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

[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference call of the fiscal year 2023 first quarter earnings results by K Car. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2023 first quarter earnings results by K Car.

[Interpreted] Yes, nice to meet you, everyone. This is Kwon Eun-Hee, Head of IR at K Car. Thank you for joining us at the first quarter 2023 earnings conference call for K Car. Before we begin, I would 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 first take us through a business highlight; followed by financial results from our CFO, Mr. Bae Moo-Geun; followed by a Q&A where we will be joined by Mr. Chun Hoil, Head of Marketing; and Mr. Jung Jin-Moon, Head of Planning as well. Please note that detailed presentation materials are uploaded on the IR section of our corporate website, kcar.irpage.co.kr as well as the KRX website. Our presentation materials today are based on K-IFRS and contain estimates that may be subject to partial change upon external auditor review. Please be advised that all projections may differ materially from actual results depending on changes to the macro end market environment. [Operator Instructions] Now our CEO, Mr. Jung In-Guk will start with the business overview.

[Interpreted] Yes. Thank you for joining K Car's conference call today. In the first quarter 2023, market conditions saw a continuation of unprecedented challenges following on the prior year, with ongoing macroeconomic uncertainty and significantly diminished consumer sentiment continuing. At K Car, as a preemptive measure against deteriorating business conditions, we revised our inventory portfolio around fast-moving vehicles in advance while managing inventory at optimized levels. As high inventory turnover normalized quickly, we recorded a recovery in the number of vehicles sold and stronger financials. We continued our dominant market position in the first quarter with above 10% market share in terms of our B2C serviceable available market. Please refer to Page 3 for the indicators. And as we braced for some externalities last year with an operational focus on profitable growth that can be sustained over the long term, our market share did decline temporarily in the prior quarter. But as we boosted e-commerce as a share of total revenue and improved awareness through more efficient marketing, while also enhancing customer satisfaction through tighter quality control, market share has since recovered back to our prior year high of 10.8% as of the first quarter. On to Page 4 for our vehicle unit sales trends, which are used in calculating market share. In the first quarter, our number of vehicles sold was 37,211, which is a slight Y-o-Y decrease of 1.1%. On a Q-on-Q basis, however, this represents a 21.9% increase from the fourth quarter, which is almost twice the growth versus the broad used car market. Retail sales increased on both a Y-o-Y and Q-on-Q basis, recording 29,670 units sold. The share of e-commerce, which passed the 50% mark for the first time in the fourth quarter last year, increased to 57% of the total revenue mix as of Q1, reconfirmation that growing consumer preference for the e-commerce channel is gaining further momentum. An increase in e-commerce sales not only contribute to improved GP margins, but also expected to help further expand our market share as K Car continues its leadership in the e-commerce space. Auto financing is slowly recovering as well. Last year, when the auto loan installment financing rate rose to its statutory limit, the share of auto loan finance sales declined significantly from 30% of vehicles sold to a low 10% level in Q4. However, as the rate hike cycle eased into the start of the year, used auto loan rates have all been moving downward. As bond markets stabilized after the first quarter, used car financing rates have seen additional downside pressure and we expect a portion of auto finance sales to increase in the second quarter. For auctions, we recorded a total of 7,541 vehicles sold which is a 6.8% decrease Y-o-Y, but a 25.3% increase Q-on-Q, driven by a recovery in the domestic wholesale market and export market growth. We have also seen an improvement in our margins, thanks to enhanced business structure and operational efficiency gains, particularly across our sourcing channels. Please refer to Page 5. Starting in the second half of last year, we revised our product portfolio centered more around high turnover vehicles while improving our sourcing channel mix with tiered priority towards the higher margining channels. We also have run promotional events to boost the share of ancillary sales. Thanks to these combined efforts, GPU on retail sales was 8.8%, which is a 20 basis point improvement from the fourth quarter. The red bar on the bottom shows the share of combined sourcing from our own C2B channel, which includes vehicles we source directly from our own sourcing platform, the sell at-home service. Also trade-in from buyers who pay only the difference between their old vehicles and their new K Car cars and sourcing from customers visiting our store location. Although as a percentage, it declined slightly, as our aggregate sourcing volume increased, the number of source vehicles increased from the previous quarter. On the business side, in Q4 last year, we actually rolled out a major upgrade of our warranty program, extending the KW maximum warranty period to 2 years while significantly expanding our repair shop network coverage by threefold and reducing service pricing. Thanks to our proactive response to changing used car consumer needs, we saw a significant increase in the warranty attachment rate, which went up to 53.6% in Q1. According to a recent survey, awareness for our warranty plans and inclination to purchase coverage for used cars has been on the rise with a high degree of satisfaction among actual users. We expect warranty revenue and profit contribution to increase more notably in the second half, as awareness for our warranties improved further from Q1 to Q2. Also, we'll be boosting our upselling initiatives and running -- and continue to run promotions to improve repurchase rates, which we believe will help boost improvement further. The new Incheon Home Service Mega Center, which we opened in Q4 last year, has seen higher turnover versus comparable existing store locations and is expected to contribute to boosting our overall e-commerce sales. Our second auction center in Sejong is also on track to achieve stable operations activity levels, in line with market recovery, and has quickly established itself as the only major auction house in the wider Chuncheon region. Thanks to these enhancements to our business structure, we have established a stable underlying revenue stream while achieving greater financial soundness. Our cash and cash equivalent assets stand at KRW 94.2 billion as of the end of the first quarter, which is a significant increase from KRW 13.9 billion recorded at Q4 end. Our financial liabilities have decreased and interest expense declined by 5% Q-on-Q. As we move past the first quarter, the used car market is seeing a pickup and recovery in deferred pent-up demand, amid eased pressure from the rate hike cycle, also recovery in used car pricing and improvements in the export market. That said, because uncertainties still remain on the financial market, as do concerns of a global economic recession, it is still quite difficult to predict exactly how the market will play out going forward. That said, we intend to leverage our unmatched economic moat built on the strength of our OMO platform, linking both online and off-line, and our robust used car database accumulated over 23 years, and our nationwide network and best-in-class professional human resources specialized in used vehicles. We are quite confident that we can further reinforce our market dominance at this time, thanks to our strengths. Looking ahead, we'll continue to demonstrate growth of size backed by substance by uncovering unmet needs of potential customers to deliver improved services and user experience while also building a more advanced business structure and new business model that can satisfy the expectations of our future business partners. Next, our CFO, Mr. Bae Moo-Geun, will take us through the financial results.

[Interpreted] Yes. Before presenting on our financials, allow me to first comment on our first quarter dividend. Earlier this morning, our Board of Directors resolved upon a quarterly dividend of KRW 191 per common share for the first quarter to be distributed within May. In 2023, we will be paying out quarterly dividends same as last year with the total dividend amount still undecided. Yes. In the first quarter 2023, total revenue was KRW 517.7 billion, a 7.1% decrease Y-o-Y but a 13.5% increase Q-on-Q. To break down the downside factors resulting in reduced revenue in Q1 into P&Q, first, the Q in terms of number of units sold was 37,211 units, which is a slight decrease of 1.1% Y-o-Y. The bigger factor came from unit pricing or the P, which declined by 7% on a Y-o-Y basis. In terms of Q1, retail -- or Q1 retail selling price was KRW 15.23 million, which is a KRW 930,000 decline compared to KRW 16.16 million in the fourth quarter. This is due to the temporary adjustment of our inventory that our CEO previously explained more towards the mid- to lower-priced models. Average unit price of wholesale vehicles was KRW 4.31 million, which is a decline of KRW 400,000 versus fourth quarter last year. Rental car revenue was up 19.9% Y-o-Y, recording KRW 14.5 billion. Other revenue came from delivery fees charged to home service customers and totaled KRW 1.7 billion. In terms of first quarter gross profit, the total was KRW 52.4 billion, up 2.7% Y-o-Y and 14.5% Q-on-Q, despite the overall decline in used car pricing. This was thanks in large part to our improved channel mix, also operational gains from our sourcing processes, which led to an improvement in the unit margin. Our GPU, or gross profit margins, recorded 10.1%, up 97 basis points Y-o-Y and 9 basis points Q-on-Q. SG&A recorded KRW 39.1 billion, up 3.1% Y-o-Y and 8.3% Q-on-Q. SG&A as a percentage of revenue was 7.5%, which is 36 basis points lower than the fourth quarter last year. Labor expenses, which account for the biggest portion of SG&A, recorded KRW 21.5 billion, up 12.7% Y-o-Y and 19.7% Q-on-Q. Thanks to our efforts for greater operational gains by utilizing our non-face-to-face channels and our mega center, the change to our head count was kept to a minimum. However, the rise in payroll to reflect price inflationary pressure was the main driver of increase in labor costs. First quarter operating profit was KRW 13.2 billion, up 1.4% year-on-year and 38% Q-on-Q. Our OP margin was 2.6%, an improvement of 21 basis points year-on-year and 45 basis points Q-on-Q. First quarter CapEx was KRW 2.1 billion, accounting for 0.4% of sales. By components, our investment into the Sejong auction center was KRW 1.4 billion, and the remainder was IT software spend. Our 2023 full year CapEx is expected to stay consistent with last year as measured as a percentage against revenue. And for your information, 2022 full year CapEx was KRW 6.4 billion, which was 0.3% of '22 revenue. For further details on our preliminary financial results and operating metrics, please refer to the IR section of our company website as well as the [ KIND ] website where we have posted our earnings call materials and fact sheet.

[Interpreted] Yes. And we will now move on from the presentation to our Q&A session. [Operator Instructions].

[Interpreted] [Operator Instructions] The first question will be provided by Jae il Lee from Eugene Investment & Securities.

[Interpreted] Yes. This is Lee Jae il from Eugene Investment & Securities. Regarding the entrance of large corporates into the used car market, so it's highly likely that larger companies, including Hyundai Motors, will now be moving into the used car market space. What kind of impact do you think this will have on your sales and your business? And then other than Hyundai Motors, what other large companies do you think could potentially consider moving in?

[Interpreted] Yes. Nice to meet you. This is the CEO of K Car, Jung In-Guk. You asked about what likely impact there can be from OEMs advancing into the used car market, what impact we foresee at K Car? Well, I think it is now known that the likely timing for their entry may be sometime in the second half of this year. And I understand that there are ongoing talks between the industry and relevant institutions about this development. But depending on market conditions and how they change, I think, going forward, if anything, there will be more opportunities for collaboration or cooperation amongst the OEM players, the large corporates and other used car companies. And the OEMs, even if they do move in, I understand will be restricted in terms of their supply, limited to their own brand of automobiles less than 5 years with less than 100,000 kilometers in milage, for example, to be sold only through the online channel, whereas we are much more wider in scope, we can handle any car model, any brand or any make both on and off-line. We think that we will really emerge as a differentiated platform that can better serve the diverse needs of consumers. And then in the longer -- mid to long term, I think, we can look to cooperate further with the large corporates and institutionalized type players and OEM players, of course, to work together to further consolidate the market. And regarding your second question, what other corporates are likely to look to move into this market? Well, because the used car market itself is so sizable with a lot of growth potential, I would imagine that there can be different combinations as more players move into the space. So entry can vary in terms of purpose, also form and strategy and timing. But just to categorize into certain grouping, I think the first group of companies that will move in will be the OEM makers first. And then second, there may be rental or lease companies who have a need to offload their fleet of vehicles after the contracts expire and as the cars go off lease or off rents. Third, I think there might be some companies that move into the certified used car business, primarily around imported vehicles, that would be the third grouping. Fourth, there could be capital companies for a slightly different purpose than the others, but they would be looking to provide auto loans, installment financing. And so I understand a lot of the capital companies maybe interested in coming in. And then a fifth group could be companies, commerce players or those otherwise who have an advertisement listing type model that I believe or I imagine could be highly interested in this market.

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

[Interpreted] Yes. It seems that e-commerce is now accounting for close to 60% of total revenue. So if you look at the total customer journey, what percentage of the users really do online-only, self-progression where they, in fact, purchase their car without ever seeing the car in person? So I'd like to know that percentage. Because if it is high, I imagine that potentially, you could actually support that kind of e-commerce business, mostly around your mega center in the longer term, in which case, I'm curious, what kind of impact you expect on your P&L?

[Interpreted] Yes. This is Chun Hoil, Head of Marketing at K Car. Let me take your question regarding e-commerce. So from K Car customers who buy through our e-commerce channel, actually 90% or more of those buyers actually make their purchase without ever seeing their vehicle in person. So the automobiles are on display at one of our trade centers off-line. But as I said, 90% of actual e-commerce buyers actually buy the car unseen. So you may wonder how could somebody buy a used car without ever seeing it live? Well, I think the fact that more than 90% of our e-commerce users do actually is a good indicator of the great trust that they place on the K Car brand. Second question regarding the Incheon mega center, we are reviewing different options and different possibilities in a positive light. As we boost e-commerce sales, that has the effect of increasing our ancillary sales as well for warranty plans, et cetera. So we are reviewing potentially expanding the Incheon mega center further as one of possible options.

[Interpreted] The following question will be presented by [ Seo Yeon Jeong ] from [indiscernible] Securities.

[Interpreted] Yes. So it seems quite possible the warranty attachment rate, I didn't quite hear what percentage you mentioned in terms of improvement. And are there other indicators that you could share with us in terms of your KW performance after the update? And then if you could explain about the margins, I would appreciate it as well.

[Interpreted] Okay. This is Jung Jin-Moon, Head of Corporate Planning. So KW plans are a very representative part of our ancillary services. So let me focus mostly on the KW plan. In July 2022, we commissioned an outside institution to conduct a customer survey ahead of the planned product update. And reflecting those findings as of December 2022, we completed our product upgrade. And so there are 4 major points to the upgrade. First, we adopted what was called KW 24. That means extending the warranty period from 12 months to 24 months, also the driving distance from 20,000 kilometers to 40,000 kilometers. Second, we expanded the scope of coverage. Previously, it was limited to certain items only, but overall, the scope was enlarged to cover more parts or consumables as well, also engine tune, et cetera, as well. Third, we enlarged the repair shop coverage. So the regular repair shop, we increased from 115 to 391. The heavy repair shops, increased from 20 to 27. And then the fourth part of our revision was about changing the pricing scheme, where we identify certain models where there was a lot of high price resistance and where we adopted more consumer-friendly pricing. So as a result of the revision to the KW plan, overall, we saw an uptick in warranty purchases and actually the attachment rate, which was about in the low 40% range prior to the upgrade, increased to the low 50% afterwards. And because the total amount of services that we provided increased, this did have the effect of pushing off our cost structure. But as we saw improvements in purchases and attachment rates, overall, the total income that is a function of the P&Q actually improved, as we saw, again, a ramp-up in revenue. And we found that upon post-revision survey, there was a very high rate of customer satisfaction among actual users.

[Interpreted] Yes. It seems are no further questions lined up. So with that, we will conclude the first quarter 2023 earnings conference call for K Car. So if you did not get a chance to ask a question this time or if you have further inquiries, please contact us at IR team, and we will try to get back to you with a full answer. And we'll look forward to seeing you at the next quarter. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]