Q3 2022 PARTS iD Inc Earnings Call
<unk> Chief Financial Officer, I would like to point out that certain statements made during the presentation. All forward looking statements. These forward looking statements reflect management's judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting parts.
These business.
Accordingly, you should not place undue reliance on these forward looking statements.
For a more thorough discussion of the risks and uncertainties associated with the forward looking statements could be made in the conference call and webcast. We refer you to the disclaimer regarding forward looking statements included in our third quarter 2022 earnings release, which was furnished to the SEC Today on form eight dash.
As well as the company's most recent annual report Form 10-K, and other filings with the SEC.
The company does not undertake any obligations to update or alter any forward looking statements, whether as a result of new information future events or otherwise. In addition, the company class to refer to certain adjusted non-GAAP metrics on this call explanation of these metrics and reconciliations of GAAP.
Metrics to those non-GAAP metrics can be found in the earnings release issued earlier today, which is also posted on the press release page of our website at Www Dot parts I D Inc. Dot Com finally, as a reminder, a slide presentation is accompanying today's prepared.
Remarks. This presentation is available from the webcast link located at Www.
That part D, Inc. Dot com with that I'll turn the call over to Nino Cioppino, Chief Executive Officer of part IV Nino.
Thank you good afternoon, and thank you for joining us it's great to reconnect with you today to share the details of parts Ids third quarter results.
We remain intently focused on managing the elements of our business within our control to steer the organization in a financially responsible manner through this period of intense macroeconomic pressure.
While an inflation, we're a U S consumer resulted in lower top line results in the third quarter. The expense saving measures, we implemented last quarter led to notable progress and profitability.
As Youll recall in the second quarter, we undertook several cost saving actions.
Including reducing head count.
In light of the market slowdown further optimizing advertising spend and reducing corporate overhead and select capital expenditure.
These actions combined will provide an estimated $12 million in annualized savings.
These efforts allowed us to achieve an improvement in third quarter, adjusted EBITDA compared with a year ago. Despite net revenue declining 22% in the quarter.
I am encouraged by this first sign of progress as we continue to focus on improving the business fundamentals around revenue margin expansion and enhancing operational efficiency.
Since becoming a public company at the end of 2020, we have repeatedly stated our goal to drive long term profitable growth.
Our top priority is positive adjusted EBITDA and positive free cash flow and the expense savings savings measures. We've implemented over the last 120 days are significant steps towards achieving those priorities.
We recognize that we have a long path ahead of us, but the team and I remain intently focused on executing the priorities that will guide parts I D towards sustainable and profitable growth.
Turning now to slide four.
For investors new to the par safety story I'll start with a very brief overview of our new of our business.
Technology platform in our operating model.
This idea of a technology driven digital Commerce company on a mission to transform the $400 billion plus U S auto aftermarket and the 100 billion dollar plus adjacent complex parts markets, we serve our.
Our platform business model brings together over 1000 industry suppliers more than 4500 active brands over 18 million product Skus and over 14 billion product and statement data points.
With the customer at the center, we use proprietary technology and data to create unique user experiences where customers can quickly and easily find their parts and accessories.
A blend of our easy to use platform and highly skilled sales and customer service agents.
There are several key points that highlight the attractiveness of our platform business model and underscore how parts idea as distinguished from the competition.
First and foremost our purpose built digital commerce platform combined with our proprietary fitment data delivers a highly differentiated customer experience.
This is evidenced by our product return rate, which continues to be approximately <unk>, 6% compared to industry averages of more than 20%.
Second our product catalog of more than 18 million product skus in over 4500 brands is unrivaled.
Third our asset light and capital efficient fulfillment model with over 1000 suppliers has enabled us to scale, our catalog size quickly and to add adjacent verticals. Unlike many others that have substantially more capital intensive businesses.
With that brief background I'll walk through the key highlights from the third quarter of 2022.
And then I'll turn it over to Carlos for a review of our financials.
After <unk> finishes I will cover our key growth opportunities and the strategic initiatives to capture that growth after that we'll open the lines for questions.
Turning now to slide five.
Macroeconomic factors, including inflation and low consumer savings rates are impacting discretionary spending and continues to be a headwind for net revenue compared to 2020 in 2021 hits.
Historically car accessories have not fared well during recessionary times, however, I'm encouraged by our success with repeat customers, which contributed 34, 5% of revenue in the third quarter. Despite this challenging environment custom.
Customers continue to demonstrate confidence purchasing from us and a number of them spending over $1000 continues to grow.
We're excited about the positive about the consistent positive trends, we are seeing from repeat customers and we have a number of projects underway, including email marketing programs to continue using these important repeat customer metrics in the right direction.
Compared to the third quarter of 2021, we saw a lower number of orders do due to a 28% decrease in traffic and a nine 5% decrease in conversion rate that was partly offset by a 558% increase in average order value.
The decreases in traffic in fact conversion rate are attributed to a widespread reduction in consumer discretionary spending coupled with our purposeful reduction in advertising spending and a decrease in organic search traffic attributed to search engine algorithm changes.
The five 8% increase in average order value is primarily due to us passing higher shipping and inflation related cost to the consumer.
Turning now to slide six.
Supply chain disruptions continue to impact the broader industry due in part to continued factory closures and port backlogs around the world. Our team continues to navigate through these challenges by partnering closely with key suppliers to more precisely forecast inventory availability and manage against back orders and cancellation.
<unk>.
We believe these efforts are working in the third quarter in the third quarter order cancellation rate decreased nearly 12% compared to the third quarter of last year and more than 6% compared to the second quarter of this year.
Along with the supply chain challenges the decline in new vehicle production and sales is also impacting the industry.
While accessories sales have declined significantly as a result, we are building on the repair on the repair parts momentum as consumers are increasingly choosing to hold onto and repair their existing vehicles, rather than wait months and pay over MSRP for new vehicles.
Last quarter, we launched a repair parts private label House brand called select which is now a top 10 repair brand by revenue with over 45000 Skus.
While this is still a small portion of our business.
This quarter original equipment revenue increased to nearly 50, 50% year over year. Additionally.
Additionally, the combined to repair an OE margin expanded by nearly 16% this quarter.
For the first nine months of 2022 repair parts sales and profit are both up 10% compared to the first nine months of 2021.
Inflationary pressures continue to be a sizable headwind in response, we continue to raise prices judiciously across the most impacted segments of our business to offset margin pressure.
Next as I mentioned earlier <unk> has strong ties to Ukraine. It at home to many of our independent contractors.
Fortunately many of them have been able to migrate to safer regions in Ukraine or to other countries and are continuing to work remotely.
<unk> has no physical assets in the country and Fortunately, we have managed this disruption with modest impacts of regular business activities to date.
We are closely monitoring the situation.
The safety of our team members and the need to maintain operations and productivity as.
As the situation continues to evolve we will adapt with any needed adjustments as appropriate.
While these factors are a challenge today, we are intently focused on protecting profitability and prudently managing cash.
Late last quarter, we implemented a global expense saving program, which reduced our which reduced our personnel related expenses by more than 20%.
We also optimized our advertising investment to the most profitable opportunities in.
In addition, late last month, we negotiated a new shipping contract. So we anticipate will yield more than 15% net in at lower outbound shipping rates.
These measures together will create meaningful operating leverage that are projected to help offset the pressures I just detailed.
While we have more work to do the work we've completed over the last two quarters are intended to enable us to weather the current macroeconomic environment and positions us as a more profitable company once headwinds subside.
With that I'll turn it over to Claus.
Thanks, Neil and good afternoon, everyone.
Turning now to Oklahoma translated well, we continue to experience demand picture. We are pleased to have made progress with our profitability profile this quarter.
Compared to third quarter of 2021.
A significant improvement in adjusted EBITDA, particularly considering the 22, 1% decrease in top line revenue.
Adjusted EBITDA this quarter was a positive $159000 compared to $138000 loss in the loss.
The year ago period.
We also saw a significant improvement in degree of operating loss this quarter as we improved gross margins optimized our advertising spend and implemented additional SG&A savings initiative.
And the third.
Third quarter of 2021.
<unk> operating loss by nearly 30% this quarter.
As we discussed last quarter, we took significant operating and capital expenditure optimization measures.
Quarter, two and expected with series to metabolize fully order gross up third and fourth quarter. This year.
At the end of quarter three.
We realized approximately 84% of the savings.
In total we anticipated that these actions will save the company.
Great.
This is bill.
We continued to make additional headway with our expense base this quarter.
Simply we negotiated.
<unk> shipping contract that is predicted to in a 15% net reduction in.
Outbound shipping costs.
Turning to slide nine you can see that the gross margins by 20 basis points quarter over quarter for the second consecutive quarter.
We also saw significant year over year margin improvement within our different verticals and the pits and OE parts business.
One, 1% and 15, 6% as to activity.
We believe that supply chain constraints will continue to be headwinds for the remainder of this year. The actions we have already taken combined with continued margin improvements within our different verticals.
<unk> as a business.
Intended to protect and grow margins going forward.
As a reminder, the parameter.
Primarily operator capital efficient just in time inventory business model.
Since we have negligible inventory, we do not have equivalent cost or operating expenses.
Properly comparable gross margins with the competition in class and I just meant upon please discuss margin part of the fulfillment cost.
Turning now to our balance sheet and cash flow dynamics on slide 10 cash decreased by $3 1 million in the three months ended September 32019 due.
Primarily <unk> working capital.
One 1 million a significant improvement from $7 7 million decrease in working capital last quarter.
Cash used in the networking capital.
December 31, 2021, primarily consisted of a decrease in customer deposits.
<unk> six <unk> 7 million.
Driven largely by <unk>, 8% decrease in <unk> in September 2022, compared to December 2021.
And a reduction in average on shipped an unbeliever days from 11, 6% to 920 days and decrease in accounts payable of $4 4 million.
This brought total assets to $37 1 million at September 30, compared to $52 5 million at December 31.
The company is simply implemented several measures to support it.
Liquidity.
Since June 2022 company implemented reductions in both operating and capital expenditures that are intended to drive operating profitability.
Q approximately creating it in.
Savings.
The new shipping contract will approximately be saving.
10% net outbound shipping costs.
Currently the company has recently announced a new 5 million senior secured term loan.
Transaction led by <unk> capital LLP intended to be used for working capital and liquidity needs.
Company on slides liability in <unk> sole discretion to receive up to additional 5 million of incremental senior secured debt pursuant to the credit agreement.
I will now turn the call back to Neil for.
For a review of our strategic initiatives.
Thank you <unk> turning to slide 12, you can see that our runway for long term growth is substantial.
The specialty automotive equipment Murphy in the U S was estimated to be a $48 billion market and it's estimated that 52% of this market is online and is growing much faster than brick and mortar.
This is very promising as a specialty segment includes interior and exterior accessories custom wheels and performance products.
Which together represent approximately two thirds of our sales.
The overall U S. Automotive aftermarket is estimated to be four a $439 billion market. We've invested heavily in growing our aftermarket repair and original equipment product lines and we are seeing this work yielded very positive results. We now have 34 major manufacturer brands, including Dodge Jeep Hyundai <unk>.
Lexus and approximately $2 million of original equipment product Skus.
Which has significantly broadened our product selection to now provide customers with a diverse range of both aftermarket and original equipment parts all in a one stop shop platform.
Next looking to the right of this slide is the estimated market size opportunity for the seven adjacent verticals, we launched in 2018.
These verticals are highly fragmented and in most cases, there is no dominant online leader.
This presents a substantial opportunity for us.
These adjacent verticals, we're focused on voting power sports motorcycle and RV camper.
Which together represent an estimated $22 billion.
Of total addressable market annually.
Addressing these large and growing markets with our asset light capital efficient business model is an enormous opportunity and we've only scratched the surface.
We believe we are on the right path for long term growth.
Turning now to slide 13.
Despite the near term macroeconomic challenges there are many significant industry tailwind at our back as well.
First the U S auto Parts' e-commerce market shares projected at over $22 billion by 2023.
This is up from $15 billion in 2020.
Second the specialty equipment segment of the industry is forecasted to grow to $55 billion by 2024 up from a record $50 9 billion last year.
Third miles driven miles driven rebounded back to pre pandemic levels earlier, this year driving strong demand for our repair and maintenance products.
Through August of 2022, Q cumulative travel have increased by one 7% or over 36 billion vehicle miles.
For many of the adjacent industries, we serve are experiencing growth and are projected to continue growing and finally EV adoption is accelerating this presents a challenge for our competitors, who must add to their already capital intensive inventory positions.
We believe this category dynamic leaves us well positioned with our asset light platform model, which is purpose built to easily and cost effectively add new and emerging categories like EV to our catalog without large investments in inventory.
Turning next to slide 14.
We're orienting the business to succeed across each of these dimensions through a technology first approach positioning our platform to adapt to the ebbs and flows in the macroeconomic environment.
Our aftermarket repair and original equipment catalog delivered impressive margin growth of nearly 16% this quarter.
Not only are we growing margins in these two categories, but we're also growing the business. This quarter. We made further progress with our body parts and repair business by identifying and securing a new partner that will offer more fulfillment locations and increased margins in key categories. We plan to go live with this new partner in the first half of 2023.
In our adjacent verticals, we continue to make progress developing the product catalog there as well this.
This quarter, we added over 3000, boating and marine Skus with another 48000, new skus in the pipeline.
We also added more than 60, new RV specific brands this quarter.
Furthermore, this quarter, we increased our margin for the for our accumulative adjacent verticals business by 35, 1%.
With regards to customer acquisition and retention repeat customer revenue remained strong at 34, 5% of total revenue this quarter and the percentage of customers, who spend more than $1000 with us grew to five 9%.
We believe we can continue growing our base of loyal customers as we continue making progress.
With CRM and email marketing initiatives.
Lastly, we continued to make progress in pricing and profit optimization.
We delivered positive adjusted EBITDA and continuous gross margin improvement all year.
Looking ahead, we are confident in our ability to drive increased profitability for the company. Despite today's challenging operating environment.
Turning next to slide 15.
Before we open up the call for Q&A I want to leave you with the six key areas of our company's strategic vision private label expansion online to offline do it for me services.
Positioning of vendor inventory international expansion mobile App and evolving our platform model to a two sided marketplace.
Private label expansion in online to offline Ti FM services are some of the most exciting areas of future growth for the company.
While our private label business is small today the opportunity for improved gross margins long term as we develop and scale. These brands is substantial.
To do it for me segment remains very attractive to us and we are continuing to lay the foundation for further growth.
At our tire installation program continues to gain momentum we continue to examine new partners in additional products and services beyond tires that we can implement and scale in the future.
Next forward positioning inventory will drive lower costs and increased shipping fees.
As we look to the future we believe our tech enabled digital commerce platform and data intelligence can be replicated internationally further expanding our market. Additionally.
Additionally, serving our customers with the mobile App is expected to further enhance the customer experience, while also increasing long term purchase frequency and.
And finally with respect to our long term outlook, we are positioning ourselves to evolve our platform model into a parts and accessories marketplace.
Aided by our existing purpose built technology and proprietary data.
Turning now to slide 16.
In closing as I mentioned at the top of the call. We are focused on controlling the things within our control in this challenging macroeconomic environment and we are making progress in doing so.
Encouraged by the headway, we've made with our margin and profitability results this quarter and I'm excited about the additional steps we've taken in the past 90 days to drive further improvement.
Before I open the call to questions I'd also like to thank the entire <unk> team, both domestically and internationally for their dedication.
Good work and commitment to serving our customers.
With that we'll open the call for questions.
Ladies and gentlemen, you have reached the question and answer portion of the call to ask a question. Please press star one on your telephone keypad.
Again star one for any questions at this time.
Yeah.
Our first question comes from Maria rents with Canaccord Maria. Please go ahead.
Great. Thanks for taking my questions and I appreciate all the color on the quarter.
I know, the recently announced new Jo Malone financing, but can you maybe just talk about your current liquidity profile, especially given the challenging macro backdrop and then secondly, you touched on this a little bit but any more color you can share on the revenue declines in the quarter and then how you're thinking about churning topline growth.
Thank you so much.
Hi, Good afternoon Maria Thank you for the questions Carlos will take the liquidity now jump in and cover the other two questions.
Thanks Dino.
Hey, Maria.
If I can say so our current cash balance as office at $86 5 million. After this borrowing a $5 million.
Continue to face macroeconomic headwinds and the resulting decline in revenue and profitability. We substantially this is negative working capital.
This consumed approximately <unk> million in cash.
Cash from operating activities of which $13 6 million was attributable to the technician working capital during the nine months ending September 32022 at this point.
Demand such that our major cash consumption has been because of the decline in revenue and our negative working capital model.
We continue to tightly manage operations given the liquidity constraints.
As we talked about in our fifth in the presentations.
<unk> several measures to improve the liquidity.
In June 2022 company implemented reductions in both operating and capital expenditures and that are intended to save approximately $12 million and we have a greater tumor India, 84% has already been realized.
On an annualized basis chicken, we have negotiated a new shipping contract, which will save approximately 15% net in outbound shipping costs.
Third as you already stated we took 5 million senior secured term loan.
And we also have an auction that a few of another 5 million at the sole discretion of lasers.
Also as a next step we filed the S. Three registration and we are actively working on to activate a.
Resuming the capital part of addressing the liquidity of the growth investments.
Thank you classes and Maria to comment on the revenue decline hit.
Historically in these recessionary environments car accessories have not fared well as consumers pulled back on discretionary spending.
In addition, as I'm sure you and the others no new vehicle sales have been down.
Based on the information we have in the third quarter, new vehicle sales were down 19%.
Impaired to the third quarter of 2019 due to shortages. So this directly impacts demand for car accessories.
While used car prices seemed to have stabilized.
These prices are still approximately 40% higher than pre COVID-19 prices.
So is it new and used vehicle sales are directly impacting.
The accessories part of our business, which represents as I said in our remarks about two thirds of our product.
Product mix.
All of this we still delivered positive EBITDA, we improved gross margin again, a year to date, we've grown our repair parts revenue and profit 10%.
With with respect to the to the third part of your question about returning to growth.
So given the macroeconomic uncertainties right now it's difficult for us to comment.
However, when the macro environment begins to improve we are well prepared to capture discretionary spending for accessories, given our extensive product catalog catalog of 18 million skus in over 4500 brands. However, we're not sitting idle waiting for the external environment to improve we've made significant progress.
Our repair parts business as I just said.
Which is up 10% year to date versus last year, originally equipment revenue was up 50% year over year.
In addition, we've made progress on our online to offline do it for me initiatives as we reported last quarter. We now have over 9000 tire installation locations.
And while this program is still small in terms of revenue, we're laying the groundwork and architects in what we believe is the future of <unk>.
How this category will be shopped in terms of online to offline.
And lastly, but certainly not least.
In the third quarter, we added over 3000, boating and marine Skus, we have another 48000 items in the pipeline and we added over 60, new RV specific brands to our camper I D vertical.
Maria.
Okay.
Operator, perhaps we can take a follow up question. When she comes back we can continue with her.
Okay. Our next question comes from Mike <unk> from Es Hutton, Mike. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question here and I appreciate all the contact and call that you provided on the call.
In particular regarding the macro environment, which obviously remains to be difficult.
You highlighted a couple of times, the addressable market and adjacent vertical as you know you've added a lot of skus have seen improving margins can you just help me understand kind of.
How much business, you're doing I guess outside of car I E.
Just help me put that detail on the context I guess.
Hey, Michael Yes. Thank you for the question and thank you for joining and the support.
The adjacent verticals now represent approximately 8% of our product of our sales in the third quarter.
This is down year over year last year in the third quarter represented approximately 10% of sales.
But as I said discretionary spending is down so if you think about those categories.
Voting motorcycle parts power sports. These are all very much discretionary categories, but despite all that we're continuing to build the product catalog in all of those verticals, specifically and boating and in the RV categories, where we've added 3000, new skus and boating and marine as I said over 1000.
The new RV specific branch that camper I D. So as that demand as is that consumer demand begins to improve we're going to be well positioned to continue capturing it.
Yes, certainly I mean, it sounds like you are.
Are you positioning yourself, while for a rebound in cancer and on discretionary spending.
Those protocols will obviously benefit and then just and similarly.
Could you and I'm, sorry, if I missed my phone Continental Delphi <unk> same thing with the private label business and OEM, obviously, you've been saying.
Tremendous growth there.
Margin improvement can you just put that in context as well.
Absolutely you private label is a very small piece of our business today, it's less than 5% of sales.
So we see this at a very substantial opportunity for us to to grow and with that growth in private label volume. It will have a direct improvement in overall gross margin.
The gross margin on our private label products are in many cases more than two or two or two or three ex.
The margin on the rest of our assortment. So long term as we continue building our brands like <unk> select like <unk> and others. This is going to have a very positive impact to gross margin and again today private label is less than 5%. So we have a lot of room for growth.
Certainly yeah that makes a lot of sense and then my last question.
Some nice metrics regarding your repeat customers I mean is this.
Are you seeing repeat customers in selecting in our number of Skus as this in our in a particular area of the business or I guess any color you can provide around what these repeat customers are coming back for.
Yeah, Great question, Mike, we don't have that well, we haven't disclosed our share that previously, but what I would say is from a contribution mix accessories still represents two thirds of our business and repair parts now has grown to in the third quarter to represent over 25% of our business. So yes.
It's a combination of.
The repair parts growing and there is a higher frequency of repeat business on that side of the business. Because we continue to grow that contribution we expect nothing but positive upward movement in our repeat customer metrics that combined with the very intentional work, we're doing on CRM marketing and email marketing.
Our marketing team has made a lot of progress on the email marketing programs, we kicked off at the end of last year.
And even there we've got still a lot of room for growth and that's a one year old program. So there's a lot to accomplish there as well.
Got it. Thank you yeah, you kind of hit the nail on that I mean, that's where I was going with the repay customers repair repair products is that now is there any correlation there. So that's very helpful. Thanks for taking my questions guys. That's really it for me.
Thank you Mike.
Operator are there any other environment.
To ask a question. Please press star one on your telephone keypad at this time again Thats star one for any questions.
Okay.
Okay. There are no further questions at this time I would now like to turn the floor back over to Humana Cioppino for closing remarks.
Thank you everyone for joining the call today to for US to update you on the progress, we're making and we look forward to everyone. Joining us again in March for an update on the fourth quarter and full year results. Thank you again to all of our teammates domestically and internationally for the hard work and dedication.
Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect. Your lines at this time and enjoy the rest of your day.
[music].
Yeah.