RideNow Group Inc (RDNW) 2023 Q3 法說會逐字稿

Greetings and welcome to the RumbleOn third-quarter 2023 earnings conference call. (Operator Instructions) A question and answer session will follow the formal presentation very much require. Thank you. You may begin.

Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining us on this conference call to discuss RumbleOn. Joining me on the call today are Mike Kennedy, RumbleOn's new Chief Executive Officer. Our Q3 results are detailed in the press release we issued this morning and supplemental information is available in our third quarter Form 10Q.

Before we start, I would like to remind you all in discussion contains forward-looking statements, including but not limited to RumbleOn's market opportunities and future financial results involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results 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 based on current expectations as of today, RumbleOn assumes no obligation 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 early this morning. Now I will turn the call over to Mark.

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

I have known Mike for many years, and I am confident that with his expertise and successful background in the field, he is uniquely qualified to lead RumbleOn's transformation plan and 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 through 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.

With that, I will turn it over to our new CEO, Mike Kennedy, Mike.

Thanks, Mark, and welcome, everyone. I have been on board for a week as RumbleOn CEO. It's been a busy week and there are already a couple of things that are clear in my mind. First, I have 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, and I am convinced that the team is focused and is excited about what we can accomplish together.

Second, I am confident that we will deliver the benefit of shareholders. In particular, once the rights offering is completed and a little over three weeks, our balance sheet will be greatly strengthened and we will be in a position to go on the offense, acquiring dealerships and expanding our footprint and look forward to updating all of you on our progress going forward.

For now, I would like to provide some color on my background for turn it over to Mark to walk through the team's progress towards the exciting future here at RumbleOn.

I love this industry and I bring over three decades of experience at leading powersports companies. Most recently, I was CEO of vans and Heinz, private equity own leading manufacturer of Power Sports Performance Products. I spent the bulk of my career at Harley-Davidson serving several capacities across different geographies and commercial aspects. My time at Harley-Davidson culminated as Vice President Managing Director of the Americas, where I managed 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 have often said in my career that the action is in the showroom with our customers and now have never been closer that excitement. I look forward to speaking with all of you in the coming weeks and months.

Mark, will now walk you through the company's business update in more detail. Go ahead, Mark.

Thanks, Mike. After an expensive search, we are [excited] to interest the leadership of RumbleOn tonight. We are 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.

We look forward to keeping you updated on our progress on these initiatives, while Mike forms his vision for driving long-term shareholder value. I will now walk you through what we have done, what we are doing now and what we plan to do going forward.

First, during the quarter, we continued 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 are evaluating our options regarding unused or underused facilities in an effort to offset our real estate expense.

As you know, we have implemented $30 million in annualized cost reductions and have identified another $12 million totaling annualized cost savings of $42 million. With the effect of these measures benefiting 2024, we believe we can confer reduce expenses, as Blake will describe in more detail. Cutting expenses out of an organization is not always immediately visible and often there is a tail with lag for a few months.

Second, we continue to improve our inventory managed. We have implemented a stringent buy-sell process at the store level that will continue to top direct our used inventory levels and at the same time allow those inventories to be increased and decreased more efficiently. Adjusting for our seasonal network meets. Manufacturers of our new products are assisting us as well through increased rebates and incentives, well 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. We will see some margin compression on the noncurrent products, but with higher 2024 product CPU is being delivered in the quarter, it 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 time line. These changes will increase the right vehicle yield, helping us to achieve a better balance of new and used inventory, which also allows us to get the right vehicles in the right place at the right time and at the right value.

Third, we are actively strengthening our balance sheet. As previously discussed, we are in the process of raising $50 million 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 eight of the nine previously identified properties for an aggregate purchase price of just over $49 million. 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.

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. Fourth, I want to update you on a disciplined and strategic approach to acquisitions. We have identified certain accretive acquisition candidates that we can expect to be closed by the end of the first quarter 2024.

We have additional targets in the pipeline for the remainder of '24. We have proven that acquiring underperforming dealerships and optimizing our operations with the right processes, personnel and inventory management, which right now perfected over a 30 plus year span will yield the best results for the company and its shareholders. This strategy has produced strong returns in the past, and we believe it is vital to the long-term success of the company.

With that, we will turn the call over to Blake to walk through our third quarter 2023 financials and outlook in more detail.

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. As part of these agreements, we have committed to pay down $120 million through the sale of non-core assets and an equity raise. Mark already gave you an update on our real estate sales resulting in the company remitting $47 million directly to Oaktree to reduce outstanding debt under the term loan.

Additionally, we believe we will sell our finance portfolio before year end strain 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 million fully backstop rights offering that we announced on our Q2 earnings call in August.

As Mark stated, we plan to use $50 million 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. The Board of Directors has fixed the close of business on November 13th 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 13th and terminate approximately 16 calendar days thereafter.

All eligible stockholders as of the record date will have the opportunity to participate in the $100 million 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.

Now moving to our third quarter financial results. Our 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 at the powersports market drastically normalized in November 2022.

I believe after this quarter, our [competitors] will revert back to a more standard year-over-year versus sequential comparison. Starting with third 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.

Moving to revenue, in the third quarter, we generated $338.1 million, which is down 11.7% or $44.6 million from the prior quarter due to normal seasonality. Total third quarter gross profit was $91.9 million, down $14.5 million 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&I parts and accessories and service, tend to flow in concert with vehicle sales. 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 $3.4 million, roughly flat for the quarter.

Moving down to expenses, total third quarter SG&A expenses were $85 million, down $15.4 million or 15.3% sequentially. Related primarily to a reduction in compensation, professional fees and general and administrative, partially offset by increased facilities. We continue to work on reducing our facility expense through sublease initiatives. Additionally, in the month of October, we made significant headcount reductions that are provide more flow through to the bottom line in Q4 and going forward.

Turning to inventory, we still have work to do at all 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 inventories back to pre-pandemic levels. We plan to make more room for the 2024 model year and are making progress by aggressively marketing the non current model-year product.

Adjusted EBITDA was $13.2 million in the third quarter, down 44% from the second quarter of 2023, driven by normal seasonality and a lag in expense reductions made during the quarter. Adjusted net loss from continuing operations was $11.9 million and adjusted diluted earnings per share was negative $0.71.

Turning to the balance sheet and cash flow. At the end of Q3, we had $32.2 million of unsold (technical difficulty) our net debt, not inclusive of floorplan at the end of the third quarter was $311 million. This includes the principal, non inclusive of reductions for debt discount and issuance costs.

End of the year after the completion of the $100 million rights offering and sale of other non-core assets, net debt should be below $200 million.

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 two operating segments, powersports and asset light logistics to generate combined revenue within the range of $1.38 billion to $1.48 billion. 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 million to $65 million. The range is somewhat broad because, new management is just getting started fully identifying business needs and this requires time to right size and short term inventories. And with that, operator, we will open it up to questions.

Thank you. We will now be conducting a question and answer session (Operator Instructions)

Eric Wold, B. Riley Securities.

Thanks. Good morning. Some questions, I guess one, just following up on the inventory comments, inventory to settle out at year end, as you work to push through some of the noncurrent model year inventory and then, as you think about returning to normal cadence in '24, how should we think about, when you are sort of building inventory back up again into '24? What should look like throughout the year?

While, we show we feel good currently with our initial level, we are doing well and move into '23 product. I think we probably have less than 9% of our product is below '23 model year. And we have already done two large campaigns with two of our larger manufacturers moved a lot of that product out, they are assisting, as I said earlier, with incentives rebates, some additional buydown on the financing.

So, we are seeing good activity on those promotions. And, you know, by the end of the year, as I think was our target to really try to get our used inventory lined up. I think we are in really good shape.

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 use side, we have still got some overhang there. Again, the dollars are probably in line and the days supplier in line that we have got some aging issues, and we hope to flush that out in Q4 plan to plan to flush that out in Q4.

And be(technical difficulty) and the commentary around the acquisition pipeline and once you complete the rights offering because, that's on some targets out there expect to close in Q1 and then more throughout the remainder of 2014, essentially kind of what the environment looks like for acquisitions right now, these are the number of willing sellers--

[You are seeing] a greater pool of potential targets coming up because, the environment ran and kind of what does that mean for-- the size of an average target pipeline and valuation very busy on determining which direction we want to go. We have lots of options, but we really want to focus on what works best for the company, setting up our platform. I think these will close easily in the first quarter. The two that we are working on currently and the pipeline will carry us throughout the year. I mean, there is plenty of opportunities, Eric, it's really just a matter of focusing on what works best for our company and our platform.

Yes, Eric, I think is trailing 12 month EBITDA has normalized or is coming down for a lot of non part dealerships and stuff there is going to even be increased opportunities there at good values.

Got it. Thank you both. Appreciate it.

Michael Baker, D.A. Davidson.

Hey, thanks, guys. I just wanted to ask a very big picture question. As I recall a couple of years ago when we first started looking at you guys, the idea the vision was RumbleOn was going to sort of combine online and in-store, use the new and the customer would have visibility across the entire portfolio of product, again, new used online, et cetera, either walking in the store or on their computer.

How has the vision changed? We have been through a couple of now a couple of CEO changes. How what is the long-term vision for the company? How has that changed and, let's say, the last two years? Is that still the vision or assumes now it's a little bit more focused on brick and mortar to just talking about what didn't work and what's the vision of the company longer term?

Mike, I think the vision is changed a little bit, but we still have the ability to do what you are talking about, which is completed deal, 100% online and we still do that. We are, we have been doing that to really grow that our cash offer program, which is our acquisition program. And by doing that, I think you will find the omnichannel, probably a lot more successful on the use side of the product because, a lot of limitations with with OES and 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 offer program. We can buy the bikes nationally, we can sell bikes nationally, we don't have to answer anybody on the size of that business where we ship it. What we sell it for use is is definitely still a feature of the company.

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 [your cutting costs] and you have 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?

Well, now we are still moving forward on some of the technology, but frankly, we are really fine tuning what we already have. I mean, we are making bigger leaps and more success, just fine tuning the admin on the acquisitions of those products. So, really geo-targeting where we are buying product. And I don't want to give you too much of the secret sauce, but we are really looking at it fine tuning the process authority in place. We are being very successful with that.

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

Thanks, Michael.

Seth Basham, Wedbush Securities.

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 are thinking about the outlook in for Q1? Do you think that we hit the bottom? Or do you think that some of the macro pressures are going to further restrict demand?

Well, I wish we had a crystal ball on that. And maybe you could help, but we are just moving forward with what we have to do. And I mean, we have to we are lowering our debt costs. We have made progress on our inventories and we are 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 things that we do best.

Got it. As you turn the page into 2024, it seems like you are expecting higher demand, you are expecting higher gross profit and cost base has come down. So, that points to materially higher EBITDA in '24 than '23. Is that the right interpretation? The way you guys are forecasting the business?

Yes, I would say that, our 2024 guidance reflects a little bit of growth. We are being pretty conservative, but a little bit of growth in used GPUs relatively the same and definitely cost reductions, which to your point does bump up EBITDA.

Trends without that pressure in 2024?

We hope so. The guidance right now is 53, 50, which is pretty squarely in the middle of where we are 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 have got a lot of new inventory at this point. And so, we are just kind of trying to take a conservative approach, but certainly there could be some upside there.

It was linked to (inaudible) point. I mean, we have got 24 product come and that is holding a better margin. I mean, there is a lot of there is 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 and there is a lot of that generally gets released by the OES early-- 24 models that have come out late in the 23 years-- the rebates, the incentives and the 24 product that's coming in, it's getting, we are getting all the money for the 24 product.

Got it. And my last question, just thinking about the used to new the ratio into 2024 with some of the changes to your cash-- In fact, the used to new ratio to change meaningfully next year?

[Remove] the one news. We are 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 want to ramp up our acquisitions. So, January, February and in the early March to really ramp everything up for the summer. So, we are right where we want to be. We are going to turn that knob and right now, we are unloading some of the dated stuff, but we are really leading it up going to get ramped up January February, March, and we will be ready for the summer with two to one.

You might see that even shift a little stronger, maybe 175 to 1 in the spring after we load up with that product, it's going to fluctuate a little bit, but on a year annual basis, we are quite intent right now with two to one ratio.

Thank you.

Thank you. (Operator Instructions) Michael Baker, D.A. Davidson.

All right. I will jump 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 debt goes from? I think you said $311 million to less than $200 million and remind us what your revised covenants are in terms of leverage ratios and how long those revisions permanent or temporary waivers? Just remind us how that works.

Great question. So $311 million goes to below $200 million, really with the $100 million rights offering, where $50 goes straight to principle. We have got one more real estate property, which will get us another $7 million call it and the final and the portfolio coming off right now, the principal balance of that is about $14 million, that will go away as well.

Some proceeds up to $15 million to pay [debt]. So, as far as our covenants with Oaktree, we did have in the form of not even being tested. And then in Q4 for that covenant DARTs 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 first secured net leverage. And then in Q3 of 2024, it goes to [4.25] secured net leverage, which is where actually was to begin with. So, goes back. It's Q3 in a year.

Okay. Can I ask maybe these are dumb questions relatives to that, but the calculation, so the numerator, the numerator I guess here is net debt, right? So, you 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 from that calculation and the numerator is net debt and others, you get a credit for the cash?

Exactly.

Yes. Okay. Thank you.

Yes.

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

Thank you. Let me wrap up and just share a couple of things. First, I want to thank Mark for his confidence in me, as well as mentor building on momentum that he is created here.

Secondly, I want to reiterate that we will lay out a clear vision and a set of strategies that will deliver and efficient operation and deploy our capital smartly for the benefit of shareholders.

And lastly, thank you, everyone, for your questions and your interest in RumbleOn. And I look forward to speaking with you in the near future.

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.