Vroom, Inc. (NASDAQ:VRM) Q3 2023 Earnings Call Transcript

Vroom, Inc. (NASDAQ:VRM) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good day, and thank you for standing by. Welcome to the Vroom’s Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Jon Sandison, VP of Investor Relations. Jon, please go ahead.

Jon Sandison: Thank you, operator. Good morning, everyone, and welcome to Vroom’s third quarter 2023 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 third quarter 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.

A customer smiling delightedly after driving away in their new car from the automotive retail shop.

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, 2022, as updated by our quarterly report on Form 10-Q for the three months ended September 30, 2023. For additional discussion of 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 third quarter 2023 earnings release and earnings presentation.

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

Tom Shortt: Thank you, Jon, and thank you to all of our investors, analysts, Vroommates, UACC colleagues and partners who are joining us today. Starting on Slide 3. During the third quarter, we continued to work towards our goal of resuming growth selling through aged inventory and improving variable and fixed costs per unit in alignment with our three key objectives and four strategic initiatives. On Slide 4, our third quarter highlights. During the third quarter, we recognized an adjusted EBITDA loss of $64.5 million, an $8.2 million sequential increased loss. Our results were negatively impacted by higher realized net losses and a negative mark-to-market of finance receivables originated in late 2022 and early 2023 at UACC due to unfavorable portfolio performance.

We made changes in underwriting criteria earlier this year that we expect to lead to improved delinquency trends. E-commerce units grew approximately 11% sequentially. As we pivot the business towards growth, we remain focused on reducing variable and fixed costs per unit while driving the right mix of marketing spend, unit growth rate, and GPPU. E-commerce GPPU increased from $2,954 to $3,144 sequentially benefiting from an increase in mix of unaged units sold within the quarter. We are making progress on our long-term roadmap and our four strategic initiatives. We reduced our adjusted SG&A $3.1 million sequentially on an 11% increase in unit volume. We are updating the range of our full year 2023 guidance to an adjusted EBITDA loss of $225 million to $245 million, primarily driven by the higher realized losses and negative mark-to-market at UACC as previously discussed.

Additionally, we are updating our year-end cash and cash equivalents guidance to a range of $137 million to $162 million. Moving to Slide 5. During Investor Day in May of 2022, we outlined the unit economic drivers behind our four strategic initiatives that we believe are key to building a profitable business. We have been providing quarterly updates on the progress on each driver. For Q3, GPPU was $3,144, a $190 sequential improvement primarily driven by an improved mix of unaged and aged units. During the third quarter, as a result of legacy title issues, 34% of our units sold were held greater than 180 days, compared to 80% in the second quarter, 77% in the first quarter, 75% in the fourth quarter of 2022, and 49% in the third quarter of 2022.

We expect sequential reduction in our mix of age units and expect improved GPPU as a result. We expect our fourth quarter mix to be less than 20% from aged units. Our GPPU of unaged units or units we’ve owned less than 180 days was comparable to our third quarter of 2022 GPPU of $4,206. We continue to see strong products GPPU as we develop and grow our captive financing capabilities. We reduced our all-in logistics costs per unit by 7% sequentially. We recovered $48 million of cash and inventory in the third quarter by selling through aged units and financing a higher percentage of our inventory under our Floorplan Facility. Our selling cost per unit increased by 1% as we completed the full in-sourcing of our sales function. We reduced our titling, registration and support costs per unit by 15% sequentially.

We reduced our marketing costs per unit by 13% sequentially. We reduced our fixed costs per unit by 15% sequentially. Lastly, our advanced analytics team, functional business teams and tech team 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. Turning to Slide 6. I’m very pleased with what our Vroommates and UACC colleagues have delivered over the past year. As mentioned previously, we expect the headwinds experienced in this quarter related to UACC portfolio performance to ease as the tightening and underwriting criteria made earlier this year is expected to lead to improved delinquency trends.

We have improved e-commerce GPPU the last four quarters as we sell-through our aged inventory. We continue to make progress on our long-term roadmap. We are resuming growth while we continue improving our operations and reducing fixed and variable costs. We expect GPPU to normalize when we sell-through the remainder of our aged inventory. Now, I will turn it over to Bob to discuss third quarter results in greater detail. Bob?

Bob Krakowiak: 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 $236 million increased 5% as e-commerce units increased 11%. As mentioned on our call last quarter, we are in the early stages of ramping up the business while remaining focused on positive unit economics. E-commerce GPPU increased 6% to $3,144 as we expected and discussed during the second quarter earnings call, we realized the negative impact of selling through aged vehicles, which was approximately $5 million. This impact was offset by a higher portion of units sold within the quarter being unaged or held less than 180 days. Adjusted EBITDA loss increased $8.2 million, or 15% to a loss of $64.5 million.

This increased loss was driven by higher realized net losses and an unfavorable mark-to-market on finance receivables at UACC. This headwind is partially offset by higher e-commerce gross profit as a result of higher unit volume and GPPU improvement. 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 focused strategic initiatives. We remain focused on maximizing our liquidity and strengthening our balance sheet. As we continued to sell-through the remaining aged inventory and began to ramp up unit acquisitions, we recovered approximately $48 million of cash and inventory quarter-over-quarter. This recovery significantly reduced our cash burn for the quarter as cash and cash equivalents were reduced by $29.3 million sequentially during the third quarter.

Let’s move to Slide 9, which provides a bridge from second quarter 2023 to third quarter 2023 adjusted EBITDA as well as cash and liquidity. E-commerce gross profit improved sequentially by approximately $2 million. Sequential unit growth along with a higher mix of unaged units sold within the quarter drove this improvement. Additionally, despite higher unit volume, we reduced our adjusted SG&A spending by $3 million sequentially. This was primarily driven by continued improvements in our marketing cost per unit. As mentioned previously, we experienced higher net losses and an unfavorable mark-to-market related to loan portfolio performance at UACC, resulting in a $13.3 million headwind for the quarter. In total, for the quarter, adjusted EBITDA loss increased by approximately $8.2 million.

Moving to liquidity. Third quarter adjusted EBITDA loss and net interest expense are the primary drivers of cash utilization within the quarter. As discussed in the second quarter call, we expected to recover cash in inventory as we sold through aged units. We released $48 million of cash and inventory within the quarter. This was partially offset by a restricted cash increase of $14 million due to inventory growth. These factors resulted in $209 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 third quarter, there was approximately $73 million of available liquidity at UACC, which when combined with our cash balance results in approximately $282 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. This morning, we are updating our 2023 year-end cash and cash equivalents forecast to a range of $137 million to $162 million. Additionally, we expect approximately $60 million of available liquidity at UACC at the end of the fourth quarter. We continue to hold the residual certificates associated with our securitization completed earlier this year.

If we decide to sell those certificates in the fourth quarter, we estimate that proceeds from the transaction could contribute up to an additional $20 million of liquidity. As a result, our year-end midpoint liquidity could be up to $230 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: Thanks, Bob. Now turning to Slide 11. We introduced our long-term roadmap at our May of 2022 Investor Day, where we highlighted our midterm goal of a breakeven EBITDA business and our long-term goal of a 5% to 10% adjusted EBITDA margin business. As we indicated on Investor Day, implementing order of magnitude change is rarely a direct route. We adjust the specifics of this route from time to time when we believe it makes sense to do so in the pursuit of long-term profitability. Since that day, we have made significant progress on building a well oiled transaction machine, building a well oiled metal machine, and building our captive finance offering. We have significantly improved our customer experience and dramatically improved our sales to customers net promoter score by 80 full percentage points.

We have transformed virtually every aspect of the business and we are now ready to pursue raising capital to scale the business. Since Investor Day, we have had headwinds we did not anticipate and few, if any, tailwinds. First, our legacy titling and registration issues resulted in significant costs, including customer rental car expenses, customer concessions, losses from customer buybacks, significant aged inventory, which has impacted GPPU, and legal and regulatory costs. We ended 2022 with a significant portion of our inventory greater than 180 days old, while used vehicles depreciated in 2022. We spent most of 2023 selling down aged units that were greater than 180 days old, causing significant pressure on GPPU in 2023. Second, we purchased UACC in early 2022 with the strategy of executing securitization transactions, selling the residual certificates and recognizing a gain on sale on each transaction.

During 2022, we executed two securitization transactions in which we sold the residual certificates and recognized gain on asset sale of $46 million. Since 2022, several macroeconomic factors, including high inflation, higher interest rates, degraded credit performance, and volatility in used vehicle valuations impacted our performance at UACC, including the following. Inflation increased significantly in 2022 and continues ahead of the Fed’s target in 2023 impacting consumer purchasing power. Interest rates have increased significantly since we bought UACC. In May of 2022, the Fed funds rate was 77 basis points, up from less than 10 basis points since April of 2020. The Fed funds rate is currently at 5.33%. The last time it was at high was in February of 2001.

This sizable increase in interest rates had an adverse impact on UACC’s business. Used cars are less affordable and used car payments are at all time highs. Our warehouse interest rates have increased approximately 500 basis points, increasing our cost of funds and compressing our spreads. Volatility in used vehicle valuations caused vehicle book values to increase significantly in 2021 and then decrease in 2022. This increased credit losses as vehicle recoveries were adversely impacted and default rates increased. Due to these current market conditions and investors return expectations, UACC is elected to hold its 2023-1 residual certificates. Despite these headwinds, we have made significant progress on our long-term roadmap. Over the last 15 months from the second quarter of 2022 to the third quarter of 2023, UACC has increased its Vroom loan originations and is currently originating over 40% of Vroom customer loans.

We improved product GPPU by approximately $1,200. Leveraging our CarStory assets, we have invested 18 months developing our pricing engine and for 2023 year-to-date generated greater than $4,200 GPPU on unaged units or units held less than 180 days. We sold through the majority of aged units caused by legacy titling registration issues. We have reduced our all in logistics costs per unit by 18% and reduced all in logistics costs by $40 million annualized. We increased the percent of pickups and deliveries on the Vroom fleet. We reduced cash and inventory by $85 million. We improved inventory turns 24% and reduced inventory by $295 million. We reduced our leverage by repurchasing approximately $292.5 million at face value of our convertible notes for approximately $103.4 million, including accrued interest, with a weighted average repurchase price of approximately $0.35 on the dollar.

We completed in sourcing our sales function. We improved our net promoter score for sales to customers by 80 full percentage points. We have made significant progress on our goal to be best-in-class in title and registrations, including during 2022, we introduced our digital title vault and focused on significantly improving titling and registrations for our customers. We reduced our titling, registration and support costs per unit by 46% and reduced annualized costs by $78 million. 99.7% of our customers received their registrations before the expiration of their initial temporary tag in September 2023. We partnered with the state of West Virginia to launch its national digital titles clearinghouse. As the only retailer with access to this new digital system, Vroom will be able to transfer out of state titles into the company’s name and significantly reduce the timeline for processing them.

We reduced our annualized marketing costs by $22 million while we worked to optimize the mix of unit growth, pricing and marketing spend. We reduced annualized fixed costs by $59 million. We have reduced our annualized run rate costs by $235 million since the second quarter of 2022 and by $440 million since the first quarter of 2022. I’m very proud of what our Vroommates and UACC colleagues have achieved in executing our long-term roadmap and I continue to be excited about the long-term opportunity ahead of us. Thank you for your time today. And operator, we are ready for questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Rajat Gupta of J.P. Morgan. Rajat, please go ahead with your question.

Rajat Gupta: Great. Thanks for taking the questions. I had first question on UACC. If I look at the other loss item in the income statement, it’s gone from $5 million last quarter – last year in the third quarter to $33 million. You mentioned like $13 million of the sequential move from 2Q was due to the higher realized and unrealized losses, but it still seems like a very big number. Could you help us understand how we should expect that other loss item to progress in the near-term and also within that $33 million, how much of it is tied to the UACC third-party portfolio versus the Vroom portfolio? And I have a quick follow-up. Thanks.

Bob Krakowiak: Yes, Rajat. So thank you for your question. So that number is really – it’s a combination of two things. So it’s – first of all, it’s what Tom had mentioned before, it’s the increased losses in the mark-to-market on the UACC portfolio. On the residual portfolio for 2023-1, but it’s also the additional loans that have been originated as well since 2023-1 in January of this year. So that’s the primary driver. And then in terms of the breakout between Vroom and UACC, we don’t break out that detail.

Rajat Gupta: Got it. And so what’s flowing through the product GPPU is basically just the interest income on those loans.

Bob Krakowiak: That’s correct.

Rajat Gupta: Got it. Got it. As a follow-up and more of like a broader question, if you look at the fourth quarter guidance and the exit rate on EBITDA losses, dial in some CapEx and some cash interest. It’s still pretty material %40 million-ish per quarter – $40 million to $50 million-ish per quarter of cash burn, which at the current liquidity profile would give you around four at max five quarters of bandwidth. How do you plan to navigate in case we do have a choppier backdrop, maybe more credit losses in the near-term? How do you navigate that backdrop? Are you considering any other recapitalization or restructuring options of the balance sheet, like we’ve seen at some of your peers in both the U.S. and UK? Thanks.

Tom Shortt: Hey, Rajat, it’s Tom. Thanks for the question. Yes, we actually announced today that we are going to pursue raising capital to scale the business. And so we are going to pursue that relative to just the ongoing performance of the business. This has been a challenging year as we work through the remaining titling and registration issues. It’s really impacted our GPPU all year. But we feel like we’re well positioned going forward into 2024 and that we’ve got a very strong operating business. We’re very pleased with the customer experience that we’re delivering. We focused on really improving all our unit economics, and we think that positions us really well for 2024. And then on top of that, we do want to grow the business at a faster rate. And so we did announce that we are just now at the beginning stages of pursuing additional capital.

Rajat Gupta: Got it. And what form would that take? Have you disclosed any more details around that?

Tom Shortt: Yes, not at this time, obviously. It could be a private investment, it could be additional convertible debts, it could be at the market offering, rights offering. But again, we’re at the very beginning stages and we’ll update you down the road as we have more information.

Bob Krakowiak: Yes. And just one more thing, Rajat, I wanted to add to at the tail end of the last question you had asked about, so we have made – we’ve made a number of – UACC has made a number of changes to their underwriting standards since they’ve issued 2023-1. Obviously, it takes time for those changes to cycle through. But in terms of what we’re seeing so far, based upon those initial underwriting changes they’ve made, we have seen improvement in the portfolio, but that’ll take time to materialize in our results.

Rajat Gupta: Got it. Thanks for the color.

Bob Krakowiak: Thank you.

Operator: [Operator Instructions] Our next question comes from Colin Sebastian of Baird. Colin, please go ahead with your question.

Unidentified Analyst: Thanks. This is Reese on for Colin. I guess you guys did just address the capital plans and you’re not going to provide any further detail on that, but maybe you could touch on where you’re at in the aged inventory process right now. I know you guys were hoping to finish most of that by the end of the year, and the amount of aged units is going to be down in Q4 versus Q3. So how does that shape up heading into 2024? Are you going to be mostly work through the aged inventory or is there still going to be more work to do next year? And that’s just potentially more tailwind or less headwind? Thanks.

Tom Shortt: Yes. I would say that we’re down to just a few hundred cars or less that we consider aged. And as we said each month this year, we’ve continued to improve the mix. So while we said less than 20% for the quarter, we think each month sequentially in the quarter will go down. We may have a little bit left at the end of the year, but nothing that we would view as material going into 2024.

Unidentified Analyst: Okay. Got it. Thank you.

Tom Shortt: Thank you, Reese.

Bob Krakowiak: Thanks, Reese.

Operator: I am showing no further questions at this time. I would now like to turn it back to Tom Shortt for closing remarks. Tom?

Tom Shortt: Thanks, everyone. We appreciate your time today and have a fantastic day.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.