Vroom Inc (VRM) 2022 Q2 法說會逐字稿

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Second Quarter 2022 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Liam Harrington, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Vroom's Second Quarter 2022 Earnings Call. Joining us on the call today are Tom Shortt, Chief Executive Officer; and Bob Krakowiak, Chief Financial Officer. Please note this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at ir.vroom.com. The second quarter 2022 earnings release and earnings presentation are also posted to the Investor Relations website.

Before we begin, please note that the discussion today includes forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements about Vroom's operations and future financial performance. These and other forward-looking statements are based on management's current assumptions and are neither promises nor guarantees and are subject to a number of risks, uncertainties and other important factors that may cause actual results to differ materially. We direct you to the company's most recent SEC filings, including the Risk Factors section of Vroom's most recent Form 10-K for the year ended December 31, 2021, as updated by our quarterly report on Form 10-Q for the 3 months ending June 30, 2022, for additional discussion of factors that could cause actual results to differ materially.

Please note further that today's discussion, including the forward-looking statements speak only as of the date of this call, and Vroom assumes no obligation to update such statements. The company may also discuss certain non-GAAP financial measures during today's call. You can find the presentation of the most directly comparable GAAP measures and a reconciliation of those measures in the second quarter 2022 earnings release and management presentation.

I'd like to now hand the conference over to Tom Shortt, Chief Executive Officer. Tom?

Thank you, Liam, and thank you to all the investors, analysts, Vroommates, UACC colleagues and third-party partners who are joining us today to discuss Vroom's second quarter earnings.

I'll start on Slide 3. We introduced our long-term road map in our May 26 Investor Day, where we highlighted our midterm goal, which is a breakeven business and our long-term goal of a 5% to 10% adjusted EBITDA margin business. As we mentioned on Investor Day, we have made the choice to slow down. We are slowing down with the intent to continue improving our customer experience. We plan to live within our means while we prioritize unit economics, profitability and liquidity over growth. As previously announced, our road map relies on 4 focused strategic initiatives. First, build a well-oiled transaction machine. Our transaction machine includes titling and registration, selling, e-commerce and marketing. Our primary focus in the short term is building a well-oiled titling and registration machine.

Second, build a well-oiled metal machine: how we buy, move, recondition, sell, deliver and price vehicles. Our goal is to optimize the end-to-end supply chain by synchronizing how we buy, move, recondition and deliver vehicles to reduce cycle times, reduce supply chain costs, improve inventory turns and improve customer delivery times. Third, build a regional operating model, leveraging our national brand. We intend to sell nationally but operate more regionally around our reconditioning centers and transportation hubs. We expect to build density in regions to drive marketing and supply chain economics while improving customer delivery times. We have a significant opportunity to reduce the number of miles or vehicles travel and reduce inbound and outbound transportation costs.

Fourth, build our captive finance offering. We intend to expand on our captive finance offering for Vroom customers, which we believe will improve conversion rates and improve unit economics while also improving the customer experience. We also intend to continue to grow the UACC third-party dealer business, which contributes to our consolidated EBITDA.

Moving to Slide 4, our second quarter highlights. We improved adjusted EBITDA, excluding the securitization gain in Q1 by $51 million or 38% sequentially. Our e-commerce gross profit per unit, or GPPU, was $3,629, reflecting progress toward our long-term goal. We reduced adjusted SG&A by $52 million sequentially. We are making progress on our long-term road map on our 4 strategic initiatives. Development of our captive financing operation is on plan. Our pricing initiatives are driving GPPU improvements. We made several process and tech improvements in transaction processing, including in titling and registration that are beginning to bear fruit. We have continued tech development and anticipate additional tech deployment in 2022 to progress us towards our goal of becoming best-in-class in titling and registration.

Given our quarter-over-quarter adjusted EBITDA improvement and our focus on profitability and liquidity over growth, for the year, we currently expect to be at the low end or below our forecasted e-commerce units, near or better than the midpoint of our forecasted adjusted EBITDA loss range, meaning an EBITDA loss between $325 million to $350 million and near the midpoint of our previously forecasted liquidity range.

Turning to Slide 5. During Investor Day, we outlined these key unit economic drivers behind our 4 strategic initiatives that we believe will build a profitable business model. This slide is an update on our Q2 operational progress on our 4 strategic initiatives by financial lever. For product and vehicle GPPU, we achieved $3,629 e-commerce GPPU driven by our pricing initiatives and captive financing operation. Development of our captive financing operation is on plan.

We've recently announced that UACC completed its second securitization since our acquisition and UACC's 14th securitization overall, demonstrating UACC's ability to leverage its substantial capital markets experience to opportunistically deploy securitization transactions and maintain capital flexibility even in a challenging market.

SG&A logistics. We reduced our all-in logistics costs by $20 million sequentially. We began optimizing our logistics operations in Q3. Inventory. We achieved a 21% improvement in listed for-sale inventory as a result of transforming the titling process. Our SG&A sales. We reduced our sales costs by $8 million sequentially. We began our sales pilot and launched new e-commerce initiatives in the quarter. SG&A for titling and registration. We focused on improving the customer experience while we made improvements in transaction processes. This drove a $3 million increase sequentially. As I mentioned, we expect continued tech deployment in the second half of 2022.

SG&A for marketing. We reduced our marketing costs $15 million sequentially and saw improvement in our cost per opportunity as we focused on our high return on investment marketing channels. SG&A fixed costs. We reduced fixed cost $12 million sequentially. In the business realignment plan, we announced we were closing our TDA service business. With that closure, we determined that our TDA service business real estate is better suited for our reconditioning business. Accordingly, we plan to relocate our Stafford, Texas reconditioning facility to our lower-cost service site. This will further reduce our fixed costs once the transition is complete. These variable and fixed-cost sequential changes represents a $52 million sequential reduction in adjusted SG&A mentioned earlier.

I'll turn it over to Bob now to go through our financial performance in the second quarter and our forward outlook. Bob?

Thank you, Tom. I would like to begin by providing more detail on our financial performance in the second quarter, as we executed against our strategic initiatives we initially outlined in our Investor Day presentation in May.

Let's turn to Slide 7 for a summary of second quarter financial performance versus the first quarter. Total revenues of $475 million decreased 49% sequentially as we intentionally reduced e-commerce units. E-commerce units decreased 53% quarter-over-quarter as we chose to slow down our e-commerce business to focus on improving operational execution. We are pleased with our progress on gross profit per unit as we more than doubled e-commerce GPPU quarter-over-quarter to $3,629. This is a quarterly record for Vroom. I will discuss the drivers of this expansion in more detail on the following slide.

Our adjusted EBITDA loss improved by $21 million sequentially, and our adjusted EBITDA, excluding securitization gain, improved $51 million sequentially in the second quarter. This was driven by our record e-commerce GPPU as well as decreased fixed and variable costs as a result of our realignment plan and the initiatives set forth in our long-term road map. As a reminder, second quarter adjusted EBITDA and full year 2022 adjusted EBITDA guidance include impacts from nonrecurring costs to address operational and customer experience issues. We incurred approximately $8 million of these costs in the second quarter.

Our adjusted EBITDA, excluding securitization gain and nonrecurring costs to address operational and customer experience issues, improved by $59 million sequentially.

Please turn to Slide 8 for a summary of our financial highlights for the second quarter. E-commerce units decreased 53% quarter-over-quarter to $9,233 as we chose to slow down e-commerce transactions to focus on improving operational execution. Let's dive further into our record GPPU performance. During the second quarter, we substantially grew vehicle in product GPPU. E-commerce vehicle GPPU increased 264% sequentially to $2,166, an increase of nearly $1,600. Our commitment to our strategic initiatives outlined at Investor Day helped drive improvement in sales margin as we revised pricing algorithms to focus on optimizing GPPU over transaction volume.

As we move forward, we see additional opportunities to optimize our pricing strategy. E-commerce product GPPU increased 25% quarter-over-quarter to $1,463, an increase of nearly $300. This was primarily driven by higher interest income due to a higher volume of loans held by UACC for Vroom customers. For a review of how UACC and captive financing impact our financial statements, please refer to Slide 11 of our first quarter management presentation.

While we drove GPPU performance and significantly reduced our expense base, our adjusted EBITDA, excluding securitization gain per unit decreased 32% quarter-over-quarter. As we expected in the short run, our expenses did not decrease at the same rate as e-commerce units during the second quarter. In addition to deleverage on select fixed costs, we also chose to support our goal of addressing the current titling and registration challenges and making titling and registration an area of competitive strength.

Next, please turn to Slide 9, which provides a comparison of our adjusted EBITDA, excluding securitization gain versus the prior quarter. Let's start with a look at gross profit, which increased by $14 million in spite of a 53% contraction in units. There were 3 main areas that impacted gross profit versus the prior quarter. First, the reduction in e-commerce unit volume reduced gross profit by $18 million. This was mostly offset by increased e-commerce GPPU, which delivered an additional $17 million in gross profit. Non-e-commerce gross profit improved by approximately $15 million, which was primarily driven by interest income within the retail financing segment.

As a reminder, the retail financing segment includes results from UACC loans originated by third-party independent dealership customers. Our results in the second quarter benefited from having a full 3 months of business activity versus the prior quarter since the UACC acquisition closed in February. We are pleased with the ongoing performance from our third-party dealership business.

Moving on to expenses. Our largest reduction in expenditures was outbound logistics, primarily driven by lower variable expenses as we sold fewer units during the quarter. We successfully reduced marketing expenses by $15 million during the quarter. On top of lower variable marketing costs, we also experienced savings as we prioritized our higher ROI channels of marketing. Overall, we reduced marketing expenses at a lower rate than unit volumes as we continue to invest in select brand-building campaigns and initiatives.

Next, our realignment plan drove $11 million in compensation and benefit cost reductions quarter-over-quarter. In total, we delivered approximately $59 million of improvement in adjusted EBITDA, excluding securitization gain and nonrecurring costs to address operational and customer experience issues.

Please turn to Slide 10 for an update on liquidity. We ended the second quarter with $533 million in cash and cash equivalents excluding restricted cash and continue to forecast $450 million to $565 million at year-end. We updated the bridge from the first quarter call with actual second quarter results to highlight the expected sources and uses of cash during the second half of the year. Our previously provided adjusted EBITDA loss guidance for the full year of $375 million to $325 million implies a loss of $182 million to $132 million of adjusted EBITDA during the second half of the year.

Next, we expect approximately $26 million to $36 million in capital expenditures in the second half of the year as well as $5 million to $10 million in stock-based compensation and $10 million in UACC or Vroom financing. We released $43 million of restricted cash to cash and cash equivalents in the second quarter. We forecast approximately $82 million to $107 million of additional cash release in the second half of the year as we improve operations and speed up our transaction processing.

Lastly, we forecast approximately $39 million to $64 million of cash and inventory to be released through the remainder of the year. We anticipate improvements in cash and inventory as we continue to improve our transaction and titling processes. Altogether, this implies approximately $500 million in liquidity at the end of the year.

Now I'd like to pass it back to Tom for a few final remarks. Tom?

Thanks, Bob. Turning to Slide 11. We improved adjusted EBITDA, excluding the securitization gain by $51 million, or 38% sequentially. Our e-commerce GPPU of $3,629 reflects progress towards our long-term goal. We reduced adjusted SG&A by $52 million sequentially. Development of our captive finance operations are on plan. We made significant improvements in transaction processing, including titling and registration. We remain very focused on continued improvement in titling and registration in the short term. As we look ahead through the remainder of the year, we expect to be within our profitability and liquidity forecast.

I look forward to updating you on our progress on our 4 strategic initiatives each quarter as we pursue our long-term road map.

Thank you for your time and attention today. Operator, we are ready for questions.

(Operator Instructions) Our first question comes from Zack Fadem with Wells Fargo.

It's actually Sam Reid sitting in here for Zack. Wanted to dig a little deeper into SG&A because when we look at some of those line items on a per unit basis, there was generally a pretty significant step-up across the board ex logistics. Just what's your confidence that you can regain -- that you can rein in some of those line items where per unit cost stepped up a bit sequentially? I'm talking compensation, marketing, occupancy and other.

Sam, this is Tom. So when we think about variable costs, especially the number of levers that we're moving relatively fast, they take a little bit of time to remove. So first, you have to do the analytics, then you have to figure out the reductions and then you have to actually execute the cost reduction. So we feel pretty good that we'll be able to continue to reduce costs, which is why we wanted to show the dollar reduction, which we outlined on Slide 5. And it just takes a little bit of time to catch up with the rapid decline in unit volume. We feel pretty good about the targets we outlined in the Investor Day in terms of each of the SG&A, mid- and long-term fixed costs. So I view this as just a short-term timing issue.

And I just wanted to add to that, just in terms of -- on the comp and benefits, it was down about $6 million. But when you adjust for the cost realignment plan, it was down about $11 million quarter-over-quarter.

That's super helpful. And then maybe one follow-up here. This is your first quarter operating at this lower unit level. Could you give us a sense as to where you think the units that you might not have sold this quarter because of that decision may have ended up? And then kind of wanted to also just touch on sort of the unit trajectory from here. I know you guys kind of refrain from doing that at the Analyst Day, but maybe just some high-level thoughts on where you think units could go given this sort of dialed-back level.

Yes. Thanks, Dan. We're really focused on the 3 objectives of unit economics, profitability and liquidity, and that's our primary focus. And we'll forecast units in 2023 at the end of the year.

We have a question from Scott Devitt with Stifel.

I wanted to go back a little bit further in time. The last time that the e-commerce units were at the level that they were in the second quarter was, I think, back in 3Q of '20. And at that point in time, SG&A was about $60 million. So SG&A is 2.5x since then, and there's been a lot of change in the business model and need to invest. But I wonder if you could just speak to SG&A relative to like where the business was back then in terms of framing the potential opportunity for lowering the cost base over time to the extent it exists.

Yes. It's hard to reflect back to that point, Scott. This is Tom. The way we're thinking about it now is we've got more variable and fixed cost to remove in the short term, particularly to adjust to the unit that you saw in Q2. And we have all the initiatives we laid out on Investor Day for all of our variable costs, from logistics, sales, titling and registration and marketing. We're focused on driving those initiatives that we believe will get us to the long-term goals and the road map that we outlined.

Our next question comes from Colin Sebastian with Baird.

A couple from me as well. I guess first of all, just -- you've highlighted the higher GPUs. And I just want to understand your view on the sustainability of that trend. Since near term, you've sort of been able to pick more of the higher-margin units as you sort of scale volume down, but at some point, you scale that back up. So how do we think about sort of sustainability of GPUs first? And then secondly, I know you're not talking about the unit outlook, but maybe you could help us a little bit with Q3 kind of near term in terms of putting expectations. Is this a further reset lower? Or have units sort of bottomed out here? If you could help us with that, that would be helpful.

Colin, it's Tom. On the GPPU, what I would say is I feel like we've really just scratched the surface on all the levers that we articulated on Investor Day in terms of what we can do around pricing and assortment optimization. So we feel pretty good about the long-term goals that we outlined on Investor Day. Having said that, we are really focused on the 3 objectives of unit economics, profitability and liquidity. We would expect some movement around the GPPU that we had in Q2, both up and down in the short term as we really stay focused on those 3 objectives. And then in terms of units, we did update -- give a little additional color on our guidance, which is we expect to be right around the low end of our annual guidance of 45,000 units or possibly a little bit lower.

Yes. And then I just wanted to add to that, Colin. Thanks for your question that when you're thinking about the third quarter that we did announce that we completed in the third quarter of securitization, our second securitization this year from UACC, and we are expecting an $18 million to $20 million gain in the third quarter as a result of that securitization. So when you're thinking about the impact of that transaction in our third quarter numbers, and we also have the -- we'll have the full benefit of the business realignment plan in the third quarter as well.

Our next question comes from Seth Basham with Wedbush.

I have a couple of questions around some of your operational objectives. First, if you could provide some more color around what you're doing in titling and registration and where you are in terms of that process with average turnaround time, et cetera? And then secondly, if you could provide some color around what you're doing to in-house reconditioning, what you consolidated from TDA, et cetera, that would be helpful.

Yes. Sure. So the way we think about titling and registration, on titling, we're working to get titles faster, which you may have noticed has impacted our inventory turns and our days of supply. And so if you go on our website, you'll see a lot of our cars are in coming-soon status instead of available for sale. That's driven by how fast we can get titles and make sure that we have them vaulted. You may recall in our Investor Day, we talked about the digital title vault that we implemented recently. And so during the quarter, because of the improvements in the titling process and getting titles faster, we were able to improve our for-sale inventory by 21%. So that's what's behind titling.

When we think about registration, we're very focused on getting registrations done for every state faster. We made several improvements over the last several months on ensuring that we have the right processes, metrics, tools and systems to drive those improvements and reduce the number of touches. I would say in Q2, we made a lot of blocking and tackling-type improvements to make sure we're doing a much better job in taking care of our customers. When I look to the back half of the year, we're working on a lot of tech initiatives that we're hoping will speed up the process even further as well as take a lot of additional steps out, which would reduce our cost.

In terms of reconditioning, we brought in some new leadership in a couple of areas inside of Vroom. And in reconditioning, when we looked at our Stafford, Texas site, it was an old Sam's Club building that really wasn't a great layout for the facility. And since we made the decision to close the service business, we realized that over the longer run, we can exit that old Sam's Club facility and move into the service business on the TDA real estate, which will reduce our fixed costs. And it actually fits well with the model and the reconditioning needs we think we'll need in Houston.

Got it. That's helpful. And then just a follow-up. Just trying to understand how you're thinking about balancing some of the unit sales relative to GPU. You referenced this in response to one of the prior questions, but we've obviously seen quite a shift to your improvement in gross profit dollars in e-commerce with a material reduction in units. But is this the right balance here on a go-forward basis? And when do you think about growth again in units?

Yes, Seth. So I think it's the right balance now. We are very focused on unit economics, profitability and liquidity as well as improving the customer experience. As the entire organization has made improvements across the board on customer experience, both in titling and registration and logistics, I would hope as we get further down the road, that when we feel really great about the customer experience, that's when we'll begin to really start thinking about growing. But probably makes sense to give a little bit of color about the customer experience and the level of effort our Vroommates and UACC colleagues are working towards.

So we started -- after Investor Day, we started a monthly townhall to give all of our Vroommates and UACC colleagues an update on our transformation as outlined on May 26. And as part of that, we're really giving updates across all these initiatives and the financial levers that we outlined on Slide 5. And one of the good stories is we're really focused on delivering cars a lot faster to our customers. And we had 1 site that did a next day and then a same-day delivery and they were telling -- sharing with the organization their success. And it's really created a passion around customer excellence and an excitement around customer obsession, really, to where the hubs are now competing with each other. And over the last couple of months, we had 1 hub that was able to deliver a vehicle to a car within 3 hours of the purchase being finalized.

So we're really trying to get the organization rallied around this superior customer experience across all levels of the organization, from our hubs to our associates in the selling organization and titling and registration. And as I see that momentum continue to progress each month and we feel really good about our titling and registration process, that's when we'll begin to pivot and start thinking about growing.

I just want to add to what Tom said that we've proven that the customer that they really love our model, and we execute it well. We've proven that we can grow that model. And just to highlight what Tom said that right now, we are focused on unit economic, profitability and liquidity over growth at this point in time. But we have a ton of confidence that when the time is right, we'll be able to ramp this model back up like we have in the past.

We got a question from Sharon Zackfia with William Blair.

I apologize in advance, I have dueling conference calls. So if you mentioned this, I'm sorry. But I was curious about the vehicle GPU at the $2,100 plus range versus, I think the midterm goal you gave recently was $1,700. So I know pricing algorithms are helping a lot, but is there something in the GPU currently that we would expect to kind of come back before it goes forward again because I'm trying to think about that May $1,700 number you gave versus the obvious overachievement here. And then did you mention where UACC is now in terms of the capture rate on Vroom applicants and whether you're starting to see kind of a widening of the funnel of subprime customers being able now to purchase through Vroom?

I'll take the second one first. We've not disclosed what our capture rate is for Vroom. We're just indicating that UACC is originating loans for Vroom customers, and it is on plan. With regard to the vehicle GPPU I've mentioned earlier, you may not have heard. I think we've really just scratched the surface in terms of what we can do as we outlined in the investor deck in terms of pricing algorithms and assortment optimization. Having said that, one of the levers that we outlined is we did implement shipping fees in terms of pricing algorithms and assortment optimization. Having said that, one of the levers that we outlined is we did implement shipping fees for especially very long-distance vehicles. And you might expect over time as we improve our logistics network that we might lower shipping for our costs, so that could potentially bring vehicle GPPU down, but it would come out of SG&A. So it might be in a different line on the P&L. But in aggregate, we feel -- we still believe the goals for aggregate gross profit dollars in our mid- and long-term range that we laid out at Investor Day are an appropriate goal for us.

Great. And then just one follow-up. Have you made any significant changes in the vehicle mix that you're selling now that UACC is live and originating loans through Vroom?

Yes. We've seen a slight mix shift towards more vehicles that would be more tuned to UACC subprime financing. But it's not significant. Our mix has been relatively consistent in the short term. That's still an opportunity for us as we move forward.

Our next question comes from John Colantuoni with Jefferies.

I was just doing some back-of-the-envelope math on your 2022 outlook. And it looks like it implies that EBITDA losses per unit isn't expected to improve in the second half of the year. I guess I'm having some trouble seeing kind of where you get improved SG&A per unit with lower unit sales, given you'll be spreading fixed costs over less units. I understand that cutting units helps reduce cash burn because it lowers variable costs. But I guess I'm just wondering if you could help me get a little bit more comfort around kind of the long-term strategy given the fixed-cost component. And I have a follow-up.

Yes. So a couple of elements. We are incurring nonrecurring costs around that we outlined in terms of customer make good payments. We're also -- we increased our spend in titling and registration for the quarter even though we reduced volumes, which we felt was needed in the short term to get titling and registration where we need it. Depending on the financial lever we are articulated on Slide 5, many of those in the quarter where we just -- we're reducing with volume while we've just started initiatives around optimizing our logistics network and driving cost reductions in titling and improvement. As I mentioned, we've got several tech deployments that we expect in titling and registration throughout this year that we believe will bear significant fruit in 2023. So we're really just getting started on the unit economic kind of drivers of productivity on the SG&A levers.

Appreciate that. And maybe you could just talk about your outlook for UACC and sort of the gain on sale profitability given the tougher environment for non-prime auto securitizations? Is there an avenue for UACC to sell loans to a large partner if the market for non-prime securitizations worsens further in the second half of the year? Just to be curious.

Yes, John. Thanks for the question. This is Bob. Yes. So we remain confident in the -- I talked about guidance for UACC for the full year on the last call of $65 million to $75 million of EBITDA. We remain very confident and comfortable with that range for the year. As I mentioned earlier, we completed the securitization during the third quarter. We'll talk about it more on the next call, but we're expecting an $18 million to $20 million securitization gain.

And in terms of our strategy on securitizations going forward, we're going to do what's in the best interest of the shareholders. We thought the first transaction has a $30 million gain that we booked in Q1. In the third quarter, we'll book $18 million to $20 million. And we thought it was in the shareholders' best interest to complete that securitization and execute it. But we'll look at holding the residual portion of the securitizations as well if we don't believe that the economics make sense at the time of the transaction. And -- but really continue to follow our -- just our overall -- just originate to sell model. But do it in a way that is always in the best interest of the shareholders.

And that's all the questions in the queue. I'd like to turn the call back to management for any closing remarks.

Thank you, everyone, for your time today, and have a fantastic day.

That concludes today's conference call. Thank you for participating. You may now disconnect.