Earnings Call Transcript - ONEW Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the OneWater Marine Fiscal Fourth Quarter and Full-Year 2020 Earnings 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 introduce your host for this conference call, Mr. Jack Ezzell. You may begin, sir.

Jack Ezzell, Host

Good morning, and welcome to OneWater Marine's fiscal fourth quarter and full-year 2020 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 would cause actual results and events to differ materially from those described in the forward-looking statements. Factors that might affect future results are discussed in the company's earnings release, which can be found on the Investor Relations section on the company's website, and in its filings with the SEC. The company disclaims any obligation 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 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 record results in our first year as a public company, highlighting our strong execution and flexible business model. I would like to thank our team and customers for their unwavering commitment to OneWater. Full-year 2020 revenue surpassed $1 billion for the first time in OneWater's history, which was an increase of 33% compared to the prior year. Same-store sales increased 24%, more than doubling our expectations. Our high-margin finance and insurance revenue grew by a whopping 41% compared to the prior year and will continue to be a major focus with a lot more room for growth in the years ahead. We continue to gain substantial market share in all our business segments. At the same time, our full-year 2020 adjusted EBITDA of $83.3 million nearly doubled from the prior year, mainly due to our superior execution and strong business model. Importantly, our M&A execution is second to none. The synergies and growth we have been able to realize from our recently acquired stores have significantly contributed to our 2020 results. Bolstering our full-year results was a strong fourth quarter, where we continued to take market share and meet heightened retail demand. In the fourth quarter, revenue increased 30% and same-store sales increased 25% year-over-year, comfortably above our expectations. This increase comes on top of a 20% same-store sales increase in the fourth quarter of 2019. Our highly efficient sales process, innovative retail technologies, and strong manufacturing partnerships enabled the team to continue to deliver strong results. In 2020, the marine industry experienced a surge of first-time buyers, which has expanded our addressable markets. History has shown us that many of these customers will stay in the boating lifestyle for years to come. Our customer-focused team and huge selection of products will keep them coming back to OneWater for all their boating needs, which will support further margin expansion. Finally, our industry-leading digital platform, along with our dynamic pricing strategy, will continue to enhance operations of our dealers and serve as a clear competitive advantage. Inventories remain at historically low levels, but they have begun to build since the end of the fourth quarter. Despite supply chain constraints cited by OEMs in recent weeks, we do expect inventories to build further throughout the slower winter months, setting us up for a fresh lineup of inventory for the spring selling season. Our strong OEM relationships are a differentiator, and our inventory planning tools allow us to have great visibility into boats on order or in production. This enables us to engage with the customers and pre-sell inventory that is inbound to all locations, creating enormous savings on floor plan interest, inventory maintenance, and general carrying costs. M&A remains a core component of our long-term growth strategy, and our acquisition pipeline has continued to build on pace with our historical trends. We're seeing the size of the opportunities increase as well. Just like with our latest deal, Tom George Yacht Group, which is one of our largest acquisitions to date. We are excited about the return of this critical growth component of our business. Our proven system of employing a disciplined and prudent approach to identifying top dealers and high-performing markets, and then systematically capitalizing on improvements and synergies will continue to advance our position as an industry leader. Our results this year were outstanding, and we are excited about 2021. The ramp-up in our M&A activities and the strong execution across our dealers will continue to support our growth. While the evolution of our high-margin business segments and heightened focus on technology innovation will enable us to further gain market share. We believe all these efforts will support meaningful value for our shareholders as we move into 2021 and beyond. With that, I will turn it over to Anthony to discuss business operations.

Anthony Aisquith, President and COO

Thanks, Austin. With more and more families turning to boating as a lifestyle, demand continued at an unprecedented level in our fiscal fourth quarter. Our team continued to provide superior customer service to keep our growing customer base out on the water. Our custom CRM, along with our inventory management tools and operational dashboards, have helped us outperform the industry by selling boats across our dealerships, moving the inventory to different locations to meet the demand levels, and providing more visibility into inbound inventory from all of our manufacturers. With critical data at their fingertips, our sales team is able to seamlessly integrate the surge of new customers into the OneWater family and continue to outperform the industry. During the quarter, we made some key leadership changes to double down on our digital strategies and foster future growth. We named Dave Witty, a marine industry veteran and a long-time OneWater teammate, as our Chief Technology Officer. Dave will focus on expanding our growth digital infrastructure with integrated marketing to enhance the customer experience and provide tools for the new OneWater team to facilitate growth. In addition, we leveraged our deep bench of leadership talent and made a number of organizational realignments to position business leaders closer to our customers, which enhances our ability to capitalize on near and long-term growth opportunities. The boat show season is shaping up to look very different this year, with shows operating under significant restrictions, others being postponed, and a number being canceled altogether. We are taking the opportunity to host more intimate VIP or smaller local events at our stores where customers can have a more personalized interaction with our product and our team, and our results have been outstanding. As for traditional boat shows, we recently attended the Fort Lauderdale Boat Show. We scaled back our presence at the show, and our team operated under restrictions and safety measures, and encountered some challenging weather. Yet our sales were still higher than the prior year. Additionally, we saw sales increase in the weeks leading up to and following the show at certain locations since many customers shopped locally versus traveling to Fort Lauderdale. This is a testament to our ability to leverage our highly effective digital platform to maintain our momentum. As part of our long-term strategy, we remain focused on continuing to develop our high-margin businesses, which have historically provided stability for our company. Our service parts and other revenue increased 9% in the fiscal fourth quarter, driven by two new service locations that recently went into operation in Georgia and Alabama. Finance and insurance revenue continued to increase during the quarter and is up 41% year-over-year. The finance and insurance as a percentage of sales has increased to 3.6% of sales. We remain committed to expanding this line of business and identifying opportunities to increase penetration rates and the number and types of products that are available to our customers. And with that, I'll turn the call over to Jack to go to the financials in more detail.

Jack Ezzell, Host

Thanks, Anthony. We delivered strong results in the fourth quarter, with revenue increasing 30% to $271 million in 2020 from $208.8 million in 2019. Same-store sales increased 25%, primarily driven by the increase in the number of units sold, as well as an increase in the average unit price of new and pre-owned boats. The same-store sales increase is on top of a 20% increase in the fourth quarter of 2019. During the fourth quarter, we continued to meet the heightened demand for new and pre-owned boats across our business as customers continued to choose boating to enjoy the outdoors with friends and family in a safe socially distanced way. New boat sales grew 29% to $186.8 million in the fiscal fourth quarter of 2020, and pre-owned boat sales increased 47% to $56.2 million. As Anthony said, we continue to focus on growing the higher-margin segments of our business that offer attractive market share growth opportunities for near and long-term. Finance and insurance revenue increased to $7.7 million in the fourth quarter of 2020, and revenue from service parts and other sales increased to $20.3 million. Gross profit increased to $64.1 million in the fourth quarter compared to $46.4 million in the prior year, driven by an increase in new and pre-owned sales and higher service parts and other sales. Gross profit as a percent of sales increased 140 basis points to 23.6%, compared to 22.2% in the prior year. With the significant increase in sales, the fourth-quarter 2020 selling, general and administrative expenses increased to $39.7 million from $32.6 million in the prior year. However, SG&A, as a percentage of sales, declined 100 basis points to 14.6% from 15.6% in the prior year. The decline in SG&A, as a percentage of sales, was mainly due to the increased sales and the cost reduction actions enacted in response to COVID-19. Operating income climbed 29% to $16.5 million compared to $12.8 million in the prior year driven by higher sales partially offset by higher SG&A expenses, and the $6.8 million charge related to contingent consideration on a 2019 acquisition. Adjusted EBITDA rose 108% to $23 million compared to $11 million in the prior year. Net income totaled $6 million in the fiscal fourth quarter of 2020, up 18.9% from $5 million in the prior year. Keeping in mind that the prior year did not reflect our post-IPO organizational structure, it was not subject to income taxes. In our first full year as a public company, our team delivered record results for the year. For the first time in OneWater's history, full-year revenue exceeded $1 billion, an increase of 33% compared to the prior year, highlighting the strength of our team and the resiliency of our business model. Same-store sales increased 24%, this is on top of a 12% increase in the prior year. New and pre-owned boat sales increased 36% to $717 million and 34% to $206 million, respectively. On the higher margin side of our business, finance and insurance revenue increased 41% to $36.8 million, contributing directly to our bottom line. Full-year 2020 gross profit increased 37% to $235.5 million, gross profit as a percentage of sales increased 60 basis points compared to fiscal 2019, driven by the increased volume of new and pre-owned units sold and an increase in the average unit price compared to fiscal 2019. Full-year 2020 operating income surged 47% to $78.5 million compared to $53.3 million in the prior year. Net income increased 30% to $48.5 million and adjusted EBITDA declined 80% to $83.3 million. Now, turning to the balance sheet. At September 30, 2020, we had $66.1 million of cash and $30 million of availability under our revolving line of credit, and in excess of $10 million available on our floor plan. Total inventory at September 30, 2020, was $150 million compared to $277 million at September 30, 2019. This substantial decrease is primarily due to demand for our products into production shutdowns at our OEM partners last spring. As Anthony mentioned, we are confident that we are able to meet current retail demand in a timely manner as we leverage our strong partnerships in our industry-leading inventory management technology. With the lower levels of inventory and higher inventory turns, we anticipate floor plan interest expense to be down significantly in 2021. As previously announced in September, we closed on the public offering of 3.2 million shares of Class A common stock at $20 per share. The majority of these shares were secondary, but the company did issue $425,000 of primary shares and received approximately $8.1 million in proceeds after underwriting discounts and commissions. The proceeds from the transaction will be used for general corporate purposes, including expansion of the business. Looking ahead to 2021, we are seeing strong momentum continue and expect to see same-store sales to be up approximately 5% with adjusted EBITDA to be up low to mid-single digits; this excludes acquisitions completed during the year. As often mentioned, our M&A pipeline is strong, and we are returning to the cadence of transactions that we had prior to our IPO. We are excited to continue to grow in the current business and scale our proven strategies across newly acquired dealerships. This concludes our prepared remarks. Operator, would you please open the line for questions?

Operator, Operator

And our first question will come from the line of Craig Kennison from Baird. You may begin.

Craig Kennison, Analyst

Hey, good morning. Thanks for taking my questions. I wanted to start just with guidance, a point of clarification. Does guidance include the Tom George Yacht deal or would that be additive?

Jack Ezzell, Host

That would be additive. It's not included in there.

Craig Kennison, Analyst

Thank you. And with respect to the 2021 outlook, it seems many investors fear that this is as good as it gets from an industry perspective, and that industry demand could return to normal in 2021. I guess, Austin, how do you weigh all the macro factors from lapping the pandemic, to the surge in first-time buyers and overall growth in the industry, to political events, things like that, to get you comfortable that your growth outlook is achievable?

Austin Singleton, CEO

Craig, as we approached year-end, we evaluated how much of our growth stemmed from our business model. When considering acquisitions that have not fully matured, we generally require about 24 months to truly leverage their synergies. Some of these acquisitions were either in their first year or just hitting the 24-month mark this year. We believe a substantial part of our results came from improvements in acquisitions that have started maturing. While we acknowledge a COVID-related boost in demand that brought new buyers into our market, we also recognize that many of these new buyers may have purchased boats without fully understanding their needs. For instance, a young couple might think they need a ski boat to enjoy the water, but after spending time on the lake, they might realize a pontoon boat would better suit their lifestyle. We anticipate a shift among these new boat owners as they explore different types of boats. Additionally, we remain optimistic about our internal growth opportunities from same-store sales. Overall, I’m excited about the outlook for the coming year. The current tighter inventory should benefit our margins, and I'm confident in our projections for 2021. I'll invite Anthony and Jack to share any additional thoughts they might have.

Craig Kennison, Analyst

That's terrific. Thank you. And then my last question was just on boatsforsale.com, seems like a very interesting strategy, didn't really address much of it in your prepared remarks. But if you would, just tell us how that works? When that platform might open and what kind of investment you'll need to make in order to achieve some scale in that platform?

Austin Singleton, CEO

So the easy part is the investment. The investment is more time and dollars. Where we sit right now, we have the first three pieces of that we’re actually beta testing with our sales staff right now. We have part of the way that the trade evaluation or the pricing tool works is, Anthony, how long have we been doing that? It's been about four weeks, three weeks?

Anthony Aisquith, President and COO

Yes, about six weeks so far.

Austin Singleton, CEO

We are hoping to roll it out optimistically before the end of the year, but it will likely be in the first quarter of next year before we do. It's crucial that everything functions perfectly when we launch it, as a faulty rollout could lead to failure, which we want to avoid. We are currently testing it internally with all the sales staff using the tools in this first phase. Our goal is to ensure flawless execution when it is released. However, conservatively, I believe we are still about 60 days away from the rollout.

Craig Kennison, Analyst

Sounds good. I'll jump back in the queue. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Mike Swartz from Truist Securities. You may begin.

Mike Swartz, Analyst

Hey, good morning, guys. Just a follow-up on the guidance for 2021. With the mid-single-digit comp store growth and then low to mid-single-digit adjusted EBITDA growth, implying some sort of margin deleverage at the bottom end of that range. Is there any reason for that or any investments that you're making that would drive that?

Austin Singleton, CEO

Yes, I think one of the things if you think year-over-year, we don't have fully baked public company costs into the prior year, so that's certainly going to be a bit of a headwind for us. And that's probably the largest item, I would say, kind of going into the expense structure and probably going to have the effect of seeing SG&A tick up a little bit as a percent of sales. But we're just trying to, I think, be conservative in putting the model together.

Mike Swartz, Analyst

Okay. And maybe just given the state of both shows being canceled or postponed or scaled back, over the next nine to 12 months, maybe talk about some of the things that you're doing in a little more detail in terms of customer interaction and your own digital platform?

Anthony Aisquith, President and COO

I think we were doing - yes.

Austin Singleton, CEO

So don't give our secret in a lot of way, Anthony.

Anthony Aisquith, President and COO

It's a lot of events, in-house events and much safer environment for the customers and gives them reasons. We're blessed to be partnered with 72 different brands that every year are coming out with just some amazing products, so we have a lot to talk about. And it's pretty easy once you're in boating, like Austin was saying earlier about, you had a pontoon, you might want to go to an inboard boat. I mean, each one of these manufacturers, each year, are coming out with some amazing stuff. So it's pretty easy to get people to come in for some private events.

Mike Swartz, Analyst

And then, one more, if I may. Just in terms of the quarter, fourth quarter, and I look at the different revenue line items, strong double-digit growth in both new and pre-owned boat sales, but F&I was less than 2% year-over-year. Why was there that disconnect in the quarter? Was there something specific?

Anthony Aisquith, President and COO

Yes, I think it's important to note that we were up 41% overall, which is something we work hard to achieve. However, looking back to last year, finance and insurance in the same quarter was actually up 80%, which exceeded the sales increase, and that played a role in our performance. Nevertheless, we remain confident in this area and believe that the growth of finance and insurance will exceed our same-store sales.

Mike Swartz, Analyst

Okay, thank you.

Operator, Operator

Thank you. Our next question will come from the line of Joe Altobello from Raymond James. You may begin.

Joe Altobello, Analyst

Thanks. Good morning, everyone. I wanted to ask for an update on the overall M&A environment. Tom and George, I believe, was your first acquisition in quite some time. Are you still aiming for two to four acquisitions a year? Can we expect to see some catch-up in 2021 since last year was relatively quiet?

Austin Singleton, CEO

I believe our pace has remained consistent. One aspect that might shift slightly is the size of the deals; the ones I’m currently finalizing are larger than our typical deals. However, I don’t expect to secure more deals, not because we don’t want to, but rather because we’ve emphasized the importance of perfect execution. We can’t afford to have a deal falter, as maintaining our credibility with the manufacturers is crucial, given they are our primary source of leads. Currently, the most challenging part of closing deals is the software integration, which involves a 45-day process before and after closing, along with coordinating the software company for integration and training. Despite these challenges, I’m pleased that Anthony and Jack have encouraged me to pursue deals again this year. Our pipeline is looking strong, and we are in a good position to manage any issues that may arise with individual deals. We're actively pursuing several opportunities to ensure a solid year of acquisitions. It has been a while since we've been on the sidelines, so finalizing the Tom George Yacht deal is particularly exciting for us, especially since we’ve been in discussion with Tom for years. The strategic advantages we’ll gain from this acquisition are also promising.

Joe Altobello, Analyst

That's very helpful, Austin. Thank you. And maybe kind of a follow-up on that, on the inventory side. I think Jack you mentioned, you're at $150 million of inventory, year-end, that's down almost 50% year-over-year. How long do you think it'll take you guys to get back to what you perceive to be ideal inventory levels? And do you expect to operate at a higher turn rate, permanently going forward?

Jack Ezzell, Host

I'm going to begin, and I want to emphasize that we will never return to that level; we have no desire to go back to that level.

Austin Singleton, CEO

The inventory situation is complex. While you can analyze inventory alongside your P&L to identify costs, the details can be obscured at times. With our current practices, having less inventory can lead to higher returns, resulting in lower costs and improved margins. Our manufacturers are working tirelessly to provide us with boats and are striving to increase production. Due to the advancements Anthony has made in developing and refining our inventory management tools over the past four years, we anticipate being able to achieve greater sales with reduced inventory. The enhanced forecasting tools and data collection methods we have implemented will enable us to make more accurate decisions moving forward. I don’t foresee us reverting to previous inventory levels. As we grow the company, our inventory will inevitably rise; however, our goal is to maintain a leaner operational strategy. Ideally, I would like to achieve three more inventory turns each year. While that may be a challenge, we are committed to improving our systems and the data we gather to strengthen our approach.

Jack Ezzell, Host

Well, Austin, you covered most of what I wanted to say. The only additional point I would make is that after the year ended, we started to see inventory levels rise as anticipated. In the past month and a half, shipments have been arriving, we are currently in a seasonally slower period, and stores are beginning to increase their inventory on the lots.

Joe Altobello, Analyst

Great. Thank you, guys. Good luck.

Operator, Operator

And our next question comes from the line of Mike Swartz from Truist Securities. You may begin.

Mike Swartz, Analyst

Hey, guys, thanks for letting me hop back on here. And just wanted to follow-up on the comments you made regarding the fiscal year '21 outlook; that you said you saw the momentum carry to the early part of the year, and no one's asked the question. Any color or quantification you can provide just in terms of what you saw on a comp-store basis in October or maybe even quarter-to-date as we sit here today?

Austin Singleton, CEO

Yes, I would say it's progressing well, similar to what we've observed in recent months. It is understandably a seasonally slower period; therefore, sales are diminishing as we move through October, November, and December, which is the smallest month of the quarter. This period also represents our smallest quarter of the year, making it difficult to project a full-year forecast based on the smallest quarter alone. From a seasonal perspective, this presents some challenges as we look to model the year. We remain confident in our annual model; however, it's unclear how the quarter will align. Last year's second quarter was weaker due to shutdowns and COVID, while Q3 was strong for us; still, it's uncertain how both shows will impact the results for Q2 and Q3.

Mike Swartz, Analyst

Okay, great. Thanks a lot, guys.

Operator, Operator

Thank you. And I'm not showing any further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.