RumbleOn Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the RumbleOn Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Will Newell, Head of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining us on this conference call to discuss RumbleOn's Q3 of 2023 financial results. Joining me on the call today are Mike Kennedy, RumbleOn's new Chief Executive Officer Mark Tack, RumbleOn's Board Observer and Ride Now Founder I'm Blake Lawson, BlumBlum's Chief Financial Officer. Our Q3 results are detailed in the press release we issued this morning and supplemental information is available in our Q3 Form 10 Q.

Speaker 1

Before we start, I would like to remind you the following discussion contains forward looking statements, including but not limited to RumbleOn's market opportunities and future financial results that involve risks and uncertainties that may cause actual results The forward looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, And RumbleOn assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Also, following discussion contains non GAAP financial measures. For a reconciliation of these non GAAP financial measures, Please see our earnings release issued earlier this morning. Now, I will turn the call over to Mark.

Speaker 2

Thanks, Will, and good morning, everyone. Thank you for joining us for our Q3 2023 earnings call. We're excited to formally introduce Mike Kennedy to all of you as the new Chief Executive Officer. We're pleased to have such a proven leader join RumbleOn at such an important time in our history. Mike is a seasoned executive with a proven track record in the powersports industry.

Speaker 2

I've known Mike for many years and I'm confident that with his expertise and successful background in the field, he is uniquely qualified to lead RumbleOn's transformation plan Enhance value for our shareholders. I want to thank the RumbleOn team for their continued hard work and dedication throughout this transition As we make progress towards our goals. In terms of my future role, I will continue to act as a consulting capacity to the term of my employment agreement. I will also be a Board observer and given my significant ownership interest in the company and my passion for the industry, I plan to stay very involved in the business going forward. And with that, I will turn it over to our new CEO, Mike Kennett.

Speaker 2

Mike? Thanks, Mark,

Speaker 3

and welcome, everyone. I've been on board for a week as RumbleOn's CEO. It's been a busy week and there are already a couple of things that are clear in my mind. First, I've been very impressed with the passion of our team. As most of you know, there have been a lot of change in recent months here at RumbleOn.

Speaker 3

And I'm convinced that the team is focused and is excited about what we can accomplish together. 2nd, I'm confident that we will deliver an efficient operation and deploy our capital smartly for the benefit of shareholders. In particular, once the rights offering is completed in a little over 3 weeks, our balance sheet will be greatly strengthened and we'll be in a position to go on the offense acquiring dealerships and expanding our footprint. I look forward to updating all of you on our progress going forward. For now, I'd like to provide some color on my background I'll turn it over to Mark to walk through the team's progress towards the exciting future here at RumbleOn.

Speaker 3

I love this industry And I bring over 3 decades of experience at leading powersports companies. Most recently, I was CEO of Hanson Hines, Private Equity Owned Leading Manufacturer of Powersports Performance Products.

Speaker 2

I spent the bulk of

Speaker 3

my career at Harley Davidson serving several capacities across different geographies and commercial aspects. My time at Harley Davidson culminated as Vice President and Managing Director of the Americas, I manage a network of 800 dealers throughout North America and Brazil. One of the aspects of this opportunity that really excites me is being close to the showroom. I've often said in my career that the action is in the showroom with our customers and now I've never been close to that excitement. I look forward to speaking with all of you in the coming weeks months.

Speaker 3

Mark will now walk you through

Speaker 2

the company's business update in more detail. Go ahead, Mark. Thanks, Mike. After an extensive search, we're excited to entrust the leadership of RumbleOn to Mike. We're confident that he will manage our turnaround plan efficiently and effectively by instituting further cost saving initiatives, repositioning our inventory management process, Strengthening our balance sheet and executing a more disciplined and strategic approach to acquisitions.

Speaker 2

We look forward to keeping you updated on our progress On these initiatives, One Mike forms his vision for driving long term shareholder value. I will now walk you through what we have done, what we're doing now, What we plan to

Speaker 3

do going forward. 1st, during the quarter, we continue

Speaker 2

to make progress in our plan to right size the cost structure, Specifically in our regional management structure, optimizing positions that were overbuilt in anticipation of a much larger footprint. We're evaluating our options regarding unused or underused facilities in an effort to offset our real estate expenses. Further, we continue to identify incremental cost savings at our dealerships and distribution centers. As you know, we have implemented $30,000,000 in annualized cost reductions and have identified another $12,000,000 totaling annualized cost savings of $42,000,000 with the effect of these measures benefiting 2024. We believe we can further reduce expenses as Blake will describe in more detail.

Speaker 2

Having expenses out of an organization is not always immediately visible And often there is a tail that can lag for a few months. 2nd, we continue to improve our inventory management. We have implemented a stringent buy sell process at the store level that will continue to self correct our used inventory levels And at the same time, allow those inventories to be increased and decreased more efficiently, adjusting for our seasonal network needs. Manufacturers of our new products are assisting us as well through increased rebates and incentives, while Also easing some carrying costs like free flooring programs. We will take advantage of these programs and enhance them through increased digital strategy, on-site events, Stronger staff incentives and the movement of excess products into higher performing consumer markets.

Speaker 2

We will see some margin compression on the non current products, but with Higher 2024 product GPUs being delivered in the quarter that will help counter a portion of that compression. Our team is committed to clearing out the 2023 products and feel confident these actions are setting us up for a strong 2024 and forward. Additionally, we have overhauled our cash offer tool, effectively reducing marketing spend, freight costs and administrative timelines. These changes will increase the right vehicle yield, helping us to achieve a better balance of new and used inventory. This also allows us to get the right vehicles in the right place 3rd, we are actively strengthening our balance sheet.

Speaker 2

As previously discussed, We are in the process of raising $100,000,000 in a fully backstopped rights offering. Dollars 50,000,000 of those proceeds will be used to pay down debt. The remaining funds will be utilized to accommodate the growth of our national brick and mortar platform. Regarding our real estate portfolio, during the quarter, we completed the sale leaseback of 8 of the 9 previously identified properties for an aggregate purchase Price of just over $49,000,000 We also expect to complete the sale leaseback of the remaining property in 2023. The net cash proceeds were remitted directly to Oaktree to pay down our term loan.

Speaker 2

Next, as we have previously disclosed, We are in the process of selling our finance company credit portfolio. We are vetting the current options and our intent remains to finalize that sale in 2023. 4th, I want to update you on the disciplined and strategic approach to acquisitions. We've identified certain accretive acquisition candidates that we can expect to be closed by the end of the Q1 2024. We have additional targets in the pipeline for the remainder of 24.

Speaker 2

We've proven that acquiring underperforming dealerships and optimizing our With the right processes, personnel and inventory management, which right now perfected over a 30 plus year span, We yield the best results for the company and its shareholders. This strategy has produced strong returns in the past. We believe it is vital to the long term success of the company. With that, I will turn the call over to Blake to walk through our Q3 2023 financials

Speaker 4

Thank you, Mark, and good morning, everyone. As the team has detailed, we continue to execute on our strategy during the quarter And are pleased with the progress we have made despite having to make some tough decisions. We have put the company back on solid ground with a plan for growth and value creation For shareholders, not to diminish the challenges that exist, which are real, heightened interest rates, non current inventory, Inflationary and economic pressures on our consumers and geopolitical unrest to name a few, while options to finance our discretionary product remain available and plentiful, Rates are certainly higher and we are seeing increased pressure on the lower credit consumers. Despite the challenges that exist, We have the utmost confidence that our team of dealership professionals will rise to the occasion, and we look forward with confidence to the future. As you are all aware, we recently favorably amended our financing agreements with our primary lender, Oaktree.

Speaker 4

As part of these agreements, We have committed to pay down $120,000,000 through the sale of non core assets and an equity raise. Mark already gave you an update on our real estate sales, Additionally, we believe we will sell our finance portfolio before year end 2023 and are confident we will be payoff an additional $15,000,000 of Oaktree debt from the proceeds of this sale, as well as eliminate the finance company line of credit that supported this loan portfolio, Further reducing costs, simplifying our company and reducing debt. I want to provide an update on the $100,000,000 fully backstopped rights offering that we announced on our Q2 earnings call in August. As Mark stated, we plan to use $50,000,000 of the proceeds to further reduce debt And the remainder to be allocated to highly accretive acquisitions. We believe the size of the capital raise and the format are well suited to achieve these two goals.

Speaker 4

The Board of Directors has fixed the close of business on November 13 as the record date. Under the terms of the rights offering, The company expects to distribute non transferable subscription rights to each holder of its Class A and B common stock as of the record date. The subscription period for the rights offering is expected to commence on or about November 13 and terminate approximately 16 calendar days thereafter. All eligible stockholders as of the record date will have the opportunity to participate in the $100,000,000 proposed rights offering on a pro rata basis. The special committee has not yet determined the subscription price to be paid upon exercise of the subscription rights, but expects to announce the remaining terms prior to the commencement of the rights offering.

Speaker 4

Now moving to our Q3 financial results. All comparative financial results are sequential and do not include the discontinued automotive operations. October of 2022 marks the final month of what I would characterize as the COVID bump as the powersports market drastically normalized in November 2022. I believe after this quarter, our comparisons will revert back to a more standard year over year versus sequential comparison. Starting with the 3rd quarter units, we sold 17,573 retail units, including 10,851 new units and 5,619 used units, down 13.3% from the prior quarter, due primarily to normal seasonality.

Speaker 4

Moving to revenue in the Q3, we generated $338,100,000 which is down 11 7% or $44,600,000 from the prior quarter due to normal seasonality. Total third quarter gross Profit was $91,900,000 down $14,500,000 from the prior quarter. Gross margin was 27.2%. Gross margin has troughed and normalized. The quarter over quarter reduction in gross profit dollars was driven entirely by reduced vehicle sales Due to normal seasonality, as all other profit centers, which include F and I, parts and accessories and service tend to flow in concert with vehicle sales.

Speaker 4

Total Powersports gross profit per unit was $5,380 up $32 from the prior quarter and in line with our 2023 guidance of 5,300 to 5,400 GPU. Turning to our Asset Light Vehicle Logistics segment. Vehicle Logistics gross profit was $3,400,000 roughly flat for the quarter. Moving down to expenses. Total third quarter expenses were $85,000,000 down $15,400,000 or 15.3 percent sequentially, related primarily to a reduction in compensation, Professional fees in general and administrative, partially offset by increased facilities.

Speaker 4

We continue to work on reducing our Additionally, in the month of October, we made significant headcount reductions at our corporate office. These positions were all fixed cost and will provide more flow through to the bottom line in Q4 and going forward. Turning to inventory. We still have work to do in Q4 to completely correct some of our oldest used inventory, But overall, day supply for used is at 87, which is in line with our internal benchmark as we work to improve the mix. With very few exceptions, new inventory is back at pre pandemic levels.

Speaker 4

We plan to make more room for the 2024 model year 4% from the Q2 of 2023, driven by normal seasonality and a lag in expense reductions made during the quarter. Adjusted net loss from continuing operations was $11,900,000 and adjusted diluted earnings per share was negative $0.71 Turning to the balance sheet and cash flow. At the end of the quarter, we had $41,400,000 of unrestricted cash. At the end of Q3, we had $32,200,000 of unflowed equity in our used inventory, which could be used to help fund the business. Our net debt, not inclusive of Floorplan at the end of the Q3 was $311,000,000 This includes the principal balance of our term debt, convertible notes And finance portfolio line of credit, not inclusive of reductions for debt discount and issuance costs, less unrestricted cash in the bank.

Speaker 4

At the end of the year, after the completion of the $100,000,000 rights offering and sale of other non core assets, net debt should be below $200,000,000 Now let me provide additional details on our outlook for the remainder of 2023. For the full year, we are reiterating our guidance for all metrics. We expect our 2 operating segments, Powersports and Asset Light Logistics, to generate combined revenue within the range of $1,380,000,000 to 1,480,000,000 We continue to expect to generate a full year gross profit per unit similar to Q3 of $5,300 to $5,400. We expect our full year 2023 adjusted EBITDA in the range of $55,000,000 to $65,000,000 The range is somewhat broad because new management is just getting started And this requires time to right size some short term inventory issues. And with that operator, we will open it up to questions.

Operator

Thank you. We will now be conducting a question and answer session. The confirmation tone will indicate your line is in the question Our first question comes from the line of Eric Wold with B. Riley Securities. Please proceed with your question.

Speaker 4

Thanks. Good morning. Just a couple

Speaker 5

of questions. I guess one, just following up on the inventory comments, Given the current guidance that you have for this year, where would you expect inventories to settle out At year end as you work to push through some of the non current model year inventory. And then as you think about Returning to a normal cadence in 2024, how should we think about when you start building inventory back up again into 2024? What Look like that's

Speaker 2

rough year. Well, we feel good currently with our inventory levels. We're doing well and moving the 23 product. I think we probably have Less than 9% of our product is below 23 model year. And we've already done 2 large campaigns with 2 of our larger manufacturers, moved a lot of that product out.

Speaker 2

They are assisting, as I said earlier, with incentives, rebates, some additional buy down on the financing. So we're seeing good activity on those promotions. And By the end of the year, I think it was our target to really try to get our used inventory lined up. I think we're in really good shape.

Speaker 4

Hey, Eric, this is Blake. I would just add, from a dollar perspective, I believe not much will change, But we are working certainly, like Mark mentioned, on the mix to make room for the 2024 model year. And then on the used side, we've still got some overhang there. Again, the dollars are probably In line and the day supply are in line, but we've got some aging issues and we hope to flush that out in Q4, Plan to flush that out in Q4 and be ready for the selling season in 2024 in the spring.

Speaker 5

Got it. Thank you. And then second question kind of on the commentary around the acquisition pipeline and once you complete The rights offering, you've got some targets that are expected to close in Q1 and then more throughout the remainder of 'twenty four. Just give us a sense of kind of what The environment looks like for acquisitions right now, these the number of willing sellers Increasing or seeing a greater pool of potential targets coming up because of the environment we're in and kind of what does that mean for Maybe the size of an average target in your pipeline and valuation multiples?

Speaker 2

So we'll keep them very busy on determining which direction we want to go. We have lots of options, but we really want to focus What works best for the company, setting up our platform. I think that I think these will close easily in the Q1, the 2 that we're working on currently. And the pipeline Will carry us throughout the year. I mean, there's plenty of opportunities, Eric.

Speaker 2

It's really just a matter of focusing on what works best for our company and our platform.

Speaker 4

Yes, Eric. I think his trailing 12 month EBITDA has normalized or is coming down for a lot of Ma and Pa dealerships and stuff, there's going to even be increased opportunities there At good values.

Speaker 2

Got it. Thank you both. Appreciate it.

Operator

Thank you. Our next question has come from the line of Michael Baker with D. A. Davidson. Please proceed with your question.

Speaker 6

Hey, thanks guys. I just wanted to ask a very big picture question. As I recall, Couple of years when we first started looking at you guys, the idea, the vision was RumbleOn

Speaker 2

was going

Speaker 6

to sort of combine online And in store, used and new and the customer would have visibility across the entire portfolio of product, again, new, used, online, etcetera, Either walking in the store or on their computer.

Speaker 4

How has

Speaker 6

the vision changed? We've been through a couple now, a couple CEO changes, what is the long term vision for the company? How has that changed in, let's say, the last 2 years? Is that still the vision? Or it seems now it's a little bit more focused on brick and mortar.

Speaker 6

So just talk to you about the what didn't work and what's the vision of the company longer term?

Speaker 2

Mike, I think that I don't I think the vision has changed a little bit, but we still have the ability To do what you're talking about, which is complete a deal 100% online, we still do that. We have been doing that. There's just a lot more opportunity right now to really grow that the our I'm moving new product around the country out of your target market. So that portion of the business really, I think the real growth in that side is on our cash shopper program. We can buy the bikes nationally.

Speaker 2

We can sell bikes nationally. We don't have to answer to anybody on the size of that business, where we ship it, what we sell it for. Used It's definitely still a future of the company.

Speaker 6

Okay. And So I guess to follow-up on that, where are you? I know there was the idea was you needed a big technology investment to get there, To make all that work, can you we understand you're cutting costs and you've cut some I think some technology people. What needs to be reinvested to make all this work? Or is the only investment going forward just going to be investing in buying stores?

Speaker 2

Well, no, we're still moving forward on some of the technology, but frankly, we're really fine tuning what we already I mean, we're making bigger leaps and more success just fine tuning the admin on the acquisitions of those products. So Really geo targeting where we're buying product and I don't want to give you too much of the secret sauce, but we're really looking at Fine tuning the process that's already in place, we're being very successful with that.

Speaker 6

Okay. Thanks for that. I have other questions, but I'll jump back in the line to try to commit to the one question and one follow-up idea.

Speaker 2

Thanks, Mike.

Operator

Thank you. Our next questions come from the line of Seth Basham with Wedbush Securities. Please proceed with your questions.

Speaker 7

Thanks a lot and good morning. First, could you give us a little bit more color on how demand trended through the quarter and how you're About the outlook in 4Q and 1Q, do you think that we hit a bottom or do you think that some of the macro pressures are going to further restrict demand?

Speaker 2

Well, I wish we had a crystal ball on that. And maybe you could help, but We're just moving forward with what we have to do. And I mean, we have to we're lowering our debt. We've lowered a lot of money out of our SG and A costs. We've made progress on our inventories.

Speaker 2

We're doing everything we wanted to do and it's all moving forward. And that's really all we can do. We can't Control the macro environment, we can just do the best we can do and continue to sell product, do things we do best.

Speaker 7

Got it. As you turn the page into 2024, it seems like you're expecting higher demands, You're expecting higher gross profit and your cost base has come down. So that points to materially higher EBITDA in 2024 than 2023. Is that the right interpretation of the way you guys are forecasting the business?

Speaker 4

Yes. I would say that Our 2024 guidance reflects a little bit of Growth and we're pretty being pretty conservative, but a little bit of growth in used. GPU is relatively the same and definitely cost reductions, which To your point, does bump up EBITDA.

Speaker 7

Can you give us a little bit more color on that GPU expectation into 'twenty Or considering that you guys have taken a lot of pain as you move through aged inventory, shouldn't we see better trends without that pressure in 20 24.

Speaker 4

We hope so. The guidance right now is 53.50, which is Pretty squarely in the middle of where we're at right now and anticipate that we will start to see Improved margins in used in 2024, but that could be partially offset by New inventory margins, which quite frankly, we've got a lot of new inventory at this point. And so We're just kind of trying to take a conservative approach, but certainly there could be some upside there.

Speaker 2

To Blake's point, I mean, we've got 24 product coming in. It is holding a better margin. I mean, there's a lot of there's always demand for 2024 product. Every New Year, Our consumers really love their toys. They want to have the coolest, the newest thing that's out there.

Speaker 2

And there's a lot of that Generally, it's released by the OEs early 'twenty four models that will come out late in the 'twenty three years. We're really, I think, focusing on the efficiencies of what we do, covering the expenses again And really trying to offset some of that inventory correction, some of these campaigns that we're running now with the rebates, the incentives And the 24 product that's coming in is getting we're getting all the money for the 24 product.

Speaker 7

Got it. And my last question is just thinking about the used to new ratio into 2024 with some of the changes to your cash offer and it seems like a little bit less emphasis on the used Should we expect the used to new ratio to change meaningfully next year?

Speaker 2

We're running a 2:one right now, 2 new to 1 news. We're happy with that ratio. We have slowed down a little bit on our acquisitions, but it's that time of year. I mean, we really don't Ramp up our acquisitions, though, January, February, and into early March to really ramp everything up for the summer. We're right where we want to be.

Speaker 2

We're going to turn that knob and right now we're unloading some of the data stuff, But we're really leaning it up. It's going to get ramped up January, February, March, and we'll be ready for the summer 2 to 1, you might see that even shift a little stronger, maybe 1.75 to 1 in the spring after we load That product is going to fluctuate a little bit, but on a year annual basis, we're quite intent right now with a 2:one ratio.

Speaker 7

Thank you.

Operator

Thank you. Our next questions come from the line of Michael Baker with D. A. Davidson. Please proceed with your questions.

Speaker 6

All right. Jumping back in, thanks. I just can you and maybe it's in your filing somewhere, but remind me, just walk Through again the how the deck goes from, I think you said 311,000,000 to less than 200, And remind us what your revised covenants are in terms of leverage ratios and how long those Are those revisions permanent or temporary waivers? Just remind us how that works.

Speaker 4

Yeah. Great question. So $311,000,000 goes to below $200,000,000 really with The $100,000,000 rights offering where $50,000,000 goes straight to principal debt And the other $50,000,000 is in your cash account, so Which there's also obviously we've got one more real estate property, which will get us another $7,000,000 call it and the finance portfolio coming off, right now the principal balance That is about $14,000,000 that'll go away as well as, some proceeds up to $15,000,000 to pay down debt. So, it should easily be below $200,000,000 at the end of the year just with Those facts. And as far as our covenant with Oaktree, we did have Relief for Q2 and Q3 being in the form of not even being tested.

Speaker 4

And then in Q4, that covenant Starts at a total net leverage of 5.5. And then in the first quarter, It drops to 5, and that's for both total net leverage and secured net leverage. So 5.5 and then 5 and then in Q2 of 2024, it goes to 4.75 for total net leverage And 4.25 percent for secured net leverage. And then In Q3 of 2024, it goes to 4.25 Of total net leverage and 3.75 of secured net leverage, which is where it actually was to begin with. So it goes back to where it was to begin with In next Q3 in a year.

Speaker 6

Okay. Can give yourself credit for the cash. And the denominator, is that the annual EBITDA Outlook or is it trailing 12 months EBITDA or just remind us, I'm not calculating it. Yes, it's

Speaker 4

trailing 12 months adjusted EBITDA.

Speaker 2

Okay.

Speaker 6

And the numerator is net debt. In other words, you get a credit for the cash?

Speaker 2

Exactly.

Speaker 3

Yes. Okay. Thank you. Yes.

Operator

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over Mike Kennedy for closing remarks.

Speaker 3

Thank you. Let me wrap up and just share a couple of things. First, I want to thank Mark Tack There's confidence in me as well as his mentorship during the transition period. Mark is an incredibly successful entrepreneur And smart businessman, and I look forward to building on momentum that he's created here. Secondly, I want to reiterate that we will lay out a clear vision and a set And lastly, thank you everyone for your questions and your interest in RumbleOn.

Speaker 3

And I look forward to speaking with you in the near future.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.

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