Q1 2022 Shift Technologies Inc Earnings Call

May 10, 2022

Hello, Thank you for standing by and welcome to shifts Technologies' first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised.

Today's conference maybe recorded if you require any further assistance. Please press star Zero I would now like to turn the conference over to your speaker today <unk> Vice President of strategy. Please go ahead.

Good afternoon, and welcome to the shift technologies first quarter 2022 earnings call. Joining me on the call today is our CEO , George Harrison and our CFO that China. During our remarks, we will make some forward looking statements, which represent our current judgment on what the future may hold.

And while we believe these judgments are reasonable. These forward looking statements are not guarantees of future performance and involve certain assumptions risks and uncertainties actual outcomes and results may differ materially from what is expressed or implied in any forward looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward looking statement.

We undertake no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise. After this conference call. During the course of this call we will be referring to non-GAAP measures I, just defined and reconciled in our earnings materials.

I will now turn the call over to George.

Thank you Henry and good afternoon, everyone. Thank you all for joining us today.

First quarter represent solid execution.

Operating environment.

Revenue up $220 million and adjusted <unk> of <unk>.

One we beat our first quarter guidance ranges.

Adjusted EBITDA loss of $46.

Came within our guidance range.

We are pleased with the progress we've made on each of the three strategic priorities.

<unk> earnings call, which one.

Spending adjusted GPU through operational efficiency improvement.

In Q1 that was.

With $13 22 up 41% from Q1 2021.

Fantastic results and I want to give a huge shout out to auction team members working on F&I.

<unk>.

Optimizing our personalized sales and drive.

Higher conversion rate in.

In a moment I'll get into some more details around the improvements we're making there.

Third driving unit sales will increase in market penetration and expanding into new markets.

Our E Commerce net sales grew 51.

One and we saw a nice balance of growth from our legacy West coast market.

When you it takes months, which accounted for about 70%, 30% of the 51% growth.

You can find further details on our switching priority Q1 shareholder letter posted on our Investor website.

I'll spend the rest of my prepared remarks talking about the my quick environment and actions, we're taking today to maintain strong business performance for this challenging industry.

As we discussed in that much earnings call 2022 per ship is going to be.

<unk> equivalent profitability.

A keen focus on driving operational efficiencies and cost savings.

Improving our liquidity position.

While this has always been our plan for 2022 since we began planning for this year back in 2021 evolution of the macro environment over the past several months.

Ive made these initiatives all the more important.

For meaningful options on this theme that I want to highlight.

First we have executed on a comprehensive performance management and cost reduction initiatives.

That led to a leaner more.

<unk> corporate and sales organization.

There were two components.

Firstly, a transition in our sales and fulfillment teams.

<unk> to return to an in person sales team from the remote team format that we've been operating in over the past two years because of Covid.

We expect to meaningfully improve conversions.

Currently in order to maintain operational excellence, we eliminated a number of corporate positions and equal about 10% of the corporate team mostly through a normal course of performance management. These actions coupled with hiring initiatives. We completed in Q4, primarily due to staff up our logistics and reconditioning team give us confidence that we are.

Appropriately staffed to meet customer demand, while maintaining a cost effective and leaner organization.

Second we are focused on our existing markets.

Still meaningful opportunity to capture share in our core west coast markets, and notably a massive opportunity in Texas.

Further encouraged by a strong performance in Texas.

I spoke to earlier.

The near term, we have positive expansion into Las Vegas.

We still think this will be an attractive market over the long term.

The regulatory environment to be more challenging than anticipated.

We did not in this market to be essential to meet our 2022 goals.

Third and responsive as well documented macroeconomic factors impacting vehicle affordability have impacted both the customer and the other market as a whole.

Increasing the number of value caused inventory vehicles eight years or older over 5000 miles.

These vehicles are significantly more affordable while we.

We are certainly not immune from challenges posed by the pricing environment.

To leverage our full spectrum inventory to cater to changing consumer needs gives us a greater advantage relative to peers more concentrated inventory.

We do not expect to increase the percentage of value cost creep and you with initial challenges right.

It's possible that some more value plasma, resulting in F&I declined quarter over quarter, which we view as a worthwhile tradeoff given the higher funding margin.

Let's see on value vehicles.

Fourth as you saw via an 8-K last week, we put in place an ATM or at the market facility up to $150 million in new equity capital that we can draw upon over the next several years. This facility gives us flexibility as we continually evaluate all potential financing.

Options.

We're highly focused on balanced and capitalizing on the massive market opportunity.

<unk> profitability and prudently investing our capital.

Focus on sustainable growth, while marching forward on our path to profitability has enabled us to achieve strong results despite market challenges.

Today, we are reaffirming our full year guidance across revenue units GPU and EBITDA.

While we are very cognizant of the significant macroeconomic factors.

Consumer behavior.

Industry, we feel confident about our strong execution for the year and our ability to adjust to the changing environment to ensure that we continue to execute successfully.

A quick comment on our pending acquisition of data.

Closing process is proceeding nicely and we expect to close in May in line with our original timeline.

Really excited about the next phase here and we expect to pilot the marketplace product in Q2.

As we work towards the close.

To ensure that this acquisition will be cash neutral to shift.

I want to congratulate the shifting their teams for their effective execution on the close in preparation for the pilot.

Now I'll turn the call over to border towards first quarter financial results and with the second quarter and full year 2020 guidance for that.

Thank you George and good afternoon.

We had another strong quarter of execution.

Revenue for the first quarter grew to a record $219 6 million an increase of 107%.

As the prior year period.

E Commerce units sold grew to 6714 up 51% year over year.

Adjusted gross profit per unit.

<unk> 1681 in the.

Quarter versus 1706 last year.

The slight decrease in adjusted GPU was driven by E Commerce GPU of 330 versus 723 last year.

As discussed on our last quarter's call. This was driven by sell through of inventory acquired in 2021 during periods of higher relative pricing.

Which we sold early in the first quarter when the relative prices were lower.

E Commerce GPU is expected to recover in the second quarter as prices normalize.

Okay.

Key to our long term strategy.

We delivered a significant increase in adjusted other gross profit per unit, mostly F&I.

Growing to 1322 in Q1 versus 1162 in Q4 and 938 in fiscal 2021.

Our strategic investment in enhancing our ancillary product offering by hiring and training a high performance F&I team is showing great results.

SG&A expenses were $64 million or 29% of sales versus $50 2 million or 47% of sales last year.

Marketing expense declined versus last year by $3 4 million to $11 9 million due to our transition to brand marketing in the first quarter of 2021, which resulted in overlapping marketing expense.

Adjusted EBITDA loss for the quarter was $46 6 million or a loss of 21, 2%.

Revenue compared to 32, 5% loss rate last year.

The improvement in adjusted EBITDA margin year over year reflect continued operating leverage as we grow revenue.

We ended Q1 with cash cash equivalents of $106 8 million, including $11 9 million in restricted cash.

The cash used in the quarter was unusually high.

Due mostly to a $38 million investment in inventory to ensure a proper capacity for.

For the busy spring selling season.

And the annual incentive payment for the 2021 performance here.

This cash use is expected to be reduced significantly.

For the coming quarters as we convert the high point of inventory achieved in Q1 into sales and cash while many of the annual or nonrecurring payments are behind us.

Now turning to guidance for the second quarter.

We expect revenue to be in the range of $225 million to $235 million.

Adjusted GPU is expected to be in the range of 1800 to 2000 and.

An adjusted EBITDA loss for the quarter is expected to be in the range of $37 million to $39 million or 16, 5% of revenue at the midpoint.

For the year our guidance is unchanged.

Revenue in the range of 1 billion to $1 1 billion retail units for the full year in the range of 34000 to 38000 <unk>.

Adjusted GPU ahead of our 2021 GPU of 2126 and.

And we expect adjusted EBITDA loss margin to be in the range of 12% to 15%.

With that I'll turn it back to George.

Thanks, Oded I'd like to thank our 17 pumps to outperformance.

Ever changing macro environment.

We have the right team and plan in place to meet our long term vision.

With that we're now happy to answer your questions for this portion of the call, but and I are joined by our President and Jeff comment operator can you. Please open up the lines for Q&A.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Todd with tourists you May proceed with your question.

Yeah, Hi, thanks, Thanks, a lot.

Couple of questions. So.

So George as you think about your marketing spend this year versus last year I guess Q.

Q1.

Declines because you called out the overlap.

If you had last year.

How should we think about.

Cadence for the rest of the year as it compared to last year and then on.

On the guidance.

<unk>.

It has to kind of think about the shape of the year it seems like.

The EBITDA margin improvement is more back half loaded and given the environment pretty pretty volatile with respect to pricing and all that.

How much confidence do you have in.

And kind of hitting the midpoint of that guidance.

You talked about.

Okay.

And then I'll, let you take that.

You won't get though.

Let me start talk about EBITDA and then we can.

Talk about marketing as well so we feel good about the guidance we have provided right.

Put in place a lot of initiatives in the first quarter that would serve us very well for the.

Remainder of the year both on <unk>.

<unk> and selling and marketing and <unk>.

G&A.

Overhead so all of those should show continuous improvement throughout the year.

Of course, the guidance, we provided second quarter is.

Significantly better than first quarter from.

EBITDA loss rate and then we expect to see continuous improvement.

Throughout the rest of the year.

Specifically to marketing.

CAC in Q1 was about half of what it was a year ago in Q1, right because last year. We mentioned we had this dual strategy that was going on in the transition.

Again, we expect the CAC too.

Continue to improve as we go throughout the year.

You've seen in our long term plans, it's still going to be <unk>.

Significant so we can support our growth going forward, but it's going to be lowered the expected to be lower than the.

The 70 to 170 or so that we printed in Q1.

Yes.

Just trying to.

So we are expanding into new markets.

When you get greater efficiency on marketing just about being in the market that will contain and kind of.

Getting more share there when they are making more efficient.

Yes, so just to add to what our plan in the hall answer that question as well so.

You saw kind of midterm plan and long term plan and we need to get marketing down.

Yeah.

Those numbers and to get to profitability, which is very much on the phone.

Yes.

At that kind of in 2020 for 2025, the market numbers that Phil.

Higher than I think when the ideal because we want to make sure that we sustained growth in the future beyond that you.

Probably could maintain the business as it is at that point with much less cap then than it is in the model as far as this is concerned we would expect marketing numbers to come down.

Everything.

Quarter end would progress at <unk>.

For the next couple of quarters.

See how Q4 shapes up.

And part of the reason is that we are continuously aiming to improve.

Our marketing and become better at that.

We are.

Last year was more elevated in light of the things that we've spoken about in the past.

So we feel really good about marketing being down versus Q1 and Q2 for example, and then in Q3.

And refreshing our brand campaign, a little bit this year, we're not going to have a sublease spokesman and then you add that we are launching and these are as a result.

Less expensive asked to put together in a more nimble that avenue timeline shift, which we think is going to be quite eye, catching and very clever and we'll be very fun.

This team to see and hopefully have a breakthrough in the market really well.

It's about that.

And then.

As far as new market, we're not launching any brand new markets by now, but obviously, Texas is still a fairly new market with only been therefore, a little bit and so.

We do anticipate Texas to grow pretty significantly and so I think.

That will be caught me.

Continuing our investment and will continue.

Got it thank you.

Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Sharon Zackfia with William Blair. You May proceed with your question.

Hi, Good afternoon, I guess a question on the cars over eight years old can you kind of refresh us on where you are now in terms of percentage of mix and that kind of age cohort and.

Where you would ultimately want that to be as we go throughout this year and any refresher on kind of the difference in front end profitability that you've historically seen for that age of car versus where you've been more so over the past year and a half.

Sure.

Talk to you so.

Maybe I'll start even more back kind of in 2020 and 2020.

<unk> Destiny became quite elevated we were up to 40 plus percent.

<unk> at various points, but we thought that made sense given the uncertainty that COVID-19 was presenting in Q2 and Q3 of 'twenty 2020, but the implication of that of course was that our reconditioning got on a little bit buttoned up. So as we then in Q4 of 2020 and route them last year.

Getting a precondition to improve significantly which I'll talk about in a minute one of the things we did was to reduce the value mix.

In a significant way down to about 20%, 25% in order to give the reconditioning team time to improve.

They were able to receive some really remarkable result last July our reconditioning throughput increased to an opex.

And with 90 plus percent of reconditioning being done in house.

Example, towards the end of last year, so re content.

Doing all of that while cutting costs in a pretty significant way. So recently, which has some really awesome results. When we talked about the fact that we would reduce the <unk>.

<unk> percentage of our total sales in 2021 I also said that hope was that once we.

We're able to achieve things that they need to achieve last year, we'd be able to scale it up to be more and we feel really good about where we kind of today, enabling it to do the larger portion of value. So we're not talking about a huge increase we're talking about getting to maybe 35, 40% on value, whereas you know.

Four.

Few months, it's been more like 30% and earlier in 2021 was <unk> 25. So it is a change from where we had been in 'twenty, one, but not a massive change.

But we think that it is the right thing to do it in light of where the market conditions are today, and where consumer demand is value cross sell with it.

Quickly, we get more leads per value vehicles versus all the other vehicles.

And so from all those perspectives, it's inventory that that makes sense to sell.

On the front end, we do align better with value. There are two reasons for that number one because we are able to buy them for a lower percentage of market versus non value vehicle and secondly, because we are able to sell them at a higher percentage to market and then everything else because the demand for those cars is so strong in this gas environment.

They do have lower backend margin, which makes sense because they cost less money. So you originate less financing fewer people by an extended service contract like a warranty for those cars, but we think that that is a reasonable trade off to make given the strength on the front end and also given the strength in consumer demand.

So we don't expect the increase in value from say 25 to 30 to $35, 40% to have a meaningful impact on the overall gross profit, but it is possible that has an impact on the F&I gross profit because of what I just discussed.

That's really helpful. I guess, one other question Theres, obviously, a big shift between kind of implied GPU in the second half of the year versus the first quarter and what Youre expecting for the second quarter can you talk about the pushes and pulls that you've seen I mean, some of them. We know obviously for the March quarter.

But what you are still experiencing in June and why Youre expecting that big step up in the back half.

So as we mentioned on the prepared remarks, a lot of the pressure that we've seen was at the beginning of the year January timeframe based on cars that we bought it.

In the fourth quarter of last year.

That would be paid a little bit more for them and then there was some pressure in January to sell them.

So the margin was.

Had some pressure, but that abated as we went through the quarter and actually towards the end of the quarter with it as well going into Q2 and that explains why we were able to raise the guidance for Q2 above the numbers from.

Q1, we also expect that to continue throughout the year.

You've seen the F&I results in Q1, we were extremely pleased with the growth in that.

It's <unk>.

Much higher than we've seen in <unk>.

Previous quarter, it's definitely last year and that should continue should continue to be strong for the rest of the year and should help our GPU. So based on that we expect.

Have to be higher than first half and progressing through throughout the year with quarter.

Okay. Thank you.

Thank you and as a reminder to ask a question you will need to press star one on your telephone.

Our next question comes from Zach <unk> with.

Wells Fargo you May proceed.

Thanks, guys its actually our Sam Reid here pinch hitting for that one.

I wanted to actually quickly touch on the fair acquisition I totally get that the acquisition hasn't yet closed but could you perhaps still gauge the level of interest you have been able to glean from some of the dealers since the transaction was announced any learnings that might help as you go through as you go about integrating this acquisition into your business.

Sure. So we won't give any specific numbers, but I can give you directionally kind of what we what we know.

Fair team before the acquisition was done had already signed up a fairly large number of dealerships to work with them on the marketplace.

And so they were kind of all set up and ready to go whenever.

Pete.

Whenever the business was ready to launch.

Matt.

Those dealerships, although obviously the acquisitions happening and they are excited to continue working with the product and so we are really excited about launching.

The data.

Of the launch later this quarter I can't give you a date, yet, but obviously, we will announce that when we are ready to go with that and we think that it'll be a very good test of the product with a great inventory of dealer cars listed on that.

Okay.

George I would add to that.

Oh, sorry, I would just add.

The assortment mix.

Will really complement the shift inventory.

And so we're very excited.

We've kind of profile, then work with the dealers and our launch market on how the customer value prop will play out when.

When we launched the marketplace.

No. That's super helpful. Guys really appreciate the color maybe pivoting really quickly over just a macro question here that's kind of brought.

Obviously, we're seeing a lot of pressure on the consumer in conjunction with some rising rates et cetera.

What point do you think we might see this translate into consistently lower asp's for used vehicles and are you seeing any sign of that.

A negative inflection in pricing or is that still likely a few quarters out.

I mean, certainly those things impact our business and consumers are really focused on monthly payments.

So 1% to 2% increase in interest rate, obviously impact then.

Monthly payment and a pretty significant way for customers and so one of the reasons why we decided to.

Move toward.

Percentage of value is to be able to address the customer needs to be able to still afford the car that they're buying.

We think that broadly speaking.

The typical depreciation trends that happen and then distributing inventory does not increase in price all the time are broadly happening.

And already.

But we don't expect prices to kind of mcafee collapse and so.

The black meaning like them to go down 10% to 20%. It does the things that caused the spike last year haven't fundamentally changed the new car supply is not that different now than it was a year ago.

No that's super Super helpful. Much appreciate it guys.

Thank you. Our next question comes from Seth Basham with Wedbush You May proceed with your question.

Thanks, a lot and good afternoon.

Recognizing that you had some macro effects.

And sector specific challenges you guys have taken some action to.

<unk> reduced some of your cost, but how are you balancing.

Further cash burn that.

It is likely relative to the growth prospects that you see is there a point at which you feel you need to slow your growth further and further reduce expenses to conserve capital.

So let me start.

By talking about.

You mentioned, the cash use and obviously thats an important point.

We feel very good about where we are for 2022.

From a liquidity and cash point of view, but we also realize the.

With the expectation to strengthen our liquidity position going into next year.

That being said what <unk> seen in Q1 was building up inventory we use.

More cash than we expect to use in further in future quarters.

For that purpose. We also had some one time thing so I wouldn't model the rest of the year based on.

Q1.

To be significantly lower use Houston that.

In addition, as we described on the last call. When we showed our path to profitability, we have taken a number of initiatives in order to improve our.

Unit economics.

<unk> financial situation, including.

On the.

Selling to fulfillment process that George spoke in his opening remarks.

Also on marketing and G&A.

We have taken great steps to make sure that our cost structure is aligned with our strategic objectives.

And we.

Executed very well in Q1, we think we're in a good position to execute in Q2 and for the rest of the year, but we feel good about that.

Got it and reminder, I'll just add.

But I think we have a really good plan that has an optimum balance between growth and profitability for 2022.

Well as a long term plan that gets us to profitability.

As a business in 2025, so we're really happy with what we put forward and it's a good balance between growth and not trying to grow.

And a massive rate, but still at a good rate while also driving towards improvement.

On the property side, and a pretty significant way.

Far more so than anything else.

Yes.

Got it no that plan to profitability in 2025.

What could change that plan and lead you to.

Alright.

Okay.

Bye.

We're seeing your cost for sure.

For some reason neither of us.

The second part of what you said.

Alright.

Regarding 2025 plants.

What could change that plan and lead you to try to become profitable more quickly by reducing your cost structure.

On lower sales plans.

Well certainly we like the plan, we put together and we think it's responsible and the right plan for the business and if it becomes necessary changes we will consider it but at this point, we're executing towards what's in the plan and we think it's the right and a good plan.

Sue.

Fair enough. Thank you.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Georgia area. So for any further remarks.

Great well. Thank you everybody for joining us and we'll talk to you guys again in August .

Okay.

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

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