K Car Co Ltd

KRX:381970

Earnings Call Transcript

[Operator]

[Interpreted] Good morning, and good evening. First of all thank you all for joining this conference call. And now we will begin the conference call of the Fiscal Year 2023 second Quarter Earnings Results by K Car. [Operator Instructions]

Now we shall commence the presentation on the fiscal year 2023 Second Quarter Earnings Results by K Car.

[Eun-Hee Kwon, executive]

[Interpreted] Hello. This is Kwon Eun-Hee, Head of IR at K Car. Thank you for joining us at the second quarter 2023 Earnings Conference 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.

Our CEO, Mr. Jung In-guk will first take us through a business highlights, followed by financial results from our CFO, Mr. Bae Moo-Geun, followed by a Q&A session 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 on the IR section of our corporate website kcar.irpage.co.kr as well as the Korea Exchange Kind website. The presentation materials are based on K-IFRS and contain estimates that may be subject to change upon external auditor review. Please be advised that projections may differ materially from actual results, depending on changes to the macro and market environment.

[Operator Instructions] Now our CEO, Mr. Jung In-guk, will start off with the business overview.

[Jung In-guk, executive]

[Interpreted] Yes, greetings. Thank you for joining K Car's Conference Call for the Second Quarter today. As the rate hike cycle eased in the second quarter, the used car market did see a recovery in market pricing and strong export trends. However, used vehicle sales recorded negative growth both on a Y-o-Y and Q-on-Q basis as difficult business conditions continued. With auto financing rates rising in the second half of last year, the effect of higher interest rates and higher vehicle prices continue to constrain consumer sentiment weighing negatively on the used car market.

Within this overall business environment, K Car has been working on a 2-phase process to improve our business structure. During Phase 1, we focused on improving our underlying fundamentals to improve profitability. To this end, throughout the first half of 2023, we have worked on improving our sourcing channel mix, applied AI forecasting capabilities, increased non-face-to-face sales and purchasing. We're also working to boost ancillary sales.

As a result, we have outperformed against our targets for the quarter, achieving record high gross profit and GPU in Q2, which is proof of successful execution of our Phase 1 strategy.

Phase 2 will be about expanding our market share, although we continue to maintain our market dominant position into the second quarter 2023 with above 10% market share in our B2C serviceable available market. Our market share was still a bit flat in the first half as we focused operations around improving profitability as part of our Phase 1 strategy. As we move further into the second half, however, we will be shifting into Phase 2, easing existing purchasing policies, which have been managed more conservatively in the first half amid high interest rates.

We'll also be readjusting our inventory portfolio to acquire a more diverse mix of vehicles across different price ranges, shifting our marketing focus from branding to boosting sales performance as we continue to strengthen our online marketing and sales activity.

To reinforce our OMO infrastructure for greater market share, we have doubled the size of our Incheon Home Service Mega Center as of this week with parking capacity to accommodate 600 vehicles. A new store location with 180 parking slots was opened in [ Ansan City ], Chuncheon province, which will help boost local sourcing, while expanding our sales touch points with customers in the wider Chuncheon area. It is still hard to predict how the market will play out in the future as the possibility of additional rate hikes and inflation still remain alive, especially as automakers are planning to move into the retail used-car market on the second half.

However, we at K Car believe we will be able to strengthen our market dominance even further during this period of uncertainty, as we actively leverage our robust infrastructure that links up both on and offline as well as our nationwide network coverage, top industry-leading professionals, specific or specialized in the used-car space and notably our economic [ moats ], which cannot be replicated in the near term.

In Q2, the number of vehicles sold totaled 36,755, down 2.6% Y-o-Y from total vehicle sales, 28,199 were retail, down 6.1% Y-o-Y. Auction vehicles totaled 8,556, which is the highest record ever, up by 10.7% Y-o-Y. E-commerce accounted for 57.6% of total retail sales as we continue to see an uptrend after breaking past the 50% mark in the fourth quarter of last year. The increased share of e-commerce will not only contribute to improved GP margins, but is also expected to help increase our market share as a leader in the used-car e-commerce space.

Retail ASP was KRW 15.45 million in the second, which is a slight increase from KRW 15.23 million in Q1, but still considerably lower Y-o-Y versus KRW 17.21 million high that we recorded in the second half of last year. Starting in the second half, ASP has been rising as we start expanding and normalizing our inventory mix. We expect used car pricing to continue to increase as the price of new vehicles increases and as large auto OEMs enter the used car retail market.

In the second half, we expect positive trends from both the [ P ] and [ Q ] side. [ Q ] upside from our market expansion strategy, [ P ] upside from normalization of our inventory mix and rising price trends, which combined is expected to help us achieve a turnaround in sales.

Starting in the second half of last year, we started making adjustments to our inventory portfolio to be more centered around high turnover vehicles. We also improved our sourcing channel mix by buying more from higher marketing channels, while also working to increase the share of e-commerce sales, also running promotional activities to boost ancillary sales. Thanks to these combined efforts, our GPU on retail sales has improved to 10.1%, up 2% Y-o-Y, 1.3% Q-on-Q.

The red bar on the bottom shows the share of combined sourcing from our own B2B channel, which includes the vehicles we source directly from our own sourcing platform and also trade-ins from buyers who only have to pay the difference between their trade-in cars and their purchases from K Car. And also a vehicle sourcing from customers who visit our store locations. This share of C2B direct sourcing and total sourcing volume has increased both versus the prior quarter in prior -- excuse me, versus the prior quarter in Q2.

Over the past several years, we have worked hard to build up an innovative OMO platform, capable of providing the most customer-centric user experience in the used car industry. The platform integrates our online home service platform together with all 48-store location nationwide to best reflect user preferences, while providing greater accessibility and this represents a key source of differentiation, unique to K Car. With all of the key channels already established and in place, we are now focused on improving operational efficiency and optimizing our user experience even further.

Even as today's used car market continues to evolve, we are confident that we can uncover diverse new business opportunities as we are confident about K Car's future. Our self-confidence is grounded on our economic moat, which will come out shining even more when market conditions improve. And this will only strengthen our dominant presence on the market, but also be reflected into higher corporate value as well.

And with that, I will pass it on to our CFO, Mr. Bae Moo-Geun to take us through our financial results.

[Bae Moo-Geun, executive]

[Interpreted] Before I move on to the financial results, I would like to comment first on second quarter quarterly dividend for 2023. Earlier this morning, our BOD passed the resolution to pay out a payment in the first quarter, KRW 191 per common share, which will be distributed within the month of August.

In the second quarter, revenue totaled KRW 505.7 billion, down 13.9% Y-o-Y. The main driver of the decrease in the second quarter mostly came from reduced offline retail vehicle sales. Offline vehicle sales recorded KRW 197.6 billion, down by 29.5% year-on-year. Meanwhile, online vehicle sales recorded KRW 252.5 billion, down slightly year-on-year.

If you were to break down the downside factors for reduced revenue into quantity and price, Q or the total number of cars sold dropped by just 2.6% year-on-year. However, the average selling price of retail vehicles actually declined by more versus the KRW 17.21 million high that we recorded in the second quarter of last year. And so for the second quarter this year average selling price retail was KRW 15.45 million, down 10.2% year-on-year, up 1.5% Q-on-Q.

In terms of our wholesale or auction revenue, in the second quarter we recorded KRW 39.7 billion, down 0.5% year-on-year. In terms of the P and Q, for Q or the number of direct auction vehicles sold, which excludes consignment sales recorded 8,556 units, which is up 10.7% year-on-year. However, in terms of the P or the average auction price, we saw a larger decline of 11.6% year-on-year at KRW 4.32 million. Rental car revenue recorded KRW 14.3 billion, up 6.9% year-on-year. Other revenue from delivery fees charged to home service customers totaled KRW 1.7 billion.

In the second quarter, our gross profit recorded KRW 57.7 billion, up 14.4% year-on-year, marking the highest quarterly GP to date. This was thanks to overall improved sales margins on retail vehicles sold, mostly due to decreased portion of e-commerce sales and also due to the improvements in our sourcing channel mix. In terms of our GP margins, they recorded 11.4%, a 2.8% point improvement year-on-year.

SG&A in the second quarter totaled KRW 42.2 billion, up 8.2% year-on-year. SG&A as a percentage of sales was 8.4%. Actually, 46% of the total annual budget actually came from ATL advertising spend, including TV campaign. However, when we take out the advertising spending, SG&A comes down to 7.4% of sales. The largest component of SG&A is the labor expenses improved and declined by 2.1% Q-on-Q at KRW 21 billion. This is thanks to our efforts as part of Phase 1 of our strategy for margin improvement where we work to improve per person productivity and also work to boost the operational efficiency of our store locations.

Depreciation and also building maintenance costs for our physical stores also declined by 7.2% and 6.7%, respectively, recording KRW 6.1 billion and KRW 700 million each. As of the end of the second quarter, of the number of total executive employees was 1,134 with 955 of them being personnel specialized in used cars. In the second half of the year, we'll continue our efforts to run our organization with greater operational efficiency.

Operating profit in the second quarter totaled KRW 15.5 billion, up 35.6% year-on-year. OP margin was 3.1%, a 1.1 percentage point improvement year-on-year. Second quarter CapEx totaled KRW 400 million, which was less than 0.1% of total sales. Most of the CapEx went toward improvements on store facilities or equipment. For full year 2023, we intend to manage CapEx at a similar level against total sales. And for your information, last year, total CapEx on a full year basis was KRW 6.4 billion, which was about 0.3% of total sales. 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 website, where we have posted our earnings call materials and factsheets.

[Eun-Hee Kwon, executive]

[Interpreted] Yes. We will now move on to the Q&A. [Operator Instructions]

[Operator]

[Interpreted] [Operator Instructions] The first question will be presented by [indiscernible] from Eugene Investment & Securities.

[Unknown Analyst]

[Interpreted] Yes, this is [indiscernible] from Eugene Investment & Securities. I'm wondering if you're seeing some trends, what kind of trends you're seeing in terms of the auto financing rates? Are they stabilizing some? What do you think in terms of the likelihood of rates going down?

[Jung In-guk, executive]

[Interpreted] So thank you. This is the CEO, Jung In-guk. Let me explain about what kind of trends we are observing in terms of the auto financing rates. So after the FOMC, the Fed engaged in its giant step at its meeting in June last year, the benchmark rates in Korea, obviously also increased. If you look at the trend in terms of the minimum installment financing rates applied as of the end of the fourth quarter last year, it was as high as 12.9%, but since has stabilized by more than 5 percentage points, recording somewhere around 7.9%.

So although we do believe that the high rate environment is likely to be maintained for some time, the rates on the auto installment financing, which actually had gone up further relative to the increase in benchmark rates. I think is showing some trends of stabilizing. And in fact, the percentage of auto finance sales from our total sales mix actually has improved to 20%.

[Operator]

[Interpreted] Yes, please go on with your next question, please.

[Unknown Analyst]

[Interpreted] Yes. It seems that since April or so, the successful auction ratio or the rate on your wholesale vehicles actually has been trending downward. Could this be interpreted as the trend that signals some kind of a slowdown in the overall used car market?

[Unknown Executive]

[Interpreted] Just to clarify the question. Is your question in reference only to the auction piece? Or does it also include retail sales as well?

[Unknown Analyst]

[Interpreted] Yes, I was asking just with regard to the auction side.

[Jung In-guk, executive]

[Interpreted] Yes. Well, as we explained during our earnings presentation for the second quarter, overall, we have seen quite strong trends on the exports side. We obviously have 2 auction centers in Osan and Sejong. And relative to the auction houses of other competitors, we've really recorded higher successful bid rates, also while managing good profitability and margin.

In terms of the export side, of course, it does vary depending on the destination market, which may have different regulations or taxation type theme. So that may be subject to greater volatility. However, overall, we have really seen strong export trends hold up quite well thus far. And relative to other auction home, our auction centers actually have unique advantages because our sourcing personnel who are working nationwide has the ability to source a diverse range of different types and models and different makes of vehicles to make that supply available to our auction home. And so I think this is a great source of competitiveness, the diversity of our range and model and make years actually is very key.

So although it is quite difficult to predict what will happen exactly in the second half, my view is that likely these favorable trends will be maintained and will likely hold up throughout the remainder of the year.

[Eun-Hee Kwon, executive]

[Interpreted] Yes. The next question actually was forwarded to me personally by analyst Changhee Lee from Samsung Securities. For personal reasons the analysts could not ask directly. So let me ask in his stead. This seems that in the second quarter, your marketing costs overall have trended up quite significantly at somewhere around [ KRW 5 billion ]. What is your view in terms of future marketing expense trend?

[Chun Hoil, executive]

[Interpreted] Yes. This is Chun Hoil, Head of Marketing. Thank you for your question. So if you look at our marketing spend, the historical trend, typically it is more heavily loaded in the first half of the year versus second half. So we are maintaining that high historical pattern. It's just a matter of whether there is more allocated in the first quarter versus the second quarter that kind of difference only.

In the second half of the year, we will, of course, continue with our branding efforts because that would be important. But we want to shift our focus more to boosting sales performance to again use marketing mostly to drive up sales in the second half.

So for your information, let me just add that for full year, our total marketing spend budget will be quite similar to last year at around [ KRW 10 billion ]. So the remaining marketing budget that we have on hand will be directed toward mostly digital marketing in the third and fourth quarter.

[Operator]

[Interpreted] Currently, there are no participants with questions. [Operator Instructions]

[Eun-Hee Kwon, executive]

[Interpreted] Yes, it does seem that typically during the summer season, these conference calls do end more quickly than usual. Thank you very much. And with that, we will now conclude our earnings call for the second quarter. Thank you for attending. And if you were not able to attend or would require a one-on-one session, please do not hesitate to contact us at the -- IR team at K Car. Thank you very much.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]