Vroom, Inc.

Good morning, and thank you for standing by. Welcome to Vroom's third quarter 2021 earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Joining us on the call today are Paul Hennessy, Chief Executive Officer, and Bob Krakowiak, Chief Financial Officer. Please note that this call will be simultaneously webcast. on the investor relations section of the company's corporate website at ir.vroom.com. The third quarter earnings release and earnings presentation are also posted to the IR website. Before we begin, please note that the discussion today includes forward-looking statements within the meaning of the federal securities laws, including but not limited to statements about Vroom's operations and future financial performance. These and other forward-looking statements are subject to a number of risk, uncertainties, and other important factors that may cause actual results to differ materially from those in such statements. We direct you to the company's most recent SEC filings, including the risk factor section of Rooms' most recent Form 10-K for the year ended December 31, 2020, as updated by our quarterly report on Form 10-Q for the three months ended September 30, 2021. for additional discussion of factors that could cause actual results to differ materially from those in the forelicking statements. Please note further that today's discussion including the forelicking statements speak only as of the date of this call and Vroom assumes no obligation to update such statements based upon future developments or otherwise. The company may also discuss certain non-GAAP financial measures during today's call. You can find a presentation of the most directly comparable gap measures and a reconciliation of those measures in the third quarter earnings press release. I'll now hand the conference over to your first speaker today, Paul Hennessy, Chief Executive Officer. The floor is yours.

Thank you, and welcome, everyone, to Broom's third quarter earnings call. Today, Bob and I will walk you through a presentation reviewing our third quarter performance and provide an updated outlook on the balance of this year. Before I dive in, I'd like to thank our employees and board members for their incredible efforts this quarter as we build an outstanding customer-centric company. I'd also like to thank our investors for their ongoing support as we scale our business. Let's start on slide three. I wanted to take a minute to formally introduce our new Chief Financial Officer, Bob Krakowiak. While many of you have heard from Bob on our United Auto Credit Corporation, or UACC, acquisition call, this is his first time joining us for earnings. He's been with us for two months now, and his experience and guidance have already been a tremendous asset for Vroom. Bob joined us from Stone Ridge Corporation, a designer and manufacturer of electronic systems for the automotive industry, where he served as CFO for over five years. Previously, he served in finance and investor relations leadership roles at Vistion, Owens Corning, and Kmart Corporation. I'm thrilled to have Bob on the team. His seasoned track record of results-driven leadership will help propel Groom to the next level. Let's turn to slide four. We are proud of our performance during the third quarter. We drove triple-digit year-over-year e-commerce unit growth. as we ramped output across the business to keep pace with record demand. While we are slightly light of our guidance on e-commerce units, we feel good about taking a disciplined approach to our acquisitions, pricing, and supply chain. Our e-commerce gross profit per unit, or GPPU, came in well ahead of our guidance as we preserved vehicle margins and expanded product margins. We delivered strong results on the expense side as well, coming in better than our initial expectations while still investing in our long-term objectives. We're making progress on our strategic initiatives. As we announced last month, we entered into an agreement to acquire UACC. With UACC in our corner, we'll be able to build out a captive finance business commencing in 2022, driving greater profitability and expanding our reach to consumers. We are on track to exceed our key 2021 supply chain targets. We completed our 2021 rollouts of last mile hubs ahead of our expectations, reaching over 40% of our customers during the third quarter. Additionally, we grew consumer sourcing to a record high of 81% of our vehicles sold during the quarter. Looking ahead, we are bullish about the fundamentals of the underlying business. and we'll continue to take a disciplined, sustainable approach to our unit targets. We'll talk more about our outlook later in the presentation. Now on slide five, I'm going to go through a few of our e-commerce highlights. E-commerce units grew 123% year over year to 19,683 units as we capitalized on marketing investments and increased our listed inventory levels in a high-demand environment. Our e-commerce revenue growth outpaced our units as average selling prices accelerated through the quarter, which we attribute mainly to elevated vehicle prices in the broader market. E-commerce gross profit per unit increased 17% year-over-year to $2,560. We hit a record high in product gross profit through higher attachment rates, while our vehicle GPPU slightly increased. We'll get further into GPPU puts and takes later in the presentation. Let's go deeper into unit trends on slide six. As we look across our business holistically, we like to think about total e-commerce transactions. This means units sold plus units sourced from consumers. We've experienced tremendous growth in total transactions year-to-date in excess of 200% as we execute our consumer sourcing initiatives and scale our selling and processing capabilities. As you can imagine, our consumer sourcing programs has been a key driver of growth for our transactions. In the third quarter, we sourced 81% of retail units sold directly from consumers, nearly triple our rate in the third quarter of last year, and up significantly from 65% in the prior quarter. Our competitive algorithm-based pricing methods make us a compelling option for consumers wishing to sell their vehicles. Our Sell Us Your Car and other marketing efforts have also catalyzed seller demand for our model in a favorable market environment. We amplified marketing this quarter with increased investments in national campaigns. As a result, we achieved a record high in website visitation, with over 2.2 million average monthly unique visitors in the third quarter, up 28% compared to the prior quarter. Turning to slide seven, as we announced previously, we entered into an agreement to acquire UACC, expecting to close late this year or early next year. We expect our business to reap several benefits from this acquisition. First and foremost, UACC, combined with Vroom, will allow us to build captive finance capabilities, increasing our product gross profit opportunity as we capture more economics of the transaction. We also expect scale benefits and an improved conversion rate. Currently, we have significant potential with lower credit score consumers who make up over half of the credit applications we receive. The acquisition of UACC will allow us to increase our reach across the entire consumer credit spectrum. Integration planning is well underway. Once the acquisition is complete, we expect to begin integrating our backend systems and processes in the first half of 2022. In the second half of the year, we'll scale e-commerce loan originations as we begin to develop UACC into an integrated captive finance operation. We remain committed to an asset-light funding strategy for our direct-to-consumer lending business, And we'll provide more specifics on the combined opportunity of Vroom and UACC after the transaction closes. Back to our current operations on slide eight. I'm proud of our logistics accomplishments this year. Our rollout of our last mile program continues. We opened our 30th last mile hub in the third quarter, achieving our annual target for 2021 ahead of schedule. We also accelerated deliveries with our own last mile experience to 41% of e-commerce deliveries, meaningfully above our 26% last mile delivery rate achieved in the second quarter. As we head into the fourth quarter, we are already nearing our 2021 exit run rate target of 50%. Our last mile program allows us to deliver a superior customer experience and paves the way to better unit economics by improving delivery efficiency. In addition, we've also made further investments in our line haul program, adding new trucks and drivers to our network this quarter. I would like to point out that we are currently experiencing reconditioning constraints due to labor shortages and historically high demand levels at our third party reconditioning centers. We view this as a transitory issue. While we continue to like the optionality of third party sites, and we'll continue to work with our partners to expand capacity As part of our hybrid approach, we acknowledge the increasingly competitive environment for reconditioning capacity. Growing interest in selling cars online will also require room to invest in selective, dedicated reconditioning capacity. Our hybrid approach is the best strategy to scale for the future. On slide nine is an update on our sales support and technology. In the near term, we continue to invest in people to scale our business and improve our processes. Our ability to process higher volumes of transactions on the support side has improved significantly since the beginning of the year as we work towards providing a touchless experience for both buying and selling vehicles. Going forward, our investments today will move us towards a seamless end-to-end e-commerce experience as well as driving improved scale economics. Stepping back, I want to recap the themes for this quarter on slide 10. We had strong year-over-year e-commerce unit growth. We achieved exceptional gross profit per unit results versus our guidance. We advanced our supply chain strategy and kickstarted plans to build a captive finance arm for our business in 2022. In the near term, we continue to navigate through the current supply-constrained environment to continue to grow our business. Now I'll hand it over to Bob to walk you through the financials of the quarter and our outlook. Bob? Thanks, Paul.

It's great to be a member of the pit crew at Vroom and to join everyone for the third quarter earnings call. I would like to begin on slide 12 with our financial highlights. We had a strong quarter as we drove healthy year-over-year unit growth and outperformed our expectations for the quarter on revenue, e-commerce gross profit per unit, total gross profit, and adjusted EBITDA. Total revenues of $897 million increased nearly 180% year over year and 18% sequentially, coming in above the high end of our guidance. Our overall growth was principally driven by growth in retail units. Higher than expected average selling prices further drove the outperformance relative to our expectations. Third quarter e-commerce units of 19,683 grew 123% year over year and 8% quarter over quarter. We experienced healthy growth for the quarter as consumer demand remains high for used vehicles and as we delivered strong execution in a healthy demand environment. During the quarter, continued focus on our strategic objectives drove increased listed inventory and amplified marketing. our e-commerce GPPU hit $2,560, up 17% year-over-year, a meaningfully higher product GPPU and slightly increased vehicle GPPU. I'll go further into the drivers of e-commerce units and e-commerce performance on the next slide. Total gross profit for the quarter of $58 million increased 128% year-over-year and came in ahead of our expectations. This was driven primarily by the expansion of e-commerce GPPU in higher unit volumes. As expected, our per-unit profitability contracted versus the second quarter as we experienced transient macro headwinds to sales margins. Despite the headwinds, we surpassed our gross profit guidance for the quarter thanks to better-than-anticipated performance across all three lines of our business. EBITDA which was adjusted for acquisition costs related to our announced UACC transaction came in at an $87 million loss versus a $36 million loss in the prior year. This was also ahead of our expectations for the quarter. Third quarter adjusted loss per share of 70 cents was better than our guidance due to improved revenues, gross profit and expense levels. At the bottom of page 12, you can see the primary highlights of our fourth quarter outlook. For more details regarding our fourth quarter guidance, please see our earnings press release. We're expecting 20,000 to 20,500 e-commerce units in the fourth quarter. This implies 84% year-over-year growth at the midpoint. As Paul mentioned, we are experiencing transitory events that are reducing throughput in our supply chain. As a result of these temporary issues, We anticipate total revenues of $865 to $900 million, a year-over-year midpoint increase of 117%, primarily driven by unit growth and current elevated average selling prices. We expect e-commerce gross profit per unit in the range of $2,100 to $2,300. This implies 21% year-over-year growth at the midpoint. we are guiding to a total gross profit of $50 to $58 million, primarily driven by our annual growth in e-commerce units and GPPU. We remain focused on achieving over 200% gross profit growth for 2021. Slide 13 provides a summary of our third quarter e-commerce performance. As we've discussed previously on today's call, our e-commerce units grew 123% year over year, but came in slightly below our expectations. E-commerce revenues hit $702 million, an increase of 216% year over year, driven by strong unit growth and higher average selling prices. Our third quarter e-commerce average selling price of approximately $34,400 expanded significantly year over year and was higher than our guided range as we continue to improve our pricing algorithm in a historically strong vehicle pricing market. E-commerce vehicle GPPU of $1,315 increased slightly from $1,302 in the prior year. During the quarter, we continued to deliver improved productivity on reconditioning costs, which was partially offset by lower sales margins as the cost to acquire vehicles in the current environment were higher than the prior year. E-commerce product, GPPU, of $1,245 increased $359, or 41%, from $886 a year ago and also showed quarter-over-quarter gains. Our higher product profitability was primarily driven by higher attachment rates as well as higher average loan sizes due to higher e-commerce average selling prices. Moving to the other segments on slide 14. Wholesale units of 9,760 grew 58% year-over-year. Wholesale gross profit per unit of $215 contracted year-over-year as expected and came in ahead of our guidance of $50 to $100. As our pricing strategies kept pace with increasing prices in the used vehicle market through the quarter, we were able to book higher gross profit on wholesale units than we originally anticipated. We sold 1,749 TDA units in the third quarter, growing 20% year over year and surpassing our expectations. We saw positive customer response to our inventory selection improvements for TDA. TDA GPPU also increased to $2,175 for the quarter, up $347 over the prior year and well ahead of our guidance range of $1,650 to $1,750. TDA GPPU benefited from lower per unit sourcing costs year over year, as well as higher product profit due to higher average loan balances. Turning to slide 15, I would like to provide some additional color on our SG&A performance. On an absolute spend basis, our SG&A increased as we continue to make key strategic investments in staffing and new technology to keep pace with demand, as Paul discussed earlier in his comments. The chart on slide 15 shows our SG&A spend per total e-commerce transaction year to date for 2021 versus 2020. For 2020, our total SG&A spend per total e-commerce transaction was $5,401. Year-over-year increases in logistics rate inflation and expenses related to the announcement of the acquisition of UACC added $169 per unit on a year-to-date basis. Our total e-commerce transactions, which we define as e-commerce vehicle purchases plus e-commerce units sold, has more than tripled year-to-date versus 2020. Purchases include trade-ins and straight buys and exclude auction source units. Despite the increase in logistics and transaction expenses, we are seeing the benefit of leveraging our scale by reducing per unit cost by $1,617 year over year. On a net basis, this benefit resulted in a 27% reduction to our year-to-date SG&A per total e-commerce transaction versus 2020. In closing on slide 16, I am pleased with our performance during the third quarter. We are working tirelessly to continue executing our growth strategy. Our fourth quarter guidance continues our track record of strong year-over-year growth, and we are looking forward to closing the UACC acquisition and welcoming their team as partners in the future growth of our company. We are excited to share with you the transformational aspect of the UACC acquisition and will do so after the transaction closes late this year or early in 2022. Thank you for your time, everyone. It is great to be at Vroom. With that, Paul and I are ready for your questions.