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Presentation

Operator: Greetings, and welcome to the Lazydays Holdings, Incorporated Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Debbie Harrell, Corporate Controller. Thank you. You may begin.

Debbie Harrell: Good morning everyone, and thank you for joining us. On the call with me are John North, our Chief Executive Officer; and Kelly Porter, our Chief Financial Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information, including potential future financial performance, which is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from such forward-looking statements and information. Such risks, uncertainties, assumptions, and other factors are identified in our earnings release and other periodic filings with the SEC, as well as the Investor Relations section of our website. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and any or all of our forward-looking statements may prove to be inaccurate.

We can make no guarantees about our future performance and we undertake no obligation to update or revise our forward-looking statements. On this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website for how we define these measures and reconciliations to the closest comparable GAAP measures. With that, I’d like to turn the call over to John.

John North: Thanks, Debbie. Good morning, everybody. Thank you for joining us. I’ll start with a few comments and observations this morning. I’ll turn it over to Kelly for her very first earnings call as our CFO to take you through the financials, and then we’ll be happy to take a few questions if you have some. First, I want to say we’re incredibly proud of the team’s efforts for the year ended in December. We finished with 18 operating locations, we set a record for our company at over $1.3 billion of revenue. And we now have over 1,400 team members in 11 states, ensuring our customers experience the Lazydays way every time they visit one of our stores. Thematically, calendar 2022 concluded for us quite similarly to the broader RV industry.

After a pandemic fueled continuation of outsized deliveries for the first six months of the year, we experienced sequential softening in sales volume each month from July to December. Industry-wide, the normalization of demand, coupled with record RV production for the year has resulted in elevated inventory levels, lower gross margin on new units and increased carrying costs through both higher days supply and higher interest rates on floor plan facilities. The cyclicality of our business and the commensurate levers to pull, however, are neither new nor novel. We are focused on improving the health of our inventory through the prudent disposition of prior model year units, maximizing profit opportunities on both current model year new and used inventory and focusing on the countercyclical revenue opportunities in the service, body and parts businesses.

The majority of our below-the-line costs are comprised of personnel and marketing expense, which ratably scale down as sales volumes and gross profit generation moderate. The expenses associated with the variable operations of our business, that is new, used and finance and insurance naturally modulate with gross profit. We have supplemented this natural reduction of expenses by also restructuring to remove corporate overhead, eliminating nonessential spending and partnering with our store general managers to ensure staffing is in line for current sales volumes. Outside of the day-to-day tactics required of any operator in the current economic environment, we have prioritized improving the health of our organization for growth. The key areas of focus are: one, owning and controlling our real estate; two, ensuring sufficient capital for growth and three, preparing our support infrastructure to leverage economies of scale across many locations.

To that end, in December, we purchased the real estate at our Elkhart and Nashville stores increasing the percentage of locations we own to 39%. We see further opportunities to acquire more of our real estate through existing purchase options or relocating to new facilities in the future. To steal a bit of Kelly’s thunder, yesterday, we closed on an amendment to our syndicated credit facility, increasing our borrowing capacity and lengthening the facility maturity to 2027. This will allow us to flow additional inventory due to growth at both acquired and greenfield locations as well as ensure adequate inventory levels at existing locations. Further, as outlined in the press release we issued earlier today, the warrants associated with our 2018 deSPAC transaction expire in less than a month.

Assuming all the warrants are exercised, we would generate additional growth capital of over $33 million. Finally, in terms of preparing our organization to scale to significantly more locations, last week, we completed our first acquisition of 2023 with the purchase of Finley RV in Las Vegas, Nevada. Concurrently, we were also awarded the right to sell Tiffin brands in the market, which will be added into the existing product lineup at the store. Additionally, we remain on track to open four new greenfield locations later this year beginning in the spring in Council Bluffs, Iowa, just outside of Omaha. We remain hopeful that we will find further attractive growth opportunities either by building or buying in 2023. Behind the scenes, we’ve been making significant changes to our internal reporting, infrastructure, corporate operations and organizational design.

We believe these modifications will allow us to scale quickly, improve performance in our existing network of stores and aggressively leverage overhead and infrastructure costs in the future. As just one, but an important part of these efforts, I’m pleased to announce we added a new Chief Technology Officer, Chander Makhija to the team just last month. Chander comes to us with a stellar resume and decades of experience supporting Fortune 500 companies, and we couldn’t be happier with his addition to the team. Although much of the hard work we have diligently toiled to deliver has yet to prove externally demonstrable results, we are confident the ultimate benefits will be obvious in the future. With that, I’ll turn the call over to Kelly.

Kelly Porter: Thank you, John. Please note that unless stated otherwise, the 2022 fourth quarter comparisons are versus the same three-month period in 2021. Total revenue for the quarter was $243.5 million, a decrease of 24.5% from 2021. On a same-store basis, total revenue was $232.2 million, a decrease of 28% reflecting a softening of sales volumes in the quarter, combined with discounting of our 2022 model year inventory. We ended the year with a 250 days supply of new vehicle inventory and a 78 days supply on used inventory. We calculate our days supply on a trailing 90-day average. Given fourth quarter seasonality and our efforts to build inventory to prepare for the Tampa SuperShow, day supply looks higher at year-end relative to our expectations and other reporting periods.

Total new unit sales declined 18.2% and gross profit per unit, excluding LIFO, declined 20.3% to $15.40 per unit. On a same-store basis, new unit sales declined 23.1% in the quarter, and gross profit per unit, excluding LIFO, declined 19.1% to $15,272 per unit. Total used unit sales, excluding wholesale units declined 27% and gross profit per unit declined 24% during the quarter to $15,756 per unit. On a same-store basis, total unit — used unit sales, excluding wholesale units declined 30.8% and gross profit per unit declined 23.6% to $15,840 per unit. Finance and insurance revenue declined 23.6% during the quarter, primarily as a result of declines in unit volume. F&I per unit was $5,351, a 2% decline over 2021. And on a same-store basis, F&I per unit increased slightly to $5,497 versus $5,461 in the prior year.

While we did note a decline in finance penetration due to higher volume of cash deals, we continue to see overall F&I product penetration as a significant opportunity in our stores. Our service body and parts businesses continue to grow. Total service, body and parts revenue increased 9.1% during the quarter to $14.5 million. And on a same-store basis, revenue increased 4.8% to $14 million. Moving on to SG&A. As John mentioned, while the majority of our cost structure is variable in nature, we are continuing to work to reduce corporate overhead and eliminate non-essential spend to further rightsize our infrastructure yet properly position ourselves for future growth. Total SG&A as a percentage of gross profit in the quarter was 80%, excluding the impact of LIFO.

This is an increase of nearly 200 basis points over the prior year and approximately 70 basis points higher than we saw sequentially from the third quarter. Adjusted net income was $0.9 million for the quarter, down from $20.2 million last year, and adjusted fully diluted earnings per share was a loss of $0.02 and compared to $0.93 of income per fully diluted share in 2021. Now a high-level review of full year results. Total revenue for the year ended December 31, 2022 was $1.3 billion, an increase of 7.4% from 2021. The total retail units sold for the year were 14,012, and on a same-store basis, total retail units over 12,208. SG&A as a percentage of gross profit for the year was 65%, adjusted net income was $64.1 million and adjusted fully diluted earnings per share was $3.05.

Moving on to discuss liquidity and capital allocation. As of December 31, we had cash and cash equivalents of $61.7 million. We were comfortably in compliance with our debt covenants, and our covenant leverage ratio stood at 0.57 at the end of the quarter. As John mentioned earlier, we amended our credit facility on February 21 and subsequently estimate total liquidity of approximately $165 million, including unfinanced real estate. The amendment extends the maturity to 2027 retires all associated term and mortgage loans and provides for higher advanced rates on used inventory. For the full year 2022, we have generated adjusted operating cash flows of $76.2 million, and we deployed $104 million in capital for acquisitions, share repurchases and internal investments, including capital expenditures, real estate purchases and technology.

Of that amount, we deployed approximately $15 million on acquisitions and $40 million on capital projects, including the purchase of real estate of our Elkhart and Nashville locations. These properties were previously leased and recorded as finance leases on our balance sheet. The remainder was dedicated towards share repurchases. In fact, we invested $44.5 million to repurchase 2.7 million shares of common stock at an average price of $16.51, retiring over 18.6% of our shares outstanding. We remain opportunistic repurchases of our stock and we’ll have a balanced approach to capital allocation, including acquired and organic growth, share repurchases and internal investments in the future. With that, we can open the call to questions. Operator?

Operator: Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Mike Swartz with Truist Securities. Please proceed with your question.

Mike Swartz: Hi. Good morning, guys. Maybe just to start, you acquired two of your previously leased locations during the quarter. Maybe provide us just some high-level thoughts or strategic rationale around why — I guess, why you want to control the real estate, maybe how you see that playing out in terms of capital allocation going forward?

John North: Sure. Good morning. Nice to hear from you, Mike. I think, I’m just a victim of the past success I’ve seen at other companies that have owned their real estate. You know, my background working at both Copart and Lithia, I think, one of the hidden assets that both of those organizations was a strategy to own real estate that span decades. And as we talked about in the last quarterly call, we really are endeavoring to invest capital for a 10-year plus time horizon. And there’s no question in my mind that over time, locking in our infrastructure cost, fixing our rent so to speak, in the sense of not having CKI escalators, and importantly, being able to refinance the real estate as necessary to tap into the equity appreciation that will be accumulating and accreting over time as property values increase.

It’s just, I think, been really, really prudent. I’ve seen it work really well in the past. And I think it’s something we want to make sure we participate in. I think, additionally, owning your real estate just gives you a lot more flexibility. If you’ve ever seen vacant lease facility where there’s been a sale leaseback, trying to get out of those are very, very challenging. And not to say that we necessarily think that’s in the cards sort of things we’re trying to do. But I think just maintaining site control and the ability to have maximum flexibility in terms of how we think about our real estate portfolio, our dealership operations is something that’s critical to us. And — my experience in this business is that the acquisition opportunities typically are not totally unfettered.

You know, you’re typically dealing with some period of time where sellers need to finally be rational and transact, and that’s when there’s an opportunity for us to buy stuff. And we’re not out just constructing new locations on every street corner, so to speak. And so, I think, we can own our real estate and still have plenty of operational cash flow to finance the growth that we anticipate having. So I think we can proverbially have our cake and eat it too.

Mike Swartz: Okay. That’s helpful. Thanks for that John. And then second question, just on — in terms of the inventory environment, I think everyone is well aware that we’re kind of working through some elevated inventory levels and within that elevated non-current inventory levels. Maybe give us a sense of like how much more you have to go in terms of the inventory liquidation? And maybe what percentage of your current new inventory is model year 2022?

John North: Sure. Again, I give a lot of credit to the operators in our organization. As I mentioned, in, I think, November when we spoke last, this was already a topic top of mind for us was getting our inventory healthy as we talked about it at the time. And I was looking at the inventory stats that our team pulled together just yesterday. Our inventory levels on an absolute basis were flat from the end of January to where we sit today in February. So we really haven’t added or shrunk our inventory levels at all, and I feel pretty good about where they are, so call it plus or minus 3,700 units. What we have seen is a sequential improvement each and every month in terms of prior model or to your point, as of yesterday, about 72% of our inventory was current model year.

So we were still getting 2022 inventory even into September and October in some cases. So we’ve been ahead of this curve since really the late summer, but we’ve been continuing to have that. And then we had a number of inventory units that we couldn’t sell because they were under a recall. And there’s been plenty of conversation about that as it pertains to the spend recall. And so we’re working through all of that. We’ve seen still profitable front end, as we would call it, in terms of that sales, although it’s shrinking, right? So we’re discounting more aggressively to get through it. What we’re seeing on our current model inventory is that grosses are really hanging in pretty much unchanged. So I think it’s just that each store having to try to find the right customers, we’ll stretch and get aggressive in terms of pricing to move through that stuff.

And then for the current model year stuff, there’s still pretty good healthy gross profit to be had there. And so it’s a balance of both. And it’s going to take us another few months to work through it. But I’m really pleased with where we are relative to being ahead of this and really having a good strategic plan and something that we’ve been working on for months.

Mike Swartz: Okay. That’s great. And one more if I can fit it in. Just I think you’ve talked about sitting out the corporate overhead and kind of optimizing the cost structure. Is there any way to think about maybe the run rate cost savings that you’ve already enacted or maybe what the broader plan is?

John North: I totally appreciate the question. That’s probably a quantification that we’re not going to get into this morning. I think to be totally blunt about it, we’re still trying to I think totally get our arms around where things are, too. I mean, Kelly has been here, 90 days. I’ll hit six months in another week or two. So I think we’re still trying to figure all of that out. It will be lower. We’ve taken costs out for sure. I think there’s opportunity there to do a little bit more, but I’m not sure that I can really quantify it for you right now.

Mike Swartz: Fair enough. Thanks.

Operator: Thank you. Our next questions come from the line of Steve Dyer with Craig-Hallum. Please proceed with your questions.

Steve Dyer: Great. Thanks good morning, John and Kelly. As it relates to some of the capital allocation questions, Mike had, just kind of looking forward, certainly seems like the pace of adding new dealerships is going to be faster than maybe it has been historically for this company. Two questions around that. One, is your preference greenfields or acquired. And number two, are we at a point, I guess, from an asking price perspective, yet it’s we’re probably still fairly early in this cyclical slowdown. Are you finding, I guess, asking prices to be rational, or is that something that you think is going to take more time going into this year?

John North: Hey, Steve, great to hear from you. Our preference is 100% device stuff. Greenfields come with their own set of complexities, the two biggest ones in my mind are, let’s call it, an 18-plus month construction lead time, where you’re sinking capital in the ground, so to speak, and waiting many, many, many months for a return and while you’re avoiding goodwill, the second component of a Greenfield is in the start-up cost and really having to start from scratch, with an entirely new staff of sales and service personnel versus if you’re buying an existing location. You’ve got an installed customer base. You’ve got employees that know the drill. You’ve got brands that exist in the market. And so I think we definitely are focus more on looking for acquisition opportunities.

And that’s sustain €“ we won’t do a Greenfield. I’m sure that, there will be circumstances and situations where that makes a ton of sense. We’re excited about the ones that we have in flight. But I think, in general, you’re going to see us do more acquisitions as opposed to building stuff, and I think that allows us to grow faster. In terms of selling prices, my opinion on this, that been informed over, I don’t know, 15 or so years of watching it is that, they really don’t change that much. I think sellers get to a point, generally speaking, where they need to transact €“ and that’s when the pricing becomes realistic and rational. If you walk up and knock on somebody’s door unsolicited, the price that comes back usually doesn’t ever make any sense €“ and then when you get to that point where someone really has a life event, they’re going to retire or they’re ill or whatever the catalyst is where it’s time for them to sell.

I think that, they become reasonably rational in terms of their expectations for pricing and there’s a transaction that you can have. I do think, there’s a little bit of inflection in the last couple of years, everybody has been over earning. Everybody was making more money and maybe taking more gross profit. And this has been a phenomenon that’s certainly extended beyond our industry into automotive and boats and a number of other verticals. And so I think no one is willing to sell at that point in time, because they’re over-earning and no buyer is rationally going to pay for over earning. And why would you as a seller accept a lower multiple when there’s windfall profits to be had. And so I think as we get into a more normalized environment, which is what this really feels like, I think this is kind of back to “normal.” I think that will be a good thing.

I think dealers paying for plan again. I think having to cut gross profit and deal with aged inventory again, I think all of those things can become helpful tailwinds to us. But I don’t think it necessarily means that there’s some fire sales to be had and he’s got a high-quality asset with good brands and good people. It’s still valuable, and we’re still willing to pay a fair price for it, and we still think we can generate a good economic return.

Steve Dyer: Thanks. That’s helpful. I guess, when you look at the acquisition landscape, how do you think about it? Are you looking for to sort of fill-out certain geographic areas or maybe something that’s close to an existing dealership or not? Are you looking for really specific brands that are sort of hot or trending, or are you sort of trying to buy $1 for $0.50? Just sort of what is your criteria there going forward?

John North: Yes, all of that. I mean, I think one thing I’ve probably come to appreciate a bit more is that there are, in our view, at least some really desirable brands within this space, where the product tends to be a little bit more tightly allocated, the gross profits tend to hold in a little better. And I think that we’ve been definitely interested in that. I think there’s benefit to clustering locations. So the Las Vegas store is a great example where we like the proximity to our Arizona market. We would like to diversify away from our campus store a little bit. And that’s not to say that — I mean, it’s a phenomenal store, but it’s one-third of our company. So finding some diversification elsewhere in the country, particularly where we’ve already got clusters of stores is helpful.

But primarily, what we’re looking at is return on equity, right? It’s really simple. We want a 20% after tax return on equity. We want our money back in five years, and then we want the annuity cash flow. And that’s a formula that we’ve seen and has been executed very, very well in our history, and we think is very, very applicable here, and there’s opportunities that tick those boxes and we’re hopeful we can deliver more of them in 2023.

Steve Dyer: Got you. And then I guess I’ve never been accused of being an outstanding mathematician, but in your adjusted reconciliation for GAAP, non-GAAP, you show net income of $936,000 in a negative $0.02 of earnings per share. Can you help me rationalize how that’s possible?

Kelly Porter: Sure, Steve. It’s one of the fun things I got to learn when I got here. So with our interesting capital structure with our preferred stock and our warrants and everything, we do go through a little bit of a complicated process on the EPS calculation. In particular, the thing that’s going to kind of refer you into a loss there to start with is the dividend on the preferred. So starting with our net income, we’re moving the dividend out of there; it turns it into a loss that has been fully allocated to the common shareholders. So that’s the simple math there. If you want to work through it together offline, happy to walk you through it.

Steve Dyer: No, that makes sense. Thanks Kelly. I guess, lastly for me, you guys don’t guide or anything like that for this next year, but are there any, sort of, I guess, guide post in the way that you’re thinking about the year from a growth perspective, maybe when the greenfields come on, so on and so forth, or are you going to leave that alone right now?

John North: In short, I don’t know that we’ve got a ton of visibility there, right? I mean, we opened a few greenfields, but it was in the pandemic. And so what’s it going to be like to open the greenfields in 2023? I mean, I think, we believe there’s going to be some start-up period costs associated. You’re not going to have revenue that’s going to come in across the door immediately. Houston is a good case study for us. We had a service center there, as you probably recall, and in the October-ish time frame, we added a sales operation in there, which I think was a good decision. It still took us 90-plus days to really see some traction there. And I’m — and we’ll see how February goes. I’m hopeful that we’ll be profitable there in February.

We did not become profitable prior to that. So figure in November, December, January, granted seasonally slow tier period, but it takes time to ramp. So there’s going to be some of that. We don’t really know exactly what that’s going to look like. But I think it’s going to be manageable. We’re certainly not going to provide any financial guidance. I think there’s been plenty of machinations in the industry around what wholesale production and retail deliveries are going to be. And I’ll let smarter people than me prognosticate on what that looks like. What I can tell you is that, we’ve seen a pretty okay start to 2023, certainly better than how we felt coming out of November and December. As I mentioned, our current model year inventory is holding good gross profit.

I think we see good opportunity for us to grow used sales, which has been talked about outside of just our company, I think, as an industry, there’s opportunity, but certainly here. And then the real positive spot for me in the fourth quarter was seen service body and parts up seeing the same-store number up 4.9%, I think, from memory. I think that there’s organic opportunity to perform in our locations and to drive revenue up. How you put all that into your model, Steve, is while you’re a better analyst than I am. But I think overall, we feel like it’s manageable and the trends that we’re on, there’s not going to be a significant departure from, and we’ll keep you posted on how the greenfields come on. The first one doesn’t come on until April.

So I think we’ll have probably a little bit more to share with you, as we get to the next quarterly call.

Steve Dyer: All right. Fair enough. Thank you, both. Good luck.

Operator: Thank you. Our next questions come from the line of Fred Wightman with Wolfe Research. Please proceed with your question.

Fred Wightman: Hi, guys. Good morning. Thanks for taking our question. I just wanted to follow up on the 250 days of new inventory. I know that you made a comment that it was high due to the Tampa show, but is there any way to sort of size where that stands today and maybe how you feel about that currently?

A €“ John North: Yes. I mean, we give a 90-day look back — so we take the trailing cost of sales and use that to calculate what the days supply is. And obviously, we could come up with a forward-looking day supply and that would imply some kind of a sales volume guidance, and so that’s why we don’t do it. I think, as I mentioned to one of the earlier questions, we’re about 3,700 units in inventory. That’s been pretty consistent, December, January and February. So I would say we haven’t been increasing or decreasing. We did certainly make a conscious effort as we got into December to make sure we had inventory on the ground, and I know you were down here for the Super show, which I think went pretty well. We had a lot more on-ground inventory this year than we have in the last couple, and that allows us to deliver the units, which is really important because as we say in the business, time kills deals — so the longer it takes for you to deliver a unit, the less likely it is that it ultimately is delivered.

And so I think in general, that 3,700 unit mark is pretty unchanged. We feel pretty good about it. I think it represents the right stocking levels for the stores that we’re operating today. And so I don’t anticipate big changes directionally up or down. I think the next big step function is going to be when Council Bluff comes on in April. We obviously need to put a couple of hundred units on the ground in that store to prepare for the spring. Absent that, I wouldn’t anticipate big changes in either direction.

Fred Wightman: Makes sense. And then just within that 3,700 unit, the mix as far as towables and motorized is sort of healthy and where you want it to be in.

A €“ John North: Yes. I think as we talked about throughout last year, towables certainly recovered faster than motorized. And so I think there was still some lack of motorized availability in the — let’s call it, the third quarter. But I would say by the fourth quarter, that’s pretty normalized now. And I would say the retail environment in general, people have plenty of stuff to sell. So I don’t think that there’s the inability for us to get motorized, if we desire it if we need it. And so in general, I think we have what we need. I agree with a lot of the other commentary that’s been out in the marketplace that it seems like OEMs are doing a decent job of slowing down production and allowing dealers to sell through stuff.

And yes, you’ve got to discount and be aggressive on your power model or stuff. But the channel isn’t continuing to be stocked as they would say. And I think as we get into the spring and summer and seasonally pick that stuff up, we should continue to see the health of the inventory improve, and so I’m encouraged by that.

Fred Wightman: Awesome. Thanks so much, guys.

Operator: Thank you. There are no further questions at this time. I would now like to hand the call back over to John North for any closing remarks.

John North: Just thanks everybody for joining us, and we’ll talk with you in a couple of months. I appreciate your interest.

Operator: Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.