RumbleOn Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 12, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the Rambo On Inc. 3rd Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Elliot Wagner, Vice President of Finance. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us on this conference call to discuss RumbleOn's Q3 2024 financial results. Joining me on the call today are Mike Kennedy, RumbleOn's Chief Executive Officer and Tiffany Kice, RumbleOn's Chief Financial Officer. Our Q3 results are detailed in the press release we issued this morning and supplemental information will be available in our Q3 Form 10 Q once filed. Before we start, I would like to remind you that the following discussion contains forward looking statements, including, but not limited to, RumbleOn's market opportunities and future financial results and involves risks and uncertainties that may cause actual results to differ materially from those discussed here.

Speaker 1

Additional information that could cause actual results to differ from forward looking statements can be found in RumbleOn's periodic and other SEC filings. 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, the 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'll turn the call over to Mike Kennedy, RumbleOn's CEO.

Speaker 1

Mike? Thanks, Elliot.

Speaker 2

Good morning, everyone, and thank you for joining us for RumbleOn's 3rd quarter earnings call. As we walk you through the details of our Q3 results and key work streams within the team, you will see the entire organization has been fully engaged and continue to reshape the company for long term success. I'm excited to share our key focus areas with all of you today, and I'm enthusiastic about our future. We've engaged an investment bank to explore refinancing of the company's debt and continue to get clarity on a viable path to deleverage our balance sheet and lower our cost of capital. We believe the $30,000,000 of incremental capital commitments from our 3 largest shareholders announced this morning, which includes a commitment for a $10,000,000 fully backstopped equity rates offering, will enable full repayment of the convertible notes as they come due on January 1, 2025, and help position us for successful refinancing.

Speaker 2

This incremental financial support from our largest shareholders shows a full team's alignment with our objectives. In the meantime, we continue to gain traction on our operational strategy of running the best performing power sports dealerships in America and feel great about what the future has in store for us. From an operations perspective, I'm incredibly proud of the RumbleOn team's performance in the Q3. In our Powersports group, while the quarter's landscape became incrementally more challenging from start to finish, we made significant improvements and progress in the business. Our automotive transport business Wholesale Express was able to deliver growth across the board on units delivered, revenue generated and gross profit earned.

Speaker 2

Before turning the call over to Tiffany Kice, I'll walk you through a few of those highlights specifically around our inventories, cost optimization initiatives, M and A strategy and cash flow from operations. Our core strategy revolves around leveraging our national scale to run the best performing dealerships in America supported by an aligned and efficient corporate office. We continue to focus on this goal and as a result the team's efforts have consistently delivered positive free cash flow during the 1st 9 months of 2024. Although we remain laser focused on achieving our Vision 2026 goals which we outlined in March, we recognize that industry growth trends and the M and A opportunity set may influence the timing of reaching our goals. The current macro environment remains difficult, but we are proud of the gains we've made to date and continue to build positive momentum.

Speaker 2

We set a goal to reduce new inventories by $50,000,000 for the full year 2024. As you review the balance sheet, you'll see a $53,800,000 reduction in total inventory as of September as compared to the prior year. While that number represents our total inventories, which includes new vehicles, pre owned vehicles, parts and accessories and apparel, it gives you a clear indication that we are headed in the right direction. As we strive to right size our inventories during the Q3, we experienced margin compression. As a result, we're now positioning margins to improve in the business going forward.

Speaker 2

Our OEM partners have been constructive in helping us address the inventory overhang, which has further accelerated our progress. Although there's still more work to be done in optimizing our inventory levels and mix, I'd like to congratulate our team for making significant progress in this regard, and I'm confident we're on track to meet our year end new inventory reduction target. I'm also pleased to share that we have fully executed on our $30,000,000 of annualized cost savings announced on our Q2 earnings call. Congratulations to the team for proving our ability to move quickly and be agile in the current environment. As we have mentioned on prior calls, we take a continuous improvement approach to managing the business and we see additional opportunities that we are addressing to both strengthen the team and drive more cost out of the business at the same time.

Speaker 2

Some of those opportunities come from our traction of our strategy of leveraging our scale to be the best in the industry and other aspects come from our alignment and clarity on what is most important to drive the business. A key measure for us in our cost optimization work is adjusted SG and A as a percent of gross profit dollars. As you see in the earnings release, adjusted SG and A as a percent of gross profit for the quarter was 86% versus 89% during the same period last year. From a year to date perspective, our adjusted SG and A as a percent of GP was 84% versus 87% a year ago. These metrics improved even in the face of gross profit declines of 19% from Q3 2023 to Q3 2024 and a 15% from a year to date September 2023 to date September 2024.

Speaker 2

We would expect this KPI to improve even further in 2025 based on the actions executed and further cost optimization actions planned, which will set us up for a long term target of 75% of SG and A as a percent of gross profit. Shifting gears, I want to provide an update on our M and A strategy and highlight our recent expansion in the Northeast. In August, we acquired Harley Davidson dealership in West Bridgewater, Massachusetts, now named Revolution Road Harley Davidson. This expansion showcases the team's ability to grow our network and our OEMs commitment to aligning with us. We are poised to continue growth via acquisitions and greenfield opportunities as they arise.

Speaker 2

We remain focused on our acquisition pipeline activity and encouraged by the number of opportunities. That being said, we recognize the need for discipline in the current environment. We will be selective and only deploy capital where it makes financial sense and will be accretive to our per share value. Lastly, we're pleased to see the Federal Reserve interest rate reductions of 50 basis points on September 18 and a 25 basis point cut on November 7. The 75 basis points of cumulative rate reductions over the last few months will help us save approximately $3,000,000 in cash interest expense in 2025, helping to improve our financial metrics and free cash flow.

Speaker 2

We are managing through the execution of a turnaround, the industry transition off of COVID and the broader macro challenges, and I'm both encouraged and optimistic about the progress we're making to improve the core operations of the company. We're focusing on what we can control to establish a strong foundation for the future, positioning ourselves to capitalize on a recovery in the industry. We're moving aggressively to improve the long term earnings potential of the business and optimizing efficiencies and costs in an effort to drive free cash flow. We believe there is significant competitive advantage with our cash offer platform and being the largest powersports dealership network in North America, and we're confident in our long term plan to initiate 2026 strategy. And with that said, I'd like to turn the call over to Tiffany to walk us through this quarter's financial performance.

Speaker 3

Thank you, Mike, and good morning, everyone. I will start by reviewing our financial results for the Q3 of 2024 followed by an overview of our balance sheet. We generated revenue of $295,000,000 and adjusted EBITDA of $6,800,000 in the Q3 of 2024. Revenue was down 12.7% year over year and adjusted EBITDA was down 26.1% year over year. Total company adjusted SG and A expenses was $64,300,000 or 86.5 percent of gross profit compared to the same quarter last year of $82,100,000 or 89.2 percent of gross profit.

Speaker 3

As a reminder, we are targeting adjusted SG and A to be 75 percent of gross profit within our Vision 2026 plan. Adjusted SG and A expenses were 21.7% lower than the same quarter last year. Moving on to our segmented performance, the Powersports Dealership Group retailing approximately 14,300 total Powersports major units during the quarter, which is down 13.2% from the same quarter last year. Total new powersports major unit sales were approximately 9,700, down 10.2% to the same quarter last year, while pre owned unit sales totaled approximately 4,500, down 19%. Our new inventory levels have been heavy throughout the year and as Mike mentioned earlier, we have made great progress in working down these inventory levels and believe our new inventory reduction target is in sight for the end of the year.

Speaker 3

Our team is working closely with our OEM partners to align new inventory levels to the current market environment. We have made significant progress during Q3 2024 and expect to meet our reduction goals in new inventories. Gross margins for major unit sales were challenged on new and pre owned inventory in the Q3. New unit gross margins for the quarter were 11.3% compared to 13.8% in the same quarter last year, driven by overstocking in the industry, compounded by our decision to exit non core product lines and over assorted brands not aligned with Vision 2026. Pre owned gross margins of 12.1% for the quarter compared to 13.6% in the same quarter last year.

Speaker 3

We continue to leverage Ridenau's cash offer, our purchasing scale and our industry relationships to improve the pre owned business. Our parts, service and accessories, or fixed operations business, delivered $49,200,000 of revenue and $22,700,000 of gross profit or GPU of $15.89 down $49 or 3%. The decrease comes primarily from accessories and service. Our financing and insurance teams delivered $24,300,000 in revenue or GPU of 1701, down 4.3 percent year over year. The decrease was driven by a decline in unit volume.

Speaker 3

So all in, revenue from our powersports dealership group was 279,900,000 down 13.6% to the same quarter last year. The decrease in revenue is attributed to the lower major unit volume. Total GPU for the group was $4,955 down $425 or 7.9 percent to the same quarter last year and in line with our expectations as we continue to manage the macro environment. Turning now to our Asset Light Vehicle Transportation Services operating group. For the Q3, Wholesale Express revenue was up 7.9% as compared to the same quarter in the prior year, while gross profit increased 2.9 percent to $3,500,000 The increase was driven by an increase in number of vehicles transported.

Speaker 3

Turning to our balance sheet. We ended the quarter with $66,700,000 in total cash, inclusive of restricted cash, and nonvehicle net debt was $217,000,000 Availability under our short term revolving floor plan credit facilities totaled approximately $121,500,000 as of September 30. Total available liquidity, defined as unrestricted cash plus availability under floorplan credit facilities on September 30, totaled $188,200,000 Cash inflows from operating activities was $68,600,000 for the 9 months ended September 30 as compared to cash outflows of $8,500,000 for the same period in 2023. This improvement is a direct result of our focus on efficiencies and cost optimization. I'm also happy to report that we signed a credit agreement amendment with our existing term loan lender, which relapsed at certain covenants for the next quarter through June 30, 2026, providing further financial flexibility.

Speaker 3

In connection with our credit agreement amendment, we have received incremental capital commitments for $30,000,000 from our 3 largest shareholders, of which $10,000,000 is in the form of a backstopped common equity rights offering. This new capital commitment reaffirms our 3 largest shareholders' support of the business and strengthens our cash position as we focus on repaying the convertible notes coming due on January 1, 2025, while maintaining debt covenant compliance. As we look ahead, we continue to actively evaluate different opportunities to optimize our capital structure, lower our cost of capital and extend the debt maturity profile of the company. As part of this process, we recently engaged an investment bank to explore refinancing of the company's debt. With that, we'd like to begin the question and answer session.

Speaker 3

I'll turn the call back over to the operator now to open the line.

Operator

Yes, thank you. We will now begin the question and answer session. And the first question comes from Craig Kennison with Baird.

Speaker 4

Hey, good morning. Thanks for taking my question. Just following up on the capital infusion of $30,000,000 can you give us a little more information about the terms of the $20,000,000 and then the $10,000,000 backstopped portion?

Speaker 2

Yes, sure. Let me start it off. Thanks for the question. By the way, those details will be filed in the Q later on this afternoon and the 8 ks this morning, sorry. But you want to just talk a bit about it, Tiffany?

Speaker 3

Sure, Chad. So we filed an 8 ks this morning that will describe the $30,000,000 $10,000,000 of it is coming from a fully backstopped rights offering from our 3 largest shareholders, and we will execute on that prior to December 1. We'll launch it prior to December 1. The remaining $20,000,000 $4,000,000 of that comes from a sale leaseback of 1 of our properties in Florida, And then the remaining $16,000,000 of that is coming from a floor plan facility that's being provided by 2 of our largest shareholders.

Speaker 4

Okay. Thank you for that. And then I wanted to ask about a press release on the partnership with Octane and what you can share regarding the economics of that relationship?

Speaker 2

Yeah, Craig, thanks for the follow-up question. Yeah, we announced the relationship with Octane. It's a preliminary relationship. We're doing a lot of exciting things for our customers and for our stores in terms of offering services. It's a white label program that's going to be rolled out across all of our Ride Now outlets and it's just a really good partnership.

Speaker 2

We've been doing a lot of business with Octane, you know over the last few years. They're a great partner of ours and just strengthen the partnership and open up opportunities for down the road.

Speaker 4

Okay. Hey, thank you.

Speaker 2

Thanks, Greg.

Operator

Thank you. And the next question comes from Eric Wold with B. Riley Securities.

Speaker 4

Thanks. Good morning, everyone. Appreciate taking my questions. A couple of questions, I guess, I know you talked about you

Speaker 1

were working a lot

Speaker 4

with your OEM partners to reduce the new vehicle inventories with the goal of 50,000,000 dollars reduction by year end. Maybe talk a little bit more about kind of your actions around used vehicles. I guess how just one, how aggressive maybe aggressive is not the right word, but I guess how aggressive are you being with the cash offer tool and willingness to take on used vehicle inventory? And then maybe what are you seeing from the consumers in terms of the velocity of vehicles being offered to you or kind of looking for an offer versus maybe what you saw 6, 12 months ago?

Speaker 2

Yeah. Sure, Eric. Thank you. Appreciate the question. I can't really speak to your last point about, you know, what's changed over the last 6 months or so.

Speaker 2

You know, the cash offer platform is a great tool for us. We think it's competitive advantage. We're the largest purchaser of pre owned products in the country by a long shot. And of course, as a reminder, right, we totally reengineered that process and we're really pleased with the results. We entered the year with, you know, tight inventories from a day supply perspective.

Speaker 2

We announced that early on in the year. We've been chipping away at that as we've gone through the year and we're I would say we're you know comfortable with our day supply of pre owned today and you can see the performance in the quarter was slightly better than Q2 and we're optimistic about that platform of incoming product and our ability to turn it at our stores and then also leverage our national scale of dealerships where we also acquire a lot of product, pre owned product direct from the customers whether it's in the service lane, trade ins or just locally. So all in all, it's a phenomenal opportunity for us. We love the pre owned business. It's a great avenue for us and the margins have been pretty good this year too.

Speaker 2

So we're pleased with it overall.

Speaker 4

Thank you. And then a follow-up question, I know you talked a little bit about the year over year changes in F and I and parts, service accessories. But just looking the percentage of those revenues as a percentage of vehicle revenues was down kind of meaningfully year over year and kind of off trend from kind of what it's been in recent years. Anything to call out there? Was that an incision internally into the changes you're making?

Speaker 4

Was that due to mix of product? Was that a shift in just consumer demand? Trying to understand kind of what drove those declines relative to unit sales year over year?

Speaker 2

Yes. No, it's a great question Eric. I appreciate you paying attention because fixed operations are really, really important to our business and we like that business because it's you know it's great customer engagement and relationship and then of course the margins are great as well. I think we're experiencing 2 things in that area. When your pre owned volume drops, it tends to sort of pull on that fixed operations because we're not pushing the volume of pre owned motorcycles through the service department.

Speaker 2

So there's a little bit of that that we're digesting and then I just think overall coming off of, you know, the extraordinary numbers from COVID and all those new customers that entered the market. So I gets better as we turn to 2025 and our strategy of kind of focusing on those areas has improved over the last quarter. So, I would expect that to improve going forward. Helpful. Thank you.

Operator

Thank you. And the next question comes from Mike Baker with D. A. Davidson. Please go ahead, Mr.

Operator

Baker. Your line is live.

Speaker 5

Okay. Sorry. To get to the 75% ratio of SG and A to gross margin, is that more likely to come from gross profit dollars getting better or is there still significant cost savings that you're working on?

Speaker 2

Yes, great question, Mike. The answer is a little bit of both, right. That's you know, we expect gross margin and gross profit dollars to improve going forward, and we also see opportunities to strengthen the team and continue to drive cost optimization out of the business. So it's a bit I don't mean to kind of say it's both, but it is both, and we expect to get improvement on the GP side as well as the SG and A side going forward.

Speaker 5

Well, and to follow-up on that, that $30,000,000 that you've already taken out, I guess what you're saying is there's more to go, but any way to size that relative to what you've already been able to accomplish?

Speaker 2

Yes, certainly not at that $30,000,000 level. And again, as I said from the beginning, right, my goal with the culture of this company and the senior leadership team is to develop a continuous improvement mindset and we're going to wake up every day no matter how good yesterday was, we're going to have a mindset that we can do a little bit better tomorrow. And as our strategy takes traction, we're seeing opportunities, you know, whether it's on the marketing side of things where, you know, our cost per click, our cost per lead is coming down. On the productivity side, our effectiveness of closing those leads is going up. Driving test rides within our stores is improving.

Speaker 2

And so we just think there's opportunities still in a lot of different areas of the business to get better as well as take cost out. And then as the business improves the gross profit dollars will increase, especially coming off this inventory reduction which I'm really proud of the team and the progress they made, but that certainly put some compressed pressure on gross margins on the new categories.

Speaker 5

Yes, makes sense. And if I could follow-up one more on that inventory question, and sorry if I missed it. The How much where are you relative to that $50,000,000 goal? We know where you are obviously in total inventories, but I guess where relative to the just on the new side? Thanks.

Speaker 2

Yes. No, good question. Thanks for asking. The team has done great work in this area and I'll be totally transparent. At the end of Q2, I was a little nervous and I had some pretty heated conversations with my team around our progress and the team completely stepped up in Q3 and delivered.

Speaker 2

And by the way, I mentioned in my remarks, I want to mention again, our OEM partners have played a big role in that. They've been incredibly productive in helping us reset the right profiles and make sure our day supply is at a healthy level. But the team, at the end of the day, really delivered and moved out a lot of that product in Q3. So, I feel very confident that we're going to achieve our $50,000,000 target, which was set out at the beginning of the year to achieve by the end of the year. And so I'm really proud of the team what they've been able to deliver in that regard.

Speaker 5

Can you quantify where you are now or are we not breaking that out?

Speaker 2

Yes, we're not bringing that out at this point. You'll see it in the year end numbers, but, yes, we just don't share that level of specificity right now.

Speaker 4

Okay. Thank you.

Speaker 2

You bet. Thank you.

Operator

Thank you. And this concludes our question and answer session. I would like to return the conference back over to Michael Kennedy for any closing comments.

Speaker 2

Okay, thank you everyone. I'd like to close out and just mention 2 important things. First, I want to take a moment to express my appreciation and gratitude to the entire team. Throughout the company, you continue to impress me by keeping our riders as our top priority and taking on the current macro environment with conviction and determination. Thank you very much, everyone.

Speaker 2

Lastly, I'd like to emphasize that we are committed to vision 2026 and maximizing our long term per share value, while confidence builds on delivering our key targets around annual revenue in excess of 1,700,000,000 dollars annual adjusted EBITDA of greater than $150,000,000 and annual adjusted free cash flows of $90,000,000 or more. And regardless of timing, we as a management team and the company are laser focused on achieving vision 2026 and we'll make decisions in the best interest of a long term per share value creation at every turn. Thank you very much for your time today and your continued interest in Remelon. That concludes our call.

Operator

Thank you. As mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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