Good morning and welcome to the OneWater Marine Fiscal First Quarter 2024 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jack Ezzell, Chief Financial Officer. Please go ahead.

Good morning and welcome to the OneWater Marine’s fiscal first quarter 2024 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, that 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 SEC filings. The company disclaims any obligation or undertaking to update the forward-looking statements to reflect circumstances or events that occur after the date that 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 a solid quarter despite the industry-wide return to seasonal selling patterns and moderated pricing. In an increasingly competitive environment, our team remained active, closing deals and driving same-store sales growth of 2%. We continued to outperform the industry, which market data indicated was down about 4% for the quarter. With the anticipated return to historical seasonal mix, demand softened as expected, and customer preferences turned towards our larger boat offerings. Unit sales were flat in the first quarter, reflecting the effectiveness of our sales team and our strategic approach to inventory management. As expected, we continued to operate in a more competitive environment. Boat margins across the industry continued to reset during the quarter, and we expect this to continue through the first half of the year. Additionally, quarterly margins will continue to fluctuate with seasonality and model mix, similar to traditional pre-COVID years. As a reminder, we typically benefit from stronger margins during the summer selling months, with a mixed shift to the lower ASPs with higher margins and increased unit volumes, compared to the slower winter months with the mixed shifting to higher ASPs with lower margins. Before I turn this over to Anthony, I would like to emphasize our strategy and our path to get to where we are today. When we went public in February 2020, we had a solid growth strategy consisting of steady organic growth coupled with a battle-tested M&A. COVID created a lot of disruptions, both good and bad. The transition back to historical trends has been challenging, but we believe we are approaching the new normal. As we move forward, OneWater is a fundamentally stronger company, having grown significantly with a more robust and diversified product offering. Compared to where we were pre-COVID, our baseline has been reset higher, and we are off to a great start in 2024. Adding to that, we are encouraged by what we've seen at the boat shows so far, giving us confidence in the coming year. Even as we navigate the challenging macro environment and inventory overhang in the industry, we are still very confident in our ability to deliver on our growth strategy. We are excited about the future as we continue to grow market share, optimize costs, enhance profitability through our higher margin businesses, and pursue M&A opportunities to amplify shareholder return for years to come. With that, I will turn it over to Anthony to discuss business operations.

Thanks, Austin. Our team delivered first quarter same-store sales growth of 2% supported by higher average unit prices as customers shifted their preferences to our larger boat offerings. We are excited about the boat shows we have participated in so far this year and are seeing strong demand for our manufacturers' newer models, which is a positive sign given our inventory strategy. We are pleased to report growth in customer orders at the boat shows that were not impacted by inclement weather. We are looking forward to the Miami International Boat Show in a few weeks, which is an important event for us and the industry. Our aggressive inventory management approach has positioned us well in an industry flooded with non-current models. We opened the year with a healthy model mix and will continue to work down non-current inventory where we can favor newer models. Inventory levels were up sequentially as is standard in the winter build months in preparation for the selling season. That said, our 24 weeks on-hand inventory continues to outperform the industry at approximately 38 weeks on hand. While boat sales are up year over year, total finance and insurance revenue was down moderately as we faced the challenges of higher rates. However, finance penetration during the quarter tracked consistent with our target of 60% of new boat customers financing a portion of their purchases directly with us. Credit availability and the use has remained strong, and we feel good about where we stand today. And with that, I'll turn the call over to Jack to go over the financials in more detail.

Thanks, Anthony. Fiscal first quarter revenue decreased 1% to $364 million in 2024 from $367 million in the prior year quarter. New boat sales grew 4% to $241 million in the first fiscal quarter of 2024, while pre-owned boat sales decreased 4% to $53 million. The increase in new boat sales was primarily driven by an increase in the average selling price as customers gravitated towards larger boats in the quarter. The decrease in pre-owned boat sales was due to a drop in brokerage consignment sales, partially offset by an increase in pre-owned sales from trade-ins. Revenue from service parts and other sales for the quarter decreased 10% to $62 million compared to the prior year. As a reminder, we sold Roscioli Yachting Center and Lookout Marine in our fiscal fourth quarter of 2023, which primarily drove the decline. Additionally, we saw a reduction in parts and accessory sales to original equipment manufacturers. These OEMs have reduced production of boats as a result of elevated industry inventory levels. Finance and insurance revenue fell 18% to $7 million for the first quarter, primarily due to a decline in income earned on loans given the current high interest rate environment. Overall, gross profit decreased 17% to $91 million in the first quarter compared to $110 million in the prior year, driven by the normalization of gross margins on those sold. Gross profit margin fell sequentially with expected seasonality and a preference towards larger boats, partially offset by increases in margins on our service parts and other sales. We anticipate gross margins to continue to stabilize through the first half of the year, as the cycle returns to normal. Though we anticipate this new normal will level off higher than what we saw prior to the pandemic, given structural changes in our business and the industry. First quarter 2024 selling, general, and administrative expenses increased to $80 million from $78 million. SG&A as a percentage of sales was 21.9%, up 70 basis points from the prior year period. SG&A as a percentage of sales is typically higher in the first quarter, which is historically the slowest quarter as lower revenues reduce our fixed cost leverage. We continue to monitor the sales environment and proactively manage costs to optimize the business. Operating income decreased to $6 million from $27 million in the prior year period, and adjusted EBITDA was $7 million compared to $30 million in the prior year period. The decline in adjusted EBITDA was primarily due to lower gross profit and heightened floor plan borrowings and related interest costs. Net loss for the fiscal first quarter totaled $8 million or $0.49 per diluted share compared to net income of $11 million, or $0.61 per diluted share in the prior year. In the fiscal first quarter, adjusted loss per diluted share was $0.38 compared to adjusted earnings per diluted share of $0.73 in 2023. Turning now to the balance sheet. On December 31, 2023, total liquidity was in excess of $65 million, including $45 million of cash and additional availability under our credit facilities. Total inventory on December 31, 2023 was $707 million compared to $610 million at September 30, 2023. This inventory build reflects our preparation for peak selling season, and we expect inventory levels throughout the remainder of the year to mirror the seasonal patterns we have historically experienced. Total long-term debt currently stands at $440 million. Our net debt to adjusted EBITDA ratio is 2.6 times. Our liquidity and leverage position remain in a comfortable range, and we are utilizing our cash to pay down our floor plan, which carries the highest interest rate. Looking ahead, we are maintaining our fiscal 2024 guidance and expect margins to stabilize with seasonal norms. We anticipate same-store sales to be up low to mid-single digits, and we expect adjusted EBITDA to be in the range of $130 to $155 million, and adjusted earnings per diluted share to be in the range of $3.25 to $3.75. On capital allocation, our priorities remain unchanged, and we are focused on delivering organic growth and increasing our footprint through strategic M&A of top-performing dealers in the best boating markets in the country. As always, we are prudent in our approach and will allocate cash where we believe it will provide the most value for our shareholders. For our M&A deals, we look to utilize free cash flow as our funding source, which has historically given us the best return on our invested capital. As always, we remain disciplined in our approach when evaluating acquisition targets, and the pipeline remains active, and we are poised to act when the right deal comes along. This concludes our prepared remarks. Operator, will you please open the line for questions.

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. The first question comes from Drew Crum with Stifel. Please go ahead.

Okay, thanks. Hey guys, good morning. On same-store sales, can you address how the plus 2% performed versus your expectations and the level of promotional spend you deployed relative to plan in order to achieve that figure? And I guess, will you need to be more aggressive here in order to hit your same-store sales target for the year? And then I have a follow-up.

Jack, do you want to take that or do you want me to?

Yeah, I would say we're fairly close to plan, where we expected it to come in during the quarter. I would say from a promotional activity standpoint, I would say it continues to be elevated similar to that we saw in the fourth quarter. I don't know that trends have really changed a lot. I think we continue to be very aggressive in the marketplace. Customers are still coming through doors. Initial boat show activity has been good, and we continue pushing on.

Okay, perfect. And then on the service parts and other business, you mentioned the sales leaseback transaction contributing to the down 10%. Do you see the year-on-year declines moderating going forward? I think with lapping the retailer de-stocking, the comps would get a little easier, but you also have the cuts in production by OEMs, which you flagged. So curious as to how you see this business trending over the next few quarters. Thanks.

Yeah, for sure. I mean, it's going to be challenged for the year. I would expect the decline, right, because the December quarter is such a small quarter, I would expect that percentage decline to moderate some, like you suggest. But I do expect it probably to be, service parts and other for the year to be down, I don't know, if we're in that 5% to 7%, but it's going to be an impact, right, because we closed on the transaction right at September 30th, so you have a full year that you have to bake out.

Okay. Got it. Thanks, guys.

Thank you, Drew.

The next question comes from Craig Kennison with Baird. Please go ahead.

Hey, good morning. Thanks for taking my question. I think you mentioned the acquisition environment. I'm just, I'm curious. I imagine there are some dealers on your target list that are ready to get out in the current environment. Is it a more active environment today, and how aggressive could you be if those who want to sell are ready to sell?

As Jack mentioned earlier, Craig, we plan to utilize free cash flows, which will impose some limitations unless we see a significant increase in opportunities. We aim to be strategic in our approaches. Currently, one challenge is determining what a true multiple is, as the multiples we have set don’t clarify exactly what we are paying a multiple on. We anticipate some margin decline, and it’s unclear how much more dealers can endure with high floor plan interest costs. Many dealers are facing difficulties; something we thought would occur last fall is now likely starting to happen because they have made it through the winter. They are not only dealing with double-digit floor plan interest rates and decreasing margins, but cash flow is also constrained due to curtailments, creating a challenging situation. I wouldn’t say conditions have improved much. Throughout the ups and downs of COVID, we typically added one or two deals to our pipeline each month, which was a consideration for us. We receive several inquiries weekly, but many of these opportunities are not aligned with our interests. So, I would say the situation is fairly consistent and hasn’t increased significantly. However, we may see a rise in opportunities as some may decide to sell, particularly as we approach spring and individuals assess their financial positions. People may need to delve into their savings, leverage real estate, or find other means to sustain cash flow until the earning months of April, May, and June. If we experience adverse weather conditions in spring, that could further delay income and cash flow recovery until May, June, and July. So, while we have prospects we’re considering, we will remain opportunistic as we advance.

Yeah. Thanks, Austin. And then I'm trying to reconcile a weird dynamic in my mind, which is, retail looks to be somewhat in line with your own expectations, but it feels like every OEM has agreed it's actually time to cut production and help you and other dealers get right with inventory. It was just like a realization on the OEM's part that it's things are different or the pain is so severe for some dealers on floor plan expense that they had to do it. What do you think changed in the minds of OEMs when frankly retail is about what you thought it would be?

Yeah, so that's a really good question. When you look at retail and where we sit right now and how that works, we're able to probably be a little bit more optimistic versus the OEMs because we have the inventory that's already on hand. So, they're having to replenish inventory whereas we have too much. So, we sell through that inventory where they need to build boats today. And so as that kind of shifts, we have plenty of inventory. I mean, I think, Anthony, if I'm not wrong, if we just didn't order another boat from here on out, we'd have plenty of inventory to sell through probably a good chunk of the summer.

Correct.

We're feeling a bit optimistic because we have all the inventory available. Our focus now is just on performing and selling, while OEMs are facing challenges with where to store their inventory. They can't build products if they lack storage space. This discrepancy seems to stem from timing issues, which may have led OEMs to not fully recognize the situation as we have. When we look at individual dealers and their promotional activities, it's been nearly two decades since we faced a scenario where most dealers are dealing with double-digit floor plan interest costs. This is a significant expense, and margins have tightened. In the past, floor plan curtailments were not strictly enforced, meaning there wasn't a direct cash outflow. However, as we've moved through this winter, dealers have been required to write checks for curtailments, effectively marking their inventory to market. While this is a necessary discipline for the industry, it's a new experience for many, and they may be uncertain about how to adapt. Today, many in the industry are likely feeling anxious about navigating this shift. They're faced with challenges they're not accustomed to, and they need to adjust their approach to manage this situation. It's been tough for some dealers, and they might be questioning the state of their finances. Looking back at dealers who successfully weathered the challenges of ‘08/’09, it's clear they can handle this, too. I'm not suggesting they're doomed; it will be a struggle, and now may be an appropriate time to consider their exit strategies.

Great. Hey, thank you.

The next question comes from Joe Altobello with Raymond James. Please go ahead.

Thanks. Hey, guys. Good morning. Just to follow up on that comment you made, Austin, about non-current inventory in the industry. How long do you think it will take for your competitors to kind of work through that non-current?

Well, I mean, it really just depends on how strong this spring early selling season is. I think we're doing, we're seeing good things at the boat shows. Things are going really good at the boat shows for us. I imagine you've got several other dealers out there that are performing very well at the boat shows. People are coming through the door and they're buying boats. And so as that inventory kind of pushes through a good early spring selling season, we'll accelerate that. If you have weather or pockets that aren't as good, that can change things. And so, that's a crystal ball I just don't have. If you just wanted, Anthony probably has a better gut at that than me, I'd take a swag at it and say that once we get to model year change going into 2025, that lag point of June and July, I think we should be in pretty good shape unless there's something out there that we're not seeing from a macro standpoint. Anthony, you got any feeling on that?

No, I think that we're heading that way. And we have a plan in place to ensure their inventory is right.

Yeah, I think the only thing I would throw in there, Joe, is we had gotten some indication that dealer inventory is around 38 weeks. And so, if manufacturers cut 20%, 30%, let's say 25%, right, if I just say, okay, well, then that reduces, and retail's flat, does that reduce it back down 25% and that gets them closer to that 26 weeks on hand, that two turns that historically the industry has seen? That sounds like some math you can get around that that would make sense assuming this season is a flat year.

Okay, that's very helpful. Maybe just to follow up on that, you talked about normal seasonality several times this morning. Maybe help us understand what you mean by normal seasonality because your business has changed a little bit since COVID. So as we think about the next three quarters, for example, how do we think about the cadence for the year from maybe a sales and EBITDA perspective?

Jack, let me jump in, then you can backstop it a little bit. I think, Joe, one of the things that the exercises that we kind of went through is we wanted to go back and look at ‘17, ‘18, ‘19 as individual years and seasonality by month and quarters, and then also took an average of those three and kind of applied that to where we are today for the first quarter. And it was a really good exercise and it gave us a lot of confidence on where we sit today. There's a lot of things out there in front of us that we can't control on the macro that could change some things. But when you look at just how it used to be, and then what we're seeing as far as like the transition to bigger boats in the winter months, because those are a longer build time, just the way the customers' buying patterns and not the urgency in the September, October, November to order smaller boats, they're waiting for the boat shows; it just feels just like it was in ‘17, ‘18, and ‘19. I mean, we had great years at those times. Now, I do agree that we've shifted the EBITDA contribution to some of these higher margin businesses. So that changes it a little bit. But if you just kind of really look at the seasonality of new boat sales, which is still the predominant driver of our EBITDA, and you go back and you look at it pre-COVID, take all the COVID noise out of that, it’s a pretty compelling story where we sit today. And I think that's something that's got us optimistic, feeling pretty good. Boat shows have helped a little bit. But then, we got to really be careful and watch really tight, inventory and all this stuff as we move forward because there are some things out there that could stump us that we can't control. So going back to what we kind of say all the time, we're controlling the things we can control and we're watching it really closely. And if this shifts, we're going to make big adjustments. But right now, if you look at what the seasonality was pre-COVID and take all that COVID noise out of it, it kind of feels like we're back to this new normal of something very similar to what we saw pre-COVID. Jack, I probably rambled too much, but you can add to that.

No, you pretty much stole all my thunder. I think the only thing I would add to when you work through the math of it, I think as I look out at consensus guidance, right, I think we got the front half of the year just a little too heavy and the back half of the year a little light. And when you think about that, right, you go kind of over the last several years with COVID, right, and scarcity of inventory, the first half of the year, we accelerated so much, we shifted so many sales into that beginning part of the year. And we were selling pontoon boats and ski boats in the December quarter when that customer wasn't even really using the boat. Normally that was a spring and early summer boat buyer. And so now I think we're seeing those sales transition back, and that's our expectation. But like Austin said, we’re cautiously optimistic that if those sales don’t come in the back half, or as we're going through the boat show season lining up orders, we'll adjust. But as of right now, we're constantly optimistic.

Okay, great. Thank you, guys.

The next question comes from Michael Swartz with Truist Securities. Please go ahead.

I apologize for that; I forgot about the mute button. I’m trying to understand the guidance better. I would assume there’s some sensitivity to the path of interest rates, which could affect consumer demand, your flooring expense, and F&I revenue. Could you clarify what you are including in your guidance regarding interest rates for the next six to twelve months?

Jack, I don't think we embedded a whole lot of changes in interest rates.

I wouldn't say we included any significant changes. In our models, we gather yield curves from several banks, including Truist, and combine them in the model without incorporating any extra shifts or significant reductions. Regarding retail, we are acknowledging the pressure we've experienced on the Finance and Insurance line, where we can't achieve the spreads we once did. That represents more of a negative impact rather than a positive one. If rates decrease a bit, it might improve, but overall, it’s a highly profitable business and this is just a small factor in the model.

Got you. That's helpful. And maybe just expanding, I think, Anthony, you had some commentary around the boat shows, and I think, we kind of look at the boat shows and compare them to a year ago and maybe if we can go back to pre-COVID, maybe back to the 2019 level, not so much concerned about what you're seeing demand-wise there, but just the level of promotional intensity maybe versus back then. And I'm sure the answer's a little different pertaining to model year ‘23 or model year ‘24, but is there any way you can just frame what discounting looks like this year versus maybe a normal year?

I think it's back to the way the boat business was in 2018 and 2019. Everybody's being pretty competitive, and the manufacturers are being great partners and helping us move boats. As far as the volumes are concerned, I'm pretty impressed with what we've had. Some shows that we've had some, unfortunately, pretty bad weather in the northern markets that were affected. But the boat shows that we had in the southern markets were up over the prior year and continue to do very well. It is with the help of great manufacturing partners though, which we had that help in 2018 and 2019. During COVID, we didn't have any help; we didn't need any help. But as things get more competitive and as the inventory rises, they are staying with us, if you will, helping us make – ensuring that we have great shows.

Great. Thank you.

The next question comes from Fred Wightman with Wolfe Research. Please go ahead.

Hey guys, good morning. You've talked for a few quarters now about working down your inventory to position OneWater for what you were seeing on the horizon in terms of slowing retail and some dealers getting a little bit heavy. Do you just feel like your mix of current versus non-current compared to what you're seeing in the industry today really positions you to do that? And can you maybe just talk about your ability to capture, maybe where that would show up? Is it more on the comp side? Is it more on the margin side? Like, where do you think that proactive approach, that you've taken is going to be most visible?

I believe the impact will be widespread. One of the things we're observing is the current situation with weeks on hand. We don't have a clear understanding of the composition of the 38 weeks on hand from an industry standpoint. This data comes from Wells Fargo, but it doesn't break down the inventory into specific years like 22s, 23s, or 24s. Despite this, when we compare our position to the 38 weeks on hand, it gives us a significant competitive edge. However, as we progress further into the year, there's concern regarding the lingering 23 inventory, which is becoming increasingly challenging to sell. Some of the 23s sell easily, like popcorn, but others are less desirable. This has raised some worries in recent weeks as we anticipate it will become tougher to move that 23 inventory. Our hope is that this will lead to an increase in sales of 24s to counterbalance any margin decline we might experience with the 23s. Ultimately, I believe this will reflect in same-store sales and gross margin, depending on how quickly we can reduce the 23 inventory and transition to selling 24s alongside it, allowing us to be less competitive, especially with the new models.

That makes sense. And is there any way that you can just give some context to the pricing or margin benefit for those 24s versus the non-current stuff just to sort of help us think about what that blended margin opportunity could look like?

Well, I mean, I would think, Anthony, it's probably double, isn't it? If you take our 24s, put it against the competitor's 23, we could probably get twice the margin they're getting. If they're getting a 6%, we're getting a 12%. If they're getting a 10%, we're getting a 20%. If they're getting a 12%, we're getting a 24%. I would say it's close.

It's very mixed by model, whether it's brand or a recent renewal versus a model that's more outdated. It's really hard to break down that number.

Okay. Thanks a lot, guys.

The next question comes from Noah Zatzkin with KeyBanc Capital Markets. Please go ahead.

Hi, guys. Thanks for taking my question. You kind of touched on this a little bit, but in terms of the levers that you have available to you should retail potentially soften, I guess first, like internally, how are you thinking about those levers? And then second, like, is there an expectation that that OEM incentives could step up where units not to be moving come spring and summer? Thanks.

Jack, we've discussed this quite a bit over several quarters. We have numerous options available. Looking back to before 2008 and 2009, our largest expense on the profit and loss statement is our employees. Most of our expenses are linked to the performance of various departments. If there’s a slowdown, expenses adjust accordingly. We also have various cost-cutting strategies in our toolkit, but we've found it challenging to implement many of these recently because revenues have been stable. If we were to make cuts without a significant slowdown, it could negatively impact our service to customers, which we want to avoid. We're monitoring the situation closely and feel confident in managing costs if there's a major macroeconomic shift or an event beyond our control. Regarding manufacturer incentives, I can't speak for manufacturers, but if there’s a slowdown, they will likely need to address it. Dealerships are managing floor plan expenses that they’ve not encountered before, and excess inventory can strain their cash flow significantly. I've heard discussions around a curtailment holiday, which might become necessary if conditions worsen, as it significantly affects dealers’ operational cash flow. Currently, I believe that dealers cannot handle additional promotional costs. If they are squeezed further by increased floor plan expenses and cash flow issues from curtailments, it could be detrimental for individual dealerships. One of our key advantages is our ability to transfer inventory between various stores, allowing us to shift stock to hotter markets, which should help us. However, if the slowdown is severe, manufacturers will need to react or risk losing dealers.

Very helpful. Thank you.

This concludes our question-and-answer session. Thank you for attending today's presentation. You may now disconnect.