Good day, and welcome to Vroom's First Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there’ll be a question-and-answer session. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to Liam Harrington, Vice President of Investor Relations. You may begin.

Good morning, everyone and welcome to Vroom's first quarter 2022 earnings call. Joining us on the call today are Bob Mylod, Executive Chairman; Tom Shortt, Chief Executive Officer; and Bob Krakowiak, Chief Financial Officer. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at ir.vroom.com. The first quarter 2022 earnings release and earnings presentation are also posted to the IR website. Before we begin, please note that the discussion today includes forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements about Vroom's operations and future financial performance. These and other forward-looking statements are subject to a number of risks, uncertainties and other important factors that may cause actual results to differ materially from those in such statements. We direct you to the company's most recent SEC filings, including the Risk Factors section of Vroom's most recent Form 10-K for the year ended December 31, 2021, as updated by our quarterly report on Form 10-Q for the three months ended March 31, 2022 for additional discussion of factors that could cause actual results to differ materially from those in the forward-looking statements. Please note further that today's discussion, including the forward-looking statements, speak only as of the date of this call, and Vroom assumes no obligation to update such statements based upon future developments or otherwise. The company may also discuss certain non-GAAP financial measures during today's call. You can find a presentation of the most directly comparable GAAP measures and a reconciliation of those measures in the first quarter 2022 earnings release and management presentation. I'd like to now hand the conference call over to Bob Mylod, Executive Chairman. The floor is yours.

Thank you, Liam, and thank you to all the investors, analysts and Vroom mates who are joining us for today's first quarter earnings release. We have quite a lot to cover today. One of the most important of which is today's announcement of executive leader changes. Specifically I'm very pleased to announce the promotion of Tom Shortt, from Chief Operating Officer to Chief Executive Officer. At the end of today's call, I hope you'll understand and appreciate why our Board of Directors is supremely confident that Tom is exactly the right person at the right time for Vroom. I cannot be more excited about his ascension to CEO and I and my fellow Board members are committed to doing everything in our power to help Tom and Vroom succeed. Speaking of our Board, we continue to be very engaged with management in shaping the direction of the business and have been having a number of discussions over the last few months about how to improve our operations and results. As you saw in our press release today, we have added the title of independent executive to my existing title of Chair of the Board. As independent executive chair, my job will be to counsel and advice Tom and help him with any of the critical decisions that he will be making in the coming year. My title is also meant to make clear that I and the Board are eager to be by management's side closely monitoring the results of today's actions and also being at the ready to continue to oversee any further course corrections that are necessary from here so that Vroom is in a position to win. I'd like to acknowledge that the past several months have not looked very much like winning. We know we fall…

Thank you, Bob, for that warm introduction. Good morning, everyone, and welcome to our first quarter earnings call. Before we dive in, I'd like to thank Paul for building one of the largest used automotive dealers in the country and for recruiting me to Vroom. I'd also like to thank all of our Vroom mates and our third-party partners for their support in serving our customers. Now let's start on slide four. I'm very excited that we completed our acquisition of United Auto Credit Corporation, or UACC, in February. I'd like to welcome all of our associates at UACC to Vroom. At UACC, we've already completed our first securitization during the quarter resulting in a gain of $30 million and we expect to complete another securitization in 2022 and anticipate a similar sized gain. Our expectation is that UACC will generate total securitization gains of $65 million to $75 million in fiscal year 2022. Our integration of UACC into our business is on track and UACC is already originating loans for Vroom customers. We exceeded our expectations in the first quarter coming in ahead of our guidance. We delivered a higher level of e-commerce units than we forecasted. Our e-commerce gross profit per unit, or GPPU, was more than $250 ahead of guidance and much more than our fourth quarter exit rate. We expect to further improve e-commerce GPPU for the full year versus the first quarter. Our adjusted EBITDA loss of $107 million was ahead of our expectations, thanks to our e-commerce segment results and the benefit from the gain of our first securitization by UACC. Our reconditioning network transition out of ADESA is on track as we allocate throughput to other sites. We intend to transition our remaining logistics hubs from ADESA locations by the end of the…

Thank you, Tom. I'll start with the highlights of our financial performance during the first quarter on Slide 9. I am pleased to report that we exceeded all of our key financial guidance targets for the first quarter. Total revenue of $924 million came in ahead of guidance by 6%. This revenue beat was driven by higher e-commerce revenue as we came in ahead on units and delivered a greater-than-anticipated contribution from retail financing following the acquisition of UACC. First quarter units increased 26% year-over-year to 19,473 and we're ahead of the high end of our guidance. Our performance was driven by stronger seasonal demand. During the first quarter, we focused on stabilizing and expanding e-commerce GPPU from fourth quarter levels and prioritize favorable unit economics over growth. In turn this drove sequential unit declines coupled with profitability improvement. E-commerce GPPU of $1763 was 18% ahead of our guidance with better-than-anticipated performance across both product and vehicle margins. Adjusted EBITDA loss of $107 million was ahead of our guidance by $23 million. Approximately half of the outperformance was driven by a higher-than-anticipated gain on sale from our first securitization. The other half can be attributed to our core Vroom business which benefited from better-than-expected e-commerce performance and improved execution versus our expectations. Before I go into our guidance for the year, I would like to mention a few extraordinary items to keep in mind as you think about normalized earnings. Due to further declines in our share price during the quarter, we conducted a quantitative assessment which resulted in a full impairment of our goodwill. This resulted in a $202 million onetime noncash charge during the first quarter. As we look ahead, we anticipate total cash charges of approximately $6 million in 2022 related primarily to severance and lease costs…

[Operator Instructions] Our first question comes from Rajat Gupta with JPMorgan. Your line is open.

Great answering the questions and thanks for all the detail in the slides. Just a question on your first one on unit economics. In 1Q excluding UACC, the EBITDA per car was a loss of roughly $6,500. The full year guidance implies 2Q to 4Q EBITDA loss of roughly $280 million or roughly $260 million excluding the non-recurring costs on maybe like 35,000 units or so for the remainder of the year. That's a loss of roughly $7,000 to $7,500 a car. Even as you assume a rate of roughly $7,000 after cost savings layering probably $1,000 from the captive finance integration, we still get to something like $6,000 of EBITDA loss per car which would imply a significant degree of cash burn next year as well roughly $400 million as per my calcs after accounting for UACC and CapEx on maybe 65,000 to 70,000 units next year. The fixed cost reduction in the realignment plan also seems to be just 14% workforce, but with units down roughly 50% in the near-term. So the question here is -- sorry for the long question, but you're trying to get comfortable with the new economics progression to a profitable level. And what level of volume will that take? And how do you expect to fund the business in the interim? Thanks. And I have a follow-up. Sorry for the long question.

Hi, Rajat. This is Tom. Thank you for the question. Before I answer your question I just want to clarify something I said on slide 5. I believe I said we expect to have liquidity at the end of the quarter of $0.5 billion I meant to say at the end of the year. Yes. So I appreciate your question Rajat. Here's how we think about it. This year as you can tell from our initiatives it's really about building the core processes systems and infrastructure we need to create a profitable business model. So within that we are very focused -- so the actions we've taken are intended to significantly improve variable contribution margin, which we're defining as GPPU less variable operating costs like marketing, customer experience and logistics. We expect our fixed cost to be reduced in absolute dollars. However, as you point out our fixed cost per unit will increase in the short-term. And we're maintaining our fixed costs because we have strategic assets in those fixed costs that we'll need as we accelerate growth.

Got it. So are you anticipating -- any color on when you what level of volume do you anticipate to be profitable with this new realignment plan, or is that something we will probably look to get at the Investor Day?

Yes. On the Investor Day we plan to share our long-term economic model. And we believe that the four initiatives that we've laid out today make significant progress not only in 2022, but in the years ahead and really lay the foundation for that continued improvement. So when you think about building a well-oiled title and registration machine, well-oiled metal machine and the regional operating model those things don't happen overnight. And as you implement those strategies, we'll expect continued positive unit economic momentum beyond 2022.

Yeah. The only thing Rajat I just want to add to that is if you look at the actions that we talked about today on the call, I mean those actions are essentially have all been taken. So just in terms of thinking about the cost reductions and how we're thinking about things, the headcount reductions those have all been announced and the actions that we're taking have -- we're already -- we're well down the path on those -- on all the items that we referenced.

And then lastly, conservative in our guidance given the unknown macroeconomic market for the balance of the year.

Got it, got it. And just one more on the first quarter. Is there a way to quantify the pressure of operational issues or Omicron or price mix in the first quarter on the e-commerce vehicle in GPPU? Just asking in order to get a sense of comfort around expectations of higher GPPU exiting the year in the used-car pricing environment that might moderate at some point? So just curious how do you manage that transition? Thanks.

So Rajat I've mentioned a couple of things. So we talked about the nonrecurring -- we've nonrecurring costs that we're going to incur the $17 million to $27 million in nonrecurring costs that we're going to be incurring this year. So that had an impact for us in the first quarter. With respect to Omicron and the reconditioning facilities, which has been an issue for us in prior quarters it was -- in January we had some disruptions and some issues in recon as a result of Omicron but really February-March for us has been -- has not -- we haven't had any issues as a result of the virus at all. Tom I, don't know if there's anything you want to add to that?

Yeah. The only thing I would add is and I can't size it for you, but we have brought in additional resources as we work through our titling and registration issues. And we are doing everything that we can to dramatically improve and take care of our customers. And that's been our focus in Q1 and in Q2. And so we'll be investing in those. But I can't size that for you at the moment.

And then maybe like any color on like when you say higher GPPU exiting the fourth quarter versus the 1,763, anyway to get a sense of like what magnitude you're looking at there, or where is it coming from? Is it primarily the product GPPU or is it a substantial portion from the vehicle GPPU? Just trying to get a sense of what's the run rate here once these operational hurdles have been addressed?

Yeah. What I can share with you today Rajat is we've made pretty significant changes in the way we think about pricing and the way we go to market. So if you think about the market we were in previously, we were really pushing all of our levers to get to triple-digit growth because that's where the market sentiment was. Over the last couple of months we've made some dramatic changes in how we think about overall unit economics, how we price the acquisition of cars, how we price the sale of cars and we implemented several changes over the last couple of months and we are seeing very favorable early results from those changes that have been implemented and we'll expect to share those as we announce Q2. But we expect them to be north of where we ended Q1.

Our next question comes from Zach Fadem with Wells Fargo. Your line is open.

This is Sam Reid pinch-hitting for Zach here. Wanted to maybe touch upon your unit guidance a little bit. I know you already talked about this in detail, but your guidance implies that you're stepping down units from 20,000 this quarter to roughly 10,000 on a run rate going forward. Can you talk about why you think this is the right level to balance growth and profitability? What drove that number specifically? And how long do you think we'll need to stay at this run rate before you can once again pivot back to growing units aggressively?

Yeah. Hi, Sam it's Tom. Thank you for the question. When we -- during the quarter as we implemented new metrics and data structures around titling and registration to really get a better handle on the challenges that we had, we started realizing where we're at and what we needed to do to get caught up. And so as we begin to decide how long it would take us to really improve the customer experience, we didn't want to continue to sell at a high rate when we know that we had those issues. So that was one factor. The second factor was we made dramatic changes in the way we price the cars we buy and the price that we sell cars at. And those two things combined led us to believe that this is the right level of units for the balance of the year to enable us to improve our structure around all four of the initiatives and at the same time improve our unit economics.

Yeah. That's super helpful. I really appreciate the color there, and then one quick follow-up. Can you talk about your plans for reconditioning in a bit more detail as you transition away from ADESA? Specifically, what we're looking for here is a sense as to what the balance is going to be maybe going forward between working with additional third parties versus what you're going to be taking in-house just that split there.

Yeah. I would tell you that we are looking at that. The way we think about that is we still have opportunities in our own reconditioning network in Houston, and we're going to continue to improve our own network while at the same time, we'll always with our third party partners. And we're going to take a very careful look at really what makes the most economic sense. And if it makes economic sense, we will look to potentially stand up a second VRC later this year, early next year, if it makes sense. So, it's really going to come down to the return on the investment after we go ahead and implement the opportunities that we think we have in our own reconditioning center.

That’s super helpful. I really appreciate. I’ll pass it on.

Thank you.

Thanks, Sam.

Our next question comes from Colin Sebastian with Baird. Your line is open.

All right. Thanks and good morning, everyone. A couple of follow-ups for me please. I guess first on the rationalizing the footprint beyond the ADESA transition. I'm curious where you're focusing from a regional perspective and how we reconcile that with improving customer delivery times given the national sales effort. And then maybe as a follow-up to the first question on the call, as we look ahead a few quarters and potentially some of these liquidity issues extending into 2023. Just curious on when you'd expect to potentially need to raise more capital in context of the realignment plan working out? Thank you.

Thank you for the question, Colin. On the first part, we are actively looking at where we want to be regionally. If you think about the way our business was built, we scaled nationally, which meant we were buying and selling cars nationally. We had built regional reconditioning -- a regional reconditioning network and logistics hub, but we didn't have our supply chain synchronized in a way that dramatically reduces the miles our vehicles travel. So, for example, you could buy a car in Southeast of the United States that may come from the northwest of the United States. And so, our intent going forward is we still want to offer customers that potential if they desire and really want the car in Seattle, but we're going to push more towards trying to buy and sell cars more regionally. And if you think about the three largest states in the country by population California, Texas, Florida, those obviously be key regions for us. But we're going to continue to work through what makes sense based upon the assets that we have, the customer base that we have and really the assortment density that we have in each region. Bob, do you want...?

Yes, to add color on your second question. I think it's just important to point out. I know we mentioned on the call today, we're executing on $200 million of annualized cost reductions and given the line of sight to $0.5 billion of liquidity at the end of the year. But really for us, this is really about living within our means in managing the business that way. So, there's obviously lots of things moving around right now with interest rates in the used vehicle market, what we're committed to as a leadership team and as a company is to live within our means get to that $0.5 billion of cash at the end of the year and then, we'll see where the market is and we'll continue to of course, correct and make the appropriate adjustments given the amount of resources that we have.

Yes. So I might add one more thing to your first question, which is -- so an example of something we've already implemented. When you go on our site today, based upon your ZIP Code, which we added recently, you're going to see cars in your search criteria that are sorted closest to you, with the cars farthest away from you being at the last search page. So small things like that are things that we're just beginning to do and I see this as a multi-year effort as we implement this. So if you think of other large supply chain transformation that I've been a part of in the past, you lay out the strategy you build the data and the analytics and then you begin implementing. And we've begun implementing, but I believe the path ahead is significant that we can achieve when this initiative is fully executed.

All right. That’s all helpful. Thank you.

Thanks, Colin.

Our next question comes from Seth Basham with Wedbush. Your line is open.

Thanks a lot and good morning. My question firstly, on the titling and registration issues. Can you give us some perspective on the time line for normalization on those issues please?

What I can share with you is that, we began making significant progress in Q1 towards improving our processes. We've already implemented a couple of systems that are dramatically improving our process. And I'll tell you there is a daily call every day we are making progress on improving the process. Right now, we're focused on ensuring that all our customers have vehicles that they can drive where we failed them. And we are building and having a strategy in place that we're working on that we think, as Bob mentioned in his remarks, could ultimately be a long-term competitive advantage for us. So we're not prepared to share an exact timing other than to tell you it is truly our number one priority. So there is a tremendous amount of focus on it.

Got it. Okay. Thank you. And you don't think that there are any long-lasting impact to your brand or relationships with DMVs from the issues you've experienced?

We certainly believe that we have some repairs to do there and we're actively working on that. But our first step is to ensure we take care of all our existing customers and ensure that all customers and purchases that are happening now, we deliver titles and registrations in that.

Got it. Okay. And my follow-up question is on pricing inventory management. You are changing some of your pricing tools and it also seems like you're shifting your inventory a little bit based on the market environment. But are you first thinking about focusing on certain areas of the market from a consumer income standpoint moving up or downstream? And then, secondly, from a pricing standpoint what's your goal in terms of pricing relative to the market?

Yes. We definitely -- our goal holistically on pricing is to be competitive in the market and those are analytics that we're looking more and more at, especially, over the last couple of months. We have begun tapering the number of units that we purchase to begin to right-size our inventory. And it really takes two things. It takes the metal supply chain and the title and registration supply chain to work, because for our cars to be listed for sale, we need to get the title. So we have initiatives in place to speed up the entire process. So if you think about how it works, we want to speed up how fast we pick up the car, because then we can put in inventory faster. So we have to pick it up faster. We have to pay off the loan faster. We have to get the title faster. And then we can make it available for sale faster. And the same thing with just traditional supply chain elements that you would do to improve inventory turns. So we have initiatives that we're focused on in both of those process -- processes to improve inventories over time.

Thank you.

Thank you.

Our next question comes from John Colantuoni with Jefferies. Your line is open.

Thanks for taking my questions. I wanted to start with the cost savings program. Given your business relies on third parties for reconditioning customer service and a fair amount of delivery, along with the fact that you said, you need to improve the user experience which presumably requires some investments in technology, I was curious if you could walk through kind of the key cost buckets or buckets of cost savings opportunities. And also maybe help give us a sense for how much of the realignment of our cost savings are coming from improved GPU or unit economics versus pure cost reductions?

Yeah, sure. Thanks for that question. John, this is Tom. The way we think about it is really driving productivity on all levers of the P&L. So we think we have opportunities across our costs really across the board. And the -- what you're seeing in the realignment plan is largely driven by contribution margin improvements, by improving our gross profit per unit as well as improving for example our marketing efficiency. We're very focused on and have already made several changes to only spend marketing on our highest ROI channels. And so we believe that we're just at the beginning of making those and we'll share with you in our Investor Day later in the month, how we think those levers will change in the long-term to build a profitable business.

Great. And maybe just talk about at least -- it sounds like you're going to be saving quite a bit of this for the Investor Day. But just talk about from a high level, how you're going to approach to realizing the improvements in per unit economics in light of macro headwinds like wage and parts and fuel inflation, higher levels of depreciation and other cost headwinds that are a bit out of your control?

Yeah. Thanks for that. We believe that the opportunities we have in just improving our basic business operations are significant particularly relative to the likely transitory economic things we're seeing like dual surcharges and other items. So for example, where -- our goal is to improve our marketing cost per unit by focusing on our highest ROI marketing channels. Our goal is to improve our transportation cost per unit by having our vehicles travel fewer miles. Our goal in the longer run is to have our customer experience cost per unit go down, as we automate and improve the processes in titling and registration. And our goal is to make sure we optimize our pricing and GPPU profitability, while being competitive, but also taking into account all the elements and the levers that we have. So that's what I mean where we think we have opportunities really across all line items on the P&L, as we start to build out the foundation and the infrastructure to drive true productivity improvement per unit cost basis as well as in GPPU.

Thanks. Appreciate the color.

Thank you.

Our next question comes from Naved Khan with Truist. Your line is open.

Okay. Thanks a lot. A couple of questions. So, on this sort of year-end cash position, I'm curious what are you thinking in terms of the exit cash burn rate versus where we are right? So, we're going to implement these strategies as we progress throughout the year and wondering how we end the year? And also in terms of the sort of the unit guide for the full year, should we think about the -- how should we think about the curve? Should we expect to kind of see a trough somewhere in the middle and then coming back up at the other end or should we model it kind of more evenly? And maybe just on the GPPU sort of dynamics from here on, the pricing environment continues to be pretty volatile, so just wondering what gives you the confidence in sort of the bridge you laid out for in your cash position and EBITDA?

Yes. Thank you for the question. I'll take the last two and then turn it over to Bob for the first one. We expect the units be relatively consistent over the next three quarters with possibly some seasonality downward pressure in Q4. And that -- and back to the GPPU, as I mentioned earlier, we implemented several changes already that we are seeing positive GPPU momentum from Q1 rates. And we believe that from the items that we've implemented already and the trajectory that we're seeing in units, that those two will look better than Q1 -- or the GPPU will look better in Q1 than rest of the year. And really the way I think about that is there's just -- the significant shift we made in the entire business driven towards triple-digit unit growth to more focus on profitability, we had some pricing levels that we are able to change to make that change and the changes are relatively significant.

With respect to the exit cash burn, really the way to think about it the actions that we're taking, we began those actions during the second quarter. And you can look at our existing run rate and then adjust for the actions that we've taken. But I think one of the things that's really important to understand in terms of exit run rate as well is just -- I also mentioned there is a third to fourth quarter securitization with UACC, which is another -- from an overall -- from an optimal EBITDA perspective another $35 million to $40 million in terms of improving the exit rate, depending upon market conditions and when we execute. But as we continue to improve on the transactional processes and kind of, talked about productivity -- and improve overall productivity, we are continuing to expect improvement in our overall run rate as we go through the year.

Yes. And just to add one last thing. Your point is well taken, which is why we built a large range in our forward guidance. We recognized that we're not operating in a vacuum and there are macroeconomic forces that could impact our GPPU.

thank you.

[Operator Instructions] There are no further questions. I'd like to turn the call back over to Tom Shortt for any closing remarks.

Thank you everyone for your time today and we look forward to sharing more additional details at our meeting later this month. Thank you and have a great day.

Thank you.

This concludes today's call. You may now disconnect.