CarLotz, Inc.

Thank you for standing by, and welcome to CARLOT's first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker 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 aware that today's call is being recorded. If you require any further assistance, please press star 0. I would now like to turn the call over to Susan Lewis. Vice President, Investor Relations.

Thank you. Good afternoon, everyone. With me on the call is Lev Peeker, our Chief Executive Officer and Board Member, and Tom Stoltz, our Chief Financial Officer. 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 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 Lev.

Thank you, Susan, and good afternoon. Thank you, everyone, for joining us today to discuss our first quarter fiscal 2022 financial results. It's an honor to join Carlotta, CEO, and I want to thank the team at CarLots for the warm welcome I have received. Before I dive in, I want to share what initially drew me to the opportunity at CarLots. First, the unique consignment marketplace model is a differentiator for the business. Consignment provides significant value to our customers, allowing them to sell their cars at retail rather than at wholesale prices. Second, CarLots has omni-channel capabilities in an industry that is experiencing significant change and transformation in how customers buy and sell used vehicles. Our customers can choose how they shop and when they shop. A customer can complete some or all of a transaction online or go to one of our physical locations with a service center to buy, sell, or in the future potentially have maintenance performed over the car's life. And third, the highly fragmented and large industry offers opportunity to build a successful business. Approximately 40 million used vehicle transactions occur every year and no single vehicle seller holds more than 5% market share. We just need to capture a very small percentage of the market to be successful. I've now been at CarLots for three weeks. I have met with every corporate employee and have visited most of our hubs across the country. I couldn't be more excited to say that I have found a very talented group of teammates who are dedicated to the company's success and have a wealth of ideas about how to provide the best customer experience for our retail and corporate partners. I'm proud to join this talented team and excited to lead the next phase of the journey in creating the greatest vehicle buying and selling experience. As I see it now, we need to build upon the company's foundation and produce profitable growth so that we can continue to scale the car lot business. To do this, we need to be laser focused on execution, particularly as unprecedented market conditions continue to present challenges. First and foremost, we need to better optimize sourcing with an emphasis on profitability. We need to sell more cars to grow revenues and leverage our expense base. We need to continue to grow our consignment strategy, raising awareness in the marketplace of the value proposition of consignment. We need to enhance our lead generation and lead management process. We need to continue improving the efficiency of our processing centers. We need to develop a robust logistics strategy. We need to continue enhancing our technology infrastructure to improve the customer buying and selling experience. And finally, we need to carefully manage our spending, both SG&A and CapEx. We have already paused our real estate growth strategy to better utilize the capacity we already have in place, and we're reviewing every contract and expense line item to validate that they support our goal to sell more cars and provide the best buying and selling experience for our customers. The opportunity is there, and these actions will serve as our roadmap to guide us forward. To accomplish our goals, we'll continue to add discipline to how we operate. Our focus is on profitable growth, leveraging the assets currently in place. I want to be very clear. We're working towards EBITDA breakeven as a first step. I'm empowering our talented and experienced teammates to make decisions, and we'll be holding them accountable to results. I believe they're excited to have this responsibility and to directly contribute to the future of our business. Going forward, we'll seek to capitalize on three of our biggest assets. our differentiated consignment model, our omnichannel experience, and of course our talented team to improve our business. We plan to grow consignment through our corporate accounts and consumers to deliver value. We also plan to continue to develop our omnichannel experience, letting our customers choose how they want to shop. We have an opportunity to further utilize our hub and service center infrastructure by expanding the ways we can serve our customer at our hubs over the entire vehicle life cycle. I look forward to getting to know all of the CarLabs investors and analysts and providing future updates on our progress and performance. I will now hand the call over to Tom for the financial results of the quarter. Tom?

Thanks, Lev. For full details regarding our financial results, please refer to our press release available in the investor relations section of our website. For the first quarter, revenues were $63 million, an increase of 11%, versus last year. Retail units sold were 2,270 versus 2,554 last year. Revenue growth in Q1 was driven by an increase of 138% in F&I revenue, a 14% increase in average selling prices, offset by a decline of 11% in retail units sold. We believe retail units sold were impacted by less desirable inventory and macroeconomic factors impacting consumer sentiment and vehicle affordability. The underlying trend is difficult to know since we are lacking significant government stimulus from last year. Gross profit for Q1 was $2.1 million, a 3% increase versus last year. Retail GPU was $827. Like Q4, gross profit and retail GPU in Q1 were negatively impacted by lower front-end profits on owned vehicles, processing center inefficiencies, and deleveraging of processing center fixed costs. They were partially offset by strong F&I. SG&A expense, excluding stock compensation and depreciation, was $27.7 million in Q1. SG&A for the quarter was primarily driven by 11 more hubs in operation than last year and investments in marketing and technology. Net loss was $24.8 million, and our adjusted EBITDA loss was $25.6 million for the first quarter. Now turning to the balance sheet, at quarter end, our cash and marketable securities totaled $150 million, and we have approximately $18 million of remaining availability on our floor plans. I will now turn the call over to Lev for comments before Q&A.

Thank you, Tom. As I mentioned earlier, I believe there is significant opportunity at CarLot. We're optimistic about the future and the potential of this business. In the next couple of months, I look forward to sharing our enhanced strategy for CarLot. Operator, we will now take questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that's star 1. on your touch-tone telephone to ask a question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Once again, that's star one on your touch-tone telephone. Our first question comes from the line of Sharon Zaxia of William Blair. Your line is open.

Hi, good afternoon. I guess a few questions, just unpacking the GPU on the cars themselves, that loss of $800. Tom, can you kind of break it into the parts that you named in terms of how much of that decline was the lower front end profit versus the process center inefficiencies versus the deleverage? And have you seen any improvements on the process center inefficiencies as we've gotten out of Omicron?

Yeah, hey, Sharon. In our filings, we break out the front-end retail GPU, and if you do that on a per-unit basis, it shows about an $800 loss per retail unit on the front end. Obviously, the processing fees are part of that, and the repair costs for any units that we own ourselves are in that bucket. All the reconditioning cost inefficiencies are in that bucket. The F&I was still very strong, and that's obviously reported as well. But I would say the majority of the negative impact to GPU in the quarter was due to the processing center inefficiencies. We just had a lot more capacity available to us than we were able to produce in terms of units sold. And so that was the biggest piece of it.

So as we think about that, kind of going forward, I mean, how should we think about the path to retail vehicle GPU profitability? Do you need to hit a certain unit threshold to get there? Or is there something you can do? I think you guys mentioned, you know, positive EBITDA or break-even EBITDA as a big goal. Clearly, getting there on the car itself, XF and I has got to be part of that. So how do you think about kind of getting to the retail, being back in positive territory, the trajectory there?

Yeah, let me take that. This is Lev, and nice to meet you. We'll outline kind of a bigger strategy later, but I think if you think about the sources of our vehicles, I think we have to become a little bit more diversified. We've also, unfortunately, had to let some people go in the processing centers last quarter to facilitate realign the capacity we have with the volume we're actually processing there so that will help a little bit but generally speaking I think we need to get as close to capacity as possible in terms of operations and we need to diversify the mix of vehicles that are coming in so that we're not just reliant on one source of vehicles but we can get consumer source vehicles as well as commercial consignment and consumer consignment which are more profitable for us from the front-end GPU perspective. So it's going to be a mixture of different things, but really it's sourcing from different sources, as well as realigning the staffing to the current volume.

Thanks, that's helpful. And then can you give us the mix on commercial versus consumer-consigned in the quarter versus owned? And then separately, any thoughts on cash burn that you're expecting for 2022?

Yeah, I can take that as part of the disclosures in the queue. Our consignment inventory was about 34% of total inventory at the end of the quarter. And so obviously the balance of that was owned inventory. Again, we're seeing some positive shoots on the commercial account side, but we still obviously would like to see that be a higher number. As far as the cash burn goes, we have, we believe, at the current run rate, about 18 months of liquidity. But again, we've mentioned a number of things here on the call, from better sourcing to getting arms around the reconditioning costs, working on lead management, a lot more doing a better job of logistics, working on our technology side, all that, and then also controlling just SG&A costs in general. So we believe that we will see the cash burn improve as we go forward.

Okay. Thank you.

Thank you. Once again, to ask a question, please press star 1 on your touchtone telephone. Again, that's star 1 on your touchtone telephone to ask a question. Our next question comes from Emmanuel Rossner of Deutsche Bank. Your line is open.

Thank you very much. I wanted to ask you about the F&I strength that helped offset some of the retail weakness. Can you elaborate a little bit more on what's driving that and do you view this as a sustainable trend?

We do think it's sustainable. We've seen both nice increases in the penetration rates, both for financing and all the product services, And the contracts, we brought out a few additional services over the last couple of quarters, and we're seeing those grow in acceptability as well. So we do think that will continue to be strong for us.

Understood. That's all I have. Thank you.

Thank you. Once again, to ask a question, press star 1 at this time. At this time, I'd like to turn the call back over to Lev Peeker for closing remarks. Sir?

Thank you, Operator. Before we close, I'd like to welcome Ozan Kaya to Carlotta's President. He officially started two weeks ago and is getting up to speed quickly. He has significant experience building customer relationships and developing and executing omnichannel strategies, and he'll join our quarterly calls in the future to provide operational updates. Welcome, Ozan. I would also like to reiterate how excited I am to join CarLots. The team and I are already hard at work to deliver amazing experiences to our customers and to create long-term shareholder value. I look forward to meeting all of you soon. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect.