sit right now. I wouldn't say that anything over the last six months has changed the cadence or the inflow. It's pretty steady the way it's been for the last 2 years.

Thank you. That concludes our Q&A segment. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.