Q3 2019 Earnings Call

Good morning, My name is Suzanne and I will be your conference operator today at this time I would like to walk everyone to the lazy de holdings Inc. third quarter 2019 financial results Conference call all lines of the placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session. If he would like to ask a question. During this time.

Simply press Star then the number one on your telephone keypad. If you like to withdraw your question. Please press the pound ski. Thank you Mr. James <unk> corporate controller now begin.

Thank you Sam good morning, and thank you for joining us for our third quarter 2019 financial results Conference call I'm teams me hand, corporate controller PC days.

We issued the company's earnings press release. This morning, a copy of the earnings releases available under the events and presentations section to the Investor Relations page of our website and has been furnished as an exhibit to our current report on form 8-K filed with the FCC.

With me on the call today, and Mr Bowman, and our chairman and Chief Executive Officer, and Mr. Netcomm, a shot our chief financial Officer.

As a reminder, please note that some of the information that you will hear today. During our discussion may consist of forward looking statements, including without limitation statements regarding revenue gross margin operating expenses stock based compensation expense tax product mix shift and geographic expansion actual results were trends for future periods.

Could differ materially from the forward looking statements as a result of many factors.

For additional information regarding factors that could impact the forward looking statements. Please refer to the risk factors discussed in the Form 10-K filed with the FCC on March 27019th.

We also will discuss non-GAAP measures of financial performance that we believe are useful to the company, including EBITDA adjusted EBITDA and adjusted EBITDA margin. Please refer to our earnings press release for reconciliations of these non-GAAP financial measures for the most directly comparable GAAP financial measures.

For the three month ended September Thirtyth, 2019, and 2018 as well the nine month ended September Thirtyth 2019, the financial information presented represents the operating operating result of lazy days Holdings Inc. for the nine month ended September Thirtyth 2018, the financial information presented represents the combined operating results.

Lazy days holdings Inc. for the period from March 15, 2018 to September Thirtyth 2018, what the operating result of Lazy days Harvey Center Inc. for the period from January 1st 2018 to March 14 2018.

Now it is my pleasure to introduce filmer name.

Thank you James and good morning, everyone. Thank you for joining US. This morning, I will give a quick overview of what we are seen in our markets and then Nick will give more details on our specific performance.

In the third quarter, we saw a continuation of the weaker demand that began in September 2018 de stocking also continued in the third quarter and we believe the pace of de stocking was more aggressive in the third quarter for a number of reasons.

First there was a model of your change in the quarter and this created a lot of incentive to move 29 teen product off of watts.

Second the third quarter represents the end of the primary summer selling season for the majority of dealers in the country and dealers were trying to move as much inventory as possible off the robots before the demand slowed down for the winter.

Third dealers typically have curtailment payments due on their floor plan loans once the new vehicle has been ongoing bought for a year or more.

The behavior, we saw in the marketplace indicates to us the dealers reacted to the over stocking of the last year or so as to avoid larger than normal curtailment payments curtailments can have a significant negative impact on cash flow foreseen dealers to reduce prices and margins to move vehicles facing.

And curtailment.

In general we try not to participate in significant price discounting. Unfortunately, the trifecta of activities mentioned above.

Forced us to price more aggressively during the quarter, which did impact our margins.

Based on early indications we've seen in the market, we believe margins will improve in the fourth quarter.

The good news is that this activity has likely accelerated destocking in the industry. The bad news is that it had a very adverse impact on gross margins as many dealers priced product very aggressively at or below cost in order to move it.

Nick will comment more on the gross margin impact in a few minutes, but we believe margins should start to move higher is the activities mentioned above.

Come to an end.

We're pleased to continue to experience the growth benefits of our geographic expansion strategy in the third quarter. Although overall RV demand was down in the third quarter, we were able to generate double digit revenue growth.

Our inventory continues to be well balanced and we feel very good about our current inventory position our balance sheet is in great shape, and we are ready to take advantage of any strategic opportunity that presents itself.

Now I'm going to turn it over to Nick Thomas shot our CFO to take you through some of the financial highlights of the third quarter Nick Thanks.

Thank you Bill and good morning, everyone.

Please note that unless stated otherwise the 2019 third quarter results comparisons or did the same three month period ended September Thirtyth 2018.

Total revenues for the quarter were $158.4 million up 16 million or 11.3% versus 2018.

Starting with RV sales total RV revenue from the sale of recreational vehicles was $138.9 billion for the quarter.

Up 13.6 million or 10.8%.

Total RV unit sales excluding wholesale units.

We're Uh Huh were 1930 535 units or 7.5%.

Breaking out new RV sales unit sales were 1248 up 170 units or 15.8% compared to prior year.

The average selling price up new vehicles was $69100 down $4400 per unit or 6%.

Net new RV sales revenue was $86.8 million up 7 million or 8.8%.

Shifting to pre owned vehicle result units sold excluding wholesale were 687 down 35 units or 4.8%.

Pre owned vehicle revenue for the quarter was $52 million up 6.4 billion or 14.2% from 2018.

The average selling price a pre owned recreational vehicles was $65500 up $5500 per unit or 9.2%.

The unit decline impact on our retail pre owned vehicle sales revenues versus 2018 were partially offset by a 4 million dollar increase in our low to no margin wholesale sales.

Revenues from our other lines of business consists of consists of parts accessories and related services.

Finance and insurance for ethanol high revenue as well as other miscellaneous revenue, including consignment sales commissions camp grounds rentals restaurants et cetera.

In total revenue from these other lines of business for the quarter was $19.5 billion up 2.5 million or 14.7 per cent compared to 2018.

This increase was driven by an ethane I revenue increase of $1.2 million or 13.7% to 9.3 million.

And parts and service revenue increase of $1.6 million or 23.2% 8.8 million.

The second I and service revenue increases were driven by our acquired locations in Minnesota, Tennessee, and the villages, Florida as well as increased happened I penetration across our combined business.

Were partially offset by declines in other miscellaneous revenue stream.

We continue to be pleased with our ethanol performance as evidenced by F and I revenue indexing that 7% of retail RV revenue compared to 6.6% in Q3 2018.

Q3, gross profit was $30.5 million up point 2 million versus 2018.

Gross margin as a percentage of revenue decline compared to prior year to 19.3% versus 21.3% in 2018 with a change primarily driven by aggressive competitive end of year end of model your pricing, reducing RV sales gross margins as well as increased low to no margin.

All sales sales as a percentage of our sales mix.

Excluding transaction costs, depreciation and amortization and the amortization of stock based compensation SGN eight for the quarter was 25.6 million up 1.8 million compared to the prior year related to expenses from our Threed dealership acquisitions since August 2018 in Minnesota.

And as fee and the villages Florida.

Amortization of stock based compensation decreased 1.6 million compared to the prior year as a result of the graded vesting schedule of the market based awards issued to management in March 2018.

Income tax expense was point $9 billion as compared to 1.1 million for 2018.

The net loss for the third quarter was $2.5 million as compared to the net loss of 2.7 million in 2018 for the reasons as noted above.

Adjusted EBITDA was $5.3 million for the quarter down 1 million versus 2018, adjusted EBITDA margin decreased 110 basis points to 3.3%. This was primarily driven by the decline in our gross margins for the period, which were down 200 basis points to 19.3.

The person for the reasons I discussed previously.

Please refer to our earnings release for the table, which includes a reconciliation of GAAP net income to adjusted EBITDA and net income margin to adjusted EBITDA margin.

Now turning to our September thirtyth balance sheet, and our financial position, we had cash on hand of $33.5 million and networking capital 45.2 billion.

With cash up 6.9 million compared to December 30, Onest 2018, and up 3.3 million compared to June Thirtyth 2019.

This increase was primarily the result of cash flows from operating activities net of our floor Pan flying financing payoffs as we reduced our inventory year to date by approximately $54 million, excluding the recently acquired inventory at the villages Florida.

At the end of Q3, we had approximately $126.2 million in total inventory consisting of 88.7 million in new vehicles 36.4 million in pre owned vehicles about $4 million in parts and inventory and LIFO reserves of 2.8 million.

As of September Thirtyth 2019, we had no borrowings under our 5 million dollar revolving credit facility 15.7 million in term loans outstanding and 107.6 million in gross notes payable in our floor plan facility.

We also had approximately $7.4 million outstanding on notes payable related to acquisitions.

Thanks for your time this morning, and now I'll turn the call back over to build Renee.

Thanks, Nick.

We had number of exciting announcements during the third quarter, we closed on our acquisition of Lions coach on August Onest. This dealership has been has been branded lazy days at the villages and is located near the entrance to the villages active adult community and just 30 minutes from Orlando, Florida.

It won't give us great access not only to the villages, but also to the Orlando and Ocala, Ocala, Florida markets and help us grow our Florida market share.

Lazy days that the villages becomes our seventh full service dealership.

Please recall that earlier this year, we also announced that we will we are building our eight full service dealership in the national tenants in Nashville, Tennessee, and we expect this dealership to be operational late in the second quarter of 2020.

In September we announced we will open lazy days service of Houston in the first quarter of 2020. This 30000 square foot state of the Art service facility will be the first of what we hope will be many dedicated lazy days service centers.

RV owners and RV manufacturers are demanding better service from the RV industry, and we're committed to providing it.

The lazy days name and brand is very well known across the RV industry and stands for an exceptional sales and service experience. Our goal is to bring our great experience to more customers in more locations and growing our dedicated service center footprint will help us achieve this goal.

We continue to aggressively pursue growth opportunities, we are seeing an increase in the number of owners wishing to sell their dealership.

This doesn't mean, they're all attractive or all the good fit with lazy days strategic direction, but it is safe to say that the sale activity has picked up in the last quarter, which should improve our ability to find attractive prospects were geographic expansion.

As many of you know we have deliberately kept a very strong balance sheet with little debt and strong cash flow to enable us to aggressively expand during an industry downturn if attractive opportunities present themselves.

We can't guarantee all or any opportunities will be appealing to us, but we do believe our chances of finding good growth prospects are improving in the current market conditions.

And we have the resources and are well prepared to act when necessary.

Lastly, we're also excited to announce this morning that our board of directors is authorized stock repurchase program.

We're constantly evaluating the best allocation of our capital and based on the current value of our stock price along with the confidence we have in our growth strategy management and the board believe that lays it a stock and as it is an attractive investment opportunities.

This stock repurchase program program will have no impact on our growth plans or strategy.

We will continue to aggressively grow our geographic footprint.

That is all for our repaired the prepared remarks. Please open the line for questions. Thank you.

Of course, and just a reminder, in order to ask questions. Please press Star then the number one on your telephone keypad, well pause for just a little bit loves compiled acuity roster.

Our first question Thats a line of Fred.

Citibank Your line is open.

Hey, guys. Good morning, how are you could we just started off talking about the gross margin performance from the quarter I think was down 200 basis points a bit more than it was down last quarter is that really all due to the uptick in promo activities could you help us understand the cadence of the problem promo activity sort of throughout the course.

Her and then maybe specifically on that comment about margins improving a bit are normalizing a bit into the fourth quarter, what sort of giving you confidence there.

Yes, so Fred could you repeat the question I'm not sure we fully understand what you're asking.

Hi, just gross margins right I mean gross margins were down in the quarter pretty significantly on a year over year basis was that entirely due to to promo activity in discounting and how did that sort of trend throughout the quarter.

Yeah, I think the quarter was rough right from the start a new is a continuation of glass the end of last quarter. So it.

I don't know promo activity there are three things that impacted it that we discussed right. It was the.

The the end of the summer selling season, certainly had an impact.

The model year change to 2020, certainly had an impact and we believe based on the actions we are seeing and quite frankly some of the the information were seen from a from acquisition candidates that a number of dealers are facing curtailments, which is putting a lot of strain on their cash flow which is.

Forcing them to sell so we think those conditions, it's hard for us the way how much each of those conditions impacted the margins but.

There was a there is a distinct movement in the market in margins in what people were willing to take four product.

And those are the three things we believe.

The impact good and when the 20 twenties were introduce then dealers had more leeway to promote discounted pricing online and we were able to see aggressive pricing being offered by our competitors relative to invoice cost.

Okay.

I think that's really helpful.

So rather than I mean, it's rather than promo, what's really discount tickets with aggressive pricing in the industry. That's that's worth what I was I was getting and you didnt mention that Fourq, you think that the margin improvements going to normalize can you just talk about what what's giving you that that confidence.

Yes, what we said is early indications are that it's going to improve in Q4, and we have a month of Q4 under our belt and that's that's what we're basing that on but that isn't to say things couldn't change in November or December .

We're just we're it's feeling like it's moving back.

In the other direction I know one more comment the knick touched on it I think you know Fred that.

Advertise pricing internet pricing when they introduce a new model year that comes off of the old product. So there is no longer a minimum price and dealers can really go out there and promote any price they want and that that ends up really having a negative impact on.

Margins when that happens.

Sure. So that makes sense and I think last quarter, you talked about de stocking or the retail Destocking you expect that to continue through the end of this year sounds like got accelerated a little bit this quarter. I mean is the inventory sort of as an industry level clean now do you still think that there are some more units that need to come out how are you thinking about that.

Okay.

We we obviously don't see everybody else's inventory, so it's hard for us to gauge that.

We do get insight into some others inventory as we as we pursue our geographic expansion and it's still we think there was a good move in the quarter to to get inventories right.

But we still think theres, a little room to grow but were much better shape is our sense.

Okay, and then just finally sort of overall retail expectations for the industry I mean, not a lot of units left here 19, how are you thinking about 19 and 20, just from sort of an overarching industry performance at the retail level.

I'm sorry could you repeat the question again, sorry, yeah, just industry level retail expectations for the rest of this year next year.

Yes, I'm still not sure what are what do we expect for the balance of the year next year.

Well for retail I mean at an industry level.

It's what do you think 2019 full year retail will end up at an industry level and then for 2020 different that'll stay the same as you're going to improve sort of still be down mid single digit like how are you thinking about that yes, we're we're kind of.

Planning for.

Continued continued softening in 2020 flat to down a little bit 2020, that's what that's that's just our planning process, it's really hard for us to give you any insight into where the industry's going.

Sure and just to confirm that flat to down that is talking about on an absolute level right, you're not saying flat versus what you saw 19 to down a little bit you're saying is an absolute level it could be flat to down we're thinking overall.

RV retail demand is probably flat to down a little bit thats, what everybody, saying, so we're not saying anything different than what others sorry.

Yes, that's that's fair thanks, a lot guys.

And again that is starts on the number one on your telephone keypad, if you'd like to ask a question.

Next question will have line of Steve Dyer of Craig Hallum. Your line is open.

Hey, guys rights that go on for Steve.

Right.

So I know you guys historically don't comment on organic sales versus acquisition contribution, but it would be helpful. So I guess.

Minimum are you willing to comment if revenue was up year over year on organic basis in the quarter.

We're not prepared to give that and we're not when we get bigger we may do that.

Brian , but it's just competitively we don't want to share too much data like that.

Yes. The answer is no we're not we're not going to break out same store sales at this point in time.

Okay, a few follow up questions on the vehicle gross margins, but so first of the 220 basis point vehicle gross margin decline can you quantify how much of that was from mix shift from new to use like a new units were up quite nicely and use were down.

I I don't have the what the mix shift was that I was a breaking that out but there definitely was an impact of a shift from higher higher margin use to the newer units and then at the same time. The we also believe that the discounting that we were seeing on the news.

New units to move the 2019 model year had an impact on you sales overall.

Just with new units being attractively priced it was put pressure on our ability to sell through the use.

Gotcha, so that kind of goes a long to my next question, but was there any and it sounds like both new and used felt the pressure from from new but was there any size pricing pressure I guess in either the new versus used and then as well as towables motorized et cetera.

No.

No.

And then moving along the F and I.

Nicely up 14%.

Is that primarily a structural improvement lazy.

Getting better attach rates or is there some market dynamics that are improving that are also hoping there.

I think thats, all internal improvement either us improving our existing operations or some of the new ones that we acquire but that's that's just a great effort I team that we have that's doing a great job.

And were able to we're able to benchmark our locations against each other and if there is.

Best practices that we can apply or even getting the right people in the right seed and those that fund I roles, we make those adjustments.

Gotcha, a last one from me you've talked.

Quite a bit about curtailments and impacted.

From a competitive standpoint of.

Competitors, having to move inventory I guess did you guys bump up against any curtailments that impacted your inventory decisions or was that entirely just a pricing issue again competitor actions. Thanks to good luck.

It was all against competitive action, our curtailments are minimal and.

Certainly.

History is similar to historical.

Excuse me historical levels.

We manage our inventory. So we did not we did not face any issues relative to two curtailment, but we do think a number of our competitors that.

And again it is star one on your telephone keypad, if he would like to ask a question.

We have another question from spread widening.

Citibank Your line is open.

Hey, guys just one quick follow up on the curtailment side. This isn't you're not seeing for plan lenders get more aggressive with curtailments. It's really just the fact that we're coming up on the 12 month anniversary of some of this inventory hitting the channel is that fair to say or are you actually seeing some changes on the terms or.

Finance partners get a little bit stricter with some of those payments.

I think you have it right right. It's just normal you know you pass an anniversary curtailments start it's normal practice and if you are approaching the ended the season. If your let's say in one of the northern areas. The likelihood that you're going to have to continue to make payments during the slow season is high.

Perfect makes sense. Thank you.

No no further questions in the queue I turn the call back over to Bill mourning for his closing remarks.

Great. Thank you everyone for joining us this morning, and we'll talk to your next quarter. Thank you have a great day.

And this concludes today's conference call you may now disconnect.