Vroom - Q2 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to Vroom's Q2 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one-one on your telephone. To remove yourself from the question queue, you may press star one-one again. I would now like to hand the call over to Jon Sandison, Vice President of Investor Relations. Please go ahead.

Jonathan Sandison (CFO and Treasurer)

Thank you, operator. Good morning, everyone, and welcome to Vroom's Q2 2023 earnings call. Joining us on the call today are Tom Shortt, CEO, and Bob Krakowiak, CFO. Please note this call will be simultaneously webcast on the investor relations section of the company's corporate website at ir.vroom.com. The Q2 of 2023 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 31st, 2022, as updated by our quarterly report of Form 10-Q for the three months ended June 30th, 2023, for additional discussion on factors that could cause actual results to differ materially from those in the forward-looking statements. 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 based on future developments or otherwise. The company may also discuss certain non-GAAP financial measures during today's call. You can find a presentation of the most directly comparable GAAP measures and a reconciliation of those measures in the Q2 of 2023 earnings release and earnings presentation.

I'd like to now hand the conference over to Tom Shortt, CEO. Tom?

Tom Shortt (CEO)

Thank you, Jon, and thank you to all of our investors, analysts, Vroommates, UACC colleagues, and third-party partners who are joining us today. Let's start on slide 3. We introduced our long-term roadmap at our 26 May 2022 Investor Day, where we highlighted our midterm goal of a break-even EBITDA business and our long-term goal of a 5-10% adjusted EBITDA margin business. We remain committed to our long-term roadmap, and I am pleased with the progress we've made as we work toward these goals. As we indicated on Investor Day during 2022, we strategically slowed down the business while we improved our customer experience, improved our processes across titling and registration, pricing, marketing, reconditioning, and logistics, and insourced our sales function from our primary third-party resource.

As we execute our strategy in 2023, we are resuming responsible growth, selling through aged inventory, improving variable costs per unit, continuing to reduce fixed costs, and converting balance sheet items into cash. Our long-term roadmap remains unchanged. During 2023, we are continuing to focus on our three key objectives and four focused strategic initiatives. On slide 4, our Q2 highlights. During the Q2, we recognized an adjusted EBITDA loss of $56.3 million, an $8.5 million, or 13% sequential improvement, which was within the range of our expectations. E-commerce units grew approximately 5% sequentially. This quarter is the Q1 with sequential growth since we realigned the business and introduced our long-term roadmap in the Q2 of 2022.

As we pivot the business towards responsible growth, we remain focused on reducing variable and fixed costs per unit while driving the right mix of marketing investment, unit growth rate, and GPPU. E-commerce GPPU increased from $2,552-2,954 sequentially, benefiting from GPPU on unaged units, which was in excess of $5,000. During the Q2, as a result of legacy title issues, 80% of our units sold were held greater than 180 days, compared to 77% in the Q1, 75% in the Q4 of 2022, and 49% in the Q3 of 2022.

We expect sequential reduction in our mix of aged units, with the Q3 mix expected to be less than 40% from aged units. We expect the Q4 aged mix to be sequentially better than the Q3. As we work through the remaining aged inventory, we expect to have normalized aged inventory levels, which we expect to produce higher overall GPPU. We are making progress on our long-term roadmap and our four strategic initiatives. We reduced our adjusted SG&A $2.2 million sequentially on higher unit volume. Excluding increased marketing investment, we reduced adjusted SG&A $5.7 million sequentially.

We repurchased $18 million face value of our convertible notes for $7 million, reducing our leverage at a substantial discount. We are narrowing the range and improving the midpoint of our full year 2023 guidance to an adjusted EBITDA loss of $200 million-225 million, adjusting our cash and cash equivalents to reflect the convertible note repurchases. On Slide 5, during Investor Day, we outlined the unit economic drivers behind our four strategic initiatives that we believe are key to building a profitable business, we've been providing quarterly updates on our progress on each driver. This slide is an update to our Q2 progress by economic driver. GPPU was $2,954, a $402 sequential improvement, driven primarily by strong GPPU on unaged units.

80% of units sold in the Q2 were aged. As I mentioned, our GPPU for unaged units was in excess of $5,000. We expect sequential reduction in our mix of aged units and expect improved GPPU with the mix improvement. We expect our Q3 mix to be less than 40% from aged units, and we expect the Q4 aged mix to be sequentially better than the Q3. We continue to see strong product GPPU as we develop and grow our captive financing capability. We reduced our all-in logistics costs per unit by 17% sequentially. Our improved titling and registration processes resulted in a 43% improvement in inventory turns sequentially. We reduced our selling costs per unit 26% sequentially. We reduced our titling, registration, and support costs per unit 29% sequentially.

We increased our marketing spend $3.5 million sequentially in order to facilitate unit growth by ramping up unit acquisitions to grow inventory in the second half of the year. Our unit acquisitions had essentially been on idle since we pivoted the business in the Q2 of 2022. Our increased marketing spend was required to restart the unit acquisition engine. We continue to source primarily from consumers. We reduced our fixed cost per unit 12% sequentially. Lastly, our advanced analytics team, functional business teams, and tech teams continue to build data assets, analytical assets, and tech assets that we believe in the long term, will provide a competitive advantage across titling and registration, pricing, conversion, unit and product margin, and supply chain costs. Slide 6. I'm very proud of what our Vroommates and UACC colleagues have delivered over the past year.

Excluding securitization gain and non-recurring costs, we continue to reduce our losses despite absorbing significant GPPU pressure caused by our legacy titling and registration issues in 2022. We have improved e-commerce GPPU the last three quarters as we sell through our aged inventory. We continue to make progress on our long-term roadmap. We are at the turn where we are beginning to resume responsible growth while we continue down the road of improving our operations and reducing our fixed and variable costs. We expect GPPU to normalize in the back half of the year, when the majority of our sales are expected to be on, on unaged vehicles. Now I'll turn it over to Bob to discuss 2Q results in greater detail. Bob?

Bob Krakowiak (CFO)

Thanks, Tom. I'll start with a summary of our financial performance on slide 8. All comparisons are against the prior quarter, unless otherwise noted. Total revenue of $225 million increased 15%, as e-commerce units increased 5%. As mentioned in the Q1 call, we are in the early stages of ramping up the business while remaining focused on positive unit economics. E-commerce GPPU increased 16% to $2,954. As we expected and discussed during the Q1 earnings call, we realized the negative impact of selling through aged vehicles, which was approximately $11 million. This impact was offset by GPPU in excess of $5,000 on unaged units. Adjusted EBITDA loss improved $8.5 million, or 13% to $56.3 million.

The improvement was driven by reduced operating costs, unit growth, and higher GPPU. On the expense side, we further reduced our fixed and variable operating costs despite higher unit volume, as we continue to pursue our three key objectives and four focus strategic initiatives. We remain focused on maximizing our liquidity and strengthening our balance sheet. In the Q2, we repurchased 18 million face value of our convertible notes for $7 million, further reducing our leverage. We also completed the sale of non-investment grade notes related to the 2023-1 securitization and completed secured repo financing on securitization interests at UACC, improving available liquidity at UACC to approximately $93 million at the end of the quarter.

As we continue to sell through the remaining aged inventory and begin to ramp up unit acquisitions, we increased our cash and inventory quarter-over-quarter, negatively impacting our cash position. We expect our cash and inventory balance to reduce and normalize in the second half of the year as we sell through the majority of remaining aged units, allowing us to floor a higher percentage of our inventory balance. Let's move to slide 9, which provides a bridge from Q1 2023 to Q2 2023 adjusted EBITDA, as well as cash and liquidity. E-commerce gross profit improved sequentially by approximately $2 million. Sequential unit growth, along with strong GPPU on unaged units, drove this increase. In addition to our improvements in e-commerce gross profit, we continue to reduce our variable and fixed cost structure as we drive efficiencies throughout the organization.

In total, for the quarter, we improved adjusted EBITDA by approximately $8.5 million. Moving to liquidity. Q2 adjusted EBITDA loss and net interest expense are the primary drivers of cash utilization within the quarter. Additionally, due to certain floor plan requirements related to our acquisition ramp-up, cash and inventory increased $11 million sequentially. We expect this cash to be recovered during the Q3. Next, we repurchased 18 million face value of our convertible notes for $7 million, reducing our leverage. We may continue to opportunistically repurchase notes from time to time to reduce our outstanding indebtedness at a discount, subject to market conditions and availability. These factors resulted in $238 million of cash and cash equivalents on the balance sheet at quarter end, which was within the range of our expectations.

Additionally, it is important to understand that earnings from the UACC business have been used to pay down warehouse lines. We could draw against these lines as a source of liquidity. At the end of the Q2, there was approximately $93 million of available liquidity at UACC, which, when combined with our cash balance, results in greater than $330 million of total available liquidity. We remain focused on capturing balance sheet opportunities to improve our available liquidity. Next, let's turn to our full year cash and cash equivalents and liquidity outlook on slide 10. We expect the 2023 ending cash and cash equivalents balance of $137 million-187 million, which is consistent with our previous guidance, adjusted for convert repurchases of approximately $13 million that were completed in the H1 of the year.

As mentioned previously, we expect to recover a significant portion of our cash and inventory balance as of 30 June 2023, during the second half of the year. We expect this to occur as we continue to sell through the aged units and replace them with fresh inventory. Additionally, we expect approximately $74 million of available liquidity at UACC at the end of the Q4. We continue to hold the residual certificates associated with our securitization completed earlier this year. If we decide to sell those certificates in the second half of the year, proceeds from the transaction could contribute up to an additional $25 million of liquidity. As a result, our year-end midpoint of liquidity could be up to $261 million. Thank you for your time and attention this morning.

With that, I'll turn it back to Tom for a few closing remarks. Tom?

Tom Shortt (CEO)

Thanks, Bob. Turning to slide 11, I'm incredibly proud of what our team has accomplished this quarter. We continue to transform virtually every aspect of the business to improve our customer experience, improve our processes, drive operational efficiencies, reduce fixed and variable costs, decrease our cash burn rate, and reduce our convertible debt. While we still have a lot of work to do, I believe we are well positioned to resume responsible growth and continue our business transformation as we execute our long-term roadmap and pursue our mid- and long-term goals. Thank you for your time today, and operator, we are ready for questions.

Operator (participant)

As a reminder, to ask a question, you will need to press star one one on your telephone. Again, that's star one one on your telephone to ask a question. To remove yourself from the question queue, you may press star one one again. We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sharon Zackfia of William Blair.

Sharon Zackfia (Partner and the Group Head of Consumer Equity Research)

Hi, good morning. Thanks for taking the call. I guess a question on responsible growth. I mean, there's, I'm sure that's the rate of growth that you feel like you can satisfy in a, you know, a profitable manner. You know, from the outside, it's, it's kind of hard to understand what that might translate to in, in the back half of this year as we enter 2024. If you could give us any kind of context on the rate of growth that you think the company can support at this period, I think that would be helpful.

Tom Shortt (CEO)

Yeah. Good morning, Sharon Zackfia. We're, we're very focused on figuring out the right balance. Like, our, our number one objective is cash burn, as we work towards our, our long-term goals. You know, we're not gonna grow excessively, you know, we're at the risk of burning additional cash or, or hurting unit economics. So we're working through right now, what's the right level of marketing investment? What's the right unit growth rate and the right GPPU? Based on those three things, as we work through those, that and our cash burn, which is our primary driver, that's gonna yield the, the growth, and that's why we're not providing really guidance on what our unit growth rate will be at this time.

Sharon Zackfia (Partner and the Group Head of Consumer Equity Research)

Okay. Then can you give some more color around the sales functions that you've brought in-house and how the performance there is relative to your expectations, if there's anything else that kind of meaningfully still needs to happen to get to kind of a fully optimized sales function?

Tom Shortt (CEO)

Yeah. We've been pleased with insourcing our sales team from our primary third-party partner earlier in the year, and I would say that it's met our expectations pretty much exactly as, as we expected. As we look to the longer term, we continue to make significant investments in our site to make it a more digital experience. That's really the main lever that we're gonna see as we look towards the, the long run, as well as we do have several initiatives within our sales team to provide them additional tools to be more efficient.

Sharon Zackfia (Partner and the Group Head of Consumer Equity Research)

Thanks for that.

Tom Shortt (CEO)

I'd say-

Sharon Zackfia (Partner and the Group Head of Consumer Equity Research)

Last question for me is... Sorry.

Tom Shortt (CEO)

I'd say it's basically on plan and as we expected.

Sharon Zackfia (Partner and the Group Head of Consumer Equity Research)

Okay. Is it fair to say that you plan to end the year with kind of minimal aged inventory, and that we won't be talking about this hopefully in 2024?

Tom Shortt (CEO)

Just to comment on that, it's interesting, we've had this plan since the Q4, it's been kind of stunning to me. We're remarkably on plan each quarter as to where we thought we would be. All of this aged inventory, essentially all of it, is a result of our legacy titling issues. In the future, to the extent we do have any inventory that's aged, it would all be math-based, meaning we're running these very sophisticated pricing algorithms that have said, based on market depreciation rates and when we bought the car, it may make sense to hold the car longer. I think it will be very de minimis, and it would be embedded in, in our pricing algorithm, so it wouldn't be something to, to call out.

Having said that, I think we may have a very small amount at the end of the year still related to title and registrations, and we haven't really calculated it for next year, but I think my guess would be it's pretty de minimis, and after the Q4, we probably won't be talking about it.

Sharon Zackfia (Partner and the Group Head of Consumer Equity Research)

Great. Thank you.

Tom Shortt (CEO)

Thank you. Thank you, Jon.

Operator (participant)

Thank you. Once again, to ask a question, please press star one, one on your telephone. Again, that's star one, one on your telephone to ask a question. As there appear to be no further questions in queue, I would now like to turn the conference back to Tom Shortt for closing remarks. Sir?

Tom Shortt (CEO)

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

Operator (participant)

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