Q2 2022 TrueCar Inc Earnings Call
Progress on all of those metrics.
It's something we're very focused on as well and I think you know, while it's not yet fully apparent in our metrics I think a lot of these.
The work we've done around the cost structure that I think will become more apparent to you in coming quarters.
The work around the.
Consolidation increased creating an ultimately creating greater efficiency.
I think we'll be very very powerful for us as volumes start to recover because again this business like like.
Like most businesses has a scale effect I think the scale effect is even more magnified in a digital model.
Our physical or a hybrid model.
I'm very encouraged that the work, we're doing and the metrics I'm seeing and the progress we're making there.
Is going to really be very very positive for us as we start to see volumes increase and obviously, we're going to have to prove that out and recognize that but ultimately we're trying to lay a foundation for future success.
Okay. That's helpful. And then just a second question on pricing.
It sounds like Youre adjusting from.
Right now our June to August pricing.
More through September .
For all your customers I'm, just curious what the receptivity is convincing and what you mean I mean is it just simply.
Higher auction fees.
Or are you going about this and it sounds like youre, not having any real pushback or the way you talked about so I'm just trying to understand that because that's pretty unique.
Yes.
A couple of things in late Q1, actually we increased some pricing and our dealer to dealer market places. So I think we're seeing some of the impact on that in Q2 results.
Mentioned, how they'll volumes, where we are.
Relatively flat actually slightly down versus Q1.
Financial metrics.
Somewhat improved so I think we see that showing up there and that will have the benefit of that over the rest of the year.
The one I referenced in more depth on this call was more on the commercial side of our business and what I would say John is.
And it's actually less related to.
Auction fees, if you want to call them that Ics and cell C's, it's more related to the services, we're providing around inspection and some cases logistics and other types of services for our commercial sellers.
Frankly, as you can imagine we've had a situation here over the last 12 months, where our volumes in some cases have been down like 90% in certain areas of the services, but.
It has not been possible to take our costs down to that degree we need to continue to provide service on a national basis.
And we've addressed the costs, where we can so I think what we've really tried to do is.
More of those services.
Speak to our customers about just the current reality around volumes and how the unit economics don't support is very very low volumes.
Customers have been very understanding of that and essentially what we've put in place are instead of a sort of a fixed price structure.
At all levels of volume, we've converted to a tiered price structure, which has higher pricing at current volumes and then as volumes increase over time.
<unk> returns generally towards Pinot.
The preexisting price if volumes get all the way back. So if you can imagine that type of scenario.
They've been very supportive.
I take from that that they value us as a business partner.
They value the services, we provide and they completely understand.
The volume picture that affects their business and ours. So I'm encouraged by that and these are so I would say John these are meaningful changes our current volumes.
Actually.
Perhaps even more encouraged about is that the volumes sort of increase.
The impact of these changes may actually be more meaningful as volumes start to trend back up.
Towards normal and as we mentioned Thats, probably going to take time. So we may get that benefit over a considerable period of time.
Yes, no it seems like from a revenue side on the cost side youre setting up well as volumes recover it there'll be a lot of a tremendous amount of operating leverage so it seems like youre doing all the right stuff. So we appreciate it thanks, so much guys.
Thank you John .
Okay.
Thank you.
The next question is from the line of Bob Ludwig.
CGS Securities. Please go ahead.
Good morning, Thanks for taking my questions.
Thanks, Bob Good morning, Bob.
I wanted to start with the conversion rate you gave us some interesting statistics on that and I'm, assuming that with the lower conversion rate relates to the softening of used car prices and you know it's kind of thing.
More broadly then just you guys that could last a while if prices continue to soften. So my question is is that right and B. What are you doing to encourage the selling dealers kind of to lower their limit price or to get more in line with reality and how data driven as this decision on that limit price and how long is it.
Take to normalize to get back to regular conversion rates.
Well. Thank you good question.
So first if I can comment on.
Just the metrics themselves and then what are we doing about it.
So first.
I would say the decline in conversion rate, if we think about it relative to a year ago. There is there is there are two factors. One one factor is just a straight mix shift the percentage of vehicles sold from commercial centers a year ago was higher relative to Q2 of this year and again as I mentioned the conversion rates on.
For example, we opened linked platform are our highest of our marketplaces right. Now so just a straight mix shift less open lane more dealer to dealer in relative terms will tend to reduce conversion rates. So there is that impact.
Which is not a market factor. It's just it's more of a mixed factor and then and then I'd say that has had some impacts but I'd say most of the impact we've seen has been more of a market factor.
The relative seller and buyer sentiment and again, if I was to contrasted with Q2, a year ago I would say Q2, a year ago was unusually strong.
Because if you recall, we were in a sort of an environment for prices were running up.
Demand was very strong and buyer buyer appetite with sort of higher with increasing every month right and we've kind of had the opposite setup.
Set of facts here over the last three months or so.
Where centers are kind of holding on for high prices and buyers are recognizing that the consumer demand is weakening in it for that reason there appetizers weakness.
So that's the set of facts I think you are correct that if we're anticipating an extended period of steadily declining prices conversion rates could remain under pressure.
None of us can predict precisely right, but I think thats one of our reasons for being cautious in terms of our revising our guidance, Steve look weaker conversion rates persist.
Then that will show up in our numbers.
So what are we doing about it.
Obviously trying to get sellers and buyers in line of what the true value of the vehicle is is a key factor.
And we can we can.
Candidly, Bob we don't have perfect control over that but we do have some ability to influence that through data.
Offering the cellar typically to seller a guide on the fact that these offers that they have with these bids that they have are strong large market in our opinion.
We've also launched some technologies around.
And in certain of our marketplaces, requiring the seller to put a definitive.
On the vehicle before its launched so in trade Rev. In Canada. For example centers can launch vehicles with no floor price that they want and see how the market performs.
And what we find is those cars typically convert at less.
At a lower rate so we're trying to get more of our sellers too.
<unk>.
Have to put a floor pricing.
We're also frankly limiting the number of reruns that they can run the same Vince for the marketplace because.
If they run the vehicle two or three times than we believe they've got the benefit of what the current market.
Sentiment is and running at a fourth or fifth time isn't isn't a great value. So these are things, we're looking at but I would say that those impacted sort of on the margin.
The principal driver of it is the market.
I was encouraged by a number of factors Bob just to say.
We haven't seen any worsening of the conversion rates.
In July relative to June .
So that's encouraging and I do see a market report actually yesterday.
From from Black book that said by their metrics sellers are.
Finally, starting to respond and northern prices and there was a significant sort of down step in used vehicle prices last week.
Sellers to to sort of.
Released more vehicles, and hence you get higher conversion, so I think ultimately.
Buyers and sellers learned pretty quickly.
And these phenomenon these phenomena tends to be temporary because ultimately the cars have to sell and it's in everybody's interest to have the move to the market place fairly quickly.
Okay, Great. That's super helpful color on that very much appreciated.
Just one other one I'll get back in queue. You know obviously the shift to digital began before COVID-19 and was accelerated by need during COVID-19.
Even the lack of I guess.
Physical auctions out there right now my question is how is it settling out since we can't really see these volumes is there been a partial switch back to physical.
Just by virtue of everything opening up or where are you on what we all believe to be this long journey towards digital and hour.
Sure going in and worst following him right now.
Yes, good question.
I don't have perfect data, but I do have I do have some data I think we're still on that journey, maybe the rate of the pace of maturity may have moderated a little bit.
But you know through our analysis of.
Some data that's available to us.
I believe the feet are consigned volumes at physical auctions also declined in the second quarter.
And I think on a year to date basis have.
I still see evidence of a share shift sort of away from physical and towards digital generally in the industry, but the data sources are imperfect.
There is other companies have yet to report so we'll have to see what the totality of that data looks like but I think that.
That shift continues, albeit the pace of the shift has moderated a little.
Got it okay. Thank you very much.
You're welcome Bob Thank you.
Yes.
Thank you.
Next question is from the line of Bret Jordan.
With Jefferies. Please go ahead.
Hey, guys.
Good morning, Robert on the pricing initiatives sort of offsetting the lower volumes. What are you seeing sort of in the competitive landscape. Our peers basically following the same trend just given their volumes are down as well I think you commented that you had slightly lower volumes in Q2 from Q1 is that a competitive issue or just the market issue.
No.
I think the volume issue is a market issue.
Brett My assessments again based on just seeing the volume of physical were down I don't have all the competitive data.
But I think there's no question, but volumes have just been under pressure industry wide would be my assessment.
On the pricing I mentioned, our digital dealer to dealer channels, we do benchmark pricing versus competition, we think we're.
Well positioned there.
I think we're competitive.
Maybe slightly.
Very comparable maybe slightly less on some prices than others. So I feel good about our pricing structure there.
And then in terms of what I spoke about on the commercial side of the business I don't have perfect visibility, but I know the volume challenges aren't unique to us so I wouldn't be surprised if others are having similar discussions with customers.
But I can't comment from a position of knowledge.
Okay, Great and then obviously big success with IFC when you look at the conversion and the other issues you face this year in the second half and relative to your guide.
And the $2 45 to 65 to <unk> 65 up what do you see that the credit contribution of that versus the auction operations contribution.
Well, obviously AFC has been a significant contributor to the overall profit performance of the business here over the last period of time.
And we expect continued strong performance from AFC.
But we also expect that this is I guess similar to the messages on the Investor day, we expect over time the marketplace segments to drive.
The majority of the growth as we look to the future.
But I guess, we are very encouraged by the performance of ALC.
Sure.
Continue we expect to see continued strong performance the environment changing a little bit interest rates are going up that actually has some benefits CFC the.
The risk environment maybe.
We need to stay focused on that we've had a very low risk experience over the last.
Period, a period of time.
But <unk> is a strong business and will continue to be a strong contributor we believe.
Great. Thank you.
Thanks, Brett.
Okay.
Thank you.
The next question is from the line of Daniel <unk> with Stephens. Please go ahead.
Yes, good morning, guys. Thanks for taking my questions.
Good morning.
On late so apologies if you discussed this but I wanted to start on the SG&A side. When we look at <unk>, Eric I appreciate the color on kind of a noncash in the car wave numbers, but one well that noncash number. The 10 three is that one time or is that going to continue that part of the run rate cost basis here and then I think at the analyst day, you guys talked about $30 million of run rate cost.
Savings that you were targeting this year, how many of those were captured in the second quarter and how many of those are still on the come.
And you'll let me take the first part of that question. The $10 3 million in stock based compensation is a catch up as a result of the gain on the sale transaction.
Our long term incentive plan, which is tied to PRA issues.
Add operating adjusted EPS.
Cumulative get to a point, where we have to we are accruing a cost it had been below thresholds for the night for the 2020 grant year in the 2021 grant year and we're now accruing as as our gain is reflected in our EPS relative.
Relative to the other things.
As the business has transformed its very difficult to see even for me as to what's the impact of that we have made a number of actions that reduce our costs.
But at the same time, we've had a transition of a major part of our business, where there is cost that is temporarily associated with the activities of breaking things apart. So I don't think its shown up yet in the cost structure and as I look forward I think and Peter mentioned this youll see it in the second half of the year Daniel.
Peter Peter.
Peter and I have been talking about is I'll, let Peter analyzed how do we look at the $30 million, how do we plan to see evidence of that yet.
As we go into this year, where we were and where we think we'll end the year Peter why don't you share that with you all.
All comments as well here, but certainly agree with Eric's comments I don't think its shown up yet.
And frankly.
We had a sort of a cost agenda, taking shape, but then we entered a negotiation around this transaction and I felt it was it.
We had to sort of get through the transaction because that was going to dictate the shape of cost actions that we could take we couldnt I didnt want to take cost actions within the business we were selling.
And I also felt we needed the transaction to be closed before we could fully address.
Our own our own operations. So in reality most of this work sort of started after the deal closed so mid may and onwards, and these actions have continued since then and will continue so I expect them to be more visible in the second half.
Yes.
I guess, what I'd say is I'm expecting us to end the year with an SG&A run rate something around $400 million give or take I don't want to give a precise number but I think something around that and that will be obviously.
Down on what we've seen certainly in a number of prior quarters. So.
That's that's my expectation and we are very focused on that work.
Alright. Thank you guys for that color and then Peter I wanted to ask one on the integration of car wave again at the analyst day. It sounded like you were making progress.
Curious how the integration is going and I know volume is pressured on the dealer to dealer side right now, but have the price increases allowed that portion of the business to remain EBITDA positive in this environment or did anything change in your outlook. There I think when you bought <unk> you had said that business with now profitable, but things have changed since then I was wondering any update there.
Yeah. Thanks, Thanks Danielle.
First of all well first of all the car has continued to be profitable.
So that is that is positive.
Youre right volumes in the channel and DDG generally have been under pressure and that's true of car wave as well.
But but the business continues to be profitable on the integration plan is progressing well.
We felt.
We thought it was important given the power of the <unk> platform and the feedback from customers we wanted to.
Replicate that experience within the backlog caused marketplace remember part of building out new technology and functionality within the system.
So theres been a lot of focus on that.
That is now that now exists.
I call it an advanced beta, but we held our first sale in the month of July .
We migrated cars over we brought over some buyers and sellers that we had.
An auction to pressure test the system to get customer feedback and so forth. So again that was positive that was a key milestone along the way and I'd say, we're now in the into the.
The latter stages of that migration and certainly we expect to complete it. This year. So I feel good about that I feel good about getting to one marketplace getting all of our sellers and buyers into one digital venue.
Leveraging the network effect, so on and so forth so.
Well on track and feel good about that.
Again feel good about the long term prospects for the digital digital dealer studio marketplace.
And Peter if I could add some 30, Daniel the combination of our digital to digital DDD marketplaces would be car wave that black card and trade rep in aggregate. Those three businesses are also profitable in aggregate.
Sorry.
Mentioned car wave I just wanted to be clear to everybody also the total totality of DVD is profitable in aggregate.
Great I appreciate all the.
The color and best of luck going forward.
Thank you Dan.
So I believe that concludes the questions.
So thanks.
Jacob do we have any more questions in the queue.
No no sorry.
To ask a question and answer session I would like to turn the conference back over to Peter Kelly for any closing remarks.
Thank you Jacob.
Thank you again for your questions and for your interest in car Global I'm encouraged by our second quarter results in light of the current market challenges and I believe that we are executing well against the levers that we control.
To summarize once again, we completed the transaction and are fully committed to our digital marketplace strategy.
We've paid down a meaningful portion of our debt continue to generate positive cash flows.
We have increased revenue and gross profits despite weaker seller supply and despite marketplace conversion and I believe we have a sound strategy in place to reach our 2022 bowls and beyond.
As I look beyond 2022, I'm also very encouraged by our longer term prospects for growth.
As we outlined at our Investor Day update in June I believe our growth will be driven by a number of important factors.
First the ongoing secular shift towards digital marketplaces across our entire industry. This will drive increased volume in both the dealer and commercial parts of our business.
Second a broader recovery in commercial volumes across our industry.
Third the continued strong performance by businesses like AFC, and ADESA, Canada, where we have differentiated offerings and our strong market position.
And finally, our continuous focus on cost efficiency and being an asset light digital company.
Together I believe that these factors will help help us navigate any short term challenges while positioning us for accelerated growth in the future I look forward to sharing our progress towards these goals on our next call.
You, everybody and have a great day.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.