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spk01: Greetings and welcome to the Rumble On, Inc. fourth quarter and full year 2022 earnings conference call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Will Newell, Investor Relations. Thank you. Please go ahead.
spk05: Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us on this conference call to discuss Rumble On's fourth quarter and fiscal year 2022 financial results. Joining me on the call today are Marshall Chesrone, Rumble On's chairman and chief executive officer, and Blake Lawson, Rumble On's chief financial officer. Our Q4 and full year results are detailed in the press release we issued this morning, and supplemental information will be available in our year-end 2022 Form 10-K. It 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, Rumble On's market opportunities and future financial results that 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 Rumble On'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 Rumball 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 non-GAAP financial measures, please see our earnings release issued earlier this morning. Now, we'll turn the call over to Marshall. Marshall?
spk09: Thanks, Will. Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2022 earnings call. Before we begin, let me start by welcoming Blake Lawson, who is participating today in his first RumbleOn earnings call since being named CFO in February. Having previously served as CFO of RideNow since 2016, Blake has deep knowledge of our company and the power sports industry with more than 20 years of experience, helping him seamlessly transition to his new role. and we are certainly thrilled to have him lead our financial team. I'll start this morning with a review of our 2022 performance, highlights, and actions taken, followed by the same for the fourth quarter, and then discuss our 2023 objectives and guidance before turning it over to Blake to discuss important financial metrics in more detail on our outlook. In 2022, The RumbleOn team made progress towards our performance initiatives while navigating the challenging economic environment during the second half of the year. We are encouraged by the progress made in reducing expenses, simplifying the business, leveraging technology, and improving the balance sheet while maintaining robust unit sales and revenue. We generated $120 million in adjusted EBITDA for the year compared to RumbleOn as a reported adjusted EBITDA of 31 million in 2021. We sold over 73,000 total PowerSports units in 2022 as we capitalized on the opportunity to gain market share in the extremely fragmented PowerSports business while continuing to integrate 55 privately owned retail locations into our public company. 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 throughout the year and remain fully committed to our completely self-funded business model for growth and increased market share far into the future. Along with this, we will actively manage the reduction and potential restructuring of debt in 2023. In fact, we prepaid $15 million of principal in Q4, and have plans to reduce non-floor plan debt by a similar amount early this year. We are compliant with all our lender covenants and are comfortable with our future plans to remain fully sold. New inventory supply normalized in the second half of 2022 more rapidly than manufacturers anticipated and what power sports retailers expected. OEMs also raised prices throughout the second half of 2022. Due to their cost increases, all while our customers' spendable incomes were challenged by macroeconomic headwinds, including increasing inflation and interest rates. These headwinds and not a lack of interest in our products resulted in margin pressures primarily on new units in Q4. Although we expect the first half this year will continue to be bumpy, we anticipate supply levels and the overall economy to normalize as the year progresses. To right-size our inventory, We strategically reduced our used power sports inventory in the quarter, and as of now, we've reduced it by more than $40 million since the peak in Q3. The challenges we face are primarily related to new vehicle supply and GPU. As used clearly is in our control, and the reduced GPU is reflective of our plan to utilize the quarter to achieve more appropriate day's supply levels. Additionally, as our new vehicle business normalizes over the first half of 2023, we expect OEMs will increase incentives and programs, easing margin pressures somewhat. We will continue to improve inventory turns and reduce days of supply in several ways. We implemented software to manage total inventory. And we now have the ability to manage every model of our inventory by manufacturer and then using the data to make sure the right unit is available at the right location, at the right price, and at the right time. Inventory control in the current economic environment is crucial, and our management team has years of expertise in this regard. In the meantime, our parts, service, merchandise, and finance and insurance remain strong and stable, demonstrating the resiliency and durability of our business. As you can see from our past performance, those categories of gross profit track in line with unit sales on a per unit basis. Thus, our business is not dependable on vehicle margin alone, but is mostly determined by unit sales, which in turn drives all categories of gross margin. Our fourth quarter unit sales and revenue were in line with our expectations, and adjusted EBITDA came in moderately below. As a reminder, we announced in Q3 that we would be exiting the wholesale automotive business, of which the cost to do so once complete is anticipated to be less than $3 million. So most of our comments today are about our core power sports and transportation businesses only. We sold 17,550 power sports units in Q4, and this level of sales sequentially reflects typical seasonality prior to COVID-19. Blake will expand upon our fourth quarter financials in more detail. During the quarter, manufacturer recalls caused the reduction in a number of key products, and severe storms were a direct hit to our large North Florida operations, which caused multiple days of complete operation shutdowns. Despite these uncontrollable issues, our unit sales clearly signal the success of our efforts to gain market share in all economic conditions, And we remain focused on the lifetime value of the customers by never passing on the opportunity to gain a new customer or to be helpful to customers that have done business with us before. We continued to build out our fulfillment strategy in Q4. We are now operating fulfillment centers in Orlando, Concord, North Carolina, and Las Vegas, Nevada. And in the first half of 23, we will add capacity in Bristol, Pennsylvania, our first entry into the highly populated Northeast. This warehouse location will be open to the public for buying and selling. We made important strides in implementing key technology, which we will discuss shortly. We were awarded over 60 new franchises during the year, and in Q4, we acquired two full-line Polaris franchises and one Honda franchise in all cash transactions totaling approximately $4.8 million. These three tuck in acquisitions to our existing Texas locations demonstrates our disciplined approach to accretive growth. Further, opening certain fulfillment locations to the public for a warehouse-type experience looks encouraging as we continue those tests. We are very early in implementing the fulfillment center model, and we have not included any contributions from these facilities to our financial guidance for 2023. Looking forward, and mindful of our immediate challenges and opportunities, we took several decisive actions during the quarter. First, we executed over 15 million of annualized cost reductions that will impact 2023 in areas such as professional fees, outside services, reducing corporate headcount by approximately 8% sequentially, and other compensation-related expenses. We also made meaningful adjustments around low-performing marketing expenses for 2023 budgets and have now centralized the majority of our company-wide advertising and marketing spend. With these expense reductions and others that will be implemented in the first half of 2023, our experience management team understands the cost of overreacting to economic slowdowns and then not having the proper trained staff, inventory, and resources to take advantage as the economy improves. While we grew productive headcount in the first two quarters of 2022 by more than 200 team members at the store level, which is less than four people per store, we expect amplified payback since over 70% of those increases address gaps in productive areas of sales, parts, and service. Our headcount growth should support the improvements of our customer experience plan. We also put in place a hiring freeze company-wide in Q4 for nonproductive positions, eliminated various duplicative management and corporate positions, paid no executive bonuses for the fourth quarter, and realigned company-wide benefits in the fourth quarter, which will take effect with our new benefit enrollments effective April 1st. Importantly, we identified additional expense levers that can be deployed quickly. based on market and business trends up or down as needed in 2023. We will stay on mission to be self-funded and manage debt responsibly while focusing on technology, customer experience, and other important long-term growth initiatives. Second, we right-sized our inventory during the quarter. Total new inventories increased on a dollar basis sequentially by 34 million, while used inventory decreased dramatically. We saw used pricing data begin to weaken early in the quarter and deliberately slowed the purchase of used power sports units in response, maintaining our mark to market approach when valuing inventories. Importantly, we control our destiny on used inventory due to our unique acquisition strategy, allowing us to acquire well over 95% of our used inventory directly from consumers without facing any meaningful competition. We will work with manufacturers to achieve appropriate levels of new inventory across our platform, but there is seasonality on that front as well. A good example would be that many of the products we sell, such as personal watercraft and others, are allocated annually or semi-annually in many situations, causing some ups and downs in days of supply throughout the year as we prepare for seasonal demand in advance of sales. Lastly, We continue to widen our lead in technology by augmenting our technology stack. During the quarter, we worked on standardizing and integrating multiple CRMs at the retail store level, tying together multiple legacy platforms into one. We believe we have an incredible competitive advantage since we now have a combined consumer database of over 3 million legacy customers of Rumble On, Ride Now, and Freedom. which we will begin to leverage with low-cost digital marketing beginning the first half of 2023. Our customers are extremely sticky due to the fact that we sell to people's passion for experiences, which are wants, not needs. And we have determined through testing that if we serve up meaningful online content, we can be in constant contact. Notably, we completed our total inventory aggregation. Now the entirety of our inventory can be compiled in one data location. During the quarter, we implemented a new proprietary inventory management software that allows data-driven decision making on where to best physically locate a vehicle within our system. Finally, we integrated one single source hiring platform to streamline HR processes with focus on acquiring the best talent available. This new HR process will be a key part of our future growth plans as best talent equals best results. We are making adjustments based on what we currently see and know. Bottom line, we are positioned to fully deploy our growth roadmap while navigating any temporary dislocations and macro volatility. Our plan provides for quick acceleration of initiatives or deceleration in spending for those initiatives as the marketplace dictates, all while remaining self-funded in our operations and expansion plans. Turning to our key priorities for 2023, we are focused on the five pillars of our strategy. Self-funding, reduction and restructure of debt, technology, continuing to improve the customer experience, and lastly, increasing market share through organic and immediately accretive M&A growth. First, we're committed to remain a self-funded business. While the near-term outlook may be somewhat unpredictable, Our team has responded to this dynamic environment by focusing on controlling the controllables. As I earlier discussed, the steps we are taking with respect to SG&A ensure that we will continue to be self-funding in 2023 and beyond. Second, we are focused on the reduction and restructuring of our debt. We are comfortable with our cash position at present as it continues to improve. Currently, as of two days ago, March 14th, We had a cash in bank balance of over $60 million, as well as immediately available liquidity on our $75 million JP Morgan used unit financing line of over $50 million. Due to higher interest costs, we have not and will not draw on credit facilities until such time as there is a need for the appropriate use of funds. On the big picture side of the balance sheet, this month we signed an engagement letter with JP Morgan to review our balance sheet objectives and options for 2023. We continue our work towards securing the most optimal capital structure for our business in fixed debt at the best rates, augmented by revolving debt appropriate for good cash management, and additional inventory financing options that can be leveraged over time as we scale. Third, we are expanding our competitive dominance with leading edge technology. driving towards online selling without geographic boundaries. We will launch our new corporate website in April and the all new master right now quickly thereafter. This was slightly delayed primarily due to foundational software being built and implemented to drive and support the new consumer platforms, which is needed to create the customer experience objective, as well as meeting SOX compliant electronic processes during the quarter, as we further integrate these private businesses into public company requirements. The RightNow site will have unmatched features for our customers, allowing them to see all inventory in one place, and it will have the ability to push inventory to individual dealer websites, resulting in a better online presence and customer experience. The plan calls for the constant rollout of new features as our online presence improves and matures. In conjunction with our integrated CRM, we plan to launch online soft and hard credit polls and lending pre-qualifications, just to name a few of the exciting features. Lastly, in the first half of 2023, we are rolling out a new internally developed reporting technology that will increase visibility, improve sales reporting, and provide real-time actionable data at the store level. Store managers will now see how they are performing versus expectations and how they compare real time to their peers in the company. Fourth, we remain focused on initiatives that create better experiences for our customers in-store and online. We offer the best, most diverse selection of brands at our retail locations without compare. We continue to augment our offerings by recent additions of top-rated brands to our existing locations. Further, we offer instant liquidity for our customers' assets in the form of our cash offer tool that now has nearly 1 million unique inputs. We remain committed to developing innovative solutions to positively address our customers' pain points. We are testing multiple customer service improvements in the stores, such as more transparent pricing and iPad selling, enabling one customer, one team member sales system that is faster and respects our customers' time while improving the overall sales experience and our own costs and efficiencies. And fifth, we are focused on increasing market share through both organic and acquisition growth. We continue to review M&A opportunities and are taking a cautious balanced approach. We are pleased to share with you that we recently closed on a very important multi-line store in Tallahassee, Florida earlier this month, further expanding our dominance in North Florida. This too was an all cash transaction for approximately 3.3 million. On the organic side, The continued implementation of our fulfillment strategy is a long-term game changer and should have dramatic positive effects on many facets of the store's future success. The early results exceed our expectations. However, we continue to refine this transformational concept. Fulfillment drives bricks and mortar efficiencies in sales and service, all while setting the foundation and infrastructure for the ultimate objective of pure online sales. Our fulfillment strategy will improve sell-through and efficiencies in our service departments, which we expect will then expand margin, increase revenue, and most of all, improve the customer experience. Our first early stage fulfillment centers are exemplary cases in point and in early signs are very positive. Again, we have not included impacts from fulfillment in our guidance. although we have analyzed in detail what these cost and profit-related financial impacts should be over time. We will update everyone on those expected successes each quarter as we progress through the coming year. We look forward to expanding fulfillment in the Sun Belt and the Northeast. While we do not anticipate any further M&A in the first half of 2023, we look forward to opportunities in the latter half of 2023 and beyond and would expect more favorable acquisition pricing. Now let me frame our thinking for 2023 in context of the priorities and actions I just discussed, as well as the anticipated consumer demand outlook being shared by most adjacent industries where inflation, wages, spendable incomes, and other dynamics are playing a role. We want to be realistic in setting expectations due to all of the unknowns in the economy that exists. We are prudently planning the year with sales at 1.4 billion to 1.6 billion, and adjusted EBITDA of 95 to 105 million. It is our objective to show progressive improvement against our priorities and actions as we move through the year. And whatever unknowns the economy provides, positive or negative, we are prepared to react timely and appropriately. With that, I will hand it over to Blake to walk through our 2022 financials and outlook in more detail.
spk07: Thank you, Marshall, and good morning, everyone. I want to thank the team for the warm welcome as RumbleOn's new CFO. During my first eight weeks, I have had the opportunity to assess our total expense structure and liquidity with enhanced scrutiny. It is clear to me that there are areas we can improve to reach our full potential. As Marshall detailed, we took a number of proactive measures in the fourth quarter and in the first quarter since my promotion to CFO that will benefit our results throughout 2023. My team is focused on managing our balance sheet and P&L to ensure our plan for self-funding is achieved. For the full year 2022, we sold 41,649 new power sports units and 31,764 used power sports units, which is a 1.31 new-to-used ratio. Total power sports gross profit per unit, GPU, was $6,159 for the year compared to 7,294 in the prior year. GPU is defined as the gross profit attributable to power sports vehicles sold, inclusive of finance and insurance, parts, service, and accessories, divided by retail power sports units sold. Note that this is a change from previous quarters, when parts, service, and accessories were excluded from the calculation. We believe this is more reflective of the health of our business. As new inventory supply normalized during the second half of 2022 and margins compressed, we strategically focused on unit sales and market share, all while maximizing margin opportunities where possible. We also reduced used inventory significantly by more than 40 million from the peak to now. This was to ensure that we will be in a position in the spring market to be aggressive on both trade-ins and consumer purchases. While our competitors rely on customer trade-ins or costly auction units as their primary source for used inventory, we have the competitive advantage of primarily purchasing directly from the public through our proprietary cash offer tool, while further supplementing inventory with trade-ins. Thus, we can turn the flow on and off as needed to react quickly to demand or market value dynamics. This lever and our scale provides flexibility to increase and decrease use inventory levels as necessary. This unique access to use inventory supply supported our overall power sports units sold count in 2022 to 73,413 and allowed us to capture lifetime customers while feeding our high margin segments in parts, accessories, service, and F&I. During 2022, we achieved $1.8 billion in revenue compared to $924 million in the prior year. Gross profit was $453 million compared to $158 million, and adjusted EBITDA was $120 million compared to $31 million, all on a year-over-year as reported basis. Now, turning to a review of the fourth quarter, we sold 18,419 total units, down 7.5% sequentially, due primarily to the strategic exiting of our wholesale automotive segment. We sold 17,550 total power sports units, a 4.6% decline sequentially, consistent with typical pre-COVID seasonality. We sold 10,633 new power sports units, an increase of 6.6% sequentially, as new inventory supply normalized in the fourth quarter. We also made the strategic decision to reduce our used inventory acquisitions in response to the data starting in late September showing a more dramatic value reduction of used vehicle values than previous quarters. As a result, in the fourth quarter, we sold 6,917 used power sports units, an 18% decline sequentially, but up 28% year over year. Total revenue in the fourth quarter was $369.5 million, down 18% sequentially due primarily to the wind down of the wholesale automotive segment. PowerSports revenue was in line with our expectations at 320.5 million, which was a 12% decrease sequentially and in line with previous seasonality trends. The decline was due primarily to reduced unit sales from seasonality and product mix. As we transitioned to a sales mix which consisted of lower cost Christmas gift PowerSports units in Q4, which is typical of years past. Revenue from finance and insurance declined 12% sequentially as that revenue stream typically mirrors units sold, while parts, accessories, and service sales increased 5% sequentially as our customers redeemed loyalty points and gift cards on apparel and accessories during the holiday season as is normal. Total gross profit for the fourth quarter was $93.1 million, down 19.9% from the third quarter, Gross profit from Powersports was 89.7 million, which was a 19.1% decline sequentially. Total GPU from Powersports was 5,420 compared to 6,348 in the prior quarter. The margin compression on the new units is a function of OEM price hikes and industry-wide new inventory increases that caused our competitors to discount products prior to the winter months. In response, we lowered prices on certain products to remain competitive and maintain focus on market share and capturing customers. While margins declined in Q4, they remain historically healthy when compared to pre-pandemic levels, and we are not experiencing further erosion year to date. Also, with two weeks to go in Q1, unit sales are tracking level with Q1 2022, which was an all-time record. Total SG&A expenses in Q4 were $91.9 million, down $4.2 million, or 4.4% sequentially, as we are focusing heavily on expense control going into 2023. Within SG&A, total stock-based compensation was approximately $2.1 million, down from $2.6 million in the third quarter. Adjusted net income was a loss of $11 million, and adjusted diluted earnings per share was a loss of $0.68. Adjusted EBITDA was $18.7 million in the fourth quarter, down 27.2% from the third quarter, driven by vehicle gross profit compression on new and used units in the power sports segment. I will point out that we also took a one-time non-cash impairment charge of $350 million in Q4 as a result of goodwill impairment. This charge does not impact cash or adjusted EBITDA. Turning to the balance sheet and cash flows. Let me first say that we have no exposure to Silicon Valley Bank or any of the other banks in question of default. Our primary depository bank is JP Morgan, and we maintain a secondary relationship with Wells Fargo. We remain committed to being self-funded, meaning we will fund the business out of free cash flow from operations. At year end, we had $48.6 million in unrestricted cash and $75 million used floor plan facility with JP Morgan. with unused capacity of 51 million. Additionally, we had 68 million of unfinanced equity in our used inventory, which combined with cash and bank provides nearly 100 million of available liquidity that can be used to fund the business as outlined in our plan. As Marshall pointed out, we have a signed letter of engagement with J.P. Morgan to review our balance sheet initiatives and options. As we scale our business and service our debt, we will focus capital allocation on profitability and cash generation. Now let me provide more details on our outlook for 2023. Our guidance is based on reported numbers. For the full year, we currently expect total company power sports and transportation revenue within the range of 1.4 billion to 1.6 billion, compared to power sports and transportation revenue of 1.46 billion in 2022. We are forecasting a total power sports GPU of approximately 5,700 for 2023 compared to 6,159 in the prior year 2022. This projection falls in the middle of our 2019 pre-pandemic GPU of roughly 5,000 compared to the pandemic GPU of roughly 7,000, which was inflated by favorable supply and demand economics. We expect adjusted EBITDA of $95 million to $105 million for 2023, driven by gross margin pressure, partially offset by SG&A reductions. Let me share some additional guidance details. Performance expectations in the power sports segment assume combined power sports new and used retail unit growth of approximately 5% year over year. We expect continued gross margin pressure in the first half as new unit supply imbalances work their way back to normal and historical levels. From an SG&A perspective, we have already executed $15 million in savings from compensation, marketing, professional fees, and outside services, which will begin to benefit our business in early 2023. And we have identified additional expense levers that can be deployed rapidly as the market dictates. As it relates to Q1, with only a couple of weeks left, we see no meaningful erosion in terms of unit sales from the all-time record Q1 2022. Margin pressures do appear to be persistent, but not accelerating beyond Q4. Finally, our guidance does not include any growth from acquisitions or tuck-ins, nor does it have a built-in overlay for fulfillment or technological opportunities that we create over the course of 2023. I will now pass the call back to Marshall for closing remarks before we open the call for questions.
spk09: Thank you, Blake. As we take action to navigate the current challenges in the economy post-pandemic, we are fortunate to be able to pull the levers of gross profit of our balanced business model, namely our robust used business and our durable and resilient parts service and merchandise, as well as finance and insurance. all while continuing to focus on increasing new unit sales, albeit at slightly lower margins than peak levels during COVID. The entire team is focused on both our near-term and long-term goals. The five pillars of our strategy outlined earlier allow us to emphasize our unique strengths while reacting nimbly to changing market conditions. If the economy deteriorates from current expectations, We believe we have a well-defined playbook, which would result in aggressive expense reductions, along with slowing the anticipated cost of initiatives to remain on track with our self-funding plan, which is job one. We have taken actions in 2022, establishing the building blocks for sustainable future growth and long-term shareholder value. But we are still in the early innings of our very early stage 18 month old venture into power sports retail. We are the largest power sports retailer in the country with the best people in the industry, fantastic geographic locations, a strategic business plan, and the capital to execute the vision of this incredible opportunity. In response to the additional filings consistent with previous messaging by two former directors of the company yesterday, these filings are in the hands of our board of directors. It would be premature to comment or answer questions today in this regard. You can expect a timely and thoughtful response when appropriate. In the meantime, these filings have no impact on the opportunities ahead of us and the execution of the plan we have outlined today. And in closing, I have some exciting information to share with everyone today. Rumble On and Camping World Good Sam are creating a strategic partnership. We plan to start execution of the deliverables in the coming months. Camping World is the nation's largest RV company and currently operates 189 locations in 43 states, along with the Good Sam, a products and services annuity business with an active database of over 5.5 million customers. Our mutual plan is to leverage our existing locations to generate additional revenue through sales and service without adding fixed costs to either business. Additionally, we plan to supplement each other's customer databases to yield a combined result of 8 million like-minded adventurer enthusiasts. We expect this process to improve and expand our used procurement capabilities for both companies and improve our own profitability by leveraging their Good Sam annuity business. This is just a small taste of the incredible opportunities and synergies for both companies. This, in so many ways, is a competitive advantage for the largest retailer of RVs joining forces with the largest retailer of power sports in the country. It is a win-win in every regard. I won't be expanding on it further today until we have issued a formal press release with more details early next week. And at that time, Marcus and I will be available to share a lot more about this exciting partnership. And now, I'll turn the call over for questions.
spk01: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we do ask that you please limit yourself to one question and one follow-up. Again, that is star one to register a question at this time. Today's first question is coming from Eric Wold of B. Reilly Securities. Please go ahead.
spk08: Thank you, and good morning. I'm not sure who wants to take this, Marshall Blake, but I guess in the guidance you gave for 23, you talked about new and used retail unit growth of 5%. Can you maybe just give us your sense of what you're assuming the industry or the market grows this year and your relative performance or performance to that? And I guess if you could break that down by new and used to give us a sense of how you think those respective kind of customer bases are thinking this year.
spk09: Yeah, I think in a couple of areas, Eric, on an as reported basis, obviously we have, you know, 45 days roughly of last year that we didn't have the Freedom stores included. And secondly, on the new vehicle side, I think the addition of 60 new franchises that are fairly small in nature today, but we think have a lot of legs as we move forward. We think that just by itself, by having, you know, more selection at the store level should reap additional unit sales. Much of the new product that we're bringing in is not direct competitive with the products that we presently sell in volume. So we see some opportunity there. We certainly aren't expecting the market or the amount of traffic or the amount of online traffic to continue to improve from current levels, at least in the first half. On the use side, as you heard me say before, I mean, We really control our own destiny. If you look at the gross margin of Q4, that is purely self-inflicted. Whenever you take $40 million of opportunity of fresh inventory coming into the system that always turns at a faster rate at higher gross profit, and you remove that for any window of time, obviously it has an effect on that. But we really believe we control our destiny and use volumes. We still think that the stores are capable of of doing better than one-to-one. And so we see some opportunity there as well.
spk08: My follow-up question, I guess, with year-end inventory of 331 for 2022, and your goals are going to continue to improve with day of sales throughout the year, if you think about your guidance for 23 on revenues, where would you expect inventory to end the year at? What's the reasonable range? What do you expect?
spk09: Well, if we're speaking total inventory, I think our total inventory levels on the new vehicle side are – well, in fact, we've actually seen them come down a little bit in the first quarter because obviously we were ramping into the better seasonality. And if you look at what I mentioned in the script about things like personal watercraft, those are all now on the ground. So we have inflated new inventories that we think will come down. I would tell you that if you look at total inventory today on new and you look back to pre-COVID, our current blended with both Freedom and RightNow are about equal to where RightNow was by themselves in 2018 and 2019. So these are really normalized new vehicle inventories for this time of year. On the used vehicle side, You know, I believe with our processes that still need significant improvement, our technology that we are implementing as quickly as we possibly can, that today we managed to about a 90-day supply on the used side. I think over time with fulfillment and all the processes that we have in motion, that we should be able to work that down to about a 75-day supply so you can do the math of what that inventory would look like. At the peak, we were close to $140 million on pre-owned. Today, we're just over $90 million. So it's come down dramatically. And by the way, we have turned back on acquisitions in a meaningful way as of the last three or four weeks. But it takes some time for that to catch up. And we also need to start pumping inventory very soon into our Pennsylvania facilities. So I would say that... Use has probably remained somewhat where it is today, but obviously as the turns increase, we should be able to manage it to that level, but somewhere south of the 90-day supply.
spk10: That's helpful. Thank you, Marshall.
spk03: Thank you.
spk01: The next question is coming from Craig Kennison of Baird. Please go ahead.
spk06: Oh, hey. Thanks, and good morning. I guess lots of questions on Camping World and the shareholder letter, but With those off limits, I just ask maybe about the financing side of the business. What percentage of your power sports units are financed? What is the source of that financing for consumers? And to what extent have you seen any change in behavior in the last week as banks maybe take a different view of risk in the wake of some of the bank failures?
spk09: Well, you know, those are certainly things that we have built into our thinking as far as guidance. We started talking this before the collaboration. Obviously, we couldn't predict the fall of SVP, but we, you know, we certainly talked through that and we talked to a lot of you guys about that. Because if you look back to 08, 09, much like what we're seeing today, we don't have a lack of interest in our products. we have not seen any meaningful reduction of appetite for consumer credit. In fact, we really, by looking at the percentage that we finance, which is, you know, it varies by time of year because of the average sale price, right? A little lower in December and higher in other months. But let's just use an average of about 65%, what we call penetration. The business, you know, keep in mind, we sell from soup to nuts. So we're selling, you know, $499 products mini bikes to a kid, and we're selling a $70,000 Harley to a 70-year-old. So we're all over the place. And obviously, the higher price point, the higher likelihood of retail financing. But as of yet, we really don't see a lot of changes. You asked about the sources. You know, they're the traditional sources. You know, we finance through the likes of Polaris Financial and Yamaha, which are, you know, those types of, and Honda, those are lenders that are captive They don't typically change their buying habits in economic times because obviously they're there also to support the manufacturing process and keep the flow of goods. So we don't see any change there and really even in the past we didn't see a lot of it. It really comes down more to the banks. Our largest lender is a group called Octane and they support a lot of our smaller manufacturers. And we actually just met with their top management here at the office a couple of days ago, and we're looking to build that relationship over time. And they did not share any concern whatsoever as far as their available of capital to continue on buying a widespread of financing paper.
spk06: Thank you. And just following up on the finance piece. What is the shape or what color can you add on JP Morgan advice you intend to pursue? I mean, any way to add some color as to what you intend to change as it relates to your balance sheet going forward?
spk09: Well, yeah, maybe I can be just real to the point. Obviously, our main lender for approximately $350 million of our debt is fixed debt with Oaktree. That debt is typically not a long-term solution. It's more of a bridge from our perspective. And we are working with JP Morgan and are moving along with the process of getting rated and so on and so forth. So that not only can we get more competitive rates, but I think the burdensome covenants that run with the type of credit that we have is problematic for a growth company long-term. And secondly, obviously, we want good rates, but more importantly, it's really more around the covenants and breaking this debt down to two tranches so that we have a revolving piece of debt that we can move in and out of. For us to be sitting on, and we have available credit with no problem, as we mentioned on the call, but to sit on large sums of cash and not have the ability to offset those with liquidity through lines of credit and reduce your interest expense is not the best cash management. So that's really the process. We've been working with, well, a lot of them, but we did decide to move forward with J.P. Morgan. We like the fact that they have a very, very strong local team. It certainly seems we have the A team involved, and we're super excited to move forward.
spk10: Great. Thank you.
spk03: Excuse me. Thank you. The next question is coming from Seth Basham of Wedbush Securities. Please go ahead.
spk04: Thanks a lot and good morning. My first question is just a little bit more color on the GPU expectations for 2023. Seems like you expect PowerSports GPU to improve throughout the year. Is this from new inventory normalization and your view that used inventory is under control at this point in time?
spk09: Yeah, certainly a big piece of it is we think there's quite a bit left on the used side. And we think we can move that fairly quickly and dramatically. The new side, we pretty much are projecting stuff that is going to stay at least through the first half, similar to what we saw in fourth quarter from a GPU perspective. And again, we aren't seeing anything at this point. And the quarter's almost over in first quarter. But we aren't seeing any differences in that regard. on the new GPU, and we've been able to maintain unit sales in comparison to unit sales, reported unit sales of last first quarter, which I would say that I think everybody would agree that last first quarter in 2022 was an all-time record quarter. So we're happy with the concentration on market share. And I know you didn't ask market share, but just since it's part of GPU and how we intend to sell these additional units, I would add a little bit of color there in that the new unit sales, from our perspective, when you hear from manufacturers and other adjacent segments that retail is off in a dramatic fashion and actually you see it in some of their reporting, I think the only conclusion you can come to is some of the things that we are working on with regards to market share are beginning to take hold because we are not seeing a reduction in total retail sales And again, we think there's still a tremendous upside on the used, even in a pressured environment, because what we caused in the fourth quarter was intentional and self-inflicted. And so we think we will rebound that from those levels very quickly. And we are not experiencing, Seth, the issues with regards to these values moving around as violently as you see in the automobile side. We did see in the data that we were getting of what we suspected was a more in line with past seasonality adjustments on use values. So we went ahead and made an aggressive move. In retrospect, because hindsight's always 20-20, I would say we might have overreacted just a hair, but not by a significant amount. I think that we're probably, if we had another $10 million in used inventory right now, a fresh inventory, I would probably be very happy with the decision. But in today's world, if you're a little light, it's probably better than being a little heavy.
spk04: Yeah, I definitely agree. And when you assess the outlook for the balance of the year, what kind of risk do you assign to the chances that we'll see another step down and use prices and material step down?
spk09: I don't really see it. I think the big difference, Seth, in this, and I know you follow a lot of the auto businesses or your firm does for sure, I think that the risk in this industry because we have such an inefficient redistribution supply chain. You know, we don't have a vibrant auction system or any of those types of things. And when you look at customers' ability to sell their vehicle, let's assume that they don't want to stay in the space and they want to liquidate their vehicle. Still today, by far, our largest competitor is Craigslist. And that is not a major competitor except in low-end junky cars. for the automobile business. They have a very efficient supply chain. So we just don't see the prices moving around like that. Now, with that said, I'll give you a caveat. Late model Harley Davidsons that people might have bought throughout COVID, probably one of the risks that we have right now today, because our software is mark to market, and we just experienced bike week in Daytona the last 10 days, we saw inordinate amounts of negative equity So again, no downturn in desire to buy the product, but when people have significant negative equity driven by how much they paid for it back in the last two years, that becomes a deterrent. So I would say with regards to valuation, that puts some pressure on current year and maybe one or two-year-old models, but that is not the sweet spot with our used unit program. Our used unit program is really designed to try to price volume vehicles around half of what a new the same new vehicle would sell and the only reason our current uh asp doesn't look 50 is because we have we're heavily weighted in harley-davidson uh much higher than the actual mix and that's primarily driven because off-road and personal watercraft are very hard to buy that are retailable condition that's really helpful color my last follow-up question is just on your outstanding debt you mentioned that some restricted covenants uh which ones you view as most restrictive and uh are there any that you're close to uh breaching no we don't have any covenant issues in that regard we obviously track them uh you know really daily but we look at them in depth on a monthly basis uh blake has done significant amount of analysis in that regard We are very comfortable with our current position against our covenants, and we don't anticipate near-term or long-term any issues in that regard. Keep in mind, we prepaid $15 million worth of debt in the quarter. It was not due, right? And really, it's just because we need to offset some of this increase in interest expense if possible. But spending our cash today, we also are an 18-month-old company in the retail business, And Seth, we're not out of great ideas yet. And so we don't want to get too aggressive, but we also wanted to signal that we don't have cash problems, we don't anticipate cash problems, and that's why the emphasis around self-funded.
spk07: Seth, this is Blake. I'll just reiterate that the guidance of 95 to 105 million of adjusted EBITDA, we feel good about where that puts us in relation to our covenants going forward. Of course, you never know. All bets are off if the market completely goes bad, but we feel good with our projections and where that will lead us, and we anticipate paying off additional long-term debt.
spk09: Our projections, too, Seth, just for planning purposes, we've built in a 1% interest rate increase from here. Your crystal ball is probably as good as mine. You know, I hear every day that it goes from, you know, they're going to move 25 to move two points. I mean, we just felt that we needed to pick a target, and so we have built into our modeling a 1% increase in our interest costs over the term of the year. Hopefully, we can offset whatever interest costs happen with a better finance package as we progress with J.P. Morgan. As you know, because of the bank collapses of recent, The commercial markets were just starting to kind of free up and a lot of transactions were starting to be done again. I would make the assumption, I haven't heard this, but I would make the assumption that they're probably won't back again until some of this clears. So I wouldn't expect that we will restructure this balance sheet, you know, in the first half, but we certainly intend to do it before the end of 23.
spk10: Thank you.
spk01: In the interest of time, we're going to ask our final analyst to please limit himself to one question. Today's final question is coming from Fred Reitman of Wolf Research. Please go ahead, sir.
spk02: Hey, guys. Thanks for squeezing us in. I just wanted to follow up on the comment about the Harley negative equity. Can you sort of expand on that? Is that sort of where across your different verticals you're seeing the most pressure, and sort of how does that impact or influence your retail expectations across the different categories for this year?
spk09: Thanks. I would say the same situation exists for all adjacent segments as well as power sports for high dollar late model product. I think we all know that people paid up because of supply and demand issues, and those people are the most likely to utilize consumer credit. If you pay $10,000 over sticker for a new, I'm not picking on Harley, but we do a lot of Harley business and But, you know, they're a much more expensive price point. If you take that and you pay $10,000 too much, or not too much, but what the market was at the time, and now the market is normalized, it creates quite a delta in what you owe. And unfortunately, you know, consumers think there's a relationship between what they owe and what it's worth, and obviously our system doesn't adjust for that. It adjusts to current markets. I would say that it would be typical. I've used my bike week example. Typically, we would look at a lot of transactions with, say, up to $5,000 of negative equity. And we saw a lot of transactions last week that were well north of 10.
spk10: Great. Thanks.
spk09: And thank you, everybody. We really appreciate your time. Thanks for joining us today. And we'll look forward to all of our follow-ups here over the next couple of days.
spk01: Ladies and gentlemen, thank you for your participation and interest in Rumble On. This concludes today's event. You may disconnect your lines or lock off the webcast at this time and enjoy the rest of your day.
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