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

Yes. Hello, this is Kwon Eun-Hee, Head of IR at K Car. Thank you for joining us at the Fourth Quarter 2023 Earnings Call 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 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, followed by a Q&A session with Mr. Chun Hoil, Head of Marketing; and Mr. Jung Jin-Moon, Head of Planning. Please note that detailed presentation materials are uploaded in both Korean and English on the IR section of our corporate website, K Car.irpage.co.kr, as well as on the KRX KIND 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. [Operator Instructions] Now our CEO, Mr. Jung In-guk, will start us off with an overview of business results.

Good morning. Thank you for joining K Car's conference call today. In Q4 last year, as OEM makers advanced into the certified used car market in earnest, we saw some impact on used car transactions in the quarter. There was buildup of pent-up demand for 1 month or so ahead of the planned launch of the OEM brands planned for late October, early November. Nevertheless, K Car recorded both revenue and profit growth year-on-year in the fourth quarter, recording record-high SAM, or serviceable available market, share of 12.6% in December, which is a considerable accomplishment. This was a result of our nimble response to our internal and external environment. We enhanced the competitiveness of our sourcing of high-demand vehicles while quickly clearing out 1 month plus inventory, which has been a temporary increase. Please refer to Page 3 of our performance results. K Car's market share, as you can see, is still growing. Although throughout 2023, we were more focused on improving profitability. In response to macro factors weighing negatively on the used car industry, we continue to carry forward solid growth momentum, recording full year SAM market share of 11.5%. Let me now take you through our fourth quarter sales performance. Total number of units sold was 33,279, up 9% year-on-year. As I mentioned earlier, there was some backlogging of demand ahead of OEMs moving into the used car space, which also had a negative impact on our sales results. However, as transactions normalized starting in the last week of October, we achieved above-market growth. For your reference, the broad used car market grew by just 1% year-on-year in the fourth quarter. Total retail units sold recorded 24,657, up 0.6% year-on-year. Our online share of retail sales increased to 57.1%, up 6.7 percentage points from 50.4% at the end of 2022. Online penetration of used cars is still low, at a single-digit number, much lower versus other industries. The entry of large corporates into the used car market, however, is expected to reinforce online purchasing trends for used vehicles, and we expect online penetration to move up a bit faster than before. This will have the effect of strengthening K Car's market dominance further since we have the full package not only in terms of credibility and transparency but also diverse portfolio products as well as pricing competitiveness. For auctions, total number of units sold through direct bidding, excluding consignments, recorded 8,622, up by a very high 43.3% year-on-year. K Car's Osan and Sejong auction centers have demonstrated much higher auction clearance rates versus other auction houses not only in direct bidding but also in consigned auctions as well, with B2B consignment contracts on the rise. In the future, we expect an increase in consignment volume from third-parties, including OEMs, which is why we're preparing to open our third auction house within this year. Moving on to our average unit pricing or ASP. Retail ASP recorded KRW 17.02 million in Q4, which is an increase versus KRW 16.16 million recorded in the fourth quarter of last year, also versus KRW 16.65 million in the last quarter. Despite high interest rates and economic uncertainties that remain very much alive, we believe ASP has continued to rise due to a price alignment or coupling effect with the price of new vehicles and also expectations of a policy rate down cycle. Our average retail ASP for full year 2023 recorded KRW 16.04 million, down 4.3% versus KRW 16.75 million in 2022, which is when we have the so-called car inflation phenomena from the auto chip supply issue. This year, in 2024, we expect used car ASP to rise due to higher price point of new vehicles and also from improved consumer sentiment as interest rates stabilize. Please refer to Pages 8 through 10 for fourth quarter ASP by channel, on an off-line retail channel and wholesale. Moving on to our per unit margin, GPU, and our sourcing status. Please look at Page 5 in your slides. Our fourth quarter retail GPU was KRW 1.42 million, similar to Q4 last year. GPU went down Q-on-Q mainly due to our sales performance in the fourth quarter intended to draw down a temporary increase in inventory. We had an abrupt drop in sales 1 month ahead of OEMs' entry into the market where we saw a temporary buildup of 1 month-plus inventory. We're expecting Q1 retail GPU to move back up since transactions started normalizing in the fourth week of October following our sales promotion, with our 1-month-plus stock moving quickly. 2023 annual average retail GPU was KRW 1.51 million, an improvement versus KRW 1.44 million in 2022. We see potential for further GPU upside in 2024 as we leverage demand forecast information from our AI-powered pricing management system while benefiting from improved sourcing channel mix, a larger share of online sales, higher ASP and an increase in ancillary sales. The red bar on the bottom shows the share of combined sourcing from our own C2B channel, which includes the vehicles we source directly from our own sourcing platform, also trade-ins from buyers who pay just the difference between their old cars and their K Car vehicle, and also sourcing from customers visiting our trade center locations. As you can see, despite challenging sourcing conditions from market entry by the OEMs, we were still able to maintain very solid 30% share in the fourth quarter. As we start out 2024, the used car market is showing signs of demand coming back, which has been deferred now for many years, amid expectations of rate cuts, a recovery in used car pricing and strong performance in the export market. That being said, concerns of global financial market uncertainties and a global economic slowdown have not completely disappeared yet, making it still quite difficult to project exactly how the market will play out going forward. Despite these circumstances, K Car, as the only used car business with an economic moat on all fronts, can confidently make the following three promises to you, which we are confident we can achieve in 2024. First, in 2024, we shall achieve growth in terms of both P and Q together. We will seek to strike a balance between demand and profitability and secure a strong portfolio of vehicles across diverse price points, boosting both ASP and revenue growth in lockstep. Second, we will look to achieve double-digit growth in operating profit in 2024 as we did in 2023 to recover profitability levels recorded back at the time of our IPO in 2021. Third, to do this, we will focus on boosting high-margin sales and pursue cost efficiency gains. We will increase the share of online sales, which have higher ancillary sale conversion, expand our high-margin auction channels and realign our trade centers to be more optimized for OMO transaction. Furthermore, we intend to develop a new business model targeting new entrants coming into the used car space and expand our B2B partnerships, which we are excited to show and share with you later on. As I mentioned at the start of today's call, K Car has and will continue to maneuver nimbly in response to the rapidly changing internal and external environment. We're also always staying focused on the essence of our used car business. We will continue to stay true to the basics to further solidify our position as the #1 leader in the industry that is best aligned to consumer demand. Next, our CFO, will take us through our financial results.

Yes. Good morning. Before presenting on our financials, allow me to comment on fourth quarter 2023 dividend first. Earlier this morning, our Board of Directors resolved upon a quarterly dividend of KRW 191 per common share for Q4, which will be distributed within April, following approval at our General Shareholders' Meeting in March. Our dividend policies for 2024 are undecided at the moment. In the fourth quarter 2023, revenue totaled KRW 495.6 billion, up 8.6% year-on-year. Looking at the drivers of growth by P&Q. First, our total number of units sold increased 9% year-on-year, while retail ASP increased 5.3% year-on-year to KRW 17.02 million. Direct auction ASP, excluding consignment sales, was KRW 4.87 million, up 3.3% year-on-year. By channel, our e-commerce by home, home service sales increased 24.1% year-on-year to KRW 241.9 billion. This was from a 13.9% increase in number of units sold from our e-commerce platform as well as a 9% increase in ASP. Off-line sales decreased by 10.3% year-on-year to KRW 192.3 billion, mostly due to a 10.3% drop in off-line units sold, which was partially offset by a 2.9% increase in ASP. Our Q4 off-line ASP was KRW 17.62 million. Action revenue increased 46.5% year-on-year to KRW 44.6 billion. Rental business revenue increased 28.1% year-on-year to KRW 13.5 billion. Other revenue, which includes delivery fees charged to home service users, totaled KRW 2 billion. Fourth quarter gross profit was KRW 49.7 billion, up 8.8% year-on-year. Gross profit margin was 10%, similar to last year's Q4 levels. In Q4 2022, sales were impacted from an abrupt rise in interest rates, while Q4 2023 saw around a 4-week postponement of demand up until day 1 of business by the OEMs launched into the certified preowned market. Nevertheless, we were able to achieve double-digit GPU, thanks to our ongoing efforts from the second half of 2022 to improve our user economics. Going forward, we believe it will be possible to improve our margins as this year a policy rate cut is highly likely and also as our online business continues to expand apart from some seasonality. In Q4, SG&A was KRW 37.8 billion and SG&A as a percentage of revenue was 7.6%, 0.3 percentage points lower versus Q4 last year. We see potential for further improvement in SG&A by reallocating downtown parking space, which incurs higher lease expense, and also through improvements in per-person productivity. We also expect to benefit from high operating leverage from revenue upside since all major cost items are fixed costs with the exception of credit card commission. Fourth quarter operating profit was KRW 11.9 billion, up 24.6% year-on-year. OP margin was 2.4%, up by 0.3 percentage points year-on-year. 2023 full year operating profit was KRW 59 billion, up 17.9% year-on-year. As our CEO, Mr. Jung In-guk explained, we are targeting back-to-back double-digit operating profit growth in 2024. Fourth quarter CapEx was KRW 750 million, which is less than 0.2% of revenue, mostly for operating software upgrades, including mobile office. Full year 2023 CapEx was KRW 4.27 billion, which is 0.2% of revenue. In 2024, we are planning a third auction house and several new branch openings, and we expect to execute around 0.4% of revenue as CapEx this year. For your reference, full year CapEx in 2022 was KRW 6.4 billion, which was 0.3% of 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 KIND where we have posted our earnings call materials and factsheet.

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

So while we wait for questions to come in, we will provide answers to some questions that were submitted in advance and also to questions received in real time via text. The first question is on 2024 performance outlook and also full year guidance for 2024.

Yes. So let me comment about our 2024 full year performance outlook. Looking back on 2023, I think we continue to see an unfavorable environment that weighed more negatively on used car sales more than expected. And it is true that in terms of the number of units sold, we failed to meet the target for 2023. We are seeing economic uncertainty continue to persist as major changes continue within the used car industry and market. But as I said earlier, K Car is actually the sole used vehicle provider in the industry with an economic moat across all fronts. And so let me just reiterate our three targets that we're quite confident of achieving in 2024. So first, as I explained earlier, we intend to grow in terms of both our P and Q at the same time. We will preemptively secure an inventory portfolio that strikes the balance in terms of demand and profitability, vehicles across different pricing points, to boost both ASP and sales at the same time. The second target is to achieve double-digit growth in our operating profit in 2024, as well following on the same in 2023, to restore are profitability back to the level that we had back in 2021, at the time of our IPO. Third, we intend to focus more on growing high-margin sales while also pursuing further cost efficiency. We will boost the percentage of online sales with high conversion for ancillary sales, also boost our high-margin auction channel further and execute relocation of our trade centers to be more optimized for OMO trade. Also, we will be developing a new business model targeted at new entrants moving into the used vehicle market and also expand B2B partnerships. All things that we're quite looking forward to showing to you. So OEM makers, as you know, have already now started their used car business operations. And with the start of this year, we've since seen sales recover and our sourcing policy, which we have been running conservatively under the high rate environment, while we have since eased to preemptively secure a wide variety of inventory, again, across different price points. Also in terms of profitability, we expect to be able to improve further driven by fundamental improvement in our underlying strength. So instead of relying on one-off or temporary measures, we will continue to boost our online mix, diversify our revenue stream, continue to improve our sourcing channel mix and also better utilize AI-powered predictive modeling as well.

The second question has to do with what kind of impact we have seen in terms of the retail used car market since entry by the OEM makers.

So there were lots of heightened expectations among consumers ahead of the entry by the OEMs into the used car market that began in October last year. And there was some backlogging of demand, with consumers pushing off their purchases, which did, in fact, have a negative impact on both K Car sales and our sourcing. However, starting from day 1, since the start of business by the OEMs, if anything, our K Car sales actually have since normalized. Actually, it's too early to quantify what kind of impact OEMs' entry into the CPO space will have on our sales and sourcing. However, given how the product mix and the sales channels between the OEMs and K Car are different, I would say the domains where we are in direct competition against OEM is quite limited, and we expect both sides to be mutually reinforcing our complementary role with the effect of improving the overall market environment. Also considering that next year's combined market share target for the institutionalized or corporate providers, including K Car, is just within 20%, we believe that this signify significant upside remaining for further growth and certainly enough room for share growth among the different players.

The third question is on 2024 marketing budget and plan.

Yes. This is the Head of Marketing at K Car, Chun Hoil. So our planned marketing investments for 2024 will be similar to last year's levels at around KRW 10 billion. And so let me just highlight some parts of our marketing strategy that may be different from our past. So up to now, actually, we have previously been focusing our marketing activities on boosting brand awareness and also on increasing prospects or potential customers. However, this year, we want to focus more on the group of customers with a higher likelihood of actual conversion into transactions for better efficiency of marketing spend. So rather than focusing more on potential prospects, we will focus on drawing or directing traffic of real effective or serviceable and addressable customers to our platform. And so whereas we focus mostly on ATL marketing in the past, we will now redirect that focus towards more high-efficiency digital marketing spend, with about 90% of our marketing budget going towards digital, again, with the goal of attracting more serviceable and addressable traffic to our platform.

The fourth question has to do with our plans to expand our off-line infrastructure to boost sales and revenues.

So in terms of our off-line infrastructure, let me divide my answer first into trade centers and auction houses. Let me first talk about the trade center. So for the trade centers, as we see the proportion of online sales and also non-face-to-face purchasing increase, we have been relocating some of our trade centers located in Seoul, which has been incurring high parking-related expense to other locations outside of the city center for greater delivery accessibility and more operational efficiency as well. So starting in the second half of last year, we have started closing out certain intercity trade center locations, again, with high cost per parking space. We have also added an additional parking at our home service mega center and are preparing to open more trade centers within the capital region or currently unaddressed parts of the country with greater delivery accessibility. And going forward, we want to continue to focus on boosting inventory turnover to improve the availability of our existing parking resources to increase our network of highly efficient trade centers. So we want to minimize costs by adjusting the number of trade center locations and parking space depending on demand, and we will change our operational policy so that the trade centers are based on short-term leases. For information, in terms of our trade centers to date, whenever we had new expansions, we continued to lease the underlying land and buildings, and we will maintain this kind of leasing policy but for customers more on short-term leases. And then in terms of our off-line auction house network, currently, our 2 auction houses in Osan and Sejong have been performing very well, recording above double-digit growth in terms of units sold and revenue. And also compared to other auction houses, the auction clearance rate is actually much higher by more than 20 percentage points. We are now planning to open a third auction home in a region with high demand versus available supply. This will have the effect of increasing accessibility for our wholesale and export dealers and also help us cater to the anticipated increase in consignment volume. In terms of the auction house, the parking space, we will be executing leasing contracts for each of the respective parking slots, and we're planning about KRW 1 billion in overall CapEx, which will go toward the full zone construction work, the interior build and IT equipment or system build or implementation. So we will update you in a later conference call when the exact location and the opening date of the third auction house is fixed.

With that, we will conclude today's conference call. I would like to thank all of you for joining in on our conference today. If you have any additional questions, please feel free to contact us at the IR team, and I will see you at the next quarter.