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

[Interpreted] Hello. This is Kwon Eun-Hee, Head of IR [Audio Gap] for joining us at the fourth quarter and full year 2024 earnings conference for K Car. 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 session with Mr. Chun Ho-Il, 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 in both Korean and English 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 projections may differ materially from actual results, depending on changes due to the macro and market environment. Our CEO, Mr. Jung In-Guk will start with an overview of business results.

[Interpreted] Yes, this is Jung In-Guk, the CEO of K Car. Thank you very much for joining us at our conference call today. 2024 faced a complexity of challenges throughout the year, including political issues, both domestic and global. FX rate volatility, still high interest rates and a contraction in consumer sentiment, which combined resulted in very difficult business conditions. Faced with downside pressure, the Korean economy continues to explore means of gradual recovery but as financial market volatility and concerns of a global recession persists, the past year required thoughtful and cautious decision-making across our business. Despite these circumstances, we remain firmly committed to our core value of bringing innovation to the used car market based on consumer trust. As a result, we achieved meaningful outcomes in both top and bottom line growth, recording year-on-year sales growth of 12.4% and operating profit growth of 15.4% Y-o-Y. In terms of our financial structure, we maintained a robust equity ratio of 43%, once again demonstrating solid underlying fundamentals and ROE of 19% as we boosted the efficiency of our investments. Our market share increased to 12.3% as we reaffirmed our solid leadership in the used car industry. We also won the Korean First Brand award for the sixth year in a row in the used car distribution category, further solidifying our brand value and competitiveness. In terms of overall used car market conditions in the fourth quarter, despite expectations of rate cuts, concerns persisted over financial market volatility and global economic slowdown. And the number of registered vehicles in the broad B2C market grew by just 1% year-on-year. During the same period, K Car, however, achieved 9.4% year-on-year sales growth as we drove demand in the industry. Recently, as large corporates moved into the used car retail market at full scale, there's been accelerated shift to a [ Peach ] market with rising consumer expectations. Amid these market trends by leveraging our unique strength, including the accuracy of our AI-enabled demand forecasting and forecasting data, price competitiveness and product diversity we were able to grow our B2C market share to 12.3%, reinforcing our dominant #1 position in the industry. We expect the CPO used car market led by institutionalized providers to continue to advance gradually going forward and the same for K Car's market dominance, which we also expect to grow stronger on a continuous basis. In Q4, the total number of units sold was 36,401 units with inventory turnover of 10.5x and days inventory outstanding of 35 days. We were able to achieve stable growth despite changing interest rate conditions, thanks in large part to our best-in-class inventory management system, which played a very important role. We have been improving the efficiency of our working capital to turn inventory faster which has helped minimize the burden of still high interest rates. Number of retail units sold was 26,076, up 5.8% year-on-year. We saw even growth across all channels with online retail sales up 5% and off-line sales, 6.7% Y-o-Y. We have built a virtuous cycle where an increase in retail sales in turn leads to growth in our wholesale auction business. The total number of owned vehicles sold or auctioned were 10,325, surpassing the 10,000 mark for the first time on a quarterly basis. When including 4,589 consignment inventory, the total is 14,914, representing a quarterly record high in auction sales. Now on to our ASP. As of the fourth quarter, overall ASP for all vehicles recorded KRW 13.51 million. Retail ASP was KRW 16.92 million, down 0.6% and 1.8% on a Y-o-Y and Q-o-Q basis. Up to the third quarter, ASP did continue to rise as installment financing rates held relatively stable. However, as political and economic uncertainties, both internal and external reescalated in the fourth quarter, we procured inventory to match the dampened consumer sentiment, which led to a slight drop in average unit pricing. On the other hand, wholesale ASP was KRW 4.89 million, up 0.3% and 6.8% on a Y-o-Y and Q-o-Q basis. As used car exports to emerging markets continued strong growth, we saw increasing demand for auction vehicles, which led to a rise in ASP. Looking ahead to 2025, we intend to adjust ASP strategically based on market conditions, consumer sentiment and consumption trends with the goal of maximizing sales volume. Moving on to Page 5 to our GPU and a status update on sourcing. In Q4, retail GPU was KRW 1.53 million, up 7.8% Y-o-Y, maintaining robust trends. Retail GPU was down 1.3% on a Q-on-Q basis, however, as we partially adjusted pricing in response to economic conditions. Looking at our sourcing channel mix, the share of sourcing from OEM dealerships has increased to 43% despite OEMs [ advance ] into the market, while purchasing from our own customer base decreased to 25%. This is due to stronger tendency on our side to actively seek out and purchase vehicles that are in high demand, irrespective of the sourcing channels amid a rapid overhaul of the market. Our AI-enabled pricing management system allows us to identify high-demand vehicles quickly and with precision, boosting our sourcing competitiveness. The increase in B2B sourcing is also quite encouraging as it is a reflection of our efforts to boost sourcing productivity by signing sourcing agreements with multiple financial firms that handle used cars to do large-scale sourcing. Lastly, let me briefly cover our outlook and plans for 2025. Demand for used vehicles, which has been delayed amid interest rate hikes and economic uncertainties, looks likely to see a gradual recovery. As the price competitiveness of used vehicles versus new cars is even more highlighted, this will only accelerate the rise in demand. To respond to the changing market, we will advance the efficiency of our integrated on and off-line operations while also focusing on high margining businesses like auctions to further expand market share and achieve double-digit growth in operating profit, which is our guidance for 2025. In the future, guided by a sense of responsibility as a leader of the used car industry, we will continue to build a platform that is trusted and sought out by consumers by innovating our services and advancing our technologies. Our innovative activities will allow us to achieve stable financial performance while boosting corporate value as we fulfill our due responsibility as the used car leader representing Korea. This concludes my presentation on 2024 fourth quarter and full year performance. I will now pass it over to our CFO for financial results.

[Interpreted] Yes, this is the CFO, Bae, Moo-Geun. Before presenting on our financials, allow me to comment on our dividends first. Earlier this morning, our Board of Directors resolved upon a fourth quarter quarterly dividend of KRW 300 per common share to be distributed in April, subject to approval at the General Meeting of Shareholders, which is scheduled for March 26. Yes. Next, I will move on to our financial results. Q4 revenue totaled KRW 528.4 billion, up 6.6% Y-o-Y. Total number of units sold increased 9.4% Y-o-Y, contributing to top line growth. By channel, our e-commerce sales increased 4.4% Y-o-Y to KRW 252.6 billion. Number of units sold increased by 5%, while ASP decreased by 0.8%. Offline sales increased 6.5% Y-o-Y to KRW 204.8 billion. Number of units sold increased by 6.7%. ASP was down 0.4% Y-o-Y. Auction revenue increased by 20% Y-o-Y to KRW 53.5 billion, setting an all-time high, largely due to a substantial increase in the number of owned vehicles sold through successful bidding. Rental car revenue increased 1.8% Y-o-Y to KRW 15.3 billion. Please refer to Pages 8 through 10 for a breakdown of sales and ASP by channel. Yes. Gross profit was KRW 55.8 billion, up 12.3% Y-o-Y in the fourth quarter. Gross margin was 10.6%, up 0.6 percentage points Y-o-Y and Q-on-Q. Although we saw a slight drop in margins in the third quarter as we adjusted our product portfolio in the wake of the underground EV fire incident, we have since seen a stable recovery from September onwards after winding down our investment or our inventory adjustments. In Q4, in the prior period, there was a temporary deferral of demand due to OEMs entry into the used car market. We, meanwhile, responded quickly and flexibly to these market conditions launching a bold discount promotion to maintain inventory turnover. Thanks to these measures, we were able to clear inventory once demand started to stabilize and quickly recover our margins. This experience has strengthened our inventory management and profit-centered operational capabilities, contributing positively to an overall improvement in our margin profile. In Q4, SG&A was KRW 40.5 billion, which was 7.7% of revenue, up 0.1 percentage points year-on-year. Seen on a full year basis, however, SG&A as a percentage of sales was actually down by 0.5 percentage points Y-o-Y as we achieved operating leverage from top line growth. While fourth quarter advertising spend increased to 38.5% Y-o-Y, the increase is due to the low comparison base from the previous year, reflecting a change in our quarterly marketing spending pattern. Starting in 2024, we have been executing mostly digital marketing spend, spread out across the year instead of concentrating ATL and other mass media marketing such as TV ad campaigns in the second quarter, which was our past practice. Our full year marketing budget for 2024 totaled KRW 9.1 billion. Fourth quarter operating profit was KRW 15.3 billion, up 28.2% Y-o-Y. OP margin was 2.9%, up 0.5 percentage points Y-o-Y. For full year 2024, we reported operating profit of KRW 68.1 billion, up 15.4% Y-o-Y and a slightly improved operating margin of 3%. As our CEO mentioned earlier, our goal is to achieve double-digit growth in operating profit this year through more efficient management of all sales and sourcing channels with greater or active cooperation with external networks and a focus on high-margining businesses, such as our wholesale auction. Finally, please refer to Page 14 in your slides for our CapEx trends. In Q4, CapEx was KRW 1.5 billion, which is roughly 0.3% of revenue, both invested towards software upgrades, relocation of trade centers and facility enhancements. In 2025, to respond to rising demand, we are planning to expand capacity of our auction centers while also opening new trade centers. We do not expect any major increase in our CapEx, however, expect to maintain CapEx as a share of revenue similar to the level of 2024. The plan is to proactively expand infrastructure while continuing to achieve financial stability on a sustained basis. 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 sheets. I'd like to express my sincere appreciation to all of our investors and shareholders for your continued trust and support for K Car. And with that, we will conclude our earnings presentation.

[Interpreted] Yes. With that, we will now conclude the presentation and move on to the Q&A session. [Operator Instructions] So while we ask -- or while we wait for incoming questions, we will first cover questions that were provided to us in advance as well as questions sent in, in real time through text messages. The first question is, could you explain more on your top line growth plans for this year and elaborate on what specifically the drivers will be in terms of this growth. And could you also specify in terms of your strategy in pricing, volume, market and other strategies specific to K Car.

[Interpreted] Yes. This is Jung In-Guk, the CEO. In terms of our top line growth plan for this year, we intend to focus on expanding sales and securing continued market share growth through our customized sourcing strategy that is aligned to changing demand. That will be our focus. Through timing procurement of suitable inventory, we plan on playing a central role in terms of market consolidation. On the pricing side, we continue to see constrained consumer sentiment amid economic slowdown. So we see limited upside in terms of increase to pricing in the short term. So rather than looking at price increases, our strategy is to strengthen our operational efficiency and maintain profitability by securing vehicles at reasonable price points. On the volume side, we're expecting an increase in overall transaction volume in the market as the delayed demand recovers and as the price competitiveness of used vehicles become even more visible and highlighted. Also, we're seeing an increase in customers in the market for used car -- used vehicles amid continued economic uncertainty. And so we think that this will be accompanied by an increase in sales volume for K Car as well. On the market side, amid a gradual reshaping of the structure of the used car market, we believe that K Car will continue to play a very central role. We will continue to strengthen our brand competitiveness, which is backed by consumer trust by leveraging our AI-enabled demand forecasting, our customized inventory sourcing strategy to respond quickly to changing market dynamics. Also, in terms of unique strategy specific to K Car, not only will we be strengthening the existing retail sales channel, but we also want to expand our auction infrastructure as well to see growth in the B2B space. So through this or by leveraging diverse sales channels, we hope to grow faster than the broad market to grow our top line.

[Interpreted] The next question was sent in real time through text. You did mention that there were partial adjustments done or adjustments made to your ASP, which led to a Q-on-Q decrease in terms of retail GPU, profit per unit. So could you provide further details on that and also the overall directionality for 2025?

So in the fourth quarter of 2024, we reported retail GPU of KRW 1.53 million. This is an increase -- a Y-o-Y increase of KRW 110,000. But on a Q-on-Q basis, there was a slight drop of KRW 20,000. The reason for the Q-on-Q decrease in retail GPU was mostly due a decrease in the retail ASP. In terms of per unit margins, however, it remained consistent with the prior quarter levels at 8.7%. On a full year basis, for 2024, the average GPU was KRW 1.56 million, which is a 3.6% increase Y-o-Y, which actually translates into an increase of KRW 54,000. This is a result of advancement of our sourcing and pricing strategy. Going forward, we will expand our non-face-to-face sourcing to boost per person productivity further. And by leveraging our data-enabled pricing analysis and AI-enabled sourcing system further, we'll continue to improve our profitability and focus on stable management of our retail GPU.

Yes. Moving on to the next question. The recent economic slowdown in Korea, how has it been impacting the used vehicle market and also K Car's business. And are there any changes to your sourcing mix in terms of vehicle types?

This is Jung In-Guk. Amid protracted slowdown in the domestic economy, we are clearly seeing a contraction in overall consumer sentiment. However, even despite these circumstances, we are seeing growing preference among the consumers, growing interest and demand for more -- for the used cars, which are more competitive in terms of pricing. And so we're seeing growing preference among users for used vehicles because they can purchase high-quality cars at more reasonable prices compared to new vehicles. In terms of the car type mix, we're also seeing some change as well. Growing demand and preference for compact vehicles with greater fuel efficiency that require lower maintenance costs, for example, whereas lower demand for high-end, larger premium vehicles. For K Car, we are actively using our AI-enabled algorithms to do real-time analysis of changing consumer demand patterns and we're quickly securing vehicles that are aligned to those changing demands. We're actually selling a diversity -- a diverse lineup of models in varying conditions, providing the vehicles that are more suitable to changing demand, the fastest in the industry with an inventory turn of 1 month on average. And so even despite a slowdown in economic conditions, we expect our market dominance to continue to expand.

[Interpreted] Yes, moving on to the next question, which we received in advance. In order to achieve your guidance of double-digit operating profit growth in 2025, what will be the core most drivers in achieving that goal? And what is your focus this year in terms of cost savings initiatives?

[Interpreted] Yes, this is Bae Moo-Geun, the CFO. One of the key drivers that will help us achieve double-digit operating profit growth in 2024 will be growth in high-margin sales. So 1 key part of those increased sales will come from our auction business. Already in the fourth quarter in terms of number of units sold, we've already surpassed the 10,000 mark on a quarterly basis. When combined with consigned vehicles, the total is almost 15,000 units sold. And so we have been seeing a very steep growth momentum. Given the large-scale nature of auction transactions, it is easier to achieve economy of scale, and we can gain a stable bidding commissions and sales margins from the auction business. We expect it to contribute significantly to overall improvement in our operating profit margin. We will continue to expand the auction business by expanding the auction centers. and by achieving operational efficiency, which will help us upgrade our earnings structure to the next level. We're also examining different -- other different options in terms of high-margin business and services, and we hope to be able to introduce some of those new initiatives to you in the near term. In terms of sales -- or excuse me, as our top line grows, we expect expanded operating leverage to also contribute to improve margins. As the market recovery is coupled with our company's competitiveness leading to an increase in number of units sold, this will allow us to see a natural increase in OP margins without any major increase to our fixed cost including SG&A. So thanks to this kind of virtuous cycle of increased sales, leading to greater operating leverage, in turn, helping improve our operating margins. We believe that we are on good track to achieve double-digit growth in operating profits this year. For K Car, cost efficiency or cost efficiency gains actually continue to be an ongoing priority. We are focusing on achieving greater cost savings by improving the operational efficiency of our trade centers and also by improving per person productivity. First, in terms of trade center operations, we have been reallocating resources from trade centers, which have been recording low efficiency relative to sales as we optimize our trade center operations. Meanwhile, we're reallocating the resources to higher demand regions based on data insights to maximize operational efficiency and reduce unnecessary fixed costs. In terms of labor, through -- by automating work processes and accelerating the digital transition, we have already been seeing productivity gains. By actively leveraging our AI and IT systems, we have been reducing repetitive workloads so that our employees can work in an environment where they can focus on more higher value-added work. So combined, these efforts will allow us to reduce the increase in cost relative to the pace of sales growth and overall lead to improvement in our profitability.

[Interpreted] Yes, moving on to the next question, which was sent in through text. You did explain how in the fourth quarter, the retail ASP saw a slight decline. So there is the possibility that consumer sentiment may continue to be constrained this year as well. So what are your plans in terms of your ASP strategy?

[Interpreted] This is Jung Jin-Moon, Head of Planning. So given the contraction in overall consumer sentiment, it is quite challenging to either maintain or increase ASP. However, we are looking to overcome the challenging situation based on our systematic analysis of the market, also through improved inventory management. Every week, we are carrying out ongoing market monitoring and AI-driven data analysis as part of a comprehensive review of various macro indicators, including interest rates, FX rates, other economic indicators and online consumer trends. So this allows us to assess what car types at what price range are turning over the fastest. And we are able to acquire this information in real time, which helps us calculate sourcing and sales price more flexibly. We will maintain this basic stance in 2025 as well, strategically adjusting pricing when the market is doing poorly and maximize sales volume while focusing on procuring as many high-demand vehicles as possible, which are competitive in order to maintain our profitability. We will also focus on competitive price setting for SUVs or high-end sedans, which are seeing steady demand to acquire appropriate margins. So basically, to recap our ASP strategy for 2025, the focus will be to achieve both profitability and expanded sales. So in other words, to catch both rabbits with one stone, we will accurately assess the consumer need for all vehicles sold both [ offline ] and online and provide customized inventory based on optimized pricing so that we can achieve consistent growth in spite of ongoing market volatility.

[Interpreted] Yes, we'll move on to the next question. In the fourth quarter, your advertising spending increased by 38% year-on-year. So what is your marketing strategy for 2025?

[Interpreted] Yes. This is Chun Ho-Il, the Head of Marketing. In terms of the increase in advertising and marketing spend in the fourth quarter, this reflects the low base effect as the quarterly spending structure actually has been revised. On a full year basis, the total marketing spend amount actually has seen a slight decrease compared to the prior year. In terms of the keywords, the keywords for our marketing strategy for 2025, I'd like to highlight 3. One is to strengthen brand trust. Second is to focus on digital marketing. And third is on data and customer retention. As the #1 provider, we want to further strengthen our brand's confidence. And so we will be communicating more tightly with our customers with messaging that can draw greater confidence in our brand. And also to boost the efficacy and efficiency of our marketing initiatives, we'll continue to strengthen mostly our digital-based market activities, and we intend to increase the portion of the marketing budget that is allocated towards digital marketing. Also to strengthen customer retention, we will focus on investing our data-enabled marketing capacity as well. And for marketing costs overall, we do not anticipate any major increase compared to the prior year.

[Interpreted] And the next question is about your plans for dividend policies in 2025.

[Interpreted] This is Bae, Moo-Geun. At K Car, enhancing shareholder value is a key management priority. And since going public, we have maintained a policy of providing stable quarterly dividend. In 2025, based on our robust capital position, the basic stance is to maintain stable dividend payment. We are managing stable cash flow which is used to fund not only our used car inventory sourcing, but also our dividend payments as well, making efficient use of our working capital. And the core position, again, of our company is to achieve both financial stability and profitability at the same time. We will continue to look to improve our leverage of working capital so that we can respond more flexibly to market changes and volatility. In terms of our dividend policy, dividends are determined on a comprehensive basis, reflecting our financial soundness, sales performance and broad market conditions as well. At present, we expect to continue to provide dividends at the current level. And going forward, we intend to maintain capital management policy that seeks a balance between our shareholder return policies and investments for growth. In terms of the specific size of our dividend payments and further details on our policy, they will be subject to approval and resolution by our Board and at the General Shareholders' Meeting as well. So we will share transparently those results with you as they become available.

[Interpreted] Yes, we continue to have questions sent in, in real time, but because of the limited time, we will just cover one last question that does not overlap with prior questions. So regarding the overall -- your sense of the market in the first 2 months of the year, based on those developments, what is your outlook for the first quarter?

[Interpreted] Yes. Regarding your question about the overall market conditions in the month of January and February. First, if you look at the statistics, for the Ministry of Land and Transportation as of January in terms of the number of registered vehicles. Overall, the used vehicles market has seen a decrease on a year-on-year basis in registered vehicles. However, K Car on the other hand, has actually shown strong performance with our market share actually increasing compared to the prior quarter despite poor market conditions. We are seeing even stronger positive signs in the month of February, and we have been setting new record highs in terms of daily transaction volume. And this, we think, is due to strong underlying demand and also thanks to our differentiated services, and efficient inventory management as well. Also, the increase in exports of domestic used cars also has allowed us to set new records in terms of our wholesale auction business as well. And these performance -- these results actually are important indicators that demonstrate the competitiveness of K Car. So it is still early in the year, and we have to be cautious, but we do get an appreciable sense of more positive signs coming through from the start of 2025. We will continue to focus on responding aggressively to these market changes to continue to drive growth on a continuous basis.

[Interpreted] Yes, with that, we will now conclude the fourth quarter and full year earnings call for K Car. I'd like to thank all of you for attending and for asking questions. Please contact the IR team for any further inquiries. And we look forward to seeing you in the next quarter. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]