Q2 2023 Vroom Inc Earnings Call

Participants

Jon Sandison

Robert R. Krakowiak; CFO & Treasurer; Vroom, Inc.

Thomas H. Shortt; CEO & Director; Vroom, Inc.

Sharon Zackfia; Partner & Group Head of Consumer; William Blair & Company L.L.C., Research Division

Presentation

Operator

Thank you for standing by, and welcome to Vroom's Second Quarter 2023 Earnings Call. (Operator Instructions)
I would now like to hand the call over to Jon Sandison, Vice President of Investor Relations. Please go ahead.

Jon Sandison

Thank you, operator. Good morning, everyone, and welcome to Vroom's second 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 second 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. 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 3 months ended June 30, 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 the presentation of the most directly comparable GAAP measures and a reconciliation of those measures in the second quarter of 2023 earnings release and earnings presentation.
I'd like to now hand the conference over to Tom Shortt, Chief Executive Officer. Tom?

Thomas H. Shortt

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 May 26, 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. We remain committed to our long-term roadmap, and I am pleased with the progress we have made as we work towards 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 in-source 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 cost 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 3 key objectives and 4 focused strategic initiatives.
On Slide 4, our second quarter highlights. During the second quarter, 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. Ecommerce units grew approximately 5% sequentially. This quarter is the first quarter with sequential growth since we realigned the business and introduced our long-term roadmap in the second quarter of 2022. As we pivot the business towards responsible growth, we remain focused on reducing variable and fixed cost per unit while driving the right mix of marketing investment, unit growth rate and GPPU. Ecommerce GPPU increased from $2,552 to $2,954 sequentially, benefiting from GPPU on unaged units, which was in excess of $5,000. During the second quarter, as a result of legacy title issues, 80% of our units sold were held greater than 180 days compared to 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 aged units, with the third quarter mix expected to be less than 40% from aged units, and we expect the fourth quarter age mix to be sequentially better than the third quarter. 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 4 strategic initiatives. We reduced our adjusted SG&A $2.2 million sequentially on higher unit volumes. 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 to $225 million and 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 4 strategic initiatives that we believe are key to building a profitable business, and we have been providing quarterly updates on our progress on each driver. This slide is an update to our second quarter 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 second quarter 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 third quarter mix to be less than 40% from aged units, and we expect the fourth quarter aged mix to be sequentially better than the third quarter. 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 cost 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 second quarter 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 ecommerce GPPU the last 3 quarters as we sell through our aged inventory. We continue to make progress on our long-term roadmap. We are at the churn 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 unaged vehicles.
Now, I'll turn it over to Bob to discuss second quarter results in greater detail. Bob?

Robert R. 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 $225 million increased 15% as ecommerce units increased 5%. As mentioned in the first quarter call, we are in the early stages of ramping up the business while remaining focused on positive unit economics. Ecommerce GPPU increased 16% to $2,954. As we expected and discussed during the first quarter 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 3 key objectives and 4 focused strategic initiatives. We remain focused on maximizing our liquidity and strengthening our balance sheet. In the second quarter, 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 interest 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 first quarter 2023 to second quarter 2023 adjusted EBITDA, as well as cash and liquidity. Ecommerce 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 ecommerce 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. Second quarter 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 third quarter.
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 second quarter, there was approximately $93 million of available liquidity at UACC, which, when combined with our cash balance, resulting 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 to $187 million, which is consistent with our previous guidance adjusted for convert repurchases of approximately $13 million that were completed in the first half of the year. As mentioned previously, we expect to recover a significant portion of our cash in inventory balance as of June 30, 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 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 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?

Thomas H. Shortt

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.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Sharon Zackfia of William Blair.

Sharon Zackfia

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 profitable manner. But from the outside, it's kind of hard to understand what that might translate to in the back half of this year as we enter 2024. So 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.

Thomas H. Shortt

Sharon, we're very focused on figuring out the right balance. Like our #1 objective is cash burn as we work towards our long-term goals. And so, we're not going to grow excessively. We're -- at the risk of burning additional cash 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. And based on those 3 things as we work through those and our cash burn, which is our primary driver, that's going to yield 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

Okay. And then can you give some more color around the sales functions that you 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?

Thomas H. Shortt

Yes. So 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 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. And so, that's really the main lever that we're going to see as we look towards the long run, as well as we do have several initiatives within our sales team to provide them additional tools to be more efficient. I'd say it's basically on plan and as we expected.

Sharon Zackfia

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

Thomas H. Shortt

Yes. And just to comment on that, it's interesting, we've had this plan since the fourth quarter, and we're -- it's been kind of stunning to me, we're remarkably on plan each quarter as to where we thought we would be. And all of this aged inventory, essentially all of it is a result of our legacy titling issues. And in the future, to the extent, we do have any inventory that's aged, it would all be mass-based, meaning we're running these very sophisticated pricing algorithms that have said, based upon market depreciation rates and when we bought the car, it may make sense to hold the car longer, but I think it will be very de minimis, and it would be embedded in our pricing algorithm. So it wouldn't be something 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 fourth quarter, we probably won't be talking about it.

Operator

Thank you. (Operator Instructions) 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?

Thomas H. Shortt

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

Operator

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