Q3 2019 Earnings Call
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The topic of your call today.
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[laughter] yen call funding camping World Holdings Q3 earnings call.
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Operating performance reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and on our website.
All comparisons of our 2019 third quarter results are made against the 2000.
Third quarter results unless otherwise noted.
I'll now turn the call over to markers.
Brent Thanks, and good afternoon, everyone.
Total revenues for the quarter were $1.4 billion.
Up 6% from the prior year.
Adjusted EBITDA, you $60.6 million.
The performances of our core RV and good Sam businesses and the third quarter were solid.
Total active customers rose, 17.3% to 5.2 million with continued strength in our good Sam club.
Total RV sold increased 1.3% to 28653 vehicles with use being up 14.6%, a new down 4.7%, our combined frontend backend gross profit per unit, including arsenide increased two point.
5%.
Good Sam consumer products and services hosted segment income of more than $18 million on sales of $42 million.
In addition, the good Sam club generated revenue of $13 million with more than $9 million in gross profit.
These results continued to confirm our position as the largest RV an outdoor lifestyle retailers in the world.
As you know on September Threerd 2019, we reached an inflection point in our company's history, we a mouse or strategic shift to refocus our company around locations that have the ability to sell and or service rvs.
Since the start of the third quarter through today, we have reduced our non RV inventory by approximately $100 million largely driven by the strategic shift.
Our plan is to reduce non RV inventory by an additional $40 million to $50 million in becoming months.
On our second quarter earnings call on August 7th 2019, we suddenly we expected 2019 revenue to be in the range of $4.9 billion to $5.1 billion, we are affirming that.
We also said that we expected adjusted EBITDA to be in the range of low to mid $200 million in 2019, now obviously those expectations did not contemplate the strategic shift.
We estimate the non recurring costs.
Of the strategic shift could lower adjusted EBITDA by 30 or $40 million in 2019, now that's driven primarily by reduced margins on liquidating the inventory from the store closings and the related costs.
We believe that the strategic shift and the elimination of these locations. He was the right decision for the long term health of the company and should lead to improved working capital through significant reductions in inventory and improved operating results.
Once the shift and store closures are behind US, we expect the improvement to adjusted EBITDA to be in the range of $35 million to $45 million annually. This is on top of the onetime liquidation costs associated.
With the strategic shift.
I am extremely excited about the future of camping world.
Our vision is to continue to build long term legacy business that makes our being fun and easy.
We'll do this through our high margin recurring revenue good Sam consumer services implants business and our remaining 176 RV centric locations.
We have invested heavily in our core business over the last several years hiring and acquiring new RV centric locations. What we gain from this process is several dozen additional RV dealership locations that we believe we'll continue to mature consistent with the past over the next 12 to 18 month.
Yes.
Our focus during this time period is to limits our investments into any new locations and allow our base to grow and prosper.
We feel strongly that as the RV industry stabilizes and grows we will be able to return to a level of profitability that all of us are accustomed to while building cash and de leveraging.
We are excited to expand our position as the world's largest RV and outdoor company.
Now, let me turn the call over to Mel from Us So for some additional commentary and details around our plan.
Well.
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Operator, do we still have Mel on the line or did he temporarily to get disconnected.
Mezz line is still expected.
Now maybe on Muse on your it.
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Let me that he must be having difficulties. All this is Brad I'll jump in there.
Oh, sorry, the Internet reconnected the second line.
Yes. Thank you Jerry girls rent them back on we got them Oh, the phone system here. So let me can you hear me.
Yes go ahead, though.
Okay.
As Mark has mentioned, we're very excited to be able to talk today about a major positive resetting our business.
And while it has created a fair amount of near term complexity in car.
Future direction is clear and we believe it will lead us to improve profitability cash flow and top line growth going forward.
And it's important to note once again.
What I'll call or core no go forward businesses performed well within our expectations in the quarter with vehicle revenues up 3.7% overall and good Sam service and services and plans up 2.2%.
I also want to comment briefly on a couple of balance sheet items.
First.
I think it's important to point out they know that in October we completed the extension of our floor plan facility.
Out to March 2023, the amendment reduce the capacity slightly to just under $1.4 billion.
And covenants remain substantially unchanged.
We're in compliance with the two relevant covenants at September Thirtyth.
I believe it will remain in compliance for the foreseeable future.
At September Thirtyth, we had $694 million in that borrowing under the facility down from 814 million at the end of last quarter, and 886 million a year ago.
With respect to cash.
Said last quarter that are plan was to reduce inventory as we bring additional cash back into the business.
We were successful in doing so in Q3.
Overall inventories declined $167 million in the core.
Of that about 82 million was product parts and accessories and was heavily influenced by activities related to the strategic shift.
And 85 million was vehicle inventory.
New vehicle inventory was down about $127 billion in the quarter.
Well used was up 42 million.
We've talked previously about the opportunity we see in the U.S RV market. So this shift towards views will help satisfy customer demand well, putting more high margin high turns inventory on or lot.
Operating cash flow through the nine month ended September Thirtyth 2019 was $323 million.
Up from 254 million last year, and we're continuing to generate cash as we as we reduce inventories further in Q4.
Let me finish with it.
We recently established a new leadership process to ensure greater alignment around her vision and improved communication across a broad and very capable leadership team.
Next year, we're pressing the pause button on acquisitions and external expansion.
Our primary focus for the next several years is to expand our position as the largest RV and outdoor retailer in the world.
We expect to accomplish the by executing on a number of key initiatives, including.
Vastly improving the overall customer experience.
Improving our employee and associated experience.
Growing our topline profitably.
Investing in technology that will improve user experience and operating efficiencies, including the rule continuing our rollout of an enterprise wide customer management system.
Ramping up investment in or service and parts operation to improve the RV user experience and expand or margins by optimum optimizing our massive service footprint.
Growing or pre owned RV inventory position in system, which will lead to expanded offerings to the mark to the marketplace. It typically yield less competition and higher margin.
And finally, continuing to develop and improve our dispute resolution process to make our being easier.
We believe this renewed and enhance focus around that simple vision to build a long term legacy business. It makes our being funded easy.
Puts us in great shape going into 2020 and will lead to substantial improvements in growth profitability and customer satisfaction in the future.
With that I'll turn the call over to the operator today.
Operator, Please go ahead.
Thank you.
Ladies and gentlemen, if he would like to ask a question at this time T. signal by pressing Star and then one on your telephone keypad.
If you're using a speaker phone. Please make sure you me function is turned off what are your signal to reach our equipment again that is star and then going to ask your question.
We will take our first question from Rick Nelson of seasoned. Please go ahead. Your line is open.
Thanks, Good afternoon.
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Sales trends are the two soc during the quarter.
Oh, how October November is.
Shaping up.
Any initial thoughts.
About 2020 and nowhere.
For five quarters hinted that cycle downturn.
I think that continues or.
Tim can we stabilize or in fact improve.
Yeah, that's great <unk>, Rick. Thank you. So as you know as I said earlier, our total units increased 1.3% what I think the highlight is that while new was down 4.7 are used was up almost 15% and we're going to continue to de stock.
Where we think it's appropriate in certain segments on the new side, particularly on the motorized side and reinvest those dollars and continuing to grow our used business. I think are used inventory as of today is around $170 million I don't know it for a much more to put in there may be 170.
Five 180, but it's up substantially and we're seeing the dividends not only in the increase in sales, but the increase in margins. We saw that trend continue into October as well in fact I was relatively pleased overall with the performance in October and we're starting to see the margins slowly.
He creep back up not so much on the new side, because it's still a competitive landscape.
Because of our shift to use and we'll continue to do that we're starting to see some of the benefits of that as it relates to 2020.
We're just starting our forecasting process, but for me I'm more optimistic about what the results will be in 2020 on a same store basis and overall basis. Then I was going into 2019, I don't know, where we are in the cycle, but I wouldn't expect us to be forecasting.
Anything to negative on the new side, and we are going to be forecasting something positive on did you side. So we're I'm I'm feeling far more bullish and excited about 2020, because I feel like we understand where that inventory mix needs to be again and as we look at the the channel overall the invent.
Story in that channel the whole channel not just us is down is that where it needs to be I can only speak for our company that we're relatively satisfied.
In some areas like entry level travel trailers and entry level fifth wheels, we maybe a little light.
In diesels, we still maybe a little high.
But overall, our aging and our cleanliness of inventory going into 2020 could be the best we've seen in years. Unfortunately, we paid that price in 2019, and we felt very bullish about 2020 in terms of how we're forecasting.
Okay trending towards.
His house here within the store closings, even though they were negative.
40 million.
The midpoint that you should pick up and 2020.
So there's two things that we want a bucket for everybody and it's very important that clear about this.
There are costs associated with the liquidation and the closing of the identified stores, where RV are not going to be sold not able to dissolve.
Those costs, which I term nonrecurring and high term one time sort of in a vacuum is about $30 million to $40 million a lot of that is not add basketball to the adjusted EBITDA. We took a very conservative approach in what got added back and so for example in the third quarter.
Particularly in September as the margins were compressed we still had the expenses of operating those doors, but didn't have the commensurate margin that went with the revenue because we are liquidating so that exaggerates the EBIT adjusted EBITDA down for the reported quarter as we look at about four.
Fourth quarter, we have about $48 million left as of today, but we had about $75 million of inventory associated with the closing stores. When we started the fourth quarter, we believe that between the liquidation of that inventory and the adjustments to.
The other parts of our ends and infrastructure, which include closing an additional distribution center, taking care of our customers and our people those costs are around $30 million to $40 million that's bucket one.
Bucket to is that we believe that going into 2020 with how these locations in our operating entity, they're all close that the improved EBITDA performance of our core business will be up $45 million to $45 million those are too.
Separate numbers not to be confused with one number those are two separate numbers.
Great. So.
It sounds like you're done everything now tomb adjusted EBIT.
Around 200 million for 29 team.
And that's good base is through stays stable.
A few store closings should love for you, but Tom by 35 to 45 million.
So we're still in the process of we're still in the process of finishing our budgeting. We're in the middle of it now for 2020, we don't anticipate any macroeconomic trends that would cause us to be bearish on the market and so as we said when we get rid of these stores in 2020, if all.
Things are equal, we expect to see $35 million to $45 million and better performance and we also wont have this nonrecurring liquidation expense of $30 million to $40 million. It. All you know that's how we're thinking about the business and you can deduce the numbers appropriately from there.
Okay.
And to Sarah Good Sam impact.
Profit wise from they start close friends.
But ultimately you know the good Sam file continues to grow its up I think about seven seven.
A year over year, but when we exit these locations, we'll work hard to preserve the relationship with the members who joins in those respective markets by either driving them to an adjacent location or driving them online, but we do not anticipate that we'll be able to hold onto 100% of them. So in.
The 2020 calendar year, we do expect to have some pressure on that file size.
We're already but we will be budgeting for that that pressure.
From the close locations, but we also expect to continue to mature and grow in the go forward locations. We haven't found out what that number is gonna be but we clearly are gonna have a little bit of pressure in that regard I, we expect to make that up in the overall performance of good Sam through our other products and services in our.
Listing business.
Okay.
Thanks for that.
Today House care about that sales trends that you're saying in the form or.
Gander stores.
Or that the new outlets that are selling our views.
So the locations that we have that are new to the company, though the dealerships that had been added well say since the start of 2018 have really started to perform nicely and as you know Rick some of those have come on at different points. In fact, we've added some.
Recently, we are very pleased and I want to be Crystal clear about this we are very pleased with the early performance of those consolidated locations one of the things that we have to keep in mind as if we had opened up any dealership called whatever it may be there's always this ramp up period.
How do we not lights, the RV sales trends or performance in any of the new locations.
We would have elected to include the closure of those locations in this strategic shift, but we did not see any locations now in the quarter or excuse me for the 2019 year. We did close RV dealer ships that did not perform or or were not profit.
Well over a long period of time, we close Flagstaff, Arizona that was a camping world a dealership that sold locations and as we've said from the beginning if we operate locations over a period of time that can't contribute to the overall profitability. The company, we will close them, but we don't put that same microscope on a brand new.
Dealerships that may have opened up within the last 12 months because in the history of our company. They just take time to build some sort of base.
Gotcha Hey.
Thanks, a lot and good luck.
Thank you Sir.
Thank you.
No take our next question from Brett Andress of Keybanc capital markets. Please go ahead. Your line is open.
Hey, good afternoon. So.
A few more questions on the liquidation.
What was the impact on that liquidation in the third quarter that that you cannot add back I'm, just trying to get a sense of that and then I guess in the fourth quarter. I guess is the fourth quarter. The ended the liquidation or do you expect that to continue.
Some into 2020.
So our goal is to I'm going to start with the last question. Our goal is to try to be done with as much of the liquidation as we can.
By the end of the year and as we sit here today, there is about $48 million left on the weekday we're selling about $700000 on a weekend were selling anywhere from a million to a million too and so we know that there's some trajectory I cannot say with certainty that will be fully done by the end of the year I'd say.
I cannot say it but I think that number will be diminimus enough that we should be largely done with that liquidation I think the other the other question was how does it affect the third quarter now I want to be very careful with how I answer. This question because we took a very conservative approach.
Adding things back to EBITDA and so what I can look out in the month of September once we made that strategic shift we accelerated the amount of inventory that we sold.
Some was sold without any add back at all so we may have had let's say a store did a million dollars in revenue for that month, we had very little if any margin because we are liquidating yet, but we had all the operating expenses the back of the napkin estimates that I have done has been about 10 or.
$11 million worth of gross profit that we would have normally recognized to go against the expenses that we had to incur.
And so that's that's the best Brett that's the best back of the napkin as the third quarter was affected by about 10 or $11 million there's no.
That's about the number and then in the four and then obviously the balance would be in the fourth quarter and there could be a very small amount very small amount that could leak into the first couple of weeks of.
2020, but we're hoping that.
Understood. Thank you for that.
And then the second one just looking at your New unit same store sales down 14% I'm trying to square that with some of the industry data that we see no that's pointing to new industry units being down somewhere around 7% for the quarter. So I guess are there any specific factors on the new same store underperformance versus a data.
That that we see.
Yeah, it's our and as we told everybody on the last call. We are destock continuing to destock motorized. So our performance in motorized was down 22%, we chose to exit out of those dollars and that's why you saw the new being down so much in terms of.
Inventory and that's why are used is up so much. So we're hoping is that people recognize that we made the decision to decelerate, our new inventory understanding, particularly in the motorized sector and reinvest in the U.S inventory, which is why are used.
Which is why are used is up 14.6.
So we actually feel good about these numbers.
And that's yeah, that's about that's about as much as I can say the that.
Okay, Oh, sorry, and then I think you mentioned earlier some improvement in RV trends in October and I guess, where you just referring to new sales you sales or both.
Can you repeat that question one more time please.
Just on an earlier question Youve answered earlier question, you mentioned some improvement or some stabilization in October I think you said I guess were you referring to new sales or use sales I'm not comment.
I was referring to a stabilization on the new side and an improvement on the U.S side, and we're feeling better about our margin performance and the trends in that direction and so if we look at our margins overall over the last six months, we're starting to March towards some level of.
Equalization on the margin side and October was a good example of that.
Thank you for that clarification.
Thank you we can never take or next question from Tim Conder of Wells Fargo Securities. Please go ahead your line is up.
Yeah. Thank you. So it's a it maybe just wanted to circle back to its kind of combining the first two questions here just to be clear and on the adjusted EBITDA. So just to reiterate what did the number that you're looking at now for adjusted EBITDA for 2019, and just the updated guidance on that.
With whatever from an accounting perspective that you're allowed to add back have chosen to add back and everything so was that number right around that 200 million I just wanted to clarify that and then.
Again sounds like the channel inventories at Marcus You said, you feel comfortable overall still little heavy on diesel a little light on a couple areas, but overall feel pretty comfortable so.
Thanks for that clarity the other one question I did want to ask about and Mel mentioned that here is the CRM system.
What I guess, what do you guys have plan. The he said a corporate ride enterprise full rollout of the CRM.
What other than CRM does that include the underlying back office, so to speak data analytics and and just maybe describe what we intend to be it a year from now versus where you currently are from with that.
So the systems that we're talking about is really a one customer approach, it's really around the customer record Nazi accounting and the reporting systems, because we operate our dealership business with a different operating system than we do our good Sam and our retail business that isn't what we're going to be.
Consolidating what we have done is have what we have done is initiate two separate consolidations. One is the consolidation of our field operations and the analytics of them looking at every location on a standalone basis four walls, combining every transaction that happens in there.
Okay, and creating the ball alignment for every manager and every associate in that location, whether they're working out the cash register or the whether they're working in the finance Department are working into service Department and we are well on our way and we've seen positive results with how the management team looks at said location.
The second thing is how we're looking at the customer and their experience and so we'll be rolling out before the top of the year, a new sales force from newly integrated Salesforce technology that allows our associates and our call center to look at the customer Holistically.
We've never had this before and so we believe that there's two goals here number one creating a more consistent journey to communicate with that customer by making sure that they're only marketed products and services that are either up for renewal.
That are either likely products that they would take with the current products. They have today and we'd be eliminating this canvassing of marketing. So we think theres not only a better customer experience, but the ability to save on the yesterday and they sign secondly, if we arm our cashiers that our registers are.
Sales associates on the RV side, and our call center agents with a one customer view of who they're talking to and what they have we also believe that that associate well know what to sell and when historically, we did not have that because we were operating disparate comp disparate companies and so part of the reason.
Why we're not going to be making acquisitions for a while we're not going to be opening new stores for a while it's because we believe there is a ton of juice to be squeeze out of the orange we have today.
Both from an operating efficiency standpoint at each location with better data analytics and with a better one customer record and lead management tool to get more out of that customer without spending the money to get more.
So that's how I feel like will be different in 2020 and seemed to be candidates just a more refined process on what we have a 5.4 million active customers without feeling the need to go find new ones.
Okay, and and is there some plan to too I guess enterprise married that good Sam database also given the scale of that and that those customers were you know I guess, it's or a a good target customer to begin with is the how's that.
That's going to be folded and I guess, so the overall customer database.
So today, we are operating.
Within axiom database management system that does put all of the disparate systems and all of the disparate databases into a consolidated database, we work hard and tirelessly to de dupe that base database using house holding information to to clean it up so the number that.
We report is actually de dupe than household did.
As we process, both promotional activity renewal activity and funnel activity going forward is done with a global database and so we're not looking at the good Sam member and the person who bought an RV and the person who owns a credit card separately, we look at them.
Holistically and then we understand each one of those records individually what they have and what they don't have and then a tactic to to increase our lifetime value of the customer is far more scientific now with the Salesforce process before we were patch quilting it today.
Whether we've now spent about $10 million over the last two years, putting it together, we think 2020 will will reap the benefits of that.
Okay.
And then back to my first question on the were you all targeting I guess from an adjusted reported adjusted EBITDA perspective for 19 to so we can visit that 200 million a thing.
They were referencing and from the first question is that the is that the number.
So the way that we want everybody to think about it is in August we gave people a range of low to mid two hundreds.
At this particular strategic shift, which I think everybody on the phone welcomed.
To get out of locations that don't sell our views is a 40 to 40 million dollar nonrecurring.
Expense that would impact that number how do we not had that we would be comfortable with where we're at what we had told you in August how do we not had that.
Okay. Okay. So two in a quarter minus 30 to 40 should be or should be the target adjusted EBITDA number for there okay.
Okay.
Okay. Thank you.
Yes, Sir.
Thank you.
No take or next question from Craig Kennison of Baird.
[noise] [noise] Hey, good afternoon. Thank you for taking my questions.
Got a question about.
Your source of used inventory, where do you access that inventory.
So theres three different places that were accessing it one we've gotten very strategic and analytical around tapping into our database, particularly our good Sam members and have been very active in ensuring that those good Sam members will be getting a premium on their units as part of their member benefits that's number one.
And that's really driven a pretty good amount of the increase in our sourcing of those units and that things you know a database that we possess that others don't the second is we've been more active at buying things, what we call on the curb and being far more promotional and encouraging people, if you're exiting the lifestyle or facility.
The thing that's not for you you can come to any of our locations I would say that's been a big source and then lastly, we've been sending data scientists not sales managers data scientist that have accumulated eight years of data since the last downturn of every used unit, we bought and every unit.
We've sold compiled with other data from auctions to send accounting type scientists to auctions, which is an oddity in itself. It's actually use empirical data to buy units at the auction. So those are the three primary sources.
Our ability to actually make those purchases is really what's been the best thing and so I don't know us Mel mentioned, it but $170 million of used inventory we have on the ground today, we own 100% event, none of it is for playing finance and as we.
We bring down our retail inventory and bring that cash back into the balance sheet, which Mel mentioned big cash flow change in the third quarter Big cash a change in our balance sheet over the second quarter will lead deploying that capital with smell in his management team to invest in to use because the return on cap.
Capital was so strong we turn our used inventory approximately five times a year out a 13% to 14% margin. So on an annualized basis essentially this strategic shift was largely driven by the senior management team, saying, we have money tied up in our retail inventory.
We want out of it we went out of those losses give me that money back and I want to redeploy that in use which is why you've seen dramatic shift in retail inventory down dramatic shift in used inventory up and the margins are significantly better.
I mean, it's a significant improvement in margin.
That's a very clear response, thanks for that and you had mentioned customers who are exiting the lifestyle I'm curious if you're seeing any trend. There are you in the industry have done a wonderful job, bringing in new first time buyers.
In the last several years are you seeing any change in their behavior are they satisfied with the experience are they coming back to exit.
Hey, coming back to upgrade any any sort of color on what that consumers doing.
In that context.
Yes, we have seen continued solid growth with new buyers coming into the marketplace continued solid growth and we I've also seen our ability to retain those new buyers at a pretty good right now we all know that as an industry not just our company we have to get better at him.
Proving the overall customer experience and as the number of units that were produced over the last several years group, we were running behind as an industry in terms of the number of technicians and the number of service base to be able to take care of that I think as an industry, we stubbed, our toe a little bit and we're all come.
Electively working to a improve the parts replenishment process, which we're going to be investing in fast moving new OEM replenished parts through our distribution center.
But what we have seen Craig is that in normal course of business, we were able to plot out the number of good Sam members over the course of their lifetime or just I hate to say it one of the spouses was passing away they became too old they wanted to retire from the lifestyle and we we identify.
So that has the key leakage in the industry those good Sam members in good stead members represent the stickiest of sticky in the RV lifestyle and so as we identified those folks exiting the lifestyle, we became very aggressive and proactive and identifying.
Those folks through our Salesforce journey process to get them back into our location by incentivizing them with a premium on their use unit that they're wanting to get out of because of their loyalty. The good Sam which is why do we saw an immediate increase in our used inventory, which we believe is.
Outpacing the rest of the industry.
That's great. Thank you very much.
Thank you we'll now take our next question from Bret Jordan of Jefferies. Please go ahead. Your line is now.
Hey, good afternoon guys.
Good afternoon, Russia.
Yes, John on the used inventory again sort of following up on crags. If you look at the 170 million and the three buckets that you source. It from could you sort of give us your feeling for the magnitude of each of those buckets and then within that 13% to 14% margin rate.
How does the spread look I mean, what's the what's the margin on a call that unit you source direct versus an auction versus what you buy in from a good say I remember if they're getting a premium for that unit.
So the primary source that I didnt mention.
I apologize the primary source of our used inventory continues to be that trades that people have on their new unit purchase or they are used to purchase the trades as we look at the balance others, let's say that half of it is coming from trades and the other half approximately is coming from sourcing our best.
Our absolute best source from a margin performance standpoint is when we buy units on the curve that is our absolute best because those are people, saying for whatever financial or social reason, they're exiting the space, we're able to be the most opportunistic with people that are saying I just.
I want out.
When we are inducing good Sam members to give us a shot at the unit and we're paying a premium it could have a 1% to 2% premium to somebody selling on the curve.
The last one that is the lease profitable of the three but still the still more profitable than new as when we go to the auction and the reason that I say that it's because there are other hidden costs associated with the acquisition of that unit, including the staff member who goes there they're traveling expenses.
As the auction fees, the transportation to get that unit back and the reconditioning costs. It tends to be slightly higher with all of that being said after all of those costs they still outperform materially.
Hi, five to six point, though lowest won the lowest performer of those three still performs outperformed our new margins by five to six points.
So even though it's not as ideal the way, we're sitting here today, and saying I'm going to source. All this used from wherever I can I want to be smart about it in all cases, we know that it's better than new until it's accretive.
Okay and then one question I think Matt was talking about some of the initiatives and one was dispute resolution.
Systems is that dispute between the manufacturer and the customer or is that customer dispute from a sales standpoint.
We we have instituted over the last 90 days three buckets of dispute resolution process.
And so what we wanted to do is to shorten the time between a customer being frustrated with the quality of a brand new product.
Frustrated with something that we did frustrated with the lack of part so we have three buckets there purchase of a brand new or our U.S RV and the service associated with it in Swat team number one where there are 22 people and a leader that take phone calls in my office and deal with social media.
Emails et cetera, and we work with case management tools. So hunger customer calls in they opened the case those teams are incentivized to bring the customer to total satisfaction with a period of time.
Bucket number two is our good Sam team and our Denver, Colorado Call Center anybody that the club member credit card holder roadside member warranty member insurance member any any experienced that they have a my card renewal by roadside Didnt pick me up quick enough. We have seven people end up.
Leader dedicated to immediately solving the problem with the yes in right now and I have given them along with our president Cherry feral immediate authority to solve that customer situation right. Then in there. The last is in our online fulfillment process, where there is a team of people a five and a leader that deal.
Sales with back orders shipments broken things boxes coming in wrong size, which immediately solving that problem with the yes, and right now and what we learned is that as our company got bigger we didnt have the right.
The right process set up for the customer to get in and to get out and so we'll spend a couple million dollars on a go forward basis that we believe is marketing because it it should overtime improve our overall reputation which has risen on Google by I think about a half a point or a point to about four four out of.
Five stars, we think you can get better and we also think you can improve our retention of our club members as well.
Okay, great. Thank you.
Thank you.
No take our next question from Fred Weisman of Citi. Please go ahead. Your line is open.
Hey, guys. How are you haven't heard quite as much discussion about promotional activity this quarter, especially compared to last quarter and it looks like the new margin declines were actually bit better from what we saw in to Q. So I know that people tend to get a bit more aggressive with the model year change over but can you just talked about that competitive backdrop in threeq, you and how it sort.
Trending in for Q2.
Yes, Sir Unfortunately, the competitive landscape hasn't changed much for us in Q3, and even in the start of Q4 that slight improvement or I'll say it differently. The lack of decline in the margins was really a function of us getting our inventory clean.
And and Unfortunately, we performed poorly in that regard in the first two quarters of the year, because Mel and the and the financial team, we're putting pressure on us as operators to clean up this inventory to get the aging down two world class levels and we all knew that there was a cost associated with that.
I don't want to I want to ensure that people don't have.
Don't give too much credit as the margins improve over the next several quarters.
Others in the U.S side any improvement that exist on the new side is really a function in my opinion of us not having the aged inventory and taking big losses, and those losses were really really centered around.
Last motor homes, and diesel motor home of which were which were you know deemphasizing. So the improvement that you see I have to be honest isn't because the market got less competitive it's because our inventory got cleaner and we expect that to continue to improve.
Okay. That's that's really helpful. And then if we look at that $35 million to $45 million tailwind you guys talked about so from close in the underperforming retail units.
Is that enough to get the remaining retail business back to profitability or is that still going to be challenged.
So the way we're thinking about it is we don't want to operate any locations in the long term that don't contribute to the overall profitability of that location on a consolidated basis and that location to our company and let me give you an example.
There are cases today up for management purposes, where our retail business may lose $100000 because of the way, we allocated costs and our dealership business will make $2 million in that same location. We have made the decision to look at because of how we reported to look at that.
Location on a consolidated basis, one location one brand one leader one P.M. now and what we found before is that because we had disparate systems that we weren't doing that we were missing out on the efficiencies, we do not and will not on a long term basis operate located.
And then on a consolidated basis aren't profitable now the caveat to that is when we open up a new location like a Wichita, Kansas or Lafayette, Louisiana, where we are we have any other new locations that it does take time as it always has since the history of our company to come out of that.
If we have locations that aren't profitable we will shut them like we did in Q3 that did sell out of these.
I don't expect us to have locations.
The next 24 months that aren't.
Consolidate on a consolidated basis profitable than we would just ignoring keep operator I just wouldn't expect that to be the case.
Great. Thank you.
Thank you.
We can never take your next question from John Novato of Bank of America. Please go ahead. Your line is open.
Hey, guys. Thank you for taking my questions as well the first one more because I just wanted to focus on bucket number two that 35 to 45 million benefit you expect annually from a operating without the non RV locations can you just help us understand how you actually got to that 35 to 45 million dollar number and then also along the same lines.
It seems like you're assuming sort of flat to maybe positive volume on the new side is that fair this underlying that assumption.
No that that last statement would not be accurate, so I'm going to I'm going to answer them M&A answer them, both but I am going to split split that baby up the 35.
The 35 to 45 million dollar improvement in our go forward business through the elimination of those locations is coming from primarily the operating loss that those locations pad.
Secondarily, the infrastructure costs associated with supporting those organizations, which includes people distribution centers and logistic associated with that and then lastly, our overall infrastructure is getting tighter from a supervisory operate.
Regional perspective, we beefed up our accounting staff, we've beefed up our data analytics staff to comply with what we believe will give us better data and better compliance and better governance, but we have made some strategic decisions to consolidate operational management field management and here.
One location management. So all of those things are contributing to the 35 to 45.
Okay, that's actually.
Sorry, I apologize.
The second question is how we are not prepared at this time to give our 2020 forecasts, but I did say that I'm feeling better about our 2020 prospects and 20 2020 120 to 23 now that we're getting these.
Non RV centric locations behind us and not making acquisitions not opening new stores, because we're going to let the couple of hundred million dollars that we invested in getting these additional dealerships open we're gonna, let those mature and we're going to enjoy the fruits of our labor and candidly I want to hoard cash.
And I want to de lever at this point and I want to be laser focused.
Okay that makes sense and then you could use a theory that we've been contemplating in and we're certainly newer to this industry than you are so be it would value. Your opinion here you is it possible that the last four years you on the new RV side, just a possible that sales may have been artificially inflated by maybe initially a replacement cycles.
Similar to what you see in the light vehicle industry, and then that followed by maybe by the significant discounting that happened as.
Inventory built up and.
If that is in fact, you I mean is it possible that to sustainable level of demand is actually significantly lower than 400000, I mean could we be just have been overselling in the past few years.
I personally do not believe that and the reason that I don't if we look at the average age of our buyer.
Coupled with the investments at the manufacturers have been making in both technology, and making products lighter and more millennial friendly I do not believes that the funnel of potential RV owners is going to ever be smaller I can't think of any reason if you look at the history of.
The industry over 40, or 50 years that that swell rarely contracted if ever what may happen. Once in awhile is it the number of new people coming to the market may take a temporary pause.
The number of people may take a pause, but we don't see like other industry people running for the exit doors. So when we look at the entire installed community of RV owners, we see that funnel only getting bigger.
Has the types of products that manufacturers are developing and the markets that accompany leader like us are entering and the way that a company like us is finding potential new our veers through the sale of other outdoor products that may not likely have ever tips people over we think that funnels only gonna.
To get bigger we were not terribly surprised as we forecasted in the spring of 2018 that there are cycles in our industry, where people just take a pause.
And it's a very important for any new analysts to this industry or any newcomer this industry to understand that the pause doesn't mean the exit doors. The installed base is what our good Sam business feeds on its what our use of business seeds on its what our service and parts business seeds on and went down.
Get impacted in a down cycle like it has every time there every cycle is margin pressure throughout the system, which is how it's hard that hard to overcome that and then the number of first time buyers to the market that goes away. So it's hard to overcome that but the core base.
The installed base not only stays constant, but it's still ticks up just not at the pace that we would like it too.
That's great if I could just one last one I mean is there anything to that any signs that would show that maybe that new buyer, that's coming to the market and that bigger funnel is just shifting to used units.
There is no empirical data to support that but there is data on our side, where we're going to try to actually make that happen and we are in some degrees, one where customer facing we are type agnostic, meaning our sales this.
See its are there to make sure that the customer gets the unit that's right for them in their budget, but it is true that we believe that a customer can get more unit more more features and benefits more space more slide outs for less money, which is good for them and we can enjoy wider margins, which is good for us.
And so to the degree that there is used inventory available in the marketplace for us to secure at a reasonable price and to the degree than we continue to D.
De emphasize our retail inventory and increase the emphasis on used inventory. We will continue to do that because it is the playbook that we used in the last down cycle and we need that margin to overcome whatever pause the first time buyers taking.
Thank you marks.
Thank you.
You can never take or next question from Ryan Brinkman JP Morgan.
Great. Thank you for clarifying the impact that's the full year EBITDA outlook them that discounting at that this continuing stores. It sounds like both the high and low ends of the low to mid 200 million range may be coming down commensurate with that $30 million to $40 million ahead of which 10 million was into Q. If I heard correctly I just wanted to check that that's the real.
Moving to cease to be outlook I know you don't guide quarterly but are you able to say how your three to EBITDA performance track after backing out that 10 million relative to whatever you had earlier assumed for Threeq you when guiding to the earlier loan to 200 million dollar range basically just trying to figure out how do you guys are tracking.
Relative to earlier expectation stripping out this noise.
The one clarifying comment you mentioned that you mentioned that that the impact was in Q2, we made the strategic decision to three exit yeah. That's okay. We made that decision on September Thirtyth as I said earlier, we believe our best estimate is that there was about a lot.
Seven to 10 to 11 million dollar hit to our EBITDA that we did not add back in.
Q3, and our core business are good Sam business and our core RV business is meeting our expectations.
Okay that is helpful. Thanks, and relative to that decision to not I think I heard not organically or inorganically grow stores next year and I remember at the time of the IPO that one strategy you had been expecting to employ during the downturn was to.
To turn.
You know a negative into a positive by trying to purchase distressed competitors et cetera can you talk about the logic for having a pickup the strategy isn't just a function of having already allocated capital toward the than non RV.
Retail space et cetera, or are there other factors that plays such as you'd earlier done a faster than expected pace of R&D dealership acquisitions during the upcycle.
You know I his desire to improved operating performance of those already acquired dealers and when do we get passed this period of time when that execution improved in the industry stabilizes. What are your thoughts then about the long term store count potential and ability and benefits are further rolling up the sector.
So we believe because we've added so many RV dealership locations in the last 12 months that we need to let those mature and we also believe that we have opportunity to improve our operating margins at our long historical stores and so that his primary focus number one.
The second thing is that we believe that we need to massively builds up cash on our balance sheet and get our earnings backup to the levels that were accustomed to so that we can get back to the leverage levels that we believe are appropriate for our company long term. The last piece is that it was.
It's very important to myself, Mel Brent and the balance of the management team as we had our strategy session. Several weeks ago to identify 10 to 12 key initiatives largely driven on focus around the customer dispute resolution getting more juice out of the orange that we have.
Anything that took human capital or financial capital away from that objective would just be a distraction and one that both the board myself and the management team thought would be best to get away from now the long term strategy of our company has never change and that.
Is that we are always going to make opportunistic acquisitions in white space markets that we believe will improve the overall scale of our company and over the next five to 10 years, we expect to continue to dramatically grow the footprint of our business plan.
Credibly through the Denovo or acquired acquisition of our these centric locations, which feeds to the growth of our annuity business in good Sam.
We just simply felt that for the foreseeable future building cash and de levering was more important.
To doing that than anything else.
Just because we know we have a lot of upside with our existing business.
Okay. That's helpful. Thanks, but it's just the last question is on a follow up to the discussion about competitor activity as is impacting new vehicle gross margin I thought I heard you say not to expect too much improvement over the next couple of quarters, but no last quarter's call you talked about I've seen maybe overextended competitors selling units sold.
In new units below cost, which is obviously not something that they continue to do for too long I'm. Just curious if you're able to monitor what anybody 40 and looks like at your competitors and if there's any sort of anecdotal signs that.
It might be starting to write and and when that specific pressure could begin to lift on industry wide gross margin.
So our our asset management team and sales organization team led by Mac Wagner uses a lot of technology to study our inventory position as it relates to our competitors inventory position and the analysis really focuses on the pricing not the pricing.
Philosophies that our competitors are using we've seen a lot less gas on that new towable side and the new entry level fifth wheel side, we have not seen the pressure or reduce quite frankly at all on the diesel side and even the higher end.
Aside in fact in some cases on the diesel motor home side, we continue to see people aggressively liquidate out of inventory and that's part of the reason why we're just saying we don't want any part of that and so on it on a holistic basis. The pressure is there, but we are starting to see some easing by segment.
Not easing in totality with some definite easing by segment I would expect as we entered 2020.
New travel trailers.
Well, we'll continue to become a little less.
I'm, a little less of a blood bath, but I will say this as technology for the consumer and the consumers access to information and their access to competitive information continues to be out there that it is possible or true that new.
Travel trailers, and new fifth wheels, and new are these overall could be slightly more commoditized than they were 10 years ago.
That analysis and that realization is what's causing our company to do two things redeploy it's working capital into things that we believe we have more up which is the database to acquire that use and the cash to do it.
To be able to mitigate whatever pressure could exist long term on the new side.
We're our philosophy going forward is that the pressure will continue what the heck are we going to do about it.
Got it thanks, so much.
Thank you.
Concludes todays question and answer session.
On the call back for any additional or closing remarks.
Thank you very much we look forward to are getting behind.
Our 2020 plan and look forward to giving you an update on that 2020 plan on our next call. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.