K Car Co Ltd

KRX:381970

Earnings Call Transcript

[Eun-Hee Kwon, executive]

Greetings. This is Kwon Eun-Hee, Head of IR at K Car. Thank you for joining us at the Second Quarter 2025 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 first take us through a business highlight, followed by financial results from our CFO, Mr. Bae Moo-Geun. Finally, we will have a Q&A session where we will also be joined by Head of Marketing, Mr. Chun Ho-Il; and Head of Planning, Mr. Jung Jin-Moon.

Please note that detailed presentation materials are uploaded on the IR section of our corporate website as well as the KRX, KIND website in both English and Korean. 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 us off with an overview of business results.

[In-Guk Jung, executive]

Good morning, good evening. Thank you for joining us at K Car's conference call today. I would like to express my great appreciation to all of our shareholders and investors for joining. Once again, in the second quarter 2025, we set an all-time record quarterly high, outperforming versus market consensus as we achieved continued growth driven by significant Y-o-Y improvements in retail and wholesale, driven in large part by significant Y-o-Y improvement in retail and wholesale auction ASP on a Y-o-Y basis.

Revenue was up Y-o-Y across retail, wholesale and rental. Most notably, wholesale auction revenue grew by 38% in strong double-digit growth. Same as in the first quarter, we saw an increase in both auction unit pricing and volume as well as a steady increase in commission revenue from consignment sales, which combined helped boost contributions to overall revenue from our auction business.

Although measures of domestic consumer sentiment started improving in May, this did not fully reflect into used car demand in the second quarter just yet. Nonetheless, we at K Car continued to lead the market this quarter as well, thanks to our distinct strengths, including our pricing competitiveness, diverse product mix as well as precise data-driven demand forecasting. Also leveraging our seamless OMO strategy across on and offline, our physical infrastructure consisting of 50 trade centers and our auction homes allowed us to respond quickly to consumer demand as they evolved.

As a result, even as competitive dynamics in the industry are being realigned with the entry of large corporates into the CPO space, we have maintained 12.7% effective D2C market share with our industry-leading position becoming only stronger.

Now let me take you through further details on our performance. In the second quarter, total number of units sold was 38,468 with inventory turnover at 10.8x days inventory outstanding 34 as we achieved improvements both on a Y-o-Y and Q-o-Q basis. For your reference, in Q1, our inventory turnover was 10.4x and DIO 35 days. Number of retail units sold was down 4.4% year-on-year, but this was mostly due to contraction in consumer sentiment and a decline in demand for used vehicles ahead of the presidential election.

In the second quarter, the number of registered vehicles in the effective used car market overall was found to have dropped by 4.9% Y-o-Y. Still, we were able to maintain solid performance relative to the rest of the market, thanks to efficient inventory management and demand forecasting. Looking out to the second half, we expect more positive trends going forward as we are already seeing a gradual recovery in demand for used vehicles as political uncertainties have eased post elections and also amid growing expectations about government economic policies.

Auction revenue maintained growth, up 7.9% Y-o-Y. In the first half, as the used car export market showed strong momentum, dealer-owned vehicles sold through our auction homes did increase temporarily as a percentage of total auction vehicles. But as we moved into the second half, we have been seeing a shift away from exports to domestic trading as a result of changing global demand conditions. Consequently, we have been adjusting our strategy to be more aligned to these trends as well. In particular, we are using AI-based demand forecasting to do thorough analysis specific to different channels as we assess demand trends so that we can focus on procurement of inventory with high turnover and high margin.

Now on to our ASP. In the second quarter, overall used vehicle ASP continued upward trend. Retail ASP was KRW 18.04 million, an all-time high, up 4.8% Y-o-Y and 2.7% Q-on-Q. Wholesale ASP also set a new record high at KRW 5.7 million, up 28.4% Y-o-Y and 8.3% Q-on-Q. Based on our analysis, we do not believe this to be a temporary phenomenon, but driven by structural changes underlying the market. We have seen a steady rise in demand for value for money type vehicles priced KRW 15 million or below and improved perceptions and trust towards used cars in general.

Meanwhile, rising new car prices have been driving demand for used cars with a rapid influx of customers coming into the market for like new used vehicles. This bidirectional growth in demand is driving a structural increase in ASP, and we expect these trends to continue for some time.

Let me now take you through retail GPU and a status update on our sourcing channels on Page 5. In Q2, retail GPU was KRW 1.62 million, improved performance Y-o-Y despite a slight correction on a quarter-on-quarter basis. This -- which was due to reduced consumer demand in the run-up to the presidential election. To date, we have been committed to building a strong foundation for structural improvements in our margin profile.

Conversion for ancillary service sales have been on a steady rise, and we believe that this will support stable margins in the mid- to longer term. Moreover, we have been leveraging AI-enabled demand forecasting to optimize our product mix to best suit market conditions while also expanding into more diverse sourcing channels, including B2B procurement.

This is part of our strategy for greater operational efficiency that takes into consideration both profitability and turnover. We intend to continue to advance our market diversification and product mix strategy to achieve qualitative growth that looks beyond short-term outcomes.

Overall, despite uncertain market conditions throughout the first half of 2025, we once again proved the effectiveness of our differentiated competitiveness and outstanding execution capabilities. Since launch of the new government, we have seen a gradual recovery in political stability and consumer confidence. And thanks to our efficient response, we have been quickly capturing the pickup in demand ahead of the market and we will continue to deliver and have been delivering continued unmatched performance across all business segments.

As changes in consumer expectations and purchasing patterns accelerate further, K Car is well positioned to maximize the demand concentration effect by leveraging our distinct competitive advantage and execution strength, and we will continue to refine our strategy further for sustainable growth. Next, our CFO will take us through our financial results.

[Moo-Geun Bae, executive]

Yes. Good morning. This is Bae Moo-Geun, the CFO. Before presenting on our detailed financials, allow me to comment on our dividend first. Earlier this morning, our Board of Directors resolved upon a second quarter quarterly dividend of KRW 300 per common share to be distributed on the last week of August.

Second quarter revenue totaled KRW 608.9 billion, up 3.4% Y-o-Y and 0.7% Q-on-Q, setting an all-time quarterly high. The total number of units sold declined 1.4% Y-o-Y, but with ASP rising by 4.6%, we recorded top line growth year-on-year for both our retail and auction business. Retail sales continued steady trends totaling KRW 526.5 billion, up slightly year-on-year. Auction revenue increased 38.1% Y-o-Y, continuing strong double-digit growth due to favorable export market conditions for used vehicles with ASP increasing 28.4% and the number of auction vehicles sold increasing by 7.9%.

Rental and other revenue totaled KRW 18.2 billion and KRW 2.3 billion, up 12.3% and 8.2%, respectively, Y-o-Y, continuing solid growth momentum. Please refer to Pages 8 through 10 for a detailed breakdown of sales and ASP by channel.

Gross profit recorded KRW 62.3 billion, up 4.3% Y-o-Y in the second quarter. Gross profit margins recorded 10.2%, up 0.1 percentage points Y-o-Y. That said, gross profit and gross profit margins declined versus the previous quarter due to the contraction in consumer sentiment ahead of the presidential elections, which resulted in a temporary slowdown in demand for used vehicles impacting retail GPU.

Despite the negative impact, nonetheless, we continue to deliver stable Y-o-Y performance through structural initiatives to improve profitability, such as adjustments to our product mix and efforts to enhance conversion for ancillary add-on services.

SG&A in the second quarter was KRW 44.2 billion, accounting for 7.3% of revenue. We have been consistently advancing our internal processes by applying AI technology while also expanding non-face-to-face transactions and strengthening B2B partnerships to continue to improve per person productivity and operational efficiency. This has allowed us to minimize unnecessary expenditure while also supporting stable qualitative growth.

Second quarter operating profit was KRW 18.1 billion, up slightly year-on-year. Our OP margin was 3.9%, down 0.1 percentage points Y-o-Y. The slowdown in operating profit margins was mostly due to the decline in retail GPU. That said, we are expecting better profitability in the second half versus the first half from greater operating leverage amid a continuous rise in ancillary sales conversion rates structural improvements to ASP and also as deferred demand gradually kicks back in as consumer sentiment recovers following the end of the presidential elections.

Please refer to Page 14 in our materials for CapEx trends. As you can see, Q2 CapEx was KRW 1 billion, roughly 0.2% of revenue, mostly used towards facility and IT upgrades related to the relocation of off-line trade centers for improved operating efficiency. We intend to manage full year CapEx similar to prior year levels as we continue to expand infrastructure while maintaining financial soundness. 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 fact sheet.

And with that, I'd like to express my sincere appreciation to all investors and shareholders for your continued trust and support. And with that, we will conclude our earnings presentation.

[Eun-Hee Kwon, executive]

So, concluding the presentation we will now move on to the Q&A. [Operator Instructions]

So while we wait for incoming questions, we will first address questions that were sent in through a text message. So in your presentation, you did explain reasons why retail sales in the second quarter declined versus prior year. But do you see a possible recovery in the future? What is the company outlook in terms of demand in the second half?

[In-Guk Jung, executive]

Yes, this is the CEO, Jung In-Guk. Well, the reduced retail sales that we saw in the second quarter, we believe was mostly due to the temporary effect of one-off factors, both the political uncertainty and a contraction in consumer sentiment ahead of the presidential elections. This had an equal impact on the entire used car market, not just K Car. But since June, the political uncertainties have been alleviated, and we're seeing a recovery in consumer sentiment indicators and also clear signs of recovery further in terms of our online platform traffic, also inflows into offline trade centers and also in terms of our conversion rates as well.

In the second half, we will be focused on strengthening our product portfolio further using AI-enabled demand forecasting so that we can do preemptive acquisition of vehicles that are optimized to meet prevailing demand that is specific to trends by region and by channel. Also, we will focus on delivering actual sales performance through marketing that is centered on driving real-world conversion instead of just simple exposure.

So based on this type of execution, we are very convinced that retail sales should show a rebound in the second half. And also, we're expecting visible improvement to our margins as well.

[Eun-Hee Kwon, executive]

Yes. Let us move on to the second question. Initially, you provided full year guidance, double-digit guidance for your operating profit this year. But in the second quarter, your operating profit grew by just 0.1% Y-o-Y. Although on a cumulative basis for the entire first half, it was 11% growth. Nonetheless, do you believe that you are still on track to achieve the full year guidance at this rate? And what is your outlook in terms of profitability in the second half?

[Moo-Geun Bae, executive]

Yes. This is Bae Moo-Geun, the CFO. So as you mentioned, in the second quarter, our operating profit growth was constrained. However, this was mostly due to the reduced consumer sentiment up to the presidential election. But as we moved into the third quarter, we have been seeing a clear recovery in terms of our sales performance, also solid uptrends in terms of ASP as well.

So the combined effect of our pricing strategy and also our optimal product mix has resulted in improvements in our product turnover, also in terms of our ancillary sales earnings as well. And the effect of operating leverage is also becoming more visible. So given these trends, we expect to be able to realize solid profitability in the second half as well, and we believe that we are on good track to achieve the initial growth guidance, the double-digit growth guidance for our operating profit. We are focused on driving earnings growth based on substantive improvement, and we will continue to conduct our strategic execution throughout the second half of the year so that we can show you good results for the full year.

[Eun-Hee Kwon, executive]

And the third question is on the auction business, where you achieved above 38%, very high rates of Y-o-Y growth. Do you believe that this growth is sustainable? Or is it just a short run effect from the external environment?

[In-Guk Jung, executive]

Yes, this is Jung In-Guk. Yes, recently, we have seen very significant growth in our wholesale auction business. In terms of the backdrop, there has been a very strong growth momentum in the used car export market overall, where there was an increase in the number of dealer vehicles sold through auctioning and also a rise in auction unit pricing as well. So these were the key drivers of growth. In the second half of the year, we do -- we have already started to see a shift in transactions away from exports towards more domestic demand due to changes to the global demand environment. And so aligned to these changing trends, we have also been adjusting our strategy as well.

We are leveraging AI-based demand forecasting to do accurate assessments 0specific to different channels to better assess demand profile and trends so that we can focus our acquisitions on vehicles with high turnover and high margin potential. We're also working to enhance the structural competitiveness of our auction platform as well, strengthening our dealer network, advancing the infrastructure and also expanding consignment sales. And by strategically adjusting the mix between our owned and consignment vehicles sold through auctions, we are seeking both profitability and stability at the same time. And with this as a basis, we expect the structural growth trend to be sustained.

[Eun-Hee Kwon, executive]

Yes. Moving on to the fourth question. You have set new record highs in terms of both retail and auction ASP. Why is that? Is it because overall used vehicle prices are going up? What is your outlook for ASP in the future?

[Jin-Moon Jung, executive]

Yes, this is Jung Jin-Moon. The rise in ASP is mostly due to structural trends rather than being the effect of temporary one-off factors. So we are seeing steady demand for value for money type vehicles that are priced KRW 15 million or below. But then on the other hand, customers who would ordinarily be in the market for new vehicles are actually moving into the lightly used like new used car market.

And so we're seeing an increase in demand for higher-priced used vehicles at the same time as well. So this kind of expansion of demand from both directions in terms of price points has served as a structural support for rising ASP. We are applying a very high precision pricing model based on demand forecasting. This applies not only to our sales price, but our procurement pricing as well. This has allowed us to not only achieve competitive unit pricing, but it's also helped optimize our margins as well as it helps us optimize our pricing.

And as a result, the rise in ASP has been translating into improved margins for K Car. So on balance, between all of these factors, we do not believe that the rise in ASP is just a simple cyclical rally or the effect of any one-off, but it is the combined effect of structural changes in the market and also the strategic response by K Car. And we believe that these trends will likely be sustained for the time being. And we will continue to work on enhancing the precision of our optimized product mix and also pricing strategy going forward as well.

[Eun-Hee Kwon, executive]

So we'll move on to the next question. Your retail GPU is improved on a year-on-year basis, but still down Q-on-Q. Is there -- is it that there is no further room for improvement in terms of GPU? What is your strategy to recover higher margins?

[In-Guk Jung, executive]

Yes. This is Jung In-Guk. When viewed from a more structural point of view, our profitability actually has been showing signs of gradual recovery. We are not reliant on external market conditions. We have been working consistently to improve our underlying profitability fundamentals, again, at the fundamental level. And this is driven by three major initiatives. The first is optimization of our product mix. We're using an AI-powered demand forecasting system to do real-time analysis of demand trends by region, by channel and also by price range.

So this is the basis of building up a competitive product portfolio, mostly of vehicles with high demand and high turnover with the goal of selling the inventory within 30 days of acquisition. And this kind of demand forecasting, of course, is reflected into our price setting as well. This has helped us not only in terms of efficiency of inventory management, but also in terms of stability of our margins as well.

The second initiative is to expand the conversion rate for our ancillary services. So we actually offer various customized services to help our customers throughout the process of purchasing a used vehicle, ranging from financing services, warranty, delivery and other management. And in the second half of the year, we will be expanding exposure for these types of ancillary add-on services, mostly centered around our digital channel and through our optimized strategy for boosting conversion, we expect this to increase in terms of revenue contribution.

The third initiative is on more precision pricing strategy based on AI. We apply a machine learning model that allows us to do highly precise pricing from the sourcing stage up to final sales. This is done for individual vehicles at the individual level and also outside pricing data and also search trend data is factored in as well. So this strategy has helped us achieve increase in ASP year-on-year and also improve margins at the same time as well.

So in conclusion, while there was a temporary correction to our margins in the second quarter from the impact of the external environment, we are building a structural foundation for a resilient profitability. In the second half of the year, we are looking forward to improved consumer sentiment, which will drive a recovery in profitability. We also expect some effect from the operating leverage to also kick in.

[Eun-Hee Kwon, executive]

And the next question is on the e-commerce channel where you have seen a decline in both sales and number of vehicles sold. So is there any changes to your online strategy?

[Ho-Il Chun, executive]

Yes. This is the Head of Marketing, Chun Ho-Il. Well, our e-commerce at-home service channel still is going strong, occupying 54% of our total retail sales and also maintaining strong leadership position within the online used car market as well. But for used vehicles, even if it is the same make or model, prices and valuation, of course, will vary from one vehicle to the other, depending on mileage, age, also different accident history or condition of the car.

So every product is unique with different pricing. And therefore, there is a meaningful pocket of demand among customers to come out and see the car in real life before finally deciding on a purchase or not. Just with the online purchase experience alone, this means that it will not be able to satisfy all outstanding customer needs, which is why we are continuously reinforcing our OMO or online merge with offline strategy that seamlessly combines on and offline. So with our 48 trade centers that are located nationwide, serving as the basis, we have a very seamless sales process that starts from an online search of vehicles and the customers then come to the physical trade rooms to actually see the vehicle, receive consultation and finally sign off on the contract.

And this kind of hybrid model has been very central in boosting our conversion rate and also improving our customer satisfaction as well. So in the future, we will continue to advance our AI-driven recommendation system, strengthen the transparency of information as well while reinforcing our digital contract system as well to further improve conversion also and focus on boosting the loyalty of our online-based customers.

[Moo-Geun Bae, executive]

Yes. With that, we will draw our conference call for the second quarter for K Car to a close. Thank you for joining us, and thanks to all of our participants. Any further questions, please contact us at the K Car IR team, and we look forward to seeing you in the next quarter.