Q2 2019 Earnings Call
I E.R.A.
Right.
Thank you our place your line into the earnings conference.
Thank you.
Good afternoon, and welcome to camping Worlds Holdings conference call to discuss financial results for the second quarter of 2019.
At this time all participants are listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
Please be advised that this call is being recorded and the reproduction of this call in whole or in part is not permitted without written authorization from the company.
Participating in the call today is Marcus Sliminess, Chairman and Chief Executive Officer, Brent Moody, President and Melphalan again, Chief Financial Officer.
I will turn the call over to Mr. Moody to get Us started.
Thank you and good afternoon, everyone.
A press release covering the company's second quarter 2019 financial results was issued this afternoon and a copy of that press release can be found in the Investor Relations section on the company's website.
Managements remarks on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act at 1995. These remarks may include statements regarding our business goals plans abilities and opportunities.
Industry and customer trends.
Growth and diversification of our customer base and increase in market share RV and outdoor retail location openings acquisitions dispositions and related expenses.
Increases in our borrowings future compliance with our financial covenants 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 , 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 todays call such as 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 measures are included in our earnings release and on our website.
All comparisons of our 2019 second quarter results are made against the 2018 second quarter results unless otherwise noted.
With that I will now turn the call over to Marcus.
Thanks, and good afternoon.
For the second quarter of 2019, the company reported record revenue of roughly $1.5 billion.
And adjusted EBITDA of nearly $100 million.
Despite published headwinds from both manufacture shipment data as well as retail registrations for the period. The company was still able to sell an all time high 33715 RV.
Up slightly from the previous year's all time high.
During the quarter the company generated $410 million and gross profit at a margin of 27.8% and SDMA up 303 million.
During the quarter, the RV industry was softer than we anticipated.
Declines in manufacturer shipments and RV retail registrations continued.
Additionally, we believe many competitors continue to destock and even liquidate inventory through heavy discounting and increased promotional activity.
This scenario naturally results in some level of margin compression and increased selling expenses.
Both.
Of which we experience at a higher level than anticipated during the quarter.
We believe based on history and our experience this type of cyclical softness should be short term.
However during times like this we know that we must manage the business to maintain strong transaction counts inventory turns and healthy inventory levels as well as grow our active customer file.
Speaking of our active customer file we ended the second quarter with 5.250 million active customers.
Up 26% from a year ago.
And just under 2.2 million goods in members up 13% from last year.
We are pleased to report that our good Sam services implants segment, which is driven by truck strong transaction counts and the size of our file had another strong quarter.
Segment revenue was up 5.3% and segment increased segment income increased to more than $21 million in the second quarter.
We've talked previously and now have the data to support that expanding our offering offering has widened our funnel to potential new customers.
This model has driven significant increases in our active customer file and transaction count.
While we are pleased with these stats, we recognize the need to improve the return on investment on this file and refine the offering and experience to enhance this even more.
Our job is to balance all of these things against maximizing profitability and the long term prospects of this business, which we believe we successfully achieved by generating record revenue and RV unit sales volume nearly a $100 million and adjusted EBITDA, while growing our active customer file and lowering our overall inventory level by $75 million.
Over the last 18 months. The company has worked hard to understand how to evolve and expand our brand and customer profile.
And identify new markets and RV offerings for the long term.
We have learned that the outdoor enthusiasts and the traditional RV consumer are more similar than some speculated.
And our locations, where we have our full array of retail products combined with RV sales and service have shown the most promising results by far.
Our model is to operate an omni channel RV and outdoor company anchored and predominantly driven by our core RV products and services are good Sam products and services, both enhanced by a more curated.
Outdoor products offerings.
With that being said we are in the process of analyzing categories skews vendors and locations to ensure we are maximizing our asset allocation.
Over the next several months, we piloted planned to sell down those items and bring that cash back into the company vol to reinvest in higher margin or higher turn products.
Pay down debt and invest in technology that will help us achieve our long term goals.
As we've said before we must continue to expand our footprint expand our data Bryce.
And create more stickiness with our customers.
We've also made it clear that we will not attempt to achieve that by operating business units categories are locations that don't contribute to our profitability.
Said more clearly we will not grow our files and databases at all costs.
Since June of last year, we have shut ourselves of 17 locations all with different offerings and different retail facing brands that lost money or didn't give us the return on capital we expect.
We plan to continue to make those adjustments through the balance of the year to ensure that we continue to deploy our human and financial financial capital to maximize yield.
This includes but is not limited to the disposition or exit of units locations categories distribution centers in a continued effort to improve asset allocation.
One of those categories that warrants additional capital allocation is used in our phase.
Our performance indicates that the demand is there and strong and the return on capital outperformed most other categories.
Today, we have nearly 5000 used rvs in stock we plan to continue to invest in the used RV category as consumer demand and our performance in this category dictates.
Our inventory turns on used vehicles are more than double those of new.
And as a side note our new turns are up slightly from a year ago.
As a company, we are agnostic to which type of vehicle our consumer purchases.
We are focused on a single transaction and relationship with the customer that best fits the customers needs and their budget.
Our company continues to be the largest RV dealer in the world.
As most know our branded camping world locations have been the dominant brand for years.
I'm proud to say that as of 2019, our company controls not only the largest but now also has the second largest RV dealer brand in the world with Gander RV.
Which is quickly approaching nearly 50 locations by year end.
Additionally, with the changes in our senior management and the addition of strong new talent over the last six months, we have made a hard pivot on our customer service.
Over the last seven years, the RV industry, along with our company.
Generally experienced tremendous growth.
That led to quality issues, both with products being manufactured as well as the infrastructure to address them.
Customers have experienced longer than expected wait times for parts as well as an incomplete line of communication to resolve and address their concerns.
Over the last 90 days, we have dedicated a significant amount of human and financial capital to address this.
We've made a number of changes to our customer support organizations.
We have divided the process into buckets field operations online operations and good Sam operations. Each one of those buckets as organizations now established to take live feedback 24, seven receive E mails and scours, social media and blogs to address everything and anything.
This appropriate setup, which should not be labeled the campaign is keitel, if youre not happy I'm not happy.
Our company is executing this through and enhance repair process 24 hour resolution goals and a process that is more fluid using technology technology and alternative modes of communicating with a modern customer.
We believe our tenure in this industry, coupled with the future of a widely expanded growth buyer profile and the Americans love the outdoors.
Demonstrate a bright future for our company and the RV industry as a whole.
Over the long term, we will continue to focus on returning to double digit topline growth.
And upper single digit adjusted EBITDA margins.
The growth and retention of our customer file.
Improving asset allocation to maximize overall return on investment.
Reducing debt levels.
Finding white space across the market.
Improving the RV in outdoor consumer experience.
And developing new and innovative ways for people to enjoy the RV and outdoor lifestyle and more importantly, communicate their needs concerns and suggestions.
Now, let me turn the call over the Mel to review our financial results in more detail.
Thanks, Marcus and good afternoon, everyone.
Consolidated total revenue was nearly $1.5 billion up 2% from last years second quarter.
Consolidated gross profit was $410 million down 0.6% from $412 million last year.
On a percentage basis gross margin came in at 27.8% compared to 28.6% last year.
The decrease in gross margin is largely attributable to a combination of the margin pressures that Mark has described.
The change in product mix and the impact of our inventory optimization and reduction programs.
Adjusted EBITDA was $99 million down from $138 million a year ago.
As a reminder, adjusted EBITDA last year included the add back of Preopening expenses, which were $15 million in the second quarter and $35 million in the first half of last year.
A 7.2% increase in SGN, a resulting from increases in variable selling expenses to drive revenues and reduce inventory increased advertising and promotional expenses and increased cost from a roughly 12% increase in average store count.
Coupled with margin compression were the primary factors impacting profitability in this years second quarter.
Turning to our segments the goods and services and plans segment continues to deliver strong top and bottom line results posting revenues after elimination of intersegment transactions of $45 million in the second quarter of 2019 up 5.6% from $43 million last year.
Gross profit was $26 million or 40, or 58.1% of revenues up from $25 million and 58.3% last year.
Our RV and outdoor retail segment revenue after elimination of intersegment transactions was $1.43 billion up 2.2% from just under $1.4 billion last year.
RV and outdoor retail gross profit was $384 million or 26.9% of revenues.
Down, 1% from $388 million and 27.7% last year.
The decrease in profitability was attributable to a combination of industry driven margin pressures.
Changes in product mix and the impact of certain inventory reduction and optimization programs.
During the second quarter, we continue to address slower moving or over stock products in order to both reduce inventory levels and to free up additional cash in the end total inventory decreased sequentially by more than $75 million or 4%, 4.6% in this years second quarter.
Consolidated operating expenses increased 8.5% to $320 million for the quarter.
Including the increase in SDN and mentioned earlier.
The increase in operating expenses was driven in part by incremental wages selling and associated overhead expenses related to the year over year increase in RV and outdoor retail locations.
Other expense totaled $29 million in the second quarter of 2019.
Compared to $26 million last year, the increase coming primarily from 67, and 64 basis point increases respectively, and the borrowing rate on our floor plan and term loan facilities.
Partially offset by lower average borrowings under our Floorplan facility.
Net income was $53 million and adjusted diluted earnings per share was 54 cents for the quarter quarter ended June Thirtyth 2019.
Turning to our balance sheet, we ended the quarter with cash and cash equivalents of $101 million and net working capital of $500 million.
Total inventory was $1.5 billion down <unk>, 0.74% from year end down 4.7% since the end of Q1 and up 4% from a year ago.
The increase versus a year ago was due to an increase in used vehicles driven by our initiative to grow our U.S business. This year.
And a 3.8% increase in product parts and accessories, driven by our new stores.
On a per dealership basis, new vehicle inventory was down 9.9% to $6.6 million.
At March 31 at June Thirtyth 2019.
We had $1.2 billion of term loans outstanding under the seat senior secured credit facility.
$814 million of Floorplan notes payable under the floor plan facility.
$53 million of borrowings under the Floorplan facilities revolving line of credit.
And $21 million outstanding under the real estate facility.
Looking forward to be clear, we're focused on turning less productive assets into cash to strengthen our balance sheet.
This should give us added flexibility for various opportunities that may arise.
I also want to note that given our current projections, we expect to remain in compliance with both of our floor plan facility financial covenants through the end of the year.
Let me close by saying that we believe we know this industry better than anyone and we're uniquely positioned as a key player in the industry.
So while some things are entirely out of our control. Our plan is to take tangible steps to ensure that we refine our business and thus the RV and outdoor products industry.
To appeal to a far broader base of customers, providing world class products World Class service and World class experiences for our customers.
By doing so we believe we'll be very well positioned to maximize our long term growth and profits throughout the various up and down industry periods.
And with that I'll turn the call back over to Marcus.
[noise] Thanks Mel.
Okay I've been in this industry for almost 20 years now and I have seen time and time again.
Thats softness or headwinds however people label it are typically short term.
Dealers get over inventory manufacturers make too many units and margins get dramatically compressed as the industry corrects itself.
While we can control our own inventory levels, we don't have control or visibility to the rest of the industry and many of the external factors influencing the RV industry right now.
These are some examples. These are some these are the same external factors facing many cyclical our consumer businesses right now.
And the broader market as a whole.
We don't know how uncertainties around tariffs trade wars political tensions interest rates, our stock market volatility are going to factor into consumer sentiment for rvs and the demand picture over the near term.
Based on the factors just mentioned along with the softness of the RV market, we have to plan and assume that that trend continue and expect to operate the business consistent with the second quarter to maintain strong transaction counts inventory turns healthy inventory levels and grow our active customer file while maximizing profitability and the long term prospects for the business.
Given the market conditions, and our plans to dramatically reduce our non RV inventory, we know questions about the full 2019 guidance are top of mind.
As a management team we have spent considerable time looking at multiple scenarios and have concluded that for purposes for full year 2019 guidance, we must assume that the current market conditions and uncertainties, we will continue.
Based on the assumptions, we are comfortable in our 2019 full year revenue projections of approximately $5 billion.
But those assumptions, we cry hired us to factor in potential margin compression and possible increased selling expense, which lowers our 2019 year adjusted EBITDA guidance around the mid to low 200 million dollar range.
We absolutely believe that this is the right thing for the business as a critical step to rebuilding our margins into the next year and beyond.
We are also hopeful that trend changes and improves.
Fundamentally we believe the consumer's appetite and demand for the RV lifestyle is alive and strong the RV and outdoor installed base as well as the prospects continued that trend toward a younger average age and expanded affinity to the entire outdoor lifestyle anchored by our vein.
Those are our prepared remarks, operator, we're now ready for questions.
Thank you.
Ladies and gentlemen, if youd like to ask a question. Please signal by pressing star one on your telephone keypad, if you will.
Using a speaker phone. Please make sure your mute function is to do a lot of your signal to reach our equipment again.
One to ask a question.
Our first question from Rick Nelson of Stephens.
Please go ahead Sir.
Thank you good afternoon.
Our cats.
In Q2, Skus and the sales trends that you saw during the quarter and what you're saying in July and August .
Our overall sales continued to be relatively decent our same store sales numbers, new and used combined I think was off right just under 7% right around 7% and we saw stat surveys come out month. After month in fact, I think June came out today, where new looks to be down almost 18% and so we're clearly having to prime the pump.
By maintaining heavier discounts that we would like and spending a little bit more both internally and externally to generate some of that activity.
We oddly enough I saw a decent.
Decent July as well and we're happy with our top line.
And while we think that the margins may marginally improve we're still seeing that we're having to be competitive in the marketplace and spend a little bit more to incense, both our sales associate and our customers, but I don't think demand is our concern right now we have demand than we can create demand. What we're most focused on was how were going to.
Keep our inventory clean keep our transaction count high and keep pace ahead of pace with the rest of the market.
Okay.
Now four quarters antennas downtime.
Yes.
Hi, I just had a few overview.
How long do you think that might cycle might last.
And with this downtime gaming benefiting from what we've seen in the past.
You know typically if you just studying history. The downturns are 12 to 18 months and I'm not sure when it started but as you saw the manufacturer a shipment data continue to decelerate starting in November and then I think had a pretty big number in January and February it's clear to me that the softening is here.
From our perspective largest razor focused on making sure that we right sized our inventory levels right size, our SDMA, we bail out of locations units categories, and skews and get our money back in those areas, where we don't think it's prudent to be.
But the way, we unfortunately had to build our model for the back half of the year is with a lot of uncertainty around does the market rebound our tariffs going to continue the hard parts and pieces.
We've heard about the tariffs than we've experienced these things and when we look at our second quarter, we had heavy headwinds in demand heavy discounting in the market place we had some tariffs and we still feel like our performance in light of those things was relatively respectable it's not where we want it to be but we're asking our team got to hold their head down too much knowing what we have to fix and what we have to improve on.
And are you in fact.
Seeing the declines in sales starting tomorrow.
I don't know that we're seeing the declines starting to narrow, but we don't see them widening right now.
We don't see them widening, but we havent necessarily seen that was versatile yet.
Correct.
Thanks for that color, so I would like to ask you about gander outdoors.
How those stores are performing with our views and with how our ways.
The locations, where we have our views which is pretty meaningful.
Quite frankly are pretty promising and we're noticing the crossover between the customers.
It was actually in some cases working out better than we would have anticipated.
In those locations, where we don't sell our view is we're in the process of analyzing which locations are going to move forward, which locations can consolidate in a market and which locations. We may have to exit as I've said before we are not shy about admitting when something doesnt work and we don't want to tie up the investors' capital in something that we don't believe is appropriate for the long term strategy.
And so we have already shed ourselves of locations over the last six seven months that carry multiple brands Standalone dealership, a standalone camping world store, a standalone gander store, but as we go into the back half of the year. The management is very focused on pulling assets back into the vault and not entering 2020. The things that we don't believe are part of our longer term strategy, we though we did find out though.
That our ability to integrate RV products and RV services into locations has proved out to be.
Fairly decent.
Yes.
Alright timeline.
For decisions.
You know anything meaningful or store closings.
I think we want to I think we want to have really in an intelligent analysis, we're not scared of the real estate side of things because as we entered those locations. We believe we're way behind market on that fair market value of those leases and so thats not a concern for us, but if we're going to close locations. We want to make sure that we're we're selling the inventory and maximizing our margin while balancing not having to move it twice and so as we go through the balance of the third quarter into the fourth quarter I think it will become more clear.
As we as we move towards that I want to make one clear point, though we have identified a few categories or vendors that we have elected to exit as the company regardless of how many locations. We have a silly example would be that we tried to bike business in a number of our stores and while we sell foldable bikes, we realize that we have a million dollars tied up in bikes, but its not giving us a great turn so we may minimize their exit that category and there are other smaller categories or smaller vendors, where that same thing applies and so were we want to be very scientific about it.
But we don't want to let too much grass grow under our feet because we'd rather put the cash back in our vault investing used inventory and invest in opportunities. What we know is our strike zone.
Okay that makes sense. Thanks for the color and good luck care as we push forward.
Yes, Sir.
Thank you. Our next question comes from Brent.
Brett and dress of Keybanc capital markets. Please go ahead Sir.
Hey, good afternoon first just a housekeeping when you said down 7% and your response to.
One of the last question was that same store, new and used for July and August .
That is same store and let me be very particular in scientific about it that he is same store, new and used vehicle sales for the quarter.
Unit.
Thats units sorry, Brad that's units got that you're trying to make a comment about July and August .
Around that.
No the comment that I was making around July and June is that third OSAT surveys came out on the new side. This afternoon that I think it was down 18.5 or 18.9, we don't we don't look at our business that way, we look at total transactions and our same store unit count for the quarter was down seven eight.
Understood. Okay. Thank you I just want to make sure I have that right.
Okay and then in the updated guide obviously a lot of.
Margin pressure coming from getting rid of non RV inventory I guess can you elaborate some more on that it sounds like you're getting rid of some categories. You just mentioned potentially bikes I mean, what do you replace those categories with.
So the updated guidance contemplates and assumes because we felt obligated to do it is that the softness in the RV market would continue.
And we would want to keep our revenue model going and we with vast experience margin compression and increased.
Abnormal selling expense on a temporary basis to keep our transaction count moving in addition to that we realize that we have too much non RV inventory and when we look at the yield of investing dollars in used inventory or investing in our service facility or investing in technology for good Sam that we realize that we probably have $50 million to $60 million of non RV inventory that could be better deployed into categories like used inventory or cash in the bank.
Got it okay. So things that may be outside of the four wall box.
It's things things some outside of the four wall box, but predominantly driven by our investment in use and our investment in service and Brett as we told people. When we started this process we were going to learn how wide that funnel could be created for the outdoor consumer and we also told people that if we felt that there was categories or units or segments or locations that just werent going to perform that we weren't going to wait forever to acknowledge a did we make a mistake b is there a better use of our capital and see how do we grow the business and get the double digit growth back and the EBITDA margin back to where we want it to be.
Understood Okay.
Im going to hop back into queue, but but before can you just just to make sure I have this July and August .
Retail trend correct I mean did you what were your retail trends same store in July and August .
Any any we don't we don't.
Yeah, we're not reporting those now what I can tell you is that July looks pretty decent from a topline perspective, but the trends around the margin compression and the and the short term increase in selling expense stayed pretty true in July as it compared to June and even the second quarter.
Thank you.
Thank you. Our next question comes from Seth Sigman of Credit Suisse. Please go ahead Sir.
Hi, guys. Good afternoon. Thanks for taking the question. My first question is on the cost structure earlier in the year, you talked about a greater focus on optimizing the cost structure seeking operating efficiencies across the organization.
Obviously this quarter as unit growth was still well ahead of sales growth.
Which which makes sense based on some of the dynamics you already talked about but can you just update us on the progress that you're making on the cost side and how to think about that as we move into the back half of the year. Thanks.
Okay excellent question, we made a lot of progress in the second quarter.
I think our EBITDA margin was 6.7% and candidly thats not where we want it to be we know that higher gross margins would have yielded a more appropriate number but we I think theres two different components, one what kind of businesses or segments are we operating that are pulling that down and how could we re purpose or exit them and more importantly, how are we thinking about our human capital and infrastructure to ensure that we have the right people in the right place and.
Unfortunately, we did have to make some hard decisions in the back half of the second quarter as we started to forecast for the balance of the year just that to reduce reduced head count and we're reducing it in areas, where we don't believe revenue will be affected.
And so.
I would expect that the third quarter, we will continue to see improvement as it relates to ask DNA because some of the changes we made in the second quarter will start to show up and then when we get to the fourth quarter, you will see a marketable difference compared to the fourth quarter of 2018.
As it relates to ask DNA as a percentage.
Okay. Thank you for that and I guess, just stepping back and it's sort of related but one of the things that you've talked about in the past is how the variable cost structure of the model would actually limit the EBITDA decline in situations like we're in right now.
Obviously, you highlighted a couple of one off areas, where you're seeing more pressure right now, but I guess the decline and you've done has been greater than we've all expected. So.
Yes. The question is is the current situation. We're in unique or has the model evolved and is maybe just different than what you've had historically thanks.
Yes, Sir we actually believe don't believe that the model has changed in fact, while our EBITDA of $100 million is less than we wanted we can point to two distinguishing factors that drove it there the compressed margins.
And that's slightly increased.
Selling expenses and I want to give you an example.
So our entire sales organization is made up of men and women that are on the front lines, who make their living on a commission basis and in an effort to retain solid people. During the softness we may elect to on a month to month week to week time to time basis, incentivize people, who may otherwise be.
Victimized by the margin compression that exists in the marketplace and it's our opinion that for the long term health of our business. We don't want to lose good managers. Good store managers. Good salespeople. Good service advisors. Good call Center agents and so I did along with the rest of the team decide to make sure that while everybody took a dip investors.
Employees that we could somehow mitigate some of that.
Confusion or frustration with our associates with additional incentives and Smith to mitigate it.
If we did not have a variable cost structure.
If we did not have a variable cost structure, we believe that our EBITDA in light of the margin compression could have been significantly worse.
And that's why the 6.7% EBITDA margin with the drop in same store sales with the pressure on margins with the increased selling expense. We believe the team while not not we're not happy about it we believe the team did a fairly decent job in holding onto the EBITDA margin as best they could.
Okay. Thank you for the color Mark appreciate it.
Yes, Sir.
Ladies and gentlemen, as a reminder, it is star one to ask a question and if you find that your questions have been answered you may remove yourself from the queue by pressing star to our next question comes from Brent Jordan of Jefferies. Please go ahead Sir.
Hey, guys.
Quick question on the inventory I mean, you talked a lot about working it down and it sounds like it's not RV inventory and I guess use that bike example.
I guess when you think about the GATR stores and the size and I guess that private label bike strategy did seem pretty challenging but.
How much dollar value of inventory can you take out of the model or maybe do you have a target for the the the quantity of inventory you think you can work out of us.
I'm very focused on removing $50 million of inventory out of the retail mix between now and the end of the year and parking that either in our bank account or in our used inventory and we are with our new chief merchandising.
Gentlemen, we are very focused on SKU rationalization at a higher level than before and we have 12 months of solid data of what performed in Didnt perform and whats meeting our margin.
Metrics and what's not and we will be exiting out of that product in the back half of the year and while there is a cost to EBITDA associated with that the team decided that it was better to take the lumps in terms of how it would affect our number let's put the money back in the bank and not try to hold onto a narrative that we believe we have clarity on.
Okay and then a question on your comment about margin compression and I guess, given your 20 plus years in the industry. Your GPU. There is still a bit over 8200 Bucks what is sort of a trough gross profit per unit that you have seen cyclical.
We don't really look at the growth, we don't really manage the company on a gross per unit. What we do is we look at the overall gross margin and the contributors to that we know that the good Sam business as a high margin contributor we know that the import products in our retail business is a high margin contributor. We know that service is a high margin contributor we know that use compared to new isn't materially a better contributor where we have experienced the most margin compression is into areas.
The competitive nature of the new side of the business, while manufacturers and dealers are trying to liquidate not only to de stock, but in some cases survive and stay open.
And the other part of our margin compression is the identification of inventory in our non RV inventory that we've decided to exit and get our money back and not worry about the percentages, but worry about the dollars that were bringing back into the vault.
We believe that both of those things are short lived.
But we believe that it's time to sort of acknowledge them address them and not give up market share unit count file size.
In exchange for protecting those margins we have to we have that we believe we have to hold our stake in the ground in terms of the transaction count which is why our unit volume was relatively decent.
Okay. Thank you.
Thank you next question comes from Ryan Brinkman of Jpmorgan. Please go ahead.
Hi, Thanks for taking my question.
The low to mid 200 billion guidance range it seemed quite a bit softer than the street was looking forward appears to imply an acceleration of the trend of the topline holding up so much better than the bottom line I'm just curious what the R&D inventory, having come down so much why you feel it as necessary to protect transaction count seemingly to the detriment of unit economics is that what you're doing versus I thought earlier youd expressed a lot of confidence in the ability of the firm to withstand downturns more by flexing the costs lower.
As opposed to what it seems to be here, maybe some conscious trading of profits for sales.
Brian Thats a great question, we will tell you is that the acceleration.
The unexpected acceleration of retail registration drops coupled with the marketplace not us because I feel good about where our RV inventory is but we don't have visibility into how how much inventory exists still at the manufacturers and still as other dealers because we don't Bryant Ryan have visibility into that what we know is on a daily basis, we are scraping competitors and.
Portal sites that lift inventory and we're seeing other dealers sell inventory at or below cost and we're not chasing that but we can't stand down and just assume that we can just hold our prices and key transactions constant. So we are seeing massive discounting by our competitors in the marketplace and if you go on to some of these larger aggregating websites you will see that in some cases, if not most we're not the lowest price, but we are not the highest priced and we're having to find a toggle between the middle to make sure that we keep our transaction count alive could we back off and raise our prices. We could we would lose transaction count we slowed down our inventory turns we would slow down our good Sam file we would slow down our ethanol business and as a management team. We don't believe because we know this is short term that that's a good idea.
I see thanks, and then when you combine that plan.
Youre talking about to draw down I think I heard 50, or 60 million was that of non RV inventory understanding some might get reinvested, but when you consider that plan any other initiatives you might have going on and then also of course the guidance for low to mid 200 million to be about when you add that all up what do you think it translates into.
From a free cash flow perspective for the full year is it going to be negative at this point.
To say.
No, we would not be negative, but I'll turn that over to Mel.
Thanks, Mark So yes, no I, obviously, if we can pull.
Pull additional funds out of the inventory balance that we would expect a.
Reasonably healthy free cash flow for the year.
Okay, Great and then I guess just lastly from me then you know it sounds like you might engage in some restructuring actions dark store closures distribution centers maybe.
Presumably these would be called out as one time items relative to EBITDA, but how should we be thinking about.
Cash costs associated with any restructuring and then what kind of payback you might see on that.
So we don't we don't believe that we're entering into any sort of restructuring process that distribution center that we spoke about actually closed and got sub leased in the second quarter, We got out of our Dallas distribution center with quite frankly, no real pain as we look at improving the logistic side and we brought in a new.
Distribution Center executive and logistics executive as we look at improving that we will at some 0.1 to go down to three distribution centers potentially and so thats not a restructuring as we look at other things like that.
Potentially closing some stores or bring inventory back in.
Those are we believe those are happening in normal course, we'll obviously sit down with our team and our auditors to understand what would be considered one time or what would be considered not one time, but the plan that we've put in front of you anticipate that inventory is going to be liquidated and thats going to be realized in the margin compression in the back half of the year.
I see thank you.
Okay.
Thank you. Our next question comes from Alice <unk> of Baird. Please go ahead.
Hi, gentlemen, thanks for taking my questions.
Obviously, it sounds like you're planning for more investment in the used market, but I'm, hoping you can talk a bit more about the supply dynamics. There what avenues are using to access inventory in a market that generally been in pretty tight supply and maybe walk us through your valuation valuation process as well what tools do you have in place to appraise and price used units appropriately.
So I'm going to be a little more vague Allison disclosing some of those things because they are part of our trade secrets and we have proprietary systems today that has aggregated every new weve used unit that we've sold for the last 10 years. It matches those against all the units that are in the marketplace today, and we understand where those trade values are we use that proprietary system to identify trade values consignment values curb purchase values and auction purchase values. Today, we have 5000 units in stock and one of the one of the attributes of our successful second quarter U.S business has been our ability to grow our consignment business and we use our proprietary and sort of I would call biggest asset our database to communicate with 5.3 million known our viewers to solicit the sale of.
Their unit the consignment of their unit and the trade of their unit. We know without question, we would be glad to debate it than our U.S process is superior to any other group out there largely because we have the systems and the database to procure them.
We are working on centralizing the consignment process as we get into the back half of the year because while we only have 1400 I think approximately consignments on the ground today. We believe there is an opportunity to double the size of that.
And so uses our focus.
And clearly a pay dividends for us in the second quarter and we're hoping it does in the back half.
Great. Thanks for that market and then last quarter you didn't hear some news about your E Commerce efforts and I think specifically a new program with Amazon how does that effort progressing and does your decision to reduce non RV inventory impact that relationship at all.
Our decision to reduce non RV inventory does not impact that at all because we're still going to have a heavy marine presence.
And we believe that's where the real margin is through our first month of business with Amazon.
In that in that process, we did about a half a million dollars in one month and thats with only a portion of our skews online we're loading that slowly, but we anticipate that to have realistic and reasonable growth over the next six months, but if it's a big focus for us we're going to continue to look at disposing or exiting.
Particular units, where we don't believe it.
Contributes to our long term process and we may end up taking those products that were offered in those unit locations and just ramping them up online so you're going to see over the next six months a continued shift towards online and when we have four wall economics that don't work exiting those locations because we just don't need to have the investment there.
Great. Thanks, that's all from me.
Thank you. Our next question comes from Gerrick Johnson of BMO capital markets. Please go ahead Sir.
Hi, Good morning, Hey, a inside the four wall box and the categories are skews that you're getting out of.
What's going in to replace them or what the categories will you be expanding to take a take that floor space.
In the <unk> and most of the boxes were expanding our actual used and new RV inventory and expanding our RV parts and accessories business, including hard parts and hard to find parts for the do it yourself or we believe that we need to.
Better position ourselves.
As the do it yourself location as well and so all of that space is going to be reallocated to our core RV parts and our core RV inventory.
Okay, Great and then of the $50 million to $60 million in inventory liquidated.
Or that will be liquidated.
Is that the price that you paid is that what's on the books or is that the proceeds you expect to receive.
We believe that in the aggregate because we have some reserves already assigned towards what we would consider not great inventory, we believe that in the aggregate, we will be able to get most of our costs back from that but when you sell $50 billion of inventory and you don't have a healthy margin on it it by definition would drive down your margin as a management team. We said, we can either hold onto the 50 and have better looking margins or we can get our cash back and not worry about percentages, let's worry about putting our money where it belongs and that's a decision that the management team made and is supported by the board.
Okay I'll ask one more then get back in the queue pulled bread here.
So you guys directly sourced and outdoor product to ship some enterprise third party product to ship so that an fob.
So there should be a quantifiable direct impact from the tariffs how much of that quantifiable direct impact is going into your revised guidance. Thank you.
A small portion of our current non rolling stock inventory is sourced.
Overseas and the inventory we have today is actually not affected by it because it's not coming in so we don't have the newly imposed tariffs on those as we move forward into 2020, we have not started forecasting how we believe that impacts us, but we don't believe that it is significant because it doesnt make up a giant number inside of our total revenue on the RBS themselves as most people know they are manufactured here in the states, but there are parts and pieces that go into the assembly of them, we haven't seen any sort of radical increase in prices, but there have been some and we've been working with the manufacturers to share in the absorption of that.
Okay. Thank you Mark.
Thank you own next question comes our next question comes from John .
Lovallo of Bank of America.
Please go ahead Sir.
Hi, guys. Thank you for taking my questions as well.
First one is you know given given the softness in the industry today, and which seems like you may think could last a little bit longer than you. Initially expected. How are you guys thinking about kind of heading into the fall buying season here I mean, how do you think the show season is going to go do you think that dealers are simply going to buy less as yours can be more caution than historically.
Look I can't speak to how other dealers are our processing, but Matt Wagner, who oversees the billion dollars of inventory will tell you that we have taken our inventory rolling stock levels.
To a place where we're well prepared to be strategic about the acquisitions and the timing of the acquisitions of inventory in the fall going into 2020.
Our used inventory is cleaner than its probably been I don't want to say ever but in years with less than 5% over 180 days, which is a really good metric for us.
On the new side of things, we are going to continue to destock, our diesel inventory because we want to redeploy that into our total inventory, which if you ask some of the people in our in the field. Some of the salespeople. They would tell you were a little light on towable inventory right now, but coming out of the peak of the selling season. We think it's okay that were slightly lighter than they would like us to be.
We know that we're going to go in with a very tight plan. We know that at this point at this point without us having any other information we're thinking that we have to start planning the first quarter. So look similar from a topline perspective.
To what we experienced in the last.
12 months.
As we monitor the last part of the first part of 2019 as we monitor any change in trend in the back half will obviously adjust it but we're going to be buying healthy and selling healthy in the back half and in the front half of 2020.
We think the margins may improve.
We think the margins may improve as the crossing this in the marketplace goes away as people liquidity that is stuff.
Remember that our competitors need to make money to stay open they can't sell things that at cost or below cost forever.
Got it okay that makes sense and then I was just hoping mark if you could help me just kind of reconcile a couple of comments and then I think I heard.
The first is that demand is not really the issue, but the way I'm kind of thinking about it said inventories are in pretty good shape are in better shape, but there's still a real need across the industry to incentivize the consumer and also as you mentioned today incentivize some of the sales associates to move this product. So to me that seems like a demand issue can you just help me kind of reconcile that.
It's a demand softening, but we measure our demand in a multitude of ways our web traffic our web leads our store traffic our call in traffic and we're not seeing dramatic drop off in the Inquisition, Evan what's happened, though is even though our web leads are actually up from a year ago. The profits for somebody to pull the trigger is taking a little bit longer and they're shopping a little bit more and they're looking for incentives and little bit more and so the RV industry as a whole isn't cratering from a demand standpoint, and I'm sure you know that and everybody else does it's still one of the best years from a unit sales and manufacturing standpoint, it's in the history of the industry. It just isn't what 2017 or the first part of 18 months.
But its still not we're not walking around we still have stores doing 100 units 120 units 200 units 80 units a month and so we don't feel like the bottom has fallen out and if we continue to see softness in the new side, which is what we have projected we're going to continue to divert.
Assets in dollars into used inventory because it is a fantastic hedge for us.
Got it thanks, a lot guys.
One last thing on that there is.
Very even through all the cycles overtime the demand for used inventory the demand for service the demand for all the good Sam products and services and parts and service. They rarely subside because you are servicing the installed RV community, which over the history of time hasn't really gone backwards.
Thank you. Our next question comes from Tim Conder of Wells Fargo. Please go ahead.
Hey, good afternoon. This is actually more turnkey on for Tim. Thank you for taking your questions.
So you continue to see strong growth and the good Sam membership and the overall consumer database, which should be a key competitive advantage, but it doesnt seem like the full value is really being unlocked. So just wanted to get some better color on your advancements and data analytics and how much more progress needs to be made.
Great question keep in mind that as we grow our overall customer file, but particularly our good Sam file that revenue.
His ends up when we captured today ends up getting deferred and so we recognize that revenue in those earnings over a period of time.
Ultimately I think what we've learned more than anything is that the data analytics around the good Sam member and the overall subset have given us an opportunity to more efficiently integrate into salesforce to more appropriately set up journeys and to communicate with the customer in 2019 and a more modern way.
We added Sherry feral to the company, who is now the president of our good Sam.
Ventures business, who is bringing a fresh perspective of how to think about communicating with the consumer both online boasted our portal and both through traditional direct mail in a more cohesive manner. We don't believe that we've actually.
As efficiently as we could which is whats suppress the potential ROI of that member.
And so we think Theres room, there for opportunity is going to be led by technology and we are further ahead today on the technology front than we were a year ago, but we are nowhere near where we want to be and so as we think about capex.
In the long term 12, 20 436 months.
You'll probably see significantly less capex going into giant facilities and things of that nature and more going into systems and technology and process that it is better for the customer and better for our associates to communicate with those customers.
Okay. Thank you very much.
Thank you and next question comes from Gerrick Johnson of BMO capital market. Please markets. Please go ahead Sir.
Great. Thanks, Hey, when someone buys a used RV from you guys does it have a warranty attached or what kind of warranty comes with it if so.
No all of our pre owned vehicles I'll ever used vehicles go through a traditional reconditioning process and our shop, but they are sold in the finance and insurance office with a full suite of good Sam branded products and services. So good Sam extended warranty good Sam roadside good Sam insurance, So nothing actually comes with unit themselves.
And our goal is to penetrate that transaction with those value oriented products and services for the customer they buy them and they roll them into their payments. We have found historically that including things in that transaction a makes us uncompetitive in terms of pricing and be it takes away the opportunity for the customer to make their own decisions on how they want to protect the unit. It is important to note that our penetration.
Of warranty roadside and products like that.
He is materially higher by at least seven to eight percentage points compared to our penetration on new units.
Because people feel like there is more uncertainty on the U.S unit than there is with the certainty that the manufacturer provides when it's now.
Okay that will make sense. Thank you and I just had one more clarification question on the active customer.
Number at the active customer base up 26%, but in the footnotes It does say that.
It's based on a trailing eight quarters. So are you comparing trailing eight quarters versus a trailing eight quarters last year and essentially comparing to two years ago.
We always look at our active file size as a moment in time, but our definition of an active customer is a financial transaction with us in the last 24 months. So we want to be consistent with the definition that we use during the IPO process of how we define an active customer base as we continue to grow and grow our online business and grow our membership file we still always want to keep that debt that definition consistent and appear with how we originally presented.
So what if it was just a point in time like this point right now how many active customers you have versus last year.
$5.3 million.
Right now.
And so every month.
So so so every month that would drop off right. So every month if its trailing it would continue to drop off I don't know if I have that stat handy on exactly how many were there last year, let me reference our document real quick.
Okay.
Last year at the same time.
It was $4.7 million.
Great. We can do the math summer. Thank you.
Thank you Sir.
Thank you for your time today, and we look forward to speaking you speaking to you again in the future with our third quarter earnings. Thank you.
Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.