AUTO1 Group SE
XETRA:AG1
Earnings Call Analysis
Q3-2023 Analysis
AUTO1 Group SE
Philip Reicherstorfer, Group Treasurer, opens AUTO1 Group's Third Quarter 2023 Results Presentation while introducing the significant transition within the Investor Relations team, with Mark Shellberg taking the helm after Alexander's departure. The team boasts Chief Executive Officer Christian Bertermann and CFO Markus Boser leading the call.
Bertermann shares the excitement of a triumphant third quarter, achieving the highest gross profit in AUTO1's history, along with a positive adjusted EBITDA of EUR 0.5 million, symbolizing a fiscal breakthrough achieved a full quarter in advance of projections. The GPU (gross profit per unit) for retail surpassed their revised year-end goal while the merchant GPU increased to an impressive EUR 838. With a robust total gross profit of EUR 134 million and an EBITDA improvement of EUR 35.7 million year-on-year, AUTO1 celebrates the stable quarter-over-quarter sales of 141,000 units. These strides are attributed to leveraging their market position, evidenced by their diverse customer engagement across the industry-leading AUTO1.com, convenient customer-centric Autohero, and a growing Financing arm with a soaring consumer loan portfolio.
AUTO1 offers insights into the European used car market, stating stability in Q3 with the expectation of a modest uptrend moving forward. Despite a dip in volume compared to pre-2019 figures, AUTO1 aims to capture additional market share through the distinguished offerings of their products. The company projects strong growth in the coming quarters, backed by their expansive and robust dealer network and prestigious car buying brands which fuel both the supply and demand within their ecosystem, thus forming a virtuous cycle driving future growth.
CFO Markus Boser presents a financial review detailing that the Q3 gross profit of EUR 134 million, coupled with reduced operating expenses, led to AUTO1's first positive EBITDA since the IPO. The reductions included the finalization of two major sponsorships, improvements in employee expenses, and controlled logistics costs. The company boasts strong liquidity, with a sizeable cash reserve and strategic use of nonrecourse asset-backed securitizations that ensures investment capability for growth without the burden of corporate debt.
AUTO1 upholds their performance guidance for key KPIs, with a notable improvement in the adjusted EBITDA guidance, elevating from a loss of EUR 39 million to EUR 49 million for the full year. The company anticipates a breakeven result or a modest loss for Q4 and foresees merchant units closing at the bottom range of the forecast, with retail units achieving significant quarter-on-quarter growth or maintaining year-on-year stability. AUTO1 also underscores their intention to return to growth while aiming for net income profitability over the next year, driven by investments in technology and brand development. Boser anticipates a double-digit growth rate for merchant units and mid- to high-teens growth for Autohero in 2024, emphasizing their readiness for enhanced performance and profitability.
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Hello. Good afternoon and good morning to American friends. Welcome to the AUTO1 Group Third Quarter 2023 Results Presentation. I'm Philip Reicherstorfer, the Group Treasurer.
Before we start with the call today, I would like to update you on our Investor Relations team. Alexander has decided after 2 years to pursue another opportunity in the German capital markets. We will miss him and wish him all the best.
At the same time, I'm delighted that [ Mark Shellberg ] will spearhead our Investor Relations efforts going forward. Mark has had a 20 years of experience in the equity markets and Investor Relations. Welcome, Mark.
As always, I'm joined today by Christian Bertermann, Co-Founder and CEO; and Markus Boser, our CFO.
[Operator Instructions]
Before I hand over, I must make you aware of the safe harbor provisions at the beginning of the presentation. This would apply to any forward-looking statements made by management today. And now over to Christian.
Hi, everyone. Welcome from Berlin. Welcome to this AUTO1 Third Quarter Earnings Call. So Q3 was a very strong quarter for us. We reached a number of key goals on our journey to enable Europe's used car market on our platform. Our team executed well across our different business units and continued spearheading innovation and product development. As a result, we achieved the highest quarterly gross profit in company history and reached EBITDA breakeven ahead of plan.
Keeping the current momentum going, our team is igniting growth initiatives across all units right now. At the same time, we continue to strive for excellence by delivering the best customer experience in the industry. We took a remarkable step forward in the last quarter, achieving our key target of adjusted EBITDA breakeven 1 quarter early. We reached positive adjusted EBITDA of EUR 0.5 million for the group. I'm very proud of our teams who have pushed extremely hard for this since we shifted our focus towards profitability in Q2 of last year.
Regarding other highlights, we grew retail GPU once again exceeding our revised year-end target already by today. Additionally, we completed the first wave of our pan-European used car production network leading to an in-house production share of 88% in October. We grew merchant GPU quarter-over-quarter as well to EUR 838 putting us well above target.
Total gross profit was a strong driver of EBITDA breakeven, hitting a new record level of EUR 134 million for Q3. That is EUR 11 million more than in Q3 of last year. Our EBITDA track continued its very impressive progress and crossed the zero line just 3 quarters after we made it our target.
Year-on-year EBITDA improved by EUR 35.7 million. We sold 141,000 units in Q3, which was stable quarter-over-quarter. We achieved all of these goals by continuing to leverage our unique market position across all segments. With AUTO1.com, we are running Europe's largest used car wholesale platform, which has become an integral part of our dealer partners' everyday business. We're excited to expand and further strengthen our relationships with our many thousand partners, which combined stand for the strongest dealer network in Europe.
With Autohero, we are building the used car market of the future, make it easier than ever before to buy a car from the comfort of your home and delivering it right to your doorstep. Under our Financing arm, we continue to build up a growing consumer loan portfolio, which now has a total size of more than EUR 249 million, growing 69% year-on-year, a strong future profit driver.
We see a lot of potential to add more products to our platform over time, while growing strongly in each of our existing segments. AUTO1 has a unique team with a very high energy level, having the power to transform one of the largest markets in the world. And as we have laid the foundations for strong operational leverage in the past, we are very excited to scale our business profitably from where we stand today.
Taking a look at the market, conditions in the European used car market remained mostly stable overall in Q3. The AUTO1 Group price index shows prices fluctuating around the same level for the last couple of months with limited variance. Used car transactions stayed mostly flat in Q3 compared to Q2 of this year. We expect the current stable environment to continue for now with a possible slight upward trend. There's still a strong gap to unit volumes of 2019 across all markets. However, we plan to gain market share strongly in the next couple of quarters, fueled by the superior value propositions of our products.
Let's take a look at merchant segment performance. In Q3, we sold 126,000 units to our partners, roughly stable quarter-over-quarter. Merchant gross profit came in at EUR 105 million. That is EUR 2 million more than in Q2 of this year. And in line with the quarters before, we continue to focus on our cost base and improved our unit economics throughout Q3. As a result, merchant GPU was at a record EUR 838 in Q3 and that is the best level we have seen so far, significantly improving by 18% compared to Q3 of last year.
At these excellent levels, we started to gradually invest more into supply towards the end of the quarter to position our merchant segment for the next stage of growth. We have built an incredibly strong trading network over the past decade. And to this day, we are the European market leader. The network shown here has thousands of nodes and is the backbone of the merchant business. The light blue dots represent a selection of dealer locations buying across Europe this year, while the dark blue and orange dots are showing the location of our purchasing branch network.
As we now turn to growth, we will invest into the density of our network once again. On the supply side, we can serve our selling customers even better by being closer to them. In Q3, we have added 16 branches to our drop-off network already. We believe that we have the potential to add up to 1,000 additional locations across Europe, enabling us to reach even more selling customers in the future. On the demand side, we plan to expand our merchant network substantially driven by the superior selection, availability and quality of our offering.
Thousands of buying merchants from more than 30 countries have made the AUTO1 platform a prime destination for sourcing inventory, checking prices or buying logistics. It is our ambition to become strong and trusted partners with all of the more than 200,000 merchants doing business across Europe today, fueling our merchant segment with continued growth.
On the supply side, our WKDA car buying brands are prime assets. By today, they have a combined brand awareness of 52% across Europe and offer our selling customers the fastest, easiest and most comfortable way to sell the car. We continue to invest into all of our brands to push awareness in image even higher.
In Germany, for instance, we're happy to announce that Motorsport expert and former German Formula One driver, Ralf Schumacher is the new brand ambassador for wirkaufendeinauto.de. As our ambassador, Ralf will feature in various TV commercials in Germany and Austria.
He is an excellent match for our brand and will help us to position the easy and quick service of wirkaufendeinauto.de as a relevant option for even more car sellers. Our merchant business has powerful built-in network and platform effects. Each transaction on our platform contributes pricing and sales data into our central AI algorithms, increasing their precision and coverage steadily.
This year, our technology advantage helped us to achieve the new records in GPUs across the business. But at the same time, higher and more upsized prices are leading to more sellers, in turn generating more supply and our largest selection for our buyers, which in turn drives again more buyers, resulting in a stronger demand network.
Ultimately, our unique ability to build innovative products and services for used car buyers and sellers is able to generate high market share growth and create long-term value for our customers. After hitting breakeven, we're starting the engine on that flywheel again.
Let's take a look at retail segment performance, start with GPU. In Autohero, we achieved a new record retail GPU of EUR 1,912 in Q3, representing an increase of 73% compared to Q3 of last year and EUR 232 more quarter-over-quarter. Our team is very focused on improving unit cost in Autohero and this hard work is continuing to pay off.
Looking at our historic GPU growth track, we are well on track towards our long-term target of EUR 3,000. As a result of this very strong GPU development, retail gross profit for Autohero increased by 52% to EUR 28.9 million year-over-year, up from EUR 19 million in Q3 of last year.
Units came in at 14,800 vehicles sold in the last quarter. That is a slight growth quarter-over-quarter. Over the course of Q3, we prepared our retail business for reaccelerated growth in the quarters to come. We're also happy that we completed the first wave of our in-house pan-European used car production network as planned.
In October, we announced 3 new production centers in France Sweden and Austria to refurbish used cars for Autohero. Within just 2 years, we have created a strong European production footprint with our network of 10 internal refurbishment facilities and laid the foundation for future growth of our Autohero business at favorable unit economics.
The additional centers increased the total production capacity by 22% from 147,000 units to 179,000 units per year at full capacity. Internalizing the production of used cars allows us to fully control each step of the process and that enables us to offer the best quality cars for our Autohero customers. And as we have made outstanding progress on our in-house footprint in Q3, we have also reached our Q4 production targets already.
In October, 88% of all units sold were produced internally in one of our in-house production centers. That is an increase of 12% compared to just 1 month ago in September. We are impressed by our production teams, we have achieved this massive ramp-up in such a short amount of time. With our recently opened production centers and continued focus on hiring, we expect the in-house share to slightly increase from current levels. We were able to decrease the production cost in our flagship facility in Berlin even further in Q3.
The production cost in our Brandenburg center has decreased by EUR 250 per unit from Q3 of last year to Q3 of this year and is now at EUR 630. Our production center in Brandenburg sets the bar for all other production centers in Europe. We're delighted to see that we continue to replicate our learnings and best practices from our flagship facility to our other sites bringing the production cost of all internal production centers closer than ever to our flagship center with now EUR 670.
External production costs remained flat at EUR 1,110 with a slight decrease from Q2 to Q3 by around EUR 40 per unit, and that, in turn, confirms again our strategy to in-house production. In addition to reaching our year-end production targets early, we also achieved our year-end marketing cost target in Q3 already. Marketing cost per unit was at EUR 500 per car delivered in Q3, which is a decrease of 55% compared to Q3 of last year, where marketing costs were still above EUR 1,000 per car delivered.
We plan to keep marketing costs per unit around current levels for now. We talked a lot about cost and efficiency improvements for now. But what's most important is that our customers remain in the front and center of everything we do. I'm very happy that this continues to result in strong customer satisfaction debit. In Q3, we achieved a high NPS of 71, which is in line with last year. Our excellent Trustpilot score of 4.6 and Google score of 4.3 across all markets are stable, and those validate these high internal NPS values by an external source. We now sum out a bit and take an early look on what we set out to achieve during this year and what we have achieved so far, and that comparison is looking strong.
At the beginning of the year, we targeted key achievements in retail GPU growth and associated unit cost decreases, increasing profitability in our merchant segment. And finally, as the overarching target reaching group profitability on adjusted EBITDA by Q4 of this year.
We have delivered successfully against every one of those targets already in Q3. We increased retail GPU beyond the EUR 1,900 level, improved unit economics in retail strongly, got a EUR 80 level for merchant GPU and delivered the first positive EBITDA as a public company. Going into '24, we are more than excited to reaccelerate growth across our business segments, targeting high unit levels at the favorable unit economics we have reached by today. We will launch important products throughout the next year, which already exists today in prototype versions and aim to benefit from the positive network effects described earlier that bigger scale enables.
Financially, we plan to move towards net profitability driven by significant operating leverage and high growth across the business. I'm now handing over to Markus, who will give you a more detailed financial update after last quarter.
Thanks, Christian. Taking a look at our usual financial overview of key KPIs for the third quarter, we achieved EUR 134 million in gross profit, our highest gross profit ever achieving industry-leading GPUs even as average selling prices declined year-on-year, with units essentially flat for over quarter with noneconomic significantly improved. We think we've now hit the term point in units and can take this profitable quarter as the right basis to move back towards growth.
While achieving our best-ever gross profit, we also reduced our OpEx base sustainably to EUR 134 million to also achieve our first positive EBITDA since our IPO, representing a EUR 36 million year-on-year improvement in EBITDA.
Bridging the key elements toward our profitability. We achieved about half of our early breakeven beat through an improvement in our gross profit by almost EUR 7 million, primarily by improved GPUs, growing our absolute gross profit will continue to be a key focus going forward. We achieved the other half of our breakeven move through improvements in OpEx, which we see as sustainable.
Moving through the individual items. Our reductions in marketing were primarily driven by the end of 2 large sponsorships for Autohero. The increased expense in internal logistics was partially achieved, it was partially the result of increased car buying. Employee expenses also improved by EUR 5 million, primarily the effect of decisions made in previous quarters.
As a result, we have reset our cost base to a new baseline level. As we move to growth mode from here, we will invest incrementally in sales and expanding our purchase channels, but doing so from the stronger GPU and unit economic levels that we have now achieved.
Liquidity continues to remain strong with cash and cash equivalents at EUR 545 million, actually up since the fourth quarter of 2022, even though we increased our inventory by over EUR 108 million and also our consumer loan portfolio by EUR 21 million.
As of every quarter, I will reiterate that both our inventory and consumer loan portfolios are financed through nonrecourse asset-backed securitizations and we have no corporate debt, enabling us to continue to invest in our growth.
As we go to guidance, we maintain our guidance on all KPIs, except adjusted EBITDA, where we increased our guidance from minus EUR 50 million to minus EUR 70 million to minus EUR 39 million to minus EUR 49 million for the full year. While we are now adjusted EBITDA breakeven sustainably across the year, and as mentioned, ready to shift to growth again, we want to be cautious as we head into year-end and specifically December, which has fewer working days due to the holiday season, therefore, inherently less profitable and a more volatile performance as dealers focus on year-end balance sheet. Therefore, while we are adjusting our full year EBITDA guidance upwards.
The implication is that we see the top end of Q4 adjusted EBITDA to be breakeven, similar to Q3 and the bottom end of sight loss for Q4. On the slide, we maintained our full year guidance range. I believe emerging units will come in at the bottom end of our distributed 5% of our 560,000 [ range ] so around 532,000 to 535,000 which still implies significant growth in Q4 over Q3 as well as year-on-year.
Retail units should be close to the middle of the range, implying significant growth quarter-on-quarter or flat year-on-year. We will be providing detailed 2024 guidance when we report in February.
As Christian mentioned, with our current unit economics, we see ourselves now in a position to return to growth as a result of our investments in tech, branding, data and processes. Now I'd like to turn it over to questions.
Was Markus also breaking up for you a little bit?
He was.
I mean, Markus, do you want to go through the slide with the guidance again because I think you were breaking up, and it is probably one of the key slides. Maybe you want to repeat that.
Can you hear me better now? I'll put on my speaker phone.
I think it was more like an Internet connection. I know you're in the office. But yes, let's try again. I think that -- yes.
Okay.
So let's try the slide again because I think that was like a little bit of network connection.
Specifically on guidance. On guidance, we maintain our guidance on all KPIs, except adjusted EBITDA, where we increased our guidance from minus EUR 50 million to minus EUR 70 million to minus EUR 39 million to minus EUR 49 million for the full year. While we are now adjusted EBITDA breakeven sustainably across the year and as mentioned, ready to shift to growth again, we want to be cautious as we head into year-end and specifically December, which has fewer working days due to the holiday season and therefore, inherently less profitable and a more volatile performance as dealers focus on year-end balance sheet.
Therefore, while we are adjusting our full year EBITDA guidance upwards, the implication is that we see the top end of Q4 adjusted EBITDA to be breakeven, similar to Q3 and the bottom end at a slight loss for Q4.
On the unit side, we maintained our formal full guidance range, but believe that merchant units will come in at the bottom end of our stated 5% throughout 560,000 range, around 432 to -- excuse me, 532,000 to 535,000, which still implies significant growth in Q4 over Q3 as well as year-on-year.
Retail unit should be close to the middle of the range, implying significant growth quarter-on-quarter or flat year-on-year. We will be providing detailed 2024 guidance when we report in February. But as Christian mentioned, with our current unit economics, we see ourselves now in a position to return to growth as a result of our investments in tech, branding, data and processes.
Now over to questions.
Hi, everyone. I am Rafael, you zoom operator.
[Operator Instructions]
And we will start with Catherine O'Neill from Citi. Catherine, you have quite a number of questions. Maybe you can put them into 2 rounds.
I won't ask them all just pasted them all into the box for now. But -- so yes, the first question actually is if you could give a little bit more detail on the main drivers of that level of increase you saw in GPU both in merchant and retail and how sustainable these GPU levels are in 4Q and into 2024? That's the first question.
The second one is on your increase in inventory and your unit guidance into the fourth quarter? Because I think last time you reported, you said dealers were still Saturday inventory to clear and there were some bottlenecks on the retail side with the in-house refurbishments. But given your guidance is now implying both quarter-on-quarter and 4Q on units. I just wondered what you're seeing in the market that's giving you that confidence to increase the inventory as we go into the last quarter and where we should think about inventory landing at the end of the year.
And then the third question is on the sort of unit growth and the return to growth for 2024, how we should think about that with possible kind of trade-offs on the margin, if there are any. And linked to that is, do you still -- are you still confident on hitting free cash flow breakeven in 2024?
Catherine, yes, maybe I'll start on the GPU block. So I would say the answer is twofold. On retail, we are seeing this positive trajectory that we have been taking as a quite stable value. So we would see probably a slight upside on the retail GPU for a year, but we're quite happy with the level that we are at now, maybe a slight upside on the retail side.
And then I think the merchant GPU numbers were very good. So I would say this is not the level that we now would target for every quarter, maybe slightly below that. But Markus, maybe you can also add to that.
And yes, your second question, I think, was the increase in inventory and how we see the remainder of the quarter going and how confident we are, what happens now that we think we can actually scale this. I mean, we've started to see more demand on the platform for our product, not only by the market. So I think you cannot count on the market right now. But I think that 70%, 75% of the input factors that are responsible for demand on our side.
So I think we started to go after them and set them in the right direction. We invest into the right areas to continue to see higher demand levels. And this is why we're quite confident when it comes to going into that higher unit trajectory. And maybe this is a good segue to let markets on the '24 unit growth and free cash flow.
Yes. So I think just kind of maybe starting with the point on I think Christian talked about retail GPU, which I think we see as sustainable at these levels and ones that we can keep and over time, also grow further even as we grow more units. I think on the merchant side, traditionally, we have given this guidance of 675 to 800 GPU, where we saw that merchant GPU. I think clearly, with the last few quarters having been either above the 800 or around the 800, I think we can take that up. But I don't think it's kind of permanently or necessarily over 100, but I definitely think that, that range should be at least EUR 50 higher of where we will be for the next few quarters.
And obviously, over time, I believe that, that too can go up. But I think for now, I think the GPU we had this quarter is a short term, if you will. I think Christian answered the inventory question. I think on the unit side, I think the key theme that hopefully you've heard this year is that we really wanted to take this year to improve permanently both GPU and unit economics. And I think we've done a lot of things to our business to move all of that positive and believe that on that basis, as I said, with the commentary I made earlier on the views, but I think you really say that overall, we've really just taken a full step forward in both of the businesses on the GPU.
So I believe that we can go to growth with those better and higher GPUs. I think on the merchant side, we'll be providing our more formal and detailed guidance together with our 2023 results in February.
I think overall, I think that we can get the merchant units to reach double-digit growth next year. And also think that in Autohero, we should be able to get mid- to high teens growth for next year as well. And as I said, we'll provide more detail when we do our formal guidance at the beginning of next year.
Okay. Just on the free cash flow, I just wanted to -- Yes. I just wondered if you still comfortable with that.
Yes. The intend to hit net -- kind of net income profitability over the course of next year. I think with some of the working capital movements, I don't necessarily want to kind of nail ourselves down to specific orders.
And I think actually, one of your questions earlier was inventory generally, Q4 actually tends to be a quarter where we build up -- where inventory tends to be built up that then quite rapidly builds off again in the first quarter, but certainly expect to be -- we are aiming to be making it profitable over the course of next year.
Over to [ Nick Hawkins ].
Yes. I just wondered whether you could make some comments, please, on how volumes have moved in your markets obviously seen what you've done, but I wonder how your markets have moved in terms of volume. You've kindly provided some price information, but I'd like to know what's happened to volume.
Yes. Thank you, Nick, for the question. So it's not that easy to have all the data just after closing because some of the markets reported really well. Like, for instance, Germany and some also other markets that are bigger and then a lot of other smaller European markets there. Statistics often is not that perfect when it comes to used car volumes, new car volumes are sometimes easier.
So our view is, while not having all the data at hand that we are seeing a slight upward trend in units year-on-year. So let's say, roughly 3%. If we take Q3 over Q3, 3% to 4%, that's our view at the moment. But quarter-over-quarter, it's pretty much flat. So this is our current view of European used car trading volumes.
And with that, to Julia [indiscernible] from UBS.
Yes. Sorry, yes, I just want -- I just wanted to ask about Autohero volumes for the next year. Obviously, already, you've said something on this, but if you can elaborate a bit on this, do you expect this strong growth to continue. Any details will be appreciated.
Yes, I mean I think as I said, I think we see growth of Autohero moving back into growth over for 2024. And from where we stand right now, we'd expect to see mid- to high digits growth in that business for next year.
Thank you, Christian. Thank you, Markus. I think that actually concludes the questions as well for today. So everybody, thank you very much. And we look forward to talking to you soon and otherwise at the next earnings call in February later.
Thank you, everyone. Thank you.
Have a good week. Bye-bye.