Operator: Good afternoon, and welcome to the Camping World Holdings Conference Call to Discuss Financial Results for the Third Quarter 2019. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at 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 this call today is Marcus Lemonis, Chairman and Chief Executive Officer; Brent Moody, President; and Mel Flanigan, Chief Financial Officer.

I now will turn the call over to Mr. Moody to get us started. Please go ahead.

Brent Moody: Thank you, and good afternoon, everyone. A press release covering the company’s third quarter 2019 financial results was issued this afternoon, and a copy of the press release can be found in the Investor Relations section on the company’s website.

Management’s remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks may include statements regarding our business goals, plans, abilities and opportunities; industry and customer trends; growth and diversification of our customer base and increase in market share; RV and outdoor retail location openings, acquisitions, closures, dispositions and related expenses; our 2019 strategic shift; 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, our Form 10-Qs and other reports on file with the SEC. Any forward-looking statements represent our views only as of today, and we undertake no obligation to update them. Please also note that we will be referring to certain non-GAAP financial measures on today’s call such as EBITDA, adjusted EBITDA and adjusted earnings per share diluted, which we believe may be important to investors to assess our operating performance.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and on our website. All comparisons of our 2019 third quarter results are made against the 2018 third quarter results, unless otherwise noted. I will now turn the call over to Marcus.

Marcus Lemonis: Thank you, Brent. Thanks, and good afternoon, everyone.

Total revenues for the quarter were $1.4 billion, up 6% from the prior year. Adjusted EBITDA is $60.6 million. The performances of our core RV and Good Sam businesses in the third quarter were solid. Total active customers rose 17.3% to 5.2 million with continued strength in our Good Sam Club. Total RVs sold increased 1.3% to 20,653 vehicles with used being up 14.6% and new down 4.7%.

Our combined front and back-end gross profits per unit, including F&I, increased 2.5%. Good Sam consumer products and services posted 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 continue to confirm our position as the largest RV and outdoor lifestyle retailer in the world. As you know, on September 3, 2019, we reached an inflection point in our company’s history.

We announced a 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 the coming months. On our second quarter earnings call on August 7, 2019, we said that 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 this strategic shift. We estimate the non-recurring costs of the strategic shift could lower adjusted EBITDA by $30 million 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 is 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 RV-ing fun and easy. We’ll do this through our high-margin recurring revenue Good Sam consumer services and plans business and our remaining 176 RV-centric locations.

We have invested heavily in our core business over the last several years, adding and acquiring new RV-centric locations. What we gained from this process is several dozen additional RV dealership locations that we believe will continue to mature consistent with the past over the next 12 months to 18 months. Our focus during this time period is to limit 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 deleveraging. 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 for some additional commentary and details around our plan. Mel? Operator, do we hit still have Mel on the line or did we temporarily get disconnected.

Operator: Mel’s line is still connected. Mel is maybe unmute on your end.

Brent Moody: Let me – he must be having difficulties.

This is Brent. I’ll jump in there. Mel, are you there?

Operator: Mel has reconnected the second line.

Mel Flanigan: Yes. Thank you, Gerald.

Brent, I’m back on. We got off the phone that’s been here. So let me – can you hear me?

Marcus Lemonis: Yes. Go ahead, Mel.

Mel Flanigan: Okay.

As Marcus mentioned, we’re very excited to be able to talk today about a major positive reset in our business. And while it has created a fair amount of near-term complexity and cost, the future direction is clear. And we believe it will lead us to improved profitability, cash flow and top line growth going forward. And it’s important to note once again that what I’ll call our core go-forward businesses performed well within our expectations in the quarter with vehicle revenues up 3.7% overall and Good Sam Services and Plans up 2.2%. And I also want to comment briefly on a couple of balance sheet items.

First, I think it’s important to point out that in October, we completed the extension of our floor plan facility out to March of 2023. The amendment reduced the capacity slightly to just under $1.4 billion and covenants remained substantially unchanged. We’re in compliance with the two relevant covenants at September 30 and believe it will remain in compliance for the foreseeable future. At September 30, we had $694 million in net borrowing under the facility, down from $814 million at the end of last quarter and $886 million a year ago. With respect to cash, we said last quarter that our plan was to reduce inventories and bring additional cash back into the business, and we were successful in doing so in Q3.

Overall, inventories declined $167 million in the quarter. 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 million in the quarter, while used was up $42 million. We’ve talked previously about the opportunity we see in the used RV market. So this shift towards used will help satisfy customer demand while putting more high margin, high turns inventory in our lot.

Operating cash flow for the nine months ended September 30, 2019, was $323 million, up from $254 million last year, and we’re continuing to generate cash as we reduce inventory further in Q4. Let me finish with this. We recently established a new leadership process to ensure greater alignment around our vision and improved communication across our broad and very capable leadership team. Next year, we are 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 this by executing on a number of key initiatives, including vastly improving the overall customer experience; improving our employee and associate experience; growing our top line profitably; investing in technology that will improve user experience and operating efficiencies, including the role – continuing our rollout of an enterprise-wide customer management system; ramping up investment in our service and parts operation to improve the RV user experience and expand our margins by optimizing our massive service footprint; growing our preowned RV inventory position in system, which will lead to expanded offerings to the marketplace that typically yield less competition and higher margin; and finally, continuing to develop and improve our dispute resolution process to make RV-ing easier. We believe this renewed and enhanced focus around that simple vision, to build a long-term legacy business that makes RV-ing fun and 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 for Q&A. Operator, please go ahead.

Operator: Thank you.

[Operator Instructions] We will take our first question from Rick Nelson of Stephens. Please go ahead. Your line is open.

Rick Nelson: Thanks. Good afternoon.

Marc, can you address RV sales trends that you saw during the quarter? How October or early November is shaping up? And any initial thoughts about 2020? I know we’re four or five quarters into the cycle downturn. Do you think that continues? Or can we stabilize or in fact, improve?

Marcus Lemonis: Yes, that’s great, Rick. So as I said earlier, our total units increased 1.3%. But I think the highlight is that while new was down 4.7%, our used was up almost 15%. And we’re going to continue to destock where we think it’s appropriate in certain segments on the new side, particularly on the motorized side, and reinvest those dollars in continuing to grow our used business.

I think our used inventory as of today is around $170 million. I don’t know if we’re much more to put in there, maybe $175 million, $180 million. 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 creep back up, not so much on the new side because it’s still a competitive landscape. But because of our shift to used, 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 than 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 too negative on the new side, and we are going to be forecasting something positive on the used side.

So we’re – I’m feeling far more bullish and excited about 2020 because I feel like we understand where that inventory mix needs to be. And as we look at the channel overall, the inventory in the channel, the whole channel, not just us, is down. Is it 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 may be a little light in diesels. We still may be 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 feel very bullish about 2020 in terms of how we’re forecasting.

Rick Nelson: Okay. I’m trying to log, so say with those store closings, EBITDA, they were negative $40 million at the midpoint that you should pick up in 2020?

Marcus Lemonis: Well, there’s two things that we want to bucket for everybody, and it’s very important that I’m clear about this.

There are costs associated with the liquidation and the closing of the identified stores where RVs are not going to be sold, not able to be sold. Those costs, which I term non-recurring and I term onetime, sort of in a vacuum, is about $30 million to $40 million. A lot of that is not add backable 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 have the expenses of operating those stores that didn’t have the commensurate margin that went with the revenue because we’re liquidating.

So that exaggerates the EBIT – adjusted EBITDA down for the reported quarter. As we look at the 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 infrastructure, which include closing an additional distribution center, taking care of our customers and our people, that those costs are around $30 million to $40 million. That’s bucket one. Bucket two is that we believe that going into 2020 without these locations in our operating entity, they’re all closed, that the improved EBITDA performance of our core business will be up $35 million to $45 million.

Those are two separate numbers, not to be confused with one number. Those are two separate numbers.

Rick Nelson: Great. So it sounds like you’re guiding now to an adjusted EBITDA around $200 million for 2019? And if the base business stays stable, the store closings should lift the EBITDA by $35 million to $45 million?

Marcus Lemonis: So 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 trend 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 in better performance. And we also won’t have this non-recurring liquidation expense of $30 million to $40 million. That’s how we’re thinking about the business, and you can deduce the numbers appropriately from there.

Rick Nelson: Okay, got you.

And is there Good Sam impact profit-wise from these store closings?

Marcus Lemonis: Ultimately, the Good Sam file continues to grow. It’s up, I think, about 7.7% year-over-year. But when we exit these locations, we’ll work hard to preserve the relationship with the members who joined 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 on to 100% of them. So in the 2020 calendar year, we do expect to have some pressure on that file size.

And we’re already – but we’ll be budgeting for that pressure from the closed 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 going to be, but we clearly are going to have a little bit of pressure in that regard. We expect to make that up in the overall performance of Good Sam through our other products and services in our existing business.

Rick Nelson: Okay, thanks for that. Finally, if I could ask about the sales trends that you’re seeing in the former Gander stores or the new outlets that are selling RVs.

Marcus Lemonis: So the locations that we have that are new to the company, so the dealerships that have been added, we’ll 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 is if we had opened up any dealership called whatever it may be, there’s always this ramp-up period. Had we not liked 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 dealerships that did not perform or were not profitable over a long period of time. We closed Flagstaff, Arizona.

That was a Camping World 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 of the company, we will close them. So we don’t put that same microscope on a brand-new dealership 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.

Rick Nelson: Got you. Thanks a lot and good luck.

Marcus Lemonis: Thank you, sir.

Operator: Thank you. We will now take our next question from Brett Andress of KeyBanc Capital Markets. Please go ahead. Your line is open.

Brett Andress: Hey, good afternoon. So a few more questions on the liquidation. What was the impact on that liquidation in the third quarter that you could not 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 end of the liquidation? Or do you expect that to continue some into 2020?

Marcus Lemonis: 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’s about $48 million left. On a weekday, we’re selling about $700,000. On a weekend, we’re selling anywhere from $1 million to $1.2 million. And so we know that there’s some trajectory. I cannot say with certainty that we’ll be fully done by the end of the year.

I just cannot say it. But I think that number will be de minimis enough that we should be largely done with that liquidation. I think 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 to adding things back to EBITDA. And so when I can look at 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 $1 million in revenue for that month. We had very little, if any, margin because we’re liquidating it, but we had all of the operating expenses. The back of the napkin estimates that I have done has been about $10 million 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 the best, Brett – that’s the best back of the napkin is the third quarter was affected by about $10 million or $11 million.

There’s no – that’s about the number. And then in the fourth – 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 none.

Brett Andress: 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 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 the data that we see?

Marcus Lemonis: Yes. 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 our used is up so much. So what we’re hoping is that people recognize that we made a decision to decelerate our new inventory, understanding particularly in the motorized sector, and reinvest in the used inventory, which is why our used is up 14.6%.

So we actually feel good about these numbers, and that’s about as much as I can say to that.

Brett Andress: Okay. And then I think you mentioned earlier some improvement in RV trends in October. And I guess were you just referring to new sales, used sales or both?

Marcus Lemonis: Can you repeat that question one more time, please?

Brett Andress: Just – yes, on an earlier question, you – or in an answer to an earlier question, you mentioned some improvement or some stabilization in October, I think you said. I guess, were you referring to new sales or used sales on that comment?

Marcus Lemonis: I was referring to a stabilization on the new side and an improvement on the used 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 stabilization on the margin side. And October was a good example of that.

Brett Andress: Thank you for that clarification.

Operator: Thank you. We can now take our next question from Tim Conder of Wells Fargo Security.

Please go ahead. Your line is open.

Tim Conder: Yes, thank you. So maybe I just wanted to circle back to kind of combining the first two questions here. Just to be clear, on the adjusted EBITDA.

So just to reiterate what the number that you’re looking at now for adjusted EBITDA for 2019. 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, it sounds like the channel inventories, Marcus, you said you feel comfortable overall, still a little heavy on diesel, a little light on a couple of areas. But overall, feel pretty comfortable.

So thanks for that clarity. The other one question I did want to ask about, and Mel mentioned it here, is the CRM system. What – I guess, what do you guys have planned? You said a corporate-wide enterprise full rollout of the CRM. What – other than CRM, does that include the underlying back office, so to speak, data analytics? And just maybe describe what we intend to be a year from now versus where you currently are from with that.

Marcus Lemonis: So the systems that we’re talking about is really a one-customer approach.

It’s really around the customer record, not the 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 stand-alone basis, four walls combining every transaction that happens in there and creating the goal alignment for every manager and every associate in that location, whether they’re working at the cash register or whether they’re working in the finance department or working in the 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, a newly integrated sales force 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 their 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 there’s not only a better customer experience, but the ability to save on the SG&A side. Secondly, if we arm our cashiers at our registers, our 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 will know what to sell and when. Historically, we did not have that because we were operating 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 is because we believe there is a ton of juice to be squeezed 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. And so that’s how I feel like we’ll be different in 2020.

And Tim, to be candid, it’s just a more refined process on what we have for our 5.4 million active customers without feeling the need to go find new ones.

Tim Conder: Okay. And is there some plan to, I guess, enterprise marry that Good Sam database also given the scale of that and that those customers were, I guess, yes, were a good target customer to begin with? How is that going to be folded in, I guess, to the overall customer database?

Marcus Lemonis: So today, we are operating with an 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 dedupe that database using householding information to clean it up. So the number that we report is actually deduped and householded.

As we process both promotional activity, renewal activity and funnel activity going forward, it 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 the tactic to increase our lifetime value of the customer is far more scientific now with the sales force process. Before, we were patch quilting it together. We’ve now spent about $10 million over the last two years putting it together.

We think 2020, we’ll reap the benefits of that.

Tim Conder: Okay. And then back to my first question on the – where are you all targeting, I guess, from an adjusted reported – adjusted EBITDA perspective for 2019? Just so we can – is it that $200 million, I think, that we’re referencing from the first question? Is that the number?

Marcus Lemonis: So the way that we want everybody to think about it is, in August, we gave people a range of low to mid-200s. This particular strategic shift, which I think everybody on the phone welcomed, to get out of locations that don’t sell RVs is a $30 million to $40 million non-recurring expense that would impact that number. Had we not had that, we would be comfortable with where we’re at, what we had told you in August, had we not had that.

Tim Conder: Okay. Okay. So $2.25 million minus $30 million to $40 million should be the target adjusted EBITDA number for the year. Okay, okay. Okay, thank you.

Marcus Lemonis: Yes, sir.

Operator: Thank you. We will now take our next question from Craig Kennison of Baird.

Craig Kennison: Hey, good afternoon. Thank you for taking my questions.

I had a question about your source of used inventory. Where do you access that inventory?

Marcus Lemonis: So there’s three different places that we’re accessing it. One, we have 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’s, as 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 curve, and being far more promotional and encouraging people if you’re exiting the lifestyle or if it’s something 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 scientists that have accumulated eight years of data since the last downturn of every used unit we’ve bought and every used unit we’ve sold compiled with other data from auctions, to send accounting-type scientists to auctions, which is an oddity in itself, to 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 if Mel mentioned it. But of the $170 million of used inventory we have on the ground today, we own 100% of it. None of it is floor plan financed. And as 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 change in our balance sheet over the second quarter, we’re redeploying that capital with Mel and his management team to invest in to used because the return on capital was so strong.

We turn our used inventory approximately 5 times a year at 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 want out of those losses. Give me that money back, and I want to redeploy that in used," 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.

Craig Kennison: That’s a very clear response. Thanks for that. And you had mentioned customers who were exiting the lifestyle. I’m curious if you’re seeing any trend there.

You and 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? Are they coming back to upgrade? Any sort of color on what that consumer is doing in that context?

Marcus Lemonis: Yes, we have seen continued solid growth with new buyers coming into the marketplace, continued solid growth. And we have also seen our ability to retain those new buyers at a pretty good rate. Now we all know that, as an industry, not just our company, we have to get better at improving the overall customer experience. And as the number of units that were produced over the last several years grew, we were running behind as an industry in terms of the number of technicians and the number of service bays to be able to take care of that.

I think as an industry, we stubbed our toe a little bit, and we’re all collectively 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, who were just, I hate to say it, one of the spouses was passing away. They became too old. They wanted to retire from their lifestyle. And we identified that as the key leakage in the industry.

Those Good Sam members, and Good Sam 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 in identifying those folks through our sales force journey process to get them back into our location by incentivizing them with a premium on their used unit that they’re wanting to get out of because of their loyalty to Good Sam, which is why we saw an immediate increase in our used inventory, which we believe is outpacing the rest of the industry.

Craig Kennison: That’s great. Thank you very much.

Operator: Thank you.

We will now take our next question from Bret Jordan of Jefferies. Please go ahead. Your line is now open.

Bret Jordan: Hey, good afternoon, guys.

Marcus Lemonis: Good afternoon, sir.

Bret Jordan: Question on the used inventory again, sort of following up on Craig’s. If you look at the $170 million and the three buckets that you source it from, could you sort of give us some 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 margin on a unit you source direct versus an auction versus what you buy in from a Good Sam member if they’re getting a premium for that unit?

Marcus Lemonis: So the primary source that I didn’t mention, and I apologize, the primary source of our used inventory continues to be the trades that people have on their new unit purchase or their used unit purchase, the trades. As we look at the balance of it, 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 curb. 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 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 curb.

The last one that is the least profitable of the three, but still more profitable than new, is when we go to the auction. And the reason that I say that is because there are other hidden costs associated with the acquisition of that unit, including the staff member who goes there, their travel and expenses, the auction fees, the transportation to get that unit back and the reconditioning costs that tends to be slightly higher. With all of that being said, after all of those costs, they still outperformed materially by 5 to 6 points. The lowest one, the lowest performer of those three, still performs – outperforms our new margins by 5 to 6 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 and so it’s accretive.

Bret Jordan: Okay. And then one question, I think, Mel 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?

Marcus Lemonis: 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 parts, so we have three buckets.

Their purchase of a brand-new or used RV and the service associated with it, and so team number one, where there are 22 people and a leader that takes phone calls in my office and deal with social media, e-mails, et cetera. And we work with case management tools. So come the customer calls in, they open 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 in our Denver, Colorado call center.

Anybody that’s a club member, credit card holder, roadside member, warranty member, insurance member, any experience that they have, my card renewal, my roadside didn’t pick me up quick enough, we have seven people and a leader dedicated to immediately solving the problem with a yes and right now. And I have given them, along with our President, Cherry Farrell, immediate authority to solve that customer situation right then and there. The last is in our online fulfillment process, where there is a team of people of five and a leader, that deals with back orders, shipments, broken things, boxes coming in wrong size, with immediately solving their problem with a yes and right now. And what we learned is that as our company got bigger, we didn’t have the right process set up for the customer to get in and to get out. And so we’ll spend $2 million on a go-forward basis that we believe is marketing because it should, over time, improve our overall reputation, which has risen on Google by, I think, about 0.5 point or 1 point to about 4 out of 5 stars.

We think it can get better. And we also think it can improve our retention of our club members as well.

Bret Jordan: Okay, great. Thank you.

Operator: Thank you.

We’ll now take our next question from Fred Wightman of Citi. Please go ahead. Your line is open.

Fred Wightman: Hey guys, how are you? I 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 a bit better than what we saw in 2Q.

So I know that people tend to get a bit more aggressive with the model year changeover. But can you just talk about that competitive backdrop in 3Q and how it’s sort of trending in 4Q too?

Marcus Lemonis: 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 unfortunately, we performed poorly in that regard in the first two quarters of the year because Mel and the financial team were putting pressure on us, as operators, to clean up this inventory, to get the aging down to 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. Other than the used side, any improvement that exists 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 gas motor homes and diesel motor homes, of which we’re 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.

Fred Wightman: Okay, that’s really helpful. And then if we look at that $35 million to $45 million tailwind you guys talked about from closing the underperforming retail units, is that enough to get the remaining retail business back to profitability? Or is that still going to be challenged?

Marcus Lemonis: 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, for management purposes, where our retail business may lose $100,000 because of the way we allocate 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 report it, to look at that location on a consolidated basis.

One location, one brand, one leader, one P&L. And what we found before is that because we have disparate systems and we weren’t doing that, we were missing out on the efficiencies. We do not and will not, on a long-term basis, operate locations that 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 a Lafayette, Louisiana, where we are – we have any other new location, 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 RVs.

I don’t expect us to have locations in the next 24 months that aren’t consolidated – on a consolidated basis, profitable, that we would just ignore in Q3. I just wouldn’t expect that to be the case.

Fred Wightman: Great, thank you.

Operator: Thank you. We can now take our next question from John Lovallo of Bank of America.

Please go ahead. Your line is open.

John Lovallo: Hey guys, thank you for taking my questions as well. The first one, Mark, is I just wanted to focus on bucket number two, the $35 million to $45 million benefit you expect annually from operating without the non-RV locations. Can you just help us understand how you actually got to that $35 million to $45 million 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 that, that’s underlying that assumption?

Marcus Lemonis: No. That last statement would not be accurate. So I’m going to answer them, and I’m going to answer them both, but I am going to split that baby up. The $35 million to $45 million improvement in our go-forward business through the elimination of those locations is

coming from: primarily, the operating loss that those locations had; secondarily, the infrastructure costs associated with supporting those organizations, which includes people, distribution centers and logistics associated with that; and then, lastly, our overall infrastructure is getting tighter from a supervisory operational perspective. We’ve 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 even location management. So all of those things are contributing to the $35 million to $45 million. The second question is we are not prepared at this time to give our 2020 forecast. But I did say that I’m feeling better about our 2020 prospects in 2020, 2021, 2022, 2023, now that we are getting these non-RV-centric locations behind us and not making acquisitions, not opening new stores because we’re going to let that $200 million that we invested in getting these additional dealerships open.

We’re going to 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 delever at this point. And I want to be laser focused.

John Lovallo: Okay. That makes sense.

And then just a theory that we’ve been contemplating in and we’re certainly newer to this industry than you are, so I would value your opinion here. Is it possible that the last four years on the new RV side, is it possible that sales may have been artificially inflated by maybe initially a replacement cycle 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, true, I mean is it possible that the sustainable level of demand is actually significantly lower than 400,000? I mean, could we be – just have been overselling in the past few years?

Marcus Lemonis: I personally do not believe that. And the reason that I don’t is that when we look at the average age of our buyer, coupled with the investments that the manufacturers have been making in both technology and making products lighter and more millennial friendly, I do not believe 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 swell rarely contracted, if ever. What may happen once in a while is that 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 industries, people running for the exit door. So when we look at the entire installed community of RV owners, we see that funnel only getting bigger as the types of products that manufacturers are developing and the markets that a company leader like us are entering and the way that a company like us is finding potential new RVers through the sale of other outdoor products that may not likely have ever chipped people over, we think that funnel is only going 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 very important for any new analysts to this industry or any newcomer in this industry to understand that the pause doesn’t mean the exit doors.

The installed base is what our Good Sam business feeds on. It’s what our used business feeds on. It’s what our service and parts business feeds on. And what does get impacted in a down cycle, like it has every time through every cycle, is margin pressure throughout the system, which is held. It’s 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 still ticks up, just not at the pace that we would like it to.

John Lovallo: That’s great. If I could just follow-up one last one.

I mean, is there anything that – any signs that would show that maybe that new buyer that’s coming to the market in that bigger funnel is just shifting to used units?

Marcus Lemonis: 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, when we’re customer-facing, we are type-agnostic, meaning our sales associates are there to make sure that the customer gets the unit that’s right for them and their budget. But it is true that we believe that a customer can get more units, 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 that we continue to deemphasize 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 buyer is taking.

John Lovallo: Thanks, Marcus.

Operator: Thank you. We can now take our next question from Ryan Brinkman of JPMorgan.

Ryan Brinkman: Great.

Thank you for clarifying the impact to the full year EBITDA outlook from the discounting at the discontinuing 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 hit, of which $10 million was in 2Q, if I heard correctly. I just wanted to check that that’s the real moving piece to the outlook. I know you don’t guide quarterly, but are you able to say how 3Q EBITDA outperformance tracked after backing out that $10 million relative to whatever you had earlier assumed for 3Q when guiding to the earlier low to $200 million range? Basically, just trying to figure out how you guys are tracking relative to earlier expectations stripping out this noise.

Marcus Lemonis: So one clarifying comment.

You mentioned that the impact was in Q2. We made the strategic decision to exit...

Ryan Brinkman: Q3. I’m sorry.

Marcus Lemonis: Yes, that’s okay.

We made that decision on September 3. As I said earlier, we believe our best estimate is that there was about $10 million to $11 million hit to our EBITDA that we did not add back in Q3. And our core business, our Good Sam business, and our core RV business is meeting our expectations.

Ryan Brinkman: Okay. That is helpful.

Thanks. And then 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 expected to employ during the downturn was to turn a negative into a positive by trying to purchase distressed competitors, et cetera. Can you talk about the logic for having pivoted the strategy? Is it just a function of having already allocated capital towards the non-RV outdoor retail space, et cetera? Or are there other factors at play such as you’d earlier done a faster-than-expected pace of RV dealership acquisitions during the up cycle, a desire to improve the operating performance of those already acquired dealers? And when we get past this period of time, when execution improved and the industry stabilizes, what are your thoughts then about the long-term store count potential and ability and benefit to further rolling up the sector?

Marcus Lemonis: 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 is primary focus number one. The second thing is that we believe that we need to massively build up cash on our balance sheet and get our earnings back up to the levels that we’re 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 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, that 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 changed, 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 5 to 10 years, we expect to continue to dramatically grow the footprint of our business profitably through the de novo or acquired acquisition of RV-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 delevering was more important to doing that than anything else just because we know we have a lot of upside with our existing business.

Ryan Brinkman: Okay. That’s helpful. And then just the last question is a follow-up to the discussion about competitor activity as it’s impacting new vehicle gross margin. I thought I heard you say not to expect too much improvement over the next couple of quarters.

But on last quarter’s call, you talked about seeing maybe overextended competitors selling units, selling new units below cost, which is obviously not something that they can continue to do for too long. Just curious if you’re able to monitor what inventory looks like at your competitors and if there’s any sort of anecdotal signs that it might be starting to right and when that specific pressure could begin to lift on industry-wide gross margin.

Marcus Lemonis: So our asset management team and sales organization team, led by Matt 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 philosophies that our competitors are using. We’ve seen a lot less gas on the new towable side and the new entry-level fifth wheel side.

We have not seen the pressure reduce, quite frankly, at all on the diesel side and even the higher-end gas side. 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 a holistic basis, the pressure is there. But we are starting to see some easing by segment, not easing in totality but some definite easing by segment. I would expect as we enter 2020, new travel trailers will continue to become a little less of a blood bath. But I will say this, as technology for the consumer and the consumer’s 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 RVs 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 its working capital into things that we believe we have more of, which is the database to acquire that used and the cash to do it; to be able to mitigate whatever pressure could exist long-term on the new side, where our philosophy going forward is that the pressure will continue, what the heck are we going to do about it?

Ryan Brinkman: Got it. Thanks so much.

Operator: Thank you. This concludes today’s question-and-answer session. I’ll now hand the call back for any additional or closing remarks.

Marcus Lemonis: Thank you very much. We look forward to 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.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation.

You may now disconnect.