Good day and thank you for standing by. Welcome to OneWater Marine's Fiscal Third Quarter 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to the speaker today. Please go ahead.

Good morning and welcome to OneWater Marine's fiscal third quarter 2023 earnings conference call. I'm 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 the 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 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 would 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 these results in increased market share for OneWater. 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 weeks 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 floorplan costs and other carrying costs. More importantly, going forward, we will have a good supply of 2024 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 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…

Thanks, Austin. Our teams remain active during the selling season to drive solid revenue growth in a challenging market. Results were driven by double-digit growth and 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 has occurred at big box retailers over the last several months. While 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 30, 2023, is down modestly compared to the end of Q2 and we expect the seasonal decline further. We are continually operating at a 17 weeks of inventory on hand compared to an industry average of 28 weeks. We will enter the 2024 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 past 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 their 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 the SG&A expenses to continue moderating as we further integrate acquired parts and service businesses. We remain focused on executing our playbook and positioning OneWater 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 continue to positively impact our results, climbing 23% to $92 million, driven by the contributions of our recently acquired businesses and dealer 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 boats sold. Gross profit margin fell to 27% as a percentage of total sales. As expected, the investments made in the 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 mostly offset by a variable cost structure where expenses have started to adjust down with the declining gross margins. 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…

[Operator Instructions] Our first question comes from the line of Joe Altobello of Raymond James.

First question for you, Austin and sort of a big picture question. Maybe where do you see pricing and 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. So I guess, do you think we ultimately go back there at some point?

Pricing, that's 1 thing we're encouraged about. Pricing doesn't seem to have risen that much for the manufacturers this year. So it's a pretty modest price increase from the majority of our manufacturers. Probably 3% or less and a lot of that is content or engines. So we're super optimistic that the 2024, as far as the price increase, is going to give us a little bit of running room and let us be a little bit more competitive if this inventory stays as high as it is on the 2023. Margins, we didn't expect this, what we saw in this last quarter, it really started right before Memorial Day and I kind of have sat back and go, you know, why did it happen so fast? And I think the realization kicked in for the majority of the industry when they got that April interest bill from the floorplan manufacturers in late May and they saw how much they were going to be spending every month on inventory carrying it through the summer and into the fall and that's when discounting came. Now, what we have seen is some promotional activity from some manufacturers which is starting to come on board which will help maybe ease some of that downward turn to margins. But I would say our comfort level where they maintain where they are right now is kind of low. I mean, I would suspect that margins are going to deteriorate a little bit more and the hope would be that for us, is that we do get some promotional activity out of the manufacturers but also that we get this inventory cleaner and then we start selling 2024s at a higher margin against 2023s, because that's a pretty easy sell when you match those 2 up with the customer. Inventory is still extremely scary. We're comfortable where ours is. The industry is high and it's going to take a while for it to flush through. But there's positive trends for July, we had a good July. We're hearing some preliminary results from out of Wells Fargo for what the industry did in July. So maybe it'll trim down. It's just going to be a thread in the needle is going to be kind of what we're going to have to do over the next, you know, 6 to 9 months.

And maybe a second question on M&A. You sort of alluded to a 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 fiscal '23 and maybe into fiscal '24?

Yes. So we go back and kind of look at our deals and I mean, it's kind of a math equation that's 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 did them and you adjust their pricing, just the revenues up for the pricing increases that we've seen on new boat sales. Now remember, the majority of the deals that we end up doing, we're looking at a mom-and-pop, 90%, 95%, 85% of their revenue is coming from new boat sales. So it's very new boat sales dependent. They're really, really good at that and everything else is just kind of all the other business operations get drug along with that. So when we went back and looked at that and adjusted sales with old margins, we kind of put in, you know, what the curtailments were going to be, what interest carry was going to be. If you weren't making north of 5% as a net profit, you're going to run out of cash. And so we're kind of sitting back going, okay, well, this is not good, so there could be some good deals. And we've already started to look at a couple of deals where it's almost like tossing the keys. It's like, if you'll take over my inventory obligation and give me a lease, it's yours. And we think that will become a little bit better and a little bit more available to us as we work through this winter because we haven't seen -- we're around 8%, I think, on our floorplan, Jack. Is that right?

Yes. That's correct.

Yes. And the majority of the industry is north of 10. And so that's going to eat pretty good as we go through the winter. So you're going to have some of these dealers that have already thinking about selling that are, I hate to use the word aged out but have great businesses. I don't know if they're going to really want to fight through another, what cycle we're going to go through. And so it's going to be interesting over the next 6 months from an M&A perspective but we're already starting to see those deals where, hey, you take inventory obligation and give me a lease and here's my business. So that's going to come our way. So maybe there's a way that we can start working with some manufacturers, because I don't want all that old inventory. So hopefully, we can partner up with some manufacturers that help us do that, especially if the dealer's in trouble. So the next 6 months to 9 months on the M&A side might be interesting.

Next question comes from Michael Swartz of Truist Securities.

Maybe just 1 for you, Jack, quickly. The flat comp store sales in the quarter, what was the composition of that units versus pricing?

Yes, so that was units were just ever, slightly negative, price was slightly positive.

Okay. So it does sound like you gained market share but it also sounds like at least directionally you're talking about things getting worse through 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 I guess is this just more of a 1, pricing promotion has gotten worse. Two, you guys are planning to take it on the chin a little bit more than you maybe thought and reduce inventory so that you're in a better environment going into fiscal year '24. Did I frame that okay?

100%. 100%. This is a more -- the competitive landscape going into Memorial Day, you could feel it. And then by the time we got into June, we were fighting. We were scratching for every deal. And it got to the point where a customer would come in, you would talk to them, build a relationship, give them a price, they'd leave. They'd come back 3 days later with a competitor with a much better price, you would try to work them on pieces and benefits and sell them and give them a new price. They leave for 4 or 5 days, they come back with a cheaper price. I mean, it was really, we worked every deal till there was no grub left and that's just 100% what we saw.

Yes, Michael, I would also say, as we exited last quarter, right, we had a double-digit same-store that we achieved in the quarter you know and felt it was going to also pull back. I think coming in flat was below our expectations at the time. And like Austin said, I mean, that the market slowed, price sensitivity escalated and we were fighting to keep it unit sales roughly flat.

Okay. And it sounds like in terms of overall inventory, it doesn't sound like you're uncomfortable with where you sit necessarily today with 17 weeks on hand but it sounds like you're more kind of targeted on or concerned around maybe model mix within that inventory. So do you have any metrics or targets by the end of your either fiscal year end or calendar year end of where you want to be in terms of maybe other weeks on hand or just percentage of your new inventory that's model year '23.

Yes, that’s what we're focused on. Jack, you take that. Let me say this real quick. Inventory weeks on hand is not really the -- that's the metric that we measure compared to industry. But we are getting truckloads of 2024 from the manufacturers already. Manufacturers are screening for orders. And we're already getting a lot of '23 boats in. So that 17 weeks on hand, if you look at the inventory that's actually costing us money, that's the '23 inventory. And so as long as that continues to run down fast and we can't hand save 17 but it's because we're receiving 2024s, that's fine with me because that really doesn't have a carrying cost to us. Jack, do you want to throw in anything there?

Yes, no, I'd say we're very comfortable in the mix of that inventory, '23 versus '24 is really key because what happens as we roll out the rest of this calendar year, right, the 23s are still feel very current when I'm selling it in 2023. But when we get into the springtime, a lot of dealers are going to be carrying 2023s into the spring vote shows, some of the winter vote shows. We're going to have our '23 inventory pretty lean as we work through it over the next several months. So it's that composition that makes a huge difference. And multitude as well, right? When Austin was talking earlier about pressure on other dealers, as that inventory gets older, they're having to make, pay down the floor plan balance on that boat in a period of time where there's 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'll put pressure on them to liquidate boats at lower prices. So we're comfortable with our position; we just not 100% sure where the industry will be.

This question is from Kevin Condon of Baird.

I wanted to ask a little bit about if you're seeing anything across different categories or I guess value versus premium parts of your offerings. I think earlier this year, you noted 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 pushbacks from customers around just the affordability of boats given the last 2, 3 plus years of price moves and just if there's anything that manufacturers or dealers are doing to try to address those affordability concerns?

Yes, I'll jump in on the pricing. As far as categories go, I mean, the SSI data, I think, is the best way to look at that. I mean, we're not seeing anything that's different than what the SSI data is showing from a category. I mean, you can look at it and say -- 1 thing I would say is we're a big pontoon dealer. So pontoons have been very good for us. I think the SSI data shows that down a little bit. So you just look at the SSI data and we're kind of in line with that from a segment perspective. The premium value, that's a really tricky deal because what is considered premium. We consider the majority of our brands premium for where we're selling. But then there's also this thought that premium is just bigger. It's just like it's premium 80 feet and bigger or 60 feet and bigger for the size. But when you look at a 25-foot pontoon boat that's 200 grand, we consider that premium. So premium has held up well but really what's held up better than anything is the boats that have a longer build time. So, if you can build a boat in 8 weeks versus a boat that takes 22 weeks to build because it's a more complicated build, there's less supply, so that demand is still there and those are the units that are still sold out into the future. We still have that. It's the ones that they can build quickly and I don't even know if quickly, it's the ones that they can -- that are really kind of like production set of the shorter build time that are still premium but they're the ones that we've got more inventory on. So premium is definitely holding up because you've got a longer build time on the bigger stuff. But we're not seeing - Anthony, it's just kind of generic across all brands and segments right now. I mean, it's not easy to

Yes, I would say 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 for financing are being -- they can go away. They're just being a little more cautious with the rates have risen quite a bit but they're still selling. They haven't shut off by no means but our premium inventory is still selling very well.

And real quick on the pricing, I think we're seeing the manufacturers understanding that the price increases we got this year. You know, like I said, we have the majority of our manufacturers are sub 3% and there's content in on that 3%. So we almost feel like the majority of them are flat or close to flat. And that's a good thing but yes, vote prices over the last 3 years, that's tough.

This is our last question coming from Griffin Bryan of DA Davidson. Brandon Rollé: Hi, this is Brandon Rolle with DA Davidson. Just 1 question. You had talked about seeing increased promotional activity from the OEMs. Could you talk about what you're 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 a retail and wholesale incentive perspective, given what's going on in terms of dealer inventories?

Yes. I think they've all kind of come out with their saying, stuff they've done in the past. I mean, it starts off with like, hey, here are special rebates for boats but if you sell 1, you got to buy 1. And so like you get this discount but it's on the order boat. So if you have a 2023 and you sell it and you order another 2024 to replace that, you get a $2,000, $5,000, $8,000 discount offer 2024. That's kind of where it starts. And then we see it morph into the more incentives just to move current inventory. I think Malibu came out with their - it's not a layaway program but similar to that, I think it's been super successful. But they're all starting to kind of go back to where they were pre-COVID when inventories were building, they needed to move that up and there's just kind of a transition where it starts off light and it's kind of like you sell one, you buy one and then it's like, okay, we need to accelerate that. So then it's just discounts. And I expect that to continue to ramp up as you get into the fall and winter season. I think a lot of the manufacturers' orders are mean right now. And it's because people are looking at that interest statement from the floor plan companies going. Oh my gosh. And that's a big number and we've got to get rid of this in the board. Brandon Rollé: Okay, great. And just one follow-up I know you have exposure to the pontoon industry but also the Ski/Wake 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. I mean, I think a little bit of its price driven. They've gotten pricey. But I also think the reverse drive. When you go and you look at a Malibu or a MasterCraft or a Correct Craft, I'm just making a number, just 300 grand and you can go buy a Cobalt with a reverse drive that has a lot of the same abilities. It's not a competitive ski boat. So if you're going to be wakeboarding, surfing, skiing, 85% of your time, that buyer is still buying the inboards, the tow boats. But if you're only doing it 20% or 30% of the time or 40% of the time and everybody likes it, those are those straps are really kind of starting to kick in and really are related to consumers because there's different, it rides a little bit better in rough water, it's a little bit faster on the top end and it's less expensive. So when you look at the cobalt reverse drive, I mean, those boats are almost, they're hard to keep in stock right now. And so that's been a little bit, I think, of a decline. And we actually have a little bit to do with it also.

Austin, I just would also add on the pontoon segment, right, that's a really wide segment with a lot of units and value units that we don't necessarily participate in. And so I think our higher-end pontoon consumer is probably a little more resilient and we're doing a little bit better in that category than maybe the SSI number suggests.

Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.