In a Nutshell
ONEW is one of the US’s largest marine dealership groups and is working on the consolidation of the sector.
The situation presents the key ingredients for a successful roll-up strategy: highly fragmented industry, proven operational playbook, seasoned management and financial resources.
The recent evolution is promising and ONEW seems to be successfully implementing the roll-up strategy: growing the acquired businesses, smoothly integrating them and generating scale economies.
The group is profitable, generates strong FCF, keeps a healthy capital structure and trades at attractive multiples.
Though its demand seems to remain resilient, there are some headwinds/risks that could slow down in the short run its recent performance but probably its strategy will keep thriving in the long run.
(it is recommended to read this post directly in Substack since it is too long for email and might be truncated)
Introduction: What OneWater Marine Inc. (ONEW) does?
ONEW, in short, is the owner and operator of one of the US’s largest marine dealership groups. Being said that, let’s have a look to its Form 10-K in order to dive a little bit deeper into the Company. This is what is stated in relation to ONEW:
This paragraph clearly and concisely explains what are ONEW’s main activities, sector and geographic scope. However, the attractiveness of this company doesn’t lie there. One of its main competitors (MarineMax $HZO) provides a paragraph that helps to better understand why this company caught my attention:
Here resides the opportunity: ONEW is trying to carry out this consolidation process through a classic roll-up strategy, buying healthy mom-and-pop or other small operators and making them more profitable by being part of a national network that can create efficiencies. This kind of processes is really hard to accomplish and indeed “research shows that more than two-thirds of roll-ups have failed to create any value for investors”, but those that are successful can create meaningful returns.
But let’s start from the beginning, defining the concept of roll-up strategy and why the recreational boating industry might represent a good opportunity for this kind of strategy.
What is a roll-up strategy?
For those not familiarized with the M&A activity, and specifically with roll-up strategies, it might be useful to start with its definition. Let’s have a look to some excerpts from different sources that may help to form an idea of the concept:
Basically a roll-up strategy seeks the consolidation of a specific and highly fragmented sector by acquiring smaller companies and improving their performance and profitability through the implementation of the acquirer’s operating strategies and taking advantage of the benefits of scale.
Key ingredients for a successful roll-up strategy (and why both ONEW and the recreational boating industry perfectly fit in)
Highly fragmented industry
“The most successful roll-ups have been in fragmented sectors with no real dominant players”. The rationale behind this idea is that highly fragmented markets allow consolidators to achieve and benefit from scale economies. “The boat dealership market is highly fragmented and is comprised of approximately 4,300 stores nationwide” with most boat retailers owning three or fewer stores:
This is the perfect playing field for a consolidator: a roll-up strategy needs by definition many targets to make multiple acquisitions and the smaller the operators, the lower their capacity to negotiate with the acquirer.
Operational formula applicable to acquired companies in order to create value
The acquirer must have a post-acquisition playbook in order to drive more meaningful growth and profitability than the acquired companies on a standalone basis. In one of its last presentations ONEW perfectly summaries how they create synergies through its consolidation process:
It also explains its strategy in its Form S-1: “We seek to create value by implementing the best tested operational practices to family-owned and operated businesses that previously lacked the resources, management experience and expertise to maximize the profitability of the acquired standalone businesses. We believe that the boat retail market is underpinned by strong fundamental drivers, and that, with the implementation of operational control measures and the injection of resources, local stores can significantly increase revenues and profitability.”
The idea is the following: as ONEW provides basically all the services related with the recreational boating industry (i.e. boat sales, finance and insurance, service and repairs, and marine parts and accessories) and enjoys a diversified product portfolio, it looks for market-leading dealers but with lower levels of service or smaller portfolios to expand their business with new and higher-margin revenue streams, taking simultaneously advantage of the benefits of scale. ONEW states in its Form 10-K that “independent retailers typically offer a limited selection of boat brands, and they predominantly focus on new boat sales with less expertise and capacity to create a meaningful business from non-boat sales such as F&I products” (even though the ones they acquire are immediately accretive to the group).
Management and financial capacity
Apart from the right industry and the right playbook, it is also relevant for a successful consolidation process the presence of seasoned M&A management and financial resources to fund the acquisitions.
In terms of management, the key positions in ONEW (i.e. CEO, COO and CFO) are held by professionals that have been several years within the Company deploying the roll-up strategy:
As they mention in the last Form 10-Q, “since the combination in 2014, (they) have acquired a total of 55 additional retail locations, 8 distribution centers/warehouses and multiple online marketplaces through 26 acquisitions”.
In terms of financial resources, the majority of purchase considerations are paid mainly with cash from operations and debt. ONEW produces cash enough to partially fund its roll-up strategy and, for the remainder part, it’s able to access to favorable financing conditions (≈3% interest rate) and it is able to keep a reasonable leverage ratio (though this will be further discussed later in the part dedicated to risks).
Additional positive aspects of the ONEW’s roll-up strategy
As mentioned in the previous paragraph, ONEW’s roll-up strategy seems to comply with the key prerequisites to be a successful strategy, but there are many other positive aspects that invite to be optimistic. Let’s have a look to several other features that help to understand the symbiotic relationship between ONEW and the acquired companies, and why its consolation strategy should keep thriving:
Efficient inventory management
ONEW has consistently made investments in inventory management systems and planning tools, providing sales teams with visibility into the available inventory and where it is located, including boats on order or in production. Besides the company is able to transfer boats between stores in order to meet customer demand and keep more balanced or lower inventories. As stated in its Form S-1, “this flexibility reduces delays in delivery, helps (them) maximize inventory turnover and assists in minimizing potential overstock or out-of-stock situations”.
In that sense, once a new dealership is acquired, it has almost automatically access to an inventory pool of boats that otherwise would be impossible, and a “salesperson in one location can pull up a particular model at all of (their) locations with a touch of a button as well as present that boat to a customer right on the spot”. This capacity to get additional inventory helps to rapidly expand dealerships’ boat sales shortly after the integration and entails a relevant competitive advantage for the group.
Stronger bargain power and higher capacity to comply with manufacturers’ requirements
Boat manufacturers usually keep some control over small dealerships through dealer agreements (comprised of specific requirements and performance goals), or at least are able to exercise some pressure over them.
ONEW’s strong relationships and scale allow the Company to enjoy priority treatment with those manufacturers and to receive better pricing and terms across all of their brands. ONEW is a material customer for its manufactures, representing in some cases more than 30% of some brand’s sales and enjoying strong bargaining power, and any dealership that gets into ONEW family acquires immediately this preferential status.
Benefits of scale and lower cost of capital
ONEW, as a bigger organization than standalone boat retailers, is able to benefit from many aspects that the scale provides. The main advantages come from those services that can be more efficiently provided with a centralized approach (e.g. support resources or back-office functions) or those whose access is available or conditions are better with the scale (e.g. floor-plan financing). All those aspects allow ONEW to generate higher degrees of profitability and to lower the cost of capital compared to smaller dealerships, and, again, any dealership that becomes part of ONEW group rapidly enjoys all these benefits.
Diversified and more stable revenue streams
ONEW’s strategy has been historically focused on boat sales but this part of the recreational boating industry is rather cyclical and seasonal. Taking this into account, the Company has always had in mind the need of looking for more diversified and stable revenue streams, in order to try to offset the impact of those structural characteristics.
In that sense, ONEW initially sought to expand its product assortment (e.g. ski wakes, pontoons, saltwater fish, runabouts, yachts) and diversify across geographies (i.e. expanding into new States). The Company still maintains these objectives, but also has gradually moved the focus to grow the high-margin less-cyclical parts of the business: repair and maintenance services, and parts and accessories.
These movements have made ONEW to be currently able to provide a broad range of products and services, and any dealership that is acquired by ONEW rapidly enjoys all these diversification and stabilizer effects, that would be difficult to achieve in case of being outside the group.
Low integration hurdles
Boating dealerships are usually small owner-operated businesses, with few employees and lean organizational structures. Its integration doesn’t generally carry relevant hurdles and indeed, in the case of ONEW, the “acquisition team is typically able to convert the selling dealer groups’ back-office systems to (its) IT platform within approximately ten days, with full integration of most acquisitions completed in approximately 45 days”. This easiness to integrate new acquired companies allows a smooth transition to the new organization and ONEW just needs approximately 24 months to realize the expected synergies.
This absence of hard integration difficulties allows the acquired companies to be immediately accretive and ONEW to keep a steady cadence of transactions.
Keeping key personal and branding
In close relation to the previous point, ONEW’s strategy seeks to retain key staff, including senior management, and dealer’s branding in order to create as low disruption as possible in the acquired dealership. Indeed, as stated in its Form S-1, “the operational management of (its) boat dealer groups is decentralized, with certain administrative functions centralized at the corporate level and the primary responsibility of day-to-day operations localized at the store level. Each store is managed by a general manager, often a former owner, who oversees the day-to-day operations, human resources and financial performance of that particular individual store”. This strategy aims to retain the goodwill and customer relationships of dealer groups and helps their smooth integration.
Exit strategy to dealerships’ owners
The boating industry is an industry where most dealers have difficulties to find an exit strategy. ONEW has created a model that allows those dealerships’ owners to exit on their schedule. Indeed the model is built on the idea that the owner can stay with the dealership (if preferred by him/her), continuing to work, but freed up from the burdens of ownership. ONEW mentions in its Form S-1 that they “have an extensive acquisition track record within the boating industry and have developed a reputation for treating sellers and their staff in an honest and fair manner”, and that their “reputation and scale have positioned (them) as a buyer of choice for boat dealers who want to sell their businesses”. And indeed, “100% of (their) acquisitions have been sourced from inbound inquiries, and the number of annual inquiries (they) receive has consistently increased over time” and the pipeline of dealerships to add to the ONEW group remains robust.
What about ONEW’s financial performance?
ONEW completed its IPO on February 2020 and there is no long-historical database of public information available, but there are at least some data that can help to get an idea about whether the company is heading in the right direction.
Let’s start looking at its top-line evolution:
We can observe that the Company has been steadily increasing its revenues and, more importantly, it has been able to do that by increasing all of its business lines. The Company is committed with the diversification of its revenue profile and indeed it has mentioned several times that it is trying to move the focus to non-sales-boat activities in order to achieve a more balanced and less cyclical portfolio.
However, with relation to the revenues evolution, it is important to make two caveats. The first one is related with ONEW´s business strategy. ONEW follows a strategy that blends organic growth and strategic acquisitions, and this makes difficult (and sometime useless) the comparison between different periods, as acquiring companies usually means acquiring growth. In order to have a more realistic view about how the Company is performing, it is interesting to analyze how the “non-recently-acquired” part of the business is performing. In other words, how the same-store sales are evolving:
The same-store sales evolution has been rather impressive, outperforming even before the pandemic period. These data are really relevant because provide a graphic idea about how ONEW is implementing its strategic plan. One of the Company’s key objectives is to grow organically through the implementation of its practices and the expansion of new revenue streams into the new acquired business, and it seems to be doing a really good job.
The second caveat is related with this exceptional COVID-19 pandemic period. ONEW has been one of those companies specially benefited with the dynamics created by the COVID-19 pandemic, as customers have sought safe outdoor activities that can be enjoyed close to home. In that sense it is really important to take into account that there might be some distortion within the last two years data. This period has been specially marked by heightened customer demand and by the surge of new customers into the marine industry, and it is unclear how returning to a more normalized environment will affect the Company’s performance.
However, there are at least two aspects that invite to be optimistic. The first one is the persistence of the demand. Let’s have a look to the comments that some of the main actors within the sector have made about this issue during their last conference calls:
“Insatiable demand” (…) “demand continued at a prolific pace as the thirst for our feature-rich, larger boats remains incredibly strong, even during what is historically a slower season in October through December. Demand has been broad based across all brands and all models” (Malibu Boats Q2 2022 conference call, Feb. 2022)
“Although we believe product availability is limiting retail sales, we remain very optimistic about the sustainability of consumer demand, due to continuation of favorable consumer trends. As consumer preferences continue to evolve, we expect that structural changes in where and how people choose to live, work and recreate have generated strong consumer demand for the boating lifestyle that will persist.” (MasterCraft Boat Holdings Q2 2022 conference call, Feb. 2022)
“The December quarter certainly exceeded expectations and industry demand trend remains strong.” (MarineMax Q1 2022 conference call, Jan. 2022)
“It's important to note that retail declines are being driven by product availability and are not a result of declining consumer demand. U.S. lead generation, dealer sentiment and other leading indicators, all remain very positive” (…) “I could tell you that retail demand is very strong as we enter the market. So there's no indication of any pullback in raw consumer demand.” (Brunswick Corp. Q4 2021 conference call, Jan. 2022)
“Although most winter boat shows were canceled this year, we still see many indications that the increased consumer demand that we began to see almost 2 years ago is continuing well past the 2022 model year.” (…) “But we know there is very, very strong demand and everybody is looking for as many boats to be delivered as possible and we're trying to meet as much of that demand as we can.” (Marine Products Corp. Q4 2021 conference call, Jan. 2022)
It is important to highlight that most of these comments were made before the Ukraine’s invasion and its spillover effects (and specifically its impact over fuel prices), but at the same time it is encouraging to see that the demand seems to remain strong (regardless of the existence of some headwinds that will be commented in the part dedicated to risks).
The second aspect that invites to be optimistic is the stickiness of the recreational boating activity. In a recent survey carried out by Left Brain Marketing (February 2022) they asked the following question: “based on your ownership experience thus far, how likely are you to remain a boat owner over the next 5?”. The conclusion was that “a vast majority intend to remain a boat owner over the next 5 years”:
It seems that the intention of many of both the new and repeat boaters is to stay within the marine activity. Should this is the case, the pandemic might have created some structural change in boating demand. Besides, recreational boating is a customer-word-of-mouth industry where the higher the number of people coming into boating, the higher the number of others being tempted to do the same (after having enjoyed their friends boats). This dynamic could create some sort of positive effect that could help to keep demand at strong levels.
Apart from growth, ONEW has had always in mind profitability. Its idea is to fund (at least partially) the Company’s acquisition strategy with internal funds and this necessarily requires walking through a profitable path:
The company has been able to generate positive operating results and FCF, and has been clearly improving its cash generation during the last years. Additionally, this impressive outperformance has come together with a gradual improvement of its margins:
Gross margins have remained extraordinarily high during the last quarters due to the mix of heightened demand, lean inventories and increases in average selling prices, and there could be some levelling off in the near future. Additionally, there might be some impact coming from the pressure manufacturers are suffering in their cost structures, that will probably be pushed to the dealerships and to the extent that it cannot be retransferred to the customer. On the other hand, the Company is doing a really good job strengthening higher-margin Finance & Insurance and Service & Parts income, and this might help to at least partially offset those negative impacts and to hold the margins.
In any case, despite some headwinds (and the risks that will be analyzed in the next paragraph), ONEW is doing a really good job both organically growing its business and trying to carry out the consolidation of the sector, and doing so keeping the business profitable.
What about the risks and headwinds?
Supply chain challenges
As many other industries, the boating industry is also suffering a challenging supply chain environment. OEMs are generating limited production volumes and not being able to catch up with the heightened customer demand. This situation is making dealerships to work with lean inventories and to be able to close lower sales than it would be possible in a normalized environment.
The main actors within the industry have expressed that they don’t expect the situation to start improving at least until the end of fiscal 2022 and it will take until fiscal 2024 for dealer inventories to reach optimal levels. Taking into account that currently consumer demand remains rather strong, this year, to some extent, will play out in parallel to supply chain issues.
Inflationary pressures
OEMs keep facing material, labor and freight inflation and many have approved price increases that are being implemented in 2022. This means that this cost pressure will be probably transferred to dealerships. ONEW has recently mentioned in one of the last conference calls that “even with the price increases, historically, for the last 30 years, we pushed that on to the consumer” and that they are confident they will be able to deal with recent price increases and expect no impact on the resilient demand. However, this is something that requires close monitoring because at some point price increases will probably start to affect demand and customer will start to refuse paying the price increase, specifically in case of worsening economic conditions. Additionally, inflationary pressures on essential products (e.g. cost of fuel, energy, housing, etc.) are starting to affect consumer discretionary and this might finally have some impact on the boating demand.
Deteriorating consumer expectations/situation
In close relation with the previous point, as an industry which is part of consumer discretionary, recreational boating strongly depends on consumer confidence and situation. Let’s have a look to two interesting charts:
This is not at all a macroeconomic report, but it is relevant to take into account that the consumer confidence and situation seems to be deteriorating during the last months. Additional deterioration might strongly affect boating consumer demand.
ONEW prepared an interesting slide in its September 2021 Investor Presentation trying to estimate, through the analysis of previous recessions, the potential impact in case of a hypothetical downturn:
The main objective for the Company was to reflect the (partially) anti-cyclical effect of the Pre-owned, Finance & Insurance and Service & Parts business lines, that show more stability through the cycle. However, it is relevant to highlight that this slide also shows that recessions have a relevant impact on new boat sales. Being true that the impact during the Great Recession was related with factors that are not present today (e.g. huge inventories) and it would be not expected this kind of negative downside, the recession risk is another risk that must be carefully monitored.
Higher interest rate environment
Interest rate increases might have a double negative effect for the company. On the one hand, a direct effect on the Company due to its funding structure.
ONEW has recently worsened its leverage ratio, though its current situation is not at all worrisome and it is still within acceptable levels (with its target at 1.5x). However, the Company might keep increasing its debt levels alongside the deployment of its acquisition strategy and a rapid and material increase in interest rates might negatively affect its profitability.
On the other hand, an indirect effect. As most of ONEW’s sales are financed, rising interest rates might also affect customers’ capacity or desire to purchase its products. This would finally have an impact on its demand, adversely affecting the business.
Valuation
As commented in relation to the revenues evolution, the valuation of a company like ONEW becomes difficult and maybe meaningless due to its acquisition strategy. Each acquisition modifies its capital structure and financial projections, and will probably make previous valuations outdated or even useless.
Anyway, analyzing its current multiples at least may be useful in order to have an idea about the expensiveness or cheapness of the Company in the current situation and might help to provide some feeling about the future. Let’s have a look to some of the last figures published or communicated by the Company:
As it can be observed, using FY21 adj. EBITDA ($155m), its multiple would be 5x. However, in order to try to smooth a little bit the number, we could take the last 3 years average adj. EBITDA ($95m) and the multiple would be 8.2x. The idea it to try to offset a little bit the potential extraordinary impact coming from the pandemic period, but the reality is that the Company has made 9 acquisitions during 2020 and 2021 and nowadays is a much more powerful company than in 2019.
Finally, should we take FY22 guidance (recently increased in Q1 2022 earnings release) or FY24 target (see Q1 2022 conference call), the multiple would be 3.6x and 2.6x, respectively. Besides it is important to highlight that those multiples do not take into account additional acquisitions. Indeed during Q2 2022, the Company has made 2 additional acquisitions that are not included within those figures.
All in all, the Company seems not to be trading at high multiples and, should we take future guidance/target, they could be even considered really attractive multiples.
Final bonus point: owner-operated business and skin in the game
ONEW was formed in 2014 through the combination of Singleton Marine and Legendary Marine (Bos family). Philip Austin Singleton, Jr. (second generation boat dealer and founder’s son) is the CEO since April 2019, but joined Singleton Marine in 1988, shortly after his family founded the company in 1987. Nowadays the owners of those original businesses hold more than 9% share of common stock each one. Specifically Singleton family holds approximately 9.5% and Bos family 12.8% (including Classes A and B common stock). Besides, Anthony Aisquith (President and COO) holds approximately 3.8%.
This means that this is an owner-operated business (even founder-operated) where management and founding partners hold a relevant stake of the ownership, and those kind of business tend to generate a superior and more lasting performance.
Interesting. Thanks for the write-up
Great article! I love the fact that the insiders own a lot of the shares. Only thing that concerns me is the fact that the sales of new boats during a crisis could decrease a lot.