Earnings Call Transcript - ONEW Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the OneWater Marine, Inc. Fiscal Second Quarter 2021 Earnings 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. I would now like to hand the conference over to your speaker today, Jack Ezzell, Chief Financial Officer. Please go ahead.

Jack Ezzell, CFO

Good morning and welcome to OneWater Marine's fiscal second quarter 2021 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 would like to remind you that certain statements made by management in this morning's conference call regarding OneWater Marine and its operation 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 to differ materially from those described in the forward-looking statements. Factors that might affect future results are discussed in the Company's earnings release, which can be found on the Investor Relations section on the Company's website and in its SEC filings. The Company disclaims any obligations or undertaking to update forward-looking information 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 Singleton, CEO

Thanks, Jack, and thank you, everyone, for joining today's call. We delivered incredible results for the second quarter of 2021 with growth across every part of our business. Revenues increased 74% to a record $330 million. Adjusted EBITDA increased 315% and same-store sales increased 57%. Importantly, our higher-margin finance and insurance revenue also grew significantly by 46%, and we doubled our service parts and other revenue. The continued expansion of these businesses emphasized the strength of our strategy to move beyond new and pre-owned boat sales, adding stable revenue streams for our long-term growth. OneWater is firing on all cylinders and I am extremely proud of our team's ability to remain agile in today's fast-paced, dynamic environment. Our investment in technologies continues to enable us to differentiate ourselves in the market and capture the seamlessly limitless customer desire to get out on the water. These technologies bolster our ability to not only sell boats, but also sell the right boats to the right customers, as quickly as possible. Importantly, our digital solutions drive operational efficiencies across our business, maximizing profit and extending our competitive advantage throughout the industry. With no indications of slowing down, we believe this level of demand will remain heightened as new and experienced boaters come to OneWater for our arsenal of premium boats and robust service capabilities. During the last several months, we have had a number of exciting announcements and developments. First, we executed the soft launch of BoatsForSale.com, our all-inclusive virtual platform to buy/sell and compare boats that provides easy access to financing and insurance offerings. Anthony will talk more about this in his remarks, but suffice it to say while a small part of our business today, we see this platform as having the potential to be a big opportunity for us. Further, we announced the creation and expansion of OneWater Yacht Group, which unifies OneWater's yachting presence and provides a launch pad for further growth. At the same time, we amplified our service and repair offerings at the Roscioli Yachting Center. Additionally, last week we announced that OneWater was named the sole U.S. distributor for Sunseeker yachts, a leading manufacturer of premier yachts based in the U.K. with customers across the globe. OneWater Yacht Group has been a key dealer for Sunseeker across most of the eastern seaboard. Under the terms of the agreement, we will now manage the Sunseeker dealer network in other markets throughout the U.S. This first-of-its-kind agreement is a statement to our proven execution and strong partnerships. It is exciting to say the least, as it will allow us to further enhance our portfolio of premium brands and expand our geographic reach and presence in the luxury yacht market. Finally, the integration of our three acquisitions, Tom George Yacht Group, Walker Marine, and Roscioli's are progressing well and in alignment with our proven playbook. Our disciplined and prudent approach to identify top dealers in high-performing markets and our flawless integration continues to advance our position as an industry leader. With these integrating well, we now expect to complete four to six typical acquisitions per year for the next several years. As we execute our long-term growth strategy, we are confident that through continued investment in our innovative digital platforms, the evolution of our higher-margin business segments, and the integration of our recent M&A activities, we will further extend our market share and generate meaningful value for our shareholders. With that, I will turn it over to Anthony to discuss business operations.

Anthony Aisquith, President and COO

Thanks, Austin. Customer enthusiasm is at an all-time high. The incredible customer demand for boats across all categories continues to drive sales with our technology investments supporting tremendous lead generation. Our sales team have remained agile by utilizing our state-of-the-art operational dashboards, supporting further outperformance within the industry. We are focused on providing an exceptional selling experience to keep the veteran and new foundational layer of boaters enthusiastic about the boating lifestyle, and the OneWater family of dealerships for years to come. Inventories remain at historically low levels as supply chains continue to be pressured. Our inventory planning tools and strong OEM relations have given us confidence that we will have sufficient inventory to meet demand throughout the prime selling season, although we recognize it will be a challenge. We are in constant communication with our manufacturers and barring any further supply chain disruption, we are expecting a strong finish to the year. As Austin mentioned during the second quarter, we launched BoatsForSale.com. Along with the acquisition of the domain in August of 2020, we aggressively developed a new consumer, seller-focused marketplace that serves as an extension of our store footprint, including new, pre-owned boats, as well as finance and insurance services. Nearly 1 million boats are sold per year person to person and we believe this platform will completely change the way people sell their boats. Utilizing the site, sellers across the country can list their boats for sale and immediately increase the reach of potential buyers. In turn, buyers can search the listed boats, adding or removing parameters for the boat they desire and even receive what we call a boatification or a notification when a boat is listed that meets their exact parameters. Importantly, the site also enables us to build our pre-owned boat inventory by bidding on a listed boat and offering the seller a cash offer. While in its early days since the launch, we are very encouraged by the growth opportunities that can be created through this innovative marketplace, including our ability to broaden our customer and geographic reach. As Austin mentioned, the platform is a small piece of the business today, but we believe it will create an additional avenue for growth for OneWater. Near term, our goal is to have over 15,000 boats on the platform by the end of this fiscal year. Therefore, we would expect to see modest incremental revenue generation starting in fiscal 2022. I will now turn the call over to Jack, who will talk more about the financials in detail.

Jack Ezzell, CFO

Thanks, Anthony. Second quarter total revenue increased 74% to $329.6 million in 2021 from $190 million in 2020, fueled by the increase in same-store sales of 57%. This increase was primarily driven by new unit sales and an increase in the average selling price of new boats sold, and to a lesser extent, an increase in the average price of pre-owned boats sold. New boat sales grew by 81% to $239.7 million in the fiscal second quarter of 2021, and pre-owned boat sales increased by 47% to $56.1 million. Finance and insurance revenue increased by 46% to $11.8 million in the second quarter of 2021. Revenue from service, parts, and other sales increased by 101% to $22.1 million compared to the prior year. Gross profit nearly doubled to $88.8 million in the second quarter compared to $44.6 million in the prior year, driven by the increase in margin on new and pre-owned sales, a shift in the model mix and size of the boat models sold, as well as an increase in the average unit price. Additionally, higher finance and insurance, service, and other sales contributed significantly to the increase in gross profit. Gross profit as a percentage of sales increased 340 basis points to 26.9% compared to 23.5% in the prior year. While selling, general and administrative expenses increased to $48.3 million from $32.4 million, SG&A as a percentage of sales decreased to 14.7% from 17% in the prior year. The decline in SG&A as a percent of sales was primarily driven by the increase in sales across the businesses and the reduction of expenses, including the cancellation of certain boat shows. Operating income rose sharply to $38.7 million from $8.5 million in the prior year, driven by the higher sales and expanded gross profit, partially offset by higher SG&A. As a result, adjusted EBITDA rose to $40.1 million compared to $9.7 million in the prior year. Net income totaled $30.6 million or $1.83 per diluted share in the fiscal second quarter of 2021, up from $3 million or $0.18 per diluted share in the prior year. Turning to the balance sheet, as of March 31, total liquidity was in excess of $100 million, including cash on the balance sheet, availability under our revolving line of credit and availability under our floor plan facility. Total inventory at March 31, 2021, was $186 million compared to $333 million at March 31, 2020. The substantial decrease was due to the sales increase experienced in recent quarters, combined with industry-wide supply chain constraints. From a capital allocation perspective, we are focusing on reinvesting in the business to accelerate organic growth and the strategic M&A opportunities as we have discussed. In addition, we will continue to evaluate other capital allocation strategies that increase shareholder return. Looking ahead, for the full fiscal year 2021, we are increasing our guidance for same-store sales to be up approximately mid to upper teens, given the broad-based outperformance in the first half of the fiscal year 2021. Additionally, we have raised our outlook for adjusted EBITDA to be in the range of $130 million to $135 million, and diluted earnings per share to be in the range of $5.80 to $6 per diluted share. This all excludes any additional acquisitions that may be completed during the back half of the year. Our guidance assumes OneWater manufacturers can maintain production at the current pace and meet the elevated demand in the face of industry-wide supply chain challenges. This concludes our prepared remarks. Operator, would you please open the line for questions?

Operator, Operator

Instructions. Our first question comes from Brett Andress with KeyBanc Capital Markets.

Brett Andress, Analyst

I wanted to ask about the Sunseeker agreement. Just any more details you can share around exactly how the management part of that works? I mean, is the plan to eventually be the only Sunseeker dealer in the U.S.? And then separately, I mean, how do the economics of that agreement flow also?

Austin Singleton, CEO

Yes. So we're the U.S. distributors, so all the boats coming into the United States will run through OneWater. I don't see us in the near or midterm future being the only Sunseeker dealer. There are a couple of other dealers that perform really well. We're still putting everything together. One of the things that we're excited about is being able to consolidate and show them at Roscioli because we have the space to do that and it creates a base for U.S. operations. A customer that's really interested could come down and see them all. However, we don't really have any stores in the Midwest that might be interested in this. Of course, there's a prominent dealer on the West Coast. We'll be looking for some sub-dealers, but this gives us a bit more control over the influx of boats. I don't really want to get into how it was set up prior to us taking over, but it was somewhat chaotic, as boats were coming in from all over the place. So this agreement allows for a more professional setup in the United States for how the boats flow. We will be responsible for U.S. marketing, overseeing boat show displays, print marketing if we choose to do that, customer events, and all that comes with an associated expense. Because of that, a percentage of every boat sold will go to OneWater. It's a good deal for us as it enables a complete plan for the country, and we can find solid dealers that will enhance our positioning where we are currently located. Overall, it's an exciting opportunity.

Brett Andress, Analyst

Got it. Okay. Makes sense. And then Austin, just more of a high-level industry question. But as you look at the broader industry and the dealers that you compete with in your markets, how do their inventory situations look right now compared to yours? I have to imagine that there will be some difficulties out there among the smaller dealers this selling season, and I wonder if that was one of the drivers behind increasing the M&A target to four to six a year.

Austin Singleton, CEO

No. I don't think that was the change in the M&A strategy. One of our Achilles' heels on the acquisition front has been integration, and it's not been integration on our side. It has been getting CDK lined up for the training and moving everything over. If you go and do a deal and they're on the same software, it's a pretty easy transition. But if they're using DockMaster or Control4, getting their information inputted and mapped correctly, and then getting their employees up to speed on CDK, it has been a slow process. That said, we have begun doing integration in-house, which has given us the confidence to increase the cadence of our acquisitions. Regarding inventory, I think the next couple of quarters for all of us are going to be challenging due to the pressures on supply. We can shine in forecasting and understanding what we need. One of the key differences between us and the smaller dealers is that we have thousands of orders with manufacturers and digital tools allowing us to analyze that information for better decision-making.

Operator, Operator

Our next question comes from Drew Crum with Stifel.

Drew Crum, Analyst

So a lot of moving pieces in the gross margin improvement during the quarter. Can you rank order the importance of the various drivers and those that you see as sustainable going forward? And then separately, you mentioned the ASP being up for both new and pre-owned boats. With inflation and the creation expansion of the Yacht Group, how do you see ASP for your boats trending going forward? Is that likely to accelerate or should we see it rise more in line with the industry?

Jack Ezzell, CFO

Yes. So on the first question, I would say that new boat sales, because it represents such a large portion of our revenue, the increase in margin had the greatest impact on overall margin. However, we're equally excited to see improvements in sales of our non-boat business because we feel like that's a lot more sustainable for the long term. The increase in parts and service, with revenue being up 100%, is partly driven by Roscioli's addition to the results. That provides us with good sustainable recurring revenue streams. Mix shift will always affect margin projections, particularly with larger boats that tend to have lower gross margin percentages. Nevertheless, we are focused on improving overall margins in our Yacht Group, which should help. As for ASP, we typically model half of our same-store sales growth from unit growth and half from ASP growth.

Operator, Operator

Our next question comes from Joe Altobello with Raymond James.

Joe Altobello, Analyst

A couple of questions. I guess first on inventory, and I know it's hard to argue with a 57% comp here. But do you feel like you lost any sales due to a lack of inventory in the quarter?

Anthony Aisquith, President and COO

No, sir. Not at all.

Joe Altobello, Analyst

Okay. I mean, obviously.

Anthony Aisquith, President and COO

We're outpacing the industry significantly. We have been in contact and utilizing all the tools that we have to ensure we have boats available.

Jack Ezzell, CFO

It's important to remember, as Austin alluded to earlier, that when you're competing against a smaller dealer with, say, 20 orders with a manufacturer, we have about 200 orders. Our digital tools provide us insights into those 200 orders and enable us to shift inventory to get products where customers want them.

Joe Altobello, Analyst

That's helpful. I guess in terms of seasonality, Q2 is typically a quarter where you build inventory. Q3 is typically a quarter where you draw down inventory. So it sounds like we're probably going to see that inventory number go even lower in the June quarter. So I'm curious, when do you expect to start growing inventory again? And when do you think it normalizes?

Austin Singleton, CEO

Well, I would jump in, Joe. Let me first say that if demand keeps at the pace it is, it will be a long time before we can start building on inventory. Door swings and lead volume continue to be very strong. Manufacturers won’t just flip a switch in June to produce 10% or 15% more boats. It’s a slow ramp-up. It's great dynamic for selling boats that are coming in two weeks from now, four weeks from now, six weeks from now without carrying inventory because carrying inventory costs is minimal now.

Anthony Aisquith, President and COO

I would say that we probably, pre-pandemic, carried too much inventory. To get back to those levels, the more we utilize our tools, we want to increase our turns. I'm not sure when inventory will return to normal, but we could be a year away from having lots full of inventory again. Our goal is to order the right boats while minimizing interest costs.

Joe Altobello, Analyst

Got it. Okay. Just one last thing for me on product quality, especially with OEMs struggling. Are you seeing any quality issues or customers coming back for rework?

Anthony Aisquith, President and COO

I wouldn't say that we're seeing poor quality. We've always been the last piece of the build, with our rigging finished, assembling the boats. So I don't see the quality of the boats declining.

Austin Singleton, CEO

I think the challenge they face is more about getting the boats completed rather than declining quality. Boats today are not being built worse than they were 18 months ago. Instead, it's about missing components that delay delivery because they are waiting for one part, like a porta-potty, and that can sit for a month. Customers often prefer to receive the boat incomplete rather than wait for that one missing item.

Operator, Operator

Our next question comes from Mike Swartz with Truist Securities.

Mike Swartz, Analyst

Sorry if I missed this in your prepared comments, but maybe Jack or Austin, any color on the trends you're seeing thus far in your fiscal third quarter, so April, maybe your comparable store sales or backlog or any metrics you can provide?

Jack Ezzell, CFO

Yes. I would say - go ahead, Austin.

Austin Singleton, CEO

I was just going to say, Mike, that will get me in trouble, so I'll let Jack talk about that one.

Jack Ezzell, CFO

Yes. Obviously, we’re up against a really significant comp for the quarter and the back half of the year. If you look at our same-store guidance, it projects low single-digit comps for the back half. We continue to have, as Austin mentioned, positive retail demand. Customer interest is elevated. Leads coming in and door swings are all very positive. So we feel comfortable with that same-store sales increase for the back half of the year, given the levels of demand we have seen thus far.

Mike Swartz, Analyst

Okay. Great. To add to that, regarding the guidance, you mentioned the EBITDA range of $130 million to $135 million, which suggests that EBITDA will be flat in the latter half of the year. However, you're expecting comparable store growth and have some strong seasonal acquisitions for the second half of your fiscal year. So, what are the factors contributing to that flat projection?

Jack Ezzell, CFO

Yes. I think I'd have to double-check my numbers, but I think from consensus numbers, the back half is up with double-digit increases at that. Those numbers are correct.

Mike Swartz, Analyst

That’s fair. It’s probably just versus my numbers then. And just final question for me. You mentioned the new Yacht Group that you're building out. With Roscioli and Sunseeker, are there any overhead or investment costs to consider for the near term?

Austin Singleton, CEO

No, not anything really out of the normal that's going to significantly impact our CapEx, because Roscioli was a turnkey operation. Most additional costs associated with this new venture would typically be allocated to the boats.

Anthony Aisquith, President and COO

Correct.

Jack Ezzell, CFO

I think it goes back to what we originally said on Sunseeker; we expect to expand the profitability of the brand over time. There may be some incremental SG&A-type costs from a marketing standpoint, but we anticipate leveling off those costs as sales increase.

Austin Singleton, CEO

Also, one more thing to mention: One of the advantageous aspects of Sunseeker is that they build incredible boats which are sold globally. We won't have a high inventory risk. We plan to pre-sell many of the production slots. If you come in today wanting a specific model, it typically has an 18-month wait period. So we're looking to build a strong dealer network across the U.S. without all the overhead of immediate inventory.

Operator, Operator

Thank you. And there are no other questions in the queue. This concludes today's conference call. Thank you for participating. You may now disconnect.