Earnings Call Transcript - ONEW Q1 2025

Operator, Operator

Good morning. My name is Chloe, and I will be your conference operator today. I would like to welcome everyone to the OneWater Marine Inc. fiscal First Quarter 2025 Conference Call. All lines have been muted to prevent background noise. I would now like to turn the conference over to Jack Ezzell, Chief Financial Officer. Please go ahead.

Jack Ezzell, Chief Financial Officer

Good morning, and welcome to OneWater Marine's Fiscal First Quarter 2025 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 the securities laws 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 influence 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 may occur after the date the forward-looking statements are made, except as required by law. Please also note that all comparisons to our fiscal first quarter 2025 results are made against our fiscal first quarter 2024, unless otherwise noted. And with that, I would like to turn the call over to Austin, who will begin with a few opening remarks. Austin?

Austin Singleton, Chief Executive Officer

Thanks, Jack. Thank you everyone for joining today's call. Our first quarter results came in better than expected, driven by a low double-digit increase in new unit sales significantly outpacing the industry. Overall, revenue increased 3%, with same-store sales up 4%, driven by the strong push from our sales team to gain market share and optimize inventory. Margins declined in the quarter, reflecting the impact of deliberate actions to drive sales. Margins also vary by product. Current model year margins are holding up well while brands we are exiting were discounted to close sales. Given the impact of Hurricane Helene and Milton on the West Coast of Florida, I am pleased with our top-line growth in the quarter. As you may recall, we temporarily closed several stores in the fall in preparation for the storm affecting Florida and the Gulf Coast. While it is difficult to quantify lost sales that we recouped during the quarter, sales in the impacted area were down mid-single digits compared to the prior year. Overall, we are making good progress on managing inventory, which is down 10% year-over-year. Our goal is to have cleaner inventories each quarter, striking the right balance of brand, make, and model, ensuring that we are well positioned to meet customer needs while maintaining operational efficiency. These efforts are starting to pay off, as highlighted by our lower carrying cost on floor plan interest expense versus the prior year period. We are also seeing the benefits of our ongoing cost reduction initiatives taking effect. Selling, general and administrative expenses declined on both a dollar basis and as a percentage of total revenue. Between our inventory position and cost actions, we are setting OneWater up for success in the quarters to come. Despite better than expected results in the first quarter, which is historically our smallest quarter, we remain cautiously optimistic about 2025. The industry continues to face uncertainty after a challenging 2024, and we have not seen any significant market changes that would alter our outlook for the year. As a result, we are reaffirming our guidance range for 2025. Our focus remains on executing our inventory strategy as we prepare for the summer selling season while remaining nimble to respond to any changes in market dynamics. With that, I will turn it over to Anthony to discuss the business operations.

Anthony Aisquith, President and Chief Operating Officer

Thanks, Austin. Sales in the quarter benefited from higher unit volumes, offset by the lower average unit price as we work to drive sales during the slower winter months. With all of our stores operational again after hurricane-related closures, we developed promotional strategies and actions to give customers additional reasons to buy. I am proud of the team's effort to achieve the increase in sales in the quarter that seasonally experiences the slowest activity. Our attention now shifts to the boat show season. Regional shows have had mixed results, some facing challenges like unprecedented cold weather and snow in Atlanta and significant rain at the St. Petersburg outdoor show. Despite these adversities, customers have been active when weather permitted, and overall sentiment has been positive. The premium category has done well and is in line with recent trends. All in all, we are ready to serve customers at upcoming events. After a year marked by high inventory levels, our focused approach to inventory management has put us in a strong position as the industry works to clear out excess and noncurrent inventory. While this push caused some near-term discounting, we are encouraged by our solid finance and insurance performance, which helped offset some of the impact and highlighted the benefits of our diverse business model. Total finance and insurance revenue grew 50 basis points as a percentage of total revenue compared to the prior period, and finance penetration remains strong. Our diverse brand portfolio continues to be a key advantage, enabling us to deliver boats and meet the varied wants and needs of our customers across different markets. Meanwhile, the promotional environment has continued with our manufacturing partners, accurately supporting sales initiatives and helping clear aged inventory. Although we typically build inventories in the winter months, we've added inventory from the fourth quarter at a slower pace compared to the prior year, being mindful of the volume and model of 2025 boats we are taking in. 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. The first quarter was a solid start to the year with revenue increasing 3% to $376 million from $364 million in the prior year. New boat sales were up 3% to $248 million in the first quarter, while pre-owned boat sales increased 7% to $57 million. Overall, same-store sales were up 4%, driven by an increase in new unit sales despite the industry unit sales being down approximately 14% in the categories we participate in. Revenue from service parts and other sales for the quarter decreased 1% to $62 million. As we have seen in the last several quarters, reduced production schedules from boat manufacturers drove lower sales in our distribution segment, which were partially offset by increases in our dealership segment. Finance and Insurance revenue increased 28% to $9 million in the first quarter and was higher as a percentage of total boat sales. Gross profit decreased 8% to $84 million in 2025 compared to $91 million in 2024. This was driven by lower margins on the brands we are exiting, in addition to new and pre-owned boat pricing. First quarter 2025 selling, general and administrative expenses decreased 1% to $79 million. SG&A as a percentage of sales was 21%, down 90 basis points as a percentage of revenue due in part to lower personnel costs in the quarter, previous cost reduction actions, and ongoing expense management. These savings were partially offset by certain inflationary increases in fixed and administrative expenses. Operating loss decreased to $2 million, and adjusted EBITDA was $2 million. Net loss for the first quarter totaled $14 million or $0.81 per diluted share, compared to a net loss of $8 million or $0.49 per diluted share in the prior year. Adjusted loss per diluted share was $0.54 compared to an adjusted loss per diluted share of $0.38 in the prior year. Now turning to the balance sheet. December 31, 2024, total liquidity was in excess of $40 million, including $23 million of cash and additional availability under our credit facilities. Total inventory at December 31, 2024, was $637 million compared to $707 million at December 31, 2023. We continue to improve our current mix in aging while we execute on our brand rationalizations. We expect to see some incremental benefits from further inventory reductions as we progress throughout the year. Total long-term debt as of December 31, 2024, was $428 million, net of $23 million in cash, which results in net leverage of 5.2 times trailing 12-month adjusted EBITDA. We are focused on reducing leverage in the latter half of 2025. Looking ahead, we are maintaining our previously issued fiscal 2025 guidance and anticipate total sales to be in the range of $1.7 billion to $1.85 billion, with same-store sales up in the low single digits. We continue to expect adjusted EBITDA to be in the range of $80 million to $110 million and adjusted earnings per diluted share to be in the range of $1 to $2. Our capital allocation priorities remain the same, driving organic growth, expanding our presence through strategic acquisitions in key boating markets. The pipeline is active, but we will continue to deploy cash where it creates the greatest value for shareholders. This concludes our prepared remarks. Operator, will you please open the line for questions.

Operator, Operator

Our first question comes from Fred Wightman from Wolfe Research. Your line is open.

Fred Wightman, Analyst

Hi guys. Good morning. I was hoping you could just talk about the cadence of the quarter also. And I think when you reported last or held the call last, you talked about some encouraging October trends. So I'm wondering if you could just update us on what you saw from sort of month-to-month basis.

Austin Singleton, Chief Executive Officer

I think it was a pretty solid quarter on every month if you were comparing it over last year. But I would say, if anything, December's the one month that you really can't pinpoint because it starts to get really cold in some places, but then people get caught up in Thanksgiving into November and running into just the year-end, New Year's, and Christmas. I would say October and November were pretty good, and December was probably on average or flat. Anthony, you probably have a better feel for that than I do.

Anthony Aisquith, President and Chief Operating Officer

Yes. I think you described it exactly. I mean, our October and November were very strong, with December just being what it normally is in normal times.

Jack Ezzell, Chief Financial Officer

The thing I would point out to you, Fred, is that October, in particular, especially the first half, was impacted by the storms. So that geography was a little bit light compared to the rest of the country.

Fred Wightman, Analyst

Okay. That makes sense. And then just on the front-end grosses, it was down a little down year-over-year, and then down a little bit sequentially. I know you guys are exiting some brands. So can you maybe just give us some guideposts for what that looked like maybe on a like-for-like basis versus the exited brands, how to think about that margin profile going forward? Thanks.

Austin Singleton, Chief Executive Officer

Jack, let me say this, and then you can fill in where I leave off. Fred, we want to eliminate those exiting brands completely. There is no support from the manufacturer, and the sales team is not enthusiastic about them due to the lack of a long-term future. As a result, they tend to focus on other products. It's challenging, yet we have successfully pushed those through. However, this is resulting in zero or negative margins, significantly impacting us. I believe we mentioned that the New Year model products have much better, healthier margins. As we progress through this year, we feel more confident about what we said last quarter regarding the earnings call. The green shoots we are seeing suggest that as we phase out these exiting brands, we expect to see margin improvements because the new boats are contributing higher margins.

Jack Ezzell, Chief Financial Officer

Yes, Fred, I think next quarter, we will see some margin pressure continue as we get through the rest of them. But I would expect, once we get past our second quarter and kind of get into the heat of the season, that margins may tick up a little bit. But we are focused on making sure we keep our inventory in check, and we are balancing that with our model year '25s coming a little bit slower than model year '24s did. You'll notice that by the inventory decline year-over-year, and we're going to continue to focus on bringing those numbers down.

Fred Wightman, Analyst

And Jack, just to be clear, when you say pressure in 2Q, is that a sequential comment, year-over-year comment, both? What do you mean?

Jack Ezzell, Chief Financial Officer

It is a year-over-year. I would say, sequentially, it's flattish, maybe even a little bit better. Again, it is really hard to move a lot of product in those winter months especially outside of Florida, and the team did an outstanding job outside of Florida moving product.

Fred Wightman, Analyst

Perfect. Thanks a lot guys.

Operator, Operator

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

Martin Mitela, Analyst

Hi, good morning. This is Martin on for Joe. I just first wanted to touch on the comp. Do you have an idea of where comp was excluding Florida?

Jack Ezzell, Chief Financial Officer

Yes, it's going to increase. I would estimate it to be around 6% to 7%.

Martin Mitela, Analyst

Okay. And then just quickly on the comp again. Do you have a breakdown between units and ASPs?

Jack Ezzell, Chief Financial Officer

Yes, units were up by double digits, approximately in the 12% to 13% range.

Martin Mitela, Analyst

Perfect. Appreciate it guys. Thank you.

Operator, Operator

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

Michael Swartz, Analyst

Hi, guys. Good morning. Maybe just starting with inventory. Jack, is there, I guess, an inventory level you guys are actually targeting for new boats? Is there an inventory level you guys are targeting for fiscal year? And maybe what does that look like relative to where we are today?

Jack Ezzell, Chief Financial Officer

Yes, we made a strong, coordinated effort with our sales initiatives and order management this quarter. Our goal for September 2025 is to achieve a year-over-year reduction of over 10 percent. Although we are currently down just over 9 percent this quarter, I believe we can adjust that figure in the next quarter as we prepare for the upcoming season. This will remain somewhat flexible throughout the year, but our objective is to exceed a 10 percent decline.

Austin Singleton, Chief Executive Officer

Our goal is to reduce our numbers slightly since we've exited nine brands. However, we will continue to operate as usual and keep an eye on the market. We feel optimistic about the second half of the year. I can’t say for certain if there will be a significant increase on the retail side, but if retail performs better than expected, that may not be the case. We will need to adjust our plans based on demand and what we're observing, which we monitor on a weekly, almost daily, basis.

Michael Swartz, Analyst

Excellent. Regarding inventory, can you provide insights on what aged inventory looks like today compared to a typical year? Also, how much inventory is still tied up with the brands you are exiting? I'm trying to understand the potential impact of this challenge over the next couple of quarters compared to what we've experienced in the past six months.

Austin Singleton, Chief Executive Officer

Yes. I wouldn't say it will have a significant impact over the next few quarters. As Jack mentioned earlier, we are feeling some pressure this quarter. When I view the situation from an overall perspective, the brands we are exiting are primarily part of our dated inventory. We are focusing on current products for 2025, with older items being phased out. Typically, in a normal year before COVID, the industry entered the off-season with about 20% to 25% of carryover inventory heading into the new calendar year. We generally aimed for slightly less than that. We are currently probably under 20%, aren’t we?

Jack Ezzell, Chief Financial Officer

Yes. I don't have that right in front of me. I would agree with your comment. I did hear from some data I've gotten from wells that suggested the industry as a whole was kind of getting to that point.

Austin Singleton, Chief Executive Officer

The situation with inventory, both for OneWater and the industry according to Wells, indicates that inventory is being effectively managed. I don't have precise numbers comparing total inventory and dated inventory, but the sentiment seems much more positive now than it was a month, three months, or six months ago, especially as we approach the selling season. The trend in inventory dating continues to improve gradually, and these are some of the signs of growth we anticipate in the latter half of the year.

Michael Swartz, Analyst

Thank you, Austin. Your quarter showed a 4% increase in comparable sales, even with the various challenges in the Florida market, and you're still keeping your outlook for the full year despite easier comparisons ahead. Can you share what the internal discussions were like about maintaining that outlook?

Jack Ezzell, Chief Financial Officer

Yes, I believe a lot of it relates to the fact that the December quarter is typically the slowest of the year. Looking at consensus, they have Q3's EBITDA at $50 million, which seems a bit optimistic. Additionally, Q2 and Q4 usually have similar figures. If we adjust Q3 downward slightly and stabilize Q2 and Q4, that keeps us around the $95 million consensus number, which is the midpoint of the range.

Austin Singleton, Chief Executive Officer

Jack, I'm feeling a bit more optimistic and starting to notice some positive signs. However, we have seen similar signs in the past that didn't pan out, so it's important to remain cautious until we progress further into the selling season. After the Miami show in the latter half, I believe we will have greater confidence in our outlook compared to where we stand today after the slowest quarter of the year.

Jack Ezzell, Chief Financial Officer

Yes. I want to highlight that what initially seemed like a positive impact from the Fed's interest rates now appears less favorable. The latest projections indicate that we may not receive as many rate cuts as we anticipated three or six months ago. While I don't see this as a significant challenge ahead, it seems that the relief we expected in the latter half of the year may not materialize.

Michael Swartz, Analyst

Got it. Okay, helpful. Thanks guys.

Operator, Operator

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

Ryan Williams, Analyst

This is Ryan on for Noah. Thanks for taking my question. And I know you just kind of briefly touched on it, but it would be great to hear your perspective on the industry. I know we are in a difficult environment, and it seems like that rate cut conversation has changed and has maybe kind of put on pause for now. But it would be great to hear if you are seeing any other kind of green shoots or changes in confidence coming out of this quarter.

Austin Singleton, Chief Executive Officer

I am not certain if there has been a shift in confidence. Jack and Anthony discuss this frequently. The positive indicators we mentioned in the last earnings call are still present and seem reasonably attainable. A key factor will be clearing up inventory. As inventory gets updated, if we removed all 2024 models and older from the total industry, focusing only on what’s available for 2025, the industry appears to be in very good shape. Manufacturers have been disciplined in reducing production, and dealers are managing their inventory correctly as we approach 2025. Given this situation, we are in a strong position from an industry standpoint. The focus now is on cleaning up the remaining inventory, and the quicker we do that, the more advantages it will create for us at OneWater. This will result in higher profit margins on new boat sales and increased turnover for new boats, yielding savings we can measure based on our interest expenses when we enhance turnover. There are also costs that are difficult to quantify; for instance, if you move inventory around 25 times instead of just once, there’s an associated cost with that. Additionally, even if interest rates remain unchanged, increased turnover means we pay less in interest. Furthermore, as inventory gets cleaner, manufacturers will start to ramp up production for 2026, which benefits us. If manufacturers increase production by 10%, we can anticipate a 10% boost in our sales to those manufacturers due to their need for parts to build boats. All these factors are beginning to take shape, largely hinging on the cleanup of inventory. I can confidently say that at the end of every quarter, indeed every month, and now even weekly as I communicate with our partners and suppliers, we are moving in the right direction. The operations are stable, and this is fostering confidence as we approach the selling season, which is currently more of a wait-and-see scenario. We just need this momentum to persist.

Ryan Williams, Analyst

Yeah. Thanks for taking my question. And maybe just pivoting a little bit, it would be helpful to hear any thoughts around the state of the preowned market? What you are kind of seeing there and how you're thinking about used in 2025.

Austin Singleton, Chief Executive Officer

Yes, we have been saying this for the last 25 years; we still do not have enough inventory in the preowned market. From an industry perspective, it remains very limited, and I don’t anticipate that improving anytime soon.

Operator, Operator

Our next question comes from the line of Alice Wycklendt from Baird. Your line is open.

Alice Wycklendt, Analyst

Yeah, good morning gentlemen. Thanks for taking my questions on for Craig this morning. Maybe a little bit related to the pre-owned question, but a little more focused on new. Curious if you have a way to measure first-time buyers versus trade-in buyers. In some markets like auto, we're seeing some consumers sitting out because the monthly payment math just doesn't make sense given inflation rates and trade-in values. So wondering if you are seeing anything on that and how it's playing out in the Marine category.

Austin Singleton, Chief Executive Officer

Jack, Anthony, I'll let you all take that. I mean you can speak really to the Atlanta Boat Show probably on that, just what we saw there.

Anthony Aisquith, President and Chief Operating Officer

Yes, we are starting to see an increase in trading activity, which is a shift from the significant drop we experienced during the COVID period. This fiscal year has begun with higher demand for trades; people are trading boats now more than before. We are fortunate to work with many innovative manufacturers, which provides people with exciting reasons to trade. Unlike twenty years ago when new boats were merely different colors, manufacturers today introduce remarkable features every year that encourage trading. I'm not sure of the exact percentage increase, but it has risen significantly.

Jack Ezzell, Chief Financial Officer

Again, right, what Austin was getting at, our biggest challenge is supply when it comes to selling trades or selling used boats. And so I think we've seen some indicators of supply coming in at the show that you referred to. When you break down our sales, our pre-owned sales, which are up 6.5% year-over-year, actually trades are up double digits in that, countered by a little bit of people shifting from a downward trend in consignment. So people go ahead and trade in their boats to get that new product, and it is an easier, more efficient process for them where they can just hand over their trade, and we'll take care of the paperwork and everything else with getting them in a new boat.

Austin Singleton, Chief Executive Officer

It's important to clarify that gaining clarity on this issue has been challenging for us, as we've been advocating for change in several states for years. The situation has now essentially evolved into a title issue. In the past, many boats changed hands between consumers without going through a dealership due to the absence of a tax benefit. When sold directly from one person to another, there was no sales tax due. This was particularly the case in about half the states where we operate. We have been gradually pushing for legislative changes to ensure that when a boat is registered with a new tag, sales tax is applied. If a sales tax payment at a dealership isn't proven, it affects the transaction. Consequently, this shift is likely leading to more trades coming our way. While it is somewhat difficult to assess the full impact of this change, I agree with Anthony and Jack that trades are indeed on the rise.

Alice Wycklendt, Analyst

Great. That's helpful color. Just switching gears a little bit. I mean you called out higher F&I penetration mitigating some of the margin pressure from working down inventory. Maybe let us dig into that a little bit, what's driving that? And is it something that's sustainable through the balance of the year?

Jack Ezzell, Chief Financial Officer

Yes, it is definitely a concerted effort by the team. I think it is one of those areas where if you are not pushing as hard as possible to secure that financing, it won't happen. The team implemented some effective strategies, including price points and special financing options for certain discontinued brands, which helped to drive some growth. We will continue to be very competitive in the finance and insurance department, aiming to expand our penetration and increase our income in that area.

Alice Wycklendt, Analyst

Great. And then I think I just want to touch on the M&A pipeline. I think you called it active; maybe frame a little bit more what that looks like today.

Austin Singleton, Chief Executive Officer

Yes, we are not in a hurry to take any action at the moment. Time is on our side, and we are being cautious, waiting to see how things develop over the next 30 to 90 days as we approach the season. Many dealers have had a challenging winter, and we want to observe how the numbers respond as we head into the selling season compared to last year, especially since most of our purchases are based on a trailing 12-month period. We will be selective and disciplined about our timing and wait for opportunities to present themselves.

Alice Wycklendt, Analyst

Okay. That’s all from me.

Operator, Operator

Our next question comes from Bryan Griffin from D.A. Davidson.

Bryan Griffin, Analyst

Yeah. Thanks guys. Good morning. What have you guys been seeing from a promotional aspect of these shows so far? I'm assuming it is still competitive, but maybe just some high-level comments on what you've seen so far by category and maybe other dealers.

Austin Singleton, Chief Executive Officer

I believe it's been fairly steady over the last year. Manufacturers are still actively supporting sales by moving their inventory, recognizing the need to assist, especially in clearing out stated inventory. They seem to be maintaining the same level of engagement. This is why we didn't anticipate much activity last quarter or this past fall. There wasn't much incentive to make purchases in October when buyers could wait until January and still be ready for the boat show season. Overall, things have remained consistent with what we've experienced for the past year or year and a half in terms of promotions. Manufacturers are dedicated to helping retailers reduce field inventory, which is beneficial for everyone moving forward.

Anthony Aisquith, President and Chief Operating Officer

No, I think it has been consistent across the board, Austin. Every manufacturer, not just ours, but also our competitors, is actively engaging with everyone. I haven't noticed any slowdown at this point, but their efforts are very beneficial in bringing things together.

Bryan Griffin, Analyst

Got you. And what are you guys hearing from OEMs on potential tariffs and how that may impact demand and margins overall?

Austin Singleton, Chief Executive Officer

Well, I mean, go ahead, Jack.

Jack Ezzell, Chief Financial Officer

I think a lot of them have a wait-and-see sort of standpoint. I mean, I think there is too much noise around exactly what things look like to try to do anything to prepare or to counteract it. Over the course of time, a number of manufacturers have worked to diversify their sources of product, but a lot of products are manufactured in the United States, which certainly helps. But I think it just remains to be seen on that.

Austin Singleton, Chief Executive Officer

I don't want to imply that it's insignificant or that it won't have any effect at all, as that will vary based on the tariffs and their specifics. When you consider a boat, regardless of whether it's a pontoon, ski boat, center console fishing boat, or runabout, the main components affecting pricing are the engine and the raw materials used to construct the boat, such as aluminum and fiberglass. Those materials constitute the bulk of the cost. Therefore, it's unlikely that tariffs on various materials from different countries will lead to a sudden 20% increase in boat prices just because material costs rose by that amount. The materials represent a small fraction of the overall cost, so their impact is not as significant. Additionally, boats are already quite pricey, and that doesn't seem to deter customers.

Bryan Griffin, Analyst

Understood. Thanks guys.

Operator, Operator

There are no further questions at this time. This concludes today's conference call. You may now disconnect.