Earnings Call Transcript - ONEW Q3 2024

Operator, Operator

Good morning. And welcome to the OneWater Marine Fiscal Third 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.

Jack Ezzell, CFO

Good morning. And welcome to OneWater Marine’s fiscal third 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 would 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 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 in the Investor Relations section on the company’s website and in its filings with the SEC. 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. Please also note that all comparisons of our third quarter 2024 results are made against the third quarter of 2023 unless otherwise noted. And with that, I’d like to turn the call over to Austin Singleton, who will begin with a few opening remarks.

Austin Singleton, CEO

Thanks, Jack, and thank you, everyone, for joining today’s call. When we spoke to you last, we noted same-store sales trended slightly positive in April, and May trended slightly down. However, towards the end of May and into June, the sales decline got progressively worse. Also in Texas, one of our key markets, we saw significant negative impact from severe weather throughout the quarter. In the end, third quarter results were below our expectations. Recent industry data indicated that the categories we participate in were down approximately 23% in June and 15% for the quarter, whereas our unit sales were down approximately 14% and 6%, respectively, including the impact from the adverse weather in Texas. Excluding Texas, our unit sales were only down 2% for the quarter. I am proud of the team for delivering results in a challenging environment that continue to outperform the industry data. On a same-store sales basis, sales were down 8% for the quarter. We are encouraged to see July sales to date changing course and trending flat to positive, so we remain cautiously optimistic about the fourth quarter. While we cannot control market conditions or the weather, we continue to focus on efficient inventory management and proactive cost optimization, both of which improved during the quarter. Importantly, we made further headway on sequentially reducing our inventory in terms of dollars and weeks on hand despite lower revenues for the quarter. This is due to our focused effort to end the summer selling season with clean inventory, both in terms of units and model mix, and ensure that we are aligned with market demand as we prepare for fiscal year 2025. While we continue to outperform the industry in this area, we are encouraged to see weeks on-hand inventory decline sequentially for the broader industry as the market adjusts to this dynamic environment. We also maintain a proactive approach to expense management that we expect to pay off considerably for fiscal year 2025. Last quarter we implemented a number of cost optimization initiatives and are beginning to realize the benefits. Importantly, our flexible cost structure enables us to accelerate these cost actions when necessary. Turning to M&A, the deal pipeline remains active and we are spending considerable time on strategic initiatives. We are a patient and experienced management team, and we will pursue the right deal when the timing, price, and strategic fit are aligned with our objectives. OneWater will continue to prioritize thoughtful capital allocation and maintain appropriate levels of leverage while evaluating strategic opportunities, supporting the long-term viability of our business. We believe that acquisitional growth is a key part of our story just as much as it has been for the last two decades. On the fundamentals of the industry, I am pleased to report that we have been very encouraged by the turnaround that we’ve seen in July. However, given the industry-wide decline that we saw this quarter and the weather-related impact in Texas, we are lowering our full-year outlook. Despite the lowered guidance, our focus remains on factors within our control, including our ongoing strategic inventory management, the cost-cutting measures, and the green shoots we have seen in the Distribution business. These have positioned us very well as we prepare to turn the page into fiscal year 2025. With that, I will turn it over to Anthony to discuss business operations.

Anthony Aisquith, President and COO

Thanks, Austin. As mentioned, demand slowed during the quarter before picking up in July. Given the challenging retail environment, the sales cycle is slower, and we are seeing customers delaying purchases. We were also challenged by severe weather in Texas, which forced closures of various lakes at the time when our retail locations typically experience a high volume of sales during the summer season. While we see this as a one-off event, the impact of the lost sales is sizable, and it’s unclear if they will be recouped. For our various retail categories, premium held up well, as expected, and we saw pre-owned sales outpacing new boat sales. Despite the challenging retail environment, the team did a great job holding gross margins, which were in line sequentially and within our expected range. The selling environment remains competitive and our teams are active, staying aggressive and closing deals with support from our manufacturing partners. To make way for the next model year, we are selling through current inventory and we are making good progress while ensuring we have appropriate levels to meet demand. Utilizing our industry-leading inventory management tools, we are evaluating every make and model by location. For some locations, we have elected to exit certain brands and optimize the model mix for others. For the quarter, we ended up with 23 weeks on-hand inventory versus the industry of approximately 26 weeks on hand. Pricing for next year’s boats has moderated with model year 2025 boats expected to have low single-digit price increases for manufacturers. We are looking forward to getting out and selling these boats, and we believe customers will find a ton of value with all the new features in the 2025 lineup. Turning to our higher margin businesses, we are pleased that finance and insurance income increased slightly as a percentage of sales. Finance penetration is solid, and we are comfortably within our target range. In our service and parts and other businesses, we saw similar trends as the previous quarter. Dealership segment sales were up when factoring out the impact of dispositions that occurred in the fourth quarter of 2023. Our Distribution segment faced the challenge of reduced production by boat manufacturers, but they continue to see green shoots from the retail business. Overall, we are pleased with what we have seen so far in July and feel good about our inventory position heading into the fourth quarter. The team remains focused on meeting our customers’ needs and getting them out on the water. And with that, I’ll turn the call over to Jack to go over the financials in more detail.

Jack Ezzell, CFO

Thanks, Anthony. Fiscal third quarter revenue decreased 8.7% to $542 million in 2024 from $594 million in 2023. New boat sales were down 10% to $333 million in the fiscal third quarter of 2024, while pre-owned boat sales decreased 4% to $107 million. The decrease in boat sales was due to the demand softness in the retail environment and an outsized impact of the adverse weather in Texas. Revenue from service parts and other sales for the quarter decreased 8% to $84 million. Distribution segment service parts and other sales were lower largely due to reduced parts and accessory sales to the original equipment manufacturer in response to industry-wide elevated inventory levels. However, Dealership segment service parts and other sales remain solid when factoring out our recent dispositions. Finance and insurance revenue decreased 6% to $18 million in the third quarter, but was slightly higher as a percentage of total boat sales. Gross profit decreased 17% to $133 million in 2024 compared to $159 million in 2023, driven by the continued normalization of gross margins on boats sold. Sequentially, gross profit margins declined 20 basis points and were in line with our expectations. In the third quarter of 2024, selling, general and administrative expenses decreased to $87 million from $93 million. SG&A as a percentage of sales was 16%, up 40 basis points on lower sales, largely due to fixed cost inflation for rents that adjust based on CPI. On a dollar basis, SG&A was down 6.2% due to previous cost reduction actions, ongoing expense management, and lower personnel costs in the quarter. Operating income decreased to $40 million from $60 million, and adjusted EBITDA was $39 million, compared to $62 million. Net income for the fiscal third quarter totaled $17 million or $0.99 per diluted share, compared to net income of $33 million or $1.95 per diluted share. In the fiscal third quarter, adjusted earnings per diluted share was $1.05, compared to adjusted earnings per diluted share of $2.15. Now turning to the balance sheet. On June 30, 2024, total liquidity was in excess of $60 million, including $41 million of cash and additional availability under our credit facilities. Total inventory on June 30, 2024, was $599 million, compared to $687 million at March 31, 2024. Despite lower than expected revenues in the quarter, our focus enabled us to decrease inventory 13% sequentially due to the proactive matching of inventory levels with market demand. We expect to continue to work down inventory until the fall when the seasonal inventory bill begins. Now turning to our outlook. We are updating our fiscal 2024 guidance due to the challenging market conditions in the third quarter. Our initial guidance for this year was built on industry expectation of unit sales flat to down mid-single digits, with our performance expected to be up in the low to mid-single digits. Now the industry data is suggesting unit sales will be down in excess of 10%. We are now expecting our unit sales and same-store sales to be down mid-single digits. Accordingly, we expect adjusted EBITDA to be in the range of $90 million to $100 million and adjusted earnings for diluted share to be in the range of $1.50 to $2. To conclude, we continue to execute on factors within our control as we monitor and adapt to changing market dynamics. We remain committed to prudent expense and inventory management, and we are confident in our position as we close out the year. And with that, I will turn the call over to Austin for some closing remarks.

Austin Singleton, CEO

Thanks, Jack. A resilient team continues to execute well in a dynamic environment. Given our market leadership position, we expect to continue outpacing the industry and end the year with the appropriate inventory on hand. The decision to reduce guidance is painful in the short term, but it is made thoughtfully with the backdrop of a rapidly changing retail environment and adverse weather in Texas. Importantly, we do think these decisions position the business for profitable growth in fiscal 2025. We are not providing formal guidance for fiscal 2025 at this time. Our outperformance of industry sales trends, our right-sized inventory, our ongoing expense management, the recovery of the Texas market, range use in the Distribution segment, as OEMs increase production, and hopefully a reduction in interest rates should all provide some tailwinds as we navigate into 2025. This concludes our prepared remarks. Operator, would you please open the line for questions?

Operator, Operator

The first question is from Drew Crum with Stifel. Please go ahead.

Drew Crum, Analyst

Okay. Hey, guys. Good morning. Thanks. With the updates that you’ve made to fiscal 2024 guidance, is this more a function of the market challenges or just more severe relative to your forecast three months ago, or is it the adverse weather in Texas? I’m just trying to understand the magnitude of those two factors. As it relates to Texas, is it isolated to fiscal 3Q, or does it linger through the balance of this year?

Austin Singleton, CEO

Yeah. When you look at that, I would say, it probably leans more towards just overall market conditions. When you check out the SSI data, there’s been a dramatic decrease across the board for the industry. We felt that in June. Coming out of last quarter, we spoke to April being up and May kind of fell in line close to expectations, and we were expecting to have a great June, and June, not only for the industry, but for us, it really fell off a cliff and so that really hurt. As far as Texas goes, it’s a meaningful impact. We’ve got two of our biggest stores in Houston and Dallas. And when you went through that, if you look at Houston, it’s already had the total amount of rainfall for the entire year through May. And so what we had in Texas was we had a lot of our lakes that our customers boat on that were actually closed, and you weren’t allowed to boat on them. So, that doesn’t breed really well into people getting excited about going out and buying a boat, even on a sunny day. If they go buy a boat and they can’t put it on their lake and use it, they’re like, okay, why are we buying a boat? So, I think, it was isolated. I don’t expect to have a pickup, because we’re not going to make that up just for the fact that we’re rolling into the off-season here in about 45 days when you look at lakes. But it had an impact, but just overall, it was a tough quarter. I mean, we saw just a whole industry decline, and then we had to deal with that weather, and it just kind of built on itself and came to life in June.

Jack Ezzell, CFO

Yeah. I would…

Drew Crum, Analyst

Thanks, Austin. Go ahead, Jack.

Jack Ezzell, CFO

Texas will have a little bit of an impact in July, but it did seem as we kind of got to mid-July, things started opening up and kind of going back to normal.

Drew Crum, Analyst

Okay. Got it. And then just on the cost optimization initiatives and the reduction you reported in the SG&A line, your percentage of revenue, just trying to understand if fiscal 3Q is indicative that you hope to achieve going forward? Thanks.

Jack Ezzell, CFO

Yeah. I would say that’s based on the cuts we made at the end of March. That’s kind of where it’s lining up. When you peel back the layers of the onion, you can see personnel costs as a percent of sales was actually down in that 20 basis points, 25 basis points that we were looking for on SG&A. When we have things like rent and whatnot that are tied to CPI, that just makes that fixed line, fixed expenses going up even in a time when sales are going down. So, we’ll continue, we’re focused through the June quarter and right now on selling boats. It’s the season and we’ll continue to monitor what happens at retail and we’ll react accordingly.

Drew Crum, Analyst

Thanks, guys.

Austin Singleton, CEO

Thanks, Drew.

Operator, Operator

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

Joe Altobello, Analyst

Hi. So, I just want to follow up on the demand inflection that I think you guys saw from June to July. Is that, do you think, timing-related perhaps, and we should look at those two months’ sort of as one period?

Austin Singleton, CEO

Joe, the 4th of July fell in the middle of the week here and I have a lot of people coming in and…

Jack Ezzell, CFO

Hey, Austin, we’re losing you there a bit. Maybe…

Austin Singleton, CEO

I don't think, can you hear me?

Jack Ezzell, CFO

No, I lost you. Hey, Joe. I don’t think so. I believe what Austin was referring to is that the 4th of July fell late in the week on a Thursday. That might have contributed to some changes, but as we look ahead, it wasn't that we saw a significant drop in June and a major increase in July. July is expected to be flat to slightly down, so I don't think there's any issue with timing or shifts from one month to the next.

Joe Altobello, Analyst

Okay. Got it. And maybe a question on the guidance. If I look at the midpoint of your EPS guide, it does imply Q4 is roughly flat with last year. What’s driving that improvement in trends from Q3?

Jack Ezzell, CFO

I believe there are some issues with EPS. It would be better to focus more on EBITDA. When we examine EBITDA, we do see some differences, but when considering tax and interest levels, we expect some improvement in the latter half of the year regarding rates, although everything appears generally consistent.

Joe Altobello, Analyst

Okay. Got it. Thank you.

Operator, Operator

The next question...

Austin Singleton, CEO

Jack, can you hear me now?

Jack Ezzell, CFO

Yes, Austin.

Operator, Operator

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

Michael Swartz, Analyst

Hey. Good morning, guys. Just a point of clarification, Jack. I think you had just said that July sales are running flat to down, but in the prepared remarks you said flat to positive. I just wanted to clarify which one it is?

Jack Ezzell, CFO

I apologize. It’s flat to up, slightly up. I’m sorry.

Michael Swartz, Analyst

Okay. Perfect. And it just, I mean, we’ve kind of talked about this kind of inflection in July, but if we look at guidance and what’s implied for the fourth quarter, if it’s something like, comp store sales are still down pretty significantly, but you’re calling out July flat to up. I’m trying to understand how you get to down if July is flat to up, just given the fact that and maybe you can help us understand, like, July is probably a significant portion of the quarter?

Jack Ezzell, CFO

Yeah. I mean…

Michael Swartz, Analyst

Any color around that.

Jack Ezzell, CFO

Absolutely. As we navigate the seasonality of the business, July stands out as the peak month. After that, we typically see a slowdown. There's considerable uncertainty in the market at this time, so we're aiming for a cautious approach for the quarter and presenting a conservative estimate. We have not modified our guidance since the beginning of the year. Previously, we indicated that we were leaning toward the lower end of our range, and as June unfolded, we fell below that. We're now trying to provide a figure that makes sense. We've narrowed the guidance range a bit to reflect that we only have one quarter remaining, which should help clarify our expectations for the results.

Michael Swartz, Analyst

Got you. And then just with gross margin, and I think you said, on a consolidated basis was kind of in line with your expectations. I guess how did that play out by different reporting segment? I mean, were boat margins, new boat margins, it’s like they stepped down about 150 basis points. Was that the expectation or were you kind of forced to discount a little more given the softness that you encountered in the quarter?

Jack Ezzell, CFO

I would say that while you’re correct about the decrease, when you look sequentially, we stepped down 20 basis points from last quarter on new boats. I think this aligns more with our expectations since it felt like a change in trend, and we began to pace that forward through the rest of the year.

Michael Swartz, Analyst

Okay. And just a final one from me on the cost side. Is there any way to frame, based upon the actions you’ve taken this fiscal year, maybe how much an annualized cost you’ve removed from the system and how much of that will be variable versus how much of that’s kind of more structural in nature?

Jack Ezzell, CFO

Yeah. So, as you know, our expense structure is typically about 50% fixed, 50% variable, and we look to take, I think, we said last quarter, it was about $10 million to $15 million on an annual basis and looking to receive about half of that, which I think worked out to be about a 0.25 point of SG&A as a percent of sales that we had kind of shaved off. And so we saw that coming in this quarter on the personnel line in particular. Some of the other lines came down a little bit, but we were focused a little bit in those cuts in March on personnel.

Michael Swartz, Analyst

Okay. Great. Thank you.

Operator, Operator

The next question is from Craig Kennison or, excuse me, Kennison with Baird. Please go ahead.

Craig Kennison, Analyst

Hey. Good morning and thank you. I think Anthony mentioned that consumers were delaying purchases. I’m just curious, does that mean they’re shopping at your stores or Dealerships, but they’re just pushing back on price or is there another factor that causes you to believe it’s just a delay?

Anthony Aisquith, President and COO

I just think they’re shopping more is what I think they’re doing, what it appears.

Craig Kennison, Analyst

Okay. And then…

Austin Singleton, CEO

And then as it relates?

Craig Kennison, Analyst

Yeah. Go ahead.

Austin Singleton, CEO

I’d just say, too, like, we get a lot of questions around interest rates, right? Our F&I as a percent of sales ticked up a little bit in the quarter, and so it doesn’t seem like financing is a challenge. I think consumers keep adjusting to the new rate environment. It certainly wouldn’t hurt us if the Fed gave us some relief.

Craig Kennison, Analyst

Thanks. And how would you frame the promotional environment today versus maybe this time last year or even what you thought in the winter?

Anthony Aisquith, President and COO

I’ll jump in real quick on that. I mean, I think the manufacturers have done a great job of continuing that on. I mean, I think everybody knows that inventory’s got to be clean as we roll into the 2025 model year, and I think the manufacturers, how do they make money? They’ve got to build boats, and so they know that they’ve got to help clear the channel, and that channel seems to be getting better and better month by month, and I think June was a little bit of a, oh, boy, and then it’s kind of started to come back alive in July, and that’s not just OneWater, that’s the industry as a whole. Talk to Wells Fargo, who’s the leading floor plan lender in the space, and they saw a huge drop in June, but it picked back up in July also. So manufacturers are doing what needs to be done, and the promotional activity is still continuing, and I expect that to continue through the end of the year, probably into next year’s boat shows. I think your dealers, us, everybody’s going to be a little bit tighter and a little bit more conservative on reorders and stocking up, and that’s not what the manufacturers want or need. So they’re going to continue to help, and they’ve proven that out month after month.

Craig Kennison, Analyst

Got it. Thank you.

Operator, Operator

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

Fred Wightman, Analyst

Hey, guys. Good morning. In Anthony’s prepared remarks, he was talking about model year 2025 boats, model year 2025 product more in a future sense, but I thought that there was a handful or a majority of 2025 products was coming out earlier in June. So can you give us a sense of sort of what the mix of 2025 product is in your inventory now versus what that would look like normally?

Austin Singleton, CEO

Yes, Jack can elaborate on that. When dealers showcase 2025 boats in June, they are merely updating the serial number without introducing new products or updating existing ones, as that requires a complete production overhaul. Many manufacturers aim to unveil 2025 models by late May and June to avoid selling a 2024 model right before the new ones arrive with all the updates. In terms of valuation, a boat's serial number plays a crucial role. If a boat is labeled as a 2025, it has a different value compared to a 2024 model, even if both are identical. Dealers need to be savvy and not solely depend on valuation guides. The 2025 models are starting to come in, but the bulk will really begin to arrive after the July 4th changeover. We haven’t observed a significant amount of product yet. We are currently receiving truckloads of 2025 boats daily as we clear out our 2024 inventory.

Anthony Aisquith, President and COO

Correct. Of course.

Jack Ezzell, CFO

It’s just a small portion of our inventory. Manufacturers are shipping many boats, but they can only produce a limited number each week. That's why we need to build up our inventory during the winter to ensure we have enough supply for the summer. They are starting to ship a few boats to various dealers across the country, but no one has a substantial supply. As Austin mentioned, especially with new models, those are quite difficult to find.

Fred Wightman, Analyst

Makes sense. And then, Austin, last quarter you sounded really upbeat about the M&A pipeline, sounded pretty upbeat again in the prepared remarks today. So can you just give us an update on sort of the outlook for deals, velocity of inbounds, sort of how you’re thinking about M&A at a high level?

Anthony Aisquith, President and COO

Yeah. I mean, the cadence has been pretty much about the same. I mean, even pre-COVID through COVID, I mean, it’s not like the spigot turns on and off as far as deal flow to us or opportunities to us. I think right now we’ve got plenty of opportunity in the pipeline. I mean, like I’ve said numerous times, decades, and it’s just right now it’s looking at what’s going to happen. I think that we expected to see some struggles last winter and it didn’t seem like it took place, with filled inventory at 26 weeks across the industry, you’ve got dealers that are heavier than that, some that are lower than that. So that’s an average and I think that the realization of 10% plus interest rates for the majority of your mom and pops, that’s really come to bear through the winter. And so I think we’re just going to sit back and we’re very opportunistic, we’re looking at several things, and it’s something that we want to do. But then again, we’re going to continue to make sure that our leverage stays where we want to. We’re going to use free cash flow to do deals. And so we’re going to be very selective, and especially, in what felt like things were starting to deteriorate until we got into July, it kind of put us up and made us a little bit more cautious. But we’re actively in the market, we’re actively working deals, and we’ll just see how that flushes out over the next 60 days to 180 days.

Fred Wightman, Analyst

Perfect. Thanks a lot, guys.

Operator, Operator

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

Noah Zatzkin, Analyst

Hi. Thanks for taking my question. Maybe this is a little tough to answer, but kind of any working hypotheses around what kind of drove industry softness in June? And then when you think about July, would you say you think the improvements are more idiosyncratic, more industry-driven improvement or like, how do you kind of frame up, I guess, how much of that you guys are controlling?

Austin Singleton, CEO

I can't really comment on what happened, as it took us by surprise. However, I can confirm that there was a general increase in July. When I discuss with Wells, we avoid delving into specifics about individual dealers and instead focus on the overall industry and the volume of payoffs. They monitor payoffs daily and weekly in comparison to previous years, so they can see that when payoffs rise, sales also increase, which is what they observed. They noted a drop in payoffs in June, aligning with the SSI data, and now they are seeing a rise in payoffs, which should also reflect in the SSI data. While July is not necessarily a rebound from June—where June had a decline of around 23% across the industry—they do expect to see an improvement compared to June's figures. I can't explain what happened in June, but for us, most of our sales come from customers who do their research and come in to set up demos and then take delivery shortly after. We still have pre-sold boats arriving. The drop we experienced in June was mainly with customers who made decisions quickly, around a week to ten days, and that segment softened significantly for us in June, but I'm unable to pinpoint the cause.

Noah Zatzkin, Analyst

That’s really helpful. And then I think you kind of touched on this, but just in terms of your sense of dealer health across the broader industry, like point in time, anything to call out kind of coming on the heels of a softer June?

Austin Singleton, CEO

I don't think "health" is the right term; it's more about motivation. At the start of COVID, many experienced dealers were concerned about the situation and didn't want to repeat the challenges of 2008 and 2009. When Anthony and I began this journey, we were focused on the exit strategies for seasoned dealers aged 60 to 64. That discussion took place a decade ago. Now, we may see some of these mature dealers, despite their age, deciding they are not willing to endure another difficult period. They may choose to step away, accepting a lower return than they could have received during COVID or in 2017 or 2018. What I'm observing is that now is the time for some to exit. It's less about the industry's overall health and more about navigating tough times. The last three years were relatively easy, but as winter arrives, we need to adapt. I'm not worried about the industry's condition overall. I regularly communicate with Wells, and they're confident about inventory levels and trends. Looking ahead to 2025, we feel optimistic. This quarter hasn't been great, and the current quarter might see minimal changes. Winter may be challenging now that seasonality has resumed. However, as we approach boat show season next year, inventory should be well-positioned. We anticipate seeing some margin improvement on new boats, alongside several other positive indicators we've mentioned. This makes us hopeful that 2025 will be a year of recovery.

Noah Zatzkin, Analyst

Really helpful. Thank you.

Operator, Operator

The next question is from Griffin Bryan with D.A. Davidson. Please go ahead.

Griffin Bryan, Analyst

Yeah. Thanks. So, I guess, as we look for the fall, what do you think the playbook will be for you guys in terms of building that inventory with model year 2025 units and then just maybe the magnitude that you guys plan to build that inventory given where retail is at?

Austin Singleton, CEO

The current focus of the team is to sell off the 2024 inventory as quickly as possible, regardless of the circumstances, and to replace it with 2025 models. For instance, if we have a $100,000 boat with a 15% margin at the end of the season, selling it now would net us $15,000. If we hold on to that boat until next March, the margin may drop to about 10%, and we’ll also incur interest costs. So, we might only make $10,000, but then also pay around $4,500 in interest. This doesn’t even account for the additional costs of maintenance and handling the inventory. Therefore, the goal is to clear out the current inventory quickly and replace it with the 2025 models, which are essentially interest-free. This strategy will help reduce the weeks of inventory on hand, but we expect to see an increase again towards the end of August or early September as the new 2025 models arrive, which is acceptable since they won’t incur interest. Overall, the strategy is to clean up the inventory, avoid interest costs, and prepare for the upcoming year. Would either of you like to add anything?

Jack Ezzell, CFO

No.

Anthony Aisquith, President and COO

Just exactly right. It’s getting the inventory in the right spot and that’s what we’re previously working at to make sure that we are, so we’ll have a very successful 2025.

Griffin Bryan, Analyst

Got it. Makes sense. And then can you comment on the brands that you guys liked throughout the quarter and maybe the categories that those were in and then just kind of the rationale around those exits? Thanks.

Austin Singleton, CEO

I don't think we want to go in that direction. We can discuss our detailed analysis with our inventory tool, which we have done, but we explored it even further. The situation is different now with interest rates at 8.5% compared to 4% or 4.25%. This affects how we evaluate everything, as some brands have raised their prices more than others, while some have not introduced the necessary innovations. During COVID, we decided to take on a variety of other brands because we needed to maintain inventory. We were selling everything available, and we couldn't afford to run low on stock. So, we analyzed everything from location to model to options, connecting that back to the manufacturers, and we identified key brands. It's easy to reference our deck to see which brands we have in most of our stores or those prevalent in specific regions. A lot of inventory sharing is happening. However, some of the lesser-known brands we adopted can't be easily moved across multiple locations or have not been innovative and merely rode the COVID wave. We assessed these brands and decided not to invest in them when we could instead purchase more from premium brands. Now that the market has normalized, we see that our top brand, Pursuit, previously had certain models sold out for two years, but that is no longer the case. We're returning to a normal timeframe for delivery, which ranges from 14 to 30 weeks based on the complexity of the boats. We can expect larger quantities, rather than being limited to seven units next year; we can obtain 25 units if desired. There were just a few manufacturer brands we reviewed and concluded that, within the scope of OneWater, it makes sense to invest more in brands like Pursuit so we can have a broader range of locations, allowing us to move inventory throughout the season and adapt quickly. There weren't many of these cases, probably less than a dozen, perhaps even under ten.

Anthony Aisquith, President and COO

Yeah. Around that.

Austin Singleton, CEO

It wasn’t like it’s and it wasn’t when you look at it from a dollar perspective, especially when you look at it from a profit perspective, it was easy to do.

Griffin Bryan, Analyst

Got it. Excellent. Thanks, guys.

Operator, Operator

This concludes the question-and-answer session and the conference. Thank you for attending today’s presentation. You may now disconnect.