PARTS iD, Inc. (NYSE: ID) Third Quarter 2022 Results Conference Call November 9, 2022 4:30 p. m. Eastern Time
Participating companies
Nino Ciappina – CEO
Kailas Agrawal – Chief Financial Officer
Conference Call Participants
Maria Ripps – Canaccord
Mike Albanese – EF Hutton
Operator
Register today to discuss PARTS iD’s Q2 2022 monetary results.
Today’s call Nino Ciappina, Director General; and Kailas Agrawal, Chief Financial Officer.
I wish to emphasize that certain statements made in the presentation are forward-looking statements. These forward-looking statements reflect management’s judgment and research only to date and actual effects are likely to differ materially from existing expectations based on a number of points affecting the business of PARTS iD. Accordingly, you deserve not to place undue reliance on such forward-looking statements.
For a more detailed discussion of the dangers and uncertainties related to the forward-looking statements to be made during the convention call and webcast, we refer you to the forward-looking disclaimer included in our third quarter 2022 earnings release, which was provided to the SEC. today on the Company’s Form 8-K and most recent Annual Report. Form 10-K and other documents filed with the SEC. La Company assumes no legal responsibility for updating or adjusting prospective emails, whether as a result of new information, long-term events, or otherwise. In addition, the Company plans to consult to ensure the adjusted non-GAAP measures on this call. An explanation of those parameters and reconciliations of GAAP parameters with non-GAAP parameters can be found in today’s earnings release, which is also posted on the press release page of our online website. page at www. partsidinc. com. Finally, as a reminder, a slideshow accompanies the comments ready today.
This presentation can be viewed from the webcast link in www. partsidinc. com. With that, I give the floor to Nino Ciappina, executive director of PARTS iD. Nino?
Nino Ciappina
Thanks. Hello and thanks for joining us. It’s wonderful to reconnect with you today to share the highlights of the third quarter effects of PARTS iD. We remain focused on managing the elements of our business within our control to lead the organization in a fiscally responsible manner in this era of intense macroeconomic pressure. While a US customer concerned about inflation led to diminishing earnings effects in the third quarter, the expense relief measures we implemented in the last quarter delivered significant progress and profitability. As you may recall, in the current quarter we undertook several cost relief measures, adding headcount reductions in light of the market downturn, further optimizing advertising spend and cutting corporate overhead. and safe capital expenditures. These combined moves will generate annualized savings estimated at $12 million. These efforts allowed us to improve adjusted EBITDA in the third quarter compared to the prior year, despite a 22% decline in net earnings for the quarter. I am encouraged by this first sign of progress as we continue to focus on improving the basics of the business around profits, expanding margins and gaining better operating efficiency.
Since becoming a public company at the end of 2020, we have stated our purpose to generate successful long-term growth. Our most sensible priority is positive adjusted EBITDA and positive loose cash flow. More than 120 days are vital steps to achieving those priorities. We recognize that we have a long way to go, yet the team and I remain focused on executing the priorities that will guide PARTS iD towards sustainable and successful growth.
Now let’s move on to slide 4. For investors new to the PARTS iD story, I’ll start with a very brief review of our new business: our business, generation platform, and operating style. PARTS iD is a corporate-driven e-commerce with a project for the U. S. automotive aftermarket. UU. de more than $400 billion and the adjacent complex portion markets of more than $100 billion that we serve. Our platform business style combines more than 1,000 industry vendors, more than 4,500 active brands, more than 18 million SKU products, and more than 14 billion product and meeting knowledge points. With the visitor at the center, we use proprietary generation and knowledge to create exclusive user reports in which consumers can temporarily and seamlessly locate their portions and accessories through a combination of our highly professional platform usage and sales and visitor support agents.
Several key themes highlight the appeal of our platform’s trading style and highlight how PARTS iD stands out from the competition. Above all, our purpose-built e-commerce platform, combined with our proprietary gadget data, provides a highly differentiated visitor experience. This is evidenced through our product return rate, which continues to be only around 6% versus industry averages of over 20%. Secondly, our product catalog of more than 18 million product references and more than 4500 brands is unmatched. The efficient capital execution style with over 1000 suppliers has allowed us to temporarily scale our catalog and load adjacent verticals, unlike many others who have capital-intensive businesses.
With this brief history, I will review the highlights of the third quarter of 2022 and then hand it over to Kailas for review of our finances. Once Kailas is complete, I will cover our key expansion opportunities and strategic projects to capture that expansion. . After that, we will open the line for questions. Macroeconomic factors, in addition to inflation and low customer savings rates, are affecting discretionary spending and continue to be a drag on net profits in 2020 and 2021.
Historically, car accessories have not withstood periods of recession well. However, I am encouraged by our good fortune with regular consumers, who contributed 34. 5% of profits in the third quarter despite this challenging environment. Customers continue to show confidence through purchases from us and the number of them spending over $1,000 continues to grow. We’re excited about the positives: the consistent positive trends we’re seeing in repeat consumers and we have a number of projects underway, adding email marketing systems to continue evolving those vital signs of repeat consumers in the right direction. Compared to the third quarter of 2021, we recorded a reduction in the number of orders due to a 28% reduction in traffic and a 9. 5% reduction in conversion rate, which was partially offset by a 5. 8% increase in average order value.
The minimums in site traffic and conversion rate are attributed to widespread relief in client discretionary spending, along with our targeted relief in ad spend and a minimum in biological search traffic attributed to adjustments in the search engine algorithm. The average price of orders is basically due to the fact that we pass on higher shipping prices and inflation to the customer. Now let’s move on to slide 6. Supply chain disruptions continue to have an industry-wide effect, in part due to plant closures and port backlogs around the world. Our team continues to address these demanding situations by working intensively with key suppliers to forecast stock availability and manage backorders and cancellations.
We believe that those efforts are bearing fruit. In the third quarter, the order cancellation rate decreased by approximately 12% compared to the third quarter of last year and more than 6% compared to the current quarter of this year. Along with supply chain challenges, declining production and sales of new cars are also affecting the industry. While accessory sales have particularly declined as a result, we rely on repairs – the boost of parts market shares, as consumers increasingly decide to stay and repair their existing cars rather than wait months and pay the MSRP. for new cars. Last quarter, we introduced a personal label personal label logo of personal label spare parts called iD Select, which is now one of the 10 most sensitive fixed logos in terms of earnings with over 45,000 SKUs.
While still only a small component of our business, this quarter OEM revenue increased nearly 15% year-over-year. In addition, the combined margin of fixed and original appliances increased by almost 16% this quarter. For the first time nine months of 2022, sales of replacement portions and profits increased by 10% compared to the first nine months of 2021. Inflationary pressures remain a headwind. In response, we continue to wisely increase costs in the hardest-hit segments of our business to offset margin pressure.
Secondly, as I mentioned earlier, PARTS iD has close ties with Ukraine. It is home to many of our independent contractors. Fortunately, many of them have been able to migrate to safer regions in Ukraine or other countries and continue painting remotely. PARTS iD had no physical assets in the country. And, fortunately, we have brought this disruption under control with a moderate impact on normal business activities to date.
We’re keeping a big eye on the scenario, whether it’s protecting our team members and wanting operations and productivity. As the scenario evolves, we will adapt with mandatory and mandatory changes. While those points are challenging today, we are firmly focused on protection. profitability and prudent cash management. At the end of last quarter, we implemented a comprehensive cost-saving program, which reduced our workforce expenses by more than 20%. We have also optimized our advertising investments on maximum successful opportunities.
In addition, beyond last month’s expiration, we negotiated a new shipping contract that will generate more than 15% net of the decrease in outbound shipping rates. Together, those measures will create significant operating leverage that deserves to help offset the pressures I have just mentioned. While we still have work to do, the work we have done over the past two quarters is aimed at enabling us to tackle the existing macroeconomic environment and position ourselves as a more successful company once the headwinds subside. With that, I will move on to Kailas.
Kailas Agrawal
Thank you Nino. Good afternoon everyone. Now let’s move on to our functionality on slide 8. As we continue to revel in pressure demand, we are pleased to have made progress on our profitability profile this quarter. Compared to the third quarter of 2021, we made particular progress in adjusted EBITDA, especially given the 22. 1% drop in revenue.
Adjusted EBITDA this quarter positive at $159,000, compared to $138,000 last seen in the last era of the previous year. We also saw a significant improvement in operating loss this quarter, thanks to improving our gross margins, optimizing our ad finish and implementing more charge-saving initiatives. General and administrative. Compared to the third quarter of 2021, we reduced operating loss by nearly 30% this quarter. As we discussed last quarter, we took significant OPEX and CAPEX optimization moves midway through the current quarter and expect the savings to fully materialize in the third and fourth quarters of this year. By the end of the third quarter, we achieved approximately 84% of the savings.
In total, we expect those moves to save the company $12 million on an annualized basis. We continue to make further progress with our spending base this quarter. % relief on outbound shipping costs. Regarding slide 9, you can see that we increased our gross margins through 20 quarter-over-quarter base issues for the time being in a row. We also saw significant margin innovations year-over-year in our adjacent verticals and replaced an original portion business of 35. 1% and 15. 6% respectively.
While supply chain constraints will remain an obstacle for the rest of this year, the moves we’ve already taken, combined with continued margin improvement in our adjacent verticals, maintenance and OE quantities are aimed at protecting and expanding margins on the move. Go ahead. As a reminder, we basically apply a just-in-time and capital-efficient stock trading model. Since we have negligible stock, we do not have fulfillment prices on our operating expenses. To compare our gross margins well with the competition, we want a gross margin adjustment learned by your cost of execution. Returning now to our balance sheet and cash flow dynamics on slide 10, money was minimized to $3. 1 million in the 3 months ended September 30, 2022, basically due to a capital working replacement of $2. 1 million, a significant improvement from a minimum of $7. 7 million in operating capital. last quarter.
Cash used in net working capital since December 31, 2021 basically consisted of a reduction in visitor deposits of $6. 7 million, basically due to a 29. 8% reduction in the price of orders won in September 2022 compared to December 2021 and a relief on average. in days shipped and undelivered from 11. 6 to 9. 6 days and a minimum in accounts payable of $4. 4 million. This brought total assets to $37. 1 million as of Sept. 30 from $52. 5 million as of Dec. 31. The company has recently implemented several measures for its liquidity. Since June 2022, the Company implemented operating and capital expenditure discounts that aim to drive operating profitability and achieve annualized savings of approximately $12 million. The new shipping contract will save approximately 15% on net outbound shipping costs.
In addition, the Company recently announced a new $5 million senior secured term loan in a transaction led through JGB Capital, LLP to be used to cover capital and liquidity needs. The Company also has the ability, at JGB’s sole discretion, to obtain up to an additional $5 million of senior secured debt pursuant to the credit agreement. I will now call Nino again for a review of our strategic initiatives. Nino?
Nino Ciappina
Thank you Kailas. Let’s move on to slide 12. You can see that our long-term expansion path is important. The Specialty Automotive Appliance Market in the U. S. It has been estimated at $48 billion and it is estimated that 52% of this market is online and developing much faster than brick and mortar.
This is very promising because the specialized segment includes internal and external accessories, traditional wheels and functionality products, which in combination account for about 2/3 of our sales. The entire automotive aftermarket in the United States is estimated to be $439 billion. We have invested heavily in expanding our spare parts and original appliance repair product lines and are seeing very positive effects from this work. Now we have 34 major manufacturer brands, adding Dodge, Jeep, Hyundai, Lexus and approximately 2 million OEM SKUs, particularly expanding our product range to now offer consumers a diverse diversity of original and aftermarket devices on a single platform.
Then, to the right of this slide, is the estimated market length opportunity for the 7 adjacent verticals we introduced in 2018. These verticals are highly fragmented, and in most cases, there is no dominant line leader. This represents a great opportunity for us. With those adjacent verticals, we focus on boating, motorsports, motorcycles and motor homes, which together account for approximately $22 billion in the overall addressable market annually. Approaching those giant, developing markets with our low-efficiency asset and capital trading style is a huge opportunity and we’ve only scratched the surface.
We are on track for long-term growth. Now let’s move on to slide 13. Despite the short-term macroeconomic challenges, we also have many significant tailwinds in the industry. First, the share of the U. S. auto portions e-commerce market is expected to be large. succeed in more than $22 billion by 2023.
Second, the industry’s specialty appliances segment is expected to succeed at $55 billion through 2024, up from a record $50. 9 billion last year. Third, miles traveled returned to pre-pandemic levels. this year, which generated a strong demand for repair and maintenance products. Through August 2022, cumulative trips increased by 1. 7% or more than 36 billion vehicle miles. Fourth, many of the adjacent industries we serve are developing and are expected to continue to grow.
And finally, EV adoption is accelerating. This presents a challenge for our competition, which will have to rise to its positions of stocks that already require a lot of capital. The momentum of this category puts us in a smart position thanks to our lightweight asset platform model, which is designed in particular to operate smoothly and profitably load new emerging categories, such as electric cars, into our portfolio without significant equity investments. Now let’s move on to slide 14. We run the business to succeed in each of those dimensions through a technology-driven technique that positions our platform to adapt to the ebbs and flows of the macroeconomic environment.
Our original parts and appliances portfolio generated impressive margin expansion of nearly 16% this quarter. We are not expanding margins in those 2 categories, but we are also developing the business. and securing a new spouse who will offer more fulfillment sites and higher margins in key categories. We plan to commission this new spouse in the first part of 2023. In our adjacent verticals, we also continue to advance product catalog development.
This quarter, we added more than 3,000 marine and marine SKUs with 48,000 more new SKUs in the pipeline. We also added more than 60 new RV-specific brands this quarter. In addition, this quarter, we increased our margin for our cumulative adjacent verticals through 35. 1%. In terms of visitor acquisition and retention, repeat visitor revenue remained at the top with 34. 5% of overall revenue this quarter and the percentage of consumers who spent more than $1,000 with us increased to 5. 9%. We can continue to grow our unwavering visitor base as we move through CRM and email marketing initiatives.
Finally, we continue to make progress in optimizing prices and profits. We achieved positive adjusted EBITDA and continuous improvement in gross margin during the year. Looking ahead, we are confident in our ability to develop the company’s profit capacity despite today’s operational challenges. environment. Now let’s move on to slide 15. Before opening the call for questions and answers, I must leave you with the 6 key spaces of our company’s strategic vision, the expansion of personal etiquette; online and offline DIY services; Advanced positioning of supplier inventory; external expansion; cellular application; and evolve our platform style to a bilateral market.
The expansion of private labels into online and offline DIFM installations is one of the most exciting spaces of long-term expansion for the company. While our personal brand business is small today, the opportunity to earn long-term gross margins as we grow and grow those brands is substantial. . The do-it-for me segment remains very attractive to us and we continue to lay the foundation for long-term expansion. As our tire installation program continues to grow, we continue to look for new partners and more products and facilities beyond tires that we can put into effect and evolve over the long term. Then, complex stock positioning will result in reduced prices and higher shipping speeds.
As we look to the future, our virtual commerce platform based on data generation and intelligence can be replicated internationally, expanding our market. In addition, serving our consumers with the mobile app deserves to further enhance the visitor experience while increasing the frequency of purchases in the long run. And finally, in terms of our long-term vision, we are positioning ourselves to evolve our platform style into a portion and accessory market, with the help of our existing specialized generation and proprietary knowledge. Now let’s move on to slide 16 In conclusion, as I mentioned in the most sensible part of the call, we are focused and moving towards controlling the things under our control in this challenging macroeconomic environment.
I am encouraged by the progress we have made with our margin and profitability effects this quarter and am excited about the additional steps we have taken over the past 90 days to drive further improvements. Before opening the call for questions, I would also like to thank the entire PARTS iD team, both nationally and internationally, for their dedication, commitment and commitment to serving our customers. With this, we open the call for consultations.
Q&A session
Operator
[Operator Instructions] The first is by Maria Ripps de Canaccord.
Maria Ripps
First, I know you recently announced new term loan financing, but can you just tell us about your existing liquidity profile, especially given the challenging macroeconomic environment?in declining earnings during the quarter?And then, how do you plan to make profits grow again?
Nino Ciappina
Kailas will take the cash. And I will interfere and cover the 2 questions.
Kailas Agrawal
If I could say it, our existing money balance starting at $6. 5 million after that $5 million loan. We continue to face macroeconomic hurdles and the resulting decline in revenues and profitability will greatly update negative current capital. This was fueled by approximately $14. 4 million of money from our operating activities, of which $13. 6 million was attributable to 10 days of current capital in the nine months ended September 30, 2022. At this point, it even demonstrates that our significant money burning has been due to declining revenues and our negative working capital model. Of course, we continue to manage trades largely given liquidity constraints.
As we discussed in our script and presentations, we have implemented several liquidity measures. As of June 2022, the company has implemented discounts on operating and capital expenditures that aim to save approximately $12 million and we are very insightful about this, 84% have already been achieved on an annualized basis. Second, we have negotiated a new shipping contract, which will save approximately 15% net on outbound shipping costs. . And we also have the option to get another $5 million at the sole discretion of the future. In addition, in the next step, we have filed SC records and are actively working to activate capital raising for liquidity routing or expansion investment.
Nino Ciappina
Maria, commenting on the historic decline in revenue in those recession environments, car accessories have not fared well as consumers have reduced discretionary spending. Also, as you and others no doubt know, new vehicle sales have declined. According to available data in the third quarter, new vehicle sales fell 19% compared to the third quarter of 2019 due to shortages. Therefore, this has a direct effect on the demand for car accessories. And while used car prices appear to have stabilized, those costs are still about 40% higher than pre-COVID costs.
So only new and used vehicle sales have a direct effect on the accessory component of our business, which represents, as I said in our comments, about 2/3 of our product mix. Despite all this, we still achieved a positive EBITDA. We advanced more in the gross margin. And since the beginning of the year, we have increased our replacement portions and our profit by 10%. Regarding the third component of your query on a return to growth, given the existing macroeconomic uncertainties, it is difficult for us to comment on it. However, when the macro environment begins to improve, we are well poised to capture discretionary spend on accessories, given our extensive product catalog of 18 million SKUs and more than 4,500 brands. However, we are not sitting idly by waiting for the external environment to improve. We have made significant progress in developing our aftermarket business, as I just said, which is 10% more year to date compared to last year. Originally, device cash was up 50% year over year. Additionally, we are advancing our online and offline DIY initiatives.
As we reported last quarter, we now have more than 9,000 tire installation locations. And while this program is still modest in terms of revenue, we’re laying the groundwork and designing what will be the long-term of how this category will be purchased in terms of online to offline sales. Last but not least, in the third quarter, we added more than 3,000 marine and marine SKUs. We still have 48,000 parts in the works and have added over 60 new motorhome-specific brands to our Camper and vertical RV. Mary? It is ok. Operator, maybe we can take a follow-up consultation and come back, we can continue with it.
Operator
It is ok. Next comes from Mike Albanese of EF Hutton.
Mike Albanian
And I appreciate all the context and color it provided to the call, especially when it comes to the macro environment, which remains an obvious challenge. It has continuously highlighted the addressable market in adjacent verticals. You’ve added a lot of SKUs, you’ve noticed that your margins improved. Can it help me understand how much business you do, I suppose, outside of CARiD?And help me put that detail in context, I guess.
Nino Ciappina
Thank you for your club and support. Adjacent verticals now account for approximately 8% of our profits, from our sales in the third quarter. Therefore, it has decreased from year to year. Last year, the third quarter accounted for about 10% of sales. But like I said, discretionary spending is down.
So if you think about the categories, navigation, motorcycle parts, motorsports, they are all very discretionary categories. But despite all this, we continue to expand the product catalog in all those verticals, especially in navigation and VR. category in which we have added 3000 new SKUs in navigation and marine. And as I said, over 60 new RV-specific brands in CAMPERiD. com. So as customer demand starts to improve, we’ll be well placed to keep capturing it.
Mike Albanian
Yes definitely. I mean, it turns out you’re positioning yourself well for a rebound in discretionary spending that verticals would benefit from markedly. And then, in the same way, you can just you, and sorry if I missed this, my phone was turned off for a minute, but it’s the same with personal labels and OEMs. Obviously, he has noticed a phenomenal expansion there, increased margins. Can you put that in context as well?
Nino Ciappina
Absolument. La personal label is a very small component of our business today, accounting for less than 5% of sales. Therefore, we see this as a great opportunity to grow. And with this expansion in the volume of personal labels, there will be a direct improvement in overall gross margin. Therefore, the gross margin on our personal brand products is, in many cases, greater than 2 or 2x or 3x the margin on the rest of our assortment.
So in the long run, as we continue to grow brands like iD Select, like [Ricksu] and others, this will have a very positive effect on gross margin. And again, today, personal etiquette is less than 5%, so we have plenty of room to grow.
Mike Albanian
And then my last question, some measures with respect to your normal consumers. I mean, do you see regular consumers in a number of SKUs?Are you in a specific business domain or I guess you can provide a color in what?Those normal consumers come back?
Nino Ciappina
We don’t have that, well, we haven’t disclosed or shared it before. But what I would say is that, from a combination of contributions, accessories still make up 2/3 of our business and spare portions have now gone to — in the 3rd. quarter to constitute more than 25% of our business. Therefore, it is a combination of developing spare portions and a higher frequency of loyalty in this aspect of the business. As we continue to build this contribution, we do not expect anything positive. Upward movement in our normal visitor measurements. This is combined with the very intentional paints we do in CRM marketing and email marketing.
Our marketing team has made great strides in the email marketing systems we introduced that expired last year. And even there, we still have plenty of room to grow. It’s a one-year program, so there’s still a lot to accomplish there as well. .
Mike Albanian
Yes, you kind of put your finger on it. I mean that’s what I mean by those normal visitor correction products. So it’s very useful.
Operator
[Operator Instructions] Very well. There are no more questions at this time. Now I would like to give you once again, Nino Ciappina, for final comments.
Nino Ciappina
Thank you all for signing up for today’s call to update you on the progress we are making and we hope everyone will sign up with us in March to receive an update on fourth quarter and full year results. Thanks again to all our domestic and foreign members. Teammates for their hard work and dedication. Thank you.
Operator
Ladies and gentlemen, this concludes today’s teleconference. They can now disconnect their lines right now and the rest of the day.