RumbleOn, Inc.

Greetings, and welcome to the Rumble on Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance, 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, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining us on this conference call to discuss Rumble On's third quarter of 2023 financial results. Joining me on the call today are Mike Kennedy, Rumble On's new chief executive officer, Mark Tack, Rumble On board observer and Ride Now founder, and Blake Lawson, Rumble On's chief financial 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 the following discussion contains forward-looking statements, including but not limited to, RumbleOn's market opportunities and future financial results that involve risks and uncertainties that may cause actual results 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 Rumble On assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Also, following discussion contains non-GAAP financial measures. For reconciliation of these non-GAAP financial measures, please see our earnings release issued earlier this morning. Now, I will turn the call over to Mark.

Thanks, Will, and good morning, everyone. Thank you for joining us for our third quarter 2023 earnings call. We're excited to formally introduce Mike Kennedy to all of you as the new Chief Executive Officer. We're pleased to have such a proven leader join RumbleOn at such an important time in our history. Mike is a seasoned executive with a proven track record in the power sports industry. I've known Mike for many years, and I'm confident that with his expertise and successful background in the field, he is uniquely qualified to lead RumbleOn's transformation plan 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've been on board for a week as RumbleOn's CEO. It's been a busy week, and there are already a couple of things that are clear in my mind. First, I've been very impressed with the passion of our team. As most of you know, there have been a lot of change in recent months here at RumbleOn, and I'm convinced that the team is focused and is excited about what we can accomplish together. Second, I'm confident that we will deliver an efficient operation and deploy our capital smartly for the benefit of shareholders. In particular, once the rights offering is completed in a little over three weeks, our balance sheet will be greatly strengthened and we'll be in a position to go on the offense, acquiring dealerships and expanding our footprint. I look forward to updating all of you on our progress going forward. For now, I'd like to provide some color on my background for turning 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 power sports companies. Most recently, I was CEO of Anson Hines, a private equity-owned leading manufacturer of power sports performance products. I spent the bulk of my career at Harley-Davidson serving in several capacities across different geographies and commercial aspects. My time at Harley-Davidson culminated as Vice President and 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've often said in my career that the action is in the showroom with our customers, and now I've never been closer to 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 extensive search, we're excited to entrust the leadership of Rumble On to Mike. 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've done, what we're doing now, and what we plan to do going forward. First, During the quarter, we continue to make progress in our plan to right-size the cost structure, specifically in our regional management structure, optimizing positions that were overbuilt in anticipation of a much larger footprint. We're evaluating our options regarding unused or underused facilities in an effort to offset our real estate expenses. Further, we continue to identify incremental cost savings at our dealerships and distribution centers. As you know, we have implemented $30 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 further reduce expenses as Blake will describe in more detail. Cutting expenses out of an organization is not always immediately visible and often there's a tail that can lag for a few months. Second, we continue to improve our inventory management We have implemented a stringent buy-sell process at the store level that will continue to self-correct our used inventory levels and at the same time allow those inventories to be increased and decreased more efficiently, adjusting for our seasonal network needs. Manufacturers of our new products are assisting us as well through increased rebates and incentives while also easing some carrying costs like free flooring programs. We will take advantage of these programs and enhance them through increased digital strategy, on-site events, stronger staff incentives, and the movement of excess products into higher-performing consumer markets. We will see some margin compression on the non-current products, but with higher 2024 product CPUs 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 timelines. These changes will increase the right vehicle yield, helping us to achieve a better balance of new and used inventory. This also allows us to get the right vehicles in the right place 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 $100 million in a fully backstop rights offering. 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 Oak Tree 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've identified certain accretive acquisition candidates that we can expect be closed by the end of the first quarter of 2024, and we have additional targets in the pipeline for the remainder of 2024. We've proven that acquiring underperforming dealerships and optimizing their 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'll turn the call over to Blake to walk through our third quarter 2023 financials and outlook in more detail. Thank you, Mark, and good morning, everyone. As the team has detailed, we continue to execute on our strategy during the quarter and are pleased with the progress we have made, despite having to make some tough decisions. We have put the company back on solid ground with a plan for growth and value creation for shareholders. Not to diminish the challenges that exist, which are real, heightened interest rates, non-current inventory, inflationary and economic pressures on our consumers, and geopolitical unrest to name a few. While options to finance our discretionary product remain available and plentiful, rates are certainly higher and we are seeing increased pressure on the lower credit consumers. Despite the challenges that exist, we have the utmost confidence that our team of dealership professionals will rise to the occasion and we look forward with confidence to the future. As you are all aware, we recently favorably amended our financing agreements with our primary lender, Oak Tree. 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 Oak Tree to reduce outstanding debt under the term loan. Additionally, We believe we will sell our finance portfolio before year-end 2023 and are confident we will be able to pay off an additional $15 million 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 backstopped 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. All comparative financial results are sequential and do not include the discontinued automotive operations. October of 2022 marks the final month of what I would characterize as the COVID bump. as the power sports market drastically normalized in November 2022. I believe after this quarter, our comparisons will revert back to a more standard year-over-year versus sequential comparison. Starting with the 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 power sports 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 GPUs. 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 at our corporate office. These provisions were all fixed cost and will provide more flow through to the bottom line in Q4 and going forward. Turning to inventory, we still have work to do in Q4 to completely correct some of our oldest used inventory, but overall base supply for used is at 87, which is in line with our internal benchmark. as we work to improve the mix. With very few exceptions, new inventory is back 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 71 cents. Turning to the balance sheet and cash flow, at the end of the quarter, we had $41.4 million of unrestricted cash. At the end of Q3, we had $32.2 million of unfloored equity in our used inventory, which could be used to help fund the business. Our net debt, not inclusive of floor plan at the end of the third quarter, was $311 million. This includes the principal balance of our term debt, convertible notes, and finance portfolio line of credit, not inclusive of reductions for debt discount and issuance costs, less unrestricted cash in the bank. By the 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, power sports 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 5300 to 5400. 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 some short-term inventory issues. And with that, operator, we will open it up to questions.