Ladies and gentlemen, thank you for standing by, and welcome to the RumbleOn Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [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.

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 Web site at investors.rumbleon.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate Web site. 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 the actual results to differ materially from those discussed here. Additional information that could cause the 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 Web site. And now, I will turn the call over to Marshall. Marshall?

Thank you, and good morning, everyone. October 19th was RumbleOn's second anniversary. Just two 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 this space. In just the first nine 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 two years' unit volumes, inventory capture from consumers, revenue growth, and customer acquisitions cost to any of our peers during the same or even much later in their lifecycle, 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 startup 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 will do so with a high degree of…

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 of Q3 was 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 are 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 were 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 resulted in a reduction of buying powersports vehicles, cars and trucks from consumers, which not only affected revenue, but impacted margins since a consumer purchase generate 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 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…

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.

Thank you. [Operator Instructions] And your first question comes from Steve Dyer with Craig-Hallum Capital. Please go ahead.

Hey, guys, Ryan Sigdahl on for Steve.

Hi, Ryan.

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

This is Steve Berrard, and good morning. We obviously are continuing to manage the business with the view of getting 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.

Great. And 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, like a lot of others are?

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 [technical difficulty]. So anyway, on the marketing side, we've got the data lead costs down; we've brought on a new agency. As we said in the letter and in the opening comments, 302 might not be the right number. We will 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 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 sale.

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

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 acquisitions 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?

Couple of pieces there I'd touch on is number one obviously 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 classified is the convergent rate from classified has been higher and faster than what we anticipated. Thus, we will migrate a proration of that cash offer spent over to the classified offering to drive people into that funnel which is end result the both funnels. If you look at the cash offer funnel and you look at the classified funnel, they are 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 the total marketing spend, keep in mind when we start a more -- the first of our kind of local and regional sites advertising, to-date we have primarily Facebook and Google primarily on the acquisition side. Now, as we move into the distribution side to reach our consumers where we can continue to manage this cap down to a reasonable level certainly compared to our peers, is from the fact that retail sales have three times as much margin. And so, yes, we will spend more money overall dollars, but we do believe our cap will continue to be managed at that industry leading level.

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

Great. Thanks for taking the question, guys. Can you just revisit sort of your approach on just profitability growing or balancing profitability growing or balancing profitability with overall growth? Just want to make sure what worked for you there. Thank you very much.

I think like anything else, Ron, we went through Q1 and Q2. In Q2, we won the clues ourselves and we did -- we can sell everything we can possibly buy, but the net effect of that scale of growth was 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 worked hard in Q3. Actually started in the end of Q2, it's going to bring our fixed and variable cost in the line with the type of business there we have. We kind of evaluated the marketing the spend. I think you will see a robust growth rate in 2020, but it is going to come from various components of the business. We are a strong retail business. We do have the transportation business, which will continue to grow. I think the adding f the two of RumbleOn Finance is going to significantly drive not only retail but sales on the whole. We mentioned in our shareholder letter we are going to start providing floor plan 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 us the scale of growth that we have experienced. I think it's going to be better managed along some line of cost structure that allows us to maintain our path of profitability that we are committed to.

And I think, Ron, in that regard kind of also on the previous question as well, is if you track this we gave you the information of the 302 from the 428 in cap, but keep in mind one year into the business which was Q3 of 18, we were $1425 which is more in line where some of competitors stand today. So, we do feel that we have a strong advantage to capture market share at high margin retail business, and we are not putting a huge number out there as far 25% of our volume.

Got it. Thank you very much.

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

Thanks. This is actually Philip Rigby on for Tom White. So just on the finance product, can you help us think about how we should be thinking about the tax rate on powersports versus auto? Just trying to get some idea on the how that functions from a modeling perspective. Thanks.

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 will be no reason for it to be any different. On the powersports side, the fact that retail financing for consumers especially in the 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 discussed to expand the use of that finance company as well, to both 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 real, real confident that we'll be able to work towards more market levels within 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 a 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 is that is attached to the financing portion of it. And if you look at that in comparison to our peers, it's a complete -- almost a complete reverse. So we see it as being 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 just did as a complete plus. If I was building it, 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 of those loans becomes very, very effective, and profitable for us as well.

Thank you. It's very helpful.

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

Great. Thanks for taking my questions. First just want to set out on the cars. You quantified the loss ratio on units last quarter, I believe it was somewhere in the ballpark of 30%. Could you provide an update on that metric in Q3?

Yes, I'd be happy to. We improve 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 of this that required more reconditioning than anticipated and so forth. So we're very -- maybe I'm correct -- very happy with the close to 50% reduction that we presently have, we will 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 time loss ratio, which was about 30%. We're down in the eight to 9% range today, and we're walking automotive to that same level.

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

Got it. Yeah, 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 it was weakness associated with the pullback and marketing expense or is there any other associated kind of macro pressures out there that kind of drove the unit volumes and Powersports from Q3.

So I think that I'll answer a couple ways, and Steve will probably want to weigh in as well, but we have to say that there were some effects from a reduction in marketing. I mean, if you look at our, if you look at the high-end of our guidance for the quarter, we're off about 8% from the high-end, right? If you look at our marketing, we were 29% below. So during that, 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 in 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 it stay connected, and also kind of what is our true organic line. These are all tests that new startup companies have to do, or at least should do in the early days of their company. We just happened 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 micro-economic 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…

Lee, I think the summary would be, I think this quarter proved like we did Q2. If 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 reserve.

Got it, that detail is helpful. Last question from me, seem 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?

You're referring to both in RVs?

Correct.

Yes, just for future reference, we consider powersports, basically motorcycle side by side than ATV, both RVs they're 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 any 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 at 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 concentrated our efforts and resources in that regard. I would say presently, we will probably look at those other segments in 2021 or beyond.

Lee, if I can add, we spent the better part of the last four quarters, preparing ourselves to be a major player in retail, and get our cost structure in line with type of business that we want to manage for future. So adding yet not 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 Trump's 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're 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 get from.

Fair enough, thanks for taking my questions.

Well, thanks again, we like to thank all of you again for joining the call today and 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.

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