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

Yes. Good morning. This is Kwon Eun-Hee, Head of IR at K Car. Thank you for joining us at the second quarter 2024 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 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 Q&A, where we will be joined by 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, kcar.irpage.co.kr, as well as 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 future-looking 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 off with an overview of business results.

Yes. Good morning. Thank you for joining us at K Car conference call. In the second quarter of 2024, we saw used car retail ASP recover to record high levels, and the number of units sold increased, resulting in continued double-digit growth Y-o-Y in both sales and operating profit. This, as explained in the prior quarter call, is not a one-off improvement in short-term performance as it really represents the outcome of our swift response to ongoing structural transition and change in the used car industry translating into real results. In terms of operational efficiency, we maintained inventory turns similar to the record high level we saw in the first quarter, resulting in additional improvement in our per unit sales profit. This was the outcome of ongoing effort towards fundamental change across core areas of business, including AI-enabled demand forecasting to drive sales as well as productivity gains by expanding our non-face-to-face sourcing channel, among others. We also improved the UX/UI of our website and mobile platform as well as our offline trade center conditions as we work to improve the quality of our customer service that's the basis for long-term growth. Yes. Please now refer to Page 3 of your slides. The negative growth trends that persisted in the used car market over the last 2 years turned around to growth with the start of this year, and the number of vehicles sold in the first half grew by 0.5% Y-o-Y for the broad market. Meanwhile, we significantly outperformed versus the market, recording 7% growth and 12.3% share in the serviceable available market. We are expecting a turnaround in the used vehicle market as deferred demand picks up amid expectations of interest rate cuts. Also, as OEM automakers and large corporate advance into the retail used car market, expectations of consumers have become more sophisticated as well, driving market consolidation led by institutionalized leaders, which is why we believe we will continue to see our market leadership strengthen for some time going forward. Let me now move on to second quarter sales performance. Total units sold recorded 39,017 units, up 6.2% Y-o-Y. Drivers of growth include our use of AI demand forecasting, which allowed us to selectively source vehicles in high demand with the inventory turns, also solid auction sales in our Osan and Sejong auction centers. For your reference second quarter -- excuse me, our second quarter DIO or days inventory outstanding was 32.7 days, and inventory turnover, 11.2x, which is, in fact, the highest level of inventory turns globally, allowing us to make the most out of our working capital to fund our sourcing and sales of used vehicles. This has enabled stable growth of our business, resilient to changes in the interest rate environment. Number of retail units sold recorded 29,525, up 4.7% Y-o-Y. Online retail sales increased by 2.5%, while off-line sales grew 7.7%. The online share of retail sales now stands at 56.4%. The total number of vehicles sold through auctions recorded 13,791, which includes 9,492 units sold through direct bidding, an increase of 10.9% Y-o-Y and 4,299 in consignment vehicles sold. We recorded an auction clearance rate of around 80% at our auction centers, where auctions are executed twice a week. And for your reference, according to statistics, which are disclosed on a weekly basis on the Korea Auto Auction Association website, this is almost 20 percentage points higher than the average successful bidding rate by other auction houses. Yes. Moving on to unit pricing. Second quarter retail ASP recorded KRW 17.22 million, which is a significant increase versus KRW 15.45 million recorded in the second quarter of last year, also versus KRW 17.15 million in the first quarter of this year. We have resumed procurement of high-end vehicles to build up inventory as interest rate uncertainty has moderated somewhat and installment financing rates have stabilized. As a result, the average ASP of K Car retail vehicles have continued to rise for 5 consecutive quarters. We believe the price alignment or coupling between new and used vehicles as well as reduced interest rate concerns have led to stronger consumer sentiment, which should continue to drive the uptrend in pricing. Please refer to Pages 8 to 10 for further information on our second quarter sales and ASP by channel, online, offline and wholesale. Yes. Moving on to our per unit margins, GPU and our sourcing status. Please look at Page 5 in your slides. In the second quarter, our retail GPU was KRW 1.6 billion, recovering record high levels that we achieved in the second and third quarter last year. The improvement was due to high inventory turnover, market consolidation and expansion of our non-face-to-face sourcing channel. Ancillary sales, which impact retail unit economics, has also seen continued growth. The KW, K Car Warranty, which provides extended quality protection up to 2 years at 40,000 kilometers, recorded an attachment rate of 52%, with subscriptions increasing by more than 5% year-on-year for mid- to long-term coverage, which has had a positive impact on our unit margins. The KW schemes provide coverage not only for the engine and transmission but for other auto parts as well, and this has been well received by used part consumers who now have higher standards. We expect the sign-up rate to continue to rise for some time. In terms of the purchasing channel breakdown, it remains largely unchanged in terms of the mix from before in spite of OEMs moving into the market. Actually, it is not an exaggeration to say that the used car business is essentially a used car procurement business as inventory acquisition is that much important. We leverage our pool of full-time professionals with abundant experience in used car trading while also referring to AI-enabled recommendations, which allow us to secure high demand inventory across all channels, reinforcing our dominant leadership position in the sourcing market as well. This year, as new types of institutionalized or corporate players move into the used car market, this has led to the emergence of new B2B business opportunities, including large-scale used car sourcing. We are also committed to fulfilling our social responsibilities and attractive business management of sharing. In the second quarter, we hired 12 sports athletes with disabilities as full-time employees. We're able to train [ assessing ] new training facilities and compete in various sporting events for persons with disabilities in lieu of work. On the environmental front, we have also seen meaningful achievement to respond preemptively to the government's initiative to encourage greater adoption of zero pollution vehicles. And we have been working to achieve a set of sales targets for environmentally friendly vehicles sold. As a result, our share of eco-friendly car sales was 1.8 percentage points higher versus the market as of the first half of 2024. All executives and employees at K Car also take part in regular cleanup activities along the Cheonggyecheon stream as well as across our nationwide trade center location as we focus on internalizing environmental protection and eco-friendly business practices through diverse ESG activities. We are now halfway through 2024, and I believe the strength of our first half results are a solid indicator that we are on track and highly likely to achieve the full year guidance that we shared with you at the start of the year. First, we have achieved growth in terms of both our P and Q while recording double-digit profit growth. Third, we told you that we will focus on driving high-margin sales growth and cost efficiency, while our wholesale channel sales have grown 20.2% Y-o-Y, while retail ancillary sales, including K Car Warranty and commission sales, also increased by 19.3% Y-o-Y. In terms of cost, we have achieved operational cost savings across our trade centers while maintaining parking space as is at 12,000 units. Although we have already significantly outperformed against market growth, as the rate cut cycle begins, market recovery will gain greater momentum, which we expect will trigger accelerated growth for K Car. Going forward, we'll leverage a customized marketing strategy driven by big data and AI technology to create new business value, at the same time, seeking greater operational productivity gains for improved profitability. We'll also work harder to expand B2B services, targeting new business partners that are moving into the used car market. Next, our CFO, Mr. Bae Moo-Geun, will take us through the financial results.

Before presenting on our financials, allow me to comment on second quarter 2024 dividends. Earlier this morning, our Board of Directors resolved upon a quarterly dividend of KRW 300 per common share for the second quarter, which is a 58% increase from the quarterly dividend of KRW 190, which we have maintained up to last year from -- or since our IPO. This reflects our commitment to strengthen shareholder returns based on improved performance this year. Second quarter dividends will be distributed within August. In the second quarter of 2024, revenue totaled KRW 589 billion, up 16.5% Y-o-Y. Looking at the drivers of growth by P and Q, first, the total number of units sold increased 6.2% Y-o-Y. Retail ASP increased 11.5% Y-o-Y to KRW 17.22 million. Direct auction ASP, excluding consignment sales, was KRW 4.44 million, up 2.7% Y-o-Y. By channel, our e-commerce sales increased 14% Y-o-Y to 270 -- or excuse me, KRW 287.9 billion. This is from an 11.2% increase in e-commerce ASP and a 2.5% increase in the number of units sold. Off-line sales increased 20.4% Y-o-Y to KRW 238 billion, driven by an 11.6% increase in ASP and a 7.7% increase in off-line units sold. Auction revenue increased 12.8% Y-o-Y to KRW 44.7 billion, driven by a 10.9% Y-o-Y increase in the number of owned vehicles sold through direct bidding and a 2.7% increase in wholesale ASP. Rental business revenue increased 13.9% Y-o-Y to KRW 16.2 billion. Other revenue, which are delivery fees charged to home service users, totaled KRW 2.1 billion. Please refer to Pages 8 through 10 for a breakdown of our sales and ASP by channel across retail, e-commerce, off-line and wholesale. Gross profit recorded KRW 59.7 billion, up 3.5% Y-o-Y. Gross profit margin was 10.1%, down 1.3 percentage points Y-o-Y but still a slight improvement Q-on-Q. We maintained double-digit GP margins as we continue to consolidate the market even as retail ASP continued to rise from the prior quarter. In Q2, SG&A was KRW 41.6 billion, accounting for 7.1% of revenue, 1.3 percentage points lower Y-o-Y due to operating leverage from top line growth. Meanwhile, our advertising marketing spend decreased significantly by more than 52% Y-o-Y due to a shift in marketing strategy. Up to last year, we conducted ATL marketing such as TV ad campaigns, primarily in the second quarter. But this year, 90% of our marketing budget has been allocated for digital marketing -- or excuse me, advertising and executed more or less evenly throughout the year. This year's marketing budget is similar to last year's level, which was KRW 9.5 billion in 2023. Our second quarter operating profit was KRW 18.1 billion, up 17% Y-o-Y. Our OP margin was 3.1%, flat year-on-year but up 0.2 percentage points Q-on-Q. We expect additional improvements to our margins this year, driven by higher-margin sales growth, cost savings and operating leverage from top line expansion. Second quarter CapEx was KRW 1.1 billion, which is 0.2% of revenue, mostly for relocation of trade centers, photo zone improvements and software upgrades. 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 fact sheet.

With this, we'll now move on to the Q&A session. [Operator Instructions] Yes. As we wait for incoming questions, we will first cover questions that have been provided to us in advance and those that are being sent in real time by text. The first question. So OEM automakers actually and many large corporates and start-ups have been moving into the used car market. From a capital market point of view, this may represent significant changes to the competitive environment, which may be a threat to K Car. So what is the impact from these developments in terms of your sourcing and sales competitive dynamics? And what is your ultimate market share goal amid this change in competitive environment?

Yes. This is the CEO, Jung In-guk. Let me take this question. So the new development of the large corporates and start-ups moving into the used car market actually represents both a challenge and opportunity for the incumbent players like K Car. I do understand how, from a capital market perspective, it may be seen as a source of crisis. However, for K Car, based on our long-standing experience and also developments as they have unfolded to date, we believe that if anything, the introduction of large corporates and start-ups into this space will promote further activity in the market and help grow the size of the total market while diversifying the customer segments. And with the introduction -- or with the advance of large corporates and start-ups into the used car market, this will accelerate adoption of new types of technologies, including digital or AI-based technologies for appraisal of the auto vehicle, for example. We will also practically adopt these technologies and enhance the efficiency of our acquisition and sales process to provide differentiated value to our customers. In terms of our target market share, we seek to continue to maintain and solidify our market leadership position in the space, even amid changing competitive environment. And this will be achieved through the following strategies where we intend to expand our market share. First of all, we will strengthen our OMO platform that crosses over -- across [ flying that ] online as it represents the largest barrier to entry for new players. So this will allow users to purchase and sell their cars any time, any place with a great degree of convenience. Second, we will adopt innovative technologies driven by AI or big data to apply in terms of auto appraisals, management for further efficiency gains in terms of our customer service. Third, we want to enhance our customer center services to boost customer retention through diverse forms of customized services while offering different types of auto-related options as well to satisfy diverse needs. Also, we'll be very proactive in terms of marketing to provide differentiated user experience to boost user loyalty, continue to attract inflow of new users and through repurchasing among existing users. Through this type of strategy, our target is to achieve 30% share in the serviceable available market. And this, of course, is based on core market conditions and our existing business model. And it may actually be expanded further, depending on how the B2B used car market -- how far it grows and also depending on expansion to the C2C business.

The second question. Well, it seems that your online or e-commerce sales share actually is going down on a year-on-year basis. It's been largely flat over the past year. I do recall that you said you have higher margins from online. So if we assume that the online share does not increase further from current level, does that mean that your margins will remain flat?

Yes. This is the CFO, Bae Moo-Geun. So I do understand your concerns regarding the changes to the online sales mix. So let me explain the current situation and also take you through our future plans as well. So it is true that the online sales portion has decreased compared to the prior year and has been largely stagnant for the past year or so for the following reasons. First, after the pandemic and endemic period, we have seen an increase in more visitors coming out to the off-line trade centers themselves to see, and this has led to an increase in off-line sales. And as ASP rises, there is growing need amongst the customers to, again, come out and see the car in person before finalizing their purchase. Also given the characteristics of the used vehicle, there is a meaningful portion of users that will always want to check the car in person, in real life before purchase. That said, we appreciate the importance of online sales and have been following -- we'll seek different measures to further reinforce online sales, for example, using data-driven targeted marketing to increase online user traffic and also boosting online conversion by providing personalized promotions. But even when -- if there is no further increase in the online mix, we will still boost overall margins through the following strategies. First, we will be seeking operational cost efficiency and gains by using AI and big data for inventory management and more efficient management of our physical trade centers. Also, we will reinforce and expand our high-margin product lineup, ancillary sales, premium services and other B2B services. We'll also boost customer satisfaction to promote repurchase and also using user referrals and recommendations, promote further inflow of new users as well. So on balance, through these strategies, even if the online mix remains the same at current levels, we expect to be able to improve overall margins and maintain stable profitability.

The third question has to do with marketing. It seems that in the second quarter, your marketing expense has declined significantly year-on-year. And you mentioned that it was due to a change in your marketing strategy. So could you provide further details? While new competitors are expanding their media exposure, it seems that K Car's ATL marketing has gone down. So I'm interested in what kind of marketing strategy in particular is actually helping your performance.

Yes. This is Chun Hoil, Head of Marketing. So let me explain our new marketing strategy in a bit more detail. Amid the recent changes to the marketing environment, we also have revamped our marketing strategy at K Car. So we want to move beyond the conventional ATL-type marketing to find a more effective and efficient means of marketing and ultimately have decided to reinforce our digital marketing initiatives in the following 4 ways. First of all, we are doing customer data analytics to further calibrate our targeted marketing, providing custom advertisements that are more suited to specific target segments, for example. This has helped us boost the efficiency of marketing relative to cost. Second, we have been using social media channels like Facebook, Instagram and YouTube to boost our brand awareness and also increase engagement with our customers. Third, we have been promoting the inflow of new user traffic and effective or serviceable users, providing informative content, for example, also to boost customer trust and to boost inflows as well. Fourth, we've been analyzing the customer purchase journey to provide personalized marketing messages and promotions. So through these types of strategies, we have been more efficient in terms of our marketing spend while also achieving performance improvement as well. So we will continue to work flexibly in line with the changing market environment to achieve sustained growth.

Yes. We'll move on to the next question that was sent in real time through text. Recently, as new market participants join the used vehicle market, do you think that this will have a positive impact in promoting growth in what has been a stagnant industry? Or as the number of participants increases, will it be just splitting up the TAM amongst more players? So what is your company's strategy in terms of promoting growth in the used car market?

Yes. This is Jung Jin-Moon, Head of Business Planning. So as there are more players on -- coming into this space, it may lead to intense -- more intense competition. But at the same time, I think it can have the effect of invigorating the used car industry as a whole. So as more diverse players engage in marketing activities and adopt innovative services, this will help boost our overall awareness and perception of the used car market and draw greater consumer interest. The used car market is a very fragmented market, where the second ranking players actually have less than 1% market share. So as more players come in, there could be some effect where the existing players are dividing up the TAM. But I think a bigger consequence will be consolidation of the fragmented market led by a handful of larger players who will likely see an increase in market share. So in terms of our strategy to grow TAM, so we are looking at execution of the following 3 strategies. First of all, we're exploring development of new B2B-type services that will target new corporate-type market participants who are now coming in to this space. And we are working on new contracts. We're executing new contracts with some of the new customers as we speak. This will help create new sources of revenue in the used car market while helping satisfy diverse needs among different business customers. Second, we are collaborating with AI, big tech companies to build recommendation systems enabled by big data and big data analytics so that we can provide more accurate and reliable information to our customers to further boost conversion rates. Third, we have been procuring vehicles that are in line with customer preference and requirements by forecasting future used car market trends. For example, we're seeing rising demand for eco-friendly vehicles recently. So we have increased our acquisition of hybrid vehicles and are working to build up an advanced distribution system that is specific to these environmentally friendly cars. So this will help draw more new users into the market and help in terms of building scale. So in conclusion, while the entry of new market players will have the effect of intensifying competition on the one hand, at the same time, it can promote further growth of the broad market. So we will use this change as an opportunity to explore additional business opportunities for ourselves to grow TAM through collaborative efforts while boosting our own competitive strength. So we will continue to engage in ongoing innovation, provide customer services to further solidify our position as a market leader.

Yes. Moving on to the fifth question regarding the dividend per share. So already in the first quarter, you increased DPS, but then you're increasing it again in the second quarter. So is there any particular reason why you are increasing DPS across 2 quarters? And is there a chance for additional increase throughout the remainder of this year?

Yes. This is the CFO, Bae Moo-Geun. Let me answer your question. So we increased the DPS to reflect our improved financial performance and outlook and also to return greater profits to our shareholders. The reason for an additional increase in the second quarter is because we have acquired the capacity to pay out additional dividends while maintaining stable cash flow. So this decision actually was based on our financial soundness. So the increase in DPS is a strategic decision that is intended to enhance shareholder value and return while also reflecting our improved financial performance. In terms of future dividend policy, we will continue to be committed to providing optimal value to our shareholders in view of our financial situation, of course. In terms of likelihood of additional DPS increase, this will be determined fluidly depending on our financial results and also market conditions.

And now we're moving on to #6, which is the last of our -- the questions that we have received in advance. [Operator Instructions] For #6, following on the first quarter, second quarter also saw an increase in sales on a year-on-year basis. And you mentioned how this may be due to the structural change that is ongoing in the used car market. Do you think that this kind of change will also lead to continued improved performance in the second half?

Yes. This is the CEO, Jung In-guk. We are seeing a significant change across the used car industry, and we see continued economic uncertainty, all the while our market dominance in the used car space actually is becoming even stronger. In the first half, we secured a very competitive lineup of used car vehicles across different pricing points, achieving a balance in terms of the demand and profitability profile. And we achieved a growth in terms of both ASP and the number of units sold, recording record high sales and also the highest market share to date. And we are seeing improved perception across consumers regarding used car as a market. In particular, reliable brands at K Car, as we provide quality guarantees and transparency of trading, this actually has been accelerating further consolidation within the used car market. Also, there is now a rising demand for eco-friendly cars like hybrids as the eco-friendly used car market also is growing at the same time. We have been reflecting these types of recent trends to provide more eco-friendly car options to absorb this high-growth segment. Also, there are great expectations of rate cuts, which is leading to improved consumer sentiment as well. We think that the recovery in the used car market will gain more full-fledged momentum throughout the remainder of the year. The structural change that is currently ongoing that I've addressed so far actually is continuing to have a positive impact in our sales growth. And we believe very highly likely that it will lead to continued improvement in performance in the second half as well. We are again focusing on reflecting the major trends, namely the OMO platform, consumer trust and the eco-friendly cars as we continue to seek and drive towards sustainable growth. We will deploy different strategies in the second half of the year to improve our performance even further. And throughout the second half, we will take great care with each and every vehicle so that every customer can have a very satisfactory transaction as we do our best to achieve the double-digit operating profit growth in line with our guidance that we shared at the start of this year.

With this, we will conclude today's conference call. Thank you to all of our analysts and investors who are joining us today. Please contact K Car's IR team with any additional questions. We'll see you at the next quarter. [Statements in English on this transcript were spoken by an interpreter present on the live call.]