K Car Co Ltd

KRX:381970

Earnings Call Transcript

[Eun-Hee Kwon, executive]

Yes. Good morning. This is Kwon, Eun-Hee, Head of IR at K Car. Allow me to take you through some housekeeping notes before we begin our first quarter earnings conference call for K Car.

Today's call will proceed through consecutive translation into English. Mr. Jung in-guk, the CEO of K Car, will first present on the business highlights; followed by financial results from Mr. Bae moo-Geun, the CFO; 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 on the IR section of our corporate website as well as the 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.

Now our CEO, Mr. Jung in-guk, will start us off with an overview of business results.

[Jung In-guk, executive]

Yes, good morning, evening. Thank you for joining K Car's conference call. In the first quarter, K Car achieved record high sales with 40,093 vehicles sold, recording the highest quarterly revenue and gross profit to date. This does not represent short-term one-off performance. However, as we believe it is the outcome of our swift response to changing dynamics in the used car industry, which is currently facing a structural transition.

Our performance is a result of our continued commitment towards fundamental change across core areas of our business, such as introducing AI-enabled demand forecasting system specific to different models, which resulted in improved inventory turnover as well as significant productivity gains, leveraging our online sales and non-face-to-face sourcing channels.

Founded in 2000, K Car took 19 years to reach the KRW 1 trillion mark in annual sales. But since reaching the milestone, it has taken just 3 years to grow to KRW 2 trillion. The period between the second half of 2022, which is when we hit KRW 2 trillion, to 2023 was a challenging time with high interest rates and calculation weighing negatively on the used car market. Our growth during that time was a bit flat as we chose to focus on improving profitability over top line growth.

As we started out this year, 2024, the used car market has started to recover. And at the same time, market consolidation spearheaded by K Car is also unfolding. As a result, we have achieved simultaneous growth in both P and Q terms as we promised in the previous quarter, recording above KRW 600 billion in quarterly revenue for the first time in Q1. At the same time, operating profit was up 33.4% Y-o-Y as we achieved top line growth accompanied by solid improvement in our bottom line.

Please turn to Page 3 in your slide. So SAM or the serviceable available market for used cars, which have seen negative growth over the last 2 years, has turned around as of this quarter. K Car achieved a record high effective market share of 12.5% in Q1. We believe this is due to the ongoing market consolidation led by institutional players in the industry, which was triggered following OEM automakers' advance into the used car retail space.

Let me now take you through our Q1 sales performance by channel. Our total number of units sold was 40,093, up 7.7% Y-o-Y. This strong performance was from reduced inventory days, which we achieved by applying demand forecasting data and also thanks to solid auction sales at our auction houses in Osan and Sejong.

Total retail units sold recorded 30,612 units, up 3.2% Y-o-Y. Our online retail sales increased by 1.3% and off-line sales by 5.6% Y-o-Y. The share of online sales came in at 55.9%.

For auctions, total number of units sold through direct bidding, excluding consignment sales, recorded 9,481, up 25.7% Y-o-Y. We are seeing an increase not only in direct auctions but consignments as well and are preparing to open a third auction house in the Gyeongsang or Southeast provincial area.

Now on to our average unit pricing or ASP. In the first quarter, retail ASP was KRW 17.15 million up significantly versus KRW 15.23 million recorded in the first quarter of last year, also significantly higher than -- or excuse me, higher than the KRW 17.02 million recorded in Q4.

Starting in the second half of last year, as concerns over interest rate uncertainties were somewhat eased and as used car installment financing rates stabilized, we resumed our sourcing of high-end, high ASP vehicles as we expanded our inventory. As a result, our retail ASP increased for 4 quarters straight, climbing back up to the KRW 17 million range from Q4.

We believe ASP is continuing to rise despite uncertainties around the interest rates and the economic cycle due to price alignment trends between used cars and new vehicles and also improve consumer sentiments and the reduced concerns over the interest rate environment. Please refer to Pages 8 through 10 for first quarter sales and ASP broken down by channel, including our on- and off-line retail and wholesale channels.

Moving on to our per unit margins or GPU and also the current status of sourcing. Please look at Page 5 in your slide. Our first quarter retail GPU was KRW 1.57 million, up 12.8% Y-o-Y and 10% Q-on-Q. GPU improved, thanks to faster inventory turns and shorter inventory days, which stood at 31 days as at the first quarter, an improvement versus 33 days in the first quarter of 2023 and an even bigger improvement versus 40 days recorded in Q4.

We are seeing a continued increase in sales of our higher-margining K Car extended warranty products as well as other referral services, including insurance and installment financing. Our sourcing mix is holding up quite consistently and remains largely unchanged despite OEM makers moving into the used car market.

Right now, we're focused on actively sourcing high-demand vehicles across all of our channels while working to narrow the difference in contribution margins between channels by reallocating sales and management resources.

At our prior earnings call, I outlined K Car's 3 objectives for 2023. The first was to grow our P and Q simultaneously by securing a strong portfolio across diverse price points that strikes a balance between demand and profitability.

The second objective was to achieve double-digit profit growth. In Q1, our ASP grew 12.6% Y-o-Y. Number of vehicles sold by 7.7% and operating profit was up 33.4%, taking us one step closer to reaching this goal.

The third objective was to focus on boosting high-margin sales and boosting cost efficiency as well. In Q1, we achieved 28.5% Y-o-Y growth in our high-margin auction channel, while achieving 15.3% Y-o-Y increase in ancillary sales including K Car warranties and referral services for fee income.

On the cost side, we're in the process of realigning our branches to be more optimized for OMO transactions. And so far, our overall branch operating expenses have been improved by 3.2% without reducing the number of parking slots.

As we entered the year 2024, the used car market saw improved conditions, including reduced concerns over interest rates, recovery in used car pricing and strong used car export trends, which led to partial recovery in demand, which have been deferred for several years with the serviceable available market growing by 0.5% year-on-year.

Moving forward, the market is expected to start a full-fledged turnaround once the likelihood of policy rate cuts look more viable, which is expected then to trigger a recovery in demand. I believe K Car was able to outperform versus market expectations this quarter, not due to recovery trends in the broad market, but as a direct consequence of the commitment and effort of all employees and management at K Car.

Going forward, we will be focused on satisfying the demand of smart used car consumers while working to improve profitability further through better efficiency gains. We will also work hard to expand B2B services, target at new business partners joining the used car market.

Now I will pass it on to our CFO, Mr. Bae moo-Geun to take us through the financial results.

[Bae Moo-Geun, executive]

Yes, good morning. Before moving on to our financials, I would like to first comment on our dividend for the first quarter. Earlier this morning, our Board of Directors resolved upon a quarterly dividend of KRW 250 per common share for Q1, which is a 32% increase from the previous KRW 190 that we have maintained since our IPO, as we seek to strengthen shareholder returns reflecting our improved performance this year. Our Q1 dividend will be distributed within May.

Yes, in Q1, revenue totaled KRW 604.4 billion, up 16.8% Y-o-Y. To break down the drivers of growth into P and Q factors. First, the total number of units sold increased by 7.7% Y-o-Y while retail ASP increased by 12.6% Y-o-Y to KRW 17.15 million.

Direct auction ASP, excluding consignment sales, was KRW 4.47 million, up 3.9% Y-o-Y. By channel, our e-commerce sales increased 14.7% Y-o-Y to KRW 292 billion. This was from a 13.2% increase in ASP and a 1.3% increase in the number of units sold.

Off-line sales increased by 18.2% Y-o-Y to KRW 250.1 billion, mostly due to 11.8% increase in ASP and a 5.6% increase in off-line units sold. Q1 off-line ASP was KRW 18.54 million.

Our auction revenue increased 28.5% Y-o-Y to KRW 45.1 billion, mostly driven by a 25.7% Y-o-Y increase in the number of direct-owned vehicles that were successfully auctioned off. And meanwhile auction ASP increased by 3.9%.

Rental business revenue increased 2.4% Y-o-Y to KRW 14.9 billion. Other revenue, which includes delivery fees charged to home service users, totaled KRW 2.3 billion. Please refer to Pages 8 through 10 in your slides for first quarter sales and ASP broken down by channel across our on- and off-line retail and wholesale channels.

First quarter gross profit was KRW 60.4 billion, up 15.4% Y-o-Y. Gross profit margin was 10%, similar to last year's Q1 levels. We were able to maintain double-digit GPM despite sourcing high ASP inventory, thanks to a recovery in demand and also ongoing market consolidation led by K Car.

Q1 SG&A was KRW 42.8 billion. SG&A as a percentage of revenue was 7.1%, 0.5 percentage points improved on a Y-o-Y and Q-on-Q basis, thanks to an operating leverage effect from revenue expansion. The significant increase in advertising spend in the first quarter was mostly due to the low comparison base effect.

Up to last year, ATL advertisements were executed in Q2, with annual marketing spend executed unevenly over the year. However, as 90% of this year's budget will be in digital marketing, we expect to be able to execute the spending more or less evenly over the full year. This year's annual marketing budget is KRW 10 billion, same as last year.

As our CEO explained earlier, we recorded a reduction in our branch operating expense, thanks to efforts to boost the operational efficiency of parking slots at our branch location. Currently, we have parking capacity for 12,000 vehicles nationwide, which is consistent with last year level but at a reduced cost. This year, we will be continuing with our cost-saving efforts by realigning parking slots in high lease urban locations while pursuing per person productivity improvement as well.

First quarter operating profit was KRW 17.6 billion, up 33.4% Y-o-Y. Our OP margin was 2.9%, up by 0.3 percentage points Y-o-Y. I believe that this year, we can improve our profitability even further, thanks to quick paced growth in high-margin sales, further cost efficiency gains and operating leverage from revenue upside.

First quarter CapEx was KRW 1 billion, which is 0.16% of revenue, mostly spent towards branch relocations, photo zone improvement 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 the KIND site, where we have posted our earnings call materials and fact sheets.

[Operator]

[Operator Instructions] As we wait for incoming questions, we will first address questions that were provided to the company in advance and also those that are coming in through real-time texts.

Yes. The first question is that your sales actually increased significantly in the first quarter, over 20% in fact, relative to Q4. Other than seasonality, are there any other drivers behind the upside? And you did mention that it may in part be an impact of structural change in the used car market. Do you think this kind of change can translate into improved performance in the second quarter and also the second half of this year?

[Jung In-guk, executive]

Yes, let me address this question. It is true that there are big changes ongoing in the used car industry and there are sources of continued economic uncertainty. But nonetheless, K Car's presence and market dominance in the used car space is getting stronger than ever before.

This, of course, is the result of continued effort towards fundamental change in our core business areas. For example, we have been deploying AI technology to boost inventory turnover, leveraging our online and non-face-to-face sourcing channels to boost productivity further.

And we have also been continuing to improve the quality of customer-facing services with the eye out for long-term growth. We've continuously improved our UI/UX on our online platform, and also improved the environment of our offline branch locations as well.

In the first quarter, we focused on procuring a solid portfolio of vehicles across diverse price points. That again meets or seek a balance between demand and profitability. And as a result, we have seen an increase in both ASP and number of units sold, posting record high sales and the largest market share to date.

We will do the same in the second quarter as well as we seek simultaneous growth in both P and Q and we expect double-digit growth in our retail ASP in the second quarter, same as in Q1. So this year, basically, we will be taking utmost [indiscernible] care for every single vehicle that we sell to our customers, so that they are fully satisfied. So that we are on track to achieve the double-digit operating profit growth that we committed to you at the start of the year.

[Operator]

Moving on to the second question. So it seems that in the first quarter, the portion of online sales actually has decreased on a year-on-year basis. So why is that? And what is the company's target e-commerce share?

[Chun Hoil, executive]

Yes. I'm Head of Marketing at K Car. My name is Chun Hoil. In the first quarter, the number of online units sold totaled 17,119. This is up 1.3% Y-o-Y and 21.7% Q-on-Q. But the share of the total retail mix, it was 56%, which is down by 1 percentage points on both a Y-o-Y and Q-on-Q basis.

The reason for the reduced online share, first of all is as we had an increase in customers who were purchasing higher ASP vehicles, we also saw an increase in those choosing to make the final payment at our physical branch location.

And the second reason is, even as the number of online sales increased, total vehicles sold, so the denominator also increased. So online purchase as a percentage of total sales mix declined somewhat. But in fact, the first interface between our customer and our vehicles is predominantly online.

And in terms of the time spent during shopping, overwhelmingly more time is spent online, but there is still a meaningful share of customers who do prefer to visit one of our off-line branches during the final phase of payment. And we will continue to cater to the diverse customer needs as fitting the nature of our industry by continuously improving our OMO platform to further boost customer satisfaction and improve purchase conversion rates.

[Operator]

And moving on to the next question, which was sent in real time through a text message. I understand that if you do more sourcing from your own customer base, this can actually help improve your profitability. But it seems that the portion of this kind of sourcing through trade-ins and through home service users or among home service users has decreased on a Q-on-Q basis. Do you see further room for improvement?

[Jung In-guk, executive]

So in the first quarter, the number of vehicles sourced from our existing customer base increased by 17.3% year-on-year. So these are vehicles that were sourced through trade-ins or at any one of our 47 branch locations, among walk-in customers and also through our Sell My Car home service. However, with higher demand for all these K Car vehicles, we've actually been mobilizing all channels to source high-demand vehicles.

And so as a result, the percentage of sourcing from our customer base actually did see a slight decline. But going -- and right now, we are focused on securing high turnover vehicles mostly and realigning our sales and management resources to reduce the contribution margin difference from one channel to the next. But going forward, if required, we do intend to take measures to boost our own customer sourcing through realignment of resources centered around our Sell My Car home service.

[Operator]

The fourth question asks, starting this quarter, you have increased your dividend per share. Is this a temporary change? Or can we consider this to be a sustainable change to your dividend policy?

[Bae Moo-Geun, executive]

Yes. This is the CFO, Bae Moo-Geun. So the company is committed to business management that is centered around our shareholders to deliver sustainable growth and stable dividends to our shareholders. So since we were listed in 2021 up to the fourth quarter of 2023, we provided per share dividend of KRW 190 per quarter for a total of KRW 36 billion in total annual dividends -- cash dividends. However, as of the first quarter this year, we wanted to reflect our operating performance for 2024 as cash flow and the BOD results upon a higher dividend per share of KRW 250, which is 32% higher than previous quarters.

We have been consistently providing dividends to our shareholders since going public. And on a full year basis for full year 2024, although the decision has not been made at the BOD level yet, I do commit again to you that we will do our best to deliver top shareholder return.

[Operator]

This is the next question that has been provided by text. So can you elaborate more on your investment for the third auction house in the Gyeongsang province? What is the proposed time line of the investment and future plans?

[Jung In-guk, executive]

Yes. So as you know, we currently have 2 auction houses. One is located in the city of Osan in the Gyeonggi provincial area. So this covers our Seoul and capital region. The second auction house is in Sejong City, which covers the Central and South Western part of Korea. So that would be the Chungcheong and [indiscernible] province.

The third Gyeongsang auction house that we are preparing to set up is currently -- will actually cover the southeastern part of Korea, which is currently uncovered or underserved. So we are in negotiations throughout the second quarter. We think perhaps likely will be sometime after the third quarter for it to materialize further.

In terms of the size, Osan can accommodate about 1,000 vehicles, Sejong 500. Although we'll have to look at local conditions, including availability of leasing, we are looking to start perhaps around 300 vehicle capacity as we begin.

The auction or wholesale market actually has been showing very strong trends together with retail. So we want to focus our efforts this year on auction to help achieve our target for 2024.

[Operator]

This concludes our earnings call for the first quarter 2024 for K Car. Thank you for joining us today. Please contact us at the IR team if you have any additional questions. We will look forward to seeing you in the next quarter. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]