Vroom, Inc.

Good morning, everyone, and welcome to Vroom's second quarter 2022 earnings call. Joining us on the call today are Tom Short, Chief Executive Officer, and Bob Krakowiak, Chief Financial Officer. Please note this call will be simultaneously webcast on the investor relations section of the company's corporate website at ir.vroom.com. The second quarter 2022 earnings release and earnings presentation are also posted to the Investor Relations 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 based on management's current assumptions and are neither promises nor guarantees. and are subject to a number of risks, uncertainties, and other important factors that may cause actual results to differ materially. We direct you to the company's most recent SEC filings, including the Risk Factors section of Room's most recent Form 10-K for the year ended December 31st, 2021, as updated by our quarterly report on Form 10-Q for the three months ending June 30th, 2022, for additional discussion of factors that could cause actual results to differ materially. Please note further that today's discussion, including the forward-looking statements, speak only as of the date of this call, and Vroom assumes no obligation to update such statements. The company may also discuss certain non-GAAP financial measures during today's call. You can find a presentation of the most directly comparable GAAP measures and a reconciliation of those measures in the second quarter 2022 earnings release and management presentation. I'd like to now hand the conference over to Tom Short, Chief Executive Officer. Tom.

Thank you, Liam, and thank you to all the investors, analysts, roommates, UACC colleagues, and third-party partners who are joining us today to discuss Vroom's second quarter earnings. I'll start on slide three. We introduced our long-term roadmap in our May 26th Investor Day where we highlighted our mid-term goal, which is a break-even business, and our long-term goal of a 5% to 10% adjusted EBITDA margin business. As we mentioned on Investor Day, we have made the choice to slow down. We are slowing down with the intent to continue improving our customer experience. We plan to live within our means while we prioritize unit economics, profitability, and liquidity overgrowth. As previously announced, our roadmap relies on four focused strategic initiatives. First, build a well-oiled transaction machine. Our transaction machine includes titling and registration, selling, e-commerce, and marketing. Our primary focus in the short term is building a well-oiled titling and registration machine. Second, build a well-oiled metal machine, how we buy, move, recondition, sell, deliver, and price vehicles. Our goal is to optimize the end-to-end supply chain by synchronizing how we buy, move, recondition, and deliver vehicles to reduce cycle times, reduce supply chain costs, improve inventory turns, and improve customer delivery times. Third, build a regional operating model leveraging our national brand. We intend to sell nationally but operate more regionally around our reconditioning centers and transportation hubs. We expect to build density in regions to drive marketing and supply chain economics while improving customer delivery times. We have a significant opportunity to reduce the number of miles our vehicles travel and reduce inbound and outbound transportation costs. Fourth, Build our captive finance offering. We intend to expand on our captive finance offering for room customers, which we believe will improve conversion rates and improve unit economics while also improving the customer experience. We also intend to continue to grow the UACC third-party dealer business, which contributes to our consolidated EBITDA. Moving to slide four, our second quarter highlights. We improved adjusted EBITDA excluding the securitization gain in Q1 by $51 million, or 38% sequentially. Our e-commerce gross profit per unit, or GPPU, was $3,629, reflecting progress toward our long-term goal. We reduced adjusted SG&A by $52 million sequentially. We are making progress on our long-term roadmap on our four strategic initiatives. Development of our captive financing operation is on plan. Our pricing initiatives are driving GPPU improvements. We made several process and tech improvements in transaction processing, including entitling and registration, that are beginning to bear fruit. We have continued tech development and anticipate additional tech deployments in 2022 to progress us towards our goal of becoming best in class in titling and registration. Given our quarter over quarter adjusted EBITDA improvement and our focus on profitability and liquidity overgrowth, for the year, we currently expect to be at the low end or below our forecasted e-commerce unit. Near or better than the midpoint of our forecasted adjusted EBITDA loss range, meaning an EBITDA loss between $325 million to $350 million, and near the midpoint of our previously forecasted liquidity range. Turning to slide five. During Investor Day, we outlined these key unit economic drivers behind our four strategic initiatives that we believe will build a profitable business model. This slide is an update on our Q2 operational progress on our four strategic initiatives by financial lever. For product and vehicle GPPU, we achieved $3,629 e-commerce GPPU driven by our pricing initiative and captive financing operation. Development of our captive financing operation is on plan. We've recently announced that UACC completed its second securitization since our acquisition and UACC's 14th securitization overall, demonstrating UACC's ability to leverage its substantial capital markets experience to opportunistically deploy securitization transactions and maintain capital flexibility even in a challenging market. SG&A Logistics. We reduced our all-in logistics costs by $20 million sequentially. We began optimizing our logistics operations in Q3. Inventory. We achieved a 21% improvement in listed for sale inventory as a result of transforming the titling process. Our SG&A sales. We reduced our sales costs by $8 million sequentially. We began our sales pilot and launched new e-commerce initiatives in the quarter. SG&A for titling and registration. We focused on improving the customer experience while we made improvements in transaction processes. This drove a $3 million increase sequentially. As I mentioned, we expect continued tech deployments in the second half of 2022. SG&A for marketing. We reduced our marketing costs $15 million sequentially and saw improvement in our cost per opportunity as we focused on our high return on investment marketing channels. SG&A fixed costs. We reduced fixed costs $12 million sequentially. In the business realignment plan, we announced we were closing our TDA service business. With that closure, we determined that our TDA service business real estate is better suited for our reconditioning business. Accordingly, we plan to relocate our Stafford, Texas, reconditioning facility to our lower cost service site. This will further reduce our fixed costs once the transition is complete. These variable and fixed cost sequential changes represent the $52 million sequential reduction in adjusted SG&A mentioned earlier. I'll turn it over to Bob now to go through our financial performance in the second quarter and our forward outlook.

Bob? Thank you, Tom. I would like to begin by providing more detail on our financial performance in the second quarter as we executed against our strategic initiatives we initially outlined in our Investor Day presentation in May. Let's turn to slide seven for a summary of second quarter financial performance versus the first quarter. Total revenues of $475 million decreased 49% sequentially as we intentionally reduced e-commerce units. E-commerce units decreased 53% quarter over quarter as we chose to slow down our e-commerce business to focus on improving operational execution. We are pleased with our progress on gross profit per unit as we more than doubled e-commerce GPPU quarter over quarter to $3,629. This is a quarterly record for Vroom. I will discuss the drivers of this expansion in more detail on the following slide. Our adjusted EBITDA loss improved by $21 million sequentially, and our adjusted EBITDA excluding securitization gain improved $51 million sequentially in the second quarter. This was driven by our record e-commerce GPPU, as well as decreased fixed and variable costs as a result of our realignment plan and the initiatives set forth in our long-term roadmap. As a reminder, second quarter adjusted EBITDA and full year 2022 adjusted EBITDA guidance include impacts from non-recurring costs to address operational and customer experience issues. We incurred approximately $8 million of these costs in the second quarter. Our adjusted EBITDA, excluding securitization gain and non-recurring costs, to address operational and customer experience issues improved by $59 million sequentially. Please turn to slide eight for a summary of our financial highlights for the second quarter. E-commerce units decreased 53% quarter over quarter to 9,233 as we chose to slow down e-commerce transactions to focus on improving operational execution. Let's dive further into our record GPPU performance. During the second quarter, we substantially grew vehicle and product GPPU. E-commerce vehicle GPPU increased 264% sequentially to $2,166, an increase of nearly $1,600. Our commitment to our strategic initiatives outlined at Investor Day helped drive improvement in sales margin as we revised pricing algorithms to focus on optimizing GPPU over transaction volume. As we move forward, we see additional opportunities to optimize our pricing strategy. E-commerce product GPP-U increased 25% quarter over quarter to $1,463, an increase of nearly $300. This was primarily driven by higher interest income due to a higher volume of loans held by UACC for room customers. For a review of how UACC and captive financing impact our financial statements, please refer to slide 11 of our first quarter management presentation. While we drove GPPU performance and significantly reduced our expense base, our adjusted EBITDA excluding securitization gain per unit decreased 32% quarter over quarter. As we expected in the short run, our expenses did not decrease at the same rate as e-commerce units during the second quarter. In addition to deleverage on select fixed costs, we also chose to support our goal of addressing the current titling and registration challenges and making titling and registration an area of competitive strength. Next, please turn to slide nine, which provides a comparison of our adjusted EBITDA excluding securitization gain versus the prior quarter. Let's start with a look at gross profit, which increased by $14 million in spite of a 53% contraction in units. There were three main areas that impacted gross profit versus the prior quarter. First, the reduction in e-commerce unit volume reduced gross profit by $18 million. This was mostly offset by increased e-commerce GPPU, which delivered an additional $17 million in gross profit. Non-e-commerce gross profit improved by approximately $15 million, which was primarily driven by interest income within the retail financing segment. As a reminder, the retail financing segment includes results from UACC loans originated by third-party independent dealership customers. Our results in the second quarter benefited from having a full three months of business activity versus the prior quarter since the UACC acquisition closed in February. We are pleased with the ongoing performance from our third-party dealership business. Moving on to expenses. Our largest reduction in expenditures was outbound logistics, primarily driven by lower variable expenses as we sold fewer units during the quarter. We successfully reduced marketing expenses by $15 million during the quarter. On top of lower variable marketing costs, we also experienced savings as we prioritized our higher ROI channels of marketing. Overall, we reduced marketing expenses at a lower rate than unit volumes as we continue to invest in select brand building campaigns and initiatives. Next, Our realignment plan drove $11 million in compensation and benefit cost reductions quarter over quarter. In total, we delivered approximately $59 million of improvement in adjusted EBITDA, excluding securitization gain and non-recurring costs to address operational and customer experience issues. Please turn to slide 10 for an update on liquidity. We ended the second quarter with $533 million in cash and cash equivalents, excluding restricted cash. and continue to forecast $450 to $565 million at year end. We updated the bridge from the first quarter call with actual second quarter results to highlight the expected sources and uses of cash during the second half of the year. Our previously provided adjusted EBITDA loss guidance for the full year of $375 to $325 million implies a loss of $182 to $132 million of adjusted EBITDA during the second half of the year. Next, we expect approximately $26 to $36 million in capital expenditures in the second half of the year, as well as $5 to $10 million in stock-based compensation and $10 million in UACC or room financing. We released $43 million of restricted cash to cash and cash equivalents in the second quarter. We forecast approximately $82 to $107 million of additional cash release in the second half of the year as we improve operations and speed up our transaction processing. Lastly, we forecast approximately $39 to $64 million of cash and inventory to be released through the remainder of the year. We anticipate improvements in cash and inventory as we continue to improve our transaction and titling processes. Altogether, This implies approximately $500 million in liquidity at the end of the year. Now I'd like to pass it back to Tom for a few final remarks. Tom?