ACV Auctions Inc. (ACVA) Earnings Call Transcript & Summary
May 21, 2024
Earnings Call Speaker Segments
Rajat Gupta
analystGreat. Good evening, everyone. Thanks for joining. My name is Rajat Gupta. I'm a member of the Automotive Equity Research team at J.P. Morgan. Very pleased to have with us the team from ACV Auctions, CEO, George Chamoun; CFO, Bill Zerella, and Head of Investor Relations, Tim Fox in the audience as well. So with that, thanks, George and Bill for joining us.
George Chamoun
executiveYes. Thanks, Rajat, for having us.
Rajat Gupta
analystGreat. So maybe just to ease into the conversation -- could we get a high-level update on how you view the macro and just the industry trends so far this year, perhaps into the second quarter so far as it relates to your business broadly, the wholesale market broadly specific to ACV, maybe we can dive into that? Clearly, a lot of cross currents right now. We're seeing some supply from rental companies come in, repossessions have been there. Some moderation in used car pricing is starting to happen -- new car inventory continues to pick up. So just characterize all of that for us and what's the impact to ACV in the wholesale market?
George Chamoun
executiveYes, certainly. So for those of you that are less familiar with ACV there's 2 aspects of the wholesale market. There's dealer wholesale and there's commercial wholesale. So I'll bring that backdrop with a little bit of the 2 segments. Most of our business today comes from the dealer wholesale effector and we're sort of emerging in the commercial sector. So for dealer wholesale -- dealer wholesale is really the result of retail transactions, trade-ins and other cars, dealers are buying from consumers. So as we start to see the retail environment improve, wholesale will also improve. Wholesales also benefits as dealers lot start to fill up. If you kind of think about the core business for a retailer is to retail vehicles, if they have empty spots on their lot, they will tend to start to retail vehicles, they probably should be wholesaling, meaning cars that don't match their brand, they'll match their margin targets, cars that are probably taking them too long to recondition, etcetera. So as we start to see some of the industry dynamics, enhanced new car production has obviously increased. Incentives are starting to come out right now. We're starting to see OEMs start to push incentives. We're starting to see affordability incrementally be addressed with used car values starting to go down. So as all these movements of affordability and helping the end consumer be able to buy a new car, we'll start to see more trades, and then we'll start to see the dealer wholesale market come back.
Rajat Gupta
analystHow dependent is -- you've obviously given 2024 targets out there. I mean, how dependent is the used car pricing backdrop as it relates to those targets? Obviously, the last couple of years, you've been able to show your progress irrespective of how the market has played out. But as we're heading into a little more normal depreciation, like how do you view -- how dependent are your near-term targets on just like the pricing backdrop -- other levers you can pull?
George Chamoun
executiveYes. I think it's a really important question. I think investors up until this past quarter were a little bit worried that as used car values came down, what would happen to our revenue per unit. And what we've been evangelized to investors is used car values going down is actually a good thing for us. We felt good that we will hit our midterm revenue per unit targets we've set out there even with values going down. And the reason why we've evangelized that used car values going down is beneficial for the market. At the end of the day, this will mean affordability for the independent dealer buying these cars, their ability to recon these vehicles. At the end of the day, the consumers will be able to afford these vehicles. We already had room within our pricing to address the lower-priced vehicles. We knew we had some headroom. And so what we really try to sort of emphasize is that we feel great about our medium-term sort of revenue per unit targets. And so in a way, look at used car values going down as a positive trend for us.
Rajat Gupta
analystGot it. Got it. That's clear. I do want to get into like the whole commercial initiative as well. But just before that, you last year at the Analyst Day, you gave us 2026 targets. Recently, you referred to them more as medium-term targets. Curious to understand what's changed from your perspective in the backdrop or the mix of your business since the last Analyst Day? And how should we think about like the time line of hitting those targets today versus like a year ago? And just the complexion of how you get there?
George Chamoun
executiveYes, certainly. So I think for one, I think you've seen very consistent strong execution quarter-after-quarter. We continue to take market share. We continue to incrementally achieve the EBITDA targets we're looking to achieve. So I think from last year to now, I think most investors would say that we've delivered really exceptionally well quarter-after-quarter. Specifically, why we changed the reference from 2026 targets to midterm was when we put out there 2026, we are pretty clear to investors saying assume that the market would return back to normal. We heard back from some of our largest shareholders that they felt like that was not the best way for us to be laying out our goals and objectives. Instead, the market will return back to normal at whatever pace it does. So we decided just to instead we're committed to hitting these numbers whenever that market does connect to normal. But we're also committed to hitting these numbers over the next sort of few years without putting a year to it, whether or not the market actually returns to normal. And that's a different positioning, I think, for our investors that without putting a specific year on it, these midterm targets are going to happen. We feel great about our unit economics. We feel great about our ability to take share. We feel great about our value proposition and our continued investment in tech to really help add more value than anybody else in the marketplace in this category. So -- and I think it was smart that we took our largest shareholders advice and just took the year off it and said, we're committed to hitting these numbers with or without the market improving. And then we'll just find out in what calendar year we actually deliver on that.
Rajat Gupta
analystGot it. Got it. That's very clear. One of the recent steps you've taken, which has obviously got a lot of investors curious about the story, and it's just the Auto IMS middleware access and just some of the acquisitions you've been making to ramp up your commercial business. Just talk us through how this commercial ramp is going to look like. It looks like you have 9 locations today. You've talked about needing to get to 40 locations in order to access 80% plus of the TAM. Can you give us a sense of, first of all, like what kind of EBITDA multiples you're paying for some of these acquisitions? And then how much incremental investment should look like to get to those 40 locations in any sort of time frame you want to put on it?
George Chamoun
executiveI'll answer the first 3 questions, and then Bill, you do the fourth one. Okay. So on the first one, for those that are new to the story, Auto IMS is the middleware that's used in this industry. It's middleware that commercial consignors that are banks, they have repos, rental car companies, fleet companies and others use this middleware to provision a vehicle to a specific auction. And many of these commercial consignors use Auto IMS exclusively, not all of them, but many of them use it exclusively. We didn't have access to this middleware, that's now behind us, and we now have access to this important middleware. We are integrating directly with Auto IMS, and we have licensing with Auto IMS that covers not only physical locations, but also a business model that addresses our digital model, meaning wherever the vehicle is, not just to [ a sent ] location. So very material milestone for the -- for ACV now having access where these consignors can send us vehicles. So the second part of that is there's this integration work. It's not just integrating to get the vehicle. There's actually knowing whether or not that car needs a minor reconditioning. And what we've said is we'll have a version of this ready by Q1. So we could start to, for example, take business in a new geo starting in Q1. So incrementally, we'll start to open up new geographies. We haven't given investors at what [ pace just yet ]. But incrementally, we could start opening up new locations without doing one of the tuck-ins that you mentioned earlier, we could do it organically starting in Q1. So that was your first 2 questions. The third one related to the acquisitions. These are typically small to medium-sized businesses in any one area that are an independent auction that's typically fighting against Manheim, ADESA, us and others. They're one of the players. The key thing is they have land, they have a gated-in area, and they already have a way in some cases, to work with these commercial consignors. So it's -- we are getting some commercial consignors via this path, which is a great way to start our journey. And we have a certain commercial consignor in 1 geography. We can show them now via the ACV platform, we can help them across multiple geographies. And then the latter part of your question there, we're buying these small businesses typically anywhere between 7x and 10x EBITDA. So it's accretive. We're not buying the land. We're just renting the land. So it's working out really well for us thus far. Do you want to take the fourth question?
William Zerella
executiveSure. So our midterm targets for EBITDA are 25% of revenue, which works out to about $200 per unit sold, and that's primarily driven by our dealer-to-dealer business. If we look at the commercial business that we're acquiring in that segment, typically, the ARPUs are slightly higher from commercial consignors and that's offset by slightly higher cost because these are physical locations that we have to support the networks out to roughly the same EBITDA margins per unit. So frankly, the commercial business as far as we can see, will allow us to hit the same targets.
Rajat Gupta
analystGot it. Got it. And the ramp-up of this business, if you can talk us through like how this integration process is going to look like. Obviously, these are like a few tuck-in acquisitions, where you separate from how you've done your business, how you've grown your business. You've always been a little more asset-light, technology-focused company. And now you're buying these physical assets. How do you make sure the culture is aligned, the incentives are aligned -- the platform is smooth? I mean, the way your customers see it, like how is that going to change? Just talk us through like the undertaking here of integrating this because you're going to be doing a few more before you just do the land -- the organic land development. But what all should we be watching to make sure like this integration is going smoothly?
George Chamoun
executiveWe've got some work to do to take all the things that our Teammates in Buffalo that are using from a technology from processing titles to managing arbitration to inspecting cars and because we've been essentially operating out of this 1 location, right across the whole country. And the technology we've built for digital, much of it applies to commercial to local, whatever it may be. It will take us a little bit of work over the course of the next year to 2 years. But -- look at it in the next, let's say, 2 years from now, it won't matter whether a car was sold in location A, B or C. It will have a relatively similar condition report. Titles will be the same sort of photo capture of the title and making sure the titles are all signed in the same spot, the process for arbitration, the process for really the ACV transport being readily available for that vehicle. But this investment, you heard Bill allude to on our last couple of calls that we've ramped up some of our tech teammates between now and the end of the year, and that's part of this year's planning is so that wherever the vehicle is, whether the consignor happens to be commercial or dealer or otherwise, it's still going through the same platform. It will take some work. We'll do it iteratively. We'll have a Version 1 for Q1, your typical continuous investment. But I think the key is great experience, whether the car is selling from a dealer's parking lot or selling from one of our remarketing centers, I don't think long-term, it will matter in the short- to medium-term it's just making sure we can build an exceptional experience wherever the vehicle is at.
Rajat Gupta
analystGot it. And how should we think about the lead time involved in bringing newer consignors on board? We know you started out small with like 700 vehicles. We're wondering how the conversations have evolved, just trying to get our arms around when we can expect like an inflection on the commercial side of the business. And is there a way to compare it with the inflection you've seen in your D2D business as well?
George Chamoun
executiveI think at this point we've -- I think we've created an expectation that between commercial and consumer, it's going to be at least 10% of our business in the next few years, right? That's like at least the expectations we've created thus far. I don't think we're ready to share it growing any faster just yet. I think at the end of the day, we're -- we've got 9 locations thus far. We can take repos and other commercial business that does require land, where we'll have Auto IMS integrated with ACV going into Q1, where potentially it may or may not need land on any 1 vehicle. So we're still a little early. I would say I feel really good about the number we've given investors thus far, but I'm not ready to raise the pacing just yet, meaning the majority of our cars will be dealer wholesale for the next few years, far majority. But having said that, I feel really, really good about the expectations we've set thus far.
Rajat Gupta
analystGot it. Got it. That's clear. Before I move into the next set of questions, I just wanted to see if there's anything in the audience -- anyone in the audience that have a question? No. So moving to the D2D business; we've obviously been like in a bit of a sluggish backdrop for a while. Your long-term targets or the now midterm targets had called for like 17%, 18% market share growth. It's been around like 15% or so over the last few quarters. How should we think about how that market share progression should look like once we actually start to see an inflection in the industry broadly? And I know this was a topic on the last earnings call as well, but hoping you can elaborate on how the backdrop itself is impacting your ability to gain share. For example, we're also seeing some commercial supply come back into the market recently and openly talked about how some of their dealer customers were preferring like the commercial supply versus like dealer consignor supply. So I don't know if that was also having an impact on your business. So curious how does market share look like depending on like how the broader industry is doing?
George Chamoun
executiveYes. I think the key thing for our really long-oriented investors, at least what I hear back is we've had market share gains. And we're really taking the market pretty consistently. I mean, we could argue 1 or 2 points from one quarter after another. But I think what we would say is ACV is really executing very, very consistently. How the macro to your point, could affect our share gains are hard to tell. Having said that, I think cars filling up on dealers' lots will be very helpful and that -- it's not about if that's going to happen. I think there's been a lot of -- if there was bears and bulls in any one of these topics, folks wondering if these lots are going to fill up. I think we're watching with our own eyes, they're starting to fill up. I think the simple thing here is wholesale probably has not been a key problem. I think that's really getting to the crux of your question. It hasn't been broken these last couple of years. It's been relatively easy to sell a wholesale car. So as the market gets more challenging as these lots get filled up, is the ratio of cars coming in start to go towards wholesale, not just towards retail, I think it's going to put more pressure on wholesale and it's going to -- whoever the partner is of that dealer is going to have to really have the demand to sell these cars. We've got incredible demand. We've gotten only a local and regional and national demand. So I think we're in a -- we are in a really incredible spot that if macro does put a little stress on the ecosystem and dealers now have to really look at what's going on. We could be in a great spot. Having said that, I think what I've been trying to say, in a lot of investor meetings and calls is just kind of expect just a consistent growth rate, right? I think that we're trying to manage expectations just so in case we don't read any one press release and they go ACV share is going to grow faster overnight. But I think there is some truth that there could be a moment in the next year or 2 that our growth rate could grow faster because with more pressure, with more real estate challenges, you could see the digital model grow faster.
Rajat Gupta
analystGot it. Got it. That makes a lot of sense. Just on the D2D GMV per unit. I know like commercial is higher. So overall, as a company, that should help your GMV per unit long-term. But just focusing on the GMV per unit in the D2D business, your average, it's around $13,000 today. It's higher than the average industry today. But -- and as you become a bigger company, as you expand into more customers, more types of cars, maybe go into lower-value cars, higher mileage cars even more. How does that change the operational aspect of the company, like the inspection process, the productivity of inspectors? How does ARPU and like other services change with that? I mean does the unit economics equation change at all as you move into those higher mileage cars or lower-priced cars?
George Chamoun
executiveYes. So for those that are newer to the ACV model, our sell fees are relatively fixed. Our buy fees range based on the ASP and the price of the car. So where Rajat's going, we -- there was probably some concern that as used car values go down, if mix -- if we started to grow mix from independent dealers and others, we could have some pressure. I think what we've shown in our model with these, I would say, enhancements to our business model over the last year plus is we are still delivering really strong ARPU. Our price per unit was over $100 less than the traditional physical auctions. So we had this headroom. We had this ability to charge a fair value because we're providing an incredible inspection, unbelievable value for the buyer. So as the -- as used car values come down, if mix does mean we get more cars from, let's say, segments we're not getting. But I would say to investors, it's going to be really hard for anybody to model. Commercial could elevate our price, independent dealers could decline our average ASP. I would say, spend less of your energy focused on all that. Trust the process. We're going to get to our $500 sort of combined buy-sell Go Green fee model because it's going to be really hard for anybody to figure out -- I think in some people's models, they've got our values going up. Some folks going down. We're all over our pricing. And we feel really good about getting to our medium-term targets with all that noise going on in the background.
Rajat Gupta
analystGot it. Got it. That's clear. Any questions in the audience? None. I'll go on here. Over the past few years, one of the changes you have seen is the franchise dealers have started to focus a lot on their own used car business and trying to grow their own used car to new car ratio. And curious like what does -- how does that impact ACV's opportunity? You now have ClearCar, you have some other data products that you're offering. Curious like how can ACV play more into helping them grow that business? And what kind of implication that can have to your own traditional like or your core D2D business?
George Chamoun
executiveYes. I think franchise dealers buying more used cars is the most important thing for their long-term model. And I think franchise dealers overall have really a tremendous opportunity. If you look at the location of these dealerships, in most towns, they have great locations. In most DMAs, they're the largest ad spender in that local town, right, in almost every category across the country. So you've got unbelievable locations; you've got a huge ad marketing budget. And then you've got this key real estate, you need to fill it up. But the key is they don't have enough -- most of them don't have enough supply coming in. And what ClearCar was aimed to do is now franchise dealers have the technology and the data to buy a car from a consumer's driveway or anywhere using our technology. A consumer could be coming into their service drive, just to get their oil change. We can put a value on that car. Wherever that car is and this is a category that franchise dealers didn't have the tech to compete against the big box players. They now do. The folks that are coming to ACV are truly leveraging our Big Data model and leveraging our AI and literally consumer can just walk around the car, taking photos, and we can understand the condition that [ means ] really incredible. And if they leverage their marketing spend, not just to sell vehicles, but to buy vehicles, I would look at some of the big box guys and go -- franchise dealers should be wholesaling the same percentage as these big standalone used cars companies. The only reason why they're not is they're not buying enough. And so if you already have the ad budget, if you already have incredible locations, and this is what my team and I do on the road every week, we're evangelizing to the biggest dealer groups, let's buy more cars. They can always wholesale it, buy every car. And with our pricing, we have the pricing down where they're going to make the right margin if they retail it. We have the pricing down if they wholesale it. So with the dealers that are taking on ClearCar, these franchise dealers should do really well. And they are now armed from a tech perspective to compete -- now there's more work, it's not just tech, right? You need to change your go-to-market. You need to really just having to tackle is one part of the equation. But I think franchise dealers and other independent dealers are in a great spot to buy more cars from consumers. The average age in the car right now is 12-plus years old. These consumers can't afford to keep fixing these cars. So I think -- for those that adopt our services, they're going to be in a great spot to really sort of change their supply. And the more they buy, the more they will wholesale.
Rajat Gupta
analystGot it. That's very clear. I have a question there in the audience.
Unknown Analyst
analystJust a follow-up on the question there. So obviously, the largest big box, all the numbers are public, how much they buy and how much they're selling for. So your dealers that you're trying to advance have all the information to work from. What's the resistance that you're seeing in those early adopters? What are you seeing your numbers go from in terms of number of used cars that they're able to wholesale versus new cars? Because obviously, CarMax has put it up to 75% or thereabouts.
George Chamoun
executiveYes. So this new product, ClearCar is -- we're still very early. I mean it's probably one of the fastest auto tech from launch to 700 rooftops live. It's probably one of the fastest launch to scale we've seen in the category. Having said that, we're very early. We did -- we do have a customer-customer testimonials that we were starting to publish. We'll start to publish them more often. But we're hearing things like dealers buying 5% higher cars than they were buying previously. It sounds like a small number, but that's a really big number. If a dealer can buy 5% more inventory than they were buying. We're hearing dealers saying their conversion of trades and others are going up, in some cases, from low 40% to high 40% or even over 50% of the consumers coming in. So you're hitting the top of the funnel of getting to more consumers. You're heading to those that actually show up, have a higher conversion. We have 1 dealer that gave us such a high conversion. I'm not going to even say it publicly just yet. I just want to make sure it's right. Meaning the number of people showing up and actually converting was just exceptionally high. Having said that, we're very early. We have -- our first 700 rooftops have gone live. Look at it as like your Version 1 of the product has gone live. It's getting integrated into the CRM. It's getting -- only a handful of them are using it in their service drive thus far. Most just have them on their website. We're still early. So there's enough to get really excited about here, and it really could help these dealers -- that I know, but then getting it to be part of their overall process could take us a little while before it really materially changes the numbers.
Rajat Gupta
analystGot it. Any other questions? I wanted to quickly move to like the cost side and the OpEx management. I think one of the nicest things we've noticed over the last 3 years in your numbers is how disciplined you've been on your OpEx per unit relative to some other high-growth companies. So going forward, how should we think about inspector productivity? You've given us some numbers, I think your best regions are doing 10-plus inspections per inspector and your average is around 6. Can you give us a sense of where are the fixed versus variable inspection cost today? And with evolving inspection tools, are there any metrics we can look at to think about inspection time per car, for example, and how that might have changed over the last few years and how it can change going forward?
George Chamoun
executiveSo I'll hand over fixed versus variable, and you can talk about some of the tools. So our inspectors basically have a base salary and then they get $10 of incentive comp for every car that they inspect that transacts on our marketplace. The way it works out in terms of the math in terms of fixed versus variable, roughly 80% fixed and 20% variable. So as we get more inspector productivity, it's highly accretive to the model. So those territories where we have inspectors inspecting 10-plus cars a day, they're incredibly efficient. The average is 6 across all of our markets. So we do have a lot of inspectors in less mature markets that are below 6. So it's a big opportunity for us over time as we scale and get more share and more density in these various markets that we can increase that productivity, and it's the largest part of our employee base. So we have about 800 inspectors today around the country. I'll let you talk about the rest.
William Zerella
executiveSure. So our inspection innovation continues. I mean we have probably half a dozen pilots going on right now on inspection, whether it'd be our inspectors, whether it'd be dealer self inspection in other categories. So it's an area where we're going to just continuously improve, continuously add -- really make consideration. So to answer your question specifically, to your second question, I would say on average, it takes a little over 25 minutes to inspect a car today for a trained inspector. Over the next year to 2 years, we could take off probably as much as 5 to 10 minutes pretty conservatively because of the fact that with this data model we have and what we know and how you'd walk around the car that would mean the most mature territories where you're already doing the 10 plus that you're doing today, could even do more. Obviously, in the less mature areas where you're not doing enough, you need that supply, right? We need to go win the share to then make them busy. But that would mean that some of the territories where we've shown investors were today at 25% EBITDA margin fully loaded today. It could mean that in the next few years, that could get even better because those are the territories where these inspectors are busy all day long, and they could even do more. It's also great for them because they'll make more money. And our teammates could now make more money from more cars. So it would be good for our teammates out in the field. It would be great for our dealer partners because we might be able to get there more often, doing more vehicles. I don't want to set any timing expectations just yet, but we're all over it. And our overall inspection efficiency will only improve as we keep innovating.
Rajat Gupta
analystGot it. Got it. That's very clear. I have one question here, [ Chris ].
Unknown Analyst
analystMaybe just thinking about as commercial opportunity scales, is there -- for the inspectors, is it just -- is there any difference between inspecting a D2D car or commercial? I assume not. But if not, does that create an opportunity for uplift in productivity? And then for markets, you guys started out in the East Coast where the kind of like drive time or windshield time is pretty minimal, like for markets where you have scale in the West Coast is windshield time for inspectors like a limiting factor for getting to the productivity levels you see in the East where there's maybe more density?
George Chamoun
executiveSo on your first question, the inspection for a commercial car and a dealer car are similar from the buyer experience, what we call the condition report. Where we've got a little work to do on commercial is the way they want that data back to them to make their pricing decisions. As part of that spend, we kind of loosely talked about earlier, we do have requirements of how -- because we've got this really rich inspection. And our inspection helps them decide what recon they want to do per car. This also will be an area where we'll differentiate over others. I think we will help commercial consignors make better decisions based on our inspection. So look at it. We're already using it today, but there are enhancements we need to make so that those commercial consignors can make the right decision and also then, hopefully, in the very near term, this could be a significant differentiator to win business. On your second question, efficiency, where we have land, yes, you could do over 15 cars a day, right? So because you're not driving around, if you're doing repos all day long, you could do a lot of cars. So you -- we mentioned that the cost and revenue is different, for example, on repos. One of the areas where our cost is lower as our inspections per day cost and per unit are lower because you're doing a lot in one spot. That would be different than, let's say, an off-lease car that never got shipped to an auction that we were doing upstream. They'd be the same as our current business. We're already at that 4 dealership and now we're inspecting that car that would be no different than our today business. I'm trying to remember your third question. Okay.
Rajat Gupta
analystGreat. I think that's a good way to end. So George, Bill, thanks for the time.
George Chamoun
executiveYes. Thanks, Rajat. Thanks everyone to come by. Appreciate it.
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