Q1 2022 Vroom Inc Earnings Call
Good day and welcome to homes first quarter 2022 earnings call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question. During this session you will need to press Star then one on your Touchtone telephone if anyone should require assistance during the call. Please press Star then zero to reach an operator as a reminder, this call may be recorded.
I'll now like to turn the call over to Lynn Liam Harrington Vice President of Investor Relations you may begin.
Good morning, everyone and welcome to <unk> first quarter 2022 earnings call.
Joining us on the call today are Bob Mylod Executive Chairman.
Tom short Chief Executive Officer.
And Bob Krakowiak, Chief Financial Officer.
Please note that this call will be simultaneously webcast.
On the Investor Relations section.
Of the company's corporate website at IR Dot group Dot com.
The first quarter 2022 earnings release and earnings presentation are also posted to the IR 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 the rooms operations and future financial performance.
These and other forward looking statements.
Subject to a number of risks uncertainties and other important factors.
That may cause actual results to differ materially from those in such statements.
We direct you to the company's most recent SEC filings.
Including the risk factors section of rooms, most recent Form 10-K.
For the year ended December 31 2021.
As updated by our quarterly report on Form 10-Q.
For the three months ended March 31 2022.
For additional discussion of factors that could cause actual results to differ materially from those in the forward looking statements.
Please note further that todays discussion, including the forward looking statements speak only as of the date of this call.
<unk> assumes no obligation to update such statements based upon 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 first quarter 2022 earnings release and management presentation.
I'd like to now hand, the conference call over to Bob Mylod Executive Chairman.
Floor is yours.
Thank you Liam and thank you to all the investors analysts and roommates, who are joining us for today's first quarter earnings release, we have quite a lot to cover today one of the most important of which is today's announcement of executive leader changes.
Specifically I'm very pleased to announce the promotion of Tom short from Chief operating officer to Chief Executive Officer.
Today's call I Hope you will understand and appreciate why our board of directors, a supremely confident that Tom is exactly the right person at the right time for growth.
Could not be more excited about his ascension to CEO and I and my fellow board members are committed to doing everything in our power to help Tom and grow and succeed.
Speaking of our board, we continue to be very engaged with management and shaping the direction of the business and have been having a number of discussions over the last few months about how to improve our operations and results as.
As you saw in our press release today, we have added the title of independent executives to my existing title of chair of the board.
It's independent of executive Chair and my job will be to counsel and advice and help them with any of the critical decisions that he won't be making in the coming year.
My title is also meant to make clear that I and the board are eager to be by management side closely monitoring the results of today's actions and also being up the ready to continue to oversee any further course corrections that are necessary from here. So the rooms and are positioned to win.
I'd like to acknowledge the past several months about looked very much like when we know we fall into an ever increasing bucket of companies that had attracted significant investor interest. Despite large losses, because the markets were less focused on the pursuit of profit in exchange for delivering fast growing and large market share gains.
Valuations of companies with that business profile, it's been decimated this year and the market is very clearly demanding much near term visibility to profitability.
We know.
Oh, well what room is squarely in this bucket.
To be clear, while we know that much of our valuation has to do with these macro market forces. We also know we have a lot of work to do on improving our operational execution.
As in recent months, we have come up short.
Liberating a delightful experience each and every one of our customers.
Many of our challenge isn't revolved around the title and registration of the cars that we buy and sell to them from our customers. We have always known that this is a tedious process, one which requires a symphony a well orchestrated handoffs from many participants involved.
Buyers sellers, but many consumer finance companies that lend to our customers, our floorplan lender and of course state the M B's each with their own local rules and procedures that continue to evolve throughout the pandemic.
It is manual and time consuming.
In the past several months with the hyper growth of our business, putting more and more strain on this important operational motion and recent developments and the way our partners handled this paperwork we fell behind.
The result has been too many customers that have bought cars from us and who have not been able to register their cars in a timely manner prior to their temporary license plates expiring.
When this occurs those customers are left with a car that they bought from us, but which they might not be able to drive.
That isn't it unacceptable outcome or even one single customer let alone the many of the places happen too.
It was also put a strain on our relationships with the various states D. M DS on who we and our customers rely to process our title and registration requests.
And of course, it impacts our financial performance.
Inventory turns and increases the likelihood of markdowns.
It increases customer returns or customer make good payments, which are harmful to gross margins, but it also increases operating expenses associated with customer service calls or our employees, making repeated efforts to obtain titles and tags in.
In the last few months, we have been incurring excess customer make goods and legal expenses as we seek to remediate customer issues and address the concerns of certain state D M DS or regulatory bodies on who's doorsteps, many of our customer complaints have arrived.
From a balance sheet perspective. It has resulted at times over the last few months and our cash being inefficiently used to finance too much inventory too many receivables and too much restricted cash.
All of this activity has added up to losses that are too high.
Negative cash flows that are in excess of those losses.
I'm going to leave it up to Tom and Bob to talk in detail about what we are doing and in fact have already done in many of these areas to dramatically change this unacceptable dynamic but.
But I'm going to summarize it very succinctly, we are choosing to slow down until we get this right or.
Our goal is to take what is currently a challenge for us title and registration processing and fix it to a point that it becomes a towering strength.
Source of competitive advantage.
At this moment with these operational challenges I, just described and with the stock market as a backdrop, we're pretty sure that investors are less interested in hyper growth.
Far more interested in understanding how we're going to marshal our resources.
As Bob will explain if we do this right and we strongly believe that we will we expect to get to the moment when we are more nimble and ready to resume our growth.
And we look forward to getting there because when we do we'll be doing so with what I think is an extraordinary set of assets.
First and foremost I believe that we have built an incredible brand has tapped into a mega trend that is not ever going away.
The desire of customers to purchase their cars in a way that is consistent with what they have come to expect from the likes of Amazon or door dash They walk.
Want to transact digitally and they want their purchase delivered to their doorstep.
I've been at this ecommerce game long enough to know that this trend is only heading in one direction as newer digitally demanding generations grow up and have the means to buy cars.
And as we have reiterated over and over again the market is absolutely enormous and still largely underpenetrated.
Thus, we are not overly concerned about a temporary pause in our growth because we expect the lion's share of digital commerce market share gains won't happen until 2023 and well beyond.
Another asset that we have is our ability to source recondition and price our cars.
Despite our challenges our customers are in large part in love with their cars and that Red broom delivery truck rolls into our residential driveway with a shiny car. It is a magical customer moments we.
We know we are already good at delivering those magic moments and we are going to get better at it as we reduced delivery times and increase the percentage of our customers who experienced this last mile Magic.
If we do it consistently without incurring the backend registration challenges that reduce N P. S.
We'll gain loyalty and take a whole lot of market share.
You got another valuable asset is the newest addition to the room family United Auto Credit Corporation.
We completed that acquisition in Q1, and it is of enormous strategic importance to room.
As it will ultimately allow us to earn the full economics associated with car loans on a very substantial percentage of our transactions.
This is the type of assets that are bigger competitors, carvana and carmax or benefited from for years.
We now have that arrow in our quiver to and it will make room, a better more profitable company.
As we scale this important cross sell activity, the resulting financial benefits should show up in a meaningful way over time.
But as Tom and Bob will explain you a see CS earnings for the remainder of 2022 we'll still largely emanate from a strong business that is built on its own.
These earnings are substantial and they immediately contribute to Williams consolidated financial results as illustrated in today's first quarter announcements.
We hope that by giving you this visibility on Ua's he sees capabilities and earnings power today, you will gain increased confidence that room of strategic and financial position has been dramatically bolstered.
And then lastly, I believe that our greatest asset of the management team that is going to go after this vision to become a large profitable business.
It starts with Tom here and it goes from him every member of the room management team.
As I get the get ready to hand, the call over to Tom I want to give him a proper introduction by pointing you to our first slide of our earnings presentation.
When you examine Tom's domain knowledge in the areas, where we need management expertise.
And when you appreciate that Tom knows what great looks like because he has been a leader at some of the greatest consumer branded companies that depend on world class logistics and operations to succeed.
Hope you will join me in concluding that we could not have found ourself a person that is more out of central casting for what broom needs now.
I'd like to close my remarks on one final note I want to thank Paul Hennessy.
Whereas six years of service at Broome.
He is responsible for cultivating each and every one of those assets, but I just would count it.
And he leaves a team behind every one of which including Tom that he recruited mentored and put you in a position to take the baton.
I know I speak for Tom and Bob and wishing him well in his next endeavors.
And with that please allow me to hand, it over to rooms, New CEO Tom short.
Thank you Bob for that warm introduction, good morning, everyone and welcome to our first quarter earnings call before we dive in I'd like to thank Paul for building one of the largest used automotive dealers in the country and for recruiting need to Bruce I'd also like to thank all of our roommates and our third party partners for their support in.
Serving our customers.
Now, let's start on slide four.
I'm very excited that we completed our acquisition of United Auto Credit Corporation, or U H D C and February I'd like to welcome all of our associates at UAC C to Bruce.
Are you a T C. We've already completed our first securitization during the quarter, resulting in a gain of $30 million and we expect to complete another securitization in 2022, and then anticipate a similar sized gate.
Our expectation is that U S. D. C will generate total securitization gains of 65 million to $75 million in fiscal year 'twenty two.
Our integration of <unk> into our business is on track and you ACC has already originating loans for broom customers.
We exceeded our expectations in the first quarter coming in ahead of our guidance.
We delivered a higher level of e-commerce unit than we forecasted.
Our e-commerce gross profit per unit or G. P. P. U was more than $250 ahead of guidance and much more than our fourth quarter exit rate.
We expect to further improve ecommerce G. P. P. You for the full year versus the first quarter.
Our adjusted EBITDA loss of $107 million was ahead of our expectations. Thanks to our E Commerce segment results and the benefit from the gain of our first securitization by U H C C.
Our reconditioning network transition out of a death is on track as we allocate throughput to other sites.
We intend to transition our remaining logistics hubs from ADESA locations by the end of the third quarter.
We reached record e-commerce last mile of delivery in the first quarter at 76% and maintained a high level of consumer sourcing.
Yesterday, we announced a realignment plan as.
As we look forward our plan is to prioritize unit economics overgrowth.
Reduced operating costs and maximize our liquidity.
Our outlook for 2022 reflects this realignment plan as we.
We focus on these three objectives, we will scale back the business, while we focus on improving GPU, improving our operating processes, reducing operating costs and dramatically improving our customer experience.
Compared to Q1 annualized we expect to end the year with higher E. Commerce G. P. P. You lower operating costs and year end liquidity of 450 million to $565 million.
The high end of our estimated liquidity range is approximately $35 million less than our cash on hand at the end of Q1.
Announcing our realignment plan, let's go over the foundation of our realignment plan on slide five.
As part of our realignment plan, we intend to live within our means while accelerating our path to profitability and dramatically improving our customer experience.
First we intend to prioritize unit economics over growth.
We intend to leverage our national brand, while we focus on regional operations that drive density as we drive density we expect our operating cost to reduce and we'll be able to provide faster delivery times to our customers.
We believe we have significant opportunity to optimize our pricing engine, when we buy and sell vehicles.
We intend to maximize the power of UAC.
Second we are focused on reducing our operating expenses.
Reducing marketing costs by focusing on our highest ROI marketing channels and aligning spend with reduced volumes.
Resizing the organization to focus on profitability over growth.
Refocusing, our technology spend to drive cost efficiency and productivity.
Third we will focus on maximizing our liquidity and preserving cash while we position the business for profitability.
We intend to reduce and convert major balance sheet items into unrestricted cash.
We are focused on dramatically improving our customer experience, including our titling and registration process, while we improve our liquidity by freeing up restricted cash.
We expect to end the quarter with approximately half a billion of liquidity at the midpoint of the range.
Turning to slide six.
As we look to the future our goal is to build a profitable business model and then accelerate growth. We believe four very focused initiatives will position the company for a profitable business model.
First and most importantly in the short term we are investing in building, a well oiled titling and registration machine.
As Bob indicated earlier as we've scaled the business our processes systems and infrastructure have struggled to keep up with the growth.
We are focused on leveraging technology to improve our current manual titling and registration process.
We expect to improve our cycle time minimize manual steps in resources.
Add significant automation to the process improve our unit economics, and most importantly, improve our customer experience.
Second we intend to build a well oiled metal machine, how we buy more.
Move recondition sell deliver and priced vehicles.
We are rationalizing our near term reconditioning capacity following the ADESA exit and our expected unit volume.
We intend to maintain third party partners, while also pursuing low capital in house opportunities in reconditioning line haul and last mile.
Our goal is to optimize the end to end supply chain by synchronizing, how we buy move and recondition unit to reduce cycle times reduce supply chain costs and improved customer delivery times.
We intend to build into our pricing engine, our end to end supply chain and you a T C captive finance model to improve the customer value proposition, while optimizing arguing economic.
Third we will 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 are vehicles travel, which will reduce inbound and outbound shipping costs.
And fourth we will build a captive finance offering with our recent acquisition of D. C.
We are very pleased with our acquisition of U a E C and intend to continue to grow their core business as well as grow our captive financing for broom customers.
We believe we can improve conversion rates and improved unit economics, while improving the customer experience.
The U S automotive market is massive highly fragmented with low e-commerce penetration compared to other retail categories.
We offer a broad assortment of thousands of vehicles with no haggle pricing purchased on your favorite device from anywhere our customers choose delivering their vehicle right to their driveway.
We believe e-commerce penetration will continue as it has in other retail categories.
Like other e-commerce retailers, we believe key to delivering a compelling e-commerce value proposition and a profitable business model is a seamless buying experience.
Seamless efficient and predictable supply chain with density as a key driver of supply chain economics.
And the ability to make credit available to our customers. We believe our four focused initiatives will position us to capitalize on the significant market opportunity.
Turning to slide seven.
I look forward to providing everyone more detail on our forward outlook at our upcoming Investor event on May 26, we will provide.
Abide more detail on our three key objectives.
Prioritizing unit economics over growth.
<unk> operating expenses and maximizing liquidity.
As well as our four focused strategic initiatives, most importantly, build a well oiled titling and registration machine.
Build a well oiled metal machine.
Build a regional operating model that drives density.
Build a captive financing offering.
I'll turn it over to Bob now to go through our financial performance in the first quarter and give you more detail on the forward outlook Bob.
Thank you Tom.
I'll start with the highlights of our financial performance during the first quarter on slide nine.
I am pleased to report that we exceeded all of our key financial guidance targets for the first quarter.
Total revenue of $924 million came in ahead of guidance by 6%.
This revenue was driven by higher E. Commerce revenue as we came in ahead on units and delivered a greater than anticipated contribution from retail financing following the acquisition of U H C C.
First quarter units increased 26% year over year to 19473, and we're ahead of the high end of our guidance.
Our performance was driven by stronger seasonal demand.
During the first quarter we.
We focused on stabilizing and expanding E Commerce G. P P U from fourth quarter levels.
And prioritize favorable unit economics over growth.
In turn this drove sequential unit declines coupled with profitability improvement.
Ecommerce G. P. P. You have $1763 was 18% ahead of our guidance with better than anticipated performance across both product and vehicle margins.
Adjusted EBITDA loss of $107 million was ahead of our guidance by $23 million.
Approximately half of the outperformance was driven by a higher than anticipated gain on sale from our first securitization.
The other half can be attributed to our court room business, which benefited from better than expected e-commerce performance and improved execution versus our expectations.
Before I go into our guidance for the year.
I would like to mention a few extraordinary items to keep in mind as you think about normalized earnings.
Due to further declines in our share price during the quarter.
We conducted a quantitative assessment, which resulted in a full impairment of our goodwill.
This resulted in a $202 million one time noncash charge during the first quarter.
As we look ahead, we anticipate total cash charges of approximately $6 million in 2022 related primarily to severance and lease costs associated with the realignment plan.
The company expects to achieve at least $25 million in annualized cost savings as a result of these payments.
In total the realignment plan is expected to drive a $135 billion to $165 billion in cost reductions and operating improvements to full year 2022 adjusted EBITDA versus our first quarter 2022 annualized rate.
This represents approximately $180 million to $220 million in savings on a fully annualized basis.
Finally, we anticipate approximately $17 million to $27 million in nonrecurring costs for the year to address operational and customer experience issues. These costs should not be part of our 2023 run rate.
No.
Let me share the components of our annual guidance.
Full year, we expect approximately 45000 to 55000 e-commerce units.
This represents a reduction from first quarter levels as we prioritize unit economics over growth.
We are expecting remaining units for the year to be spread fairly evenly by quarter with some modest seasonal variance.
We anticipate an adjusted EBITDA loss for 2022 or approximately $375 million to $325 million.
Within this we forecast ecommerce G. P. P. You to continue to improve for the second quarter and to be higher in the second half than the first half as we normalize beautiful margins and expand product margins as we scale captive financing.
We also anticipate lighter quarterly SG&A spend in Q2 through Q4 versus the first quarter as we realize immediate benefits from the realignment plan.
I will go through these savings shortly in more detail.
We are also providing guidance on our year end liquidity position.
We anticipate approximately half a billion dollars of liquidity at the end of the year.
Which is only a $100 million reduction in liquidity over the next three quarters.
Now, let's take a closer look at our ecommerce performance in the first quarter on slide 10.
Our first quarter results demonstrate meaningful improvement from fourth quarter levels and came in ahead of our expectations.
E Commerce units increased 26% year over year to 19473 units driven by increased inventory and ongoing demand for used vehicles.
Units contracted sequentially as expected as we increased our focus on improved unit economics.
E Commerce revenues increased 60% year over year to $675 million driven by a 26% growth in units and a 27% increase in ecommerce average selling prices.
Average selling prices decreased slightly sequentially, yet remained elevated on a year over year basis.
Ecommerce vehicle G. P. P U $595 declined year over year, yet improved 26% sequentially from fourth quarter levels.
We have more work to do to fully restore our vehicle G. P. P U as we move through the year and expect improvement.
Ecommerce product G. P P U $1168 increased year over year and sequentially.
The year over year increase was driven by higher attachment rates and higher average loan balances due to higher average selling prices.
Next please turn to slide 11.
Before I go through our 2022 guidance in more detail I wanted to provide some commentary on how our financial statements will be impacted by the acquisition of U S. C C.
First let's begin with the income statement.
In the first quarter, you can see that we added a new retail financing segment.
This segment includes U S. You see loans originated to independent dealership customers.
Revenue for this segment includes gains and servicing income related to securitization of UHD see originations as well as interest income for acquired loans that remain on the balance sheet.
This segment also has expenses within cost of sales, which are related to historical securitization expense on the balance sheet.
Overtime captive finance will impact product revenue and gross profit for the ecommerce segment as we scale you ACC originations to finance vehicle sales.
Since we completed our acquisition of UEC in February impacted E. Commerce results was insignificant in the first quarter from captive financing.
Now a few highlights around loan originations in the balance sheet.
The first quarter, we originated approximately $118 million of new loans.
So have $350 million of unused capacity on warehouse credit lines available as of the end of the first quarter.
We will continue to have a portion of legacy dealership loans and related securitization debt acquired from U S. You see that will unwind over the next 18 months or so.
These loans and that are marked to fair value each quarter.
This loan portfolio will eventually run off and represents prior on balance sheet securitization model in contrast to the current off balance sheet securitization model we have.
Reflecting a $5 $6 million fair value adjustment to adjusted EBITDA.
I encourage you to review our recently filed 10-Q for more details on the incorporation of <unk> financials into brooms consolidated results.
Turning to slide 12.
I would like to provide some details on our realignment plan and provide more context on its financial impact.
The business realignment plan is designed to position the company for long term profitable growth by prioritizing unit economics overgrowth redo.
Reducing operating expenses and maximizing liquidity.
All in we expect to deliver approximately $135 million to $165 million in cost reductions in the operating improvements versus our first quarter run rate for 2022.
The full annualized rate of those savings would be approximately $180 million to $220 million.
To achieve these savings we are executing a number of actions.
We are reducing our head count by approximately 270 positions, which equates to 14% of our workforce.
We will also improve unit economics through a more disciplined pricing approach expanding vehicle and product G. P. P U.
Next we are focusing our marketing dollars to align with lighter throughput and acquisition expectations and pivoting towards our highest ROI channels.
As we look at our core operating model.
We will build a more regional approach, which will reduce logistics costs over time, as we drive speed and shorter distances from node to node and to the customer.
Finally, adding more automation into our sales process will reduce our number of manual transactions improve the customers experience and drive further SG&A savings Slide 13 explains our full year EBITDA guidance, which incorporates the realignment plan.
We forecast significant improvement from our first quarter run rate.
We begin by comparing an annualized first quarter run rate for a room, excluding EBITDA for you a C C.
We are doing this because we will not be issuing a securitization every quarter in 2022.
I will add the first quarter impact of the securitization later in the bridge.
Annualized first quarter adjusted EBITDA results in a loss of $548 million.
As I referenced we expect approximately $135 million to $165 million of cost savings and operating improvements for the remainder of the year from the underlying balloon business as a result of the realignment plan.
Next we anticipate approximately $65 million to $75 million from you ACC groomed financing for the full year with $30 million already realized in the first quarter.
We anticipate the next securitization to occur in the third or fourth quarter of this year based on market conditions.
These benefits are partly offset by $17 million to $27 million of nonrecurring costs for the year to address operational and customer experience issues.
Taking these adjustments into account, we expect to end the year with a 375 million to $325 million adjusted EBITDA loss.
Page 14 contains more information regarding the expected cash and cash equivalents at year end.
As I mentioned, we are forecasting approximately $450 million to $565 million of liquidity at year end based on the following bridge.
As of March 31.
We have approximately $600 million of cash and cash equivalents.
Based on the guidance I covered on the prior slides, we expect adjusted EBITDA loss for Q2 to Q4 in total to be between 268 and $218 million.
Most of which is expected to be cash.
This includes an expected gain on securitization from UAC sea of $35 million to $45 million in the second half of the year.
Next we expect capex to be approximately $35 million to $45 million for the rest of the year as we continue to invest in improving our captive finance processes and anticipate capital for a dedicated room reconditioning facility.
We will partially offset those uses of cash with the transfer of $125 million to $150 million of restricted cash to cash and cash equivalents as we improve our transactional processes.
In addition, we expect to see improvements in cash flow from U S. You see brewing financing and working capital initiatives that of realignment costs.
Approximately half a billion of cash and cash equivalents at year end will position us well for 'twenty 'twenty three and beyond.
Turning to slide 15.
In addition to the $600 million of cash and cash equivalents at the end of the first quarter, we have $700 million of capacity under our floor plan facility.
Going forward we.
<unk> continued incremental sources of liquidity from working capital efficiencies future ABS and forward flow transactions and incremental borrowing availability on UA system balance sheet.
Finally on slide 16.
In summary, during the first quarter, we exceeded our expectations on our first quarter financial guidance metrics, we began to position the business to focus on unit economics and improve profitability.
Our 2022 guidance is underpinned by cost and operational improvements from the realignment plan.
Our acquisition of U S. C C will be transformational for our business and will provide an additional source of cash and finally improvements in our processes and working capital will position us to optimize our cash usage for the balance of the year.
Thank you for your time and attention today, operator, we are ready for questions.
As a reminder, if you'd like to ask a question. Please press Star then one.
If your question has been answered and you'd like to remove yourself from the queue press the pound key.
Our first question comes from Rajat Gupta with Jpmorgan. Your line is open.
Oh, great answering the questions and thanks for all the detail in the slides.
Question, Oh, you're the first one on unit economics.
And once you excluding U S C C.
The EBITDA per car was a loss of roughly six and a half thousand doors.
During our full year guidance implies.
<unk> EBITDA loss of roughly $280 million.
Or if it was $60 million of smoothing.
The non recurring cost.
On maybe like 35000 units yourself on the remainder of the year.
You know that that's a loss of roughly 70 to $75000 a car.
Even assuming trade up roughly 7000.
After cost savings you know nearing probably you know with housing from the captive finance integration.
We still get to something like 6000.
<unk> six.
$6000 of EBITDA loss per car, which would imply a significant degree of cash burn.
Next year as well you know roughly 400 million of Astro Mike Alex you know after accounting for you as you see in Capex, maybe 65 to 70000 units next year.
Hum.
Fixed cost reduction and the realignment plan also seems to be you know just 14% workforce, but with units down roughly 50% and many of them. So I.
And so the question here is I'm sorry for the long question.
Question, when you're trying to get comfortable with the new <unk>.
That makes progression to a profitable level.
And what level of volume will that take and how do you expect to fund the business and Kevin.
And I have a follow up sorry for the long question.
Hi, rich this.
This is Tom. Thank you for the question before I answer your question I just wanted to clarify something I said on slide five I believe like I said, we expect it to have liquidity at the end of the quarter of half a billion dollars I meant to say at the end of the year.
Yeah. So I appreciate your question resort here, Here's how we think about it this year as you can tell from our initiatives is really about building the core processes systems and infrastructure, we need to create a profitable business model.
So within that we are very focused so the actions. We've taken are intended to significantly improve variable contribution margin, which we're finding as G. D. P. You less variable operating costs like marketing customer experience and logistics.
We expect our fixed cost to be reduced in absolute dollars. However, as you point out our fixed cost per unit will increase in the short term and we're maintaining our fixed cost because we have strategic assets and those fixed costs that we'll need as we accelerate growth.
Got it.
So are.
Are you anticipating any color on when you what level of volume do you anticipate it to be profitable with this with this new realignment plan.
Is that something we will probably look together at the Investor day.
Yeah on the Investor Day, we plan to share our long term economic model and we believe that the four initiatives that we've laid out today.
Significant progress not only in 2022, but in the years ahead and really found lay the foundation for that continued improvement. So when you think about building a world title and registration machine, well oiled metal machine and our regional operating model those things don't happen overnight and as you implement those strategies.
We will expect continued positive unit economic momentum beyond 2022.
We think we've got the I just want to add to that is if you look at the you know the actions that we talked about today on the call. I mean, those actions are essentially have all been taken so just in terms of thinking about the cost reductions and how we're thinking about things.
The head count reductions those have all been announced and the actions that we're taking have you know we were ready.
We're well down the oil we're well down the path on those on all the items that we referenced.
And then lastly, I think.
Conservative in our guidance given the unknown macro economic.
Market for the balance of the year.
Got it got it and just one more on you know the first quarter.
Is there a way to quantify the pressure of operational issues or you know.
Omicron or price mix, you know in the first quarter on the E Commerce Waco and GPU.
Just asking in order to get a sense of comfort around.
Expectations of higher GPU exiting the year.
And the used car pricing environment that might moderate at some point.
Just curious how do you manage that transition.
So is that I would I've mentioned a couple of things. So we talked about the nonrecurring the nonrecurring costs that were going to incur that $17 million to $27 million of nonrecurring costs that we're going to be incurring this year so that.
That had an impact for us in the first quarter with respect to with respect to I'm a crime weakened.
Reconditioning facilities, which has been an issue for us in prior quarters.
It was.
In January we you know we had some we had some disruptions and some issues in and re kind of as a result of auto crime, but really February March for US has been has not we haven't had any we haven't had any issues as a result of the Oh the virus at all or was it if you want to add to that yeah, and the only thing I would add is and I can't size. It for you, but we have brought in.
In additional resources as we work through our titling and registration issues and we are doing everything that we can to dramatically improve and take care of our customers in and that's been our focus in Q1 ending Q2.
And so we will be investing in those but I can't size. It for you at the moment.
Got it and maybe like any color on like when you say higher GPU exiting the fourth quarter.
We're sitting at 17 63, any way to get a sense of like what kind of magnitude are you looking at there you know where that's coming from is it primarily you know the product you do you is it a substantial portion from the week with GPU.
I'm just trying to get a sense of you know whats the runway to every one of these operational.
<unk> holdings have been addressed.
Yeah, what I can share with you today, our job is we we've made pretty significant changes in the way we think about <unk>.
Pricing and the way we go to market. So if you think about the market. We were in it previously we were really pushing all of our levers to get to triple digit growth, because that's where the market sentiment was.
Over the last couple of months, we've made some dramatic changes in how we think about overall union economics, how we priced the acquisition of cars, how we priced the sale of cars and we implemented several changes over the last couple of months and we are seeing very favorable early results from those.
From those changes that have been implemented and we'll expect to share those as we go.
As we announced Q2.
But we expect them to be north of where we ended Q1.
Our next question comes from Zacks, St. Joe with Wells Fargo. Your line is open.
Hey, guys. This is Sam Reid pinch hitting for Zach here.
Maybe.
Maybe touch upon your unit guidance, a little bit I know you already talked about this in detail, but you know your guidance implies that you're stepping down units from 20000 this quarter to roughly 10000 on a run rate going forward and can you talk about why you think this is the right level to balanced growth and profitability you know what drove that.
That number specifically how long do you think will need to stay at this run rate before you can once again pivot back to growing units aggressively.
Yeah, Hi, Sam at some thank you for the question.
When we.
During the quarter as we implemented new metrics and data structures around titling registration to really get a better handle on the challenges that we had a we started realizing we were at and what we need to do to get caught up.
And so as we as we begin to size how long it would take us.
It really improve the customer experience, we didn't want to continue to sell at high rates. When we know that we had those issues.
That was one factor the second factor was we made dramatic changes in the way we price the cars, we buy and the price.
Rice that we sell cars at <unk>.
And those two things combined lead us to believe that this is the right level of units for the balance of the year to enable us to improve our structure around all four of the initiative and at the same time improve our unit economics.
That's super helpful. I really appreciate the color there and then one quick follow up can.
Can you talk about your plans for reconditioning and a bit more detail as you transition away from a desktop you know specifically what we're looking for here. He says hints as to what the balance is going to be maybe maybe going forward between working with additional third parties versus what youre going to be taking in house just that split there.
Yeah, I would tell you that we're looking at that the way. We think about that is we still have opportunities in our own reconditioning network in Houston, and we're going to continue to improve our own network. While at the same time, we'll always for with our third party partners and we're going to take a very.
We'll look at really what makes the most economic sense and if it makes economic sense, we will look to potentially stand up a second b or C. Later this year early next year. If it makes sense. So it's really going to come down to the return on the investment. After we go ahead and implement the opera.
<unk> that we think we have in our own Reconditioning center.
No that's super helpful. I really appreciate it I'll pass it on.
Hey, Thank you Dan.
Our next question comes from Colin Sebastian with Baird. Your line is open.
Alright, Thanks, and good morning, everyone. A couple of follow ups for me. Please I guess first on the the rationalizing the footprint beyond the ADESA transition I'm curious you know where you're focusing from a regional perspective, and how we reconcile that with improving customer delivery times.
You know given our national sales effort and then maybe as a follow up to the first question on the call as we look ahead a few quarters.
And potentially some of these liquidity.
Issues extending into 2023, just curious on when you would expect to potentially need to raise more capital in context of of the realignment plan working out. Thank you.
Thank you for the question Colin on the on the first part we are actively looking at where we want to.
M. B regionally if you think about the way our business was built we scaled nationally, which meant we were buying and selling cars nationally and we had.
We had built regional reconditioning.
Regional Reconditioning network and logistics hub, but we didn't have our supply chain synchronized in a way that dramatically reduces the miles are vehicles travel. So for example.
You could buy a car in the south.
Southeast of the United States. It may come from the northwest of the United States and so our intent going forward is we still want to offer customers that potential if they desire and really want the car in Seattle, but we're going to push more towards trying to buy and sell cars more regionally.
Think about you know the three largest states in the country by population in California, Texas, Florida, those obviously be key regions for us.
But we're going to continue to work through what makes sense based upon the assets that we have the customer base that we have and really the assortment density that we have in each region.
Bob.
Yeah, Mark on your on your second question.
I think it's just important to point out I know, we mentioned on the call today, but we were executing a $200 million of annual of annualized cost reductions.
And given us line of sight to.
I have a $1 billion of liquidity at.
At the end of the year.
But really for US this is really about living within our means and managing the business that way so.
There's obviously lots of things moving around right now with interest rates and in the used vehicle market, we're committed to as a as a leadership team and as a company is to live within our means to get to that.
The name of cash at the end of the at the end of the year and then we'll see where the we'll see where the market is and will continue to course, correct and make the appropriate adjustments given the given the amount of resources that we have.
Yeah, Sam I would add one more thing to your first question, which is so an example of something we've already implemented when you go on our site today based upon your ZIP code, which we which we added recently youre going to see cars in your search criteria that are sorted closest to you with the car's farthest away from you being at the <unk>.
Last search paid so small things like that are things that we're just beginning to do and I see this as a as a multi year effort as we are.
Implemented so if you think of other large supply chain transformation that I've been a part of in the past.
You you lay out the strategy build the data and the analytics and then you began implementing and we've begun implementing but I believe the <unk>.
Half the head it is significant that we can achieve when this initiative is fully executed.
Alright, that's all helpful. Thank you.
Thanks, Ron.
Our next question comes from Seth Basham with Wedbush. Your line is open.
Thanks, a lot and good morning. My question first is around the titling registration issues can you give us some perspective on the timeline for normalization on those issues. Please.
What I can share with you is that.
We began making significant progress in Q1 towards improving our processes. We've already implemented a couple of systems that are dramatically improving our process and.
Tell you there is a daily call every day, we are making progress on on improving the process right. Now we're focused on ensuring that all our customers have vehicles that they can drive where we failed them and we are building and have a strategy in place that we're working on that we think is.
Bob mentioned in his remarks could ultimately be a long term competitive advantage for us. So we're not prepared to share an exact timing other than to tell you. It is truly our number one priority.
D a.
So there is a tremendous amount of focus on it.
Got it okay. Thank you and you don't think that there are any long lasting impact too.
Your brand or relationships with dnv's from the issues you've experienced.
We certainly believe that we have some repairs to do there and we're actively working on that but our first step is.
Ensure we take care of all of our existing customers and ensure that all our customers and purchases that are happening now, we deliver titles and registrations or not.
Got it okay, and my follow up questions on pricing and inventory management.
You are changing some of your pricing.
Tools and it also seems like you're shifting your inventory a little bit based on the market environment, but are you.
First thinking about.
Focusing on certain areas of the market from a consumer income standpoint, moving up our downstream and then secondly from a pricing standpoint.
What's your goal in terms of pricing relative to the market.
Yeah.
Yeah, we definitely our goal holistically on pricing to be competitive in the market and those are analytics that.
We're looking more and more at especially over the last couple of months.
We have begun tapering the number of units that we purchase to begin to right size, our inventory and it really takes two things it takes the metal supply chain and the title and registration supply chain to work because for our cars will be listed for sale, we need to get the titles. So we have initiatives in place to speed up.
The entire process. So if you think about how it works we want to speed up how fast we pick up the car. Because then we can put it in inventory faster. So we have to pick it up faster we have to pay off the lean faster we have to get the title faster and then we can make it available for sale faster.
And the same thing with just traditional supply chain elements that you would do to improve inventory turns. So we have initiatives that we're focused on in both of those process processes to improve inventories overtime.
Thank you.
Thank you.
Our next question comes from John Colon tuning with Jefferies. Your line is open.
Thanks for taking my questions I wanted to start with the with the cost savings program.
Given given your business relies on third parties for reconditioning customer service and a fair amount of delivery along with the fact that.
You said you need to improve the user experience, which presumably would require some investments in technology and I was curious if you could walk through kind of a key cost buckets or buckets of cost savings opportunities and you know also maybe help give us a sense for how much of the realignment.
Our cost savings are coming from improved GPU or unit economics versus pure cost reductions.
Yes sure. Thanks for that question John This is Tom.
We think about it is really driving productivity on all levers of the P&L. So we think we have opportunities across our cost.
Really across the board and the what Youre seeing in the realignment plan is largely driven by contribution margin improvements by improving our gross profit per unit as well as improving for example, our marketing efficiency, we're very focused on and have already made several changes.
Only spend marketing on our highest ROI channels.
And so we believe that we're just at the beginning of making those and we'll share with you in our Investor Day later in the month, how do we think those levers will change in the long term to build a.
Profitable business.
Great and maybe just talk about at least it sounds like you're gonna be saving quite a bit of this for the Investor day, but just talk about from a high level you know, how you're going to approach realizing improvements in and pure and in our per unit economics.
In light of macro headwinds like wage and in parts and fuel inflation higher levels of depreciation and other cost headwinds that are a bit out of your control.
Yeah, Thanks for that and we believe that the opportunities we have in just improving our basic business operations.
Our significant particularly relative to the likely transitory economic things, we're seeing like fuel surcharges and other items. So for example.
Our goal is to improve our marketing cost per unit by focusing on our highest ROI marketing channels. Our goal is to improve our transportation cost per unit by having our vehicles travel fewer miles.
Our goal in the longer run is to have our customer experienced cost per unit go down as we automate and improve the processes and title and registration.
Our goal is to make sure we optimize our pricing and GPU profitability, while being competitive but also taking into account all the elements and the levers that we have so that's what I mean, where we think we have opportunities really across all line items on the P&L as we start to build out the phone.
Asian and infrastructure to drive.
True productivity improvements on a per unit cost basis as well as in GPU.
Thanks appreciate the color.
Thank you.
Our next question comes from Matt Kahn with tourists. Your line is open.
Okay. Thanks, a lot.
A couple of questions. So on this sort of ear and cash position.
I'm curious.
What are you thinking.
In terms of the exit cash burn rate, which is where we are right. So.
You're going to implement these strategies as we progress throughout the year in one thing.
Javier in the year and also in terms of the sort of the unit guide for the full year should we think about the how should we think about the curve should we expect to kind of see.
See a trough somewhere in the middle and then coming back up in the other hand or should we kind of model it kind of evenly and maybe just.
On the G. P. P you sort of dynamic from here on.
On the pricing environment continues to be pretty volatile. So just wondering what gives you the confidence in sort of the.
The bridge you laid it out for India calculation on EBITDA.
Yeah. Thank you for the question I'll take the last two and then turn it over to Bob for the first one we expect the units to be relatively consistent over the next three quarters with possibly some seasonality downward pressure in Q4.
And that and back to the GPU as I mentioned earlier, we implemented several changes already.
Now that we are seeing positive G. P P momentum from Q1 rates.
And we believe that.
From the items that we've implemented already and the trajectory that we're seeing in units that those two will will look better than Q1.
The GPU will look better in Q1, the rest of the year.
And really the way I think about that is there's just.
The significant shift we made in the entire business driven towards triple digit unit growth to more focus on profitability we had.
Pricing levels that we were able to change to make that change in there the changes are relatively significant.
With respect to the to the exit cash burn I mean really the way to think about it.
The actions that we're taking.
Yeah.
We began those actions.
During the.
During the second quarter.
And you can look at look at our existing run rate and then and then adjust for you know for the actions that we've taken but I think one of the thing that's really important to understand in terms of exit run rate as well as just I also mentioned there is a third and fourth quarters of the securitization with HCC, which is another from an overall from a from an EBITDA perspective, another $35 million to $40 million.
In terms of.
Improving the improvement the exit rate, depending upon market conditions, and when we execute but.
But as we continue to improve on a transactional processes.
And kind of talk about productivity and improve our overall productivity.
We are continuing to expect improvement in our run rate.
Through the year.
Yeah, and I'd just add one last thing your point is well taken which is why we built a large range in our forward guidance. We recognize that we're not operating in a vacuum and there are macroeconomic forces that could impact our DPP.
Okay.
Thank you.
Again, if you'd like to ask a question. Please press Star then one.
There are no further questions I'd like to turn the call back over to Tom Schwartz for any closing remarks.
Thank you everyone for your time today, and we look forward to sharing.
More additional details at our meeting later this month, thank you and have a great day. Thank you.
This concludes today's call you may now disconnect.
[music].
Yes.
Yeah.
[music].