Q3 2023 OneWater Marine Inc Earnings Call
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Good day, and thank you for standing by and welcome to the one water Marine fiscal third quarter 2023 conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question. During this session you'll need to press star one one on your telephone and you'll hear an automated message advising your hand is raised to work.
Draw. Your question. Please press star one again please.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.
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Good morning, and welcome to warm water Marines fiscal third quarter 2023 earnings conference call I'm joined on the call today by Austin, Singleton, Chief Executive Officer and Anthony.
<unk>, 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 one water Murray 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 fat.
<unk>, 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 on the company's website candidates 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.
Thanks, Jack and thank you everyone for joining today's call.
I'd like to start by commending our team for doing a tremendous job driving increased sales and maintaining flat same store sales in this dynamic and changing environment.
Especially as we lap a comparable period of double digit same store sales growth in the biggest quarter of the year.
The selling environment deteriorated in the third quarter.
However, our team rose to the challenge.
In the face of double digit declines in industry unit sales, we delivered flat unit sales and same store sales.
With our sales pace outperforming the industry. We believe this results in increased market share for one water.
We also maintained a very healthy inventory level of 17 weeks on hand, the industry average is approximately 28 weeks and as it continues to build some believe the industry inventory levels will grow to 35% to 40 weeks on hand.
This will undoubtedly lead to a more promotional environment and put further pressure on new boat margins.
Our proactive approach of reducing inventory early will pay dividends in future quarters by reducing <unk> costs and other carrying costs more.
More importantly, going forward, we will have a good supply of 2020 for inventory.
Which had a very modest price increase this year.
We believe this puts us in a competitive position compared to an industry overloaded with 2023 models headed into the fall and winter.
We are increasingly cautious as demand signals are pointing towards a retail slowdown traffic.
Traffic at the height of the season slowed as evidenced by declining industry units in what is considered the prime selling season.
As we move out of the summer into the fall customers may delay their purchases, especially because inventory is plentiful and there may be better deals to be had in the spring.
In addition, with interest carrying costs continuing to rise and expect it to stay higher for longer this will cause a significant headwind for certain industry participants.
As margins and interest rates are starting to settle into the new normal we must start to look inward mainly at SG&A to get back to our target EBITDA goal.
While our SG&A costs as a percentage of revenue are reasonable at 16%. We have identified several areas to help offset these gross margin declines and outsized interest costs.
Given all those factors, we are taking a very cautious approach to our outlook and are lowering our full year guidance.
Our business is resilient and we are taking taking prudent action to ensure that we can capitalize on the new normal and emerge stronger we believe that our strategic approach to exiting the season with clean inventory positions us well for the quarters to come.
Additionally, the M&A deal pipeline is getting more and more attractive and there can be some steels to be had in the future.
We are looking at all levels of the business and are confident that by accepting the short term pain of the industry adjustment. We have set course for a solid future and attractive free cash flow generation.
That I will turn it over to Anthony.
Thanks Austin.
Our teams remained active during the selling season to drive solid revenue growth.
Challenging market.
<unk> were driven by double digit growth in pre owned boat sales supported by increased trade ins over the last few quarters for customers looking to finance their boat purchases credit remains widely available in line with what we've been seeing throughout the year as rates go up the average customer does become a little more interest rate sensitive which.
Led to the flat finance and insurance income year over year.
Our parts and service business continues to grow nicely and sales are up 23% in the quarter and 38% year to date.
Our dealerships are executing well and the distribution business is starting to turn the corner on the Destocking that occurred at big box retailers over the last several months.
It has not had a material impact.
On our results. This quarter, we are beginning to see orders from these retailers trickle in and expect them to ramp up this winter.
Moving to inventory as Austin mentioned, we are hyper focused on carrying appropriate inventory levels through the end of the selling season and into the seasonally slower winter months inventory as of June 32023 is down modestly compared to the end of Q2, and we expect the seasonal decline further.
We are.
<unk> operating at a 17 weeks of inventory on hand, compared to an industry average of 28 weeks.
We will enter the 2020 for selling season with a fresher inventory mix than many of our competitors.
This coupled with a more moderate price increase from the manufacturers, we can be extremely competitive as the 2024 models will be easier to sell than prior year models.
While we are comfortable with our inventory position some industry information suggests that inventory and overall dealer channel has built up.
<unk> 2019 levels.
As we move forward. We believe this will give us a competitive advantage against the other dealers.
The higher carrying costs and the interest expense for dealers with aged and non current inventory creates a significant drag on the earnings and cash flows. Thus we believe our proactive approach will benefit us significantly in the long term.
As we have said before there are many levers to pull as we adjust to the new sale levels and margin expectations.
We are focused on adapting our SG&A expenses to support the current operating environment.
We also expect G&A expenses to continue moderating as we further integrate acquired parts and service businesses.
We remain focused on executing our playbook and positioning one water for continued success in any environment I will now turn the call over to Jack to review the financials.
Thanks, Anthony fiscal third quarter revenue increased 4% to $594 million in 2023 from $569 million in the prior year quarter, yielding same store sales that were flat for the quarter, New boat sales decreased 1% to $372 million in the fiscal third.
Quarter of 2023, and pre owned boat sales increased 14% to $111 million.
Service parts and other sales continued to positively impact our results climbing, 23% to $92 million driven by the contributions of our recently acquired businesses and our operations.
Overall gross profit decreased 13% to $159 million in the third quarter compared to the prior year driven by the normalization of gross margins on both sold.
Gross profit margin fell to 27% as a percentage of total sales.
As expected the investments made in service parts and other businesses have softened the decline in overall gross margins as boat margins normalize.
Third quarter 2023, selling general and administrative expenses increased to 93 million from $88 million in the prior year.
SG&A as a percentage of sales was 16%, which was flat compared to the fiscal third quarter of 2022.
The increase in SG&A.
Expense on a dollar basis was primarily driven by higher expense structure of our acquired parts and service businesses as well as higher advertising expenses compared to the prior year, which supported our increase in sales.
These increased costs were.
Were mostly offset by a variable cost structure, where expenses have started to adjust down with the decline in gross margin.
As the industry normalizes, our flexible SG&A expense structure is a lever we can pull to drive future profitability.
Operating income decreased to $60 million compared to $88 million in the prior year and adjusted EBITDA was $60 million compared to $95 million in the prior year. The decline in adjusted EBITDA was due to the reduction in both gross margins and same store sales being at the bottom of the expected range combined with higher.
Floorplan borrowings and related interest costs.
Net income for fiscal third quarter totaled $33 million or $1 95 per diluted share from $64 million or $3 86 per diluted share in the prior year.
Contributing to this decline was an increase in interest expense, which was $17 million in the quarter up from $4 million in the prior year.
This increase is a result of rising interest rates and increased average borrowings on our debt facilities.
Turning to the balance sheet as of June 32023, total liquidity continues to be in excess of $100 million, including cash on the balance sheet availability under our revolving line of credit and floor plan facility.
Total inventory as of June 32023 was $573 million.
And has increased year over year as the supply chain has come back online and as we integrate our recent acquisitions our inventory remains healthy at approximately 17 weeks on hand, and we expect inventory will continue to decline sequentially until we've regained the seasonal build in the fall.
Total long term debt as of June 30 was $458 million adjusted net debt or a long term debt net of cash was two two times trailing 12 months EBITDA.
Our liquidity and leverage position remains in a comfortable range and we continue to use cash to pay down our floor plan, which has the highest interest rate, providing us with financial flexibility as needed.
Moving to our outlook, we are updating our guidance as a result of the accelerated normalization of the industry. We are guiding same store sales to be flat to the prior year and expect adjusted EBITDA to be in the range of $160 million to $170 million with earnings per diluted share to be in the range of $4 45 to $4 70.
Per diluted share these projections exclude any acquisitions that may be completed later this year.
We will continue to maintain our current capital allocation strategy supported by our strong free cash flow generation. The M&A pipeline is robust and deals are beginning to look very attractive as we continue to navigate this dynamic environment. We remain focused on positioning one water for the continued long term success.
And maximizing value for our shareholders. This concludes our prepared remarks, operator would you. Please open the line for questions.
Yes. Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile our Q&A roster.
Our first question comes from the line of Joe <unk> of Raymond James. Please proceed.
Thanks, Hey, guys good morning.
First question for you Austin, and it's sort of a big picture question, and maybe where do you see pricing and <unk>.
Margins going next year across the industry, particularly if inventory continues to build.
If I look at your new boat margins today, yes, they're down, but they're still above where we were pre COVID-19. So I guess do you think we ultimately go back there at some point.
Yes, Thanks, Joe.
Pricing that's one that's one thing we're encouraged about pricing doesn't seem to have.
Risen that much from the manufacturers here. So it's a pretty modest price increase from the majority of our measure manufacturers, probably 3% or less in a lot of those contacts or engine, so where we're super optimistic 2020 core as far as the price increase is going to give us a little bit of <unk>.
<unk> room.
And let us be a little bit more competitive.
Inventory stays as high as it is on the 2020 threes.
Margins, we didn't expect with what we saw in this last quarter really started right before.
Oriel de Palma, Boston Globe wildly happen, so perhaps an update the realisation kicked in for the majority of the industry when they got that April interest Bill.
Floorplan manufacturers in late May and we saw how much they were going to be spending every month on inventory clearing through the summer and into the call and that is one deep discounting.
We have seen some promotional activity from some manufacturers, which is starting to come on board, which will help maybe ease some of that groundwork turned the margins, but I would say our comfort level.
Maintain where they are right now is kind of low I mean I would suspect.
Margins are going to deteriorate, a little bit more and the.
The hope would be that for US is that you gave us some promotional activity out of the manufacturers, but also that we get this inventory clean room, when we start selling 2020 fours at a higher margin in its 2023.
That's a pretty easy so when you match those two up with the customer.
Inventory is still extremely scary.
We're comfortable with where ours was.
The industry is.
It's going to take a while for it to flush through.
Gross positive positive trends from July .
We have a good July .
We're hearing some preliminary results from out of Wells Fargo for what the industry did in July So maybe maybe it'll turn balance is going to be.
Threading, the needle is going to be kind of what we're going to have to do over the next six to nine months.
Got it very helpful on that and then maybe a second question on M&A, you sort of alluded to the very attractive.
Pipeline.
It's been a while since you've done a deal or acquisition. For example, so help us understand how you're thinking about your M&A strategy here in late late fiscal 'twenty, three and maybe into fiscal 'twenty four.
Yes, so we go back some time and boosted our deals I mean, it's kind of a match.
Math equation, but so high level, but if you go back and look at the deals that we've done in the past and you just took them for what they were before we get them.
You adjust their pricing just the revenues up for the price increases that we've seen on new boat sales now remember the majority of the deals that we end up doing we are looking at a mom and pop 90, 90, 585% of our revenues coming from new boat sales.
New boat sales are appointment, they're really really good quality or anything else at this time.
All of the other business operations get drug along with that so when we went back from local garden adjustment sales with old margins you're contemplating.
With the curtailments, we're going to be what interest carry was going to be.
Making north of 5%.
Net profit you are going to run out of cash.
And so we're kind of sitting back going okay.
This is not does not good so there.
To bring some good deals and we've already started to look at a couple of deals where it's almost like Tulsa and the key is like.
If you can take over my inventory obligation and give me a lease it's yours.
And we think that will become a little bit better a little bit more available to us as we work through this winter because we haven't seen.
We're at around 8% I think on a foreclosed asset is that right. Yes, that's correct, yes, and the majority of the industry, it's north of 10.
And so that's going to be pretty good as we go through the winter so youre going to have some.
These dealers will have already.
Thinking about selling.
I hate to use the word <unk>, but have great businesses I don't know if were going to really want to fight through another.
What cycle, we're going to go through and so it's going to be interesting interesting over the next six months from an M&A perspective, but we're already starting to see those deals where we take wound closure obligations and imminently.
So.
That's still to come our way. So maybe there is a way that we can start working with some of the boxes I don't want all of that old inventory. So hopefully we can partner up with some of the boxes will help us do that especially with the dealers.
Let's take the nine months on the M&A side.
Interesting.
Okay.
Thank you.
One moment for our next question.
This question comes from Michael Swartz of tourists Securities. Please proceed.
Hey, guys good morning.
Just one for you Jack quickly.
Yes.
Slightly negative price was slightly positive.
Okay.
It does sound like you gained market share but.
It also sounds like at least Directionally you are talking about things getting worse in the quarter and particularly since when you gave guidance in early may but I mean, we've obviously seen the Ssi for May June and your commentary for July seems pretty positive. So is this just more of a.
One pricing promotions gotten worse too you guys are planning to take it on the chin a little bit more than you maybe thought.
And reduced inventory.
So, but you are in a better environment going into fiscal year 'twenty did I frame that okay.
Before one underperformed.
This is a this is a.
The competitive landscape.
On Easter Memorial day.
And then by the time, we got into June .
Yes.
U S vaccines for every deal.
The point where customer with.
Paul.
Well the relationship given the price they believe a format three days later with a competitor with a much better place.
Yes.
Welcome.
Benefits and sell them given the weak life. They Liza four five days and come back with the key suppliers.
It is really worth every deal.
No blood loss.
100% of what we saw.
Yeah, Michael I would also say.
We exited last quarter right, we had a double digit same store.
That we achieved in the quarter and felt it was going to also pull back.
And we're already getting a lot of <unk>. So that 17 weeks on hand, if you look at the inventory, but the accident cost money.
That's a 23 three inventory and so as long as that continues to run down fast and weeks on hand.
I would say to 17, but it's because we receive in 2020 fours. That's fine with me because that really doesn't have a clear read across to us that we do with marine Ethan there, yes, no I'd say, we're very comfortable in the mix of that inventory of 23 versus <unk> 24 is really key because what happens is we as we rollout the rest of this.
Calendar year right. The 20 threes are still still feel very current when I'm selling it in 2023, but when we get into the <unk>.
The spring time.
Dealers are going to be carrying 2023 into the.
The spring boat shows some of the Winter road shows.
We're going to have our 23 inventory.
Pretty lean and as.
As we work through it over the next several months so that composition that makes a huge difference.
Most do as well right. When also was talking earlier about pressure on other dealers.
As that inventory gets older they are having to make pay down.
<unk> balance on that boat and a period of time, where there is low cash flows and having to pay that 10 plus percent interest plus curtailments on that boat.
In November and December when sales are seasonally slow we will put pressure on them too.
To liquidate boats at lower prices so.
We're comfortable with our position, we just not 100% sure where the industry will be.
Okay. That's super helpful. Thank you.
Okay. Thank you.
One moment for our next question.
Next question is from Kevin Condon from Baird. Please proceed.
Hi, Good morning, everyone. Thanks for taking my question.
I wanted to ask a little bit about if youre seeing anything across different categories.
I guess value versus premium parts.
Of your offerings I think earlier this year.
Would that the premium end was faring, a little bit better and I just.
Wanted to ask if that was still the case and then on a related note.
If you've been seeing any pushback from customers around just the affordability of boats given you know the last two three plus years.
Rice moves and just.
If theres anything that manufacturers are dealers.
Are doing to try to address those affordability concerns.
Yes.
All of them all.
This is the price and we saw a sizeable install let me emphasize Rob all the.
That's where you look at the bottom and we're not seeing anything that's different than what the SSR Davos showing from <unk>.
Category.
We can look at it and say.
One thing I would say, we're big pontoon dealer. So pontoons has been very good for us Luckily, that's a sidebar, which says that downward a little bit so you.
And you just look at the asset side that and we're kind of in line with that from a segment perspective.
Now, we absolutely can deal because what we.
We consider the majority of our brands premium per where we're selling them, but then there's also this.
The premium is just data.
Just like premium 80 fleet and bigger 60 figures biggest SaaS. So when you looked at a 45 foot pontoon boat.
We consider that premium so playing on the hotel of up well, but really what held up better than easily is the folks that have a longer build time. So you can build a boat in eight weeks close as oppose it takes 22 weeks to bill because it's a more complicated built there's less supply so that demand is still there.
And those will be used in are still sold out into the future we still have that.
Once that they can build quickly now I don't even know quickly it's the ones that basically.
Kind of like production instead of.
So the sort of built on that are still premium, but they are the ones that we've got more inventory on so premiums are definitely holding up well.
<unk> got a longer build time on the <unk>.
We're not seeing.
I mean, it's just timing.
Generic across all brands and segments right now it's not.
Yeah.
The premium stuff is holding up to answer. This question. The premium stuff is holding up very well the entry level stuff and the people that are more conscious prefinancing Rb.
They didnt go away they are just being a little more cautious.
With the rates have risen quite a bit.
We're still selling that they haven't shut off by no means but our premium inventory is still selling very well.
Real quick on the pricing.
I think we're seeing the manufacturers understanding that.
The price increases we got this year.
We have the majority of our main axes of sub 3% and as Pom Pom and almost 3%. So we almost feel like of the majority of them are flat or close to flat.
And that's a good thing but.
Yes, low prices over the last three years.
Huh.
Thank you.
Thank you. Our next question. Please one moment.
Okay.
Since our last question coming from Christian Brian at D. A Davidson. Please proceed.
Hi, this is Brent or <unk> with D. A Davidson just one question.
You had talked.
About seeing increased promotional activity from the Oems could you talk about what youre seeing in terms or how that's evolved maybe from the beginning of the summer to where we're at right now and maybe from both our retail and wholesale incentive perspective given.
You know what's going on in terms of our dealer inventories.
Yes, I think they are all kind of come out with their same.
Stephanie has done in the past we saw it off with like.
They are accessible rebates, so both Michelle when you got to buy online.
I would like to get this discount, but it's on the order of both safety and a few weeks.
We sell it in the order another fleet of 'twenty 'twenty four to replace that you get.
<unk> 3000, 5000, $8000 discount off of 'twenty 'twenty, four that's kind of where it starts and when we see it more into the.
The more incentives just a move print inventory I.
I think Malibu came out with their.
Layaway program, but some of that I think it's been super successful.
They're all starting to kind of go back to where they were pre COVID-19 when inventories will build demand needed to move that up and there is just kind of a transition where it starts off Hawaii, when it's finalized and sell one by one and then it's like Okay. We need to accelerate that so then its just discounts and I expect that to continue to ramp up as we get into that.
Through the fall and winter season, I think a lot of the manufacturers orders and we right now because people are looking at that interest statement from the old line companies going Oh, My gosh, not a big number and we got to get rid of this inventory.
Okay, Great and just one follow up I know you have exposure to the pontoon industry, but also the ski slash weight category and I know the Ssi data there has been a little weaker could you comment on what you think has been going on in that portion of the industry.
Yes.
A little bit of it's price driven.
The guidance pricing.
I also think the reverse.
When you go and you looked at.
The amount of blue or master craft are correct ramped it.
Making that number 300 Grand and you can go buy a cobalt with the reverse drive debt that has a lot of the same abilities, it's not a competitive.
But we're gonna be wastewater <unk>, certainly seen or 85% of your Tom that virus still buying the inboard so tow boats, but if you're only doing it 20 or 30% of the time of 40% of the time and everybody likes. It those are those slots or really panel starting to kick in and really are related to.
Consumers because this is different.
<unk> adds a little bit better in rough water, it's a little bit faster than the top end and it's less expensive. So when we look at the cobalt reverse drive I mean, we're doing both of those are almost they're hard to keep it soft right now.
So that's a little bit I think of the decline in prices has a little bit to do with it also.
Could I just would also add on the <unk>.
Pontoon segment, Ryan that's a really wide segment.
A lot of units and value units that we don't have that debate in.
And so I think our higher end punching consumers private little more resilient.
And we're doing a little bit better in that category than maybe the Ssi number suggests.
Okay, great. Thank you.
Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
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