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Edited Transcript of LAZY.OQ earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 Lazydays Holdings Inc Earnings Call

Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Lazydays Holdings Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Meehan

Lazydays Holdings, Inc. - Corporate Controller

* Nicholas J. Tomashot

Lazydays Holdings, Inc. - CFO

* William Paul Murnane

Lazydays Holdings, Inc. - Chairman & CEO

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Conference Call Participants

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* Frederick Charles Wightman

Citigroup Inc, Research Division - Assistant VP & Analyst

* Ryan Ronald Sigdahl

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Suzanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lazydays Holdings, Inc. Third Quarter 2019 Financial Results Conference Call. (Operator Instructions)

Mr. James Meehan, Corporate Controller, you may now begin.

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James Meehan, Lazydays Holdings, Inc. - Corporate Controller [2]

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Thank you, Suzanne. Good morning, and thank you for joining us for our third quarter 2019 financial results conference call. I'm James Meehan, Corporate Controller at Lazydays.

We issued the company's earnings press release this morning. A copy of the earnings release is available under the Events and Presentations section to the Investor Relations page of our website and has been furnished as an exhibit to our current report on Form 8-K filed with the SEC.

With me on the call today are Mr. Bill Murnane, our Chairman and Chief Executive Officer; and Mr. Nick Tomashot, our Chief Financial Officer.

As a reminder, please note that some of the information that you will hear today during our discussion may consist of forward-looking statements, including, without limitation, statements regarding revenue, gross margins, operating expenses, stock-based compensation expense, tax, product mix shift and geographic expansion. Actual results or trends for future periods could differ materially from the forward-looking statements as a result of many factors. For additional information regarding factors that could impact the forward-looking statements, please refer to the risk factors discussed in the Form 10-K filed with the SEC on March 22, 2019.

We also will discuss non-GAAP measures of financial performance that we believe are useful to the company, including EBITDA, adjusted EBITDA and adjusted EBITDA margin. Please refer to our earnings press release for reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

For the 3 months ended September 30, 2019, and 2018 as well as the 9 months ended September 30, 2019, the financial information presented represents the operating results of Lazydays Holdings, Inc. For the 9 months ended September 30, 2018, the financial information presented represents the combined operating results of Lazydays Holdings, Inc. for the period from March 15, 2018, to September 30, 2018, with the operating results of Lazy Days' R.V. Center, Inc. for the period from January 1, 2018, to March 14, 2018.

Now it is my pleasure to introduce Bill Murnane.

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [3]

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Thank you, James, and good morning, everyone. Thank you for joining us this morning. I will give a quick overview of what we are seeing in our markets, and then Nick will give more details on our specific performance.

In the third quarter, we saw a continuation of the weaker demand that began in September 2018. Destocking also continued in the third quarter, and we believe the pace of destocking was more aggressive in the third quarter for a number of reasons. First, there was a model year change in the quarter, and this created a lot of incentive to move 2019 product off of lots. Second, the third quarter represents the end of the primary summer selling season for the majority of dealers in the country, and dealers were trying to move as much inventory as possible off their lots before the demand slowed down for the winter. Third, dealers typically have curtailment payments due on their Floorplan loans once a new vehicle has been on the lot for a year or more. The behavior we saw in the marketplace indicates to us that dealers reacted to the overstocking of the last year or so as to avoid larger-than-normal curtailment payments. Curtailments can have a significant negative impact on cash flow, forcing dealers to reduce prices and margins to move vehicles facing curtailment.

In general, we try not to participate in significant price discounting. Unfortunately, the trifecta of activities mentioned above forced us to price more aggressively during the quarter, which did impact our margins. Based on early indications we've seen in the market, we believe margins will improve in the fourth quarter.

The good news is that this activity has likely accelerated destocking in the industry. The bad news is that it had a very adverse impact on gross margins as many dealers priced product very aggressively at or below cost in order to move it.

Nick will comment more on the gross margin impact in a few minutes, but we believe margins should start to move higher as the activities mentioned above come to an end.

We are pleased to continue to experience the growth benefits of our geographic expansion strategy in the third quarter. Although overall RV demand was down in the third quarter, we were able to generate double-digit revenue growth.

Our inventory continues to be well balanced, and we feel very good about our current inventory position. Our balance sheet is in great shape, and we are ready to take advantage of any strategic opportunity that presents itself.

Now I'm going to turn it over to Nick Tomashot, our CFO, to take you through some of the financial highlights of the third quarter. Nick?

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Nicholas J. Tomashot, Lazydays Holdings, Inc. - CFO [4]

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Thank you, Bill, and good morning, everyone. Please note that unless stated otherwise, the 2019 third quarter results comparisons are to the same 3-month period ended September 30, 2018.

Total revenues for the quarter were $158.4 million, up $16 million or 11.3% versus 2018. Starting with RV sales, total RV revenue from the sale of recreational vehicles was $138.9 million for the quarter, up $13.6 million or 10.8%. Total RV unit sales, excluding wholesale units, were 1,935, up 135 units or 7.5%. Breaking out new RV sales, unit sales were 1,248, up 170 units or 15.8% compared to prior year.

The average selling price of new vehicles was $69,100, down $4,400 per unit or 6%. Net new RV sales revenue was $86.8 million, up $7 million or 8.8%.

Shifting to pre-owned vehicle results. Units sold, excluding wholesale, were 687, down 35 units or 4.8%. Pre-owned vehicle revenue for the quarter was $52 million, up $6.4 million or 14.2% from 2018.

The average selling price of pre-owned recreational vehicles was $65,500, up $5,500 per unit or 9.2%. The unit decline impact on our retail pre-owned vehicle sales revenues versus 2018 were partially offset by a $4 million increase in our low- to no-margin wholesale sales.

Revenues from our other lines of business consists of parts, accessories and related services, finance and insurance or F&I revenue as well as other miscellaneous revenue, including consignment sales commissions, camp grounds, rentals, restaurants, et cetera. In total, revenue from these other lines of business for the quarter was $19.5 million, up $2.5 million or 14.7% compared to 2018. This increase was driven by an F&I revenue increase of $1.2 million or 13.7% to $9.3 million and a parts and service revenue increase of $1.6 million or 23.2% to $8.8 million. These F&I and service revenue increases were driven by our acquired locations in Minnesota, Tennessee and The Villages, Florida as well as increased F&I penetration across our combined business and were partially offset by declines in other miscellaneous revenue streams.

We continue to be pleased with our F&I performance as evidenced by F&I revenue indexing at 7% of retail RV revenue compared to 6.6% in Q3 2018.

Q3 gross profit was $30.5 million, up $0.2 million versus 2018. Gross margin as a percentage of revenue declined compared to prior year to 19.3% versus 21.3% in 2018, with the change primarily driven by aggressive competitive end-of-year -- end-of-model-year pricing, reducing RV sales gross margins as well as increased low- to no-margin wholesale sales as a percentage of our sales mix.

Excluding transactions costs, depreciation and amortization and the amortization of stock-based compensation, SG&A for the quarter was $25.6 million, up $1.8 million compared to the prior year related to expenses from our 3 dealership acquisitions since August 2018 in Minnesota, Tennessee and The Villages, Florida.

Amortization of stock-based compensation decreased $1.6 million compared to the prior year as a result of the graded vesting schedule of the market-based awards issued to management in March of 2018.

Income tax expense was $0.9 million as compared to $1.1 million for 2018. And the net loss for the third quarter was $2.5 million as compared to the net loss of $2.7 million in 2018 for the reasons noted above.

Adjusted EBITDA was $5.3 million for the quarter, down $1 million versus 2018. Adjusted EBITDA margin decreased 110 basis points to 3.3%. This was primarily driven by the decline in our gross margins for the period, which were down 200 basis points to 19.3% for the reasons I've discussed previously.

Please refer to our earnings release for the table which includes a reconciliation of GAAP net income to adjusted EBITDA and net income margin to adjusted EBITDA margin.

Now turning to our September 30 balance sheet and our financial position. We had cash on hand of $33.5 million and net working capital of $45.2 million, with cash up $6.9 million compared to December 31, 2018, and up $3.3 million compared to June 30, 2019. This increase was primarily the result of cash flows from operating activities net of our Floorplan financing payoffs as we reduced our inventory year-to-date by approximately $54 million, excluding the recently acquired inventory at The Villages, Florida.

At the end of Q3, we had approximately $126.2 million in total inventory consisting of $88.7 million in new vehicles, $36.4 million in pre-owned vehicles, about $4 million in parts and inventory and LIFO reserves of $2.8 million.

As of September 30, 2019, we had no borrowings under our $5 million revolving credit facility, $15.7 million in term loans outstanding and $107.6 million in gross notes payable in our Floorplan facility. We also had approximately $7.4 million outstanding on notes payable related to acquisitions.

Thanks for your time this morning, and now I'll turn the call back over to Bill Murnane.

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [5]

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Thanks, Nick. We had a number of exciting announcements during the third quarter. We closed on our acquisition of Alliance Coach on August 1. This dealership has been branded Lazydays at The Villages and is located near the entrance to The Villages' active adult community and just 30 minutes from Orlando, Florida. It will give us great access not only to The Villages but also to the Orlando and Ocala, Florida markets and help us grow our Florida market share.

Lazydays at The Villages becomes our seventh full-service dealership. Please recall that earlier this year, we also announced that we will -- we are building our eighth full-service dealership in Nashville, Tennessee, and we expect this dealership to be operational late in the second quarter of 2020.

In September, we announced we will open Lazydays Service of Houston in the first quarter of 2020. This 30,000-square foot state-of-the-art service facility will be the first of what we hope will be many dedicated Lazydays service centers. RV owners and RV manufacturers are demanding better service from the RV industry, and we are committed to providing it. The Lazydays name and brand is very well known across the RV industry and stands for an exceptional sales and service experience. Our goal is to bring our great experience to more customers in more locations, and growing our dedicated service center footprint will help us achieve this goal.

We continue to aggressively pursue growth opportunities. We are seeing an increase in the number of owners wishing to sell their dealership. This doesn't mean they are all attractive or all a good fit with Lazydays' strategic direction, but it is safe to say that the sale activity has picked up in the last quarter, which should improve our ability to find attractive prospects for geographic expansion.

As many of you know, we have deliberately kept a very strong balance sheet with little debt and strong cash flow to enable us to aggressively expand during an industry downturn if attractive opportunities present themselves. We can't guarantee all or any opportunities will be appealing to us, but we do believe our chances of finding good growth prospects are improving in the current market conditions. And we have the resources and are well prepared to act when necessary.

Lastly, we are also excited to announce this morning that our Board of Directors has authorized a stock repurchase program. We are constantly evaluating the best allocation of our capital. And based on the current value of our stock price, along with the confidence we have in our growth strategy, management and the Board believe that Lazydays stock is an attractive investment opportunity.

The stock repurchase program will have no impact on our growth plans or strategy. We will continue to aggressively grow our geographic footprint.

That is all for our repaired -- prepared remarks. Please open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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Of course. (Operator Instructions) Our first question comes from the line of Fred Wightman of Citibank.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [2]

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Could we just start off talking about the gross margin performance in the quarter? I think it was down 200 basis points. It's a bit more than it was down last quarter. Is that really all due to the uptick in promo activities? Could you help us understand the cadence of the promo activity sort of throughout the quarter? And then maybe specifically on that comment about margins improving a bit or normalizing a bit into the fourth quarter, what's sort of giving you confidence there?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [3]

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Yes. So Fred, could you repeat the question? I'm not sure we fully understand what you're asking.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [4]

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Just gross margins, right? I mean gross margins were down in the quarter pretty significantly on a year-over-year basis. Was that entirely due to promo activity and discounting? And how did that sort of trend throughout the quarter?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [5]

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Yes. I think the quarter was rough right from the start. I knew it was a continuation of last -- the end of last quarter. So it -- I don't know if -- promo activity, there were 3 things that impacted it that we discussed, right? It was -- the end of the summer selling season certainly had an impact. The model year change to 2020 certainly had an impact. And we believe, based on the actions we're seeing and quite frankly some of the information we're seeing from acquisition candidates, that a number of dealers are facing curtailments, which is putting a lot of strain on their cash flow, which is forcing them to sell. So we think those conditions, it's hard for us to weigh how much each of those conditions impacted the margins, but there is a distinct movement in the market in margins and in what people were willing to take for our product. And those were the 3 things, we believe, had most of the impact. Go ahead, Nick.

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Nicholas J. Tomashot, Lazydays Holdings, Inc. - CFO [6]

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And when the 2020s were introduced, then dealers had more leeway to promote discounted pricing online, and we were able to see aggressive pricing being offered by our competitors relative to invoice costs.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [7]

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Okay. I think that's really helpful. So rather than -- I mean it's rather than promo, it's really discounting and sort of aggressive pricing in the industry. That's sort of what I was getting at. And you did mention that 4Q, you think that the margin improvement is going to normalize. Can you just talk about what's giving you that confidence?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [8]

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Yes. What we said is early indications are that it's going to improve in Q4. And we have a month of Q4 under our belt, and that's what we're basing that on. But that isn't to say things couldn't change in November or December. We're just -- we're -- it's feeling like it's moving back in the other direction now.

One more comment, and Nick touched on it, I think you know, Fred, that advertised pricing, Internet pricing, when they introduce a new model year, that comes off of the old product. So there is no longer a minimum price and dealers can really go out there and promote any price they want, and that ends up really having a negative impact on margins when that happens.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [9]

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Sure. That makes sense. And I think last quarter, you talked about destocking, the retail destocking. You expected that to continue through the end of this year. It sounds like that accelerated a little bit this quarter. I mean is the inventory, sort of at an industry level, clean now? Do you still think that there are some more units that need to come out? How are you thinking about that today?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [10]

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Yes. We obviously don't see everybody else's inventory, so it's hard for us to gauge that. We do get insight into some others' inventory as we pursue our geographic expansion. And it's still -- we think there was a good move in the quarter to get inventories right, but we still think there's a little room to grow. But we're in much better shape, is our sense.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [11]

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Okay. And then just finally, sort of overall retail expectations for the industry. I mean not a lot of units left here in '19, but how are you thinking about '19 and '20 just from sort of an overarching industry performance at the retail level?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [12]

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I'm sorry. Could you repeat the question again, Fred? Sorry.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [13]

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Yes. Just industry-level retail expectations for the rest of this year and next year.

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [14]

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Yes. I'm still not sure. What do we expect for the balance of the year next year?

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [15]

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Well, for retail, I mean at an industry level, it's -- where do you think 2019 full year retail will end up at an industry level? And then for 2020, do you think that'll stay the same? Is it going to improve? Sort of still be down mid-single digit? Like how are you thinking about that?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [16]

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Yes. We're kind of planning for a continued softening in 2020, flat to down a little bit in 2020. But that's just our planning process. It's really hard for us to give you any insight into where the industry is going.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [17]

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Sure. And just to confirm that flat to down, that's talking about on an absolute level, right? You're not saying flat versus what you saw in '19 to down a little bit. You're saying at an absolute level, it could be flat to down slightly.

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [18]

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We're thinking overall, RV retail demand is probably flat to down a little bit. That's what everybody is saying, so we're not saying anything different than what others are saying.

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Operator [19]

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(Operator Instructions) Your next question comes from the line of Steve Dyer of Craig-Hallum.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [20]

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Ryan Sigdahl on for Steve. So I know you guys historically don't comment on organic sales versus acquisition contribution, but it would be helpful. So I guess, at a minimum, are you willing to comment if revenue was up year-over-year on an organic basis in the quarter?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [21]

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We're not prepared to give that. And we're not -- when we get bigger, we may do that, Ryan, but it's just -- competitively, we don't want to share too much data like that.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [22]

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All right. Okay.

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [23]

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So the answer is no, we're not going to break out same-store sales at this point in time.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [24]

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Okay. A few follow-up questions on the vehicle gross margins. But -- so first, of the 220-basis point vehicle gross margin decline, can you quantify how much of that was from mix shift from new to used? So like new units were up quite nicely and used were down.

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Nicholas J. Tomashot, Lazydays Holdings, Inc. - CFO [25]

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I don't have what the mix shift was that I was breaking that out, but there definitely was an impact of a shift from the higher-margin used to the newer units. And then at the same time, the -- we also believe that the discounting that we were seeing on the new units, the move to 2019 model year, had an impact on used sales overall. Just with new units being attractively priced, it was putting pressure on our ability to sell through the used.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [26]

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Got you. So that kind of goes along to my next question. But was there any -- it sounds like both new and used felt the pressure from new. But was there any outsized pricing pressure, I guess in either the new versus used, and then as well as towables, motorized, et cetera?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [27]

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Yes. Yes.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [28]

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And then moving along to F&I, nicely up 14%. Is that primarily a structural improvement at Lazy of getting better tax rates? Or is there some market dynamics that are improving that are also helping there?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [29]

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I think that's all internal improvement, either us improving our existing operations or some of the new ones that we acquire. But that's just a great F&I team that we have that's doing a great job.

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Nicholas J. Tomashot, Lazydays Holdings, Inc. - CFO [30]

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And we're able to benchmark our locations against each other. And if there's best practices that we can apply or even getting the right people in the right seat and in those F&I roles, we make those adjustments.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [31]

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Got you. Last one for me. You've talked quite a bit about curtailments and how it impacted from a competitive standpoint of competitors having to move the inventory. I guess did you guys bump up against any curtailments that impacted your inventory decisions? Or was that entirely just a pricing issue against competitor actions?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [32]

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It was all against competitive action. Our curtailments are minimal. And certainly, similar to historical levels, we've managed our inventory, so we do not face any issues relative to curtailment. But we do think a number of our competitors did.

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Operator [33]

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(Operator Instructions) We have another question from Fred Wightman, Citibank.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [34]

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Just one quick follow-up on the curtailment side. This isn't -- you're not seeing Floorplan lenders get more aggressive with curtailments. It's really just the fact that we're coming up on the 12th month anniversary of some of this inventory hitting the channel. Is that fair to say? Or are you actually seeing some changes in the terms or finance partners get a little bit stricter with some of those payments?

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [35]

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No. I think you have it right, Fred. It's just normal. You pass an anniversary curtailment start, it's normal practice.

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Nicholas J. Tomashot, Lazydays Holdings, Inc. - CFO [36]

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And if you're approaching the end of the season, if you're, say, in one of the northern areas, the likelihood that you're going to have to continue to make payments during the slow season is high.

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Operator [37]

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And there are no further questions in the queue. I turn the call back over to Bill Murnane for his closing remarks.

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William Paul Murnane, Lazydays Holdings, Inc. - Chairman & CEO [38]

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Great. Thank you, everyone, for joining us this morning, and we'll talk to you next quarter. Thank you. Have a great day.

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Operator [39]

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And this concludes today's conference call. You may now disconnect.