CarLotz, Inc.

Good day, and thank you for standing by. Welcome to the CARLOTS fourth quarter and full year 2021 earnings conference 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 this session, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your host today, Susan Lewis, VP of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. With me on the call is Luis Solorzano, our recently appointed Chairman of the Board, Michael Bohr, CarLots' co-founder and outgoing Chief Executive Officer, and Tom Stoltz, our Chief Financial Officer. For those of you who don't know Luis, before his role as chairman, he was our lead independent director and is also CEO of Acomar Partners. We are glad to welcome him to today's call. Before we get started, I would 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 releases. 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 Luis.

Thank you, Susan. Good afternoon, everyone, and thank you for joining us to discuss our fourth quarter and full year 2021 financial results, our initial thoughts on 2022, and also importantly, the announcement of our new CEO. We started 2021 with tremendous growth plans. During the year, we made significant investments in all areas of the business, hub expansion, marketing, technology, and building the organization to execute our growth plan. We were, and today we still are, strongly committed to offering our unique and differentiated consignment business model, which we believe generates value for both sellers and buyers across the country in this highly fragmented used vehicle marketplace. As you know, the used car market has undergone unprecedented disruptions. With the price of used vehicles rising over 30%, new car production down dramatically, and used car inventory at levels not seen in recent memory. Much of this stems from the chip shortage. Our new hubs have not been growing unit sales as quickly as expected, and our inventory mix has been less desirable due to a higher penetration of lower-aged vehicles with higher average price points, and also a higher penetration of dealer-owned units acquired through auctions. These factors have created and continue to create significant challenges to our business. And despite our efforts, our financial results felt significantly below our expectations. As a result, the board of directors agreed that a new CEO will help to steer the company forward into the future. Consequently, we're extremely excited to announce that Lev Peeker, CEO of CarParts.com, is joining as CEO and member of the Board of Directors starting April 18th. We believe Lev has experience, track record, and passion to help grow this business. Lev has led a successful consumer-centric e-commerce strategy, doubling sales, and improving profitability during his three-year tenure at CarParts.com. We believe there are many parallels between CarParts.com and CarLots that, in our view, make Lev an ideal CEO for this business. For example, Both companies operate in industries that are very large and highly fragmented. And both businesses are consumer-facing, operationally complex, and technology-enabled. We believe Lab's experience with operations and marketing will offer significant benefits to the company that we expect will yield top and bottom-line results. During Lab's stewardship of CarParts.com, the stock significant growth as he focused the team on effectively executing a strategic vision that resulted in increased sales and improved profitability. We really look forward to Lev joining us and introducing Lev to you very soon. While we expect our new CEO to take time to fully evaluate the business and communicate his vision, in our view, our consignment model will continue to be a Carlott differentiator. As part of that, we emphasize our commitment to serving our corporate sourcing partners. We have maintained these relationships and have run many new pilots during these challenging times in this challenging sourcing environment. Finally, on behalf of the entire board, I'd also like to take a moment to say thank you to our outgoing CEO, Michael Bohr, for his significant contributions to the company. Mike will continue to consult with Carlos for the next 12 months, so that Lab and the company will have access to Mike's vast institutional and industry knowledge, with the goal of making this transition very smooth. Mike would like to say a few words before we discuss the financial results.

Mike? Thanks, Luis. Founding CarLots almost 12 years ago and bringing the company to this point has by far been the most rewarding and challenging experience of my career. I still remember our first consignment guest and the exact make and model vehicle he brought to us. I believed then and still believe today that the CarLots consignment model is the best way to buy and sell used cars. I'm grateful for my incredible teammates who have been a critical part of this journey. I have loved working with you and say thank you for your hard work, passion, integrity, and dedication to our core values. I'm also excited about Lev's stewardship of this business. As I look to the future, I believe the company is in great hands, and I look forward to supporting Lev in any way that he has. I'd now like to turn the call over to Tom to discuss financial results for the quarter and the year. Tom?

Thanks, Mike. As you've heard us discuss in the past, the industry began experiencing unprecedented supply chain disruptions that impacted us meaningfully and required us to make several unplanned adjustments. Even with these challenges, we achieved several of our objectives in 2021. To name a few, we grew our footprint significantly We grew the F&I income by 139%. We launched our first brand marketing campaign. We expanded our team, adding expertise at the hubs and corporate, including the addition of a product team within our technology group. And as announced yesterday, we launched the beta of our mobile app. Despite our efforts, our results did not meet our initial growth projections. These challenges continue into 2022. Used car prices are still at historic highs, which makes the consignment model more challenging. Inventory remains limited, and while no one can say with certainty, it does not appear that the chip shortage will be resolved soon. Given these ongoing challenges, we are taking several actions with the aim of improving the operating and financial results of the business. First, we are pausing our real estate growth plans with the exception of one hub planned to open in 2022 to reduce the utilization of cash until the sourcing environment improves. Even with this pause, we have a lot capacity in physical infrastructure for approximately 5,500 units of inventory, which should allow for continued growth. We currently hold approximately 2,000 units available for sale below our desired levels due to sourcing challenges. By pausing our real estate growth, we plan to significantly reduce our real estate and related operational financial costs and commitments in 2022. Second, we plan to reallocate time and resources toward improving the productivity and efficiency of our current hub base and especially our processing centers. In 2021, all of our new hubs included processing center operations, During the period to ramp up a new hub to maturity, these processing centers are usually operating at sub-optimal levels. Since these new hubs have been challenged given our sourcing constraints and may take longer to mature in this sourcing environment, we are consolidating processing in some regions while also better matching demand with our labor model to reduce those inefficiencies. As we consolidate processing centers, since they are part of the hub, we believe we'll be able to reopen them easily in the future when sourcing improves and capacity is needed. Third, we plan to continue to grow our consumer sourcing initiative. We believe consumer sourcing should reduce our reliance on auctions. In addition, consumer sourcing vehicles generally have higher sell-through rates and GPU. Lastly, we plan to manage our cash further by reducing our SD&A and some areas including corporate support for HUD expansion and HUD-level staffing. I will now go through our financial results. For details regarding our financial results, please refer to our press release available in the investor relations section of our website. For the fourth quarter, revenues were $83.1 million, an increase of 124% versus last year. For fiscal 21, Revenues were $258.5 million, an increase of 118% versus last year. Revenue growth in Q4 was driven by an increase of 139% in F&I revenue, a 49% increase in retail units sold, and a 40% increase in average selling prices. For the year, revenue growth was driven by an increase of 127% in F&I revenue, a 57% increase in retail units sold, and a 35% increase in average selling prices. Gross profit for Q4 was $2.4 million, a 4% decline versus last year. Like Q3, gross profit in Q4 was negatively impacted by lower front-end profits on home vehicles, as well as processing center inefficiencies, partially offset by strong F&I results. Included in gross profit is a decrease in the lower cost of market reserve of $157,000. While we did work through most of our aged inventory during Q4, we still see slower days to sell in a portion of our inventory currently that has resulted in a continued higher level of aged inventory than we desire. This will be a major focus of improvement for the balance of 2022. For the year, gross profit was $10.6 million. Fourth quarter retail GPU was $758. Excluding the reserve decrease, adjusted retail GPU was $700. Like gross profit dollars, retail GPU was impacted by lower front-end profits on owned inventory and processing center inefficiencies, partly offset by strong F&I. For the year, retail GPU was $1,208 and adjusted retail GPU was $1,290. SDNA expense, excluding stock compensation and depreciation, was $30 million in Q4 and $93.1 million in 2021. SDNA for Q4 and the year were driven by significant investments in marketing, technology, and both corporate and hub personnel costs. Net loss was $14.2 million for the fourth quarter and $39.9 million for the year, Our adjusted EBITDA loss was $27.8 million for the fourth quarter and $82.5 million for the year. With respect to the balance sheet at year-end, our cash and marketable securities were $194 million. As we focus on the fundamentals of our business, maintaining a strong cash balance will be a priority. We are committed to managing our cost structure against sales and margin performance to improve the profitability of the business. Turning to inventory, vehicles available for sale are approximately 2,100 at year end, below our target. We believe our low inventory position and the desirability of our inventory are responsible for our lower than expected rate of retail units sold and GPU in Q4 and the slow start in Q1 in 2022. I would now like to discuss some factors impacting 2022. First, as mentioned earlier, we expect to open one new hub. Second, we expect the sourcing environment to continue to be difficult for this year. Third, given our assumptions regarding our sourcing mix, we expect retail GPU to remain challenged. We will focus on maximizing gross profit dollars and GPU through improvements in processing center efficiency, which has negatively impacted GPU and gross profit recently. Also, we are shifting the sourcing mix towards consumer, which has recently been our fastest-selling and most profitable sourcing channel, to partially offset auction purchases. We also expect continued strength in F&I to partially offset front-end GPU weakness. Fourth, as mentioned earlier, we plan to reduce SDNA in some areas, including corporate support for HUD expansion and HUD-level staffing. And fifth, we believe unit sales trends are being negatively affected by several macro factors like inflation, vehicle affordability, and rising gas prices. Since Lev is joining us in April and we will be communicating his vision over the next few months, we will not be providing full year guidance at this time. However, as an update regarding Q1 trends, retail units sold in GPU remain challenged versus Q4 2021. Now, operator, Lewis and I will now take some questions.

Thank you. If you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And our first question comes from the line of Matt Curtis with William Blair. Your line is open. Please go ahead.

Hi. Thanks for taking my question. So I guess starting with sourcing, I mean, you just reiterated your commitment to the consignment model. So far in 2022, are you seeing any increase in consignment volume sequentially as a percent of total cars?

Thanks, Matt, for that question. We have seen some pickup in consumer commercial accounts and sourcing. And we're obviously still putting a great focus on the consumer sourcing side of the business as well. And that's what we can tell you at this point.

Okay. And then I think Luis briefly touched on some of the hub performance. But just to reiterate, could you talk about how the new hubs have been performing relative to the older hubs?

Yeah. As we mentioned in the prepared remarks and talked about it earlier in other quarters, The new hubs have not been ramping as expected, and we feel like a lot of that is due to the constraints we have on sourcing right now. We've had to source from auction more than we would like, and when we source from auction, it's a less desirable unit of inventory, and it usually takes longer to sell. And so that's why our focus is now on shifting as much as we can to consumer sourcing.

Okay, and finally for me, I guess, given the CEO transition, I mean, you talked about a number of elements that will be changing in 2022, but in terms of lower SG&A spend and the pause on hub openings, but more broadly and maybe longer term, bigger picture, could you talk about what changes in long-term strategy might be ahead, if any, relative to the previous one?

Yeah, I think as we mentioned in the prepared remarks, again, that Lev is joining us. We're very excited about his background and what he brings to the company. And we really want to wait for him to get in and do a full evaluation of the business to be able to communicate better what the Go Forward strategy is going to be.

Okay, understood. Well, thanks very much, and good luck going forward. All right, thanks.

Thank you. And our next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is open. Please go ahead.

Thank you very much. Yeah, thank you. Good evening. Three questions for me, if I may. The first one, FNI seems to be like a source of strength. Can you elaborate on what the drivers are?

I'm sorry, I didn't hear the very first part of that question.

FNI.

Oh, FNI. Yeah. Yeah, we continue to see very strong F&I performance. Penetration rates are up, as well as the amounts per contract. We rolled out some new products in the last half of the year, and some of those are performing well. And the teams at other levels have done a really good job of educating the customer and getting those products sold.

Okay, so this seems like these sound like sustainable trends.

We believe it is, yes.

Okay. Second question, can you comment on the latest pricing dynamic between retail and wholesale and any meaningful or start of a change in trends there? Obviously, in monitoring some of the available data, it seems like some of the auction prices were starting to moderate a bit. Are you seeing any encouraging sign of... start of a normalization process, or not yet?

Yeah, it's been sort of hit or miss as you've gone through the past year. We've seen the margins compress and then widen a little bit, but I think they're still compressed from what they have been historically. Some of the wholesale prices have backed off some, but most recently. But again, I think we still think it'll be challenging, at least in the near term, you know, based on consignment versus just going to auction for some of the accounts that we deal with.

Understood. And then, so just finally, with the hub expansion, I guess on hold or on the back burner for the time being, what are the company's near-term operational priorities?

like and i mentioned as we talk through the remarks uh... we're going to be on ways to you know reduce casualization he talked about consolidation of the processing centers until we see sourcing improving demand picked up we talked about uh... i was in the parliament itself saves uh... some capital because they do require capital upfront uh... and we talked about them right-sizing of our hub levels, staffing levels, based on the demand that we're seeing today.

Okay, thank you.

Thank you. And again, if you have a question at this time, please press star, then 1. And I'm showing no further questions at this time, and I would like to turn the conference back over to Luis Solorzano for any further remarks.

Thank you, Operator, and thank you all for participating in this call. I would like to finish by emphasizing how excited we are that Lev is joining the company as CEO and certainly look forward to introducing him to you in the near future. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.