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Edited Transcript of RMBL earnings conference call or presentation 13-Nov-19 1:30pm GMT

Q3 2019 RumbleON Inc Earnings Call

CHARLOTTE Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of RumbleON Inc earnings conference call or presentation Wednesday, November 13, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marshall Chesrown

RumbleON, Inc. - Founder, Chairman & CEO

* Steven R. Berrard

RumbleON, Inc. - CFO & Director

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Conference Call Participants

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* Lee T. Krowl

B. Riley FBR, Inc., Research Division - Associate Analyst

* Ronald Victor Josey

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Russell Philip Rigby

D.A. Davidson & Co., Research Division - Research Associate

* Ryan Ronald Sigdahl

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

* Whitney Kukulka

The Blueshirt Group, LLC - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the RumbleON Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Ms. Whitney Kukulka, Director of Investor Relations. Ma'am, please go ahead.

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Whitney Kukulka, The Blueshirt Group, LLC - MD [2]

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Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining us on this conference call to discuss RumbleON's third quarter 2019 financial results. Joining me on the call today are Marshall Chesrown, Chairman and Chief Executive Officer; and Steve Berrard, Chief Financial Officer.

Full details of our results and additional management commentary are available in our shareholder letter, which can be found on the Investor Relations section of the website at investors.rumbleon.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website. This conference call is the property of RumbleON and any taping or other reproduction is expressly prohibited without prior written consent.

Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, RumbleON's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in RumbleON's periodic SEC filings. The forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, and RumbleON assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Also the following discussion may contain non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures, please see our shareholder letter, which will be posted to our Investor Relations website.

And now I will turn the call over to Marshall. Marshall?

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [3]

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Thank you, and good morning, everyone. October 19 was RumbleON's second anniversary. Just 2 short years ago, Steve and I made an aggressive move to launch RumbleON and execute our strategy to become a dominant solution for consumers and dealers in the emerging online vehicle industry, with an emphasis on acquiring inventory direct from consumers. Our team created a technology-enabled platform and are quickly deploying it across the entire vehicle supply chain. And we have scaled much faster than other companies in the space. In just the first 9 months of this year, we have sold nearly 37,000 vehicles and generated approximately $714 million in total revenue. We are proud of the market share we captured in such a short period of time. In fact, we would urge you to compare our first 2 years unit volumes, inventory captured from consumers, revenue growth and customer acquisition costs to any of our peers during the same or even much later in their life cycle, and you will clearly see how rapidly RumbleON scaled, even backing out the effect of acquisitions.

RumbleON is still in its infancy. We have diligently deployed resources across the platform to capture this massive market opportunity, and we've done so as a start-up in the public eye. We believe that we have demonstrated our ability to drive massive growth. However, our objective is to be the first to profitability versus our online peers. We continuously evaluate both our short and intermediate-term goals and objectives with consideration of the input we've received from our stakeholders. As we discussed on the call last quarter, we are taking prescriptive steps to improve our bottom line, cost structure and cash flows. We intend to continue to gain market share and drive disciplined growth, but we'll do so with a high degree of expense and cash management. We believe that we can continue to improve our liquidity position and achieve profitability in a relatively short time frame. Last quarter, we told you that we would be taking a disciplined approach to sales volume as we set out to significantly improve our bottom line and reduce our cash usage. Our Q3 results demonstrate our commitment to these objectives.

Consistent with our prior expectations, we improved our net loss and adjusted EBITDA loss by approximately 32% as compared to Q2, and we are on track to reduce our losses between 35% and 45% in the second half of 2019 as compared to the first half. We also reduced our cash used in operations by approximately $11 million in Q3 as compared to Q2. Consistent with our Q3 results and our prior commentary, we expect a sequential decrease in revenue and unit sales in Q4 as we focus on building inventory for the first half of 2020, in preparation for our planned acceleration in consumer retail sales, but we intend to continue to improve our bottom line and cash flow. Our expectations for total revenue may fluctuate quarter-to-quarter as we focus on optimizing for GPU and SG&A leverage. We entered the automobile segment in Q4 of last year. And as we experienced in the early days of powersports, we continue to improve our valuation algorithms on the auto side to compensate for the supply and demand curve as well as seasonality. Powersport vehicles have become much more predictable over time due to the depth and breadth of our data, and we expect to see similar benefits in our automotive business as our internal data builds.

We are putting the tools in place now and intend to have these enhancements completed by the end of the year, and we will be ready to accelerate unit and revenue growth in the first half next year. The upside of these improvements will contribute to most of the expected positive results in the first 2 quarters of 2020, with a focus on profitability and continued year-over-year revenue and GPU improvement. As we've said before, our strategy is to opportunistically build inventory in Q4 and take advantage of seasonal valuation trends. As a result, we anticipate that we will exit the year with record inventory levels in anticipation of the spring months, while executing our plans to increase sales to consumers to 25% of total sales in 2020. We are on a mission to become the first online vehicle provider to achieve profitability. As we close out 2019 and move into 2020 and beyond, our objectives will be driving to sustainable profitability and positive cash flow. Our Q3 results demonstrate solid progress towards that mission, and we are outlining a few midterm financial targets to assist everyone in tracking our progress towards these objectives. One, achieve adjusted EBITDA positive quarter in 2020. Two, achieve adjusted EBITDA positive on a full year basis in 2021.

I will focus my comments on 3 major objectives: one, being the first to profitability; two, to increase the sales mix to achieve 25% of our total sales to consumers by the end of 2020; and three, to enhance associated marketing strategies to accomplish our objectives.

I will spend a few minutes discussing our discoveries, the steps we took in Q3 and our plans for the next several quarters that we believe will position us to achieve our profitability targets and deliver sustainable growth, and then I'll turn the call over to Steve before we open it up for questions. We operate in a two-sided marketplace, vehicle acquisition from consumers and dealers and vehicle distribution to the same.

Let's begin with vehicle acquisition. RumbleON's inventory acquisition software advantage is a key differentiator. Over time, we believe that we can buy 80% plus of all inventory directly from consumers, the highest margin vehicle acquisition opportunity. We are often asked about the competitive nature of this type of acquisition. Remember, the sheer size of the market and the inefficiencies of peer-to-peer transactions via listing sites and alike, creates room for multiple winners. Our overall acquisitions direct from consumers exceeded 40% in Q3, which management believes to be second only to a well-known vehicle seller that has been around for over 25 years.

Vehicles purchased from consumers generally are higher quality and generate greater levels of profit than similar vehicles secured from auctions and other inventory. Our results consistently demonstrate that consumers welcome our cash offer strategy. During the third quarter, we continued testing and refining marketing strategies for inventory acquisition. We know that buying cars and trucks from consumers requires marketing spend. But as we acquired more consumer data, competitive data and improve our marketing strategies, we were able to drive lead costs down dramatically in Q3. We also continue to aggressively A/B test 24/7, and Q3 results allowed us to clearly understand organically driven lead traffic and consumer behavior versus paid marketing in these very early stages of evolution.

RumbleON Classifieds is proving to work exactly as we intended and is driving higher-than-expected conversion rates into our core business of buying and selling assets. As of Sunday, the platform is now available for free peer-to-peer car truck and SUV listing. To date, we have spent almost nothing promoting classifieds, but it is a valuable acquisition funnel, and we will be allocating a proration of marketing spend as we move into 2020 and beyond to support the funnel.

Craigslist currently dominates as the peer-to-peer marketplace for preowned vehicle sales, but RumbleON Classifieds is rapidly gaining share. Not only is listing an asset on RumbleON Classifieds free, but we layer on a real cash offer, which makes RumbleON Classifieds, not only the best listing site of its kind, but unlike Craigslist or other lead gen listing sites, we offer instant liquidity at any time during the live listing. Today, almost 4,000 powersports vehicles are available on RumbleOnClassifieds.com, and we are excited to have launched cars, trucks and SUVs on the platform as of a few days ago.

Looking ahead, we will continue to acquire vehicles direct from consumers as we end the year and move into the seasonally strong spring market. Through continuous testing, we can be confident that we are acquiring the right vehicles at the right price and we will continue to put resources behind this effort.

Now turning to vehicle distribution. Consumer sales, excluding financing and other income, carries almost 3x higher margins than dealer sales. We plan to grow consumer sales to 25% of total revenue by the end of 2020, and we are taking the steps necessary to steadily increase the sales mix throughout 2020 and beyond. Increasing sales to consumers will be accretive to our overall path to profitability. In Q3, powersports consumer sales gross margin was 29.3%, more than $3,000 per unit versus 20.3% in the same period last year. As we previously stated, we believe that at scale, 50% of our total sales will be direct-to-consumer.

Looking ahead, we will enhance our high-margin retail sales business and improve the overall customer experience. We are working with strategic partners to create an unmatched experience for consumers, who choose to pick up their vehicle in person similar to what we have already executed in the Nashville market. By leveraging our partner relationships, we will add this option in other select destination markets backed by local marketing efforts to drive traffic to both buy and sell from RumbleON. Again, our goal is to steadily increase consumer sales sequentially quarter-to-quarter, reaching 25% of total sales in 2020, up from its current level of under 10%.

Further after a detailed RFP process, we have selected Huge UM, a large global advertising and marketing firm as our agency of record to focus on consumer marketing as we work towards our goal to achieve 25% sales to consumers by the end of 2020. I hope you've had an opportunity to watch the short introduction of our relationship with Huge in the shareholder letter. Huge is tasked with managing and improving our branding strategies, further our successful social media development, refresh logos, colors, fonts and overall website look and functionality, launch local and regional advertising in Q1 and oversee all marketing spend and improve all related online marketing efficiencies. We will redirect and optimize future marketing spend based on what we learned during Q3 and with the guidance of our new agency. We will also layer on marketing for classifieds and regional traditional advertising starting in Q1. While we are always testing and fine-tuning, we believe we have the team and the tools in place to execute on our learnings and deploy a focused strategy as we head into the seasonally strong months in early 2020. Consistent with the expectations we set earlier in the year, we plan to achieve marketing leverage and maintain industry-leading low customer acquisition costs at below $500. In Q3, customer acquisition cost was $302 per unit sold compared to $428 in Q2 and $454 in Q1.

Finally, I want to point out that we have a group of really powerful high-margin ancillary offerings that are incremental to the benefit we will get from initiatives I have outlined. First is RumbleON Finance, a high-margin opportunity, offered through our captive finance company, which is now available for consumers to finance vehicle purchases. This is a high-margin extension of our model that will drive increase to our already powerful retail gross profit, which is currently in excess of $3,000 per unit. RumbleON Finance will be available for our automotive customers in 2020. Previously, we exclusively utilized third-party providers and earned less than $150 per unit in finance income with an attachment rate of less than 25%. Our peers earn as much as $1,500 per unit sold, with a significantly higher attachment rate. We believe that RumbleON Finance will become the prominent financing solution and we will achieve similar per unit income and attachment rates as our peers over time. We also have plans to expand supplementary financing opportunities to dealers, which we will discuss in more detail in the future.

Second, Dealer Direct is another significant profit generator and is continuing to grow in popularity among dealers. We plan to increase awareness among dealers and increase the number of dealers that are turning to RumbleON for access to an expansive virtual inventory to purchase vehicles at wholesale value without the need of waiting until the next auction day.

And third, expansion of Wholesale Express, our nationwide vehicle logistics and transportation business, which is highly profitable. Year-to-date, our transportation business generated $4.9 million in gross profit, with very little incremental associated costs. Looking ahead, we intend to expand Wholesale Express' third-party transportation business, which will benefit our total gross margin.

During the quarter, we finished the next phase of our integration of Wholesale, Inc. We streamlined many of their manual buying and selling processes with our technology and tools, reduced duplicative manual processes and functions and realigned compensation plans to improve margin performance for the future. We will continue our march to profitability by achieving operating leverage while rationalizing overhead and refining our cost structure company-wide, which will also improve our cash position. In the near term, we are focused on centralizing and streamlining back-end processes through technology enhancements, leveraging efficient marketing channels and making technology improvements to benefit the overall customer experience as we grow our retail. RumbleON has the most robust offering in the industry, and we are well positioned to execute on our mission to become the first online vehicle provider to achieve profitability and are certainly in the very early phase of our business plan.

With that, I'll turn it over to Steve. Steve?

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Steven R. Berrard, RumbleON, Inc. - CFO & Director [4]

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Thank you, Marshall. For the quarter ended September 30, 2019, we had unit sales of 10,894 versus a Q3 outlook of 11,500 to 12,500 units, revenue of $220.3 million versus an outlook of $230 million to $240 million, overall gross margin in the Q3 of 5.5% versus 5.3% for the same period of 2018 and 5.8% in Q2 of 2019.

On the powersports side, Q3 powersports gross margins of 10.7% versus 13.8% in Q2 of 2019 and 12% for the same period of 2018, Q3 powersports retail margins of 29.3% versus 27% in Q2 of 2019 and 20.3% for the same period of 2018, Powersport dealer gross margins of 9.1% versus 12.4% in Q2 of 2019 and 10.9% for the same period of 2018.

On the automotive side. Q3 automotive gross margins of 4% versus 4.2% in Q2 of 2019, automotive retail gross margins of 12.3% versus 13% in Q2 of 2019, automotive dealer gross margins of 3.2% versus 3.5% in Q2 of 2019. Unit sales, revenue and margins were heavily impacted by our refinement of the marketing spend in Q3, which resulted in a reduction of buying powersports vehicles, cars and trucks from consumers, which not only affected revenue, but impacted margins since the consumer purchase generates significantly higher gross margin than a purchase from a dealer. We also experienced some weakness in the wholesale market during September and we were reluctant to sell into that market weakness in any significant manner. Fortunately, that weakness did not have any impact on retail margins as they remain robust in the quarter.

SG&A of $19 million or 8.6% of revenue in the Q3 versus $25 million or 9.3% of revenue in Q2 of 2019, and $8.4 million or 43.8% of revenue for the same period of 2018. As we indicated last quarter, we took significant steps to rationalize our cost structure and we are well on our way to achieving our profitability improvement targets. The reduction in SG&A expenses compared to Q2 2019 were from a $1.2 million reduction in compensation versus Q2 of 2019 and a $6.1 million increase versus the same quarter of 2018. A $2.6 million reduction in advertising and marketing as compared to Q2 of 2019 and a $808,000 decrease compared to 2018. We delivered a $2.2 million decrease in other SG&A as compared to Q2 of 2019 and a $4.5 million increase compared to 2018. The decrease in compensation and other SG&A in Q3 of 2019 as compared to Q2 resulted from the effect on variable cost due to the change in Q3 unit volume as compared to Q2, and reductions made in headcount and other SG&A costs in connection with the continued integration of Wholesale, Inc. and Autosport. The improvements in our SG&A over Q2 resulted in a $2.2 million improvement in adjusted EBITDA loss in Q3 of $4.7 million versus a $6.9 million loss in Q2 of 2019. The Q3 net loss of $8.9 million versus $13 million loss in Q2 of 2019 and a $7 million net loss for the same period of 2018.

We also took steps to improve our liquidity during the quarter. In Q3, cash used in operations was $5 million, a reduction of $11 million from the $16 million cash used in operations in Q2 of 2019. Cash and cash equivalents at September 30, 2019, was $13.4 million. As of Q3, we also had $43.4 million available under our existing inventory lines of credit.

Now turning to our outlook. Consistent with our prior messaging throughout 2019, our strategy in Q4 is to opportunistically build inventory in the quarter and take advantage of the seasonal valuation trends, while continuing to manage towards our previously announced goal of using our net loss for the second half of 2019 by 35% to 45% as compared to the first half of 2019. In achieving this goal, we will further reduce cash burn, net loss and EBITDA loss, while continuing to maintain our average days of sale at industry-leading levels. Consistent with our prior guidance and in line with our historical results, we expect a sequential decline in total revenue and unit sales in Q4, mostly impacted by our intentional retention of inventory, seasonality and as we focus on our plans to increase sales to consumers to 25% of total sales in 2020. We are positioning ourselves for a strong Q1 and Q2, and expect to achieve an adjusted EBITDA profitable quarter in 2020 and adjusted EBITDA profitability for the full year 2021.

Regarding the question on many investors' minds as to whether we will need more capital, our thoughts are as follows. As demonstrated by our results, we are operating within our current capital structure. That said, we will continue to scale the company and will be opportunistic with all decisions across the business, and we'll consider opportunities to raise capital at some point in the future. We have and we'll continue to have discussions with potential strategic partners and strategic investors, evaluate other financing structures and utilize our existing cash and the substantial availability under our $43 million existing inventory financing lines of credit as well as implement and execute the plans we have discussed with you in the call today. Thank you.

And I will now turn the call back to Marshall for a brief wrap-up.

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [5]

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Thanks, Steve. Before we move on to Q&A, I would like to summarize the following. We intend to be the first online vehicle buyer and seller to reach profitability. We will aggressively move towards 25% of our total sales in 2020 being sold in the lucrative consumer channel. We will manage the future of our marketing to achieve the most cost-effective lead generation in the industry. We have a very experienced management team that is more than capable of progressing this very early-stage company to incredible levels of market share and profitability.

And operator, we can now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Steve Dyer with Craig-Hallum Capital.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [2]

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Ryan Sigdahl on for Steve. First off, maybe just on the cash burn, nicely improved this quarter. It sounds like another improvement coming in Q4. Excluding changes in inventory, do you expect that trend to continue in 2020?

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Steven R. Berrard, RumbleON, Inc. - CFO & Director [3]

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We will. This is Steve Berrard. We obviously are continuing to manage the business with the view of getting to cash flow positive. I would expect the trend to continue, particularly as we move into retail. We're now going to replace $1,000, $1,200 margins with $3,000 margins. And as we buy from consumers, we'll also enhance the margin profile because we won't be paying the incumbent fees and commissions that go with that.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [4]

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Great. That's a good segue kind of into my next question here with the retail mix. Do you expect to improve that to 25% by the end of 2020? But it seems like you guys are also rationalizing marketing spend maybe just in the near-term here. But what gives you confidence in your ability to increase that mix while also striving towards improved profitability without ramping marketing spend that a lot of others are?

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [5]

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Right. I think I'll cover that. This is Marshall. If you look at the marketing trend, I think the key is that we have driven the average cost per lead into our acquisition funnel down dramatically. And that applies to powersports in a very meaningful way as well as automotive. And we're starting to refine our automotive efforts on the cash offer side as well. I think that the -- so anyway, on the marketing side, we've got the -- we've got data lead costs down. We've brought on a new agency. We did -- as we said in the letter and in the opening comments, $302 might not be the right number. We'll continue to manage to south of $500. We are going to bring on an element of local, more traditional type advertising with the help of Huge in a couple of identified destination markets.

And we'll do that early in the first quarter, probably as early as the 1st of January. And we think that we'll be able to move the needle significantly. And keep in mind, we're also going to have what we anticipate to be the largest inventory we've had, and inventory that we are holding long enough to give the opportunity to ramp that retail business. So 25%, we think is a fairly low bar, a reasonable bar. We're presently south of 10% as you know. And we won't be at 25% in January, but I think you'll see a month-over-month, quarter-over-quarter sequential growth on the retail consumer sales.

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Steven R. Berrard, RumbleON, Inc. - CFO & Director [6]

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If I could also add to that. Introducing RumbleON Finance to the mix will help drive not only additional sales, but certainly, the huge incremental margin increase for us. Also buying cars from consumers, which is something that we've worked on in Q2, we refined a little bit more in Q3. And I think we're now prepared to make that a significant part of our acquisition funnel. And I think those things will also drive our ability to have a very attractive retail offering.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [7]

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Yes. Certainly a lot of opportunities there. As you think about kind of the marketing spend next year, I mean to date, it seems like it's predominantly been on the acquisition side of things, procuring inventory. But it sounds like a big focus and acceleration on the retail side sell-through. How do you think about the marketing spend next year to kind of keep the funnel of good quality inventory coming from consumers, but also ramping the sell-through to retail?

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [8]

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A couple of pieces there I'd touch on is number one, obviously, the most -- as you stated, which is correct. The majority of our marketing efforts have been around acquisitions through our cash offer tool. What we have found with the use of Classifieds is the conversion rate from Classifieds has been higher and faster than what we anticipated. Thus, we will migrate a proration of that cash offer spend over to the classified offering to drive people into that funnel, which is the end result of both funnels. If you look at the cash offer funnel and you look at the classified funnel, they're identical in what their end result is, and that is how many of those people that come into that funnel actually convert into a purchase. And we see an opportunity to leverage that on the classified side, for sure. On to total marketing spend, keep in mind, when we start a more -- the first of our kind of local and regional type advertising, to date, we've been primarily Facebook and Google, primarily on the acquisition side. Now as we move into the distribution side for retail consumers, where we can continue to manage this CAC down to a very reasonable level, certainly compared to our peers, is from the fact that retail sales have 3x as much margin, right? And so yes, we'll spend more money to overall dollars, but we do believe our CAC will continue to be managed at industry-leading levels.

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Operator [9]

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And your next question comes from the line of Ron Josey with JMP Securities.

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Ronald Victor Josey, JMP Securities LLC, Research Division - MD and Senior Research Analyst [10]

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Can you just revisit sort of your approach on just profitably growing or the different balancing profitability with overall growth? I just want to make sure we're clear there.

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Steven R. Berrard, RumbleON, Inc. - CFO & Director [11]

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Well, I think like anything else, Ron, we went through Q1 and Q2. In Q2, we wanted to prove ourselves and we did that we can sell everything that we can possibly buy. But the net effect of that scale growth was a cost structure that is difficult to maintain a level of profitability. We think we are in a great position to balance both. I think we've worked hard in Q3, actually started in the end of Q2 to try to bring our fixed and variable costs in line with the type of business that we have. We kind of evaluated the marketing spend. I think you will see a robust growth rate in 2020, but it's going to come from various components of the business. It will be a strong retail business. We do have the transportation business, which will continue to grow. I think the add too of RumbleON Finance is going to significantly drive not only retail, but sales as a whole. We mentioned in our shareholder letter, we're going to start providing floorplan financing to dealers who buy through our auction process. So that's going to drive sales as well. So we don't intend to give up the scale of growth that we've experienced. I think it's going to be better managed along some line of cost structure that allows us to maintain a path to profitability that we've committed to.

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [12]

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Yes. And I think, Ron, in that regard, kind of focus on the previous question as well, is if you track this, we gave you the information of the $302 from the $428 in CAC. But keep in mind, 1 year into the business, which was Q3 of '18, we were $1,425, which is more in line where some of our competitors stand today. So we do feel that we have a strong advantage to capture market share at high-margin retail business, and we're not putting a huge number out there as far as 25% of our volume.

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Operator [13]

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And your next question comes from the line of Tom White with D.A. Davidson.

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Russell Philip Rigby, D.A. Davidson & Co., Research Division - Research Associate [14]

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This is actually Philip Rigby on for Tom White. So just on the finance project -- product. Can you help us think about how we should be thinking about attach rates on powersports versus auto? Just trying to get some idea on how to reflect this from a modeling perspective.

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [15]

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Yes. I can help you on that one. I think our finance rates will be in line with the other publics. So I think if you use what their capture rates are at scale, there'd be no reason for it to be any different. On the powersports side, the fact that retail financing for consumers, especially in non-Harley-Davidson product is not very available. And so that's a niche that we are filling with our own captive. We do have some plans, as we've discussed, to expand the use of that finance company as well to both -- to motivate both dealers and consumers to finance with us. The early results of what we have purchased, looks to have a high demand from the securitization opportunities. And so we're really, really confident that we'll be able to work towards more market level. And what we use today is -- if you look at the current numbers that are out there, they range anywhere from as low as $500 with a 50% attachment rate to as high as $1,500. And -- so obviously, we'll start on the low end of that scale and that's all going to be accretive to our gross profit because we do not have those gross profit dollars today. I think what we try to point out, Tom, is that, when you look at our $3,000 gross margin on our retail sales today, there's only a very, very small part of that, that is attached to the financing portion of it. And if you look at that in comparison to our peers, it's almost a complete reverse. So we see it as being a complete add-on. It does not affect the price of what we're going to sell a vehicle for, the fact that we're going to finance it. So we do see it as a complete plus. I would -- if I was building, I would walk it there, I wouldn't jump it there because we're going to do very, very -- in our underwriting, we're doing very controlled underwriting and trying to make really good decisions, so that our initial securitization of those loans becomes very, very effective and profitable for us as well.

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Operator [16]

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And your final question comes from the line of Lee Krowl with B. Riley FBR.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [17]

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First, I just wanted to start out on the cars. You quantified the loss ratio on units last quarter. I believe it was still in the ballpark of 30%. Could you provide an update on that metric in Q3?

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [18]

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Yes, I'd be happy to. We improved that by almost 50% quarter-over-quarter as far as the percent of losing transactions. And we learned something in that -- in releasing that metric is that there seemed to be an assumption out there that dealers don't lose money on any transactions that they have. It's a fundamental of the industry. You always have units that aren't what you thought, that required more reconditioning than anticipated and so forth. So we're very -- [I'm in fact] very happy with close to 50% reduction that we presently have. We'll continue to work on it. Again, what we were trying to do at that point was to draw the correlation between when we started with powersports, we had very similar type loss ratio, which was about 30%. We're down in the 8% to 9% range today and we're walking automotive to that same level.

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Steven R. Berrard, RumbleON, Inc. - CFO & Director [19]

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Finally, I'd add, I don't see there being significant improvement from here. I think we're going to run in that at 7.5% to 10%. That's just the reality of the business at this point.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [20]

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Got it. Yes. But it's definitely good to see that improvement. Switching over to powersports. It kind of seems like there was some unit weakness in powersports, which just given kind of further down the pipeline of optimization, I wouldn't have expected that. So was the unit weakness associated with the pullback in marketing expense? Or is there any other associated kind of macro pressures out there that kind of drove the unit volumes in powersports in Q3?

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [21]

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I think that -- I'll answer in a couple of ways and Steve will probably want to weigh in as well. But we have to say that there was some effect from a reduction in market. I mean if you look at our -- if you look at the high end of our guidance for the quarter, we were off about 8% from the high end, right? If you look at our marketing, we were 29% below. So during that process, we probably cut some areas a little aggressive. But one thing I want to point out in this regard is these things that we are doing and testing. As an example, we wanted to know what our actual organic flow was, and we literally shut the Facebook and Google off for a window of time. Now in that window of time, we learned exactly what our tail was with regards to our marketing. In other words, how long does this stay connected? And also kind of what is our true organic line. These are all tests that new start-up companies have to do or at least should do in the early days of their company. We just happen to be doing it kind of out in front of everybody. So we learned a lot from that experience. And it could have had some of the effect with regards to the reduction in amount of units that we acquired.

On the economic side -- on the microeconomic side, I don't like to use weather and all those kinds of things because it sounds like an excuse. We did have some things that impacted us. We do a significant amount of business in the southeast. We had a couple of week disruptions around the hurricane and so forth in the quarter. There has been some market softness. You probably read, if you're following the powersport business, Harley-Davidson is having their challenges and had brought a lot of repossessions to the market, putting pressure in that segment of our business. I would tell you that the non-Harley-Davidson business is looking extremely encouraging. And the Harley-Davidson business continues to have its challenges. And we continue to play a big role in that piece of the business. Keep in mind on that redistribution on powersports, we now represent about 30% of all of those that are being remarketed through the auction systems in the country. So it's -- we have a big market share in that regard. And we are going to be sensitive to market changes. On the -- you didn't ask about automotive.

But just to touch on automotive, it's a little bit different from a seasonality perspective. But I would tell you, on the automotive side that we saw some of the most aggressive rebate programs on new vehicles that we've seen in quite some time and a little earlier than typical. And it did make the new car business extremely strong. But when the new car business is strong, they take in more trades. When they take in more trades, they have less appetite on wholesale market to acquire inventory. We think that's done. It happened a little earlier than it typical does, it always happens. It happens at different levels and at different times. But we had very strong July and August. And quite honestly, September was a little early for the effects of model year change on the new car side. And I think -- so obviously, it's in the press. So you can see we had about 6 or 7 straight weeks of downturn of value. Thankfully in our model, we're pretty much mark-to-market every day because if a vehicle sold yesterday, that becomes in the metric for what a vehicle that we might be giving to cash offer on today. So long answer to your question as usual, but hopefully that's helpful.

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Steven R. Berrard, RumbleON, Inc. - CFO & Director [22]

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Lee, I think the summary would be, I think this quarter proves like we did Q2. We can buy it, we can sell it. But if we affect the buy rate in any way, it does have an impact on volume, for sure.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [23]

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Got it. That detail was helpful. Last question from me. It seemed kind of absent in the shareholder letter, but maybe just provide an update on additional powersports inventory categories. And perhaps how that models into your kind of updated outlook metrics?

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [24]

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You're referring to boats and RVs?

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [25]

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Correct.

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [26]

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Yes. Just for future reference that we consider powersports basically motorcycle, side-by-sides and ATVs, both RVs being both separate segments. But we have -- as we said in our last call, we have basically postponed that. And the reason behind that is we think there's a ton of opportunity, and there aren't any players in that space in a meaningful way on the redistribution or on the liquidity side for consumers. So we want to attack that as soon as possible, but the cash offer for automobile has been significantly easier and a lower cost than what we originally thought it would be. And so we want to -- because that market is so big, and we have an opportunity to make -- to take a major slice of that pie, we've consummated our efforts and resources in that regard. I would say presently, we'll probably look at those other segments in 2021 or beyond.

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Steven R. Berrard, RumbleON, Inc. - CFO & Director [27]

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And Lee, if I can add. We spent the better part of the last 4 quarters preparing ourselves to be a major player in retail and get our cost structure in line with type of business they want to manage for the future. So adding one more thing. Even though the opportunity is great, we think the fact that we're finally able to be a meaningful and a significant player of retail, probably trumps going in any other business right now. We think the profile of the company, the P&L, the cash flow and what the company represents will look so differently a year from now based on the fact that we are making the big retail push and the strategic partners that we are working with to help us get to that level that we want. So I think that's probably the major reason we've just spent a year getting ready for what we're about to embark upon.

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Marshall Chesrown, RumbleON, Inc. - Founder, Chairman & CEO [28]

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Well, thanks, again. We -- I'd like to thank all of you again for joining the call today, and we look forward to seeing a lot of you on the road here in the coming months. And obviously, the entire RumbleON team wishes all of you a wonderful holiday season. Thanks for joining us.

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Operator [29]

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Thank you, ladies and gentlemen, for your participation. This concludes today's conference call. You may now disconnect.