OneWater Marine Inc. (ONEW) Q3 2021 Earnings Call Transcript

OneWater Marine Inc. (ONEW -0.97%)
Q3 2021 Earnings Call
Jul 29, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello. Thank you for standing by, and welcome to the OneWater Marine, Inc. fiscal third-quarter 2021 earnings conference call. [Operator instructions] If you require any further assistance, I would now like to hand the conference over to your speaker today, Jack Ezell, chief financial officer.

Please go ahead.

Jack Ezell -- Chief Financial Officer

Good morning, and welcome to One Water Marine fiscal third-quarter 2021 earnings conference call. I am joined on the call today by Austin Singleton, chief executive officer; and Anthony Asquith, 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 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 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. Overall, we delivered solid results for the third quarter of 2021. Despite industrywide inventory challenges, which pressured the top line, we grew our operating margin to 16%, and we delivered record adjusted EBITDA of $66 million, an increase of 33% compared to the prior year. Sales for the third quarter of 2021 were up against an extremely difficult 44% same-store sales comp in the prior period.

As a reminder, the prior period benefited significantly from business that shifted from March 2020 to April and May 2020 because of the COVID shutdown. This year, same-store sales for the third quarter were down 11%, all driven by significant inventory shortages across the industry, but partially offset by improvements in service parts and other sales. We believe we would have posted positive same-store sales if we had the inventory. It's noteworthy that same-store sales excludes new and acquired store sales until the end of the store's 13th month of operation under our ownership.

Our Tom George Jack Group and Walker Marine acquisitions were two of our largest and leveraged our global inventory to meet the Red Hot West Coast of Florida retail environment. We ended up sharing the same-store inventory and inventory planning tools with these acquisitions, which ultimately pressured same-store sales, but is exactly where we see the power of our network of dealers and show the interconnectivity of our organization. For comparative purposes, same-store sales for the third quarter and year-to-date 2021, when compared to the same periods in 2019 were 14% and 26%, respectively. Importantly, we grew our higher-margin less cyclical service parts and other revenue by 58% compared to the prior year, which mostly offset the shortfall from new and pre-owned boat sales.

Sales activity remains robust. Door swings and lead generations continue to be strong, and as a result, our pre sold inventory is up nearly 400%. I'm very proud of the team's focus on the controllable levers that continue to drive the business forward. Gross margin expanded by a whopping 822 basis points, driven primarily by the mix of boat models sold and was further bolstered by the sharp increase in service parts and other revenue.

We continue to focus on executing our multi facet growth strategy through strategic acquisitions and growing our higher-margin business segments to help us expand our market share and drive long-term shareholder value. As a reminder, we typically pay less than four times EBITDA for a target, and we expect to cut that purchase multiple in half within 24 months. Our strong cash generated from operations fund our acquisitions, and we generally enter into long-term leases on the dealership's real estate. Now let's take a minute to talk about two of our recent announced deals.

The first is Naples Boat Mart, a third-generation family owned and operated business that expands our presence on the West Coast of Florida and complements our recent acquisition of Walker Marine Group. Naples Boat Mark represents premium boating brands, including Grady white, hurricane and key West, while offering factory training technicians to deliver quality service for its customers, including a full-rigging shop and mobile service units. We expect this transaction to close in the fourth quarter of 2021. The second announcement we made was an agreement to acquire parts view, an online marketplace for OEM marine parts, electronics and accessories.

As I said, part of our long-term growth strategy is expanding our parts and service offerings, which commands a significant margin and helps insulate the company from the cyclicality of boat sales. Parts view generated approximately $25 million in sales over the past 12 months and has a history of organically doubling sales volume annually since its launch in 2016. We expect this acquisition to close in Q4 of 2021. Our significant margin expansion and earnings growth further underscores our superior execution and efficient operating model.

Our strong partnership with our OEMs has proven and valuable, and our proprietary digital inventory and management tools allow our team to continue meeting the needs of our customers and pre selling inventory. At the same time, we continue advancing the other parts of our business that support further margin expansion and strengthen our relationship with customers. We feel very confident as we finish our year that we will be positioned well to drive long-term shareholder value. With that, I will turn it over to Anthony to discuss business operations.

Anthony Asquith -- President and Chief Operating Officer

Thanks, Austin. Customer demand remains at historically high levels with no sign of slowing down. Our sales team has done an outstanding job driving sales in this dynamic environment. Adair sophisticated state of the art inventory management tools that provide the sales team with powerful intelligence and access to our global inventory.

Every one of our dealerships, including the two largest acquisitions, have full access to our broader inventory pool. Whether the inventory is in the store or on its way to the store, our sales teams are able to sell it. As a result, our pre sold inventory is up over 400% compared to the prior year. Customers are coming to us today to order boats for next season.

They are no longer waiting for boat shows because they are wanting to ensure they get their boat in time. We don't see inventory normalizing in the near term, and we have adapted quickly and continue to drive sales. In addition, we are focused on levers within our control, including building out the higher-margin areas of our businesses. Service parts and other revenues surged 58% to $30 million with approximately 50% dropping to the bottom line.

We see tremendous growth opportunities with these non-boat related business lines, and we'll continue to expand in these areas. As Austin mentioned, our efficient operating model allows us to do more with less, which is reflected in our industry-leading operating margin of 16%. We remain focused on stellar execution and further expansion of our business. I will now turn the call over to Jack, who will talk about the financials in more detail.

Jack Ezell -- Chief Financial Officer

Thanks, Anthony. Third-quarter revenue decreased 1% to $404.2 million in 2021 from $408.3 million in 2020, fueled by a decline in same-store sales of 11%. This decrease was primarily driven by the industrywide supply chain shortages and partially offset by improvements in service parts and other sales. New boat sales decreased 2% to $288.2 million in the fiscal third quarter of 2021 and pre-owned boat sales decreased 9% to $71.1 million.

Finance insurance revenue decreased 8% to $15.2 million in the third quarter of 2021, and revenue from service parts and other sales increased 58% to $29.6 million compared to the prior period, mostly offsetting the shortfall in boat sales. Gross profit totaled $127 million in the third quarter compared to $94.7 million in the prior year, driven by an increase in the margin on new and pre-owned sales and the shift in the model mix and size of the boats sold. Additionally, higher-margin service parts and other sales contributed significantly to the increase in gross profit. As a percentage, our gross profit margin increased 822 basis points to 31.4%, compared to 23.2% in the prior year.

For the fiscal fourth quarter of 2021, we expect continued elevated margins due to the lack of inventory at higher than historical averages, but is dependent on inventory and model mix. Selling, general and administrative expenses increased to $60.5 million from $43.1 million, SG&A as a percentage of sales increased to 15% from 10.6% in the prior year. The increase in SG&A as a percentage of sales was primarily driven by the higher variable personnel costs driven by the increased level of profitability compared to the prior year. Operating income rose to $64.9 million from $50.7 million in the prior year, driven by expanded gross profit, partially offset by higher SG&A.

And as a result, adjusted EBITDA rose to $65.5 million compared to $49.3 million in the prior year. Net income totaled $51.6 million or $3.04 per diluted share in the fiscal-third quarter of 2021, up from $40.6 million or $2.36 per diluted share in the prior year. As of June 30, 2021, our cash and cash equivalents balance was $113.2 million, an increase of $25.3 million compared to $88 million in the prior year. Total inventory as of June 30, 2021, was $116.9 million compared to $171.3 million in the prior year due to the industrywide supply chain shortages.

Inventory hasn't been this low since 2017. As Anthony mentioned, our pre sold boats are up 400%. And while customer deposits are not a perfect indicator of presales and can be lumpy at times as of June 30, 2021, they are up to $43.1 million, more than three times the prior year amount. Total long-term debt currently stands at $115.7 million.

And when you subtract the cash and cash equivalents, adjusting for the pending dividend payment, yields a very low net debt to adjusted EBITDA ratio of 0.2 times. From a capital allocation perspective, we are focused on reinvesting in the business to accelerate organic growth and strategic M&A opportunities, as we have discussed. Looking ahead for the full-fiscal year 2021, we are raising our outlook for adjusted EBITDA to be in the range of $150 million to $155 million and diluted earnings per share to be in the range of $6.6 to $6.80, excluding any additional acquisitions that may be completed during the year. However, based upon the continued broad-based inventory challenges in the industry, near term, we now expect same-store sales to increase approximately 10% for the full fiscal year 2021.

This outlook assumes one waters manufacturers can maintain production at the current pace, allowing us to deliver pre sold units and build inventory in the face of the industrywide supply chain constraints. This concludes our prepared remarks. Operator, will you please open the line for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Drew Crum with Stifel. You may proceed with your questions.

Drew Crum -- Stifel Financial Corp. -- Analyst

OK. Thanks. Good morning. I know you're not providing guidance for fiscal '22 yet, but you mentioned that you don't expect inventory levels to normalize anytime soon.

So given that dynamic and some tough comps, at least over the next couple of quarters, how should we be thinking about same-store sales performance? And then separately, maybe for Jack, the gross margin performance, you cited boat mix and service and parts growth. It sounds like you're anticipating something similar in fiscal 4Q. Should we anticipate a similar gross margin lift beyond fiscal '21?

Anthony Asquith -- President and Chief Operating Officer

Jack, do you want to take that? Jack?

Jack Ezell -- Chief Financial Officer

Yes. On the same-store sales note, we're doing a lot of work in around 2022 and projections right now. So not really prepared to speak to that. I think that we're looking for our manufacturers to provide adequate inventory.

I know they're faced with a lot of supply chain constraints. And so I think as we get more and more information out of them, it will be easier for us to get a better projection on same-store sales. I mean, we do feel like when you look at the quarters, and there's back the March quarter, we were 57% same-store sales. I mean, that's going to be an interesting comp to go up against.

So there may be some variability through the year. I think though that there is demand from what we're seeing today that there's demand that will continue to drive a positive same-store sales. So we got to work through this inventory challenge and, I think, move that forward. As far as gross margins, I mean, I do think so long that inventory continues to be constrained, we're going to do what we have to do, and we think that's going to present a more favorable margin environment.

I wouldn't go about modeling things up 822 basis points. But I certainly expect them to be elevated as we go forward.

Anthony Asquith -- President and Chief Operating Officer

One other thing I'd like to add to that, too, though, is that we're going to continue to be aggressive on our acquisition platform. And as we noticed in this quarter that when you take a dealership that we've acquired and you allow it to pull from the global inventory, that could have an impact on same-store sales, if that particular market is hotter and they're able to get additional inventory, but in the past, they attend. So with the Tom George and walkers, those acquisitions, they had their inventory that they had ordered for the year. But now they had this global inventory that they could pick and choose from as needed, and they were able to generate some sales.

So as we continue to move forward and lay in Stone harbor and Naples Boatman and some other acquisitions keeping that cadence that we spoke to, that will put a little pressure on same-store sales, while the inventory constraint is where it is today.

Drew Crum -- Stifel Financial Corp. -- Analyst

But I mean, ultimately, that's just a good business, and it's going to drive additional EBITDA growth for the company. Got it. OK. Thanks guys.

Operator

Our next question comes from Mike Schwartz with Truist Securities. You may proceed with your question.

Mike Schwartz -- Truist Securities -- Analyst

Hi guys. I don't think inventory constraints are all surprising to anyone who covers this industry. But I think when we go back to late April, your last conference call, I don't remember kind of the commentary being maybe as buyer from the inventory situation as maybe it is today. So maybe give us a sense of what happened over the past few months, whether that was retail demand related or whether that was maybe OEM production related?

Jack Ezell -- Chief Financial Officer

Well, I mean I don't think it was -- retail demand. I mean, retail demand has remained pretty consistent and strong. I think the bigger issue is the OEMS, and it's kind of like -- if you have a load of boats that's coming in that gets put two weeks, that can hinder a quarter. But that load getting pushed two weeks, pushes the next low two weeks or three weeks, which pushes the next load four weeks.

So it's kind of like a domino effect that keeps pushing it out. And I think that we were confident after talking with our manufacturers back in April that they had kind of started to feel they were over the hump, but I think they didn't realize that it was other things that were going to sneak up and buy them. Anthony, do you want to add more to that?

Anthony Asquith -- President and Chief Operating Officer

Yes. It's just been a constant between Gelco and foam and everything else that goes in has been a shortage of it started back in February in that storm in Texas that really -- I guess we all didn't realize how many things were built out of Gelco.

Jack Ezell -- Chief Financial Officer

Another thing, too, though, is, I mean, the consumers themselves have been pretty understanding and patient. And so when you get to the end of a month or the end of a quarter, that last seven days can really make an impact because if you don't get what you're suspecting to get, it pushes into the next month or the next quarter. And so we're not losing the sales. It's just getting delayed.

And like we spoke of in the opening comments, we really kind of dug into that and that pre-sold inventory that we've got coming in is -- I mean, it's north of 400% of where it was this time last year.

Mike Schwartz -- Truist Securities -- Analyst

Thanks for the color there. And maybe just for Jack, maybe give us a sense on the new boat side, particularly what units versus pricing look like during the quarter?

Jack Ezell -- Chief Financial Officer

Yes. I would say it's largely driven by price. Units were in the quarter were down slightly. But it's in this environment, command from the pricing perspective that we're pushing.

Mike Schwartz -- Truist Securities -- Analyst

OK. Great. Thank you.

Operator

[Operator instructions] Our next question comes from Joe Altobello with Raymond James. You may proceed with your question.

Joe Altobello -- Raymond James -- Analyst

Thanks. Hey guys. Good morning. So first question is just a housekeeping item.

The guidance that you gave us this morning for EBITDA and EPS, does that include any contribution at all from the recent acquisitions? Or you to.

Jack Ezell -- Chief Financial Officer

Yes, those will roll in when those acquisitions close. With us being so close to the year-end, if we're able to close one or two here before we get to the year-end, I don't think it will move the needle much.

Joe Altobello -- Raymond James -- Analyst

OK. Got it. And in terms of model year '22 s, we're hearing some pretty big numbers in terms of price increases. What are you guys seeing in terms of pricing for the model for the new model year, is there any concern about passing on to the consumer? And could that put potentially downward pressure on both margins next year?

Anthony Asquith -- President and Chief Operating Officer

I don't think so, Joe. I mean, every year, when pre coke it, we always had 3% to 5% price increases. A good part of that had to do with content that the manufacturers are doing. So I think the consumers are pretty used to it, and the demand for boating continues on.

So I don't think that's going to be an issue.

Jack Ezell -- Chief Financial Officer

One thing, Joe, that -- and I spoke to this once, the one thing I'd like to point out, it seems the consumer, especially in the spot spaces, it's really moved more toward the cost of ownership versus the cost of the purchase or the purchase price. So we have started really working with our sales associates to really work on kind of pushing the consumer -- this is what it's going to cost you to have this boat for two, three or four years. And when the preowned market is just nonexistent today, it's really driven up the price of pre-owned boats. So when you start looking at a customer -- or talking to a customer that's looking at $0.25 million ski boat and they kind of figure out to own that boat for two to three years, using it at the normal hours is going to cost less than going and buying a severally suburban on a monthly basis, it's not hard to get them to pull the trigger.

And so I am very confident because it's been a worry of mine -- pretty much my whole entire life in this industry. Oak prices just go up a ton every year, but it's never been hard to pass that on to the consumer. And I just don't see that being an issue going forward.

Joe Altobello -- Raymond James -- Analyst

OK. Got it. Just one last one, if I could. The three acquisitions that you just announced, it looks like the combined revenue is about $90 million or so over the past 12 months, how should we think about the revenue and EBITDA contributions from those acquisitions next year?

Jack Ezell -- Chief Financial Officer

Yes. I think you hit the revenue number right there. A typical acquisition of those size will bring a couple of million dollars-worth of EBITDA to the company. Parts view is a little bit different.

That entity is in significant growth mode. So there's a lot of reinvestment and additional spending to grow that. So that one will have good gross margins, but its EBITDA margin will be less than optimal as we continue to push its rapid growth.

Joe Altobello -- Raymond James -- Analyst

Ok. Great. Thank you guys.

Operator

Our next question comes from Brett Andress with KeyBanc Capital. You may proceed with your question.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Hey. Good morning guys. I think, Jack, you mentioned presales were up 300% year over year. Is there any way to kind of frame that up in terms of, I don't know, that one, two, three months of sales? And then, I guess, how have the pace of those presales been here in July? And any change in cadence or trajectory there?

Jack Ezell -- Chief Financial Officer

Yes. No, the pace is continuing to grow. It's tough to really -- there's a lot of details behind that as to when they'll fall in. We typically need to get the both from the manufacturers.

As soon as they're delivered, trust me, customers are chomping at the bit, and we're pushing to get them turned around absolutely as quickly as we can. But we are starting to hear customers say things like even this late in the season, maybe a customer who would normally maybe come to a boat show and put an order in for next season, they're coming in at the end of this season, saying, "Hey, we want to go ahead and let's get a boat on order. So we know for sure it's going to be here next season." So that's helping that backlog to continue to grow. And we're working with manufacturers to get those both slotted, built and prepared for the customers.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Got it. OK. And then just on parts view, I think that was an interesting acquisition there. But I mean does that fill a need or give you an advantage in your PS&O business? Is there a scarcity of parts out there? And now you all of a sudden have them? I'm just kind of curious how that fits the broader picture here.

Jack Ezell -- Chief Financial Officer

No, I don't think there's a scarcity of parts at all. I think what it does is it gives us a platform that we've been looking for to really set us up differently. I mean one part of the Arity has been growing great on its own. The platform is solid Philip and his team are really passionate about it.

And so we can kind of leave it in his wheelhouse to grow it. I think we bring some buying power. I think that there are some things just by us bringing it into fold that we can help accelerate not only the top line but the bottom line, but it does give us that platform that I've been seeking in order to really bolster up our P&A to get to where we can get into a meaningful loyalty program, subscription model, keeping the customers in our fold. And so it's a very important piece of the puzzle, and we're super excited about it.

And I think what excites me more than anything is the guy that's going to run with it was super passionate about it, and he's been incentivized to really help us make that thing explode.

Brett Andress -- KeyBanc Capital Markets -- Analyst

And then just the last one on parts to you. I mean, it's a smaller business, but it's growing rapidly. Just what is the margin profile of that versus your current PS&O business?

Jack Ezell -- Chief Financial Officer

Yes. I'd say at the gross margin level, it's similar. It's a parts margins in the low 30s. But it's -- right now, as far as from an EBITDA margin, it's lagging a little bit.

It's profitable, but it's not what you would expect because of that reinvestment in its growth.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Got it. Thank you guys.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Jack Ezell -- Chief Financial Officer

Austin Singleton -- Chief Executive Officer

Anthony Asquith -- President and Chief Operating Officer

Drew Crum -- Stifel Financial Corp. -- Analyst

Mike Schwartz -- Truist Securities -- Analyst

Joe Altobello -- Raymond James -- Analyst

Brett Andress -- KeyBanc Capital Markets -- Analyst

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