Camping World Holdings, Inc.

and welcome to Hampton Board Holdings Conference Call to discuss financial results for the fourth quarter and year ended December 2022. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at the time. Please be advised that this call is being recorded and the reproduction of the call in whole or in part is not permitted without writing authorization from the company. Participating in the call today are Michael , Chairman and Chief Executive Officer. Brent Moody, President. Karen Bell, Chief Financial Officer. Madeline Wagner, Chief Operating Officer. Lindsay Christian, Executive Vice President and General Counsel. Tom Kern, Chief Accounting Officer, and Brent Andrews, Senior Vice President, Investor Relations. I will turn the call over to me, Kristen, to get us started. Please go ahead.

Thank you, and good morning, everyone. A press release covering the company's fourth quarter and year-ended December 31, 2021 financial results was issued yesterday afternoon and a copy of that press release can be found in the investor relations section on the company's website. Management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks may include statements regarding our business goals, plans, abilities, and opportunities, our strategic initiatives, acquisitions, and planned capital expenditures, anticipated uses of capital, anticipated cost reduction initiatives and related cost savings, industry and customer trends, the expected impact of inflation, interest rates, and market conditions, the expected impact of the subsidiary LLC conversions on our ongoing income tax expense and tax distribution requirements, future dividend payments, and anticipated financial performance. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the risk factors section in our Form 10-K, our Form 10-Q, and other reports on file with the SEC. Any forward-looking statements represent our views only as of today, and we undertake no obligation to update them. Please also note that we will be referring to certain non-GAAP financial measures on today's call, such as EBITDA, adjusted EBITDA, and adjusted earnings per share diluted, which we believe may be important to investors to assess our operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial statements are included in our earnings release and on our website. All comparisons of our 2022 fourth quarter and fiscal year results are made against the 2021 fourth quarter and fiscal year results, respectively, unless otherwise noted. I'll now turn the call over to Marcus.

Thanks, Lindsay. Good morning and thanks for joining us for Camping World's 2022 fourth quarter and full year earnings call. On today's call, I'm going to lay out our financial results for both the year and the quarter, discuss our action plan for the current economic environment, and provide some early insights into 2023. Once that's done, I'll turn the call back over to the operator for questions. As many of you are aware, the last several years have been great. While the industry reached new heights, the number of households with RVs grew at a historical level, and this hobby has turned into a modern-day lifestyle. This lifestyle and industry have changed dramatically since I became a part of it over 22 years ago. Through those years, I've seen and experienced it all, from 9-11 to the 2008-2009 financial crisis, record high gas prices to rocket-like inflation, and lastly, the pandemic. I point that out because through all those times and things and in between, this industry has exploded. And in my opinion, while there has been and will be always a temporary speed bump along the way, both the industry and the RVer are not only here to stay, but grow. We're all dedicated to the lifestyle. From our perspective, it's the most affordable vacation in America, and the mandate for affordability is here to stay. This historically cottage industry with a rural birthplace is now fashionable for all ages, all cultures, and all interests. No one could have predicted that a worldwide pandemic would bring this lifestyle front and center. During those 22 years, I fielded all sorts of questions. But there are two questions that have survived time. First, do Americans love RVing? And second, can this cyclical industry continue to grow each decade? In my opinion, the answer is an emphatic yes. And there are decades of data to substantiate it. 2022 was a solid year for our company, actually the second best year in our history. with adjusted EBITDA of $653 million, on record sales of almost $7 billion. Those results, after making acquisitions, dividends, tax distributions, interest payments, etc., yielded year-end working capital levels that we're very pleased with. We ended the year with roughly $348 million of cash, broken up by $218 million of cash in the floor plan offset accounts, and additionally 130 million of cash on the balance sheet. We also have about $264 million of used inventory, net of flooring, and $247 million of parts inventory. Lastly, we also have $129 million of real estate without an associated mortgage. As our management team and board think specifically about 2023 capital deployment goals, we plan to be more constrictive around SG&A, capital expenditures, and initiatives, as well as less tolerant around underperforming assets, so that we may remain aggressive in accretive RV acquisitions, prudent about reducing debt, being opportunistic about stock repurchase, and maintaining the dividends. With that, it's no secret that recently the sale of new RVs and its corresponding margins have its temporary challenges. The key to keep at the top of that list is new inventory management. While we have significantly fewer new units on the ground per location compared to any time between 2016 and 2019, we believe that both logistics, supply chain improvements, and tighter planning and forecasting with manufacturers will improve this going forward. We hope to improve turns and levels over the next six months, the recombination of the spring and summer selling season, along with a disciplined and opportunistic approach to restocking. Look, historically, our inventory balances go up from year end to the end of the first quarter. But our plan is to have that new inventory down no less than $140 million by the end of the first quarter. Over the years, I've learned that the new RV sales were less predictable with a wider range of outcomes. That was always a puzzle that we wanted and were committed to solving. I felt like the key contributor to solving that puzzle was to create a more predictable business model, one that was hyper-focused on the following ideas. The used market, which is more than double the size in terms of transactions compared to the new. A robust fixed operations business, which is essentially service, collision, parts, and accessories. This piece would focus largely on the ever-growing and steady installed base. And lastly, to operate a high-margin recurring annuity business, one that would capture revenue opportunities at multiple points in our business. including our retail centers, our dealership finance and insurance offices, our service counters, our various web and online businesses, our campground network, and our national call center. That's our good Sam business. In breaking down these three, you will see that they continue to provide a strong opportunity for revenue growth, expanding margin, stability, and most importantly, predictability. In 2022, our use sales approached 1.9 billion, an annual all-time high. We sold over 51,000 units, all while use margins remain within the historical range. While we're happy with the growth in the last three years, we see this white space opportunity for our company as a primary growth agent, both in the dealerships we acquire and the new web platforms that are launched. including RVs.com. The fixed operations business, known as our products, services and other, generated almost a billion dollars in revenue. I want you to take note that when you look at the annual and quarterly results of this segment, please keep in mind that we exited significant categories at the end of 2021, like fishing, hunting, apparel and footwear. And when you exclude that revenue in comparing year-over-year results, service and parts revenue had growth in 2022. We see continued strength and stability through all cycles. Good Sam, with its high-margin recurring revenue sources, such as roadside assistance, extended service plans, insurance campground programs, and various other memberships and publications, had a record year. growing its sales by 6% and increasing its gross profit by over 11%. We are very excited about the prospects for 2023. I wanted to emphasize those finer points of the above categories to demonstrate that we understand the pieces of this puzzle and their contributions. Moving to a summary of our fourth quarter results. We recorded revenue of $1.28 billion, down 7% from last year. That was driven primarily by softening in new RV unit sales and margins in late November and December. We sold 10,334 used units in the quarter, compared to 10,669 units last year, down slightly, relatively in line with our expectations. but it materially outperformed the broader market, according to stat surveys. And Good Sam, our most valuable and predictable business asset, had $47.6 million of revenue for the quarter and $30.2 million of gross profit. Our adjusted EBITDA for the fourth quarter was $20 million. There were a few items that impacted the profitability for the quarter. We elected as a management team to reduce underperforming retail inventory by $46 million, resulting in compressed margins from heavy discounting while generating cash. We did and continue to aggressively sell through new inventory to avoid inventory aging, resulting in short-term margin compression. And due to higher interest rate environment, we experienced materially higher floor plan expense. As we plan for the remainder of 2023, we believe new RV demand and new RV margins will continue to put short-term pressure on the industry. The start of this year has seen a high level of inquiry from consumers through the web, in stores, and that shows. But conversion to sale on new units has been moderately tougher than last year with tighter margins. With the temporary softness in new RVs, we continue to remain committed to our legacy game plan of growth. We will do what we can to continue to eliminate waste, convert slow-performing assets, and eliminate non-core, non-income-generating businesses to allow for continued scale through acquisitions and new store openings. Currently, we have four locations under a letter of intent or definitive purchase agreements. Those acquisitions are anticipated to close in the second quarter of 2023. It is our goal to continue to look for transactions that add overall value to this company. And it is our belief that those opportunities will be more robust in the coming months. And we also anticipate more favorable pricing as well. Additionally, the company currently has nine locations, either built or soon to be finished. But unlike our historical process, we are waiting on opening those locations until we have more visibility on the trend lines and the current state, so as not to deploy capital or take on any new store opening expenses at this time. We believe in the strength of our business and understand that the temporary softening of both new RV sales and margins demanded action. Last fall, we started the process to reduce headcount, eliminate or reduce underperforming or excess inventory, locations, and business lines. In closing, we remain focused on where our business is going, and we're going to continue to take decisive action on our cost structure while making the necessary investments to intelligently and profitably continue to outperform the market. I'll now turn the call back over to the operator for questions.

Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star one. And our first question comes from Joy Alcabelo with Raymond James.

Thanks. Hey, guys. Good morning. I guess first question from Marcus. You've been very clear both on this call and previously that margins on new RVs will continue to come under pressure, at least in the near term. If we look historically at your GPUs on new, it's been around $5,000 per unit, give or take a few hundred. I think it peaked over $13,000 a couple years ago, and last quarter it was about $7,400. So where do you think we end up on that spectrum? Do we eventually get back to that $5,000 GPU level on new?

Look, it's our opinion when we look at the margin profile of new. While we expect it to be down from 2021, we expect it to be above the 2019 level. And whether that's in the middle of that or somewhere toggling around the middle, we feel pretty confident. I think when we look at the overall year, we see better margin improvement in the back half of the year as we just forecast things. But we do anticipate that we as a company will continue to be aggressive in moving through the flywheel new RV inventory. While we don't necessarily have a lot of trepidation about where our new inventory sits today, it's a little higher than we'd like it to be. The good news is we're going into the spring and summer selling season, and we've been far more disciplined than we have been in years past at working with the manufacturers on what we're going to bring in. And more importantly, of what we're going to bring in, we're being more opportunistic to ensure that we're going to pick up some margin to help offset the elimination of some of that older inventory.

And just to follow up on that point, are you starting to see OEMs rethink their pricing strategy with respect to rebates and discounting?

You know, we've seen a little bit more discounting than we have in the last couple of years. That's obvious. But we're very proud of how the manufacturers have wound down production in the fourth quarter and even at the beginning of this current year. As I was in Elkhart a couple of days ago, I was pleased with driving through some of those yards and not seeing thousands and thousands of units. I give the manufacturers, particularly for Forest River and Winnebago, a lot of credit for working more closely with the dealers. But this is an everyday thing, and we have to stay disciplined to ensure that the orders that dealers like ourselves are placing and the units that RV manufacturers are making are closer together. And I think in the short term, the manufacturers have recognized that for the next three, four, five months, they need to have RV retail registrations outpace the number of units that are being delivered so we expect that rv retail registrations should and hopefully will outpace the rv shipments for 2023 bringing those stocking levels back in line we believe in the next three to four months got it thank you our next question comes from mike schwartz

with trust security.

Hey, good morning, everyone. And I apologize that I missed this, but I think on the third quarter call, Marcus, you said you were anticipating, I think, a retail market of around 360 to 370,000 units for 2023. Has that changed at all since we last spoke with you? And maybe give us a sense of how the fourth quarter played out from a retail perspective and maybe how that's carried into early 2023?

And so that number of $360,000 was our best estimate as a company of what we thought shipments would be from the manufacturers. We're hoping that the retail numbers are better than that so that we can fix the stocking levels. But our number that we predicted, quite frankly, last summer when associations and manufacturers were calling for $2,400,000, still remains in that 360 range. And it could be up five or down five. But for the most part, we believe that we've seen an unbelievable amount of discipline, but frankly, discipline that I haven't seen in my 22 years that the manufacturers have instituted to ensure that we right size that. So we're pretty comfortable with that original in that 360 range shipment. As it relates to retail registrations, the first part of the fourth quarter was not terrible. But as we got to the middle of November and Thanksgiving and December, things started to decelerate pretty quickly. Now, we had to remind ourselves that that deceleration was nothing more than potentially a reminder of what fourth quarters were historically like in this industry. And whether it's any manufacturer, any dealer, the fourth quarter always had a pretty material drop-off. The other piece that's important to note is that that rocket ship that takes us back into selling season didn't necessarily start in January or even, quite frankly, February. We saw that maybe the last week of February and then accelerated in through March and then took off in April. In the previous two or three years, we experienced Januaries and Februaries that this industry hadn't seen, quite frankly, ever before. We believe that we've seen a return to the normal seasonality that exists. But in this particular calendar year, 2023, that seasonality also came with slightly more margin compression than we had historically seen. We know that that's really a cleansing of 2022s that the industry has to go through. And we think the manufacturers are being far more thoughtful about bringing 2024s in, pushing it into mid to hopefully late summer. But we think those things are going to correct themselves. So in summation, The fourth quarter was softer, but it accelerated at the end. The first quarter has, quite frankly, not taken off as the industry had hoped. And while there seems to be a lot of demand, and I call demand, I'm excited about the industry. I'm interested about learning in RVs. I'm going to shows. I'm sending web inquiries. Consumers are shopping more. and they're commoditizing the new RVs more, and they're expecting bigger discounts, which is what's leading to a slight drag in RV retail sales as an industry and a compression on the margin side. We hope that we're outperforming the market, but at this point, other than our fourth quarter outperformance of the market, we don't have any data to support yet that we're doing the same in the first quarter.

That's helpful. Thank you, Marcus. I think you had mentioned a number of costs reduction initiatives that were undertaken later in 22, including store closures and headcount reductions and cutting back on, I think, CapEx and advertising, things of that nature. If you give us a sense of the actions you've taken today, you know, as we sit here in late February, how do we think about the annualized run rate, maybe, for the cost reductions that you've put through the system?

I obviously want to be careful because we don't provide guidance as a company and we don't pick and tie these sort of cost reductions in our disclosures. But to give you a little bit of context, we unfortunately and sadly had to have a pretty significant reduction in headcount, almost a thousand people. And while we made acquisitions in the fourth quarter, the net net effect of it all was pretty material in terms of size. And if it netted out in somewhere at 850 range, at an average wage, it's a pretty significant number. And we prefer not to quantify it just because there's obviously human capital involved in this discussion. As part of that process, though, we did redeploy some of those savings into investing into our remaining talent pool, both in attracting new talent and retaining it. And we had to, quite frankly, put a lot of wage increases through our system As our employees, which happen to be consumers in the marketplace, were experiencing pretty high inflation. So we raised a pretty significant amount of our base wages, particularly in the service parts and those definitive stable cash flow environments. From other cost standpoint, we cut out about $20 million of annualized marketing. Those are things that we don't expect to recur. And those were through the elimination of long time, in some cases, decade-long agreements with big national partners. We got out of those because we understood that in 2023 and 2024, we needed to reinvest that capital into buying stock back, retiring debt, giving our employees better wages, etc., In addition to that, when we think about how our capital is deployed, shutting down a big distribution center, which is material, eliminating non-performing assets, and getting rid of exploratory teams around initiatives all brought costs down. If I was going to quantify it in a rounded way, I would say that from my perspective, it's no less than $50 million on an annual basis. But one of the things that we're fighting against is how that floor plan interest expense just continues to put some temporary headwind in front of us. As an example, I think just in the fourth quarter alone on a year-over-year basis, it's about $7 million because of the explosive rates. Some of that, a small amount of that, is because the inventory is higher. Most of that is because the rate is higher. Hopefully in the back half of this year and in 2024, as rates come back down, those savings fall right to the bottom line.

Okay, great. Thanks, Marcus.

Our next question comes from Craig Tennyson with Bird.

Hey, good morning. Thanks for taking my question. I wanted to ask about the used market. That's a market over which you have a little more control, and obviously you said it's a larger market. I'm curious what your outlook is for your own volume in that market. Is that a business that could grow even if new retail does not?

I think the way we're thinking about it, Craig, is how much can that used market outperform the new market? And the reality of it is in this kind of giant macro environment, there's going to be headwinds. And we're really working hard to have that used business maintain on a same-store basis as close to comp as possible. We think there's a little bit of headwind in that. But we think it's going to materially outperform the new. I think the special part of the use isn't just where that volume is. And we know that that white space is huge. But if the use registrations in 2021 were somewhere in that 900,000 range, we think that that use number could drop somewhere in the 750 to 760 range. I could be off, but that's just a projection. So there is some softening in that overall piece. We think we can hold on to something better than that. The special sauce in that business for me is the margin contribution that that asset provides to our overall business. And whether that's the front-end margin that is materially better than new and relatively sustainable on an annual basis from a historical basis, the contribution to our service parts business through reconditioning and parts and replacement things, and or the ability to have great performance on F&I, we expect the overall GPUs of that business to be within a very tight band. And while they may be a little softer, some of that softness is self-inflicted. And the reason that I say that is with the launch of the RV evaluator, we have become more aggressive with procurement. And anytime you're going to be more aggressive, you need to have a very stringent discipline around your aging policies and be willing to acknowledge that a mistake is a mistake and you take your losses and move on. As a company, we've always been religiously disciplined about what I call not hiding the weenie, which is allowing things to get old, which is allowing assets to depreciate without recognizing its loss. So as we look towards that, we always want to mitigate our risk by doing that. For example, in the fourth quarter, while we saw the new RV market demand dropping, we pumped the brakes a little bit on the RV Valuator values. And the reason we did that is we wanted to have a bigger windshield looking forward at what would possibly happen to those values. And as we pulled back some of our acquisitions, just slowed down the inquisition, slowed down the marketing, we wanted to see what would happen to the used values. Were we the ones that were making the market, or were we validating our thesis? In doing so, we did not see a drop in values or a drop in demand, even when we pulled back our values a little bit. That further supported our thesis. And in the first 10 days of January, we reinstituted our acceleration. We think that 30- to 45-day slowdown in acquisition, it may have cost us 300, 400, or 500 units. But the knowledge that we gained from it and the risk that we believe we avoided from it will pay us much greater dividends than 300 or 400 units that may have evolved from it.

That's really helpful. And then on the F&I side, just another category where you've been able to maximize your kind of F&I profit per unit. Is that something that we should see revert back to historical levels as well or find its way somewhere in between where it peaked and where it was pre-pandemic?

You know, I have to be honest. This is one part of our business that I don't see a lot of risk in, very similar to the good system that's I think what has really driven the growth of this business is not only the process that we have in F&I, but when you're presenting products that are driven by and enforced by and administered by a brand like Good Sam, we have seen the attachment dramatically improve. And every single time we make an acquisition, and let's say we buy that acquisition at a historical two-time, three-time, four-time earnings multiple, When we install our process and when we install the Good Sam products, the growth that we see in F&I is pretty dramatic. I don't see a lot of risk with this number. And even with ASPs moving around, even going up or slightly down through discounting or whatever contractions of mix may happen, I predict that this will stay within a tight band. Could there be a half a percent of of flexibility inside that number in terms of like the range sure but we haven't experienced that uh even in the back half of 2022 or even the start of 2021 or 2023 super helpful and then just on the dividend i think you you commented on that in your prepared remarks but um just what's your level of conviction behind maintaining that dividend and

in most foreseeable environments.

The management team spends a lot of time with the board talking about capital allocation and where we think our shareholders are going to get the best return on capital. And clearly our historical path towards acquisitions and towards reducing debt or making opportunistic stock buybacks, that's all in the equation. But returning value to our shareholders on a regular basis is also part of that equation. And when long-term holders invest in our stock, they like to see a level of predictability with their returns. And they understand that there are small segments of our business or segments of our business that have some volatility to that. When they look at the predictability of Good Sam and the predictability of service and the predictability of use, it's our expectation that they're also looking for the predictability of returns. And so at this moment in time, we don't see anything in front of us that would cause us to modify our strategy. But it is important to note that we do have this conversation on an annual basis.

Perfect. Thank you.

Our next question comes from with more research.

Hi there. A quick question for me. I just wanted to ask on the used side of things.

What do you think the relationship is between discounting on the new side and when you may see risk to the values on the used side? I understand the comments that you made about the pullback early this year and the lessons learned, but it just seems like to me that that could be an item that has some variability to it as the year plays out. Just want to get your thoughts on what's the right spread between a new price and a used price and maybe the timing of when those separate markets may converge to each other.

Morning, John. This is Matt speaking. Great question. And it's a question that we have worked very diligently to ensure that we have the solutions for, given that the RV evaluator was designed in such a way where we are predicting what the retail value will be. So that is to suggest that we are anticipating the residual value of what a retail consumer would be buying that asset for. And we're factoring in short-term modifications, short-term trends, as well as long-term trends to suggest that we're anticipating exactly what those results should be in these tight windows. We know that used assets are traditionally going to sell in about 60 to 90 days. We know at different times there's certain assets where, as Mark had suggested earlier in the Q&A, we could potentially make mistakes, and it could potentially take a little bit longer to sell through those assets. But we are so disciplined about keeping a close eye on understanding that first loss will be our best loss when we have an opportunity to sell an asset that perhaps we are a little bit overvalued on. However, as you brought up, this spread between new and used is certainly a consideration where we are very closely monitoring what that could be in the future. These changes are far more gradual than people realize oftentimes when they look at our industry where it's not actually going to be an overnight sensation. We understand that we have to project out based upon the current trend of what could happen over the next two years. Generally speaking, It takes about two years, though, for said model years to actually start to hit circulation in the used market. So we generally have a lot more time to understand what sort of information are we collecting and gathering to start to predict what those future residual value calcs would be. Typically, a sweet spot between new and used that's just one model year removed is about 15% or so, give or take five percentage points, depending upon the asset, depending upon the type code, model year, what have you, and general supplies. What we like to have is a spread between new retail pricing and used retail pricing. But as Marcus spoke earlier about when we were entering into Q4, we noticed some of the trends started to be a little bit shaky within the new and used market, and we wanted to be very conservative as you suggested earlier, just to learn what the opportunity will be and to test our thesis out. Through that process, we realized that we could toggle that value, the actual value that we as a dealer are assigning to it, and figure out what that spread should or shouldn't be, just to afford ourselves some flexibility heading into this year. We feel very confident with what our used inventory position is, and that's where we've really changed gears here over the past month, month and a half, to ensure that we're starting to ramp back up these used efforts because we feel like we have a very firm grasp on what the opportunity is within the used marketplace this year.

Great. No, I appreciate that. Thank you. And then just one question on the new inventory. Could you give us some perspective on what it looks like from a model year standpoint, percentage that's 22 versus 23, and maybe how that compares to any given normal year?

One thing that I want to mention, right, we're sitting at the end of, call it January, with about 185 new units per location. And when I look back over the last five years, we have, I can't think of ever been this low other than December of 2020 when the supply chain was just shut off. So from a per store new unit standpoint, we're pleased. From a model year standpoint,

We have been very confident that we'll be able to work through this. However, we have more 2022 model year units than we traditionally would have in terms of one model year removed sequence. We're entering into the year, typically, our mix would be about 20-ish percent of one model year removed. However, entering into this period, we have a little bit more that we know we're going to have to work through. Luckily, the manufacturers and us have worked very closely to ensure that we are working together to sell through these aged assets. And the manufacturers have had a willingness to help offset what could potentially be some margin degradation to ensure that we'll make certain that we are prepared for the introduction of 2024. There's been some chatter amongst some industry insiders and outsiders about when is this model year change going to actually occur. heading into a 2024 model year. We work closely with the manufacturers to ensure that it's going to be in the middle of the summer. I've heard some other suggestions that it could be a little earlier. That is not the case. I can assure everyone that by July, August time frame, we'll start to see the introduction of those model year 2024s, and it starts to take a little bit more time for those productions to even ramp up. So it's always a gradual cycle by which those newer model years of 2024 will be introduced, which will afford us ample time in the selling season to sell through 2022 model year.

Appreciate it. Thank you, guys. Next question.

And our next question comes from Grant Jordan with Jeffrey.

Hey, good morning, guys. Morning. Prior topic, I guess, as far as model your inventory, and I guess you guys are a little bit overweight, 22 versus normal. Could you talk about how you see the broader retail market? You know, model your exposure. Do you think most of your peers are more overweight in 22s than you are?

You know, we never want to speculate where their position is, but from the research and the intel that we've done, we seem to be far outpacing everybody's ratio of 22s to 23s. And so we're aware that we need to be first to market in terms of exiting those 2022s, which gives us the competitive advantage once we get past that. The reason that we have been so clear about continuing to aggressively sell down the new inventory both in the fourth quarter and the first quarter and potentially in a good chunk of the second quarter is because we want to actually get to the point where we can get back to some normalized margin. We think that the elimination of those 2022s, while it may have some short-term temporary pain, the other side of that rainbow looks pretty damn good because our used business continues to be strong and our ability to opportunistically restock with planning in an environment where manufacturers are looking to earn business should help mitigate margins for the full year.

Okay. And then I guess from a consumer standpoint, are you seeing any sort of differentiation between the consumer who's at the lower end towable product versus maybe the fifth wheels or motorhome product as far as just sort of strength or consumption trends?

You know, we believed a long time ago that the entry-level portion of the market, that 20,000 to 35,000, is really the sweet spot of the industry. And the funny thing about being in the industry for 22 years is that you see all these events happen, and you see the segments that get the most affected by it. And unfortunately, motorized, is usually the first to get affected, particularly in a rate-rising environment because that monthly payment gets more expensive. When you're financing a $25,000 unit, while the rate increases matter, the modification of payment between a $25,000 unit at 6% or a $25,000 unit at 7.9% isn't material enough to dissuade them. Part of our ability to fight that is when you go out and you look at other vacation alternatives or other family activity alternatives, a $200 or $250 monthly payment is still far less than a $250 night out at the ballpark. And so for us, we aren't seeing that customer go away. And more importantly, because this hasn't been asked yet, we haven't seen the retail lenders change their credit approvals on that consumer at this time either.

From that standpoint, I guess, is negative equity impacting affordability? Are these customers who are coming in maybe to trade in a unit, are they, from an affordability standpoint, able to finance that negative equity into the next trade?

Well, negative equity, unfortunately, doesn't just affect affordability. It affects accessibility. And your ability to take that negative equity with very little money down and convert that into a new transaction is tougher. One of the things that we've worked very hard with is to work with manufacturers on creating special units. big runs with more sizable discounting that allows us to take some of that negative equity and allow for the consumer to finance that transaction. The manufacturer has been very aware and very helpful in helping us solve that problem, but we're having to commit to large batch orders in the three, four, five, 600, 700, 1000 unit orders to give us that flexibility. But negative equity is something that a traditional dealer definitely would be struggling with right now.

Great. Thank you.

Our next question comes from Brandon Cole with GA Davidson.

Good morning. Thank you for taking my questions. One, just on, you know, you had mentioned that the OEMs are helping you guys out. to kind of soften the blow of, you know, the margin deterioration on the elevated model year 2022 inventory. Could you talk about what you're seeing there and, or, you know, the magnitude maybe of the support you're seeing from the OEMs and also, you know, I guess their urgency to help you out knowing, you know, there's cheaper, maybe decontented product coming down the pipeline.

Well, I think there's two separate issues. One, the manufacturers have been very responsive, all of them, at identifying any aging issues that exist, not only in our business, but every RV dealer in America. I don't think we're special in that regard. And they're bifurcating their assistance two specific ways. In one form, they're providing floor plan assistance or marketing co-op or assistance for sales person's incentives, really recognizing that we have to move through what's already on the ground. On the other side, they're starting to recognize the need to be slightly more promotional to entice orders. And that's no different than we're being slightly more promotional to entice transactions with retail customers. The one thing that I'm noticing that is different than any other soft period that I've seen in the 20 years is that they're not just making inventory on speculation, hoping that they're going to be able to discount their way through flushing it through the system. they're taking a more measured approach to manufacturing more to just-in-time retail demand. That, in my opinion, is helping mitigate some of that. Probably, if I was speculating the November, December, January timeframe for manufacturers, we're probably exaggerating the slowdown and exaggerating the losses or compression that they may be taking because they decided to take a finite period of time to give the RV dealers some breathing room to exit some of that inventory without piling inventory on top of it. I would expect that as we get through the spring and the summer, their level of management and their level of temperance will pay dividends in the back half, both for them and for us.

Okay, great. And another question, there's been a lot of consolidation in the industry over the last two years with a lot of regional dealership roll-ups. And now it seems like, you know, maybe their balance sheets could be stressed here to clear, model your 2022 inventory. How are you planning the business in these markets and, you know, where you overlap with maybe some of these more stressed chains? And on the other side of the cycle, could, you know, some of these dealership chains seeing additional stress be potential acquisition targets?

We built this entire business model off the premise that we are a growth company. And we always can't rely on just growing through different channels and different segments of our business. Acquisitions and new store openings, really the founding principles of how this business is built. And those founding principles come to the forefront more often in a time like this. And so when you see us start eliminating categories, liquidating certain non-performing assets, closing locations, it isn't because we're feeling the stress. It's because we're looking to collect acorns. We're looking to tighten up CACFacts and build cash reserves, both in our inventory and our bank account. We are a business that will continue to grow based on acquisitions. And in these periods of time, we like to accelerate that. I think that if we continue to see some level of normalization in the marketplace, and we accept the fact that the new margins are going to be softer for a while, and the new demand is going to be softer for a while, but as long as we continue to see some level of stability on use, on service, on good SAM, you could expect us to continue to accelerate that. As I mentioned earlier, we have four locations under LOI and or definitive agreements. We have nine locations that are built or ready to build, and you could expect us to continue to be very inquisitive, but we're going to be far more opportunistic and work with those dealers on ways to help them exit stage left without a lot of maybe disruption to their family or to their own personal balance sheets, getting them out in a clean and safe way.

Great. Thanks.

Our next question comes from Tristan Thomas with BMO Capital Markets.

Hey, good morning.

Good morning.

This was alluded to a couple times in the questions. How do you think the RV OEMs are going to handle new model year pricing in 24, model year 24?

In the discussions that we've had, I want to remind everybody that the OEMs, which are great innovators and great creators, are assemblers and they're subjected to a lot of the supply chain. And so I would imagine that the relationship that they have with some of their suppliers is probably where some of that pressure is going to exist. And it starts with things like frames and fiberglass and all those other pieces. It's our opinion that we hope that the manufacturers don't find their way to simply lowering prices by decontenting units. We think that takes away some of the sizzle for the consumers. However, our company is uniquely positioned, more than any other company in the RV marketplace, to take advantage of any decontenting that would happen because a lion's share of our parts and accessory business is the installation of those items that historically get decontented. And whether that's electronics or awnings or furniture or cabinetry or whatever it may be, we believe that we have a hedge to play on both sides. We're encouraging the manufacturers to look for innovation. We're encouraging to have the manufacturers find items to eliminate that don't necessarily take away value for the customer. Technology trinkets that may add value in the long term but don't add margin in the short term. Association fees that pay into associations that may provide value in the long term but don't provide value in the short term. Look for the intangible things that are attached to the cost of goods on those units that don't take value away from the end consumer. I believe every single manufacturer, not with pressure but with thought, are looking at all those intangible ads on every single invoice. $100 here, $200 there, to extract expenses to bring those units to market. But inflation is inflation, whether it's happening at a rapid rate or the smallest of rates. Rarely do prices go backwards. And if they do, they only do to correct the supply and demand curve. And once that's corrected, they maintain themselves. And they grow over time. So I'm not sure that we're going to see dramatic reductions in ASBs. We might see a normalization. We may see some temporary discounting off of that. But at the end, it's going to settle in, unfortunately, right where it is from our perspective.

Okay. Just one more. What do you think in terms of trading activity? And then also, how is RVs.com doing?

Sorry, I thought there was going to be an additional question there.

Related to your first question about trade and activity, it's become a relatively predictable science over the past few years, where we understand the ebbs and flows of trade and activity generally accelerates during what we would regard as motorized or high-profile fifth-wheel season, which is in the fall, which we saw that. And that normally translates into continued elevated trade and rates in January, February, March, and then by back half of March, April, May, that's where we start to see the trade-in rates start to decline slightly, but it always remains within this 20% to 30% range throughout the course of the year, month by month. Of assets that we sell, we can anticipate a trade-in on roughly 20% to 30% of the assets. It'll largely be contingent upon though, whatever season we're in and the rate at which we are going to be selling certain assets, like a bunkhouse travel trailer, as an example, and the way of RVs.com, which you cut off for a moment, but I believe that was your second question, Tristan. Is that correct? Yeah, that's correct. RVs.com. We have made that a live site for going on goodness, about seven, eight months now. And we have been modifying it on an ongoing basis and constantly iterating. We understand the value that this is going to bring, which is why we have been so cautious about ensuring that the customer experience is absolutely impeccable before we go through a marketing rollout that's more widespread. I can tell you just last week, we made certain that we cleaned up all of our product listing pages, our product display pages. And we have all of our used assets over the entire enterprise listed there. We have been generating on a weekly, monthly basis, hundreds of thousands of unique visitors without even any marketing efforts behind it. We understand that the appetite exists out there for this online digital retailing buying experience. And we are alive right now in two states, in Texas and Tennessee, with digital retailing where a consumer can set up their own login and profile and transact completely online, secure their financing online, and accept a home delivery. We have the documents and the information and gone through all of the diligence to understand the risk as well as the reward to have digital financing capabilities in 38 of the 48 contiguous states. We will have those 38 states States completely uploaded and prepared to accept digital financing and retail financing by middle of the summer. And I would anticipate by the end of the year, we will be prepared for a full nationwide aggressive strategy so that by 2024, we will start to yield more incremental business to tap into those white space opportunities outside of our local markets. And that's really the thesis here is that We understand there's a contingency of consumers that live beyond the 100 miles or so that customers travel on average to buy a new or used asset. And we're trying to satisfy that customer base that has a specific interest in our used assets and our new private label assets especially, where we can deliver all new private label and used assets all across the country. And that is truly what differentiates us from any of these other online buying experiences.

All right.

Got it. Thank you. Our next question comes from . Good morning.

Thanks for taking my question. I just want to talk about used. So, you know, sales were down in the used business, but inventory grew and continues to grow, and you're talking about kind of flattish comps for next year. So how should we think about inventory turns and used for 23 and beyond?

Our goal is to have used inventory turns that range from three and a half to four times. Obviously, there are certain quarters where that will look more accelerated. When we get into the fourth quarter, remember that we're always building inventory. as we head into the top of the year. And so it exaggerates a slowdown in the turn. When we get into the middle of summer, it also exaggerates the acceleration of that turn. And so the blended annual average is anywhere between three and a half to four. The reason that I've created that much of a wide window inside of that turn is because we're testing certain markets and as we launch potentially standalone used stores or we flip certain locations to be 70% used as opposed to 70% new, we want to try some things and so it may drag that turn down to three and a half as we learn. We expect that to accelerate once we understand where that right level is.

Great. And then historically, I think you've talked about SG&A to gross profit ratio being between 60% and 70%. You're at the high end of that, 22%. How are you thinking about that for 23%?

Yeah, we have never in the history of me having this business ever talked about having a range of 60% to 70% for SG&A. It's always been 70% to 72%. We were very blessed that there were periods in 2000 and – 21 and 22, where we saw, you know, 62%. We also, in historical years, pre-pandemic years like 19, saw 87 and 88%. It is our expectation that in 2023, based on the compressed margins that we're experiencing, that our SDMA on an annualized basis could be between the mid to high 70s. We could out-surprise that, but from a forecasting standpoint, that's how we're thinking about it. Most people have come at me very hard on that particular topic saying, just let go of more people, cut this, cut that. I want to remind people that in order to make lots of acquisitions and to open lots of stores, and to keep our service parts employees engaged in our business when it's typically a high turnover business, we tend to have to spend a little bit more money in those periods. We also want to remind people that the softening that exists on new demand and the softening that exists in new margins in my 20-year history is a very finite period of time. And so we want to cut the flesh but not break the bone. And so while we will continue to look how to drive that number down, we want to set that expectation properly. I believe that after we get through 23 and the margins stabilize, we'll be right back in that 68% to 72% range, which is where we believe that our EBITDA margins perform at the highest level. By the way, materially better than any public auto has ever performed, even at an average level for us.

Great. Thank you.

Our next question comes from .

Hey, good morning guys.

Thanks for taking the question. Looking at part service and other, I heard the comment around growth for the full year divestiture. But you noted back in 1Q that you would have to work with all customers and revenue associated with the divestiture through 3Q this year. So with the decline again in parts, service, and others, is cleansing of those customers taking longer than expected, or are we seeing another headwind impact results? Thanks.

Are we speaking specifically about the club or the revenue?

The revenue.

Yeah, so what we were lapping from 21 over 22 was we actually had that full assortment in our entire business through the bulk of 2022. We started that liquidation process at an aggressive level at the end of Q3, but it leaked over into some of Q4 in 22. We had some of those pieces out there. In 23, those were big numbers to last. I think as we get into, excuse me, as 22, those are big numbers to laugh. As we get into 2023, we don't have the headwind of those categories like we did in the previous year. And we're expecting that the purest, most accurate depiction of our service parts and other business will exist in 2023 because there's no 2021, 2020, 2020 noise in those numbers.

Thank you. That's super helpful. That's all for me.

Okay, if there are no more questions, thank you very much for joining today's call. We'll obviously be prepared for the follow-up calls from here.

Thank you so much.

This concludes our conference for today. Thank you for your participation and have a good day.