CarLotz, Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Thank you for standing by and welcome to CarLotz First Quarter 2021 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. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host, Dawn Francfort, Investor Relations. Please go ahead.

[Dawn Francfort:]

Thank you. Good afternoon everyone. With me on the call is Michael Bor, Co-Founder and Chief Executive Officer of CarLotz; and Tom Stoltz, Chief Financial Officer. Before we get started, I would like to remind you the company's safe harbor language, which I'm sure you're all familiar with. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

[Michael Bor:]

Thanks, Dawn, and good afternoon everyone. Thanks for joining us today. Before discussing our results this afternoon, let me start by saying how excited we are to have our first successful quarter as a public company in the books. We began our journey as a public company 109 days ago and we've made the most of every day since. With the capital that we raised through our merger with Acamar Partners, we have brought on some new and highly talented teammates launched several new hubs in dynamic fast-growing markets while filling out our pipeline of new markets through 2021 and beyond and embarked on our technology and marketing transformation initiatives that we believe will position us well for our future growth plans. I'll begin today's call by discussing the highlights of our first quarter and then update you on the progress we're making against our key growth initiatives. Then Tom will review our first quarter financial results in more detail and provide thoughts on the remainder of 2021. As you can tell, we're very pleased with our first quarter performance, which exceeded our expectations on the top-line and was at the high-end of our guidance with respect to gross profit. For the quarter, we sold a record 2,554 units, growth of 76% over last year and 28% above our guidance. We delivered net revenue of $56.6 million, representing 123% growth over the last year. Our gross profit was $2 million, at the top end of our guidance range, and retail GPU was $1,182. While we've communicated in the past that we thought our retail GPU challenge may bleed into Q2, we have seen strong retail GPU growth so far this quarter. Before discussing our strategic priorities, I want to take a moment to discuss the unique dynamics of wholesale and retail pricing that we're currently seeing, as well as address the inventory shortage across the industry. Wholesale prices are on an unprecedented rise due to strong demand driven by tax refunds and stimulus checks and the lack of new car supply resulting from the broadly discussed chip shortage, impacting new vehicle manufacturing. During times when the wholesale prices push retail prices up, the wholesale retail price gap narrows for a period of time, before prices adjust and normalize.

[Tom Stoltz:]

Thank you, Mike, and good afternoon, everyone. Today I'll focus on the highlights of our first quarter performance, and then I will discuss how we are approaching our outlook for the remainder of 2021. For details regarding our financial results please refer to our earnings release available on the Investor Relations section of our website. We had a strong first quarter on top-line with revenue growth of 123% to $56.6 million, substantially exceeding our previously provided guidance range of $42 million to $46 million. Unit sales were 2,554 significantly ahead of our expectations of 1,900 to 2,100 and up to 76% year-over-year, primarily driven in existing hubs with three new openings in the quarter. Our revenue growth for the quarter was driven by increases in our retail unit sales, a 37% increase in our average selling price due mostly to a mix shift and the clients we are serving and the types of vehicles we are selling for those clients, and a 74% increase in financing and product service contract revenue. With respect to gross profit and retail GPU both decreased year-over-year as a result of the carryover of Q4, excess inventory is related to our profit share account. Gross profit was $2 million for the quarter and retail GPU was 1,182. We successfully cleared substantially all of this aged inventory in the quarter ahead of schedule with aggressive pricing rather than absorbing, shipping and reconditioning costs on vehicles returned to the client. While this negatively impacted our retail GPU in the quarter, we did achieve the high end of our gross profit guidance by selling more of these units late in the quarter. As Mike mentioned, our inventories are current now and retail GPU's have improved. Excluding a non-cash stock based compensation charge primarily related to performance shares triggered by the completion of the merger totaling $42 million. Total SG&A expenses were $18.8 million compared to $4 million in the prior year quarter. With the increase driven by hiring management and support staff to ready for the rapid hub growth in 2021 initial planning and scope work on our technology transformation and compliance costs associated with public company filings post. As a result, our net loss was $15 million compared to a net loss of $1.5 million last year, and adjusted EBITDA was a loss with a loss of $16.9 million compared to a loss of $1.4 million a year ago. Now turning to our balance sheet, we ended the quarter with cash and marketable securities of $293 million compared to $3 million a year ago. As you are aware during the quarter, we completed a merger transaction with Acamar Partners in January. As a result of the transaction, we believe our net cash position will fund our growth plans for the foreseeable future.

[Operator:]

Thank you. Our first question comes from the line of Sharon Zackfia of William Blair. Your line is open.

[Sharon Zackfia:]

Hi, good afternoon. I guess a couple of questions on the inventory levels. I mean, where would your ideal inventory level be at this point because we went through kind of a period in the fourth quarter where inventory kind of outpaced your ability to process and now obviously the pricing environment is facing some challenges in corporate consignment and getting the inventory. So I'm just trying to get a gauge on what would be an ideal inventory level? I think we're looking at like 1,000 cars right now across the system. Where would you like to be?

[Michael Bor:]

Yes. Thanks, Sharon. Good to hear from you. Fortunately for us inventory was not a problem in the first quarter in terms of volume of inventory. We were able to sell a lot of vehicles and it's a result of that very strong demand that we saw that our inventories sold down to actually below 1,000 within the last couple of weeks. Fortunately for us, we have a lot of levers to pull when it comes to, inventory, and so in the addition to the commercial consignments that we can draw from multiple verticals, some of which are more impacted than others, by what we see in the macro environment. We also have consumer consignments. We have purchases that we make from consumers and from our accounts. And we have open-buys that our car buying team can make. And so in general, because the bulk of our new hubs are opening at the end of this quarter and into the second half, our key inventory needs are really in the second half of the year. But today, I mean to directly answer the question, we'd love to be probably another 300 to 500 units higher than we are today, which history has shown we can pull in within weeks not months. So we feel generally fortunate that we're in a position where we can pull multiple levers to get that inventory to where it needs to be.

[Sharon Zackfia:]

I guess, should we assume that inventory has then bottomed and that we'll see improvement as the quarter progresses?

[Michael Bor:]

Yes. I mean, what you see – if you – several track or inventory levels we were down in the low-800s within the last several weeks. We're up over 1,000 today. Generally it is moved in the upward direction pretty much every day since and we're seeing – we maintain regular dialogue with our commercial accounts. And so we've heard of very strong volumes that they expect coming. Really mostly in the second half, but it's starting to show, and also what we're seeing is that prices add wholesale, which as we mentioned in our remarks, it motivates our consigner to sell at wholesale when the prices are moving in the upward direction, but we've seen kind of a slowdown in that movement and it starting to flatten, which is when we see good opportunities. And then if it drops and who knows, but if pricing drops, that's when our model really provides a tremendous amount of value to them as they seek to retain more proceeds on the sale of their vehicles.

[Sharon Zackfia:]

And that's kind of what we saw last fall, right, in September and October?

[Michael Bor:]

That's right. That's right.

[Sharon Zackfia:]

Okay. And then on the – you mentioned kind of the multiple levers you could pull, have you actually increased consumer consignment so far in the second quarter or open buys?

[Michael Bor:]

Yes. Well, as we – it certainly opened buys, as we open new locations we've mentioned in the past that we typically like to stock the new locations with vehicle that we own because sell-through rates are the lowest when we first opened a new hub as the local market gets to know us as an auto retailer. And so we like to have slower sell-through on our own inventory versus our client's inventory. So we typically, when we opened a new hub it's stocked with our own inventory. So we have beefed up our buying team. We brought in some tremendous talents there, and we're seeing great results, both in terms of the volumes that are being bought and also the profitability of the units that they're buying. On the consumer consignment side, as we expand across the country and our brand becomes better known as we're seeing now and our marketing efforts continue to increase and enhance awareness of what we do. We are starting to see the beginnings of increases in consumer consignments. And we're really excited about that. I mean, when we enter a new market and we can get consumers to consign vehicles and really feel the power of what consignment can do for the values they get for their vehicles, they’re not only helps it's kind of a domino effect in that market. Not only as they tell their friends and more and more people can sign cars, but it also brings people to us and they that they can buy from U.S. as well. So we love the consumer consignment business. It's a great marketing tool that we have to just help the business home.

[Sharon Zackfia:]

Okay. And then last question for me, I might've missed this, but did you provide any kind of retail GPU guidance for the second quarter? I heard improved from the first quarter, obviously you're going to need a lot to get to the full year guidance. So I think it would be helpful to know kind of where you are first half versus second half?

[Michael Bor:]

Yes. We decided Sharon not to give specific guidance. We do believe it will improve. We've seen improvement already here, early in the second quarter. And we still expect that will make the guidance for the full year for GPU.

[Sharon Zackfia:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Gary Prestopino of Barrington Research. Your line is open.

[Gary Prestopino:]

Hey, good afternoon, everyone.

[Michael Bor:]

Hi, Gary.

[Gary Prestopino:]

A couple of questions here. First of all, did you – I looked through all the documents, did you give a number of wholesale vehicles that were sold? Was that something that you habitually do every quarter when you were with reporting?

[Michael Bor:]

Yes, it's included in our 10-Q. I think it was a little – yes, for the quarter. So it was a little over 400, I don't remember the exact number.

[Gary Prestopino:]

Okay. I went through the Q and I didn't see it, but if there was a lot of involved, I'll go back and look at that. All right. So look as I listened to what you were saying, you're saying that this whole issue with the inventory, the aged inventory onto the alternative fee arrangement that has been totally cleared out, is that correct?

[Michael Bor:]

Yes, we're in a very good shape. We were able to work our way through all that inventory particularly in March. We had really nice sales in the month of March and we feel good about where we ended the quarter.

[Gary Prestopino:]

Okay. And then you've also said something about in April you're seeing increased retail GPU that has gone into May. Is that more or less on a weekly sequential basis? Or is that year-over-year weekly?

[Michael Bor:]

Well, it's sequential to the first quarter for sure. We've seen pretty significant improvements from the first quarter to the first month of the second quarter.

[Gary Prestopino:]

Okay. And then Mike, you seem optimistic about the back half of the year with your corporate accounts and all that. What are they telling you? Is that they intend to give you more vehicles because your model is working for them on a return basis versus taking them to auction? Or they're seeing that the auction prices are starting to plateau and they've hit their apex and they're not going to keep going higher.

[Michael Bor:]

Yes, a little bit of all of that. I mean, we maintain very regular dialogue with our top accounts that we're bringing on several new accounts, us having gone public in January has elevated our reputation in the industry. And so we're working with a lot of new accounts to onboard them and we're kind of working through the sales funnel on several of them. We've seen – like we mentioned, when there is a plateau in prices, it really starts to – we end up seeing a lot of good volume when that happens, because people are accustomed to getting really good values at the auction. And then when it starts to fade compared to retail, that's when they seek to alternative channels to keep that retention high. So we have several accounts that are – have mentioned to us that they have a tremendous volumes coming in, in the second half. And so we're excited about what that means, especially as we are able to open in new locations, add capacity in some of our existing markets that have – that had been capacity constrained at the end of last year. And so just it gives us the ability to take good volumes from new accounts, but also take additional volumes from the accounts that have been working with us for years to help us hit our numbers for the full year.

[Gary Prestopino:]

So with this whole thing with processing centers resulting in slower vehicle processing, you had a big intake of cars there. What have you guys learned and what have you improved on your processing side? So if this happens again, you'll be ready for it.

[Michael Bor:]

Yes. So, as we ramp up this year, we're focused not only on processing capacity, but also processing costs and processing speed. At the beginning of the year, we were definitely seeing processing time constraints, but by the end of the quarter, we had increased capacity by 50% and now we're up to 100%. And towards the beginning of the second half of the year, we plan to be up an additional 50% from where we are today, which is more than enough capacity to meet our processing needs throughout the year. So between speed cost and capacity, we'll continue to focus on at the processing center, because if we can do a great job there, we get cars to market faster, we sell cars faster which translates to lift for our clients and GPU for us. So the processing and the ops backend of what we do is critical. It's where we're putting a lot of energy.

[Gary Prestopino:]

Okay, thank you.

[Michael Bor:]

Thank you.

[Operator:]

Thank you. Our next question comes from Seth Basham of Wedbush Securities. Your question please.

[Seth Basham:]

Thanks a lot and good afternoon. My first question is on GPU and thinking about the implied ramp and retail GPU for the balance of the year with you maintaining your guidance for the full year and missing the first quarter expectations. There is now a steeper ramp implied. If you could just give us some more color on what gives you the confidence that you will be able to overachieve in next three quarters relative to your plan a month ago, that would be helpful.

[Michael Bor:]

Yes, really most of the decrease in GPU in the first quarter was really all related to the aged inventory carryover. If you take that away, we had much more normalized GPU for the other cars we've sold during the quarter. So now that we've worked through that aged inventory. We're seeing more historical sort of levels of GPU and we feel good about where we're headed for the balance of the year.

[Seth Basham:]

Yes. Just a follow up, Tom, just to make sure you understand my question. I understand that dynamic, but the implication is that you're now expecting to achieve higher GPUs for balance of the year relative to your prior expectations. What gives you the confidence that you can do that?

[Tom Stoltz:]

Yes, so, I mean, we – GPU comes from many sources, so we've seen a great progress on the F&I side of things. We've seen better vehicle selection, which leads to faster sale of vehicles. And that helps us increase GPU with several of our accounts where we share in the upside when vehicles sell quickly. And we're – in our car buying efforts, which are an important part of stocking our new locations, have been producing results that are very attractive compared to what they've been in the past. So we put all that together and we've seen very positive signs on GPU that give us the confidence to maintain our guidance for the rest of the year.

[Seth Basham:]

Got it. And then thinking about the profit or should I say loss on the 400 some odd vehicles that you've wholesaled in the quarter, you ballooned to over $2,500 in loss for each of those vehicles understanding that you wanted to get rid of them, but why not retail them or send them back to the consigner rather than book such huge wholesale losses.

[Michael Bor:]

Yes. So, most of that wholesale loss did come from the profit share account that we have. And after 90 days, we have to return those vehicles to them and we've put some reconditioning costs and we have shipping costs to give back to them. And that's where that wholesale loss occurred from. Now, most of that occurred in the months of January and February, and in March, we decided to be more aggressive at pricing, and we were able to clear that aged inventory and also benefit when we sell the unit from some backend profit – profit on being able to finance the units or sell product services. So that helped us improve our total GP dollars, but it did impact our GPU. And that was the reason our GPU is down some in the first quarter.

[Seth Basham:]

Got it. And number of those units actually had some reconditioning costs that you put into the vehicles that you had to eat the cot up.

[Michael Bor:]

Yes, that's correct.

[Seth Basham:]

Understood. All right. Thank you very much.

[Operator:]

Thank you. Our next question comes from Karen Short of Barclays. Your line is open.

[Karen Short:]

Hi, thanks very much. I mean, obviously, and I don't mean to beat a dead horse here, but people care about GPU and you don't want to give us any color on the GPU and the 2Q to date, but I guess I'm wondering if you could give a little cadence on the GPU in during the quarter, given the comments that it did improve during the quarter. And then I had a couple other questions.

[Michael Bor:]

Yes. I want to be clear about in the first quarter it did not improve, I mean, in the month of March, that's when we cleared a lot of this aged inventory, and that's when the GPU decreased in March. But now that we've worked through that aged inventory by the end of March, we are seeing significant improvement in GPU in the month of April and in the quarter so far.

[Karen Short:]

But you're not willing to give that number in the quarter to date?

[Michael Bor:]

No, I think, we'll just stick with the fact that based on where we are now and what we're seeing we believe the guidance for the full year is achievable.

[Karen Short:]

Okay. And then as it relates to the supply versus demand question, I guess, maybe a little color on your thoughts on as the country reopens and people go back to work, I guess, what I'm wondering is won't demand just keep increasing meaning won't there would be more of a supply demand kind of imbalance going forward. And I mean, I think, that's a philosophical question as it relates to whether people use like public transport or drive, but I guess I'm not clear on why that balance would improve in the second half of the year as you commented on.

[Michael Bor:]

Well, so we're not really commenting necessarily on broad market supply and demand. What we're more commenting on is what we see in the wholesale market, which drives pricing, which ultimately drives the relative attractiveness of alternative remarketing channels, so retail versus wholesale. And we have seen very strong consumer demand for vehicles in the first quarter as you know that's largely a result of a combination of the standard tax refund season exacerbated by the stimulus checks that hit the market, further exacerbated by a lack of new vehicles which drove people to use. As we move away from that, we are obviously moving away from tax refund season. We're not expecting any mass stimulus to continue to drive the market. And we are seeing manufacturers building cars and selling cars and new vehicles are starting to flow albeit slower than we'd like. So, I think there is going to – demand, consumer demand for vehicles is a great thing for us. We're a seller of vehicles, so we love consumer demand. What we want to see is a normalization of wholesale prices, which is when consumer demand and supply of vehicles through the wholesale market start to match up better than they had when there were these external shocks the system that were driving wholesale prices up. So, we agree with you. We think that there will be continued consumer demand for vehicles and that's a great thing. What we think will plateau is kind of one-time shops to the wholesale market created by a lack of supply as it relates to demand.

[Karen Short:]

So, sorry, just on that point. So how exactly would your accounts gauge whether or not they will have higher volumes of supply in the second half of the year, like based on what data I guess is what I'm asking?

[Michael Bor:]

Yes. I mean, I don't know exactly what data they look at, hard for me to comment on that, but my guess is our clients are very large buyers of new vehicles and they have – my guess is they have pretty strong relationships with the OEMs and they communicate with the OEM. So they know when the new vehicles will begin to show up or will pick up in deliveries and they gauge their remarketing needs based on what they think, when they think the new vehicles will start to get delivered. So, I don't know exactly what data they're looking at, but I know that they have conversations with the backwards into the supply chain for when these vehicles will be delivered because they need to know in advance, so that they can notify the drivers of these vehicles to return their leased vehicles and pick up the new ones.

[Karen Short:]

Okay. That's helpful. And then, sorry, last question, just in terms of the new E-comm interface that you're rolling out in June, can you just talk a little bit about that and what maybe some risks just to think about in terms of execution if there are any?

[Michael Bor:]

Yes, the new tech platform pretty exciting. I mean, we do believe that this will help people get further down the curve of online buying right now because we're essentially an omni-channel marketplace and our guests can kind of enter and exit the online portion of the journey wherever they'd like. It's not necessarily – where we are from a tech perspective isn't necessarily a negative, but as we get more sophisticated with our tech enhancements and our tech rollout, we do believe people who are more accustomed to the in-hub experience will begin to gain additional comfort in doing the process online. And those who have already made that shift to online will view our online capabilities favorably as compared to the other solely online auto sellers. And so, as we think about where we're going with technology, it's really – our plan is to make it as easy as possible for the car shopper to do as much or as little of the process online as they'd like, and for it to be seamless if they want to combine the online portion of their journey with the in-hub experience. And so, what you'll see is a mobile app. You'll see an enhanced website and then a whole bunch of tech on the backend that makes pricing your trade and financing your vehicle and getting the vehicle delivered to your home and all the other aspects of the online car purchase. It will make it slicker and easier. And that's going to be a benefit to those who want to – who kind of seek to do more of it online. And so, we believe that that will be incremental to our ability to sell online.

[Karen Short:]

Great. Thanks very much.

[Operator:]

Thank you. At this time, I'd like to turn the call back over to Co-Founder and CEO, Michael Bor for closing remarks.

[Michael Bor:]

Thank you. And thanks to everyone who dialed in today. I do want to highlight that CarLotz' 10th birthday party is coming up in early summer. Our first birthday party was in 2012. It was in my backyard as a handful of us rejoiced in making it one year into our journey and to the launch of our second hub. Michelle, the wife of our first hired teammate, Ricky, who's still with us today, baked the birthday cake with an orange car on top of it that was more than enough for our small group to eat. And I'm thrilled that while Michelle still bakes amazing cakes, our growth has outpaced her ability to feed the team. This 10th birthday party will be a special one for us. It will be our first as a public company, it will be our first as a coast to coast company, and the team will be eating several cakes around the country and is thrilled to be executing on our vision to be the greatest automotive retail experience. And with that we look forward to speaking to all of you again shortly. Thanks and have a great evening.

[Operator:]

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