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Edited Transcript of CWH.N earnings conference call or presentation 7-Aug-19 8:30pm GMT

Q2 2019 Camping World Holdings Inc Earnings Call

LINCOLNSHIRE Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Camping World Holdings Inc earnings conference call or presentation Wednesday, August 7, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent L. Moody

Camping World Holdings, Inc. - President & Director

* Marcus A. Lemonis

Camping World Holdings, Inc. - Chairman & CEO

* Melvin L. Flanigan

Camping World Holdings, Inc. - CFO & Secretary

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Conference Call Participants

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* Alice Linn Wycklendt

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Bret David Jordan

Jefferies LLC, Research Division - Equity Analyst

* Brett Richard Andress

KeyBanc Capital Markets Inc., Research Division - Associate VP

* Gerrick Luke Johnson

BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst

* John Lovallo

BofA Merrill Lynch, Research Division - VP

* Marc J. Torrente

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Ryan J. Brinkman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Seth Ian Sigman

Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to Camping World Holdings' Conference Call to discuss financial results for the second quarter of 2019. (Operator Instructions) Please be advised that this call is being recorded and the reproduction of the call in whole or in part is not permitted without written authorization from the company. Participating in the call today is Marcus Lemonis, Chairman and Chief Executive Officer; Brent Moody, President; and Mel Flanigan, Chief Financial Officer.

I will turn the call over to Mr. Moody to get us started.

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Brent L. Moody, Camping World Holdings, Inc. - President & Director [2]

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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.

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, acquisition, dispositions and related expenses; increases in our borrowing; 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 today's 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.

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [3]

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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 manufacturer shipment data as well as retail registrations for the period, the company was still able to sell an all-time high 33,715 RVs, up slightly from the previous year's all-time high.

During the quarter, the company generated $410 million in gross profit at a margin of 27.8% and SG&A of $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 experienced 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 5.25 million active customers, up 26% from a year ago and just under 2.2 million Good Sam members, up 13% from last year. We are pleased to report that our Good Sam services and plans segment, which is driven by strong transaction counts and the size of our file had another strong quarter.

Segment revenue was up 5.3% and segment income increased to more than $21 million in the second quarter. We talked previously, and now have the data to support that expanding our 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 $100 million in 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 in RV offerings for the long term. We have learned that the outdoor enthusiast 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 has shown the most promising results by far.

Our model is to operate an omnichannel RV and outdoor company anchored and predominantly driven by our core RV products and services, our Good Sam products and services, both enhanced by a more curated outdoor products offering.

With that being said, we are in the process of analyzing categories, cues, vendors and locations to ensure we are maximizing our asset allocation. Over the next several months, we plan to sell down those items and bring that cash back into the company vault to reinvest in higher margin or higher churn products, pay down debt and invest in technology that will help us achieve our long-term goals.

As we said before, we must continue to expand our footprint, expand our database 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 or locations that don't contribute to our profitability. Said more clearly, we will not grow our files and databases at all cost.

Since June of last year, we have shed set 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 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 warrant additional capital allocation is used RVs. Our performance indicates that the demand is there and strong and the return on capital outperforms most other categories. Today, we have nearly 5,000 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 customer's 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 additions of strong new talent over the last 6 months, we have made a hard pivot on our customer service. Over the last 7 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 in the buckets: Field operations, online operations and Good Sam operations. Each one of those buckets has organizations now established to take live feedback 24/7, receive e-mails and scour social media and blogs to address everything and anything.

This appropriate setup, which should not be labeled a campaign is titled, "If You're Not Happy, I'm Not Happy." Our company is executing this through an enhanced repair process, 24-hour resolution goals, and a process that is more fluid using technology and alternative modes of communicating with the modern customer.

We believe our tenure in this industry, coupled with the future of a widely expanded growth buyer profile and Americans' love of 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 top line 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 and 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 to Mel to review our financial results in more detail.

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Melvin L. Flanigan, Camping World Holdings, Inc. - CFO & Secretary [4]

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Thanks, Marcus, and good afternoon, everyone. Consolidated total revenue was nearly $1.5 billion, up 2% from last year's 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 Marcus described, a 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 SG&A resulting from increases in variable selling expenses to drive revenues and reduce inventory, increase advertising and promotional expenses and increase cost from a roughly 12% increase in average store count, coupled with margin compression were the primary factors impacting profitability in this year's second quarter.

Turning to our segments. The Good Sam Services and Plans segment continues to deliver strong top and bottom line results, posting revenues after elimination of inter segment 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 -- 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 continued to address slower moving or overstocked 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 4.6% in this year's second quarter.

Consolidated operating expenses increased 8.5% to $320 million for the quarter, including the increase in SG&A I 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, in the borrowing rate on our floor plan and term loan facilities partially offset by lower average borrowings under our floor plan facility. Net income was $53 million and adjusted diluted earnings per share was $0.54 for the quarter ended June 30, 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 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 used 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 30, 2019, we had $1.2 billion of term loans outstanding under the senior secured credit facility, $814 million of floor plan notes payable under the floor plan facility, $53 million of borrowings under the floor plan facility's 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 that's 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. Marcus?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [5]

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Thanks, Mel. Look, I've been in this industry for almost 20 years now, and I have seen time and time again that softness or headwinds, however people label it, are typically short term. Dealers get over inventoried. Manufacturers make so 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 -- these are the same external factors facing many cyclical or 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 or 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 the trends 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 plan to dramatically reduce our non-RV inventory, we know questions about the full 2019 guidance are top of mind. As a management team, we've 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 will continue.

Based on the assumptions, we are comfortable with our 2019 full year revenue projection of approximately $5 billion. But those assumptions required 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 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. But we are also hopeful that the trend changes and improves.

Fundamentally, we believe the consumer's appetite and demands for the RV lifestyle is alive and strong. The RV and Outdoor installed base as well as the prospects continue to trend towards a younger average age and expanded affinity to the entire outdoor lifestyle anchored by RV-ing.

Those are our prepared remarks. Operator, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Rick Nelson of Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [2]

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Marcus, can you discuss the sales trends that you saw during the quarter and what you're seeing in July and August?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [3]

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Our overall sales continue 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 thought that surveys come out month after month. In fact, I think June's 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 than we would like and spending a little bit more both internally and externally to generate some of that activity.

We, oddly enough, saw a 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 incent both our sales associates and our customers. But I don't think demand is our concern right now. We have demand and we can create demand. What we're most focused on was how we're going to keep our inventory clean, keep our transaction count high and keep pace -- ahead of pace with the rest of the market.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [4]

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Okay. And so we're now 4 quarters into this downturn. Interested if you have a view on how long you think the cycle might last? And would this downturn be any different from what we've seen in the past?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [5]

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Typically, if you just study history, the downturns are 12 to 18 months. And I'm not sure when it started, but as you saw the manufacturer shipment data continued 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, we're just laser focused on making sure that we rightsize our inventory levels, rightsize our SG&A. We bail out of locations, units, categories and SKUs 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? Are tariffs going to continue to hurt parts and pieces? We've heard about the tariffs and we've experienced these things. And when we look at our second quarter, we had heavy headwinds in demand, heavy discounting in the marketplace, we had some tariffs, and we still feel like our performance, in light of those things, was relatively respectable. Not where we want it to be, but we're asking our team not to hold their head down too much knowing what we have to fix and what we have to improve on.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [6]

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And are you in fact seeing the declines in sales starting to narrow?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [7]

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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 haven't necessarily seen that reversal yet.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [8]

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Okay. Got you. Also I'd like to ask you about Gander Outdoors, how those stores are performing with RVs and without RVs?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [9]

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The locations where we have RVs, which is pretty meaningful, quite frankly, are pretty promising. And we're noticing the crossover between the customers is actually in some cases, working out better than we would have anticipated. In those locations where we don't sell RVs, 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 doesn't work and we don't want to tie up the investor's capital in something that we don't believe is appropriate for the long-term strategy.

And so we've already shed ourselves of locations over the last 6, 7 months that carried multiple brands, a stand-alone dealership, a stand-alone Camping World store, a stand-alone 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 with things that we don't believe are part of our longer-term strategy.

We did find out, though, that our ability to integrate RV products and RV services into locations has proved out to be fairly decent.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [10]

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And is there a time line for decisions on any meaningful store closings?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [11]

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I think we want to have really 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 the fair market value of those leases. And so that's not a concern for us. But if we're going to close locations, we want to make sure that 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'll become more clear 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 a company regardless of how many locations we have. A silly example would be, that we tried the bike business in a number of our stores. And while we sell foldable bikes, we realized that, yes, we have $1 million tied up in bikes, but it's not giving us a great turn. So we may minimize or exit that category. And there are other smaller categories or smaller vendors where that same thing applies. And so 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, invest in used inventory and invest in opportunities where we know it's our strike zone.

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Operator [12]

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Our next question comes from Brett Andress of KeyBanc Capital Markets.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [13]

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First just a housekeeping. When you said down 7% in your response to one of the last questions, was that same-store new and used for July and August?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [14]

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That is same-store, and let me be very particular and scientific about it. That is same-store new and used vehicle sales for the quarter.

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Melvin L. Flanigan, Camping World Holdings, Inc. - CFO & Secretary [15]

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Units. It's units.

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [16]

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That's units. Sorry, Brett, that's units.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [17]

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Got it. Okay. I thought you're trying to make a comment about July and August around that.

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [18]

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No. The comments that I was making around July and June is that SAT surveys came out on the new side this afternoon at, I think it was down 18.5 or 18.9. 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 7%, 8%.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [19]

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Understood. Okay. I just wanted to make sure I had 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 somewhere around 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?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [20]

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So the updated guide contemplates and assumes because we felt obligated to do it that the softness in the RV market would continue and we would want to keep our revenue model going, and we would thus experience margin compression and increased abnormal selling expense on a temporary basis to keep our transaction count moving. In addition to that, we realized 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 realized 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.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [21]

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Got it. Okay. So I think it may be outside of the 4-wall box? It's not...

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [22]

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Think some outside of the 4-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 weren't going to perform, then 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 c, 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?

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [23]

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Understood. Okay. Can you -- just to make sure I have this July and August retail trend correct. I mean what were your retail trends same-store in July and August? Any...

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [24]

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We don't -- yes, we're not reporting those now. What I can tell you is that July looks pretty decent from a top line perspective, but the trends around the margin compression and the short-term increase in selling expense stayed pretty true in July as it compared to June and even the second quarter.

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Operator [25]

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Our next question comes from Seth Sigman of Credit Suisse.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [26]

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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, SG&A growth was still well ahead of sales growth, 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?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [27]

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Yes, excellent question. We made a lot of progress in the second quarter. I think our EBITDA margin was 6.7%. And candidly, that's not where we want it to be. We know that higher gross margins would have yielded us a more appropriate number. But we -- I think there's 2 different components. One, what kind of businesses or segments are we operating that are pulling us down and how could we repurpose or exit them? And more importantly, how are we thinking about our human capital 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 to reduce headcount. 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 will continue to see improvement as it relates to SG&A 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'll see a marketable difference compared to the fourth quarter of 2018 as it relates to SG&A as a percentage.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [28]

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Okay. 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 in EBITDA has been greater than we've all expected. So I guess the question is, is the current situation we're in unique? Or has the model evolved? And it's maybe just different than what you've had historically?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [29]

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Yes, sure. We actually 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 2 distinguishing factors that drove it there: the compressed margins and the 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 advisers, 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 SPIFF 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 -- we're not happy about it, we believe the team did a fairly decent job in holding on to the EBITDA margin as best they could.

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Operator [30]

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(Operator Instructions) Our next question comes from Bret Jordan of Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [31]

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A 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 you used that bike example. I guess when you think about the Gander 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 quantity of inventory you think you can work out of this?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [32]

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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 and didn't perform and what's 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, but put the money back in the bank and not try to hold onto a narrative that we believe we have clarity on.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [33]

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Okay. And then a question, your comment about margin compression and I guess given your 20 plus years in the industry, your GPUs are still a bit over $8,200, what is sort of a trough gross profit per unit you've seen cyclically?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [34]

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We don't really look at the growth -- we don't really manage the company on a growth per unit. What we do is look at the overall gross margin and the contributors to that. We know that the Good Sam business is 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 used compared to new is materially a better contributor. Where we have experienced the most margin compression is in 2 areas: The competitive nature of the new side of the business while manufacturers and dealers are trying to liquidate, not only to destock, 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 we're 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 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.

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Operator [35]

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Our next question comes from Ryan Brinkman of JPMorgan.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [36]

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The low to mid $200 million guidance range it seems quite a bit softer than The Street was looking for. It appears to imply an acceleration of the trend of the top line holding up so much better than the bottom line. I'm just curious, with the RV inventory having come down so much, why you feel it is necessary to protect transaction count seemingly to the detriment of unit economics? Is that what you're doing? Because I thought earlier you had expressed a lot of confidence in the ability of the firm to withstand downturns more by flexing the cost lower as opposed to what it seems to be here maybe some conscious trading of profits for sales.

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [37]

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Ryan, that's a great question. We will tell you 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 much inventory exist still at the manufacturers and still with other dealers because we don't, Ryan, have visibility into that. What we know is on a daily basis, we are scraping competitors and portal sites that list 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 keep 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'll see that in some cases, if not most, we are not the lowest priced, 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 would slow down our inventory turns. We would slow down our Good Sam file. We would slow down our F&I business. And as a management team, we don't believe because we know this is short term, that, that's a good idea.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [38]

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I see. And then when you combine that plan you were talking about to draw-down, I think I heard $50 million or $60 million, was it 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 of EBITDA, 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? Fair to say?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [39]

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No. It will not be negative, but I'll turn that over to Mel.

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Melvin L. Flanigan, Camping World Holdings, Inc. - CFO & Secretary [40]

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Thanks, Marcus. So yes, no, obviously, if we can pull additional funds out of the inventory balance that we would expect a reasonably healthy free plant cash flow for the year.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [41]

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Okay. Great. And then I guess just lastly from me then. It sounds like you might engage in some restructuring actions, store closures, distribution centers, maybe. Presumably, these would be called out as onetime items relative to EBITDA, but how should we be thinking about cash cost associated with any restructuring? And then what kind of payback you might see on that?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [42]

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So we don't believe that we're entering into any sort of restructuring process. The distribution center that we spoke about actually closed and got subleased in the second quarter. We got out of our Dallas distribution center with, quite frankly, no real pain. As we look at improving the logistics side, we brought in a new distribution center executive and logistics executive. As we look at improving that, we will, at some point, want to go down to 3 distribution centers potentially.

And so that's not a restructuring. As we look at other things like potentially closing some stores or bringing 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 onetime or what would be considered not onetime. But the plan that we put in front of you anticipates that inventory is going to be liquidated and that's going to be realized in the margin compression in the back half of the year.

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Operator [43]

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Our next question comes from Alice Wycklendt of Baird.

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Alice Linn Wycklendt, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [44]

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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 you using to access inventory in a market that's generally been in pretty tight supply? And maybe walk us through your valuation process as well, what tools do you have in place to appraise and price used units appropriately?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [45]

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So I'm going to be a little bit more vague, Alice, in disclosing some of those things because they are part of our trade secrets and we have proprietary systems today that has aggregated every new and 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 5,000 units in stock. And one of the attributes of our successful second quarter used business has been our ability to grow our consignment business. And we used our proprietary and sort of, I would call biggest asset, our database to communicate with 5.3 million known RVers 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 that our used 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 1,400, I think, approximately consignments on the ground today, we believe there's an opportunity to double the size of that. And so used is our focus and clearly it paid dividends for us in the second quarter, and we're hoping it does in the back half.

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Alice Linn Wycklendt, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [46]

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And then last quarter, you did share some news about your e-commerce efforts. And I think, specifically, a new program with Amazon. How is that effort progressing? And does your decision to reduce non-RV inventory impact that relationship at all?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [47]

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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 process, we did about $500,000 in 1 month, and that's with only a portion of our SKUs online. We're loading that slowly, but we anticipate that to have realistic and reasonable growth over the next 6 months. But it's a big focus for us. We are 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 6 months, a continued shift towards online. And when we have 4-wall economics that don't work, exiting those locations because we just don't need to have the investment there.

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Operator [48]

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Our next question comes from Gerrick Johnson of BMO Capital Markets.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [49]

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Inside the 4-wall box and the categories or SKUs that you're getting out of, what's going in to replace them? Or what categories will you be expanding to take that floor space?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [50]

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In most of the boxes, we're 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-yourselfer. We believe that we need to better position ourself as a 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.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [51]

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Okay. Great. And then of the $50 million to $60 million in inventory liquidated, or that will be liquidated, is that the price you paid? Is that what's on the books or is that the proceeds you expect to receive?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [52]

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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 cost back from that. But when you sell $50 million 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 on to the $50 million 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 the decision that the management team made and is supported by the Board.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [53]

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Okay. I'll ask 1 more and then get back in the queue. I'll pull up right here. So you guys directly source an outdoor product, you ship some in third-party product, you ship some of that in 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?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [54]

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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's significant because it doesn't make up a giant number inside of our total revenue.

On the RVs themselves, as most people know, they're 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.

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Operator [55]

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Our next question comes from John Lovallo of Bank of America.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [56]

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First one is 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 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 you're going to be more cautioned than historically?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [57]

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Look, I can't speak to how other dealers are processing. But Matt Wagner, who oversees the $1 billion of inventory, will tell you that we had 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 it's 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 towable inventory, which if you ask some of the people in our -- in the field, some of the salespeople, they would tell you we're a little light on towable inventory right now. But coming out of the peak of the selling season, we think it's okay that we're slightly lighter than they would like us to be. We know that we are 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 to look similar from a top line 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, we'll 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 though. We think the margins may improve as the crustiness in the marketplace go away. As people liquidate out of stuff, remember that our competitors need to make money to stay open. They can't sell things at, at-cost or below-cost forever.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [58]

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Got it. Okay. That makes sense. And then I was hoping, Marcus, you could help me just kind of reconcile a couple of comments that I think I heard. The first is that demand is not really the issue, but the way I'm kind of thinking about it is that inventory is in pretty good shape or 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 I mean to me, that seems like a demand issue. Can you just help me kind of reconcile that?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [59]

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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 of it. What happened though is even though our web leads are actually up from a year ago, the process 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 a little bit more. And so the RV industry as a whole isn't cratering from the demand standpoint, and I'm sure you know this and everybody else does, it's still one of the best years from a unit sales and manufacturing standpoint in the history of the industry. It just isn't what 2017 or the first part of '18 was. But it's 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've projected, we are going to continue to divert assets and dollars into used inventory because it is a fantastic hedge for us.

One last thing on that. There is very even to all the cycles over time, the demand for used inventory, the demand for service, the demand for all the Good Sam products and services, and parts and services, the rarely subside because you're servicing the installed RV community, which over the history of time, hasn't really gone backwards.

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Operator [60]

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Our next question comes from Tim Conder of Wells Fargo.

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Marc J. Torrente, Wells Fargo Securities, LLC, Research Division - Associate Analyst [61]

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This is actually Marc Torrente on for Tim. So you continue to see strong growth in the Good Sam memberships and the overall consumer database, which should be a key competitive advantage. But it doesn't seem like the full value is really being unlocked. So just wanted to get some better color on your advancements in data analytics? And how much more progress needs to be made?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [62]

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Great question. Keep in mind that as we grow our overall customer file, but particularly our Good Sam file, that revenue is -- ends up -- when we capture it today, ends up getting deferred. And so we recognize that revenue and 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 sales force, to more appropriately setup journeys and to communicate with the customer in 2019 in a more modern way.

We added [Sherry Farrell] 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, both through the portal and both through traditional direct mail in a more cohesive manner. We don't believe that we've actually

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efficiently as we could, which is what suppressed the potential ROI of that member. And so we think there's room there for opportunity. It 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, 24, 36 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 is better for the customer and better for our associates to communicate with those customers.

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Operator [63]

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Our next question comes from Gerrick Johnson of BMO Capital Markets.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [64]

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When someone buys a used RV from you guys, does it have a warranty attached? What kind of warranty comes with it, if so?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [65]

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So all of our preowned vehicles, all of our used vehicles go through a traditional reconditioning process in 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 payment. We have found historically that including things in the transaction, a, makes us uncompetitive in terms of pricing; and b, it takes away the opportunity for the customer to make their own decisions on how they want to protect their unit. It is important to note that our penetration of warranty, roadside and products like that is materially higher by at least 7 to 8 percentage points compared to our penetration on new units. Because people feel like there's more uncertainty on a used unit than there is with the certainty that the manufacturer provides when it's new.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [66]

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Okay. That will make sense. And I just had 1 more clarification question on the active customer number. The active customer base is up 26%, but in the footnotes, it does say that it's based on a trailing 8 quarters. So are you comparing trailing 8 quarters versus trailing 8 quarters last year and essentially comparing to 2 years ago?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [67]

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We always look at our active file size as the 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 definition consistent and pure with how we originally presented it.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [68]

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So what if it was just a point in time? Like this point right now, how many active customers do you have versus last year?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [69]

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5.3 million right now.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [70]

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And how many last year?

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Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [71]

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And so every month -- so every month that would drop off, right? So every month if it's 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 a document real quick. Last year, at the same time, it was 4.7 million.

Thank you for your time today, and we look forward to speaking to you again in the future with our third quarter earnings. Thank you.

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Operator [72]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.