Q3 2022 Shift Technologies Inc Earnings Call
Okay.
Good afternoon, and welcome to the shifts technologies third quarter 2022 earnings Conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Charles Lu manager of corporate strategy. Please go ahead.
Good afternoon, and welcome to the chefs technologies third quarter 2022 earnings call. Joining me on the call today are CEO , Jeff <unk>, and CFO or that shine 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 four.
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 thoughtful discussion of the factors that may affect any forward looking statements. 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 the call, we'll be referring to non-GAAP measures.
And reconciled in our earnings.
Material with that said I will now turn the call over to Jeff.
Thank you Sheryl and good afternoon, everyone I'd like to start out by thanking the shift employees for their hard work and execution during the third quarter. It was no easy task to rapidly pivot to a new operating plan, but the team did a great job meeting the challenge I mean.
Credibly inspired by the way our team pulled together and immediately set out to the task at hand is giving our customers a simple airway to buy used cars.
As we talked about on our last call. The third quarter was a transition period for the company as we pursued our new strategy, the new operating plan prioritizes accelerated profitability and lower cash burn.
Though at lower unit volumes.
As a reminder, the actions we took during the third quarter include the following.
Streamlining sales through our online checkout channel and eliminating test drive.
Optimizing our inventory mix and assortment that favorite value vehicles, which have a more favorable right.
Gpus and overall profitability.
Refocusing, our physical footprint to our west coast markets, thereby rationalizing from 10 hubs III predictably Brooklyn roles in corporate positions by about 60% across remote and hub locations and reducing corporate overhead costs.
After tireless work during the quarter, our new operating plan is now in place and we have the foundation to execute.
The third quarter transition does impact the financial results, we're reporting today, but we expect the benefits evident in the fourth quarter results and beyond look Ed will discuss the third quarter result, and guidance shortly.
Turning to our strategic priorities.
First we prioritized achieving positive unit economics from GPU expansion.
And from leverage in selling and marketing while tightly controlling G&A expenses.
Stated earlier, we have shifted our inventory mix is skewed towards value vehicles now over half of our vehicles are considered value, which we define as vehicles older than eight years old where over 80000 miles.
As we've talked about sell through on those vehicles are consistently higher and have greater front end and total margin in.
In this environment with rising interest rates and consumer affordability had headwinds we believe that consumers will naturally be drawn to more value oriented vehicles, when making a car purchase in the coming months.
Second increase our penetration in west coast markets to grow E Commerce unit sold as.
As you know we eliminated test drives in the third quarter I moved our focus to an online checkout channel.
Normally this the move improve profitability, but as expected we've seen strong consumer response as more and more people are opting for a true e-commerce offerings.
We successfully rationalized our hubs down to three to focus on our west coast markets. Although we are still selling at fulfilling cars to anywhere in the U S.
The team continues to focus on product innovation as we advance our mission of making car purchase and ownership simple we rolled out several exciting product updates throughout the third quarter, including a new buyer checkout and dashboard experience that allows the customer to see what needs to happen next to complete their purchase and undergo the those actions themselves such as.
Uploading required documents.
We also made a number of other improvements to the online shopping and check out experience, including substantial modernization of the vehicle detail page, new personalized shopping experiences and a more interactive price payment and shipping calculator.
Our third party with the scale our marketplace business in Q2, we launched a beta version of the shift marketplace powered by fair with a number of inventory listings from our dealer partners in the greater Los Angeles area, we learned a tremendous amount from the beta test and plan to relaunch in the first half of 2023, as we optimize and improve the platform.
The team continues to build out the shopping experience and we will add additional F&I partners and customer shopping options.
Additionally over the past year, we've heard many dealers that have been very impressed with shifts sell your car flow, which enables ship to store, it's greater than 95% of our inventory directly from consumers.
We do this by providing instant quotes and by enabling the customer to conveniently tell their car to shift at their home or by bringing it to our hub.
Given the dealer interest we've created and are launching the auto acquired platform that allows dealers to embed shifts failure car flow into their website.
We're also pleased to announce a significant partnership with off lease only a terrific dealership group based in Florida. We will initially focus on optimizing our platform for off lease only sell your car flow, which will launch in Q4, and then open up the platform for additional dealer partnerships.
We believe the combined value proposition of the auto acquired platform and the ship dealer marketplace will provide significant value to dealer partners across the U S.
And finally, we're looking forward to integrating the shifting carlotta businesses upon the close of the merger to create a profitable leading omnichannel used auto retailer.
The executive team and board of directors remain excited by the pending merger and believe that it will create value for both shifts and car lots of shareholders.
At shift we are building a powerful ecosystem car sellers and buyers love our ever evolving e-commerce capabilities.
The coming months, we will continue to expand our ecosystem of becoming a leading E. Commerce platform that enables our dealer partners to build deeper more engaging relationship with their customers and in doing so will increase the access to high quality inventory to buyer leads and sales.
We will then further build out our platform by adding the car lot stores and capability to create a leading omnichannel retail customer experience.
I will now hand, it over to Oded to review our financials.
Thank you, Jeff and good afternoon.
I'll start with our third quarter results.
Our team continued to perform very well in pivoting to the new strategy, while executing the restructuring and inventory liquidation required by the change.
Our third quarter adjusted results met or exceeded our expectations, despite facing macro headwinds in a slowing economy, including rising interest rates and elevated gas prices.
We're also able to successfully manage the mix into higher demand value vehicles.
Total revenue for the third quarter was $161 9 million.
Decrease of 10% versus the prior year period.
Total units sold was 6709 compared to 88100 and they would've been last year, a decrease of 17% mostly due to the closure of several hubs in August 2022.
Part of the transition to the new operating plan.
The mix between retail and wholesale was unusual due to increased use of the wholesale channel to liquidate inventory and we adjust to a smaller geographic footprint.
Wholesale was 28% of units sold in Q3 versus 20% last year.
Adjusted gross profit per retail unit was 1925 in the quarter versus 2056 last year.
Our F&I income or other gross profit per retail unit was 1243 26, 6% higher than last year.
As we transition to a higher penetration of value vehicles with lower asp's.
We expect our F&I performance to moderate however, the increased front end margin on the value cards is expected to offset the reduced definitely resulting in higher total retail GPU.
Adjusted SG&A expenses were $39 4 million, which compares favorably to adjusted SG&A expenses of $46 6 million last year.
The decrease was primarily due to a lower operating costs and marketing expenses as a result of the restructuring.
Lower SG&A this quarter also contributed to improving our adjusted.
EBITDA loss.
<unk> EBITDA loss for the quarter was $30 million compared to $33 3 million in the prior year period.
We ended Q3 with total cash of $56 million, which includes cash and cash equivalent of $44 million in restricted cash of approximately $12 million.
Cash balance decline against the second quarter, primarily due to the cost of restructuring liquidating inventory in operating loss.
Our debt outstanding under the floor plan facility decreased by 52 million from $94 million in Q2 to $42 million at the end of Q3.
The decrease was a function of our lower inventory as a result of the liquidation of inventory in closing hubs.
Now turning to guidance.
For 2022, we now expect revenue in the range of $665 million to $675 million.
This implies Q4 revenue to be in the range of $60 million to $70 million.
The total for the fourth quarter and the year are lower than previously provided.
As we adjust to the new strategy with large e-commerce units and ultra lower asp's due to the focus on lower priced value segment.
We expect.
1022, adjusted GPU to be in the range of 1700 to 1800 higher than our prior guidance of 60 to 117.
The implied fourth quarter adjusted GPU guidance is 800 to 19 hungry.
The GPU benefit is the result of pivoting towards the value segment with higher front end total margin.
We still expect 2022, adjusted EBITDA loss to be in the range of $133 million to $138 million.
This implies fourth quarter, adjusted EBITDA loss of $20 million to $25 million.
With that I would now like to turn it over to the operator for Q&A.
Operator.
We will now begin the question and answer session.
I asked a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
And our first question will come from Sam Reed of Wells Fargo. Please.
Please go ahead.
Awesome. Thanks, so much for taking my question, maybe something high level to start out here.
You cut your business down two to three markets.
<unk> does geographies what are you doing differently to build scale at this hyper local level.
Versus what you were doing across your 10 markets. Prior and then maybe just to kind of dig a little bit deeper here you have a sense as to how your market share in those three core markets compares.
<unk> you might have been say a year ago on a like for like basis.
Hi, Sam Thanks for the question.
The first question and we addressed this.
Last quarter and it remains our strategy that by operating three hubs alone.
Yeah.
We're able to.
To talk to our to serve customers.
Across the West coast from Seattle to San Diego, and we can do that because we're able to enable the customer to pick the car up at our hub or to ship the car to them and we are finding that.
There is customer demand for four shifts inventory and assortment across all of those markets.
In terms of market share I do not have the market share top of mind.
A hand at this time, but we can follow up on that.
That's super helpful and I guess, one more question about the strategy shift now that we're a quarter in here can you give us any guidepost around conversion now that you've shifted to the fully to fully E. Commerce noted model.
The hybrid model that included test drives before just curious kind of what youre seeing sort of on a on a like for like basis, there as well.
You bet, we're continuing to work hard on conversion so as I mentioned in the opening remarks, both in terms of our product experience and our process.
Our selling process, we have continued to innovate I will say that we are still.
Aiming to get to kind of a normalized steady state as we had a significant amount of transition throughout the quarter as we were shifting our inventory and also selling through the inventory that was excess from are the hubs. We are closing. So I think we are still working towards getting to a steady state, but we're feeling very good about where conversions that and are proud of.
Pipeline for the remainder of the year is quite strong as well.
That's super helpful. I'll pass it along thanks.
Thank you.
The next question comes from Rajat Gupta of Jpmorgan. Please go ahead.
Great. Thanks for taking the questions.
On our fourth quarter it looks like the volume outlook is much lower than what was previously.
With the expected.
Given your focus on unit economics, especially on the gross margins but.
I mean, we the SG&A cost per unit.
That low level of volume is still going to look very bloated.
I mean, when should we expect you to ramp back volumes or refocus on volumes or.
If you wanted to continue to maintain this level of volumes in order to maintain gross margins.
Has there been enough restructuring done or is there opportunity for more.
Cost actions in order to lower that SG&A per unit and I have a follow up thanks.
Thank you Roger.
I would say that the third quarter was a quarter of transition where we executed the transition from the old strategy to the new rule and included of course, the hub restructure the liquidation of the inventory a lot of heavy lifting.
We're thinking going forward.
We have a model that yes, we will have lower volume in our own.
And we have less markets than we used to be we also narrowed our channel too.
To the online channel, so it's going to be a different operation.
What we have seen is that with inventory being highly reduced volume was reduced as well, especially I would say in the September October period, and it's already rebounding.
At this point, so we think that as we go into next year and we're going to provide next year.
<unk> information.
Future calls.
Youre going to see improving volumes and better unit economics.
Definitely on the SG&A side. So just to answer your question, we don't see.
Further restructuring from this point going forward.
Got it.
Any any color on what's the.
On the on your latest SG&A base, what's the fixed versus variable component.
Okay.
We haven't shared exactly what is the split between.
Fixed and variable and.
No.
Pretty straightforward as we think about our lease cost.
Some of our facilities.
Some of the staffing of course, it fixed but there is some variable component as well.
Got it and maybe just lastly on the cash balance.
Despite the restructuring.
I like the cash came in a little higher.
The cash drag was a little higher than we had expected in the third quarter I believe.
And the announcement of the merger you had mentioned that you expect the combined.
Entity car lots in yours to have roughly $125 million in cash and $50 million of that would be coming from shift.
Is that has that equation still correct and it looks like our largest cash actually might have come in even better.
At that press release, but.
I'm just curious like if you could update us on that.
If you should still be expecting $125 million and whats the split between yours and Carlos.
So we didn't anticipate that this is going to be an expensive.
Process for us because we are restructuring the aldi.
Human resource expense.
To go into it also the liquidation of the inventory, especially in the wholesale market.
But when we think going forward.
No.
Assuming that the merger will occur.
A lot of data with a vote in early December .
We believe that we're going to have at least $125 million.
Bind between the two entities I'm not going to go which is going to bring how much but.
I think in total we're going to have at least $125 million at the close.
Got it.
Thanks for the color and good luck.
Thank you.
Once again, if you would like to ask a question.
That's fine.
And our next question comes from Brett <unk> of Cantor Fitzgerald. Please go ahead.
Hi, guys. Thanks for taking my question, maybe just a follow on SG&A of $50 million in the quarter I know, you're not going to kind of tell us how much is fixed versus variable.
But I guess, even if we assume say gross margins are like 5% this quarter on a GAAP basis.
G&A has to come down quite considerably to kind of back into that adjusted range that youre talking about I guess, where should we expect SG&A to come down to this quarter.
Yes.
So what we shared was SG&A in the third quarter was on an adjusted basis was about $39 million and just remember that when we think about that we include.
July that was before the restructuring and then two.
Two of the.
Restructuring months, so I would anticipate.
The fourth quarter to be even lower than that.
We didn't give specific guidance of what.
SG&A is going to be but I'm sure you can imply from the other components of gross margin and EBITDA.
Got it makes sense and then it seemed like you talked about volumes are picking up kind of at the October start up for Q.
I guess do you attribute that to maybe the mix shift of your inventory being more skewed towards value.
I would say that it's a combination of.
Having the right assortment.
Having the right mix of assortment so the assortment levels.
As well as the improvement in our in our e-commerce selling process that we're continuing to drive the conversion rate. So.
All of those have helped us as we started off into Q4 and give us confidence in our in the guidance that we've put forward.
Yeah, I think there is also a seasonality factor in here as you know September and most of October .
The lowest months in the year and then it picks up towards the holiday season. So.
I think that the par.
All of it.
Perfect. Thank you guys I appreciate it.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Jeff Clements for any closing remarks.
Thank you I just wanted to take an opportunity to again, thank the entire ship team for all the hard work to transform the business in Q3 and to continue innovating and executing in Q4 as well is to thank everyone on the call today for their time. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Yes.
[music].
[music].
[music].
[music].