RumbleON, Inc. (NASDAQ:RMBL) Q1 2023 Earnings Call Transcript May 10, 2023

RumbleON, Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $-0.36.

Operator: Greetings, ladies and gentlemen, and welcome to RumbleON’s First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Will Newell, Head of Investor Relations with RumbleON. Thank you.

Will Newell: Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us on this conference call to discuss RumbleON’s first quarter 2023 financial results. Joining me on the call today are Marshall Chesrown, RumbleON’s Chairman and Chief Executive Officer; and Blake Lawson, RumbleON’s Chief Financial Officer. Our Q1 results are detailed in the press release we issued this morning and supplemental information will be available on our first quarter Form 10-Q will be filed later today. Before we start, I’d 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 involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

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 will turn the call over to Marshall. Marshall?

Marshall Chesrown : Thanks, Will. Good morning, everyone, and thank you for joining us for our first quarter 2023 earnings call. We delivered encouraging results this quarter and are just beginning to see the benefits of the proactive measures we took in the fourth quarter of ’22 in response to economic challenges that really began in Q3 of 2022. Despite continued macroeconomic headwind, our team continues to work toward our 5 key priorities for 2023, and we are confident about RumbleON’s position as we build the leading destination for all things powersports. Before discussing first quarter results, I will address the preliminary proxy statement filed by 2 former directors. Our Board is working diligently on resolution of this issue.

Our primary focus is around creating a smooth transition over the next 65 days leading up to the annual shareholders meeting and not a fire-ready aim approach. You should expect a series of public communications from the company as we move towards a positive resolution. I would urge you to continue to be patient. We will address all concerns and comments with accurate data and we have not and will not make any decision without first and foremost considering the best possible outcome for shareholders. With that, I’ll begin with a high-level overview of our first quarter 2023 performance and guidance followed by our 2023 objectives before turning it over to Blake to discuss important financial metrics. First quarter overview. In the first quarter, we experienced normal seasonality delivering revenue and unit sales in line with our expectations.

We achieved this in the face of unprecedented industry-wide new vehicle inventory rebalancing over the course of the 4Q and 1Q of this year, not to mention significant atypical seasonal weather disruptions. These factors have not altered our 5-pillar plan to profitably grow our company for our guidance. They have slowed us down a bit, but we proactively managed through these difficult headwinds and are back on plan in March and April. To this point, GPU appears to have bottomed in early Q1, and we saw improvement in March, which continued into April. However, credit tightening in the lower price points of new and used vehicles affected our lower-end customer and had a slight negative effect on units in April. We sold 17,336 units in Q1 in line with our expectations.

As of today, new inventory stands at a lower level than the last pre-COVID year of 2019, leaving us room to grow new units with the OEM. Recall that in the back half of 2022, we took aggressive measures to reduce our used inventory due to data signals of reduced wholesale value. We reduced our purchase of used units as we saw new inventory normalize more rapidly than manufacturers anticipated. Also, as we stated, we probably overshot on the downside by reducing used inventory by over $45 million from a high in October of ’22. The good news is, we are again ramping used inventory as we speak. We expect to catch up in time for our peak selling season just not as quickly as we would prefer. Similar to ’08 and ’09, this is not a lack of consumer demand story.

However, we are seeing that the lower end buyer from a credit perspective is seeing some tightening, but at nowhere near the dramatic level of ’08 and ’09. That is clearly reflected in our increased ASP hitting revenue targets on less unit volume. In the first quarter, we continue to build out our fulfillment strategy, albeit at a slower pace due to conservatism on capital preservation. However, we are excited to announce that we will soon be launching our first entry into the Northeast with our largest center yet in Bristol, Pennsylvania. This new center will be open to the public for buying and selling in the near term. As predicted, the first quarter continued to be impacted by the economy, but we are encouraged by the modest growth in new unit sales, inventory average days supply and an uptick in GPU that we saw in March and further improvement in April.

We are intently focused on striking the right balance between prudent investment in our business and expense control given the current economic environment. We are comfortable with our 2023 target GPU of approximately $5,700 per unit assuming no dramatic further deterioration in consumer credit from current level. Prior to this call, we spoke to some of our primary third-party financing partners and they have stated that they do not have immediate plans for any significant additional tightening at this time. Now moving on to our key priorities for 2023. We are focused on the 5 pillars of our strategy. self-funding, reduction in refinancing of debt, technology and continuing to improve the customer experience; and lastly, increasing market share through organic and immediately accretive M&A growth.

First, we’re committed to remaining a self-funded business. As previously stated, we implemented a strategy to reduce $15 million of expenses. We accomplished this and are now identifying additional cost-cutting opportunities with estimates of $10 million to $15 million which Blake will expand upon further. We will see the effects of these SG&A reductions flow through the remainder of the year and are reiterating the outlook we previously provided. Second, we are focused on the reduction and refinancing of our debt. As of March 31, our cash and bank balance was $61.8 million, and our total liquidity was over $80 million, and we remain comfortable as we see continuous improvement. We have immediately available liquidity on our $75 million JPMorgan used unit financing line of over $50 million.

Due to higher interest costs, we will not draw on credit facilities unless we have a compelling business opportunity. Additionally, we have identified $60 million of noncore assets, which can be liquidated to pay down debt. We continue to work towards securing the most optimal capital structure in partnership with JPMorgan for our business and fixed debt at the best rates augmented by revolving debt appropriate for good cash management and additional inventory financing option that can be leveraged over time as we scale. Third, we are expanding our competitive dominance with leading-edge technology. We launched our new RideNow consumer website and our new RumbleON corporate website with a more robust architecture, improved performance and customer experience.

Think of this as our proprietary base platform upon which we will serve up game-changing enhancements at regular intervals. Customer experience enhancements will now roll out far into the future. One such enhancement is the my garage feature, which allows customers to create a personalized portfolio for organizing and storing registration and insurance information and service record, favorite searches from our website and much more. Another exciting feature is an enhanced reservation, which allows customers to put a vehicle on hold, eliminating the frustration of missing out on the perfect vehicle after hours of research. This is a critical step towards true online commerce and unparalleled customer experience. We are also introducing the capability to schedule service appointments and the purchase of parts and accessories online, making us the only powersports company with such an extensive inventory selection and online capabilities for buying, selling, financing, and handling service needs as well as purchasing parts and merchandise.

Our list of functionality enhancements goes on and on, and we are committed to providing our customers with the best possible experience through innovative technology. Fourth, we remain focused on initiatives that create better experiences for our customers in-store and online. We are proud of the diverse, best-in-class selection of brands at our retail locations and continue to add new and exciting offerings from around the world, thereby expanding this unparalleled selection to our existing location. We continue to test iPad selling and many other showroom enhancements. It is important that the experience online and offline is a great one. If the customer is within any reasonable distance of our current location, we will do everything possible to create a showroom visitor.

However, long term, we intend to bring down the geographic boundary with continuous improvements to our online capabilities as consumer behavior continues to march towards simple online commerce. Fifth, we are focused on increasing market share through both organic and acquisition growth. As we mentioned in our Q4 commentary, we acquired a very exciting dealership in Tallahassee during the quarter. Since merging the location into our portfolio, we elevated that location’s productivity dramatically and couldn’t be more excited about that and future additions. We continue to see ample M&A opportunities, but for the time being, our capital allocation priority is in reducing debt and maintaining strong liquidity due to the uncertainties that remain in the world economy.

We look forward to opportunities in the latter half of 2023 and beyond. And would expect more favorable acquisition pricing. We see the continued implementation of our fulfillment strategy on the organic side as a long-term game changer. Fulfillment not only drives bricks-and-mortar efficiencies in sales and service but also sets the foundation and infrastructure for the ultimate objective of pure online sales. Our fulfillment strategy will improve sell-through and efficiencies in our sales and service departments, which we expect will then increase revenue, and most of all, improve the customer experience. We are slowing most initiatives due to the uncertainties discussed but have not modified the business plan. We have made prudent moves since June of 2022 to just slow the timing and spend around facilities, new business and real estate ventures, but have not slowed our technology plans at this point.

If we are the long-term winner in this space, it will revolve around our technology. We certainly would be much further along on initiatives such as fulfillment, centralization and other, but simply put, what might have happened this year might have to wait until 2024. We have built flexibility into all we do, recognizing that some plans may underperform our expectations, while others will exceed them. It’s the way it works when you are doing things that haven’t been done before in a legacy business like powersports. With our focus on lifetime value of customers, the future of powersports is ours to own. The focus is execution at this point. And as consumer demand evolve, we are determined to be the forefront of that change. Bottom line, our long-term plan is to be the leading destination for all things powersports by providing the best-in-class customer experience with clear focus on the lifetime value of our customers.

We are proud of our team’s hard work and remain fully committed to our objective of a completely self-funded business model for growth and increased market share far into the future. The current environment has slowed our progress, but our plan is nimble enough to get back on the throttle when things improve, and they always do. With that, I’ll hand the call over to Blake to walk through our first quarter 2023 financial and outlook in more detail.

Blake Lawson : Thank you, Marshall, and good morning, everyone. As Marshall detailed, we remain focused on our key priorities for 2023 and continue to take proactive measures that will benefit our financials throughout the remainder of the year and beyond. As we navigate this dynamic environment, my team is managing our balance sheet and P&L to ensure our plan for self-funding is achieved. Now I will begin with a review of our first quarter financial results, followed by our outlook. Beginning with first quarter units, we sold 17,336 total units, comprising 10,436 new units and 6,900 used units, both down 1.9% sequentially in the powersports segment. As we mentioned last quarter, we took a strategic approach to decrease our purchase of used inventory.

This decision was made because the normalization of new inventory happened faster than anticipated and the data from late September indicated a greater decline in the value of used vehicles compared to earlier quarters. While we recently started to increase our used inventory acquisition, as to date, our used inventory is reduced nearly 40% from the peak in October. And we don’t anticipate returning to the peak prior year used inventory levels. The new-to-use ratio for Q1 was 1.5:1, in line with the prior quarter. Our focus remains on both new and used products, which helps us maintain our status as a good OEM partner, supporting the brands we represent. As a reminder, we maintain a competitive advantage with our cash offer tool and our ability to quickly and effectively source used inventory, moving it to where it is most needed.

We continue to closely monitor days supply, and we strive to maintain significantly more used inventory that was held prior to the RideNow, RumbleON merger. This level of used inventory allows us to show the customer a much larger and broader array of models than any of our competitors and provides additional lower cost options for those credit-challenged consumers. Total revenue in the first quarter was $346.3 million, in line with our expectations. Revenue from finance and insurance declined 1.4% sequentially as that revenue stream typically mirrors units sold, while parts, accessories and service sales decreased 9.5% sequentially due to a mix reduction of UTV and ATV units, driving lower priced parts and accessories per unit sold. Total gross profit for the first quarter was $91 million, down 2% sequentially.

The decline in gross profit was due to slight consumer finance tightening as well as a 15% reduction in the profitable side-by-side category, partially offset by an increase in on-road motorcycle. Total GPU was $5,349 compared to $5,420 in the prior quarter. In the quarter, GPU was pressured as we work through our used inventory overhang, brought on by the 2022 supply imbalances in new and used units. As I mentioned, we have rightsized our used inventory and have begun acquiring fresh used products, which will benefit GPU going forward. We saw improvements in March as March GPU was 14% higher than the combined January and February average. What is also encouraging is that April GPU was slightly above March, inching us closer to our $5,700 second half of the year target GPU.

Moving to operating expenses. Since I was promoted to CFO in late January of this year, my overarching focus is on expense control. There’s always a natural lag from the time you cut an expense to the visible results, but we are now starting to see the results which will aggressively ramp up in Q2 through Q4. As we previously mentioned, we implemented a strategy to reduce $15 million of expenses and are now identifying additional cost-cutting opportunities. Our goal is to reduce SG&A by eliminating inefficiencies and waste without cutting into the sales muscle of the business. We know that we can’t simply expense our way to our EBITDA target, but it remains a key component to its achievement. Total SG&A expenses in Q1 were $87 million, down $5 million or 5% sequentially.

Within SG&A, total stock-based compensation was approximately $2.9 million, up from $2.1 million in the fourth quarter of 2022. Adjusted net income was a loss of $16.9 million and adjusted diluted earnings per share was a loss of $1.04. I will give some additional color on our expense breakdown for the quarter. Total compensation increased 1% sequentially, primarily due to strategic headcount additions in key sales and service roles in anticipation of the spring selling season as well as targeted increases in select corporate positions that will drastically decrease our utilization of higher cost professional services in the second half of 2023. Professional fees were 64% lower sequentially. We also saw a slight decrease in G&A expenses compared to the prior quarter.

Additionally, we are seeing some increased wages from inflationary pressures and labor market competition. Starting in Q2, we are implementing our plan to reduce annualized expenses by an additional $10 million to $15 million. Subject to change, the expense buckets include reductions in number one, compensation achieved through a hiring freeze and a small workforce reduction in non-revenue-generating positions; number two, employee benefits, which were obtained through our annual renewal; number three, professional fees as we replace vital outside services with our own internal workforce. These expense reductions will be partially offset by increases in facility and legal fees. Additionally, we have targeted other opportunities to further reduce expenses as the market dictates.

Adjusted EBITDA was $10.7 million in the first quarter, down 43% from the fourth quarter of 2022 driven by continued margin compression on new and used units and usual lag effect from SG&A reductions. GPU has normalized from the peak pandemic record which was driven at the time by extremely favorable supply and demand economics. As I mentioned previously, we believe the severe margin compression we experienced from November through February was partly self-inflicted with the aggressive buying of used inventory into Q3 of 2022, just as new inventory unexpectedly came rushing back. As I mentioned, we are seeing positive signs of increased GPU in March and April. March EBITDA alone represented over 100% of total EBITDA for Q1. Additionally, similar results to March were experienced in April.

Turning to the balance sheet and cash flow. At the end of the quarter, we had $51.8 million in unrestricted cash and $75 million used to floor plan facility with JPMorgan with unused capacity of $50 million. We also had $30 million of unfinanced equity in our used inventory, which combined with unrestricted cash provides roughly $80 million of available liquidity that can be used to fund the business as outlined in our plan. As we mentioned last quarter, we have signed a letter of engagement with JPMorgan to review our balance sheet initiatives and options. We continue to work closely with JPMorgan so that we are ready to go to the rating agencies and credit markets when they open back up for business. We remain focused on profitability and cash generation for the remainder of 2023 as we scale our business and service our debt.

Moreover, as Marshall mentioned, we have identified additional noncore assets which we are actively working on, that will allow for the paydown of an additional $60 million to $70 million in principal debt over the course of 2023 without impacting our operating cash flow. Now let me provide more details on our outlook for 2023. For the full year, we reiterate our guidance of total company powersports and transportation revenue within the range of $1.4 billion to $1.6 billion compared to powersports and transportation revenue of $1.46 billion in 2022. We continue to ramp up toward our target GPU of approximately $5,700 which we anticipate achieving in the second half of 2023 compared to $6,159 in the prior year 2022. We continue to expect adjusted EBITDA of $95 million to $105 million for 2023, driven by gross margin pressure offset by SG&A reductions.

We remain comfortable with this guidance range as we believe we have the flexibility to offset any shortfalls with further reductions in expenses as needed. We maintain a strong relationship with our lender, and we are fully compliant with our financial debt covenants and plans to remain so. I will now pass the call back to Marshall for closing remarks before we open the call for questions.

Marshall Chesrown : Thank you, Blake. To close out, as you know, there’s a lot of noise out there right now, and we are doing our best to navigate through the challenging environment and deliver strong results to drive long-term shareholder value. We remain fully committed to our business plan and the 5 pillars of our strategy. There is no change in our plan, and we are marching forward with a relentless focus on execution. I want to take a moment to recognize and thank the incredible team at RumbleON. We are fortunate to have such a talented and dedicated group of individuals working together towards our shared goals. With that, I will open it up for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Eric Wold of B. Riley.

Operator: The next question comes from Michael Baker of D.A. Davidson.

Operator: The next question comes from Seth Basham of Wedbush Securities.

Operator: Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the conference back over to Marshall Chesrown for closing remarks.

Marshall Chesrown : Well, thank you all for joining today. We — as always, we always appreciate it. We look forward to the follow-up calls the next two days. And obviously, we’re very approachable, both Blake and I. So any further questions, please feel free to reach out to Will and Don at any time, and we’ll schedule a conversation. So have a great day. I appreciate you being an investor and enjoy day. Thanks. Bye.

Operator: Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for attending, and you may now disconnect your lines.