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

[Foreign Language] Hello. This is Juan one, Head of IR at K Car. Thank you for joining us at the third quarter 2023 earnings conference for K Car. Before we begin, I'd like to take you through some brief housekeeping notes. We will be proceeding today's call through consecutive translation into English. The CEO of K Car, Mr. Jung In-guk, will first take us through a business highlights followed by financial results from our CFO, Mr. Bae Moo-Guen. This will be followed by Q&A with Mr. Chun Hoil, Head of Marketing; and Mr. Jung Jin-Moon, Head of Planning. Please note that detailed presentation materials are uploaded on the IR section of our corporate website at kcar.irp.co.gr as well as the CarexKind website. The presentation materials are based on K-IFRS and contain estimates that may be subject to partial change upon external auditor review. Please be advised that projections may differ materially from actual results, depending on changes to the macro and market environment. Now our CEO, Mr. Jung In-guk, will start us up with an overview of business results.

[Foreign Language] Yes, greetings. Thank you for joining K Car conference. Although third quarter results are reflective of difficult economic conditions that have continued since last year as well as abrupt changes impacting the used car business environment, we are seeing sequential recovery unfolds overall across our business. In Q3, as market entry by the OEM automakers was confirmed, the used car market that is slight decrease in number of transactions as consumers held off on purchases. Also right uncertainty over global economic recovery has led to an overall slowdown in growth. During this time, however, K Car has stayed focused to the essence and basics of the used car business as we prepare ourselves to realize profitable top line growth once more stable market conditions are later restored. [Foreign Language] As a result, we recorded retail unit pricing of KRW 16.7 billion, recovering back to last year's average, with revenue growing 4.5% Q-on-Q. Our GPU on retail sales was KRW 1.62 million, a new record high in 2 quarters in a row. Operating profit was KRW 18.4 billion, up 19% Q-on-Q. Even as profitability continues to improve, we were able to maintain our market-leading position with market share increasing again in the third quarter following our market share growth in Q2. [Foreign Language] In the third quarter, total number of units sold was 35,733, which was down 3% year-on-year. Retail units sold was 27,471, down 8.3% year-on-year. As I mentioned before, once it became final that the OEMs would be moving into the used car market, there was a bit of backlogging of demand as consumers put off their purchases for later, resulting in a drop in transaction from mid-September onward, impacting our sales performance for the quarter. For our wholesale options, as export markets continued strong expansion, we recorded 8,262 units sold, up 19.9% year-on-year. For the total retail sales mix or from the total mix, our online portion was 55%, up 6.6 percentage points versus last year. Online penetration, however, still remains at a low single-digit level for used cars by far much lower versus other industries. As OEM brands start moving into the market starting late October, we expect not only existing but more new potential consumers to try out and experience online shopping, likely boosting online penetration significantly in the used car market. [Foreign Language] In the third quarter, we recorded retail ASP of KRW 16.65 billion, which is an increase of KRW 1.2 million Q-on-Q, taking us back to last year's average levels. As we moved into the second half of the year, we focus on increasing inventory in order to normalize our product portfolio while buying more higher-priced vehicles, which resulted in a boost to our ASP. Also the auto loan installment financing rate, which at one point was close to 20%, has since dropped to the 7% range from August, which led to a partial recovery in demand for mid- to high-priced vehicles purchased on auto financing plans. [Foreign Language] Please look at Page 5 on your slide. Thanks to various efforts that we have made since the second half of last year, which includes revamping our product portfolio around high turnover vehicles, improving our sourcing channel mix, increasing our share of online sales and also running promotions to boost ancillary sales, we were able to achieve GPU of 9.4% of retail sales, which is 1 percentage point higher year-on-year. This average 0.7 percentage points lower on a Q-on-Q basis, however, but this is due to an increase in the ASP, which is the denominator. The red bar on the bottom shows the share of combined sourcing from our own B2B sourcing channel, which includes the vehicles we source directly from our own home service platform, trade-ins from buyers who pay the difference between their old cars and their new K Car vehicles and also sourcing from customers visiting our actual store location. As you can see, we were able to maintain this portion at around 30% share despite challenging sourcing conditions in the third quarter, ahead of market entry by the OEM maker. [Foreign Language] Yes. As I mentioned at the start of the call, K Car has been responding nimbly to the current internal and external environment, all the while focusing on enhancing profitability within a short time period. That being said, however, we are always focused on the essence of the used car business and always committed to the underlying basics, which is how we have really anchored ourselves as the #1 provider that is most aligned to our end consumer needs. Over the last 23 years, we have constantly strived to achieve transparency and integrity in our business and take great pride in having provided a differentiated user brand in the used car space, which was largely looked upon as a lemon market. As far as used vehicles are concerned, we still very much believe we offer a solid customer-centric experience as always, and we will be focusing on improving our OMO channel even further to deliver a more satisfying experience to all of our users. Now as more different players move into the market, starting off with the OEM makers, we believe this will mark another turning point for K Car in opening up a new chapter of growth as more consumers participate in the market and convince this will not only lead to expansion of the used car market itself but also lead to many more new B2B business opportunities in the future. We, with our peer group of new entrants, will shape and create the emergent B2B business market together. Next, our CFO will take us through the financial results.

[Foreign Language] Yes, greetings. Before presenting on our financial results, allow me to comment on the third quarter dividends first. Earlier this morning, our Board of Directors resulted upon a quarterly dividend of KRW 191 per common share for the third quarter, same as was the case for Q2. This will be distributed within November. [Foreign Language] In the third quarter 2023, our revenue totaled KRW 528.6 billion, up 4.5% Q-on-Q. The main driver of this growth was change in our retail ASP. Although number of units sold declined 2.8% Q-on-Q due to seasonality, our expanded inventory lineup and increased share of sales through auto financing led to a 7.7% Q-on-Q increase in ASP. On a year-on-year basis, revenue was down 8.2% as number of units sold and average unit pricing declined by 3% and 2.3%, respectively. Third quarter average selling price of retail vehicles was KRW 16.65 million. And from retail, the unit pricing of vehicles sold off-line was KRW 17.45 million, online KRW 15.99 million. [Foreign Language] For the auction business, revenue totaled KRW 39.2 billion, 1.1% down Q-on-Q, but up 15.6% year-on-year. Number of units sold through direct bidding, excluding consignments, recorded 8,262 , which was down by 2.3% Q-on-Q, but up 19.9% year-on-year. The average winning bid price was KRW 4.45 million, up 2.9% Q-on-Q, down 4.5% year-on-year. Rental revenue was KRW 14.2 billion, down 0.5% Q-on-Q but up 5% year-on-year. Other revenue, including delivery fees charged to home service customers totaled KRW 1.8 billion. And please refer to Page 11 on the IR slide for a further breakdown and trends. [Foreign Language] Third quarter gross profit was KRW 57.1 billion, down 1% Q-on-Q, up 8% Y-o-Y. Gross profit margin was 10.8%, down slightly by 0.6 percentage points Q-on-Q, mostly due to seasonality in the third quarter when more people tend to enjoy outdoor activities, resulting in an increase in the portion of offline sales versus higher-margin in online sales. On a Y-o-Y basis, GP margin was 1.6% -- actually was improved by 1.6 percentage points year-on-year from improving unit economics across our overall business, which started to kick in at the end of last year. When taking out the seasonality factor, our share of online sales has consistently been growing and will continue to be a source of improved margins. SG&A was KRW 38.7 billion, down 8.3% Q-on-Q, up 5.1% Y-o-Y. SG&A as a percentage of revenue was 7.3%, 1 percentage point lower Q-on-Q due to measures for operational efficiency and productivity gains, which led to a 0.4 percentage point and 0.5 percentage point drop, respectively, in labor costs and average in expense against revenue, respectively. [Foreign Language] Third quarter operating profit was KRW 18.4 billion, up 19% Q-on-Q and 14.7% Y-o-Y. Our OP margin was 3.5%, up by 0.4 percentage points Q-on-Q and 0.7 percentage points Y-o-Y. Third quarter CapEx was KRW 1 billion, which is under 0.2% of revenue, mostly used towards facility improvements, such as photozone upgrades. We expect full year CapEx to be similar to last year levels as a percentage of sales. For information, 2022 CapEx totaled KRW 6.4 billion and was 0.3% of total 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 Kin site, where we have posted our earnings call materials and fact sheet.

[Foreign Language] [Operator Instructions] The first question will be provided by Jae Lee from Eugene Securities.

[Foreign Language] Yes. This is Lee Jay from Eugene Securities. I'd like to first ask about your outlook for the used car market next year. So do you have any ideas as you project the market outlook in terms of volume, also ASP. And it seems that this year, you have seen some slowdown in your revenue growth. When do you think it will be when you are able to go back to past high-level growth? And second question regarding Hyundai Motor Company's advancement into the used car market. I'm curious to know if you have observed any sign so far of a shift in demand more towards Hyundai Motor Company in terms of used cars. And also it seems that they have said there are prices at a relatively higher level. Are you saying that this is pushing up overall pricing?

[Foreign Language] Yes. So out of your 3 questions, let me address the last one regarding the OEM automakers entry into this car market. So as you know, they have started to move in into this market as of the end of October. In terms of what kind of changes are expected from their entrants, I think it's a mix, coexistence of both expectations and concerns in terms of possible change. It's too early to quantify what the impact is likely to be in terms of sales and our sourcing. But actually, if you look at the composition of their products and their sales channels and the objective of their business, I think it is quite distinct versus that of K Car. So I don't think that there will be lots of areas where there is direct competition between us and them. If anything, again, there will be an area where we can be mutually complementary with one another. [Foreign Language] And when you look at K Car and other institutional type providers, the combined target market share 2 years out, so that would be 2025 is somewhere around 20%. So given that kind of level, I think overall, the size of the used car market in Korea will be sideway enough to accommodate ongoing growth with significant growth upside for share growth. [Foreign Language] So in the short or ultra short term, let's -- in terms of what kind of impact we may have seen, well, they did open their CPO used car business actually just last week, and it did actually trigger a bit of expectation among consumers and a bit of pent-up demand as consumers put off their purchases. So in the very short term, this did have an impact on our sales sometime from mid-September up to the opening of their service launch. However, as of last week, when they actually went live and opened services, our sales actually have since normalized. [Foreign Language] And then on the sourcing side, the portion of sourcing that we do from the OEM dealership has continued to drop as we increasingly do more on sourcing on our own channels. Also, the portion of vehicles purchased on the bidding platform has also increased. So the impact on K Car sourcing from the entry of the automakers actually has been very marginal. And then we expect it to continue to be limited going forward as well. [Foreign Language] And then regarding the second question on our market outlook for next year. Well, this is just the way I'm looking at it right now. Overall, if you look at the economic cycle, the overall economic conditions, overall, it is quite challenging, not only for the used car market, but overall. Also, interest rates are quite high. We are seeing a slowdown in consumption or spending from consumers and also self business owners as well. And potentially, I think that this may actually be protracted into next year as well. That being said, still with the entry of the OEM makers into the used car market, we are seeing growing interest among the consumers towards used cars. And so although overall, conditions are not favorable, and the economic metrics are also a bit weak. So with growing interest brewing amongst the consumers, I think that we may be at a low point right now, and I expect overall improvement in 2024. [Foreign Language] Yes. And then regarding last question regarding revenue growth. Well, if you look at the third quarter results, we did see a decline in the number of units sold, whereas ASP increased. So this was an issue that arose in the course of our -- responding to the changing external environment. I believe that managing the business ultimately is a function of 2 things, which is top line revenue and also bottom line profitability growth. And given the external situation, given the current high level of uncertainty, up to now, we have actually placed greater weighting on the profitability side over top line revenue. And I think we will continue to do that up to perhaps the first half of next year, again, putting more focus on profitability and efficiency gains over top line growth. [Foreign Language] And then in terms of ASP, we think that it should also recover naturally in 2024, and also a number of units sold as well as we continue to pursue plans to expand the number of physical branch locations we have. Right now, it's 48, but there are still certain areas of Korea where we have not established a presence. So we will go ahead with certain more openings next year. And we're working on relocating some of the existing centers as well. And so next year, to the extent that we can minimize any increase in headcount, we will continue to expand our branch presence, again, focusing on efficiency and profitability, also a key metric will be per person productivity as well.

[Foreign Language] So there are no pending questions at the moment. We will give you just one more minute and wait. But if there are no further questions after one minute, we will then conclude our conference call. [Foreign Language] Yes. With that, we will conclude the conference call for K Car in the third quarter of 2023. Thank you to all our participants and those who have listened in. If there are any further questions, please contact us at the K Car team. We'll look forward to meeting you next quarter. Thank you.