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 Third Quarter 2024 Earnings Conference Call for K Car. 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 a Q&A, where we will also 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 on the IR section of our corporate website, kcar.irpage.co.kr as well as on the Korean Exchange 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 due to the macro and market environment. Now our CEO, Mr. Jung In-guk, will start with an overview of business results.

[Interpreted] Yes. Good morning, good evening. Thank you for joining K Car's conference call today. In the third quarter 2024, we continued strong top line growth, reporting record high retail ASP on our CPO vehicles and recording solid growth in number of units sold. We believe this outperformance is a result of our quick response to the structural transition that is currently unfolding in the used car industry and represents a sustainable achievement rather than a mere one-off. The used car market saw a recovery in demand this year amid expectations of a rate cut cycle with the number of registered vehicles in the B2C market rising Y-o-Y from the start of this year up to the third quarter. Although the overall B2C market grew by less than 1%, K Car sales increased 7.4% during the same period as we led market growth. Consumers now have high expectations toward used car vehicles following the entry of large corporates in this space, which has helped boost our market share in the B2C market to 12.3%. Going forward, we expect the CPO market to continue to advance and grow led by corporate or institutionalized players with K Car's market dominance expected to strengthen further. Yes. Let me now take you through third quarter sales performance for our used vehicles. In Q3, total number of units sold recorded 38,674, up 8.2% Y-o-Y despite the reduced number of business days. This was thanks to our targeted procurement of high-demand vehicles as we realigned our portfolio by price range and fuel type based on AI forecasting data. Third quarter days inventory outstanding was 34 days with inventory turnover of 10.6x. This is thanks to our industry-leading inventory management, which is what allows us to make efficient use of our working capital in both sourcing and sales while sustaining stable growth with minimal sensitivity to the changing interest rate environment. Number of retail units sold recorded 28,731, up 4.6% Y-o-Y. Online retail sales increased by 7.6%, offline sales by 0.9%. We now have a virtuous cycle in place where an increase in retail sales leads to an increase in inventory sourcing, which in turn supports solid performance in our auction business. The total number of vehicles sold through auction were 13,988. This includes 9,943 units of our own inventory, which increased by 20.3% Y-o-Y and 4,045 in consignment vehicles sold. Moving on to unit pricing on our vehicles. Third quarter retail ASP was KRW 17.23 million, up slightly Q-on-Q and 3.5% Y-o-Y versus KRW 16.65 million that we recorded in the third quarter of last year. As installment financing rates on used vehicles stabilized, we increased our sourcing of higher-priced vehicles, which led to a continued rise in average pricing for 6 consecutive quarters. Looking ahead, we expect this uptrend in ASP to continue amid price alignment between new and used vehicles and amid improved consumer sentiment from ease concerns over interest rates. Please refer to Pages 8 through 10 for a breakdown of third quarter sales and ASP by channel, which are online, offline and wholesale. Moving on to our GPU and a status update on sourcing. Please refer to Page 5 in your slides. In Q3, retail GPU was KRW 1.55 million, down by 3.9% and 2.6%, respectively, on a Y-o-Y and Q-on-Q basis, which is a temporary decrease amid rapid changes in customer preferences. After the EV fire accident, which occurred in an apartment's underground parking lot in early August, EV sales, which has been growing quickly, recorded a steep decline, whereas demand for hybrid vehicles increased by much faster than expected. Once we reduced our existing EV inventory, we increased acquisition of hybrids as a replacement for EVs. Also in response to polarizing consumer preference between low-end versus high-end vehicles, we have worked on extending the pricing range of our inventory portfolio over July and August and have started to see a recovery in GPU starting September, which we are still maintaining into the fourth quarter. Our sourcing channel mix is largely unchanged compared to our mix before the OEMs moved into the market. Leveraging AI recommendation algorithms, we have been actively purchasing vehicles that are seeing strong demand across all channels, maintaining an overwhelming leadership within the procurement market as well. With just 1 quarter left before the end of 2024, we continue to be on track to achieve the target set out at the beginning of the year. First, we have grown in both P&Q, while second, delivering 12.2% double-digit growth Y-o-Y in our YTD operating profit. Third, regarding our commitment to drive growth in high-margin sales and cost efficiency gains, YTD wholesale channel sales have also grown by 21.1% Y-o-Y, while YTD ancillary sales, including K Car warranty, also increased by 13.7% Y-o-Y. On the cost side, we were able to boost number of units sold while achieving Y-o-Y cost savings through more efficient operations of our trade centers. Even amid expectations of rate cuts, concerns of an economic recession still remain. But if anything, these concerns have led to an increase in demand across all -- across the global used car markets, including the U.S., with listed global players in the used car market starting to see a re-rating of their share values. Even when compared to the global players, however, K Car is at an advantage in terms of our unmatched market dominance and our ability to defend against economic cycles. If on top of all of this, we are included in the corporate value of index and benefit from policy initiatives, that would be an added boost to achieving further enhancement of our corporate value in the future. Next, our CFO, will now take us through the financial results.

[Interpreted] Before presenting on our financials, allow me to comment on our quarterly dividends first. Earlier this morning, our Board of Directors resolved upon a quarterly dividend of KRW 300 per common share for the third quarter to be distributed on November 26. In the third quarter, revenue totaled KRW 579.7 billion, up 9.7% year-on-year. To break down the drivers of growth into P&Q, first, our total number of units sold increased 8.2% Y-o-Y, while retail ASP increased 3.5% Y-o-Y. Direct auction ASP, excluding consignment sales, recorded KRW 4.58 million, up 2.9% Y-o-Y. By channel, our e-commerce sales increased 12.8% Y-o-Y to KRW 283.1 billion from a 7.6% increase in the number of units sold and a 4.9% increase in ASP. Offline sales increased 3.2% Y-o-Y to KRW 229.4 billion, while ASP and the number of units sold increased by 0.9 -- excuse me, while number of units sold increased by 0.9% and ASP by 2.2% Y-o-Y. Auction revenue increased 22.9% Y-o-Y to KRW 48.2 billion, driven mostly by a 20.3% Y-o-Y increase in the number of owned vehicles sold through bidding. Rental business revenue increased 18% Y-o-Y to KRW 16.7 billion. Please refer to Pages 8 through 10 for a breakdown of sales and ASP by channel, retail and wholesale. Gross profit recorded KRW 58.1 billion, up 1.7% Y-o-Y in the third quarter. Gross profit margin was 10%, down 0.8 percentage points Y-o-Y. As our CEO explained earlier, this is a temporary drop following our portfolio adjustment after the underground EV fire incident. CPO has since come back up starting September with the recovery expected to continue in the fourth quarter as well. Third quarter SG&A was KRW 41 billion, accounting for 7.1% of revenue, down 0.2 percentage points Y-o-Y, thanks to operating leverage from top line growth. Advertising spend increased 26.6% Y-o-Y from the base effect, reflecting changes in our marketing strategy. Up to last year, ATL marketing, including TV ad campaigns were concentrated in the second quarter, whereas this year, 90% of our marketing budget was allocated toward digital advertising and executed relatively evenly throughout the year. This year's full year marketing budget was set similar to last year level. For reference, full year marketing spend in 2023 was KRW 9.5 billion. Third quarter operating profit was KRW 17.1 billion, down 7.1% Y-o-Y. Our OP margin was 3%, down 0.5 percentage points Y-o-Y. We expect to see improvements to our profitability as unit margins normalize in the fourth quarter as we expand sales. Third quarter CapEx was KRW 1.5 billion, which accounted for 0.3% of revenue, mostly used for relocation of trade centers, photo zone enhancements 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. We will now conclude our presentation and move on to the Q&A session.

[Interpreted] [Operator Instructions] While we wait for incoming questions, we will first cover questions that we have received in real time through text messages. The first question is that this year, you have shown growth -- even growth across all quarters. Can we look forward to top line and bottom line growth in the fourth quarter as well? And earlier this year, you mentioned your double-digit growth target for operating profit. So do you see it as being achievable?

[Interpreted] Yes, this is the CFO -- CEO, excuse me, Jung In-guk. So as you mentioned in your question, yes, this year, we have seen growth in terms of both sales volume and ASP across all quarters as we continue top line expansion and maintain stable profit. There are several major changes going on within the used car market today. But if anything, these structural changes have actually had a positive effect on boosting K Car sales. We think that in the mid- to long term, these trends are likely to contribute to improved performance for K Car. In the fourth quarter, we expect a major -- a significant Y-o-Y increase in the number of units sold, and we expect to continue to maintain top line and bottom line growth. Also, not only are we in line to achieve the double-digit operating profit growth target that we mentioned at the start of the year, but we believe it's likely that we will see double-digit revenue growth as well. So we'll continue to do our best to sell all of our vehicles and to deliver on the targets that we shared with you. Yes.

[Interpreted] Moving on to the second question, which is about home service or home procurement where the percentage is actually being reduced. So from a self-sufficiency point of view, do you have any measures in mind to boost that portion of self-sourcing?

[Interpreted] Yes. I am Head of Marketing, Chun Hoil. Let me take this question. So the reason why the proportion of home service sourcing has decreased actually is a result of our proactive sourcing of high-demand vehicles across all of our channels, which happened in earnest after we introduced the AI recommendation algorithm. So as a result, we have diversified our sources of inventory acquisition, but still a significant part of sourcing in terms of retail and wholesale channels are still done through the home service channel, and we consider it to still be a very key part of our competitiveness. Because K Car owns both retail and wholesale channels, it gives us a very good position to be able to source a variety of different vehicles irregardless of the condition of the car. And our 47 trade centers nationwide are serving as sourcing hubs, helping minimize car transportation costs and also giving us quick turnaround in terms of processing time. So in order to boost the portion of our own self-sourcing, we will be allocating more resources to home services while expanding marketing. But at present, rather than focusing on any one specific channel, we believe that efficient operations across all of the channels, focusing procurement on high-demand vehicles will be very key in achieving maximum performance. So we will continue to work to deliver differentiated experiences to our users and promote demand while securing adequate supply to meet that demand. We believe that home service will continue to play a key role and contribute to K Car's growth.

[Interpreted] And moving on to the third question. So I will just combine existing or questions that we've received in advance together with a question that was submitted just now online. So in the third quarter, retail GPU actually has decreased. What are the main drivers of that decline? And if GPU does improve in the future, then perhaps your gross profit margins, which are currently in the 10% range are likely to improve as well. So what kind of plans do you have in mind for improvement?

[Interpreted] Yes, this is the CFO, Bae Moo-Geun. If you look at the reason for the decline in retail GPU in the third quarter, what we believe it to be a temporary response that reflects the very rapid shift in customer preferences that we have observed. So EV vehicles, which has actually been recording very rapid sales saw a very sharp drop in demand after the incident in August, whereas demand for hybrid vehicles actually increased faster than we had expected. And so as a consequence, we reduced our existing EV inventory while replacing them with hybrid vehicle supply. And it is this transition that partially impacted our margins at that time. Also, we're seeing polarization between customers who prefer high-end vehicles and those who prefer low-end vehicles. And so we have been working between July through August to extend the range -- the pricing range of our inventory portfolio. And during the course of this transition, there may have been also a partial impact to our GPU. However, we have since started to see recovery in GPU starting September, and we expect to be able to maintain recovery levels in the fourth quarter as well. So we have been also improving per person productivity through online sales and non-face-to-face procurement, applying a flexible purchasing or procurement pricing policy as well to further boost the profitability, not only of our own sourcing channel, but external channels as well as we work to maintain the stable recovery in GPU.

[Interpreted] This is the fourth question. Can you provide a current status update on the sale of EVs and hybrid vehicles at K Car? And amid growing demand for eco-friendly vehicles in the market, what is your response strategy?

[Interpreted] Yes, this is the Head of Planning, Jung Jin-Moon. On a YTD basis up to September of this year, for the broad market, the total number of eco-friendly cars sold on the used car market was 91,749 units. So this accounts for 6.1% of all registered used vehicles and is an increase by 1.5 percentage points compared to the prior year. During the same period for K Car, eco-friendly vehicles accounted for 7.9% of our retail vehicles sold, which is higher versus the broad market average. However, the percentage of pure EV vehicles is only 1.1%, so slightly below the market average of 1.7%. For us, we are maintaining a flexible eco-friendly car strategy in terms of both sourcing and sales to be aligned with changing conditions to consumer demand. We're also working to preemptively establish a distribution system for eco-friendly vehicles. And going forward, we will work to respond to this space by offering a product portfolio that is optimized in line with changing customer demand and changing market conditions.

[Interpreted] Moving on to the fifth question. So I would like to ask about the current status of K Car borrowings and the financial impact of recent movements in interest rates. And any -- what are your plans in the case of additional funding needs?

[Interpreted] Yes. This is the CFO, Bae Moo-Geun. As of the end of the third quarter, total borrowings total -- excuse me, borrowings totaled KRW 179.6 billion, which is a reduction of KRW 4.4 billion compared to KRW 184 billion in borrowings in the second quarter. Out of the total, KRW 100 billion are in the form of loans at a fixed rate of 3.98% and the remainder are also made up of other short-term loans and facility loans from the banking sector, which are all being managed stably. For us, any impact on financials from changes to the interest rates actually is relatively limited. We are managing inventory days at 30 days, and we're using our own working capital to fund procurement of inventory. So this allows to minimize any increase in financing costs from higher interest rates. In the event that we may require further fundraising, we will look to borrow from major lenders in the banking sector through cash with no plans at present to issue bonds or raise mezzanine financing. So we will continue to enforce stable treasury management to maintain a solid financial base and respond flexibly to market changes.

[Interpreted] Yes. Moving on to the sixth question. So it's now been about a year since the OEM makers have moved into the CPO market. So what kind of changes have you felt over the past year? This is a question to the CEO. And once the cap on the number of units that can be sold by the OEMs are lifted next year, what will the impact be on K Car?

[Interpreted] yes, this is the CEO. Actually, with the entry of the OEM players into the used car market, it has had the effect of raising consumer expectations and also enhancing their confidence in the market. And it has also contributed to improved perceptions overall for the used car market and to the qualitative growth of this space. Basically, between OEM makers and specialty companies like K Car, rather than being in competition against each other, I think we have a more mutually complementary relationship. Actually, after the entry by the OEM makers, our units sold or sales volume actually increased by 7.4%, which is above the broad market growth. So this, I suppose, can be interpreted that the entry of the OEM players actually helped improve market perception and helped highlight our competitive strength and make them stand out all the more. Next year, even once the sales volume limit is lifted, we do not anticipate any major change for the time being. Given the nature of the used car market, different capabilities are very key. We have many long years of experience in terms of used car appraisal, sales and sourcing. And we are the only unique player in Korea to own both nationwide on and offline sales and procurement channels. We hold the widest range of all model types across all pricing points as well as our 2 auction homes as well. And also considering that the target combined market share of all institutionalized players, including K Car, will be about 30% for the next 3, 5 years. I believe that there is sufficient space within this market for all of the players to grow together.

[Interpreted] And the next question is for the CEO. What is your outlook for the overall used car market in the fourth quarter?

[Interpreted] Yes. So we are now in the fourth quarter, and we continue to see upside growth across our B2C market and various signs of positive development as well. So as I mentioned, the entry by the institutionalized players into this space has promoted a good competition in many ways, which ultimately will translate into added benefits for the consumer. To run the used car business well, it requires many years of long experience and capabilities, particularly in terms of inventory management are key. We have unique strengths in terms of our on and offline channels. We have our nationwide network, wide portfolio of different model mix across different price ranges. And plus, we also have our 2 auction centers, which again represents a major competitive strength. So we believe that leveraging all of these strengths, we should be able to deliver a strong performance, not only in the fourth quarter, but into next year and throughout next year as well.

[Interpreted] Yes. With that, we will conclude our earnings conference call for the third quarter for K Car. I'd like to thank all of our participants for joining our call today. Any additional questions, please contact us at the IR team, and we will look forward to seeing you at the next quarter. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]