K Car Co., Ltd. (A381970) Earnings Call Transcript & Summary

[Interpreted] Yes, hello, this is Kwon Eun-Hee, Head of IR at K Car. Thank you for joining us at the fourth quarter and full year earnings conference call for 2022 K Car. Before we begin, I'd like to take you through some brief housekeeping notes. We will be proceeding today's call through a consecutive translation into English. The CEO of K Car, Mr. Jung In-guk will take us through a business highlight, followed by financial results from our CFO, Mr. Bae Moo-Geun; also a Q&A session with Mr. Chun Hoil, Head of Marketing; and Mr. [ Jeong Jin-woon ], Head of Planning. Please note that detailed presentation materials are uploaded on the IR section of our corporate website at kcar.irpage.co.kr as well as the Korea Exchange Kind website. The presentation materials are based on K-IFRS and contain estimates that may be subject to partial change during the auditing process by an independent auditor. Please be mindful that projections may be materially different versus actuals depending on macroeconomic and market conditions. [Operator Instructions]. Now then our CEO, Mr. Jung In-guk will start with an overview of the business.

[Interpreted] Yes, good morning. Good evening. Thank you for joining K Car's conference call today. Amid ongoing uncertainties across the global macro environment, the used automotive vehicle industry overall saw a deepening of broad-based recessionary pressure during the fourth quarter 2022. Macro variables, including rising inflation and interest rates resulted in a decline in demand for big ticket items such as used vehicles, while market prices, which had showed a steep rise, was weighed to the downside. We, at K Car, have been taking various measures to respond to the short- and mid- to longer-term impact from this kind of business environment. We have shifted our portfolio to be more focused on vehicles with high turnover, while managing inventory at optimal levels and maintaining inventory turnover within the 30-day range. Recently, we have been reducing our borrowings and increasing cash or cash equivalent assets to improve our financial soundness. To improve profitability further, we have been running promotions to increase the share of inventory sourced through our direct C2B sourcing channel with zero commissions while doing a major update to our extended warranty plans to boost ancillary revenue and cut down on labor and other fixed costs within SG&A. On the business front, for our used car warranty products, KW, we extended the maximum warranty period for 2 years while significantly expanding our regular repair shop network the existing 115 to 391. There are heavy-duty repair shops from 20 to 67 to reflect changing used car consumer needs. These changes translated directly into response from consumers with a significant increase in the warranty attachment rate following the revised product upgrade. Also, the Incheon Home Service Mega Center, which we opened in November last year for improved operational efficiency of our OMO platform, has become quite active, with turnover, measured as the number of units sold versus advertised units, running at 1.6x the average of existing stores. By using the affiliated reconditioning centers within the complex, we're able to cut down on cost and time for moving the vehicles, and we're able to confirm improved operating efficiency in personnel as non-face-to-face purchasing and sales activities. While the Home Service Mega Center accommodated 200 vehicles up to January, capacity has been expanded to 300 as of February, with further plans to expand capacity further to as many as 1,200. On to our sales performance. As of the fourth quarter, the share of e-commerce surpassed 50% of total revenue for the first time, recording a meaningful milestone. We have been offering free home delivery services to online buyers starting late last year. And already, as of 2023, this has boosted the share of e-commerce revenue by 5 percentage points from the fourth quarter last year, and we expect the e-commerce revenue mix to continue to increase. Number of units sold in Q4 totaled 30,519 vehicles, which is down 9.6% year-on-year. Sales were weighed across the used vehicle industry overall from pressure of escalated used car prices and rising interest rates, which led to a drastic increase in the number of customers -- decrease in the number of customers using auto installment financing. For your reference, in the fourth quarter, SAM, which is the serviceable available market, for the used car B2C market decreased by as much as 15.4% versus last year. This was compounded by the sudden economic slowdown in the fourth quarter, with inventory levels for the total used vehicle market rising sharply from 250,000 as of the end of September to 276,000 by the end of December. At K Car, to prepare ourselves against recession, we were conservative in our sourcing, sourcing mostly fit-for-purpose vehicles only and managed to maintain lower inventory versus the rest of the market. Retail number of units sold dropped 8.5% year-on-year due to contraction in consumer sentiment from rising interest rates, also due to a drop in sales linked to auto financing. For our auction business, we saw reduced wholesale dealer demand amid broad contraction across domestic used car market. Also, in order to meet consumer demand for lower-priced vehicles, we allocated many of the older models for retail sales instead of auctioning, which was another reason for the 13.8% year-on-year drop in the number of wholesale units sold. Please turn to Page 5 in your slide for a breakdown of our acquisition channels. Starting with the second quarter of last year, we explained that we would improve our margins per vehicle by increasing the share of direct D2C sourcing, which is the red bar on the bottom. Again, these are the vehicles that we source directly from our own sourcing platform, the My Home Home Service, trade-ins and also from customers visiting our store locations, which accounted for 30% of total acquisitions in the fourth quarter, higher than Q3. In addition to our D2C sourcing strategy, we also focused on improving underlying unit economics while maintaining margins by reallocating sourcing personnel and responding preemptively to market development by revising our pricing strategy by sourcing channel. As a result, we recorded retail gross profit per unit of KRW 1.44 million and margins of 8.6%, which were the highest level in 2022. Throughout 2022, K Car's share of the B2C serviceable available market surpassed the 10% mark as we maintain above 10% market share every quarter. More recently, our quarterly share has gone down. Again, as I explained, this is due to our preemptive efforts against abrupt changes to the external market environment and our management focus on delivering sustainable profitable growth the longer term. Going forward, we'll work to continue to improve our market share by increasing e-commerce's share in our revenue mix, also improving awareness through efficient, and reinforcing quality management to boost customer satisfaction further. Yes, we are looking to achieve double-digit growth in the number of units sold this year as well. Although it is hard to estimate how long the used vehicle market is likely to be challenged, I believe K Car can turn today's circumstances into an opportunity with even bigger growth while strengthening our market-leading position. Although this is a cautious projection, it does appear that many of the external variables, including interest rates, FX rates, oil prices, are stabilizing somewhat. And in the used vehicle market, the sense from the field is that we are gradually moving beyond the period of sharp pricing volatility and falling prices that we saw last year as the market bottoms out and recovers toward a more stable direction. As said, we remain committed to proving ourselves by delivering growth that is backed by substance, by building a diversified business model and portfolio services that K Car's prospective customers and future business partners expect from us. That is it for my presentation. Next, I will pass it on to our CFO to take us through the financial results.

[Interpreted] Yes, greetings. Before presenting on our financials, allow me to comment first on fourth quarter dividend. Earlier this morning, our Board of Directors resolved upon a quarterly dividend of KRW 191 per common share for the fourth quarter, which will be distributed within April, subject to approval at the General Shareholders' Meeting, which will be held in March. Our dividend policy for 2023 has not been decided. In the fourth quarter '22, revenue totaled KRW 456.2 billion, down 9.1% year-on-year. Retail vehicle revenue was KRW 409.2 billion, down 9.7% Y-o-Y, while auction revenue was KRW 30.4 billion, down 13.9% Y-o-Y. If we were to divide the downside factors resulting in reduced revenue into P&Q, that is price and quantity, Q, or the total number of cars sold, dropped by 9.6% from the previous year; while P, or unit pricing per vehicle, dropped by 1.8% versus the prior year. In the fourth quarter, average selling price of a retail vehicle was KRW 16.15 million, which was KRW 880,000 lower versus the KRW 17.03 million average in the third quarter. Average unit pricing for wholesale vehicles was KRW 4.71 million, which is a slight increase versus Q3. Rental car revenue was KRW 15 billion, which is up 38.2% year-on-year. Other revenue from delivery fees charged to Home Service, e-commerce customers, was KRW 1.6 billion. Full year revenue for 2022 was KRW 2,177.3 billion, which is a 14.4% increase Y-o-Y. Breaking out full year revenue by business line, retail vehicle sales increased by 15.2% Y-o-Y; wholesale revenue, up 2.3% Y-o-Y; and rental increased by 22%. Fourth quarter GP margins were 10%, which represents the first double-digit number that we have recorded since the fourth quarter of 2021. Gross profit was KRW 45.7 billion, down 9% Y-o-Y from reduced revenue. Full year gross profit was KRW 200 billion, down 2.7% year-on-year. Q4 SG&A was KRW 36.1 billion, similar to previous year level, down by 1.9% Q-on-Q. The biggest component of SG&A, of which are labor expenses, recorded KRW 18 billion, down 10.4% year-on-year and 8.6% Q-on-Q. We will continue to work on improving per-person productivity through greater usage of non-face-to-face sales and also by leveraging our mega center, in turn, boosting the operational efficiency of our personnel. Advertising costs recorded KRW 1.4 billion in the fourth quarter; and on a full year, KRW 9.8 billion, which was less than the previous guidance that we provided early last year at KRW 10 billion. Total full year SG&A for 2022 was KRW 150 billion, which is 6.9% of total revenue, down 0.2 percentage points from the prior year. Fourth quarter operating profit was KRW 9.6 billion, down 32.6% Y-o-Y. Our OP margin was 2.1%, down by 0.7 percentage points Y-o-Y. Full year operating profit was KRW 50 billion, down 29.6% year-on-year. Fourth quarter CapEx was KRW 2.8 billion, which is 0.6% of revenue. By item, KRW 2.1 billion was spent for improvements to our photo zone equipment, also facility investments for our #2 auction house, as well as trade center locations damaged from flooding. Other spend items went toward IT-related investments, such as deployment of an AI-based demand forecasting solution. Full year CapEx in 2022 was KRW 6.4 billion, which is 0.3% of revenue. In 2023, we expect CapEx to be similar to 2022 levels as we leverage our non-face-to-face infrastructure and work on boosting per person productivity. As our CEO, Mr. Jung In-guk mentioned before, we are aiming to achieve double-digit growth in the number of units sold in 2023. We will apply our OMO infrastructure, and our online assets in particular, for efficient allocation of resources and cost savings as we strive to deliver top line growth accompanied by margin upside. For further details on our preliminary financial results and operating metrics, please refer to the IR section of our website as well as Kind where we have posted our earnings call materials and fact sheet.

[Interpreted] With that, we'll conclude the presentation and move on to the Q&A session. [Operator Instructions]

[Interpreted] [Operator Instructions] The first question will be provided by Moonsu Chang from Hyundai Motor Securities.

[Interpreted] I do have one high-level question, and then I may have two follow-up questions at a greater detail level. But I will start off by asking about your market outflow this year and guidance for K Car. And then once I get the answer, I'll follow up with more questions.

[Interpreted] This is the CEO, Jung In-guk. Thank you for your question. You asked about our outlook for the business' performance this year and also guidance as well. It is true that in the fourth quarter, there were some impacts from the high interest rates. And in particular, a lot of the private capital providing companies actually were very conservative, which reinforced negative growth within the broader used vehicle market. But as we moved into January, compared to the fourth quarter last year, we did see an uptick in the daily number of units sold. But still given the remaining uncertainty globally in terms of inflation, interest rates and the war in the Ukraine, it is hard to project just exactly when the recovery should begin. But nonetheless, at K Car, we have already enforced a revision of our inventory portfolio, structured it to be more optimal. We've already improved upon our vehicle products and also warranty plans as well and are seeing improvements to our unit economics as well. So we are now past the fourth quarter, of course, already into the mid part of February. And the perception on our side is that inflationary pressure has slowed down. Also, there's greater likelihood that the rate hike cycle may wind down. So although there might be some difference depending on the exact vehicle model or type, it does seem that, for the most part, the falling prices has bottomed out and are trending upward to a more stable level. And we are cautiously assessing or believing that we may be at the start of a recovery. So once there is a recovery in demand, because we benefit from operating leverage, I think we will certainly benefit from improved profitability. For our guidance for 2023, again, as we stated before, we are looking to achieve double-digit growth in terms of the number of units sold in 2023. There are certainly difficulties in terms of the macro environment, but we are continuing to see signs of recovery. And as a very unique OMO provider, we think we stand in a very good position to enjoy growth in terms of our market position and market share. And to provide further details about market prices, we have clearly seen prices stabilize, certainly for domestic cars and also small midsized cars below KRW 20 million, whereas for imported vehicles, diesel cars or higher-priced cars, the market rates still are falling. So this year, we will see the entry of OEMs and large corporates into the used vehicle market. And so we'll see a greater competition coming from these institutionalized players. Against that background, as we grow our e-commerce and online business, we expect our online penetration to grow significantly and, again, leveraging -- using our operating leverage, we expect to be able to improve and increase our profit in the near term.

[Interpreted] so I had a question regarding your market share plans. I think it's on one of the pages in your slides where you say that irregardless of market circumstances, you hope or you believe that K Car will be able to grow market share faster than the rest of the used vehicle market. I think on a full year basis for 2022, it is true that you did see an improvement to your market share versus 2021. But when you look at it on a quarter-to-quarter level, I think market share actually peaked in the first quarter of 2022, but then with macro risks and market contraction starting in earnest from that point on, I think since then, market share has gone down. So what is your assessment of the drivers for that decrease? And also, as you mentioned, the large corporates will be entering into the market starting this year, so what is your outlook with regard to that? And how do you intend to respond?

[Interpreted] And regarding your question on market share, as you suggested, we did see a decline in fourth quarter market share. For example, on a total addressable market basis, fourth quarter market share was 5.1%, which is down by 0.6 percentage points versus Q3. In terms of our B2C SAM market share, it was 10.2% in Q4, which was down by 0.5 percentage points versus the third quarter. So what happened was that with contraction of consumer spending and consumer sentiment in the fourth quarter, we actually enforced very selective sourcing of vehicles. Also, given the decrease in auto financing, the installment financing that was used due to rising rates, we also started to manage the inventory turns more tightly and, again, more stricter management of our inventory purchases. So the decrease in the market share that you mentioned was largely because we focused more on per-unit margins or unit economics rather than focusing on growing top line share. So because we did focus on margins and unit economics more than number of units sold in the fourth quarter, we did see our GP margin also rise to the high 10% level as of the fourth quarter. And in fact, for our retail per vehicle GP margin, that was also very improved to 8.6%. So again, it does appear more likely that the rate hike cycle will be eased. And we are seeing inflationary pressure also slow down and also certain signs of recovery in used car demand. And so once this materializes further, it looks that we are very likely to again lead this segment or this market. And so ahead of these changes, we will be increasing the inventory to a more optimal level. And also by using our Home Service Mega Service Center, we will actually be expanding capacity ahead of the expected improvement in the market and making investments once again to really, again, solidify our leadership position.

[Interpreted] I believe part of the question asked was about the company's position regarding the OEMs entering to the used car market and the plan or your plans to respond.

[Interpreted] So yes, it does appear that the OEM automakers are planning to enter into this market in 2023. And through the press, we have heard about many different types of plans that are in the works right now. But I think compared to what we may have been expecting, it may be taking them a little bit longer to prepare to move into this segment. And it appears that because, in order to go into the used car business, there are lots of things that you have to have in place ahead of time, I think that kind of work is still underway. Basically, my thoughts are that between the OEM automakers and K Car, which is a specialized used vehicle player, I don't think we are in competition against each other, but have more of a mutually cooperative relationship. There is a lot of overlap between the two sides across the value chain. And I think across the whole spectrum, from purchasing, to sales, to aftersales, maintenance of the cars, there are many areas where potentially the two sides can actually work and cooperate together. So once the OEMs come into the market, I think, again, we'll be able to find different areas of possible cooperation. Potentially, we can actually build and shape new models together, which will be of a great help to K Car, which is a specialist in the used car sector.

[Interpreted] So I'd like to ask about per-vehicle margins. I think on Page 5, you highlight some improvement to the margins, which is quite encouraging but still seems far off from the 10% range or so that you achieved in 2020. And given how there can be further downside pressure on pricing in 2023, if you look at it on an absolute amount basis, in the fourth quarter, it does appear that per-vehicle margin amount has decreased. So what is your outlook for this year in terms of improvement to the per-unit margin? And so if maybe we should not just compare the high points, maybe if we assume more normal circumstances, what would the per-vehicle margin amount and margin rate look like? Or perhaps based on your management plans, what kind of per-unit margins or margin amount do you see as being optimal?

[Interpreted] So actually, in the fourth quarter, our GP margin per retail vehicle actually was 8.6%, which is a 0.2 percentage point improvement on the third quarter and the highest level achieved in 2022. In terms of the gross profit per unit, GPU, it was KRW 1.44 million in the fourth quarter, which is down slightly from KRW 1.48 million in the third quarter. But margin-wise, we did see an improvement. So we've been making constant efforts to further boost per-unit margins because it is an important metric that we track and manage. One of these efforts is to increase the share of direct sourced inventory, mainly using the My Home Home Service channel, also trade-in, also buying vehicles from customers visiting our trade centers. So we've been making diverse efforts through the acquisition channels, which we believe will be helpful in improving per-unit margins going forward. And starting in the fourth quarter, a big focus for us was to increase the portion of high turnover cars in our total portfolio. So these are vehicles that are likely to sell faster, lower price. And so through this type of selective procurement, we have been able to manage inventory turns, and we think that this will also translate into improved unit margins going forward. Also, we're working to boost purpose and productivity of our sourcing staff. And a combined effect of all of these efforts, K Car believe that we will continue to see a recovery in our GP margin.

[Interpreted] So this is the CFO. I would like to elaborate a bit further on this topic. Well, as you can see from the slide, in the fourth quarter 2021, that was when the downtrend started and it bottomed out towards the end of last year before turning around towards more upside. So from that time to now, there have been many irregularities or exceptional circumstances in terms of market conditions. There was an imbalance between the sourcing and sales side, also negative impact from rising interest rates, which led to a deterioration by about 2%. However, as these negative factors become further eased, going forward, we expect the margins to also improve as well. And so there will be an additive effect on top. Thanks to our additional efforts in terms of the acquisition sourcing channels, also our efforts to improve the margins on our ancillary services as well. So depending on the market, situation, we think that we will be able to achieve 10% quite quickly. And then it will be a function of how much extra effort we make as a company in terms of how fast we can achieve past high levels of 11%, but I do see it as being quite doable.

[Interpreted] The following question will be presented by Eric Cha from Goldman Sachs.

[Interpreted] Most of the questions that I might have had has been covered, so I would just ask a very brief question regarding quarter-to-quarter performance momentum. So typically, there is a bit of seasonality in terms of your results, with the first quarter being the weakest followed by the fourth quarter, and the second and third quarter being stronger quarters. So as you mentioned, there are some improvements to the macro environment that are shaping up. So that said, what is your outlook in terms of quarter-to-quarter performance momentum or momentum trend for 2023?

[Interpreted] This is the CEO. Well, as you mentioned, there is a bit of seasonality affecting the used car market. Typically, what we see is the fourth quarter is usually the worst. And then as we move into the first quarter, usually, there is a bit of a recovery followed by ups and downs the second and third quarter. What happens in the fourth quarter is that, as we face the end of the year, that means that the car actually will be aged by one more year as we enter the new year. That makes it difficult -- or there are less people that are in the market to either sell or buy vehicles because of that kind of model age change at the end of the year. But then on top of this kind of typical seasonality, last year, there were major events surrounding the rate hike which actually compounded the situation quite severely in the fourth quarter last year. But then as we moved into the first quarter this year, we are seeing some signs of recovery. But still interest rates are still high compared to historical levels and the capital lenders in terms of their lending caps or interest rates, it is overall more -- it's improved versus the fourth, certainly, but it is still constrained versus historical level. And so these unfavorable factors have acted as a constraint on consumer sentiment compared to the past.

[Interpreted] The following question will be presented by Kyung-Ha Yoo from DB Financial Investment.

[Interpreted] It's been quite a while since I've last joined K Car's conference call. But I'm back with a question not so much regarding the company itself but the overall market. Given the rising rates and other factors, how much of an impact do you foresee this may have been having on individual business owners operating within the used car space? So how much of a restructuring do you expect to happen? And then will this have -- or is this having any impact on K Car sourcing?

[Interpreted] This is the CEO. So yes, as you mentioned, it is true that the individual dealers, the individual trading companies, who are significantly impacted in the fourth quarter from rising interest rates and also from limited floor plan financing from the capital providers. So what happens is these capital lenders usually would provide the dealer with lending against their inventory as collateral. But given the rate hike environment, the limit on those loans actually was reduced and the interest on those loans increased. Usually, the individual dealers would finance through the floor plan loans and then use the proceeds to purchase inventory. But that kind of usual pattern was not possible due to the limited availability of capital. And this type of challenge still persists today, although certain capital providers have been easing up, providing additional credit and also lowering their interest rate somewhat, giving a little bit more breathing space for some of the dealers. But certainly, compared to past levels, the amount of capital available to the smaller dealers is much limited, and I think this will have an effect on the broader used car markets. Also, the entry of the OEMs, the institutionalized larger players coming on to the market, I think this will also continue to have an impact on the used car market, impacting the car dealers as well.

[Interpreted] I have one other question. So as the percentage of EVs and hybrid vehicles increase as a percentage of your total sourcing, what kind of additional solution do you anticipate will have to be added on, if any, to take cars reconditioning or refurbishing processes?

[Interpreted] This is Head of Marketing, Chun Hoil, I will answer that question. So as you know, the one most important core component of an EV vehicle is its battery. And so being able to do very accurate diagnosis of the battery is very important and key. So starting last year, we've been working with battery makers to prepare for that kind of solution. And we are still in the process of pushing out that kind of preparatory or prep work further.

[Interpreted] Okay, I believe this will be the last question sent it through Messenger by Mr. Changhee Lee from Samsung Securities who is unable to attend the call. So he asked that in terms of the units sold, the company recorded 3.3% year-on-year growth in 2022 and has mentioned that you will aim for double-digit growth this year. So can you elaborate on what kind of strategies you will be using to achieve that double-digit growth according to your guidance?

[Interpreted] So in order to boost number of units sold, there are certain key initiatives that we are working on. First and foremost, we have to increase productivity at the per-person level and also per-trade center level as well. So this is something that we are constantly committed to, but we need to continue to improve operational excellencies for further efficiency gains. And so as we work on that front, that will have the effect of boosting the number of units sold. Second, the percentage of online sales continues to increase, surpassing the 50% mark for the first time in the fourth quarter. And we have what's called the Online Home Service, that's the e-commerce portion that we want to boost going forward. That will also have the effect of improving the number of units sold. As you know, in November last year, we launched our Home Service Mega Center in Incheon for the purpose of non-face-to-face sourcing online sales. We intend to grow capacity of the mega service center and also go ahead with additional openings and upgrades, and we expect that this will also provide further upside in terms of sales.

[Interpreted] And this is the last follow-up question from Mr. Lee. He is asking about CapEx plans for this year. Will it likely be similar to 2022 levels, which were 0.3% of total revenue?

[Interpreted] So for 2022, our total CapEx was KRW 6.37 billion, and we expect similar levels for this year as well with no major change. So as we explained previously, have a very efficient capital investment structure where we can use a small amount of investment to drive outside sales.

[Interpreted] With that, we'll close today's earnings call for K Car in the fourth quarter and full year 2022. We'd like to thank everyone for joining our call today. And with any further inquiries, please contact us at the IR team at K Car. We'll see you in the next quarter. [Statements in English on this transcript were spoken by an interpreter present on the live call.]