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Edited Transcript of CWH.N earnings conference call or presentation 3-Aug-22 12:30pm GMT

Q2 2022 Camping World Holdings Inc Earnings Call LINCOLNSHIRE Sep 29, 2022 (Thomson StreetEvents) -- Edited Transcript of Camping World Holdings Inc earnings conference call or presentation Wednesday, August 3, 2022 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Lindsey Christen Camping World Holdings, Inc. - Senior VP, General Counsel & Company Secretary * Marcus A. Lemonis Camping World Holdings, Inc. - Chairman & CEO * Matthew D. Wagner Camping World Holdings, Inc. - EVP ================================================================================ Conference Call Participants ================================================================================ * Brett Richard Andress KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst * Daniel Robert Imbro Stephens Inc., Research Division - MD & Research Analyst * Gerrick Luke Johnson BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst * Joseph Nicholas Altobello Raymond James & Associates, Inc., Research Division - MD & Senior Analyst * Michael Arlington Swartz Truist Securities, Inc., Research Division - Senior Analyst * Ryan J. Brinkman JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to Camping World Holdings Conference Call to discuss financial results for the second quarter of fiscal year 2022. (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 are Marcus Lemonis, Chairman and Chief Executive Officer; Brent Moody, President; Karin Bell, Chief Financial Officer; Tamara Ward, Chief Operating Officer; Matthew Wagner, Executive Vice President; Scott Jensen, Senior Vice President; Lindsey Christen, Executive Vice President and General Counsel; and Tom Kirn, Chief Accounting Officer. I will now turn the call over to Ms. Christen to get us started. -------------------------------------------------------------------------------- Lindsey Christen, Camping World Holdings, Inc. - Senior VP, General Counsel & Company Secretary [2] -------------------------------------------------------------------------------- Thank you, and good morning, everyone. A press release covering the company's second quarter 2022 financial results was issued yesterday afternoon and a copy of the press release can be found in the Investor Relations section on the company's website. Management's remarks today 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 the impact of COVID-19 on our business, financial results and financial condition; our business goals, plans, abilities and opportunities; industry and customer trends; our recently disclosed cybersecurity incident; the expected impact of inflation and market conditions; our strategic initiatives, acquisitions and planned capital expenditures; potential stock repurchases, future dividend payments, increases in our borrowings; our liquidity and 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 statements are included in our earnings release and on our website. All comparisons of our 2022 second quarter results are made against the 2021 second quarter results unless otherwise noted. I'll now turn the call over to Marcus. -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks, Linds. Good morning, and thanks for joining us for Camping World's 2022 Second Quarter Earnings Call. Today, I'm going to lay out our quarterly financial results along with providing some insight into the next 18 months. To start, demand for new and used RVs continue to be on par with some of the best periods we've seen in the last decade. We did find conversion to sale off of that demand of new RVs to be a little more difficult and expect that trend to continue, but feel strongly that our used results will continue to help offset that. Our revenue for the second quarter was a record setting nearly $2.2 billion, roughly $100 million above our 2021 results while delivering roughly 39,000 RVs. And while we're pleased with those results, our focus was heavily weighted on items that we know are key to the next 18 months' results. First, I want to address the most important item that's been on everybody's mind. That's inventory. It's important to start with a little context. Because of the pace of our company's growth between new stores and acquisitions, one important metric we look at when analyzing inventory is the total number of new units on the lot by location. As of today, our average new unit count per location is about 175, totaling approximately $6.4 million. That number is down compared to pre-pandemic levels, which averaged around 197 new units between 2016 and 2019 around the same time of year. I'll point to this benchmark. The highest level in the last 6 years were 2017 with a 207 average new units per location and 2018 with 214. Look, we're very confident that with our current consumer demand levels, coupled with our on-order position with the manufacturers that we are in a very solid position. Our new inventory as of today is $150 million lower than it was at the end of the second quarter. Our plan has that reducing even more. As of today, we have availability under our floor plan facility of approximately $440 million. Look, we complement our key manufacturers, both Thor and Forest River for appropriately adjusting both production levels and production days. On the used side, we are very pleased with our results in the last 12 months and we'll continue to build around this very much key category in our business, not only as a growth agent, but as a hedge against further possible reductions of new demand. For the quarter, we sold 15,555 used units for $556 million, up from $460 million a year ago. Our trailing 12 months revenue unused at the end of the quarter was approximately $1.9 billion, up about a $100 million from the previous quarter. As a marker at the end of Q2, 2021, a year ago, our used trailing 12-month sales was nearly $1.3 billion. So the growth in that 1-year period is about a $600 million increase. We remain steadfast as a company on our objective to achieve annualized used sales of $3 billion. During the quarter, we experienced the previously discussed reduction of total gross profit per unit by about 3.2%. We feel that new could experience slightly more pressure in the coming 6 months, while used should stay within the historical range. Look, over the next 18 months, we want to hone our focus to a few key areas. We plan to build our cash reserves, remain optionality with acquisition opportunities and other capital deployment choices. We believe we can continue to enhance our market share based on the continued demand that we feel we can steer our way. Our web traffic and leads continue to outperform 2021 levels. We also want to diversify our product offerings, ensuring that our mix represents the current market conditions with a very acute focus on consumer affordability. We want to accelerate our digital strategy to not only prospect new customers, but generate revenue with the full national launch of rvs.com. We want to widen our market funnel, while increasing conversion with categories like Good Sam RV rentals, which has grown very nicely over the last 8 months. And most importantly, we want to expand our talent pool with a nationwide initiative towards recruiting and training, while we increased the number of service bays, technicians and service advisers, creating both a best-in-class income opportunity and better utilizing our database of 5.5 million active customers to create service shoulder season utilization. As we've said previously, our business tends to benefit in two specific ways during any market downturn. Number one, opportunities for us to make acquisitions increase while the valuations of those acquisitions decrease. More importantly, our talent pool expands with those acquisitions; number two, our core installed business, our base of business strengthens. That includes our Good Sam business, our service and parts business and our used business. As we've spoken about in the past, our tight control of SG&A is a key component of our management philosophy. We know that in certain environments, we must make the right choices on what to shed and what to increase investment on. In this moment, increasing the investment in our people is top of mind. Our brief financial summary. As I said earlier in the second quarter 2022, we generated record revenue, nearly $2.2 billion. And while some of the revenue increase is attributed to a rise in prices year-over-year for new vehicles, our used business continues to grow, $556 million, an increase of $95.8 million from the previous year. And our core Good Sam business increased as well for the quarter to $49.6 million, an increase of $2.7 million for the same period last year. Our products and services business, part service and other, generated $278 million. And when you exclude the non-RV categories that were sold in the second quarter of 2021 that we got out of. As a reminder, we exited most of those categories by the end of the third quarter, we were actually up for the quarter when you exclude those. Our adjusted EBITDA for the quarter totaled $277.7 million, the second highest since the inception of our company, but lower than the second quarter of 2021 by approximately $56 million. The primary difference of that adjusted EBITDA was due to lower gross margins. Our gross profit for the quarter was $716.8 million, a 33.1% margin, but it was down from 36.9% as we previously had predicted. One metric that we focus on heavily is our variable cost structure. It's important for us as different segments come under pressure, either in the revenue or margin that we maintain our variable approach to expenses, namely compensation. For the quarter, we were pleased that our SG&A expenses as a percentage of gross were 62%. We ended the period with $134 million of cash on our balance sheet and $278 million of cash in the floor plan offset account. We also have $259 million of real estate without an associated mortgage. We're very proud of this overall result, but we recognize the constant need for improvement. I'll now turn the call over to Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from the line of Daniel Imbro from Stephens, Inc. -------------------------------------------------------------------------------- Daniel Robert Imbro, Stephens Inc., Research Division - MD & Research Analyst [2] -------------------------------------------------------------------------------- Congrats on the quarter. Marcus, I want to start on the topic you started with inventory. Obviously, I think impressive whittling both those down, still driving the sales. I'm curious, your prepared remarks, I think you noted you wanted to keep working that lower in the back half. Can you provide some context on maybe how much lower you would like that to be on a per-location basis? And is there anything you can do to improve the efficiency of doing that? And are you seeing any independent dealers out there maybe discounting or using price to try to lower inventory in this environment? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Well, I think there's a couple of things we want everybody to really focus on. While we're pleased with where we're at as of today with the number of new units on the lot, there's a seasonal adjustment to it. And so as we go through the balance of the third quarter, our goal is to drive that number lower by the end of the third quarter. But keep in mind, as we head into the fourth quarter in preparation for what we think will be in pretty decent '23, that number will start to rise again, and we usually find its peak in a normal environment somewhere around April timeframe is where we usually hit our peak. On the used side, that number actually from this point, we're hoping to grow. And while we don't want to chase opportunities and overpay for product, we have really started, and I think Karin has helped us with that, really prepared to build a lot of cash going into the third and fourth quarter to start to build that used inventory. And if you remember, we started about a year ago with this exploration of growing our used and seeing if we could drive the revenue. We've learned a lot. We've learned what the right terms are and where the right locations are. I would expect us to take the next 12 months to try to hit that next crescendo. But on the new side, we're pleased. We don't have as much on order as we normally would at this point in the year. And so we're analyzing the combination of market demands, adjusting inventory by location and more importantly, making sure the mix of those inventories on the lot. If there's 177 on average are also the right mix. So in the third quarter, we'll probably do some adjusting and cleansing like we always do, both on the new and used side, to prepare for starting to take in the right models at the right time at the right price at the beginning of the fourth quarter. As it relates to other dealers, we don't pay much attention to what other dealers are doing, while we monitor their pricing and their inventory levels to a degree, we're really focused on executing and improving our own velocity and our own margin performance at our own locations. We pay attention to a large degree, in certain markets where we don't like our market share position, and we may make adjustments. And we pay attention where our markets share is exemplary, and we may want to enhance our margin. So we do not price inventory across the enterprise the same way. We look at it on a market-by-market basis, which sometimes is what helps us achieve the velocity we're looking for. -------------------------------------------------------------------------------- Daniel Robert Imbro, Stephens Inc., Research Division - MD & Research Analyst [4] -------------------------------------------------------------------------------- I wanted to follow up on some of the additional growth drivers you talked about rentals, rvs.com, just given the broader change in the consumer backdrop, are you seeing the adoption of any of these change may more rentals, less purchases? And anything changing that you're noticing from your seat? And then any updated timing on the expected timing of rvs.com? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- Yes. So rvs.com has launched in a very small beta environment in one single market. And we really wanted to take time to really understand the user experience all the way through selecting a unit, getting it financed, the paperwork associated with it, make sure that we are meeting all the compliance requirements before we start to launch on a regional basis next and then hopefully, by the end of the year on a national basis. I think the most important part of rvs.com is really understanding the financing process and how seamless we're looking for that to be and making sure that we're really creating a better user experience. When we look at things like rentals or any other initiative, it's very important to understand that we really do a lot of those things for two primary purposes. One, we want to drive recurring revenue through our Good Sam business from the products and services associated with them; but two, we like these predictor files that we start to create. If we're really looking at the business overall, every single thing that we do has one single purpose, which is to increase the number of new and used RVs that we sell. And the reason for that is if you look at the lifetime value proposition that an RV buyer creates for our company for years to come, we know that if we can start that initiative there, well, it feeds us for years. And so rentals is a way for identifying people that have a propensity to like the outdoors, then they rent the unit. They realize they like the process. And then we obviously then market them the opportunity to do that full time. One of the other things we've learned through this rental process is that we're able to convert people to purchase and immediately install their unit right into the rental fleet. That's one; and number two, we've also learned that our rental business can actually be more fleet-driven, which allows us to potentially sell to big fleet carriers in a 5-pack, 10-pack, 20-pack unit of RVs, where they may put that in their own fleet and put that on our rental platform, again, all driving towards the sale and service and financing of new and used our RVs. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question is from the line of Brett Andress from KeyBanc. -------------------------------------------------------------------------------- Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [7] -------------------------------------------------------------------------------- So I would have to imagine that the first half of the quarter looked a bit different than the second half or at least that's how I think many of us are thinking about it. So could you help us with how the business evolved in the past couple of months, whether that's on a same-store sales metric, a GPU standpoint and just how that evolved and maybe kind of where we're sitting here. -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [8] -------------------------------------------------------------------------------- I see if I'm reading between the tea leaves, Brett, you're asking where the trend lines are. And what we saw happened through the quarter, yes, we saw happen through the quarters, we saw margin compression continue to accelerate from the first month to the last month. And that has somewhat stabilized in a range where we're sitting today from where it ended in the month of June. But the range of that wasn't that big. It wasn't as big as you would think. From a same-store sales standpoint, we actually started to improve that gap. We actually started with a wider gap of a miss on a same-store basis at the beginning of the quarter. And as we got deeper into the quarter, that gap closed and quite frankly, has continued on a similar pace into July. We're still going to be down on a new same-store basis. We believe, for the third quarter and quite frankly, the balance of the year and potentially even next year as well, but that gap is a little tighter than we had originally anticipated. But market conditions have changed in the last 30 days, and rates got popped again and prices continue to rise, and so we're really closely monitoring that, but we feel good that we have been able to stabilize it. What is more important to really focus on from our perspective is what we've been able to do on the used side. We finished the quarter up on a same-store basis of use. And while those comps are going to get harder in the third and fourth quarter because we launched this whole campaign, right around this time last year, we still see an opportunity and we'll continue to invest. Our used inventory today is sitting somewhere around, call it, $358 million, $360 million. We would expect to invest another $50 million to $75 million here in the next 6 to 8 months, study it, see what sort of results we get out of it, and then move forward from there. But we don't really know what the market did overall. We've seen some reports that say that the new RV dealers were down 30%, 25%, 28%. We've seen some data that says that we were obviously down far less than that. And so we're not sure if we're picking up big market share or the data is wrong, but we're pleased with our results. -------------------------------------------------------------------------------- Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [9] -------------------------------------------------------------------------------- Got it. That's helpful. I guess before I go to my next question, are you willing to kind of put any finer point maybe around just some numbers for our models here? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [10] -------------------------------------------------------------------------------- Yes, I would continue to use -- yes, I would continue to use new same-store sales being down 15% to 18%, which is what we gave you at the beginning of last quarter. Our hope is that we can outperform that but the market is telling us that it's down 30%. And so while we think we can outperform that, we think 15% to 18% is outperforming that number. As we get into the GPU period, I think you can expect a little further erosion of the new margins. I wouldn't forecast any real material erosion of the used margins. But I would maybe take the new down another point or so. -------------------------------------------------------------------------------- Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [11] -------------------------------------------------------------------------------- Got it. That's helpful. Okay. And the last one... -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [12] -------------------------------------------------------------------------------- I just want to add a little more color. The reason that we want to also make that clear is in even the best years, we always had higher margins in the summer than we did the fall and the winter, regardless of demand, regardless of inventory levels, there's just a natural curve to it, and you can see it quarter by quarter. So that's the other reason why we're brightly highlighting the fact that, that more than likely will happen because it's happened for the last decade. -------------------------------------------------------------------------------- Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [13] -------------------------------------------------------------------------------- Got it. Okay. And then just during the last downturn, I think as we look back at your model, the SG&A run rates were pretty murky back then just given you at gander, right? And all the costs associated with that, but all of that is now behind us. And I think you also may have seen you stop sponsoring NASCAR or something along those lines. I guess what I'm getting at, is this 62% as a percent of growth an okay number on the SG&A to kind of work with going forward? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [14] -------------------------------------------------------------------------------- We think it's an exceptional number. And if you look back at our years where our business was normalized, we hovered around the 70%, 71% mark. We continue to find scale in our size, which is why we're going to continue to make big acquisitions like the Richardson one that we talked about. And we're going to continue to eliminate what we consider semi-fixed, but contractual marketing obligations. We're going to continue to eliminate them as we work to take those dollars and shift those towards our employees. From an SG&A standpoint, and this may be one of the most important takeaways of today, we have made considerable efforts to modify and increase the compensation of a number of our team members in the company. And when we look at the amount of pressure that they have experienced from inflation, from food to gas to housing, we recognize that not only to retain good people, but to continue to add people to our organization. We needed to really make some pivots, particularly on the service side. So you look at what we did, we are raising our technicians $5 an hour, raising our service managers and service advisers $10,000 a year, we understand where our company and where this industry is going, and we know that we need to stabilize those sorts of things that get us through the good times, but more importantly, the bad times. So everybody could expect to see a slight pop in that SG&A, but it's not from branding and marketing and sloppiness, it's from really deciding to invest in recruiting and building a bigger bench and a bigger, stronger team because we plan to continue our acquisitions and our new store openings, regardless of how bad the market gets at the continued pace for one reason. We know that, that tough period is a finite amount of time. And every other time that there's been any sort of slowdown, we've accelerated our acquisitions and accelerated our openings, and they have paid us dividends, but the mistakes that we historically made that we've chosen as a management team to not make again is that we sometimes cut too deep, and we sometimes cut too fast. We want to believe that we're operating appropriately all the time. And so when that market comes back, because we're always that canary and while we may have seen a slowdown we've always been that canary, when it comes back, we will still have acquisitions closing in new stores opening. We still have our base being expanded. We still want to add another 500 to 700 salespeople. We still want to grow our use while that's happening. You need talented, well-trained experienced people to catch that boomerang when it's thrown at you. And that was a mistake that I made previously that I think as a management team, we've collectively agreed we will not make again. So 70% is a good marker. That's where we start to get nervous about things in a really deep -- in a really deep drop, it could break 70% because you get margin compression and expense increases at the same time, but it is not really the sustainable number. We believe the sustainable long-term 5-year average would be under 70%. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question is from the line of Joe Altobello from Raymond James. -------------------------------------------------------------------------------- Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [16] -------------------------------------------------------------------------------- A couple of questions on ASP. It's obviously held up extremely well, particularly on the new side, how do you see those trending now that even (inaudible) largely normalized? And the focus, as you put it, Marcus earlier, is on affordability. And maybe as a follow-up to that, with demand slowing and input costs coming down, is there any sense that manufacturers will look to roll back some of the price increases that they've taken over the past couple of years. -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [17] -------------------------------------------------------------------------------- Yes. Well, first and foremost, I never -- as you guys know, never want to complement manufacturers because they have a purpose of selling inventory. But I will say that when we rang the bell to the market back with all of you in February and talked about the inventory concerns we saw coming, and we mentioned it again in our first quarter call that we saw that. And we had many, many, many calls and meetings with the manufacturers. We are pleased with their -- what we consider very prudent choice to cut production, cut days supply because they know that a glut of inventory isn't good for anybody. I think that based on the cuts that have been made by the manufacturers as of right now and for the foreseeable 30, 60 days. And the amount of inventory that's waiting in yards to be shipped, which isn't as much as one would anticipate that here by the fourth quarter, we'll have somewhat normalized it in our company. We can't speak to other dealers and what they have on the lot. We don't want to speculate. But we think that the manufacturers have done one heck of a job in preventing at this point what happened in 2018. We don't anticipate because we believe that most people are capitalists. We don't anticipate any pricing really seeing any material rollback. It will really have to start from the parts and pieces side, and then work its way all the way up to the manufacturers. We do think, however, that the manufacturers are going to be putting very strong pressure on those suppliers who provide those things because the manufacturers have said to us that affordability is the most important thing for them with their consumers as well. What we know from our standpoint is that there's a direct correlation between us pressing our ASPs down and our volume going up. And while we don't know what our competitors' average selling prices are, we know that we'd like to lower ours by $1,000. That's a goal. And so as we start ordering inventory in preparation for '23, you will see us continue to work on developing, working with the manufacturers to create and coming up with price points that will allow that $1,000 goal to come to reality. When you look at our #1 travel trailer, which is the Coleman travel trailer, it's now the top -- I think it's #3 in America from a top-selling standpoint. We're the only ones that sell it. We believe we have a shot at getting it up to 2 and maybe even 1 but we think we're going to have to do it with the entry-level portion of the market in all cases, and that is really our focus. When we try to diversify mix and go higher in value, size, chassis lengths, floor plans, we're probably going to lean a little bit more into expanding that on the used side. We've had great success with that because we are sensing that the customer is paying more attention than they have in recent years to their monthly payment. I want to clear up one thing that hasn't been asked, but in case it will be asked interest rate rises have a moderate effect on our business, but because we finance anywhere between 180 and 240 months and our average financing is around $40,000 -- average sale price is around $40,000. The numbers move, but they don't take people out of the lifestyle, especially when you're comparing it to airline travel, hotel travel, theme parks, professional sports, eating out at night, doing a lot of other things. We still feel like we are clearly, as an industry, the leader in affordable family travel in America. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Our next question is from the line of Mike Swartz from Truist. -------------------------------------------------------------------------------- Michael Arlington Swartz, Truist Securities, Inc., Research Division - Senior Analyst [19] -------------------------------------------------------------------------------- Just maybe wanted to talk through the consumer and what you're seeing on the ground. And I guess coming from the perspective, I think there's a view that certain consumers are being more harmed by some of the inflationary pressures out there today. So maybe based on what you've seen in your business, are you seeing any maybe disparity between more value-oriented consumers and maybe mid-range or higher-end consumers based on their purchase habits? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [20] -------------------------------------------------------------------------------- The first litmus test that we take in thinking about our consumers is how our own employees are feeling. And when they're feeling pressure in their own lives to create affordability, that's pretty much a good snapshot or litmus test for the rest of the marketplace. What has been puzzling to us in one sense, but encouraging in another is the amount of web traffic that we're experiencing and the amount of web leads that we're experiencing, which is materially higher than a year ago. So the interest for the lifestyle is big. We think we're garnering a larger share of that interest, which is obviously indicated by our numbers. But what has happened to be quite candid, is our ability to take that interest and take that demand and take that lead and set the appointment and have them come in and convert to a sale has been a little harder. We're having to work harder for that transaction, we're having to move people around. And in some cases, we're having to move people to a lower priced unit to ensure that affordability is right for them. I think the key in understanding the affordability of buying an RV, it isn't just buying the RV and the monthly payment. We want to make sure that they have a warranty and that they're protected and they have their proper insurance. They understand that there's costs associated with maintenance and with travel. And so we really work hard as a company to make sure that we're not taking the customers last affordable dollar to make their payment. We're making sure that they have the right floor plan and all those things. And that is why the used business performed so nicely, doing almost 16,000 units because when a customer comes in as a sales organization, we're agnostic. We want to make sure the customer leaves with something, but more importantly, they leave with something we can afford. So as we go into the back half of the year, Matt Wagner, who's been the architect of our entire inventory strategy for years, which is why he's so important to this business, has really all of us focused on let's get more affordable, let's stay away from these big expensive things. I think, Matt, how many diesels do we have as a company today? New diesels. -------------------------------------------------------------------------------- Matthew D. Wagner, Camping World Holdings, Inc. - EVP [21] -------------------------------------------------------------------------------- We're under 20. So as of right now, we've modified that inventory listing to be under literally 20 units on the ground, whereas you go back 3, 4 years, we're sitting with an excess of 220. And we've proven that we could sell. However, we've also understood that, frankly, the GMROI or the gross margin return on investment simply just doesn't pencil. And that's where we've seen us redeploy quite a bit of capital within, obviously, lower-priced travel trailers, but just as importantly, the used segment. And we see unlimited opportunities on the used side given that used marketplace values or the actual install used retail is twice the size of new retail. -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [22] -------------------------------------------------------------------------------- But don't be confused when you hear the word motorized, right? Because as everybody knows, there's different classes of motorized. And the diesels are the really expensive ones that are 250 and above at this point. We still do very well with C classes, very well with B classes and very well with entry-level gas. We have had some conflicts with some key manufacturers in getting shipments on our orders, and we've noticed there seems to be a little bit of game playing going on with what were being shipped. And so we're dealing with that internally. But we have always dominated the motorized side from a market share standpoint, and we'll continue to do that as we move forward. And if we don't receive what we need on the new side, we have an easy alternative on the used side or different manufacturers to fill that void. -------------------------------------------------------------------------------- Michael Arlington Swartz, Truist Securities, Inc., Research Division - Senior Analyst [23] -------------------------------------------------------------------------------- Okay. Great. That's helpful. And then maybe just switching over to margins. And I know you talked about how to think about maybe new vehicle margins in the very near term. But -- if we take a step back and look out maybe a year or two, and I know this is crystal ball, but how do you think new vehicle margins play out maybe relative to where we were going into the pandemic-related surge. Is this something where we get back to 13%, 14%? Or do you think we're kind of at a structurally higher level, maybe not the mid-20s, but somewhere above where we were previously. -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [24] -------------------------------------------------------------------------------- I think it's all going to depend on the proper, I would say, almost a proper discipline that both the manufacturers and dealers have in executing their own strategy. And margin growth or margin deterioration is really a large function of inventory management and the discipline associated with it. If you glut the marketplace with inventory, by definition, you're going to have margin erosion. And the manufacturers, I think, have also realized that they've been able to enjoy better margins through this tighter period and have recognized the need not to go back to 2018 levels, which were really driven by just too much inventory in the channel. I think there's a fine balance between good margin and making sure that payments are affordable for consumers. We're focused on making sure that payments are affordable for consumers. But we still need to get the proper return on investment, particularly of a product that gets anywhere from 2.5 to 3 turns in an environment where interest rates on our floor plan expense are higher. So we need those margins. I would say that if I was forecasting right now for the next 18 months and even 24 and 36 months, then we're not going to ever see COVID-type margins here in the near term. But I would expect that we'll perform materially better than the '18/'19 mess that was created by both dealers and manufacturers alike. So maybe a slight deterioration from here, but nothing at this point that we could see that would be earth shattering. On the use side, we continue to even through all the cycles and all the trends, it stays within a pretty tight 2%, 3% range. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Our next question is from the line of Gerrick Johnson from BMO Capital Markets. -------------------------------------------------------------------------------- Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [26] -------------------------------------------------------------------------------- Great. First question on the new unit side. When you compare your performance there in the second quarter to the first quarter on a sequential basis, ASPs were up similarly about 14%. Units were down similarly about 10% or 11%, but gross margin performance is vastly different. You're up 100 basis points in the first quarter and down 750 in a second. So what's in between there that I'm missing that caused that big swing in gross margin? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [27] -------------------------------------------------------------------------------- The same thing that we told everybody at the end of the first quarter that the margins as the inventory repaired itself and inventory started to show up like it did in December and through the first quarter, that the supply chain demand curve would fix itself and the margins would just come back down. Did I answer that, Gerri? -------------------------------------------------------------------------------- Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [28] -------------------------------------------------------------------------------- Well, not -- I'm still confused, right? Because... -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [29] -------------------------------------------------------------------------------- Give me the specific topic that you -- are you trying to correlate? -------------------------------------------------------------------------------- Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [30] -------------------------------------------------------------------------------- It doesn't look like there's discounting here because your ASPs went up, so is it that just the price that you're taking inventory in on this, just that much higher? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [31] -------------------------------------------------------------------------------- Yes. I mean if you look at the last 12 months inventory that's come to us from an acquisition standpoint from the manufacturers has continued to accelerate and is continuing to accelerate as we sit here today. So the cost for us to buy a similar unit is materially higher. In some cases, we're buying units today that are 25% and 30% higher than they were 7 months ago. So that's been the big problem for us, quite frankly. -------------------------------------------------------------------------------- Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [32] -------------------------------------------------------------------------------- Okay. That makes sense. And then on Good Sam, it looks like revenue members margin all underperformed in the quarter. Why is that? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [33] -------------------------------------------------------------------------------- I'm sorry, which part, the membership file? -------------------------------------------------------------------------------- Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [34] -------------------------------------------------------------------------------- Yes. Good Sam, yes. -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [35] -------------------------------------------------------------------------------- Yes. We -- as we mentioned at the end of last year, when we exited the non-core RV categories, firearms, the fishing, the outdoor things. We knew that we were going to be extracting several hundred thousand people who were going to continue doing business with our company because they weren't pure core RVers. And so we have elected to accelerate that and really cleanse that file to ensure that what we are marketing to because it's expensive to market to those folks. What we are communicating, sending mail to -- sending e-mails to is to a file that we believe are our best and brightest customers. And we think that, that file will continue to erode here in the third quarter. And as we get into '23, it will sort of normalize and repair itself back to growth. -------------------------------------------------------------------------------- Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [36] -------------------------------------------------------------------------------- Okay, '23. Am I allowed to ask a third question? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [37] -------------------------------------------------------------------------------- You can ask 10. -------------------------------------------------------------------------------- Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [38] -------------------------------------------------------------------------------- Excellent. Products and services had strong year-over-year and sequential growth in margin. I understand why that would be year-over-year. But why such an improvement sequentially? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [39] -------------------------------------------------------------------------------- Well, in that number, were those categories that we eliminated those non-RV categories. And so we have revenue in the second quarter of 2021, that we're delivering what we would consider unacceptable return on investment margins. And as we exited that, in the quarter, we performed better. You say just getting a better return on everything. When we get into the third quarter, it is the quarter that we actually pulled the plug on all those non-RV categories. So we will have accelerated revenue to the tune of about $35 million or $40 million in '21 versus '20. But the margin will look even better. And we don't want people to think that all of a sudden, we did some great things. We just don't have the pressure of that margin and that liquidation of that inventory in the third quarter. However, I'm glad that you pointed out the growth that we've had. We don't report it this way, but we look at our service labor business and our parts replacement repair business, which is different than our accessory business, on a monthly basis in a vacuum. And 3 months in a row, we broke $50 million just in that category. And as we continue to expand the base, which were up nicely for the quarter, I think we were up about 5% for the quarter, and we continue to do that. And we continue to pay technicians and service advisers what we believe their worth is in the market, which we think other dealers don't necessarily reflect. We believe we have an opportunity to continue to grow that business nicely. There is more demand of units needing to be repaired than there are base in the entire universe. And while we may never get to that, we're having to get creative with how we solve that. One strategic shift that we made in the quarter is how we think about the business. And we used to think about the dealership as just one place. We now look at the dealership is saying, we have a fixed operations department, where we have parts, service accessories, collision and an acute focus on the leadership management team on that part of the business. And it's complemented by leadership team on the sales side. We used to mush it all together, and we've noticed that as we've separated it out in our own assessments, as we separated out with our own training and our own recruiting and our own enforcements of that, we've seen the fruits of that labor. And that 65% plus margin business. And so as we dial through the back half of this year in '23, even when new pulls back, which it may or it will, I don't know, we know that we have these other really sustainable business models to support us, and service is a big part of that. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Our next question is from the line of Ryan Brinkman from JPMorgan. -------------------------------------------------------------------------------- Ryan J. Brinkman, JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst [41] -------------------------------------------------------------------------------- I wanted to check in on the RV sharing initiative, including how you think this business might be impacted by a potential economic downturn. Uber commented recently that like now a record number of people want to drive for them, maybe as the labor market softens, whereas consumers look to offset the impact of inflation by making some money on the side. Just curious if you think there could be an uptick in the supply of RVs made available for share in a downturn as auto -- as owners look to monetize or better afford to pay for their existing RVs. And then also from a demand perspective, how could that be impacted by a downturn? Does the demand for renting RV suffer with other spending categories? Or does it benefit from thrifting as consumers who might otherwise have been pushed out of the market for purchasing a new or used RV this way they can sort of continue to participate in the lifestyle in a more economic way. How are you thinking about that? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [42] -------------------------------------------------------------------------------- Well, I'm going to have Matt really dig into what the purpose of that business is and what the trends have been. But I want to point out one thing that you mentioned that there's going to be all these extra RVs laying around, and that's going to go into rental. If you know any of those people who have any extra RVs, we are buying used inventory today. And so as we go into the winter, and you see that continue to accelerate. If there are people that want to exit the lifestyle, which will be the first time it's happened in 50 years. Never happened before, through any gas crisis, through any interest rate crisis or any war or anything, it's never happened. But what has happened is people's love of this lifestyle that I think COVID just sort of discovered. So Matt, do you want to jump into the details. -------------------------------------------------------------------------------- Matthew D. Wagner, Camping World Holdings, Inc. - EVP [43] -------------------------------------------------------------------------------- Yes, absolutely. Where the RV rental business was largely formed within our scope to drive the cluster of other revenue streams that we have at our disposal, inclusive of Good Sam products, retail products. But most importantly, as Marcus said previously in the Q&A session, actually driving R&D sales and just as importantly, procuring used RVs for that environment. So we've been a relatively large disruptor in this space, but we're charging a fraction of the fees that an outdoor in RV share are charging the consumers on both sides of the transaction. Because we're really trying to facilitate this environment where we're able to create this prospect funnel. Right now, within our enterprise, we have over 7 million individuals that are opted into some sort of marketing preference. The RV rentals environment continues to drive that prospect funnel for not only future RV owners, but also for us to be able to procure these RVs. We've continued to see accelerated rates of procurement of RVs within this enterprise within the RV rental space, I should say, where we are up to thousands of active RV listings with many more thousand that we at least have active on our site, but are not active for rental. So we don't haven't publicly disclosed these numbers yet as it continues to grow larger and larger. We'll make it readily available. But sufficient to say that we have been able to convert a lot of these consumers into other revenue streams, we'll continue to push that opportunity. We've been able to leverage our RV Valuator Tool to provide these (inaudible) ongoing value of what their assets are currently worth. And as you suggested, within our own environment, we're able to convert a lot of these customers, I just want to get a better return on the asset and the investments that they just made in the RV lifestyle. You asked along the same vein, what do we see in the way of potential economic headwinds in the future? I see this RV rental space as just being an augmentation of what we do. And frankly, there's always going to be consumers that are engaging the lifestyle and always consumers that are interested in what it might be like participating in the lifestyle. So over the coming 5, 10 years, this RV rental space is nothing more in my mind than our prospect funnel to drive future RV sales, future product attachment. And in the downturn, the RV rental space, I could see growing at an even more exponential rate, frankly. -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [44] -------------------------------------------------------------------------------- Yes. I think the one thing that we learned through the process is -- is there an opportunity to still be below the competitors in the space but raise our fees a little bit. And the value that we're providing these consumers, we may not be extracting as much value for ourselves in comparison to the value that we're providing them. And while we have users on the base today, who would, of course, be grandfathered in to whatever they've signed up for, we see some opportunity to improve the profitability there. We've been very, very prudent about how much money we spend trying to grow this business. And we wanted to really have a slow and steady growth as opposed to dumping hundreds of thousands, if not millions, like these competitors are. The thing for us is we prefer to be profitable. And so it's been a good thing for us, but not something that we're going to build a giant multibillion-dollar company on top of, but we like the effects of it, for sure. -------------------------------------------------------------------------------- Ryan J. Brinkman, JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst [45] -------------------------------------------------------------------------------- Okay. Great. That's helpful color. And then just my last question is, if you could share anything what you're seeing on the ground in terms of the multiples that you're being asked to pay for acquiring dealerships and sticking with sort of the implications of any downturn, how might a sort of generalized economic downturn impact your capital allocation decisions? Would it maybe tilt you more toward inorganic opportunities rather than organic growth, perhaps on a more attractive acquisition multiples, et cetera? Or how are you thinking about that? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [46] -------------------------------------------------------------------------------- Yes, first and foremost, we want to buy quality and not quantity. And when you buy quality with a good management team and a good process in place in good locations with good market share, you're going to pay more than just buying a gravel lot that you can pick up for cents on the dollar. We have seen a pretty steady consistent value when the dealers do well, we're paying in the 3 to 4x. When the dealers are struggling financially or they have some other life issue that causes them to have to leave, we can buy them from zero to 2x. We think there is definitely going to be an opportunity to see more people. And we love the fact that there are other competitors in the space looking to acquire as well because it validates our model. And most of the time, those are the dealers are buying the folks that we chose to pass on. So we usually get first blush at stuff. I think for us, it's really about doing the market analysis. Every single market has either opportunity to grow our market share or there's white space for us. And so we take a pretty strategic approach to looking at those. I would expect us to accelerate our desire to buy things if the pricing is softer as long as what we're buying is quality. And Karin has been steadfast in getting us focused on building the cash reserves, which is why our cash right now is higher than it was a year ago. And we'll continue to be very disciplined about what we're spending in CapEx, how we're thinking about investing in things. But when we think about capital allocation, we're going to do the same thing we always did. We're going to be opportunistic about making sure that we get the best return for our shareholders. And if that means making an acquisition, buying shares back, doing whatever it is, that's fine. I want to clarify because nobody has asked it today. We are very confident in every single model that we have run, including the worst downside case that our dividend that we pay today will continue, unless there's something that we don't know about that happens tomorrow. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Our last question is from the line of Gerrick Johnson from BMO Capital Markets. -------------------------------------------------------------------------------- Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [48] -------------------------------------------------------------------------------- Just one here. Can you talk about share buyback activity and in the quarter and what your plans are going forward? -------------------------------------------------------------------------------- Marcus A. Lemonis, Camping World Holdings, Inc. - Chairman & CEO [49] -------------------------------------------------------------------------------- Yes. So we still have plenty of room under our share buyback authorization as a management team without really understanding where the world was going, we elected to build cash. We also elected to make some very big acquisitions that we'll be closing here in short order. And in looking at the amount of capital, we never want to be in a situation where anybody is concerned about the amount of working capital we have even in the softest environment. When we look at the excess working capital that we identify as a team, we sit down and say, what's the best use of our capital, buying a business that we think is going to be very, very accretive to our overall revenue and earnings, that was our choice of priority for the quarter. While we continue to look at the opportunities every single day and when we're committed to buy, and we think it makes sense, we'll do that. Okay, thank you very much for joining us for the second quarter call. We look forward to reporting on our third quarter here in a few months. Take care. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Thank you. This concludes today's conference. Thank you for your participation. You may now disconnect your lines.