Q2 2024 OneWater Marine Inc Earnings Call

Participants

Jack Ezzell; Chief Financial Officer; OneWater Marine Inc

Philip Austin Singleton; Founder, CEO & Director; OneWater Marine Inc.

Anthony Aisquith; President, Chief Operating Officer, Director; OneWater Marine Inc

Drew Crum; Analyst; Stifel

Presentation

Operator

Good day and welcome to the OneWater Marine Incorporated Second Quarter 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Mr. Jack as its Chief Financial Officer. Thank you, and over to you.

Jack Ezzell

Good morning, and welcome to WorldWater Marine's Fiscal Second Quarter 2024 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 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 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 restaurant relations section of the Company's website and 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?

Philip Austin Singleton

Thanks, Jeff, and thank you, everyone, for joining today's call. Our second quarter results were in line with our expectations at the start of the year as we continue to see the industry stabilized towards historical cycles, same-store sales were down 5.1% as anticipated, considering the more normalized demand environment and the return of seasonality, however, we significantly outperformed the industry, which market data indicates was down 16% through March from where we stand today.
Consumer sentiment is holding and we continue to sell boats and grow our market share. Sales dynamics from the first quarter largely carried into the second quarter as customer buying patterns mirror typical seasonality and an increasingly competitive selling environment. Pricing continued to moderate, which we expected through the first half of the year and will continue fluctuating with seasonal trends. Year to date, we have experienced more normalized pricing, solid finance and insurance penetration and an inventory build peaking in February, all in line with historical standards.
Thus, we believe we are headed towards a more typical year for ONE water in the industry. As a reminder, we historically build inventory levels during the winter months from their volumes ramp, starting with the winter boat shows and through the summer selling season during the coming summer months, we expect to work inventory down to an appropriate level in preparation for the next model year boat as we assess the business with where we are in this yearly cycle.
Our performance is tracking in line with seasonal pre-COVID metrics, reinforcing the strength and durability of our business model. As we have said before, we have grown significantly since 2019 through strategic acquisitions and strong execution of our integration playbook. As a result, we expect our baseline to reset higher than what we saw pre-COVID as the industry normalizes, but we continue to manage the business prudently with our ongoing focus on expense management.
We had a solid first half of the year and our variable cost structure allowed us to better align our SG&A expenses with market demand. However, given the degree of uncertainty in the marketplace, we found it prudent to proactively take further action to reduce costs. These actions went into effect late in the quarter, but we expect to see results in the back half of the year. We have additional flexibility should we need it, and we continue to monitor our expense structure to adjust for changes in retail activity.
Accordingly, we remain cautiously optimistic nor may maintaining our previously issued guidance turning to M&A, the deal pipeline remains active, and we continue to monitor the market for opportunities that support our growth objectives. As announced in yesterday's press release, we have closed on the acquisition, Garden State yacht sales of premium sales, parts and service and marine facilities.
The acquisition bolsters our presence in the mid-Atlantic U.S. through a low risk low cost transaction that complements our Stone Harbor location. We are excited to put our proven integration playbook to work and capitalize on the strong upside potential of this acquisition as we move through the back half of the year. We believe we are on the right trajectory for our business. While we continue to monitor monitor various macro economic headwinds, I'm confident we will extend one Water's track record of successfully navigating through various economic cycles.
With that, I will turn it over to Anthony to discuss business operations.

Anthony Aisquith

Thanks. And we continue to see buying patterns on a good pace following the start of the fiscal year. The promotional environment is holding steady and with inventory peaking in February, we are confident in our position as we move into the summer selling season. With the return of seasonality. New and pre-owned boat sales are holding up well. As expected, demand for larger boat offerings remains healthy and this is in line with the typical mix seen during the winter months. I am pleased that our finance and insurance sales appear to be stabilizing.
Credit continues to be available and customers are using it as we have mentioned before, we have historically targeted finance penetration north of 60% of new bulk customers. We are still tracking above this range, giving us confidence as we move forward in this operating environment. Our servicing parts and other sales businesses continue to do well. Factoring out the impact of the businesses we disposed of last year. Our dealership segment service parts and other sales are up.
Our distribution segment continues to be challenged by lower sales to boat manufacturers who have reduced production for 2024 in response to excess dealer inventory throughout the industry. We expect this to continue to pressure results for the remainder of the year. For the long term, we are encouraged by our large installed base as the wave of new boaters has embraced the boating lifestyle over the last several years.
We expect to benefit from this COVID era tailwind for many years to come. Leverage, leveraging our expanded breadth of offerings. We look forward to providing our customers, the products and solutions for all of their needs. April's same-store sales were positive. So we're off to a good start to the quarter that consumers holding tight for traffic is solid, and we continue to do what we do best and sell boats.
And with that, I'll turn the call over to Jack to go over the financials in more detail.

Jack Ezzell

Thanks, Anthony. Fiscal second quarter revenue decreased 7% to $488 million in 2024 from $524 million in the prior year quarter. New boat sales were down 8% to $327 million in the fiscal second quarter of 2024 while pre-owned boat sales increased 4% to $79 million. The decrease in new boat sales was expected due to both the return of seasonality and the fact that we are up against a strong same-store sales comparable from the prior year quarter. While we saw the decline in sales split between units and price, we were pleased to see an increase in pre-owned boat sales as inventory becomes more readily available.
Revenue from service. Parts and Other sales for the quarter decreased 14% to $68 million compared to the prior year. Excluding the impact from the disposal of Rafaella Yachting Center and Lookout marine, which occurred in the fourth quarter of 2023. The dealership segment service parts and other sales were up the distribution segment's service, parts and other sales were lower due to reduced boat manufacturer production by U.S. insurance revenue decreased 4% to $15 million in the second quarter, but was in line with the prior year as a percentage of total sales,
gross profit decreased 18% to $120 million in the second quarter compared to $147 million in the prior year, driven by the continued normalization of gross margins on both sides. Second Quarter 2024 selling general administrative expenses decreased to $87 million from $90 million. SG&A as a percentage of sales for 78.7%, up 50 basis points from the prior year on lower sales
As Austin mentioned, we took actions to reduce our costs during the quarter as part of our ongoing expense management and focus on improving our operating leverage. These actions included a reduction in headcount closing certain satellite retail locations. Discontinuing sales of certain brands and abandoning IT projects are no longer considered strategic. While recent initiatives were proactive in nature, we have the flexibility to flex our costs further should the need arise.
Operating income decreased to $14 million from $49 million in the prior year period, which was impacted by a restructuring and impairment charge associated with the aforementioned cost actions. During the quarter, we recorded approximately $2 million in other expenses due to the impact of two separate EF three tornado events that significantly impacted our operations. Our location in Russell's point Ohio was directly impacted by a tornado and the Panama City Beach location was just outside the path of the tornado. The team has rallied together with the communities and are rebuilding to be ready for the upcoming selling season.
For the quarter, adjusted EBITDA was $28 million compared to $54 million in the prior year period. The decline in adjusted EBITDA was primarily due to lower gross profit in the quarter. Net loss for the fiscal second quarter totaled $5 million or $0.27 per diluted share compared to net income of $27 million or $1.56 per diluted share in the prior year. In the fiscal second quarter, adjusted earnings per diluted share was $0.67 compared to adjusted earnings per diluted share of $1.81 in 2023.
Turning now to the balance sheet. On March 31, 2024, our total liquidity was in excess of $80 million, including $47 million of cash and additional availability under our credit facilities. Total inventory at March 31, 2024 was $687 million compared to $707 million at the December quarter. We are comfortable with our inventory position and expect to continue working our inventory levels down throughout the remainder of the fiscal year.
Now turning to our outlook, we are maintaining our fiscal 2024 guidance. We are cautiously optimistic about the demand environment and feel we have reached a level of stabilization around pricing and margins. However, fluctuations outside of seasonal trends could push us to the lower end of our ranges. We are still anticipating same-store sales to be up low to mid single digits, and we expect adjusted EBITDA to be in the range of $130 million to $155 million and adjusted earnings per diluted share to be in the range of $3.25 to $3.75.
To conclude we are pleased with the progress we have made towards our strategic objectives. We are sticking to our proven playbook and positioning OneWater for success in any environment. This concludes our prepared remarks. Operator, would you please open the line for questions?

Question and Answer Session

Operator

(Operator Instructions)
Drew Crum with Stifel.

Drew Crum

Okay, thanks, guys. Good morning. I'm wondering if you could comment on your expectations for gross margin of 24.6% reported in the quarter was only down 50 bps versus 1Q up. Should we anticipate this leveling out further in the second half and assuming that's correct.
What would be the drivers?

Jack Ezzell

Yes, I think that's right, Drew. I think we plan on seeing new boat margins. So they feel like they're stabilizing, you know, new boat sales were just ever, so slightly less than last quarter. Pre-owned fluctuated a little bit with the with the mix between brokerage, consignment and trades. And so I think that largely drives our margins. So I think as we move forward, we'll expect to see them kind of in that mid 20 range.

Drew Crum

Got it. Okay. And then, Austin, you mentioned in your preamble that the close of the Garden State yacht sales acquisition.
What are your updated thoughts concerning M&A for the company?
What are you seeing in terms of valuations? And just give us a sense as to what your appetite is to do more deals in this environment?

Philip Austin Singleton

It's time to get back to doing deals. And we've got a lot of stuff. We're looking at and we're going to get back to some sort of cadence similar to what we had, you know, our during COVID or pre-COVID down as margins have kind of the two things that we were have been concerned about over probably the last 12 months has just been where the margin stabilize at what's the new normal. And then this inventory glut that's out there. Our margin has this stabilized.
And so that gets everything kind of where we want it to be this quarter that we just finished was kind of the last what we felt the COVID hangover quarter was. So when you look at a trailing 12, you kind of got all that COVID noise baked out of it. And then you know, from an inventory perspective, you know, there's still some challenges out there, but we're we're encouraged. The manufacturers have been really good over this whole time, doing great for from a promotional standpoint, they're continuing to do that and they've also backed off of production and are steadfast with that.
So, you know, the what I'm hearing from Wells Fargo, everybody's doing what needs to be done to get inventory right at model year change as we go into the fall. So those two things kind of we're I wouldn't use those as our excuses, but those were the things that we were waiting to kind of get to where we were comfortable before we got into really, really pushing on the M&A side that's there now. So it's time to start doing some M&A and we look forward to it and have been kind of bored. So we'll be back at it shortly.
It.

Drew Crum

Got it. Okay. Thanks, guys. Future.

Operator

Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.