CarLotz, Inc.

Good day and thank you for standing by. Welcome to CARLOT's 3rd Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your first speaker today, Ms. Susan Lewis, Vice President, Investor Relations for Carletts. Ma'am, please go ahead.

Thank you. Good afternoon, everyone. With me on the call is Michael Boer, Co-Founder and Chief Executive Officer of Carletts, and Tom Stoltz, Chief Financial Officer. Before we get started, I'd like to remind you of the company's safe harbor language, which I'm sure you're all familiar with. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, which includes today's press release. If any non-GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure to this non-GAAP financial measure will be provided as supplemental financial information in our press release. Now, I would like to turn the call over to Michael Bohr, co-founder and chief executive officer of CarLots.

Thank you, Susan. Good afternoon, everyone, and thank you for joining us to discuss our third quarter 2021 results. I want to start by saying that despite the headwinds we have faced this year from an inventory standpoint, I'm encouraged by what our team has accomplished, both during the quarter and year to date. During the third quarter, we achieved record revenue of $68 million, more than double our revenue last year. This 128% growth in revenue was supported by more than doubling our hub footprint, a 58% increase in units sold, and a 190% increase in F&I revenue versus last year. We started this year with exciting growth objectives for our hub footprint, brand awareness, and technology transformation, all to create more value for our stakeholders through our unique consignment business model. The significant industry disruption caused by the ongoing chip shortage and the compression in the typical margin between wholesale and retail pricing in the first half of the year, however, caused us to make several tactical changes. Even with these challenges, we have accomplished a great deal. First, we more than doubled our hub base, opening 12 units year-to-date for a current total of 20 versus only eight at the start of the year. During the third quarter specifically, we opened large hubs in Denver, St. Louis, and Atlanta. Fourth quarter to date, we've opened hubs in Plano, Texas, and Pomona, California, and have a couple more that we have announced but not yet opened this year. While we have increased the number of hubs by 150% year-to-date, we have increased our inventory capacity by 226% with these larger hubs. Second, we hired many talented teammates to build out new expertise in areas like product development while also expanding our finance technology and marketing proficiencies. We also hired many talented teammates in the hubs who have been on the front line supporting lead conversion, unit sales, and driving significant growth in F&I. We're proud of the fact that in the midst of one of the greatest U.S. labor shortages, we are more than 90% staffed as we continue to grow. Third, we have launched a marketing campaign designed to increase the awareness of our brand and focus on our consignment business model. As we enter new markets, most people don't know the car lot's name, nor do they know what consigning their car for more money could even mean for them. It's been challenging and fun to introduce our unique business model and value proposition to markets around the country and watch it grow. Fourth, we've continued our technology transformation, focusing on increasing consumer engagement and improving the functionality of our website. There's certainly more to do on the technology roadmap, but we are focused on enhancing the user experience and increasing conversions. And lastly, we've been flexible in how we source inventory and navigate consignment headwinds and appropriately stock our hubs. While we still can't predict when things will be back to normal, I'm encouraged by the sequential improvement of units sourced noncompetitively each month during the quarter and into the fourth quarter, and anecdotally have seen signs that the chip shortage is getting the attention it deserves from the companies that can work to solve the problem. Now let me elaborate on sourcing, given its importance to our business model. As you'll recall in Q2, one of our top accounts paused consigning inventory to us as we were also seeing a compression in the margin between retail and wholesale prices that significantly affected the inflow of vehicles from our traditional sources, which necessitated increased auction sourcing to fill up our hubs with inventory. As we worked to improve all of our sourcing channels in the face of this adversity, we have made progress in lessening our reliance on auctions to source vehicles. While monthly sourcing can vary based on seasonality and growth needs, in June about 70% of our inventory inflow was being sourced at auction, while in October that number was less than 50%. In part, the increase in units sourced noncompetitively this past quarter is a result of new accounts, the rekindling of a prior account, and the wholesale retail pricing environment making consignment more attractive than in the recent past. As we mentioned on our last call, the partner who paused our relationship during the height of the wholesale pricing disruption has returned and is now consigning again, accounting for about 10% of our sourcing volume in October. In addition, we have added new corporate partners to our sourcing mix, while seeing more corporate sourcing partner pilots in Q3 than in Q2. Also encouraging from a sourcing perspective is the increase in units sourced from consumers through consignment, trade-ins, and purchases. This is a primary focus for us, given the attractive variety of inventory, faster sell-through, and the relatively higher GPU generated from these units. As our name recognition and our brand grow in our new markets, combined with the efforts we are placing on growing consumer sourcing, we anticipate continuing to see unit growth in consumer-sourced vehicles going forward. While our noncompetitively sourced inventory has improved incrementally in Q3 versus Q2, the inventory purchased at auction during the last two quarters pressured retail GPU during Q3 and resulted in an increased inventory reserve for owned inventory at the lower of cost or market. Historically, we have not needed a significant reserve because the majority of our units have been consigned versus owned. With the shift over the last two quarters to more owned units and the associated price depreciation on these units owned, We increased our inventory reserve. The factors that caused the increase were as follows. First, we purchased a significant amount of inventory at auction while wholesale prices were high. These auction units can be less desirable than commercial or consumer source vehicles and can experience higher depreciation and longer days to sell. In addition, we purchased vehicles at higher price points than our historical average. These factors have resulted in the average age of our inventory increasing and the increase in the reserve. As you may know, the gross profit used to calculate retail GPU includes the lower of cost or market reserve booked on inventory still on our balance sheet and divides it by the retail unit sold during the third quarter. Including the increase in the inventory reserve of $935,000 recorded in Q3, our retail GPU was $939,000. Excluding the increase in the inventory reserve, our adjusted retail GPU for the units actually sold in Q3 was $1,815. As Tom will discuss, we expect the retail GPU to improve in Q4 versus Q3. While inventory continues to age into Q4, we are making good progress in selling the aged units this quarter, along with the newer inventory we are sourcing, and see that through the retail and wholesale channels, we should be able to reduce our aged inventory to more normalized levels over the next several months. The offset to these pressures on retail GPU is our strong back-end profitability. Like Q2, we saw significant growth in F&I. As we mentioned on our last call, we have seen increased penetration and an increase in contribution dollars from several F&I products as we increased training, enhanced our technology, and added new products and services. We are extremely pleased with these results and look to continue this momentum in Q4 as by adding several financing partners who will help us to better serve our guests who find themselves at the lower end of the credit spectrum. Previously, without the right products to serve these guests, they have the lowest conversion rates while accounting for the majority of the credit profiles submitted at our hubs and online. With more diverse financing options, we expect to better meet the needs of more guests, which we expect will improve conversion rates. Some of these financing partners have just come on board and more will be added during Q4 2021 and early Q1 2022. Even with the industry disruption we have experienced this year, I remain optimistic about the long-term opportunity of our consignment business model to drive long-term value for all of our stakeholders. As we said on our Q2 call, we have not seen a structural change in the industry that would prevent us from returning to that model when the market normalizes. We are making investments across all aspects of our business that will allow us to be in an even better position when the industry emerges from the chip shortage. As you know, we have invested in expanding our hub footprint in both new markets and fill-in markets this year. These new hubs are larger and have more processing capacity than our mature hubs, allowing us to do more work in-house and address inefficiencies in the process. And while finding corporate consignment units has been more difficult due to the industry challenges, our retail remarketing team has done a great job of maintaining our current corporate sourcing partnerships, establishing new relationships, and increasing the number of pilots. These relationships are core to our business model and will be a crucial factor in allowing us to further increase our consignment mix as the market allows. I would be remiss if I didn't discuss our marketing initiatives. We have increased our marketing investment in key geographies and launched our first major brand campaign, which aims to debunk preconceived notions about pre-owned vehicles and remind people that it feels good to be a used car person. It's a big platform that allows us to increase brand awareness and help introduce people to our unique offering. The team will build on this campaign by focusing on the quality of leads and driving conversion. All of our initiatives and investments are in place to provide the best used car customer experience through our differentiated business model. We look forward to executing on our growth plan to achieve this goal. I'll now turn the call over to Tom to present our financial results. Tom?