All right, good afternoon, everybody, and thank you for joining us. I'm Joe Altobello, a leisure analyst here at Raymond James, and I'm very pleased to have with me today for a fireside chat, Mr. Jack Ezzell, who is the Chief Financial Officer of OneWater Marine. Jack, welcome.
Thanks, Joe.
OneWater is one of the largest boat dealers in the United States. Total revenue last year approached $1.8 billion, down from a record of over $1.9 billion the year before after a very meaningful boost at the onset of COVID. The past few years, the marine industry has suffered from a combination of soft demand, excess inventories, and heightened promotional activity. But OneWater has been able to navigate this relatively successfully and has continued to take meaningful market share. So with that as a backdrop, I did want to start high level with you, if I could, and get your thoughts on the current demand environment. I mean, let's face it, a boat is a highly discretionary purchase, and one is typically financed. So factors such as consumer confidence, interest rates, matter a lot.
For a prospective buyer, as I mentioned in my introduction, we saw very strong demand at the start of COVID, though new boat sales have declined now for, I think, four years in a row. What's keeping boat buyers on the sidelines at this point? Are they unwilling or unable to make that next purchase?
Yeah, I like to think it's more unwilling. When you're a boater, you're a boater, and it doesn't matter what rates are at, what gas prices are at, you're going to find a way to get out on the water. Now, if I'm a new boat buyer and I bought a boat two, three years ago, maybe I decide to extend the life of that boat for me, and I own it for another year rather than trading it, right? So a trade cycle, we feel, is anywhere for our customers anywhere from three to five years. And then in good times where consumer confidence is high, people feel good about things, maybe it goes to the lower side and stretches out some as well. But again, like you mentioned, the sales for the last couple of years have declined.
We're now below kind of like a 20-year average of unit sales, as to when it's going to be the inflection point. I think for us, what we've tried to do, while we can't control when that inflection point is, what we can do is best manage the business for where we're at today, right? So bringing inventory down, making sure we're sizing the business for what's happening at retail is what we can control and what we've tried to control. So I think we've made some good strides there. The industry as a whole, I think, has done a lot with OEMs reducing production 40% over probably the last two years and not really seeing a meaningful inflection point forward. It has done a lot to enable retailers to sell through the inventory that they had and kind of move forward.
But we're at a very optimistic time of the year, right? This year, spring's almost upon us. For those of you from New York, it probably feels really nice outside to not have the winter coat on and whatnot. And so it brings a time of, when we look at the boat shows we've had, I'll say, some mixed results, some being flat, some being positive. Unfortunately, we didn't get that signal positive that, hey, they were all great and we're going to have a good year. But it seems like the consumers there, just some are hesitant to kind of make that final purchase.
So, you mentioned boat shows spotty, I guess, is the best way to put it. How much of that was weather dependent? Like, in areas for shows where you had good weather?
So in full transparency, not all of them, right? Some of the ones that were like, you take a Miami, which I think most people said was flat, the weather was fine, right? The Atlanta show was down, right? We had five inches of snow, which is like a major blizzard in Atlanta, and everything was shut down for days. So there definitely were some weather challenges, but I think for the most part, I don't think there's a direct correlation between the weather and kind of the results, again, or the sentiment coming out of the shows. So even like Atlanta, while we had some mixed results, it felt like the two days that we had were good days. Like Thursday was a good day, Sunday was a good day. You just kind of were missing Friday and Saturday.
Got it. So if I think about your typical customer, obviously they skew a little bit more affluent than average. A lot of them are small business owners, for example, so they don't know what their taxes are going to look like, what their tariffs are going to look like, et cetera. How much would macro clarity help from a demand standpoint versus 100 basis points lower interest rates?
Well, I think it's right. It just gives them that confidence to go out and make that big ticket discretionary purchase, right? So it's someone who, to your point, right, they don't need interest rates to go down to all of a sudden be able to afford a $200,000 toy, right? This is not an appreciating asset. It is going to depreciate, but it's a lifestyle. It's how they spend their time with their family and friends. And so it's not something they're necessarily going to give up. And so that customer will buy in a certain cycle. And I think that aspect of macro probably influences them more. Tariff certainly is the question du jour for a lot of people these days.
For us, for model year '25, so now through January, what I'm hearing from most manufacturers is pricing's fine, no changes, nothing we need to change kind of mid-year, but they're still trying to figure out what '26 pricing's going to look like. The only thing we think, when you think about a boat, right, you have your two largest components being the actual physical hull and the engines, which both of which are, for the most part, domestically manufactured, right? All your certainly your Mercuries and then the hull of the boat and whatnot is most manufacturers are here domestically. Use a lot of resins and things like that are petroleum-based products. So we don't expect to have a whole lot of increase there. So when you think about the price of the boat, it's not just going to go up 10%.
Like the cup holders, the fittings, the latches, hatches, yes, those are going to go up, but maybe that's an increase of 3%-5%. So it's not unbearable, I don't think.
So nothing meaningful from a tariff standpoint in terms of, yeah.
Not today. I haven't watched the news to see if they increased or not.
It's still early. It's only 2:20 P.M. So with that, how do you guys see the industry playing out this year, maybe kind of first half versus second half?
I think as we, certainly the second half, we come up against a lot easier comps, right? The first half, we have tougher comps, and specifically the fourth quarter, our fiscal fourth quarter, September, with the hurricane impact, we ended very soft, so that makes us feel a little bit better about the back half of the year, and what we've seen to date is the consumer seems to be coming to the table, right? So maybe they're not, maybe we're not significantly up, but there is an appetite for deals and the consumer is there, so we're optimistic at this phase, right? Whereas we're transitioning kind of out of boat shows and into the spring launch and whatnot, we're looking for that follow-through from the shows and a push to the summer.
Got it. Okay. So let's talk about OneWater a little bit. You guys reported fiscal Q1 results ending December about a month ago, which were better than expected. I think better than I expected, and I think better than you expected as well, truth be told. Despite the soft demand environment we just discussed, as well as hurricanes in Florida, for example, you still delivered comp growth of over 4%, which easily outpaced the industry. So maybe it's a bit of a softball question, but what has and continues to help you gain market share?
Yeah, well, I think, right? So the market, I think in the quarter, ex aluminum fish, it was down like 13%, 13, 14 roughly. So while I'd love to say we're really that good, Joe, we bought some business, right? So we have some brands we're looking to get out of. We priced it and we made, right? We wanted to bring our inventory down, so we made some strategic decisions. You saw some margins go down a little bit, but we found some price points on particular boats that were able to create some excitement in the industry, right? Given that reason, especially in that December quarter. If you're in the Northeast, why would I buy a boat in November? I'm not going to use it for three to six months. But we got people off the table with price.
Now, some of those prices on similar products are going up in this quarter, just trying to manage through margins, but we're just trying to look at the whole picture, look at our inventory strategies and sales strategies, promotional strategies, and kind of put a plan together, and the team executed really well.
Interesting. So if we look at your space, marine obviously, and we compare that to like RVs, for example, what we've seen on the RV side is pricing coming down generally, although it's stabilizing now, and a mix shift towards smaller, less content units, more affordable, if you will. It doesn't seem like we're seeing either of those two things in the marine space. It sounds like, as you mentioned, pricing's been pretty good. And from a mix standpoint, explain to us, are you still seeing a mix up toward bigger, more content boats?
You are, and it's interesting, right? You see, we want to, we've talked about trying to de-content some boats to make them less expensive, we're doing that, I'll say, more on a regional basis, right? If I'm up on Lake Lanier, maybe I don't need a windlass on an automatic anchor on a 28-foot boat, but if I'm here in Florida, I have to have it, right, and so you're doing some options like that where maybe you can tweak a little bit here and there regionally based on how the customer will use the boat, but we've also done some experiments where you bring in a heavily de-contented boat. It hits a great price point. The customer looks at it and goes, "Okay, well, where's this option, that option, and the other?" Well, they're over there on that boat and it's $50,000 more.
And they say, "Okay, I'll take that," right? They want the content, right? Again, it adds to the whole experience. And so I think when you're again the customer that we're dealing with, that extra incremental cost is something they can bear, although they might not want to, right? It's not something they're excited about paying an extra $30,000 for a boat to be fully outfitted. But when they really think about the total purchase experience and how they're going to use the boat, $30,000 on a $300,000 purchase isn't that, again, for this depreciating asset, isn't that much to get them over the edge, right? They're going to only own it for three years and then they're going to sell it and get something else.
Got it. Okay. One of the things we've heard from not only RVs, but also other areas of power sports, for example, is the trade-up cycle has gotten a little bit elongated. People are still using their boats, they're still using their RVs, still using their side-by-sides. But after about three to five years, which is a normal trade-up cycle, they come and think, "Okay, I can get another year out of my boat," or whatever. Are you still seeing that?
I wouldn't say we're seeing it go beyond that three to five years. Again, always a tough one to measure, but it's certainly we certainly look at the trades we're bringing in, how old are they, did we sell them, did we not. About a third of the boats we sell, we get a trade on. So two-thirds go person-to-person, and so it's a small data set to really try to extrapolate too much on, but we're not seeing. We get asked a question a lot, are you seeing a lot of people come, they bought a boat in COVID, they just want to get out of boating. We're not seeing any meaningful trends like that or anything with the trade cycle.
Okay. So you did a very nice job on the inventory front in Q1. I think it was down 10% year over year. How much work needs to be done on that front? Where do you expect the end of fiscal year at?
So we said end of fiscal year we expect to be down 10%, right? So that's, we're kind of, I'll say already there, right? We have a lot of, we ordered slower this year than we had the year prior. And so that 10% could tick down as we get to the March quarter end and as we push through the season. But we want to end up on the other side, down easily 10%, assuming retail's kind of in that flat to up low single digits.
Okay. And in terms of the aging of that inventory, what percentage of your boats today are non-current and how does that compare to normal?
Yeah, so I'd say we're at normal. It's interesting. We had some conversations with some people earlier today, got into, well, what's the definition of aged? And it's almost like it's interesting, right? You get this dynamic of, yeah, you have a boat that's a model year '24, right? So that's one element of aged. But if it's a model year '24 that's only 180 days old, that's different than a model year '24 that's 365 days old, right? So the boat, the physical time on the lot also does a lot to age the boat. And that's where, while we might have '24s, they're newer '24s. And so you feel better about those, right?
Because you always carry over a good chunk of boats that you're going to sell kind of in the winter months just because you can't, the manufacturers, they can't give us a whole lot of '25s day one, right? So they're slowly kind of working throughout the dealer network, model year '25s as we build and kind of peak in March. And then as we blow through the season, you're getting out of all the leftover carryovers as well as the current.
Okay. So if we end the year, inventory's down 10%, retail for the industry is flat to up modestly, you guys are a little bit better. Are we back in alignment from a wholesale retail perspective by fiscal 2026?
I think so. I mean, that's my personal opinion. I think as we, I think then it becomes, what's the, how are we coming out of the season, right? Are we coming out positive or negative, right, and I think that's what's going to inflect orders then for model year '26. Are people, do we have a good season and people are optimistic about '26, or do we have a slower season and people remain cautious? I think for us, we continue to always look at kind of that balance of what did we sell historically, what are new products, what are new models, what's happening with the competition, what's happening today at retail, and continue to look at inventory. What can we do to move inventory within our system? Because I'd rather relocate a boat within our dealer network rather than buying a new one from a manufacturer.
You want to keep that balance there. As retail increases or decreases, we'll continue to monitor that to figure out if we need to order more or less.
Okay. And from a promotional standpoint, how would you assess the environment right now? Is it more or less than average?
Yeah. So I would say it's. We've been on an extended period of more than average, right? Where really for the last 12 to 18 months, there's been a lot of manufacturer money coming to dealers and we appreciate their support, right? Moving those non-currents, not only for us, but for other dealers. As we think about where we reside today, and if industry inventory is healing, then most likely that money is going to start to dry up. And it should, right? The normal cycle kind of 2017, 2018, 2019 was you have promotions at the end of the season, right? So August, September, October, then they kind of get quiet, then they come back with the boat shows, January, February, March, and then it cools off again. The summer hits, you have the summer selling season, there's not a lot of promotional activity.
I could see where things this summer start to slow down from a manufacturer promotional perspective just because inventories are in theory in a good place.
But for right now, you're getting.
Right now we're getting good normal boat show support. Absolutely.
Malibu's here in about an hour, I'll let them know.
Yeah, I had dinner with him last night. We coordinated our answers.
There you go. Exactly.
No, but it's true. I mean, like they've been a really good partner of ours and I think our inventory's in a good place. So I think it, like I said, we appreciate their support and we're doing our part. We're taking the hit on margins as well. So it's not like they're giving us a whole bunch of money and we're just profiting from it. We're sharing in the pain.
Got it. Okay. In terms of margins, or you've done margins, look like they peaked around fiscal 2022, although it seems like they're in the process of bottoming. Your guidance implies some margin lift this year. What's been the big driver of that or drivers?
Well, it's the balance, right? So we did a lot of efforts last year, last March and then in September, just adjusting our cost structure, expense structure. So we've taken some expenses out, just kind of looking at what our dealerships were doing at retail, how many units were you pushing through the stores, what was the headcount, March of 2024 versus March of 2019? What are the unit sales compared to the two? And we found some stores where they had kind of through the COVID years added three, four, five people. And so we made some reductions there. We always say good habits are made in bad times, bad habits are made in good times, right? So we had to wean off some of those bad habits and bring the expense structure down. Certainly bringing inventory down, you see a direct correlation, right?
Inventory's down 10%, floor plan expenses down 10%, and so we'll look for that to continue as well.
How much of those cost savings do you think are structural, meaning when things do get better, do they come back?
So marginally better, they don't come back. Again, but if the business is more significantly scaling up, some of them will come back, right? So you want to make sure like you have the right level of personnel to give the consumer a great experience when they're at the store, right? And so that sometimes that means people. And so we flex it as best we can. That's why we made some initial cuts in March and then some supplementary ones in September. But we're trying to align as best that we feel comfortable that we can provide a great experience for customers with the lowest cost as possible.
Okay. And if I look at your EBITDA margins over time, obviously you're in a cyclical industry, so there's going to be a fair amount of volatility. But in a normal environment, mid-cycle, what do you think a good EBITDA margin is?
You know, it's probably 6-7%. I think we should be there. I'd love to be back to 10%. We obviously need gross margins, right? We're a pretty lean company on the expense side. So I think to try to lean out that much more of SG&A would compromise the selling experience and the customer experience. And so we got to try to manage through that, right? We're picking some of it up in cost, we're picking some of it up in margin, some of it in floor plan cost, then we'll all kind of roll to that more mid-cycle EBITDA margin.
Okay. Shifting to M&A, it's been a big part of the OneWater story, really as long as you've been around, basically, right? So your net leverage ratio is a little over five times right now, which is probably a bit higher than you would like. I think your goal is to get to around four times by the end of this fiscal year. Is that still the case?
Yeah, I think we'll be like 4.25 at the midpoint of the range or something like that, but pushing in that direction, absolutely, but look, we just did another small deal where we have zero purchase price, right? So those are great deals, right? It's a strategic deal. When you look at what we got from the deal, we had two locations that we took over. One of them is a heavy service location where we actually have a service need in Fort Lauderdale, and so we have some of our retail customers for our other brands where we need service capacity, and so we'll be able to use that facility for that overflow capacity, which will make that store more profitable.
And then we were able to get a good brand, which complements a lot of our stores with a large center console brand starting at 40 foot going to 65, right? Kind of a unique boat, a unique brand, just something that we didn't have in the product portfolio. And we got large territories, right? So we have the whole state of Florida, state of Alabama, North Carolina, and New York. And so those broad territories, right, you can put one or two boats at one or two locations, and then all of a sudden, right, we can be much more profitable than they were because they had just one brand at a handful of stores. And so that fixed cost leverage that you get by adding that brand to our Destin location or Naples location is pretty incremental.
So zero purchase price. How do you negotiate that? How does that come up? What kind of structure does that look like?
Austin's very talented. No, but some of that comes, right? Some of it comes from the overall structure of the deal, right? So in this case, right, American Yacht Group was the retail arm of HCB Yachts, right? So that's then how we got the large geographic territory, right? It was the manufacturer relationship there. And they, quite frankly, weren't, they were a single brand at multiple locations and it's just hard to run it. And it's a low unit volume brand, right? So it's a 40-45 units, right? Average price is $1.8 million. And so it's a low volume and just it's hard to run a dealership that way. But if I have a dealership in Naples where I'm selling Everglades, Pursuit, and other brands, to have this as someone who's in a 455 Everglades and looking to move up, this is a great complement to that, right?
So they can then move into a 56 or a 53 and kind of in the same styling of boat that they like. And for that store, maybe we have one on the ground there, maybe have three or four in Fort Lauderdale that customer can come over and see, share inventory. You get that inventory leverage because you have those broad territories. And so I think that helps us to be that much more profitable. There's other deals. We did a deal up in New Jersey where an aged-out principal, we were able to offer them a 20-year lease. We took over the property and he had tier two brands. Our tier one brands that we had in southern New Jersey, we had the territory in northern and we sold some boats up there, but certainly we were underrepresented.
Now we're able to have all of those brands in northern New Jersey and now we again cover the state wholly and much more effectively. We'll look to then that store to be much more profitable than what they were historically. There's been some strategic elements as to why you deviate, right? Historically, we've always bought performing dealers. This is more of an opportunistic buy, an opportunistic transaction, which has kind of drawn us into them.
Is there a deep pipeline of these types of deals or?
Well, yeah. Well, there's probably not a deep type pipeline of strategic opportunities. There's a lot of fixer-uppers out there. And that's just something that right now we've stayed away from. And so we're looking more for the performing dealers. They can handle themselves through the down cycle. Right now they have to adjust their purchase price expectations. Instead of $15-$20 million, maybe it's $7-$12 million. And that's hard for them to swallow at this point to say, well, I can just work a couple more years. I'm sure it's going to get better at some point, but this is an aging principal. They have no exit strategy. There's no succession plan. They're in theory, like many of them, their kids are doctors, lawyers outside the industry, something else. And so they're kind of stuck.
Nobody else is out there acquiring deals where they can actually give them a purchase price. And so as their expectations are adjusting, we're patiently waiting. And if they come back and they want to do a transaction, we'll do a transaction, right? The beauty and kind of to your question kind of about leverage, we can still do deals without leverage, right? We're acquiring deals at four times or less. So in theory, if we're paying some cash, we're bringing our leverage down with every acquisition we do. And there's ways for us to get kind of creative with some of them. So we're still working the pipeline. We just need to see their expectations reset.
Where's the leverage ratio that you want to get to where you go back to that normal cadence that we knew a few years ago, four to six deals a year?
Yeah, you know, it's interesting. We've talked about that. Like what do we want to do four to six deals? I think we'll probably tweak that to be more dependent upon the size of the deals, right? So we did some big deals where multi-locations, maybe that's one or two deals a year, and then maybe we do four deals with one location in a different year. I think the appetite's there for us. I just think we're again cautiously kind of proceeding through. We want to make sure we have the right execution strategy. We want to make sure that post-acquisition we're able to institute our synergies, double their EBITDA going forward, and that everything's truly reset from where we're at today.
Okay. Maybe one last group of questions before we break, but I get a lot of questions on the used boat market. And there's a lot of people who worry that at some point all these boaters that bought a boat during the start of COVID decide it's not for me or it's too expensive or it's too much of a hassle. What are you seeing on the used boat side? Are you seeing an influx of late models coming in or?
We wish. We would take a whole lot more of late model trades or people wanting to toss us the keys. Happy to buy them. Some of these, you work through the numbers, right? You think about it and you go and look. New boats peaked at what, 208, just over 200. The last 20 years, the average is 170, so we really 38,000 units extra that one year. Because really, right after that, it dropped quickly to 170, I think, after that, and then now 150, and so there's not this massive surge of units out there. Certainly did some people come in. You always have every year people kind of coming in and going out, but a lot of people also during that same timeframe, it wasn't just go out and buy a boat. It was, well, we bought a house on the lake.
We bought a house in Florida and on the water, and so you don't just buy a house in Florida on the water, go sit on the dock and watch all the boats go by. You go buy a boat and have it behind your house, and that's the lifestyle. And so you want to get out of it, well, I'm going to sell the boat and sell the house. I'm just much more committed, and it's not as easy as a towable RV where I just set it on the corner with a for sale sign and it goes away and I never see it again, right? And so I think it's also right when the purchase decision, you're maybe a little more committed to a change of lifestyle, and that's all part of the experience.
Understood. Well, let's wrap it there, Jack. I appreciate it. Thank you for coming.
Thank you, Joe.
Thank you, everybody. Enjoy the rest of the conference.
Take care.