Earnings Call Transcript - ONEW Q1 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the OneWater Marine Fiscal First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I will now hand the conference over to your speaker today, Jack Ezzelle, Chief Financial Officer. Please go ahead.

Jack Ezzell, Chief Financial Officer

Good morning and welcome to OneWater Marine’s fiscal first quarter 2022 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 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 on the Investor Relations section of the company's website and in its filings with the SEC. The company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. 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 today's call. Across the board, we delivered exceptional results for the first quarter of 2022, highlighting the strength of our team and our ability to outperform the market. Revenue for the first quarter increased 57% to $336 million, and even in the face of ongoing industry-wide supply chain constraints, we increased same-store sales by 28% on top of an incredible 38% comp in the prior year. These same-store sales gains are significantly above reports on the industry growth, which suggests we are achieving market share gains. As a part of our incredible increase in same-store sales, we also saw a significant increase in our higher-margin service parts and other revenue. And in the end, we delivered adjusted EBITDA of $41 million, an increase of 146%. As we come up on tough same-store sales comps over the next quarter, we should see the strength of these stable revenue streams shine through. While we expect lower inventories to persist over the next few quarters, we're extremely confident in the prospects for the business. We continue to see robust demand, and pre-sold inventory remains elevated through yet another quarter. We also saw our service parts and other sales up 111% in the quarter, significantly outpacing growth of boat sales. This increase was driven by our recent acquisitions of PartsVU and T-H Marine that led to further diversification of our revenue. We expect service parts and other revenue growth to continue to outpace boat sales as we integrate these acquisitions. And these higher-margin revenue streams will also support our overall gross profit margin in the future. We were extremely active with M&A to start the year closing three new dealership transactions and adding a significant piece to our parts and service business. The dealer transactions are OneWater's bread-and-butter, expanding our geographical reach for new and pre-owned boat sales, finance, and insurance income, and service parts and other sales. These transactions will leverage OneWater's expertise and platform to push newly integrated dealers to even greater heights. Earlier this week, we announced the closing of a tuck-in acquisition in the parts and service space. JIF Marine provides complimentary products and establishes us as a market leader in stainless steel ladders and docking products. We're very excited about the synergies and opportunities to expand this less cyclical part of our business. We also believe there is a significant opportunity for us to grow in the future through additional parts and service tuck-in acquisitions. Accordingly, as part of our corporate acquisition and diversification strategy, we're establishing a target to complete two to four parts and service acquisitions per year. This is an addition to our target of completing four to six dealership acquisitions per year. Looking ahead, our acquisition pipeline for 2022 is robust and will continue to be a core component of our overall strategy. While the opportunities are plentiful, we're committed to our disciplined approach, selecting targets that meaningfully drive growth, diversification, and align with our goals. We believe our acquisition strategy significantly adds to the earning potential of the company. In summary, our first quarter results drove expansion of both the top and bottom line. We look forward to continuing to capture the momentum of the unrelenting customer demand and feel confident about our position to manage through the supply chain constraints. Our M&A activities will continue to fuel growth as we integrate market-leading dealers and expand higher-margin revenue streams, supporting the expansion of the business and enhancing the overall quality of our earnings. We believe these efforts 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 Chief Operating Officer

Thanks, Austin. The strong levels of demand from fiscal year 2021 carry into the first quarter, when demand typically slows during the winter months. Our customers are happy, and they are out shopping, putting money down for their next boat with no signs of demand slowing. Presold inventory remains elevated, and customer deposits more than doubled in the quarter compared to the prior year, highlighting the continued strong customer demand. Seasonal sales were stronger than anticipated in the cooler climates as presold units were delivered, and in the South, the sales of big boats were particularly strong in the first quarter. We continue to see strength across the board in ski wakes, pontoons, saltwater fish, runabouts, and yachts with all categories and all geographies performing well. The team continues to do a great job of effectively using our superior inventory management tools to sell inventory from any location across our portfolio. This asset-light model reduces our flooring costs and consequently supports a higher margin profile, marked by a 550 basis point improvement in gross margin this quarter compared to prior year period. Improving our inventory levels continues to be a focus as we prepare for the summer selling season. We experienced an increase in inventory during the quarter, which is partially attributed to our numerous acquisitions coming online. The supply chain continues to pose challenges for OEMs. However, our exclusive technology and strong vendor relationships allow us to navigate the environment in an extraordinary manner. We're leveraging these resources and our expertise to put us in the position to continue to outperform the industry, and we feel good about where we stand. At some point, the supply chain environment will normalize and the overall industry will begin to build back inventory to a new level of normal. It is still unclear exactly when this will happen. However, we have the team and the tools to make sure we can operate successfully in this environment. I am also proud of the success we have had in our service parts and other lines of business. Our dedicated team takes great pride in meeting our customers' parts and service needs so they can get back on the water, enjoying their boat, and making memories that will keep them boating for years to come. We will continue to service their existing boat and stand ready to help them find their next boat of their dreams when the time comes. Moving onto our marketing activities, we continued our balanced strategy between boat shows and local dealer-sponsored events. While some shows were canceled due to COVID-19, we participated in other shows throughout the quarter and saw the same level of activity that we're seeing at our local personalized events. Customers are out, they're happy, they're excited about the product innovation, and they're buying boats. And with that, I will turn the call over to Jack to go over the financials in more detail.

Jack Ezzell, Chief Financial Officer

Thanks, Anthony. Fiscal first quarter of 2022 revenue increased 57% to $336 million from $214.1 million in the prior-year quarter, which was fueled by a 28% same-store sales increase. New boat sales grew 56% to $236 million in the fiscal first quarter of 2022, and pre-owned boat sales increased 39% to $53.4 million. We continue to realize the benefits of our diversification strategy in growing the higher margin parts of our business, which contributed meaningfully to our results in the quarter. Finance and insurance revenue increased 56% to $9.3 million in the first quarter of 2022 and service parts and other sales increased 111% to $37.3 million, driven by our same-store sales growth and recently acquired businesses. Gross profit increased 93% to $101 million in the first quarter, compared to $52.4 million in the prior year, primarily driven by the increase in gross margins of new and pre-owned boat sales and an increase in the higher-margin service parts and other sales. Gross profit margin increased 550 basis points to 30% compared to 24.5% in the prior year. First quarter of 2022 selling general and administrative expenses increased to $59.1 million from $34.9 million. SG&A as a percentage of sales increased to 18% from 16% in the prior year. The increase in SG&A as a percentage of sales was mainly due to higher variable personnel costs driven by the increased level of profitability compared to the prior-year quarter. Operating income climbed 95% to $31.3 million compared to $16 million in the prior year, driven by the increase in gross profit and partially offset by higher SG&A expenses. And as a result, adjusted EBITDA increased to $41 million compared to $16.7 million in the prior year. Net income for the fiscal first quarter totaled $23.5 million or $1.45 per diluted share, up 99% from $11.8 million or $0.71 per diluted share in the prior year. For both periods, charges related to transaction costs and contingent consideration adversely impacted diluted earnings per share. These amounts, tax affected at 25%, were $0.41 per share in the first quarter of 2022, and $0.03 per share in the first quarter of 2021. Looking ahead for the full-year fiscal 2022, we are raising our outlook for adjusted EBITDA to be in the range of $210 million to $220 million and earnings per diluted share to be in the range of $8 to $8.40 per share. We maintain our anticipation for same-store sales to be up high single-digits, despite the ongoing inventory challenges. These projections include the acquisition completed during the first quarter and the recently announced JIF Marine transaction, but exclude any additional acquisitions that may be completed during the year. With regard to our capital allocation, we remain focused on accelerating organic growth, executing on strategic M&A opportunities, and leveraging synergies. By executing these strategies on a long-term basis, we believe we can increase our adjusted EBITDA run rate by 15% to 25% per year, with our M&A strategy contributing 10% to 15% and existing operations contributing 5% to 10% aligned with their long-term same-store sales expectations. For this year, we believe we will exceed these amounts with the low-end of our guidance range, yielding adjusted EBITDA growth in excess of 30% before any additional acquisitions we may complete this year. Following through on the math, this basically gets you to a 50% increase in adjusted EBITDA by 2024 and our run rate in excess of $300 million. Needless to say, we are working hard for shareholders to execute on completing additional acquisitions, implement our proven strategies across newly acquired dealerships, and enhance our earnings by growing our higher-margin businesses. This concludes our prepared remarks. Operator, will you please open the line for questions.

Operator, Operator

Our first question comes from the line of Drew Crum from Stifel. Your line is open.

Drew Crum, Analyst

Okay. Thanks. Hey guys. Good morning. The 28% same-store sales figures, I think was better than anyone expected. Understanding the fiscal 1Q is seasonally less important. Any thoughts around what the shape of the year should look like for same-store sales? And then separately, Austin, you talked about targeting two to four parts and service businesses on an annual basis going forward. How do the economics and purchase price multiples of these deals compare to your dealership transactions? Thanks.

Austin Singleton, Chief Executive Officer

Jack, do you want to jump in on the same-store sales in that?

Jack Ezzell, Chief Financial Officer

Go ahead.

Austin Singleton, Chief Executive Officer

This quarter is typically our lightest. We had some deals that likely should have been completed last year but were pushed into this quarter. I've mentioned in previous calls that the last week of each quarter is crucial for us because it can significantly impact our results. This makes our same-store sales a bit unpredictable on a quarterly basis. We feel confident about our year-end guidance of high-single-digit growth. This quarter saw some deals delayed, and we received our shipments early due to the holiday season, reducing our reliance on the critical days between Christmas and New Year. We anticipate being much busier during the last ten days of March. Overall, our same-store sales were strong; we were aware of the incoming shipments this quarter, and as long as there are no further disruptions, we have a clear outlook for the upcoming quarters. However, those last ten days will be essential. Jack, do you want to add anything before I discuss the parts side?

Jack Ezzell, Chief Financial Officer

Yes. It's important to recognize that in last year's second quarter, we had a 58% and 57% comparable sales growth, which will be a challenging benchmark to surpass. However, in the third and fourth quarters, we will be dealing with negative comparisons, which should make those figures a bit easier. Despite being our largest quarters, I anticipate that achieving an accurate forecast for the year will be somewhat challenging. Even though the second quarter presents a significant comparison, we do not anticipate a drastic drop. We are not predicting a 30% decline in same-store sales, nor do we foresee a 30% increase. I believe we can perform close to last year's numbers, and as Austin mentioned, it will depend on how things play out at the end of the quarter.

Austin Singleton, Chief Executive Officer

To address the parts aspect, when we looked at the T-H Greenfield segment, we found the pipeline and opportunities very appealing. His pipeline may be just as strong, if not stronger, than ours, as it isn't overly complex and he already has established relationships. As we began to scale up and integrate, we collaborated with Jeff and David T-H, who highlighted all the opportunities available, and we were eager to start tackling them. Overall, the pipeline seems quite solid. The economic factors differ somewhat; he seems to be operating at a four to seven times multiple on a trailing twelve-month basis. The business appears to be more stable, as it experiences fewer fluctuations over the years. Therefore, the expected multiple for acquisitions could average between five and six. The acquisitions will be smaller, and while the synergies aren't as substantial, we aren't anticipating any parts deals that would double in value within two years. We expect to see some improvements in margins and reductions in SG&A. The growth we anticipate will need to come from increased revenues. Our strategy is to identify acquisitions that align well and enhance the PartsVU side, enabling us to boost revenues or margins as we incorporate them into the T-H framework. I believe that addresses your questions.

Drew Crum, Analyst

Yes. Thanks, guys. Appreciate it.

Operator, Operator

Our next question will come from the line of Craig Kennison from Baird. Your line is open.

Craig Kennison, Analyst

Good morning. Thanks for taking my questions. I think you mentioned that deposits were up. I'm wondering if you could just characterize how you're handling the demand that you can't currently satisfy because you lack inventory.

Austin Singleton, Chief Executive Officer

I'll let Anthony jump in on this. But let me just say, I don't think we're missing deals. The consumer has been conditioned over the last year and a half to understand they're pretty much having to wait on everything. So what I think we are seeing and why those deposits are double where they were is I think people were preparing a lot more in advance. The people that are planning on doing something for spring or summer jumped out this fall knowing that they were going to have to wait to get what they wanted. But I'll let Anthony probably, it will be better if he talked about that.

Anthony Aisquith, President and Chief Operating Officer

Craig, the customers are a little more specific on what they want and there are so many new models that are coming out that manufacturers are dealing with, so the consumer is willing to wait for what they want, and they're paying for it, and we're not having any issues with it. So I don't feel as though we're missing anything. They're just getting exactly what they want.

Craig Kennison, Analyst

It's really good environment really to be a dealer and you're able to price for the kind of features that consumers want. You're a large dealer. Are you having any conversations with your OEM partners to figure out how you might be able to preserve some of this, I guess, scarcity dynamic where the customer comes in and expects to pay full price, and they just want to choose the features they want?

Anthony Aisquith, President and Chief Operating Officer

Daily, we engage in discussions with our OEMs. I believe that the traditional model of having two turns a year, as many dealers do, is outdated. We have always operated at a higher level. It's essential to order the right boats and utilize our technology to ensure our inventory meets customer demand. For instance, if a manufacturer produces 14 different models, it wouldn't make sense to have all 14 available in a market where it takes a year to sell just two of them. Instead, we focus on ordering inventory in real-time, sharing that inventory, and leveraging the data we gather to ensure we have the right boats in the right locations at the right times. We're continuously improving in this area. Therefore, I don't foresee us returning to a situation where we have an excess of boats if we order appropriately.

Austin Singleton, Chief Executive Officer

Craig, I think the manufacturers have also recognized this. During 2008 and 2009, they didn't have the chance to learn how a consistent production schedule, without peaks and valleys, can improve efficiency, benefit dealers, create turnover, and increase margins. Most manufacturers will still need a couple of years to recover their inventory levels, and likely a few more years after that to maintain discipline without creating artificially low supplies. I believe they won't return to a pattern of overproduction that floods the inventory. The dealers and floor planning companies don't want that, and neither do the manufacturers. They've come to understand that inefficiencies from erratic production aren't desirable. Now, looking at our current inventory situation, it's clear that there's a collective understanding that wasn't evident during 2008, 2009, and 2010 when we were clearing out inventory. This awareness is leading to more aligned perspectives across the industry. I believe we have several years ahead where we not only need to address supply chain issues to normalize inventory but will also maintain discipline in production for some time thereafter. Eventually, greed may lead to excess inventory again, but I genuinely feel that's a good five to six years away. We're having discussions about the various tools we have, emphasizing that we don't need to manage them solely as OneWater tools. Some of these inventory management tools can benefit the entire industry by helping manufacturers stabilize their production. We see potential in leveraging these tools for broader use to assist others in managing their inventory effectively.

Craig Kennison, Analyst

And then just to follow up. What's the customer experience like? How do you manage the information flow so that as a customer, if I put money down and I have some uncertainty about when I might get my boat. Are you doing things to keep customers apprised of progress along the way so that customer feels engaged and pleased with the experience, even though it's hard to know what delivered?

Anthony Aisquith, President and Chief Operating Officer

Craig, the CRM, we're in constant communication with the consumer, and it's the way we train our employees to continue to have those touches even though we might be a year away or nine months away. We're continually touching the customer.

Austin Singleton, Chief Executive Officer

We don't have customers coming in and simply ordering boats without any engagement. If someone comes in and selects a boat, we can provide an estimated delivery date, which will be accurate within a 10-day window. We have a good idea of when the boat will be delivered based on our production schedules. While there can be shifts in the delivery date, it's not uncertain—we can set clear expectations. Our sales associates use a powerful CRM tool to communicate effectively with customers through email, text, and phone calls, ensuring they feel engaged throughout the process. We believe our customers are committed because this purchase is emotional, and requests for refunds are typically due to significant life changes rather than second thoughts about the purchase.

Craig Kennison, Analyst

Great. Okay. Thank you.

Operator, Operator

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

Joe Altobello, Analyst

Thanks, guys. Good morning. I guess, first question maybe for Jack clarification on the guidance. So you raised the EBITDA guide by $40 million to $45 million. By our math, the acquisition is better net included, which is I guess T-H, known for quality, and JF. I think those represent about $30 million to $35 million of that EBITDA. So was my math right, and the base business went up by about $10 million or so for this year?

Austin Singleton, Chief Executive Officer

You need to be cautious when evaluating the acquisitions. On a full-year basis, they are expected to contribute around $40 million. Therefore, it's important to adjust for the partial period. Additionally, JIF is a smaller business with annual revenues of approximately $5 million and EBITDA of just under $1 million. While it’s not a significant factor, it's essential to consider these numbers as you think through the potential costs and projected EBITDA for those acquisitions on a pro-rata basis for the year.

Joe Altobello, Analyst

Okay. That's helpful. And then secondly, in terms of the brands million-dollar-plus run rate that you guys talked about this morning for fiscal 24. I guess first, what's the similar run rate? I guess I can figure it out, right? If you're adding $40 million to the 10 to 20 that you've run rate for this year. But what are the assumptions around future acquisitions? Are you assuming call it a couple of parts and service acquisitions and maybe four or five dealer acquisitions?

Austin Singleton, Chief Executive Officer

Yeah. Real quick. One thing I want to point out Joe, that run rate is based off historical numbers. That's historical numbers, that's no synergies. I think another thing that's important to do is as we were ultraconservative when we were planning out that run rate. Jack, you can talk to them about what we put in as a base case for acquisitions. And then we have a historical record of doubling acquisitions on the dealership side inside 24 months. And we by no means put any of that in.

Jack Ezzell, Chief Financial Officer

Yes. If you consider a modest growth in the base business, we are planning around eight acquisitions a year, with three on the parts side and five on the dealership side. This is expected to generate about $25 million in EBITDA, which significantly contributes to the company's growth. Additionally, we have a strong track record of enhancing those dealership acquisitions by using our tools, and there is likely more potential beyond that $300 million.

Joe Altobello, Analyst

That's helpful. If I could ask one more question about the price environment, the 28% increase is impressive, mainly driven by pricing. Is there a possibility that we might see discounting in 2022, or is that unlikely given the current inventory levels?

Austin Singleton, Chief Executive Officer

I don't expect to see any discounting, especially not until the end of the season. Once we reach that point, there may be some areas in the country that experience weather-related issues. In the past, we've seen situations where a particularly wet Midwest meant that people couldn't use their boats until late June due to flooded lakes. If a similar scenario occurs, we might see some smaller dealers discounting to avoid carrying over inventory. However, looking at the country as a whole from an inventory standpoint, it's going to take time to return to a new normal. Therefore, I don't anticipate significant discounting, and if there is any, it will likely be on the low-end value side rather than the high-end premium side where we primarily operate. I don't foresee this happening anytime soon.

Joe Altobello, Analyst

It could be isolated. If we do see it later this year.

Austin Singleton, Chief Executive Officer

And then one other thing I'd like to point out, and Jack, tell me if I'm wrong. But Joe, you said the 28% comp. A lot of that was driven not just by new boat sales or pricing of the new boats but a lot of that was driven by those ancillary businesses. Our parts and service were a huge contributor to that.

Joe Altobello, Analyst

That's a good point. Thank you, guys.

Austin Singleton, Chief Executive Officer

Thanks, Joe.

Operator, Operator

Our next question will come from the line of Fred Wightman from Wolfe Research. You may begin.

Fred Wightman, Analyst

Hey guys, good morning. Do you have the organic inventory number? Just trying to parse out what is the impact of the acquisitions on that inventory number on the balance sheet?

Austin Singleton, Chief Executive Officer

I don't have the exact figure, but it's flat to slightly up. A large portion of it is due to acquisitions.

Fred Wightman, Analyst

Okay. And when you say flat to up, that's on a year-over-year basis, right?

Austin Singleton, Chief Executive Officer

Year-over-year basis, yes. Sequentially, it's up a lot more just because of the seasonality of the business in the year. It tends to build inventory through the winter. But yeah, on a year-over-year basis.

Fred Wightman, Analyst

Sure. Okay. That makes sense. And could you just give a little bit more detail on the margin performance across the new and the used segments that you saw in the quarter? It's still up big on a year-over-year basis, but that growth rate looks like it might have ticked down a bit versus last quarter, so are we at a steady-state margins here for those two categories going forward? Do you think it could fluctuate a bit given seasonality? How should we think about that?

Austin Singleton, Chief Executive Officer

I think what we are seeing is that for most brands, larger boats tend to be sold during the winter months we are currently in. As a result, the December quarter usually has lower margins. This is likely influencing the situation. However, we are seeing strong performance in our larger boat business this quarter.

Fred Wightman, Analyst

Makes sense. Within the high single-digit comp number that you are still guiding to, has the unit assumption changed? Are you planning for improved or decreased deliveries from OEMs compared to when you provided that information last quarter?

Austin Singleton, Chief Executive Officer

Yes. I think it's still a little early to tell. I mean, we're optimistic about the supply chain, but we are expecting some unique growth. But it is a balance there between pricing and growth.

Fred Wightman, Analyst

Perfect. Thanks, guys.

Operator, Operator

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

Mike Swartz, Analyst

Hey, good morning, guys. Maybe a question for Jack just around the cadence of acquisitions on the parts side, unveiling that target number for acquisitions annually. I guess how should we think about that relative to return on invested capital or just working capital intensive businesses, much more working capital intensive than dealerships?

Austin Singleton, Chief Executive Officer

Yes, they are. I mean, typically, the various businesses have funded working capital through either cash or some sort of revolver. As of right now, they don't have the floor plan facility like the boat dealerships do. There certainly will be a little more additional working capital, right? But a lot of them as well, aren't massive businesses. Quite so often we can integrate them into our existing operations, and absorb some of that working capital need, reduce some of their fixed costs to improve and cover that cost.

Mike Swartz, Analyst

Just similar lines in the service parts and other SEC reporting segment. Now that you've made a couple acquisitions there, I guess how should we think about the margin shaking out in a steady-state environment, understanding parts tend to be diluted relative to service, so is there a way to think about that?

Austin Singleton, Chief Executive Officer

In this quarter, we observed a slight decrease in our margin for service parts and other segments. In a more stable situation, depending on the pace of acquisitions, that margin is expected to stabilize closer to 40%. This will still have a positive impact on our overall margins, which are higher than boat sales. You're correct that parts typically have margins around 30 to 33%, while service labor margins are nearer to 60%. So, we will see an overall blended margin in that 40% range.

Mike Swartz, Analyst

Okay. Great. That's helpful. That's all for me. Thank you.

Austin Singleton, Chief Executive Officer

Thanks, Mike.

Operator, Operator

Thank you. And that will conclude our Q&A for today. I have no further questions in the queue. And this will conclude today's conference, as well. Thank you for your participation. You may now disconnect. Everyone, have a great day.