Earnings Call Transcript - ONEW Q4 2021

Operator, Conference Call Operator

Good day, ladies and gentlemen, and welcome to the OneWater Marine, Inc. Fiscal Fourth Quarter and Full Year 2021 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to your host, Jack Ezzell, Chief Financial Officer. Please go ahead.

Jack Ezzell, Chief Financial Officer

Good morning, and welcome to OneWater Marine's fiscal fourth quarter 2021 earnings conference call. I am joined on the call today by Austin Singleton, Chief Executive Officer; and Anthony Asquith, President and Chief Operating Officer. Before we begin, I'd like to remind you that certain statements made by management in this morning's conference call regarding OneWater Marine and its operations may be considered forward-looking statements under security 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 of the company's website and in its filings with the SEC. The company disclaims any obligations or undertaking to update the forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. And with that, I'd like to turn over the call 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. We delivered another year of record results highlighted by our proven growth strategy and strong execution. I would like to thank our team for their relentless efforts throughout all the challenges presented by the pandemic and its aftereffects. Full year 2021 revenue increased 20% to $1.23 billion on top of 33% growth in 2020, while same-store sales increased 10%, in line with our expectations. At the same time, our higher-margin service, parts and other sales grew by an incredible 52% compared to the prior year. These areas of the business will continue to be a major focus for us, and we see plenty of runway for growth in the years ahead. Taking the 10,000-foot view of the business, OneWater is surging. Our full year 2021 adjusted EBITDA of $156 million nearly doubled again this year due largely to our superior execution and strong business model. Importantly, our ability to find, acquire and successfully integrate M&A targets continues to be a strong recipe for success. While not factoring into our same-store sales calculations, the synergies and growth we have been able to realize from our recent acquisitions significantly contributed to the 2021 results. To that end, since we announced that we have reached a definitive agreement to acquire Norfolk Marine, a third-generation family-owned and operated business that will expand our presence in the mid-Atlantic U.S. Norfolk provides a great lineup of premier boating brands and has transformed itself into a full-service dealer in its 75 years of operation. We couldn't think of a better cultural fit as Norfolk continues to expand and diversify its offerings, their path forward falls in line with our own growth strategy. We look forward to sharing our experience with Norfolk and supporting them on further success as we welcome our first Virginia dealer. In 2021, we completed 5 acquisitions, which was in line with our previous guidance of doing 4 to 6 deals per year. For 2022, we have already completed the Naples Boat Mart acquisition and announced a pending deal with Norfolk Marine. We continue to anticipate completing 4 to 6 traditional dealership acquisitions this year with a few larger ones in the South. Additionally, we announced the acquisition of T-H Marine, a leading provider of branded marine products. As we have discussed, this is a strategic transaction for us, and it will double the size of our service, parts and other sales business. T-H Marine was built on its strengths as an OEM supplier and has evolved to create a premier omnichannel platform that supports aftermarket parts and accessory sales, which now accounts for half of its revenue. The T-H Marine transaction will provide an additional springboard for acquisitional growth in the future and further enhance profitability. It also reduces our exposure to boat sales and ultimately industry cyclicality. As we integrate T-H Marine, we would anticipate completing complementary parts and accessory tuck-in acquisitions in 2022. We are excited for this opportunity and the many more doors it will open for us. M&A remains a core component of our strategy. And as you can see, the opportunities have been plentiful. Going forward, we will remain disciplined in our approach, but we are taking advantage of a robust M&A environment to advance our goals and drive growth. We expect another strong deal year in 2022 and look forward to executing our proven approach to systematically capitalizing on improvements in synergies while advancing our leadership position in the market. In summary, we are incredibly proud of our full year results, and we are excited for the opportunities ahead. The continuation of our M&A activity and the expansion of our higher-margin revenue streams, coupled with the strong execution of our team will further support growth and enhance the quality of our earnings. We believe these efforts will continue to drive meaningful value to our shareholders long into the future. And with that, I will turn it over to Anthony to discuss business operations.

Anthony Asquith, President and Chief Operating Officer

Thanks, Austin. The fierce levels of demand that we have seen over the past year continue in the fourth quarter with no signs of waning. On the product side, we are seeing strength across the board, ski wake, pontoons, saltwater fish, runabout and the yacht categories are all performing well. Certain brands have select new hot models already sold out for 2022, and other brands continue to provide quality products that the customers are excited about as boaters can't wait to get out on the water. On the customer side, we continue to see strong demand from our existing customer base who continue to operate under the recurring purchase cycle of 3 to 5 years. We are also seeing continued influx of former boaters returning to the boating lifestyle. Many of these customers are amazed at how the product has advanced over the years. Regardless of the categories, the manufacturers continue to provide product enhancements that make customers say, wow. Many of these customers are experienced boaters who are very particular about what they want, and they are willing to wait for it and willing to pay for it. Many of these customers will stay in the boating lifestyle for years to come, which presents a very sticky business opportunity as they return to OneWater to upgrade their boat and further maintenance and repair services. Throughout our operations, we continue to focus on improving all aspects of the business. Revenue from our higher-margin service, parts and other sales increased 52% for fiscal 2021. The team worked very hard to provide customers with quality maintenance and repair services and also the parts and accessories they needed. These recurring sales and services we provide customers are set up for growth on the heels of another strong year of boat sales. I'm also excited about the T-H Marine and PartsVU acquisitions, which further bolster our service and parts and other sales. These products support our overall margin expansion and allow us to stay ready to meet our customer needs. As Austin touched on, we remain committed to expanding on our parts and service business and exploring additional opportunities to improve penetration rates and the diversity of the product offerings available to our customers. Moving on to inventories, we are pleased to see them increase during the quarter, but they remain at historically low levels amidst the challenging supply chain environment. That being said, we have been able to leverage our advanced inventory management tools to capitalize on the incredible demand we are seeing. Our dealerships, including newly acquired locations have access to pull from our broader inventory pool, no matter where the boat is located, whether it is on order or in production. Every one of our dealerships can engage with the customer and pre-sell the inventory that is inbound to any location. As a result, our presold inventory remains well above prior year and well above pre-pandemic norms. This process also creates enormous savings on floor plan interest, inventory maintenance and general carrying costs. Insight into future sales and a highly efficient sales process has allowed us to deliver enhanced margins in the quarter, marked by a 39% increase in gross profit and an 830 basis point improvement as a percentage of sales. The boat show season is underway and has returned to in-person events. We recently attended the Fort Lauderdale Boat Show where there was a record attendance. We were not only encouraged by the number of our own customers that attended the show, but many of our brands saw increased sales over last year, and from what we saw, customer demand remains strong. We continue to attend select boat show events, and we are maintaining our shift to more personalized in-store events moving forward. Our ability to market directly to customers has been both cost-efficient and allowed us to engage with our customers at a more relationship-based and personal level. And 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. Fourth quarter revenue increased 3.4% to $280.3 million in 2021 from $271 million in the prior year quarter. Ongoing supply chain challenges dampened our ability to deliver boats to customers. New boat sales grew 3.3% to $193 million in the fiscal fourth quarter of 2021, while pre-owned boat sales decreased 9.9% to $50.6 million. As part of our diversification strategy, we continue to focus on growing high-margin parts of our business, which contributed meaningful results for the quarter. Finance and insurance revenue increased 25% to $9.7 million in the fourth quarter of 2021, and revenue from service, parts and other sales increased 33% to $27 million compared to the prior year. Gross profit increased 39.4% to $89.3 million in the fourth quarter compared to $64.1 million in the prior year, driven by the increase in the average unit price of new and pre-owned sales and an increase in the high-margin service, parts and other sales. Gross profit margin increased 830 basis points to 31.9% compared to 23.6% in the prior year. Fourth quarter 2021 selling, general and administrative expenses increased to $55.4 million from $39.8 million. SG&A as a percentage of sales increased to 19.8% from 14.7% in the prior year. The increase in SG&A as a percentage of sales was due mainly to higher variable personnel costs driven by the increased level of profitability compared to the prior year quarter and increased costs associated with the current labor and supply chain environment. Operating income climbed 77.9% to $29.2 million compared to $16.4 million in the prior year, driven by increased gross profit, partially offset by higher SG&A expenses. As a result, adjusted EBITDA increased to $33.6 million compared to $22.9 million in the prior year. Net income for the fiscal fourth quarter totaled $22.5 million or $1.35 per diluted share, up 276.5% from $6 million or $0.30 per diluted share. Building upon last year's historic results, total revenue for the full year 2021 climbed to $1.23 billion, an increase of 20.1% compared to the prior year, driven by an increase in the average unit price of new and pre-owned boats sold. Same-store sales increased 10% despite a very challenging inventory and supply chain environment. We also saw a 52% increase in service, parts and other revenue. Growth in these higher margin, less cyclical aspects of our business has been and will continue to be a strategic focus of OneWater. Full year 2021 gross profit increased 51.8% to $357.5 million, driven by the increase in margin on new and pre-owned boat sales and a significant increase in higher-margin finance and insurance income and service, parts and other gross profit. Gross profit margin for fiscal 2021 was 29.1%, an increase of 610 basis points compared to fiscal 2020. Selling, general and administrative expenses in fiscal 2021 increased to $199 million or 16.2% of revenue from $143.6 million or 14% of revenue in fiscal 2020. The increase in SG&A as a percentage of sales was due mainly to the increase in variable personnel costs associated with the higher level of profitability and increased costs with the current labor and supply chain environment. Full year 2021 operating income surged to $148.9 million, nearly double the prior year operating income of $78.3 million. As a result, adjusted EBITDA climbed 87.6% to $155.9 million. Net income for fiscal year 2021 increased 140% to $116.4 million or $6.96 per diluted share compared to net income of $48.5 million or $2.77 per diluted share. Now turning to the balance sheet. On September 30, 2021, we had $62.6 million of cash and $30 million of availability under our revolving line of credit. Total inventory on September 30, 2021, was $143.9 million compared to $116.9 million at June 30, 2021, and $150.1 million at September 30, 2020. Total long-term debt currently stands at $114.4 million. Our net debt to adjusted EBITDA ratio is very low at 0.33 times. On our last call, we gave a range for the expected net debt to adjusted EBITDA ratio post-transaction of T-H Marine. While this ratio will change based on the final amounts at closing, we expect the net debt to adjusted EBITDA ratio to be approximately 1.5 times. Looking ahead to 2022, we expect a strong demand environment to continue. We anticipate same-store sales to be up high single digits despite the ongoing inventory challenges. We expect adjusted EBITDA to be in the range of $170 million to $175 million and earnings per diluted share to be in the range of $7.20 to $7.50. These projections exclude the previously announced Norfolk Marine and T-H Marine acquisitions and other acquisitions that may be completed during the year. With regard to our capital allocation, we remain focused on accelerating organic growth and continuing on strategic M&A opportunities. As Austin mentioned, our M&A pipeline is very robust, and we plan on continuing our cadence of dealership transactions. At the same time, T-H Marine's complementary business model, growth strategy and proven history of accretive acquisition provides another platform for us to grow our service, parts and other revenue, further diversifying our business. We look forward to scaling our proven strategies across newly acquired dealerships and enhancing our profitability with additional offerings. This concludes our prepared remarks. Operator, would you please open the line for questions.

Operator, Conference Call Operator

Our first question comes from Joe Altobello with Raymond James. Your line is now open.

Joe Altobello, Analyst

Congrats. So a couple of questions on fiscal '22. I guess, first, for Jack, the high single-digit comp growth outlook, how does that trend throughout the year? I assume you're expecting that to be mostly second half weighted. I'm curious how you're thinking about first half versus second half comps?

Jack Ezzell, Chief Financial Officer

Yes, for sure. I mean, I think we've said a couple of times over the last year that with the way demand has kind of been through COVID, the seasonality of the business has shifted around a little bit, and you're seeing some changes. With the December quarter being our smallest quarter in terms of dollars, it makes it probably the easiest to comp. But your point right is that in Q2, we were up against a 58% comp. But then in the back half, we're up against negative comp. So I definitely would see the back half certainly a lot easier to comp than the first half or in particular second quarter.

Joe Altobello, Analyst

And then secondly, on margins. If I look at your boat margins, you're in the mid-20s in fiscal '21, you were in the high-teens, not that long ago. So how should we think about boat margins trending in fiscal '22, given the inventory environment, given the promotional environment that we're in today?

Jack Ezzell, Chief Financial Officer

Yes, I believe they will begin to stabilize. We are currently comparing to previous years when we had high boat margins. I expect them to level off as the year progresses. Throughout the year, margins should remain elevated, although they may be affected by rising costs from manufacturers, which could be passed on to us. If we can recover these costs from customers, the margins will be maintained.

Operator, Conference Call Operator

Our next question comes from the line of Mike Swartz with Truist Securities. Your line is now open.

Mike Swartz, Analyst

Maybe another question, if I may, on FY '22 guidance. Jack, I guess, with the high single-digit comparable store outlook for the year, can you maybe give us a sense of how you're thinking about that between unit volume and ASP mix?

Jack Ezzell, Chief Financial Officer

Yes. Certainly, as you think about '21, '21 has really been driven by price or I think as we move into '22, we'll start to see an uptick of unit volume and start to get back to maybe a more normal pace of truck driving both units and price.

Mike Swartz, Analyst

Can you clarify your guidance on EBITDA, which I believe is between $170 million and $175 million? What would that figure look like if we factor in Norfolk and T-H?

Jack Ezzell, Chief Financial Officer

Yes. I mean, it's going to be subject to when those acquisitions close exactly, you have the remainder of the year for their performance. But we'll certainly give some updated guidance as we get down the road, but I'd expect them to contribute something in the range of probably about $15 million for the year. And that's their partial year. So it's not their full year. But somewhere around $15 million, $16 million for the year.

Mike Swartz, Analyst

Jack, you mentioned the price increases implemented by the OEMs, and we’ve all heard about the price hikes in the fourth quarter from nearly every OEM. Can you share your insights from conversations with customers who have boats on order, especially regarding any backlogs that aren't price-protected? How stable has the demand been over the past month?

Austin Singleton, Chief Executive Officer

Where your backlogs are price locked. Anthony, correct me if I'm wrong, I'm pretty sure that's the way it is with almost every manufacturer. I'm not saying there's not 1 or 2 out there that hadn't. But nothing meaningful that we don't have a price lock in, really not seeing much of an issue with this because even with the price increases, historically, for the last 30 years, we pushed that on to the consumer. And with more and more people looking at financing and us converting more and more people to financing, you're talking about a $4 to $15 a month change in payment. So it's just not that difficult to pass that on, and just don't see a lot of issue with that. Now if you have manufacturers coming out at midyear with double-digit price increases that could make them noncompetitive or might take it out of the market. But I just don't see that coming on top of the price increases we've already absorbed.

Anthony Asquith, President and Chief Operating Officer

That's correct.

Operator, Conference Call Operator

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

Craig Kennison, Analyst

I wanted to understand the pandemic buyer better. Have you followed up with any of those first-time buyers or pandemic buyers to gauge their experiences and whether you think they will become lifelong boaters? Some may decide that boating isn't for them, but it could present an opportunity to sell more used boats. It's still early, but I'm curious if you have gathered any of that data.

Austin Singleton, Chief Executive Officer

Yes. Please proceed, Anthony.

Anthony Asquith, President and Chief Operating Officer

Most of the customers coming in were previously boaters who stepped away from boating. In the last 15 to 20 years, the main change in boats has been their color. They are now returning to our showrooms and are often amazed by the current boat options available. Each of our manufacturers continues to innovate significantly, unlike before when major changes happened every five or six years. Nowadays, enjoying boating doesn't require exceptional driving skills, thanks to the advancements in technology. This will help retain those who used to boat in the past. There are some first-time buyers, but they are far fewer compared to the returning boaters.

Austin Singleton, Chief Executive Officer

I want to add that we've noticed some concerns in the RV sector that aren't reflecting in the marine industry. As we enter the slower season due to weather and school schedules, boating typically declines. With cooler temperatures and falling leaves, the boating activity decreases significantly, except perhaps in Florida and parts of Texas. This period is often when first-time boat buyers, who have been in the market for nearly two full seasons in 2020 and 2021, might consider selling. They could be finding that the carrying costs become burdensome without the opportunity to enjoy their boat. However, our pre-owned sales last quarter show a decline, indicating that we still can't find enough used boats. This suggests that these first-time buyers from the pandemic years are not selling their boats. We did observe some buyers making lateral trades this year, moving from one type of boat to another that better suits their family's needs. Still, the retention of these new consumers from 2020 onward has been remarkably strong, as there are virtually no used boats available; they simply do not exist.

Craig Kennison, Analyst

Regarding your M&A pipeline, are there specific regions you are looking to enter, or will the flow of deals primarily depend on the appeal of the dealership itself?

Austin Singleton, Chief Executive Officer

Yes. We are opportunistic. As I've mentioned multiple times before, the most important factor for us is the people. We need to ensure that the dealership has really good individuals in key positions. Once we identify that, everything else becomes more manageable. While we would love to continue focusing on our established areas, we are open to exploring new regions. We’re not hesitant about entering the West Coast or the Extreme Northeast. We look for the best opportunities based on talent, potential growth, and brand alignment. However, we prefer to concentrate on familiar areas, as we believe that strategy is beneficial, depending entirely on the opportunities available.

Operator, Conference Call Operator

Our next question comes from the line of Fred Wightman with Wolfe Research. Your line is now open.

Fred Wightman, Analyst

I was hoping you could unpack the sequential pickup in inventories that you guys saw. It doesn't sound like used availability improved a lot. Was that all on new? Anything you could sort of give us to size that would be helpful.

Anthony Asquith, President and Chief Operating Officer

I will start here, Jack, you can add more if needed. It's really about the timing of when things were arriving. I don't expect a significant increase from this point. It will increase somewhat, but the presales going forward are exceptionally strong. Much of what will be coming in as we approach the first half of 2022 is already presold. Therefore, the inventory is not arriving as it did previously. I believe it was just a timing issue that enabled us to make gains on the new side. Jack, feel free to correct me if I'm mistaken.

Jack Ezzell, Chief Financial Officer

Yes, we somewhat anticipated an increase and further expect it to build into the December quarter. Our inventory levels are turning over quickly. Based on rough estimates, we are turning inventory at rates of five to six times, which is more than double what a typical boat dealer would achieve and even surpasses our historical performance on the new side. We're moving products rapidly, and while our inventory remains stable, we're growing. This reflects our strong capabilities and tools for managing inventory effectively, ensuring it reaches the right locations and customers efficiently.

Fred Wightman, Analyst

Makes sense. And you guys touched a little bit on the Fort Lauderdale Show, but I think you've been a little bit more skeptical about just the role that boat shows would have going forward. Has anything that you've seen so far changed how you're thinking about that going forward or not?

Austin Singleton, Chief Executive Officer

No. I mean, I think that we always have been consistent with the bigger boat shows, especially with some of the bigger boats, it's very important for us to do those shows. I think it was the more regional shows that we're not really sure the value is there. Anthony and his team did an incredible job last year when there were zero shows doing these customer events and pulling the customers into our store for that more intimate atmosphere in order to sell. And we think that's a great model moving forward. But it doesn't take out these bigger shows. The bigger shows were important to us, and we doing those going forward. It's the more regional shows that will be still in the back burner for probably several more years.

Operator, Conference Call Operator

Our next question comes from Drew Crum with Stifel. Your line is now open.

Unidentified Analyst, Analyst

This is David on for Drew. I just wanted to follow-up on the inventory. How does the pre-owned boat inventory level play into your fiscal '22 outlook? And separately, how are you thinking about inventory management going forward, given all of the moves that you guys have had to make over the course of this pandemic?

Jack Ezzell, Chief Financial Officer

Yes. Looking at the outlook for 2022, we expect that access to pre-owned inventory will continue to be challenging. Many buyers are actively searching docks and marinas for pre-owned boats that we can purchase directly and then sell at retail. This is certainly a part of our business model, and we anticipate significant growth in this area, aligning with our same-store sales performance. As for inventory management going forward, it should become somewhat easier as manufacturers stabilize their supply chains and maintain a more consistent output. This will help us with our expectations and smooth out any fluctuations. We are in regular communication with manufacturers about what we're seeing at retail, which models we need more or less of, and we’re collaborating with them to adjust production according to retail demand.

Austin Singleton, Chief Executive Officer

I want to add to that too, we're trying to feel like going forward, this is going to take a good long time to really build up what the new norm of inventory is. If demand stays tightened like it is today, and it continues to go on. This can go on for a lot longer than we were thinking. And so as we kind of look at it, I feel the manufacturers are getting to more of a level production schedule to where it's more of a flat line instead of these peaks and valleys where we get loaded up in this month and then don't get anything this month. So as this new normal comes around, I think it's going to make both of us a lot more efficient. One of the tailwinds that I think we have, not only at OneWater but as an industry, is because of the way the manufacturers will get to a more level production schedule, we kind of had a chance to hit the reset button because of COVID. I think it makes us all have more turns. So it makes this carrying cost go down, and this is from an industry perspective. I think every manufacturer gets a little bit more level, they get a little bit more precise on how they're building and how they're shipping. And then if demand stays heightened like it is now, we're going to continually have to battle this for many years. But if it softens a little bit, I think we all still stay extremely efficient on our turns, which lowers, like Anthony said earlier, lowers our carrying cost and also allows us to probably keep that margin higher for a longer period of time.

Operator, Conference Call Operator

There are no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a great day.