Earnings Call Transcript - ONEW Q2 2020

Jack Ezzell, Chief Financial Officer

Good morning, and welcome to the OneWater Marine Fiscal Second Quarter 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 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 law and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many of which are beyond the company's control, which could cause actual results and events to differ materially from those described in the forward-looking statements. Factors that might affect future results are discussed in the company's earnings release, which can be found in the Investor Relations section of the company's website and its filings with the Securities and Exchange Commission. 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. And with that, I'd like to turn the call over to Austin Singleton, who will begin with a few opening remarks. Austin?

Austin Singleton, Chief Executive Officer

Thanks, Jack, and thank you, everyone, for joining our fiscal second quarter 2020 earnings call. We delivered strong results in the second quarter of 2020, with sales increasing in boat and non-boat segments despite the slowing environment in the last few weeks of the quarter. As we have discussed, we have a proven, adaptable model, and our performance during the quarter shows the optionality of our portfolio. During the quarter, pre-owned boat sales grew nearly 19% while our high-margin finance and insurance increased by 27% compared to the prior year. In total, revenues rose 5% to $190 million while gross margin expanded 150 basis points year-over-year. Same-store sales through mid-March outpaced the prior year by over 10% before slowing in the last two weeks of the quarter as the impact of the COVID-19 global pandemic began to materialize. Over the last 1.5 months, we really showcased the strength of our organization. As the COVID-19 pandemic spread quickly across the U.S., the economy came to a virtual standstill, ushering in a level of uncertainty never experienced in the industry. And while the ultimate impact of the macroeconomic environment is not yet known, we immediately took actions to protect the health and safety of our team members. At the same time, we implemented our 2008 playbook to ensure we remained nimble, which included reducing costs, securing liquidity and mitigating the possible impact of a prolonged period of lower demand. Moving forward into the back half of our year, there are still significant questions around consumer demand, credit availability and the continued impact on our dealership by state and local shelter-in-place orders. As such, we tapped all available resources to ensure not only the health of our employees but the financial stability of the company as well. In late March and early April, we faced an incredible magnitude of unknowns. At that time, we met the qualifications to receive funds under the Paycheck Protection Program. As such, we applied for and subsequently received the funds in late April. However, after the dust settled from the cost reduction actions that we enacted immediately following the acceleration of COVID-19 on our business and after a rebound in April and looking forward into May, we no longer feel this assistance is needed and returned the money. We also believe our employment is at an appropriate level to fully execute on our plan. Importantly, we also rolled back the non-executive compensation adjustments previously announced. We are truly seeing the resilience of our business as we move into our fiscal third quarter. Sales through April were up in excess of 10% and have been better than expected in certain locations. More specifically, boat sales in Georgia, Alabama and South Florida successfully delivered same-store sales growth, while some stores are still seeing the impact of COVID-19 and the weather. Once the weather breaks, we do expect to see a bump in sales from these stores as well. While we are excited and encouraged by these numbers, there are still many unknowns. We will continue to adapt as conditions change and leverage our recession playbook to ensure we are well positioned to navigate through a variety of operating environments in the coming months. While we are being prudent in all aspects of our business, we do believe boating provides a great activity for people in this new normal we find ourselves in. Air travel, summer camps and travel sports are likely to be altered for the foreseeable future. Recreational boating allows families to get on the water, enjoy the fresh air while continuing to practice safe social distancing on their terms. Based on current trends, we are cautiously optimistic as we move forward into the prime selling season. Before I turn it over to Anthony to talk about the operations, I want to remind you of our long-term strategy. Our team remains focused on expanding our dealership in regions with strong boating cultures, enhancing the customer experience and generating value for our shareholders. With that in mind, we are taking a temporary pause on acquisitions until the current macroeconomic environment stabilizes. We are using this time to better evaluate targets and ensure we can continue on our track record of cutting the purchase multiple in half inside the first 24 months. We have not seen any significant change to the acquisition pipeline, but we are remaining patient in our execution. With that, I will turn it over to Anthony to discuss business operations.

Anthony Aisquith, President and Chief Operating Officer

Thanks, Austin. We continue to adapt our business model to customer demand, while at the same time, complying with current federal and local mandates. Our business model was designed to support cycle resilience. No matter what's going on in the economy, we are built to be flexible to the changing market conditions as we have successfully done in the past. Over the last few weeks, our service departments are working hard, being mindful of shelter-in-place orders to deliver boats and customers on the water. At the same time, our sales team members are fully engaged with customers and providing them with virtual walk-throughs of inventory, along with private showings either at their homes or on the water. As Austin said, we are selling boats at all dealerships, which has been significantly enabled by the investments we have made in our proprietary digital platform. This platform, coupled with enhanced marketing tools and strategies, has supported an increase of over 2x the lead flow compared to the prior year. These tools have also allowed our sales team members to engage and build relationships with new and existing customers effectively while working from home and other remote locations where customers are comfortable doing business. While we're well positioned with our scale and best-in-class technology to actively pursue opportunities while at the same time maintaining the excellent customer service we are known for, even while operating in this unique, more virtual environment. As is typical in the second fiscal quarter each year, inventory was at a peak level in February and March in order to prepare for the prime selling season. We believe we are in a strong position as we work through our current inventory and move into the second half of our fiscal year. Most of our OEM partners shut down production at the end of March and through a good portion of April, which helped inventory reductions at our stores. As stay-at-home orders lift and it becomes safer for people to be out and start working again, production lines will get back up and moving. With that said, assuming OEMs continue to ramp up production, we should have sufficient inventories to support retail sales. While this reality we find ourselves in is filled with uncertainty, we are able to offer a sense of normalcy to our customers who are accustomed to spending time on the water. Our flexible business model allows our team to continue to support our customers no matter what their boating needs might be. And with that, I'll turn the call over to Jack to discuss the financials in more detail.

Jack Ezzell, Chief Financial Officer

Thanks, Anthony. We delivered a strong second quarter with total revenue up 5.1% to $190 million from $180.8 million in the fiscal second quarter of 2019. Sales from stores recently acquired contributed to the increase in revenues, but were partially offset by a 2.7% decline in same-store sales. The increased demand for boats continued into March, but as the COVID-19 pandemic quickly spread across the U.S., the pace of sales declined. As a result, new boat sales for the quarters were essentially flat year-over-year. However, as consumer demand tends to shift in weaker economic environments, we are prepared to generate income through our diverse business model. Our focus on pre-owned boat sales and higher-margin products like finance and insurance, parts, maintenance, and repair services will allow us to meet consumer demand and generate sales across all markets. Our continued focus on these businesses generated an increase in pre-owned boat sales of 19.4% to $43 million and a 27.2% increase in finance and insurance revenue to $8.1 million in our fiscal second quarter of 2020. Revenue from service parts and other sales decreased in the quarter 4.3% to $11 million compared to $11.5 million in the prior year. This decline was a result of temporary store closures, social distancing requirements and local shelter-in-place orders, which made it physically difficult for us to complete retail parts and service sales. Gross profit increased to $44.6 million in the second quarter compared to $39.7 million in the prior year, driven by increased pre-owned unit sales and higher finance and insurance revenue. Gross profit as a percentage of sales increased 150 basis points to 23.5% compared to 22% in the prior year. Selling, general, and administrative expenses increased to $32.1 million from $27.5 million, and SG&A as a percentage of sales increased to 16.9% from 15.2% in the prior year. The increase in selling and general and administrative expenses was primarily due to the stores acquired in the back half of 2019. It is important to note that the previously announced expense cuts had little to no impact on the quarter. Operating income decreased $4.1 million to $8.7 million, driven by the higher selling, general and administrative expenses, as previously mentioned, and IPO-related expenses, which are included in transaction costs. Adjusted EBITDA remained essentially flat at $9.9 million compared to the prior year. Net income totaled $3 million for the second quarter and compared to a net loss of $3 million in the prior year. The increase is primarily due to the timing of the $12.3 million reduction in income related to the noncash change in the fair value of the warrant liability recognized in the prior year, partially offset by higher interest expenses, income taxes, and transaction costs in the current period. Post-IPO, OneWater's share count changed dramatically as a result of the stock split and share offering. Additionally, the warrant liability and redeemable preferred interest were also converted and repaid, respectively, at the IPO. Now turning to the balance sheet. As of March 31, 2020, we had $20.4 million of cash and $10 million worth of availability on our revolving line of credit. Total inventory at March 31, 2020, increased to $333.4 million compared to $298.5 million at March 31, 2019. This increase is due to the dealerships we acquired in the back half of fiscal 2019. We remain keenly focused on managing our inventory levels and are comfortable with our current position as we navigate the spring selling season in conjunction with the COVID-19 pandemic. As previously announced, in March, we invoked our option to defer payment of interest on our senior term loan facility for a period of 12 months, which will reduce the annual cash interest payments by approximately $8.5 million. Accordingly, there are no interest payments due until December 31, 2020, and scheduled principal payments on the senior term loan facility do not begin until March 2022. In light of the uncertainty that exists around the COVID-19 pandemic, on March 26, we withdrew our fiscal 2020 guidance that was provided on our last call. We are offering no additional guidance at this time. This concludes our prepared remarks. Operator, will you please open the line for questions.

Operator, Operator

Our first question comes from Craig Kennison with Baird.

Craig Kennison, Analyst

Just looking at the press release, it says that April sales were solid. I'm curious if you actually saw something close to positive retail trends in April and would be also curious if you could break that up into new versus used sales.

Jack Ezzell, Chief Financial Officer

Yes, Craig. I would say it was a mixed situation, but overall, we experienced an approximate 10% increase in April. Some areas are still significantly affected by shelter-in-place orders, with certain regions, particularly the Northeast, more impacted than Georgia, for instance. We continue to see revenue across all our product lines, including new, pre-owned, and finance. I don’t have the specific breakdown of that 10% across those categories at the moment, but we did observe positive year-over-year comparisons.

Craig Kennison, Analyst

Could you explain the strategy behind your performance? It's quite impressive to see positive results in April during a pandemic. Are you significantly boosting demand with an exceptional strategy? Please provide some insight into this outstanding result.

Austin Singleton, Chief Executive Officer

I believe that from an industry standpoint, as Jack mentioned earlier, we provide the ability for social distancing on your own terms. We offer recreational activities that allow families to enjoy time on the boat and manage their own environment. They can choose who to invite on their boat or just stick with their immediate family. People are eager to get outside, and we've particularly noticed this in the southern regions, where the lake I reside on resembles the Fourth of July with so many boats on the weekends. As the weather continues to improve, the industry benefits significantly because we provide an opportunity for people to get outside and enjoy life a little more. We are really excited about the increased activity we're witnessing on the lakes.

Operator, Operator

Our next question comes from Joe Altobello with Raymond James.

Joseph Altobello, Analyst

So the commentary on April, obviously, is very encouraging. And I know we're only a month in here, but just curious, has that momentum continued into May? Or is that really just pent-up demand coming out of March?

Jack Ezzell, Chief Financial Officer

Yes. I'd say we're still very early in May, obviously, but the pace of leads and activity has continued.

Joseph Altobello, Analyst

Okay. Great. And then secondly, on costs. You guys mentioned that you did return the PPP loan, which is kind of interesting. So I'd be curious to hear what the rationale was behind that. And maybe help us understand what you guys are doing on the cost front, maybe rent abatements or renegotiations, and maybe a sense for how much of your costs today are variable versus fixed.

Philip Singleton, Chief Executive Officer

Jack, do you want me to take the first part of that?

Jack Ezzell, Chief Financial Officer

Yes. Yes. Go ahead.

Philip Singleton, Chief Executive Officer

Let me address the Payroll Protection Program. It's good to speak with you this morning, Joe. When the Payroll Protection Program was initially introduced, there was limited guidance available. At that time, many uncertainties existed, which we discussed earlier. We qualified for the program and proceeded with the application. As we moved from March into April, we experienced a slight reduction in our workforce. However, we believed that this adjustment aligned our staffing with our future plans, meaning we did not feel it necessary to reinstate those positions. Additionally, the guidance regarding the PPP continued to evolve, and the wording became increasingly ambiguous, leaving us unsure about whether to accept the funds or not. And then as April continued to go as it did, we just really looked at it and we thought, we don't really need this money. We don't really want to bring back that headcount because we feel our business is where it needs to be to operate efficiently. And so if we weren't going to bring back or didn't really think we had to bring back the headcount reduction and our business was doing good, that money needed to go back and be available to somebody that really needed it.

Jack Ezzell, Chief Financial Officer

Additionally, on the cost front, we quickly took action to reduce expenses. In this environment, with limited travel, we aimed to cut costs in travel and other areas like marketing, focusing on spending in a targeted manner. We reached out to several landlords, some of whom agreed to rent abatements while others offered to defer rental payments. Through our engagement with them and their willingness to cooperate, we felt aligned in our efforts. We are currently addressing some deferred expenses that appear in the profit and loss statement but are actually cash flow items. We are in discussions with our landlords to reverse some of these deferrals because we aim to be a good partner to them. If our cash flow allows, we don’t want to impose any strain on them, preferring to reserve that for times of actual need. We believe we can return to our landlords when necessary. For instance, we did reverse the reduction in non-executive pay because we want to support our team members. However, we also want to manage expenses carefully, keeping some options available in case our results change. So I would tell you that our expense structure is not changing dramatically. Our fixed versus variable kind of still is around that 50-50. We'll probably move a little more towards the fixed just because with revenue down and some things like that and us maintaining those costs, it might tick up a little bit. But generally speaking, we continue to watch all of our expenses on a daily basis, trimming costs where we can.

Joseph Altobello, Analyst

That's very helpful. And just one last one, if I could. In terms of unlevered inventory, can you quantify that for us at this point?

Jack Ezzell, Chief Financial Officer

Yes. It's not a huge number. I mean, obviously, we have a lot of credit availability under our floor plan. Our floor plan has a capacity of $392 million. We only have just under $300 million available. So there's plenty of capacity from the standpoint of capacity on our floor plan. We are in the season right of declining inventory, declining floor plan. But there's some availability on there, a couple of million dollars, like less than $5 million probably at this point.

Operator, Operator

Our next question comes from Mike Swartz with SunTrust.

Michael Swartz, Analyst

Just wanted to touch on new boat margins during the quarter. That number came in well ahead of what I think anyone had anticipated, particularly given some of the pressures we've seen over the past couple of quarters. So maybe what turned around during the quarter? I mean, I think mix was part of it as you highlighted in the press release, but any color there? And how should we think about that over the next couple of quarters?

Jack Ezzell, Chief Financial Officer

Yes. I'd say, if you go back to our last call, we had talked about some strategies that we were implementing to enhance our finance and insurance penetration. It was coming at the cost of a bit of new boat margin, and that was going to turn as we kind of got out of boat show season and into the normal season. I would tell you that absent the pandemic, we fully expected margins to increase. Anthony and the team did a great job of holding margin and maintaining margins through the month of March. But Anthony, maybe you want to discuss a little bit about what we're seeing on the retail front with respect to margins.

Anthony Aisquith, President and Chief Operating Officer

Sure. I mean I think that we had the plan all along, and we intentionally dropped the margins down in the past on our new stuff to, just like Jack said, to increase our finance and insurance penetration. Our whole plan was to, as we implemented the selling process through all of our stores. And once they've gotten it, we didn't need to continue to discount the boats as much as we had to. Our plan is exactly working, and our margins are rising from it.

Michael Swartz, Analyst

Okay. I think you've unveiled publicly some pretty unique sales and marketing incentives on new boats with certain new manufacturers. Can you talk about some of those as much as you can and maybe how that will impact the P&L in any way?

Anthony Aisquith, President and Chief Operating Officer

It shouldn't impact the P&L in any way, except to increase. So we were able to negotiate some one-off programs with our manufacturers and some of our banking partners that we have, to have some marketing tools out there that is going to allow us to be very attractive for our buyers no matter what's going on in the economy.

Michael Swartz, Analyst

And one final one for me, maybe for Jack. On a comparable store basis, what do the finance and insurance and used boat sales look like in the quarter just from a growth perspective?

Jack Ezzell, Chief Financial Officer

Yes, Michael, we don’t provide a breakdown for same-store performance by pre-owned or finance and insurance. However, looking at some of the numbers, it's clear that several of our legacy stores are experiencing significant growth due to the changes in finance and insurance, as well as pre-owned, and our newly acquired sources are also contributing. We don’t have specific same-store figures for finance and insurance or pre-owned, so we can't provide that data for you.

Operator, Operator

Thank you. I'm not showing any further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.