Earnings Call Transcript - ONEW Q4 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to OneWater Marine's Fiscal Fourth Quarter 2023 Financial Results Conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Jack Ezzell, Chief Financial Officer. Please go ahead, sir.

Jack Ezzell, Chief Financial Officer

Good morning, and welcome to OneWater Marine's Fiscal Fourth Quarter and Full Year 2023 Earnings Conference Call. I am 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 the 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?

Austin Singleton, Chief Executive Officer

Thanks, Jack, and thank you, everyone, for joining today's call. I would like to begin by thanking the OneWater team for their solid execution in the challenging operating environment. Despite the return to historical buying patterns and normalized pricing, we delivered record revenue in 2023, which increased 11% on top of the 42% growth in 2022. Furthermore, the team delivered same-store sales growth of 3% for the full year. For the quarter, same-store sales of 14.6% significantly outperformed the industry, which market data indicated was down high-single digits. Full year revenue from our higher-margin service, parts and other sales grew 26%, which helped us offset the expected decline in new boat margins as the industry returned to normalized pricing. Margins in the fourth quarter were in line with the third quarter, which is encouraging. Overall, we believe that margins will continue to fluctuate with the seasonality in model mix, but it does seem to feel like boat margins were stabilizing. OneWater's proven track record of managing through various economic cycles served us well during 2023. Over the past year, our proactive and aggressive approach to inventory management resulted in inventory levels at 19 weeks on hand compared to an industry average of 25 weeks on hand. We continue to aggressively work down non-current inventory, saving on interest expense and other carrying costs. This positioned us with a good supply of model year 2024 boats compared to 2023, which provides a more compelling sales opportunity. This competitive positioning in a market flooded with non-current inventory is driving results today and sets us up for success in the quarters to come. I'm pleased to announce that earlier this week, despite the difficult banking environment, we were able to increase our floor plan facility by $100 million to a total capacity of $650 million. This will support the business and recent completed acquisitions. It's important to note that while same-store sales inventory hasn't grown in terms of units compared to 2019, it has increased more than 40% on a dollar basis. This additional capacity provides us with greater flexibility, especially as we integrate the dealers we have acquired over the past few years. We also completed a sale leaseback agreement for Roscioli Yachting Center, which bolstered our cash, allowing us to sharpen our focus on Sunseeker Yacht sales, warranty, and service operations. The proceeds from the sale were used to pay down a portion of our long-term debt and to acquire the remaining 20% interest in Quality Boats located on the West Coast of Florida. As a reminder, we first acquired a major interest back in December of 2021 and have been pleased with Quality's performance in one of the most attractive boating markets in the country. On the M&A front, the deal pipeline continues to be attractive, and our strong balance sheet provides dry powder for the right deal. While we are seeing plenty of activity, we are being extremely selective and scrutinizing every opportunity to find the right dealership to add to our portfolio. In summary, I'm proud of our team's execution while navigating industry challenges as we return to a more normalized operating environment. We continue to work tirelessly to provide our customers with the boat experience they desire. We remain nimble in our response to changing market dynamics and continue to focus our efforts on strategic priorities that position OneWater for long-term success. With that, I'll turn it over to Anthony to discuss business operations.

Anthony Aisquith, President and Chief Operating Officer

Thanks, Austin. Despite the normalization of the sales environment, our team remains active in delivering a solid close to the summer selling season. Customer sentiment is holding up, and the fourth quarter same-store sales was over 14% supported by strength from new and pre-owned boat sales. Our manufacturing partners continue to be very innovative in building exciting new models in the premium segment with unique features that customers want. We saw this excitement firsthand at recent boat shows, including the Fort Lauderdale International Boat Show, which had impressive activity. While we're too early in the boat show season to draw any conclusions, we are off to a good start. Turning to our higher-margin businesses, finance and insurance income for the fourth quarter was also up slightly, though not proportionately to boat sales due to the current spread on the interest rate. The average customer seems to be getting used to higher interest rates, and credit continues to remain widely available and widely used. We believe the majority of the customers use some degree of financing to pay for a portion of their purchase. To this point, approximately 70% of new boat customers in the September quarter financed a portion of their purchases directly with us, which is on the high side of historical averages. From where we sit today, our customers are generally adjusting to the higher cost of financing. Their boats tend to be somewhat insulated from interest rates and economic headwinds. Overall, we believe our retail strategy has positioned us to continue to outperform the industry. With that, I'll turn the call over to Jack to go over the financials in more detail.

Jack Ezzell, Chief Financial Officer

Thanks, Anthony. Fiscal fourth quarter revenue increased 13% to $451 million in 2023 from $398 million in the prior year quarter. New boat sales grew 12% to $264 million in the fiscal fourth quarter, while pre-owned boat sales increased 36% to $92 million. We are pleased with the pace of boat sales that have outperformed industry reports despite the challenging macroeconomic environment. Revenue from service, parts, and other sales for the quarter increased 1% to $82 million compared to the prior year, and finance and insurance revenue grew 2% to $13 million in the fourth quarter. These sales gains generated over 14% same-store sales growth for the quarter, which significantly outpaced the industry. Gross profit decreased 6% to $119 million in the fourth quarter compared to $126 million in the prior year, driven by the normalization of gross margins on boats sold. Gross profit margin appears to be stabilizing when compared to the June quarter, but has declined from the fourth quarter of last year. We now expect margins to fluctuate with historical seasonal patterns and model mix. In the pre-COVID era, we typically benefited from stronger margins during the summer selling months, with a mix shift to higher unit volumes and lower average selling prices as opposed to the slower winter months where the mix shifts to higher average selling prices with lower margins. Fourth quarter 2023 selling, general, and administrative expenses increased to $85 million from $80 million. SG&A as a percentage of sales was 18.8%, down 120 basis points from the prior year, driven by the variable cost structure of the business, cost optimization, and integration efforts of the acquired parts and service businesses. In the fourth quarter, the company reported a non-cash impairment charge of $147 million. The charge is primarily related to the write-down of goodwill and identifiable tangible assets that were reported in our Distribution segment and was largely driven by the recent decline in the segment results, the stock price, and the overall valuation. We believe there's tremendous value in our Distribution segment, which we will realize as part of our long-term growth strategy. As a result, we posted an operating loss of $117 million compared to income of $40 million in the prior year. Net loss for the fiscal fourth quarter totaled $111 million or $6.89 per share compared to net income of $22 million or $1.28 per diluted share in the prior year. Excluding the impairment charge and other adjustments, we reported adjusted EBITDA of $28 million compared to $45 million in the prior year. We have also introduced a new metric, adjusted earnings per share, to assist with the comparability of the results. Accordingly, for fiscal fourth quarter of 2023, our adjusted earnings per diluted share was $0.42 compared to $1.68 in 2022. Turning to our full year results, total revenue for the year 2023 increased 11% to $1.9 billion compared to the prior year, driven by an increase in the average unit price of both new and pre-owned boats, an increase in the unit sales of pre-owned boats, and sales growth from higher-margin businesses. Same-store sales increased 3% in fiscal 2023. Additionally, service, parts, and other revenue increased 26% to $322 million for fiscal 2023, driven by contributions from our recently acquired businesses and dealer operations. Full year 2023 gross profit decreased 3% to $535 million compared to the prior year as a result of industry-wide normalization of boat pricing, partially offset by meaningful contributions of acquired parts and service business. Gross profit margin for fiscal 2023 was 27.6%, a decline of 410 basis points compared to fiscal 2022. Selling, general, and administrative expenses in fiscal 2023 increased to $346 million, or 17.8% of revenue from $302 million, or 17.3% of revenue in fiscal '22. The increase in SG&A as a percentage of revenue was driven by the return of a more traditional promotional environment and higher costs associated with our acquired service, parts, and other businesses. We will continue to moderate costs with our variable expense structure and bring the higher expense structures of the acquired businesses in line with the legacy business. Full year 2023 operating income fell $18 million compared to the prior year's operating income of $218 million, primarily driven by the $147 million impairment charge reported in fiscal year 2023. Net loss for fiscal year 2023 was $39 million or $2.69 per share compared to net income of $153 million or $9.13 per share in the prior year. The business generated adjusted EBITDA of $167 million for fiscal year 2023, and adjusted earnings per diluted share of $5.10 compared to $10.55 per diluted share in 2022. Turning now to the balance sheet. On September 30, 2023, total liquidity continues to be in excess of $100 million, including $85 million of cash and availability under our credit facilities. As Austin mentioned earlier, we entered into a sale leaseback transaction disclosed on September 30 that did not fund in October 2nd. As such, $45 million proceeds reflected as a receivable on our books at the close of the year. While the sale has a slightly negative impact on adjusted EBITDA, overall, it increases cash flow on an annual basis. Subsequent to year-end, we used $25 million of proceeds to pay down long-term debt and the balance to purchase the non-controlling interest of Quality Boats. Total inventory on September 30 was $610 million compared to $373 million at September 30, '22. As a result of improved lead times and industry normalization, our boat inventory has returned to pre-COVID levels, and both units are up less than 1% compared to fiscal 2019 on a same-store basis. Long-term debt currently stands at $458 million, a net debt to adjusted EBITDA ratio is 2.2x. We are comfortable with our liquidity and leverage position, and we'll continue to monitor the macro environment as we manage our balance sheet. Looking ahead to 2024, we expect demand and margins to continue to moderate to more traditional seasonal cycles and are not assuming a major economic downturn or a recovery as part of our outlook. We anticipate same-store sales to be up low to mid-single digits. We expect adjusted EBITDA to be in the range of $130 million to $155 million, and earnings per diluted share to be in the range of $3.25 to $3.75. We would like to note that beginning in fiscal year 2024, our adjusted EBITDA calculation will exclude stock-based compensation and will remain part of our definition for both guidance and results on a go-forward basis. We feel this methodology is more in line with industry standards and provides better insight into the company's true performance. Our fiscal fourth quarter and full year 2023 results provided under the historical definition, but I would like to direct our investors to the reconciliation tables in this morning's press release for further explanation of these factors. Finally, our capital allocation priorities remain unchanged. We will continue to monitor the macroeconomic environment as we conservatively evaluate opportunities to deploy cash. We will also continue to explore opportunities like sales leaseback transactions, which improved the balance sheet and annual cash flows. We remain disciplined in our approach and unwavering in our commitment to drive long-term value for shareholders. This concludes our prepared remarks. Operator, will you please open the line for questions?

Operator, Operator

Thank you. Our first question comes from the line of Michael Swartz with Truist Securities. Your line is now open.

Michael Swartz, Analyst

Good morning, everyone. I apologize for the static on the line during the pre-recorded comments, which caused me to miss a few points. Regarding the transaction, the sale leaseback, and the acquisition of the non-controlling interest in Quality, can you provide any details on how that will impact the profit and loss statement or the guidance for 2024?

Jack Ezzell, Chief Financial Officer

When you consider our two divestitures from late September, there was about a $3 million impact on EBITDA. The purchase of the remaining portion of Quality does not affect EBITDA, but it does influence cash flow since we had been distributing earnings from that business. Overall, these two transactions are expected to result in a positive cash flow of approximately $3 million to $5 million when taking into account the reduced interest costs and lower distributions, despite the loss of earnings.

Michael Swartz, Analyst

Okay, thanks, Jack. Regarding your broader comments on fiscal '24 guidance, I believe you mentioned expecting a normalization of seasonality in margins. Should we anticipate that new boat margins will return to the high teens, around the 18% to 19% range going forward?

Jack Ezzell, Chief Financial Officer

I believe if you examine the last two quarters, we've remained around 20%. It appears that we are normalizing in the high teens range. As we look ahead, particularly for the June and September quarters, we experienced a reset in new boat margins. Moving into the first and second quarters of next year, we're facing significantly higher comparisons regarding that new boat margin. Therefore, as you model and plan for the quarters, you should keep in mind that we still need to reset the margins in the first half of the year. This implies that for the first quarter, historically, we can recall instances where it was a breakeven quarter. I think we will see positive EBITDA, but concerning net income and earnings per share, we will likely revert to that kind of environment. This is part of the natural seasonality of the business, where activity slows down in the December quarter before ramping up with the winter boat shows leading into spring and summer.

Michael Swartz, Analyst

Okay, great. As a final question, could you share your outlook for new store or comparable store sales for the upcoming year? Specifically, what factors are influencing your expectations regarding industry volume, pricing, and market share?

Jack Ezzell, Chief Financial Officer

For sure. I think we're always aiming to outperform the industry and increase our market share. I don't believe anyone is expecting a significant rise in unit volume. We are probably looking at a unit volume that remains relatively flat with a slight price increase. That’s likely the best way to describe the situation. Thanks, Mike.

Operator, Operator

Thank you. Our next question comes from the line of Craig Kennison with R.W. Baird. Your line is now open.

Craig Kennison, Analyst

Hey, good morning. Thanks for taking my questions as well. It seems like the big story in the last few months has been the rise in interest rates until recently. And I'm just wondering if you see in your consumer profile, a profile that's somewhat immune to those interest rate increases and then a consumer profile that really is reacting to that impact on the monthly payment. Just wondering if you see in your data where that line of demarcation might be.

Austin Singleton, Chief Executive Officer

I don't think we really deal with the impact of rising interest rates too much because the products we offer appeal to a buyer who is a bit more insulated. Anthony has some insights on this, so I'll let him share them. Overall, I believe we are somewhat shielded from these effects, and it isn't affecting our buyers as significantly at this moment. I also want to highlight that we invest considerable time and effort into training and refining our processes, which have been the best in the industry for years. This has allowed us to maintain a financing penetration rate in the mid-60%, significantly higher than the overall industry average. If we didn't implement our policies rigorously, I don't think we would achieve such a high rate. However, even with our success, many customers are still financing through other sources. Anthony, do you want to add anything regarding your recent explorations?

Anthony Aisquith, President and Chief Operating Officer

Yeah. I mean if you look at it at a $100,000 mark is basically when you take all the noise of the big boats out, from three years ago to today, it's about $183 a month difference in the payment. And really, we're not seeing people back away from $183 more a month than they did two or three years ago. So that's really what the math comes down to when you take 3 percentage points over 240 months, it's $183 more a month that the consumers are having to pay. So, we're not seeing anybody falter or back away from that at all.

Craig Kennison, Analyst

And I think I heard during your prepared remarks, Anthony, something with respect to the F&I penetration rate. And I guess I'm curious how does the F&I penetration rate change over time? I know it's a very good number for you. I think you said over 60%. But I'm curious if consumers who have the option to take it or not just based on their own personal situation rather than the need to finance a boat, if you see your penetration kind of slip a little bit.

Anthony Aisquith, President and Chief Operating Officer

No. In the quarter, our new boat penetration reached 70%. We believe that around 90% of customers finance their purchases, though not all through us. Many are using their own funds or borrowing against their home equity line of credit. They are not paying the full cash price for the boat. Over the years, our goal has been to maintain a rate of 65% or higher. For the fourth quarter, our new boat finance penetration rate was 70%. This reflects the established process in our sales approach.

Austin Singleton, Chief Executive Officer

I think, real quick, Craig, one thing to note is that this process is relatively straightforward if you train both the business managers and the salespeople. If they start the conversation and establish this from the beginning, it becomes easy to explain to someone that this is a simple interest loan with no prepayment penalty. For example, if you’re buying a $200,000 boat, you may have that amount available elsewhere. You could always pay it off at any time, but wouldn’t it be better to consider using that $200,000 in a more effective way? By carefully scripting our conversations, we can help customers understand that while they can pay off their boat whenever they choose, it might be wiser to invest that money or keep it as liquidity. Building this narrative throughout the entire process is something we've refined over the past seven years, which has significantly boosted our rate. That's why our penetration is higher—it starts from the very first interaction with the customer, and it's the small details added during the sales process that help us close the sale of the boat.

Craig Kennison, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Joe Altobello with Raymond James. Your line is now open.

Unidentified Analyst, Analyst

Good morning. This is Martin on for Joe. Just wondering if we can get a little more color around the EBITDA guidance for next year. And I believe you are now including stock-based comps. So just wondering if we can get a number or some kind of direction around that as well.

Jack Ezzell, Chief Financial Officer

Sure. Regarding the stock-based compensation, we're looking at around $9 million for next year. When you review the guidance and compare it to this year's performance, particularly in the first half and after accounting for normalized margins, you'll find that if you factor in the $3 million related to Roscioli and the Lookout divestiture, it brings you to approximately $155 million. While we remain cautiously optimistic about the upcoming year, there are several challenges to consider. Recently, we've received some positive news regarding inflation, but it seems that people are enthusiastic about it one day, only to be met with conflicting information shortly after. Therefore, we will focus on what we can manage, which includes selling as many boats as possible and ensuring we have the right inventory in the right locations that is ready and available for sale.

Unidentified Analyst, Analyst

Got it. It's very helpful. Just another question, guidance, does that assume the current trends when it comes to retail throughout the fiscal year? Or do you think it will start improving into summer?

Jack Ezzell, Chief Financial Officer

Yeah. I think there's a lot of unknowns at this point with the year as we look towards recent boat shows and most recently with Fort Lauderdale. We're certainly encouraged, but I think it's just a little too early in the year to tell. I think as we get through the winter boat shows, often kind of that boat show season from November, Lauderdale to Miami type timeframe typically gives you a good sentiment for what the rest of the year is going to look like and what the season is going to look like. And so, we're cautiously optimistic. The low to mid-single-digit guide is, like I said this earlier, I was assuming basically a flat unit type environment. So, we're being cautious. But there's a lot of unknowns with the macro that could be headwinds against us.

Unidentified Analyst, Analyst

Got it. Thank you very much.

Operator, Operator

Thank you. Our next question comes from the line of Griffin Bryan with D.A. Davidson. Your line is now open.

Griffin Bryan, Analyst

Yeah, thanks. This is Griffin on for Brandon. Can you talk about any recent category trends you've seen over the last 45 to 60 days, anything to call out there as we head into the show season?

Austin Singleton, Chief Executive Officer

I don't think there has been any significant change in the last 45 to 60 days. We had a successful time following the Fort Lauderdale Boat Show, but that's primarily due to a larger boat mix, so it's not a fair assessment of that period. The trend we've noticed is that consumers are shopping more diligently, which seems to be true across all brands and segments. The SSI data reflects this general trend in the industry. Certain segments are performing better than others, but overall, it feels like we are maintaining the status quo. It's a competitive environment, but there are no standout products that we feel we need to eliminate from our offerings.

Anthony Aisquith, President and Chief Operating Officer

No, not at all. There's nothing, but we still have several of our manufacturers that continue to be very innovative that make people want to buy the boat. So, there are new boats that continue to come out that are doing very well.

Griffin Bryan, Analyst

Okay. Great. And then, can you just give any color on OEM promotions you've seen as of late? And how those promotions may compare versus previous years?

Anthony Aisquith, President and Chief Operating Officer

We didn't have them in the previous year. And yes, they are plentiful now. The manufacturers are standing behind the dealers and making sure we're moving through inventory.

Austin Singleton, Chief Executive Officer

I believe the manufacturers at the start of June were hesitant, thinking they wouldn't need to take action. However, the last couple of weeks in June served as a wake-up call for everyone. They realize that dealers are concerned about growing inventories and are not ordering as many 2024 models. Consequently, they have adopted a more aggressive approach for the summer and are maintaining that strategy, understanding the importance of getting inventory out into the market. Currently, I feel significantly more optimistic about the industry compared to the end of the last quarter. I've had numerous discussions with Wells Fargo regarding their floor plan business, which appears to be improving. If we can sustain this positive momentum until the year's end, the event in Lauderdale was a promising indicator. If this optimism carries on through the end of the year, we could enter the next sales season with a healthier industry than what we anticipated 90 days ago. This gives us a hopeful outlook, but we need to remain patient to see how things unfold through the end of the year and into January.

Griffin Bryan, Analyst

Great. That's all from me. Thanks.

Operator, Operator

Thank you. Our next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. Your line is now open.

Noah Zatzkin, Analyst

Hi. Thanks for taking my questions. Maybe just one on the same-store sales strength during the quarter. How much of that would you attribute to your customer relative to the broader industry consumer versus inventory versus operating differently than maybe the broader industry dealer base? Just any thoughts around the strength relative to the industry would be helpful. Thanks.

Austin Singleton, Chief Executive Officer

We believe our CRM system gives us an advantage over our competitors and is a key reason we are able to continue capturing market share and growing. Additionally, consumers remain active, with many still looking to buy properties near water, which drives demand for boats. There's also a segment of professional boaters who paused purchases during COVID due to long wait times and rising prices, and they are starting to re-enter the market now. Overall, we see a strong market, and our efficient processes contribute to our success. Moreover, for the first time in three years, we have promotional rebates from manufacturers, which further supports our position. These factors are helping OneWater stand out in the industry and gain market share.

Noah Zatzkin, Analyst

Really helpful. And maybe kind of relatedly, I know you touched on this, but just in terms of your thoughts around M&A, just given relative outperformance taking share, like is the pipeline more full than it was three months ago? Or how do you think about the opportunity in the next year?

Austin Singleton, Chief Executive Officer

The pipeline has remained stable, neither rising nor falling. It has consistently been steady. The primary factor influencing the pipeline remains an aging industry without an exit strategy, and changes occur daily. Currently, we are somewhat cautious about the pipeline as we believe there is still potential for some dealers to stabilize. In the upcoming two quarters, we need to adjust our margins to reflect the current environment, which differ from last year's first two quarters. Some dealers are still optimistic, thinking they will bounce back, which complicates matters. We are engaging with a few dealers who recognize that their EBITDA will be lower. Our valuation multiple hasn't changed, as we aim for normalization, ensuring that everyone feels comfortable regarding the valuation metrics we are using and how they align with the increased interest rates affecting floor plans. This could further decrease their numbers, and we want to avoid acquiring a business burdened with outdated inventory. We are taking a cautious approach because we anticipate significant changes in three to six months, with EBITDA likely continuing to normalize year-over-year. While we are evaluating opportunities, we are not in a hurry to make any commitments at this moment.

Noah Zatzkin, Analyst

Very helpful. Thank you.

Operator, Operator

Thank you. I'm not showing any further questions at this time. I'd like to hand the conference back over to Mr. Austin Singleton for closing remarks.

Austin Singleton, Chief Executive Officer

Well, I don't really have any closing remarks. We just appreciate everybody on the call, and thank you all.

Operator, Operator

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone, have a wonderful day.