VRM - NASDAQ

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 into an ever increasing bucket of companies that had attracted significant investor interest despite large losses because the markets were less focused on the pursuit of profit in exchange for delivering fast growth and large market share gains. Valuations of companies with that business profile has been decimated this year and the market is very clearly demanding much near-term visibility to profitability. We know full well that Vroom is squarely in this bucket. But to be clear, while we know that much of our valuation has to do with these macro market forces, we also know we have a lot of work to do on improving our operational execution. As in recent months, we have come up short in delivering a delightful experience to each and every one of our customers. Many of our challenges have revolved around the titling and registration of the cars that we buy and sell to and from our customers. We have always known that this is a tedious process one which requires a symphony of well-orchestrated handoffs from the many participants involved. The buyers, the sellers and the many consumer finance companies that lend to our customers, our floor plan lender and of course, state DMVs each with their own local rules and procedures that continue to evolve throughout the pandemic. It is manual and time-consuming. In the past several months, with the hyper growth of our business putting more and more strain on this important operational motion and recent developments in the way our partners handle this paperwork, we fell behind. The result has been too many customers that have bought cars from us and who have not been able to register their cars in a timely manner prior to their temporary license plates expiring. When this occurs, those customers are left with a car that they bought from us, but which they might not be able to drive. That is an unacceptable outcome for even one single customer yet alone the many that this has happened to. It has also put a strain on our relationships with the various states DMVs on who we and our customers rely to process our title and registration requests. And of course, it impacts our financial performance. It lowers inventory turns and increases the likelihood of markdowns. It increases customer returns or customer make good payments, which are harmful to gross margins. It also increases operating expenses associated with customer service calls or our employees making repeated efforts to obtain titles and tags. In the last few months, we have been incurring excess customer make good 10 legal expenses as we seek to remediate customer issues and address the concerns of certain state DMVs or regulatory bodies on whose doorsteps many of our customer complaints have arrived. From a balance sheet perspective, it has resulted at times over the last few months and our cash being inefficiently used to finance too much inventory, too many receivables, and too much restricted cash. All of this activity has added up to losses that are too high and negative cash flows that are in excess of those losses. I'm going to leave it up to Tom and Bob to talk in detail about what we are doing and in fact have already done in many of these areas to dramatically change this unacceptable dynamic. But I'm going to summarize it very succinctly. We are choosing to slow down until we get this right. Our goal is to take what is currently a challenge for us, title and registration processing and fix it to a point that it becomes a towering strength and a source of competitive advantage. At this moment, with these operational challenges I just described and with this stock market as a backdrop, we're pretty sure that investors are less interested in hyper growth and far more interested in understanding how we are going to marshal our resources. As Bob will explain, if we do this right and we strongly believe that we will, we expect to get to the moment when we are more nimble and ready to resume our growth. And we look forward to getting there, because when we do we'll be doing so with what I think is an extraordinary set of assets. First and foremost, I believe that we have built an incredible brand that is tapped into a megatrend that is not ever going away, the desire of customers to purchase their cars in a way that is consistent with what they have come to expect from the likes of Amazon or DoorDash. They want to transact digitally and they want their purchase delivered to their doorstep. I've been at this e-commerce game long enough to know that this trend is only heading in one direction as newer digitally demanding generations grow up and have the means to buy cars. And as we have reiterated over and over again, the market is absolutely enormous and still largely unpenetrated. Thus, we are not overly concerned about the temporary pause in our growth, because we expect the lion's share of digital commerce market share gains won't happen until 2023 and well beyond. Another asset that we have is our ability to source recondition and price our cars. Despite our challenges our customers are in large part in love with their Vroom cars. When that Vroom delivery truck rolls into a residential driveway with a shiny car, it is a magical customer moment. We know we are already good at delivering those magic moments and we are going to get better at it as we reduce delivery times and increase the percentage of our customers, who experienced this last-mile magic. If we do it consistently without incurring the back-end registration challenges that reduce NPS, we will gain loyalty and take a whole lot of market share. Again, another valuable asset is the newest addition to the Vroom family, United Auto Credit Corporation. We completed that acquisition in Q1 and it is of enormous strategic importance to Vroom, as it will ultimately allow us to earn the full economics associated with car loans on a very substantial percentage of our transactions. This is the type of asset that our bigger competitors Carvana and CarMax have benefited from for years. We now have that arrow in our quiver too and it will make Vroom a better more profitable company. As we scale this important cross-sell activity, the resulting financial benefits should show up in a meaningful way over time. But as Tom and Bob will explain, UACC's earnings for the remainder of 2022 will still largely emanate from a strong business that is built on its own. These earnings are substantial and they immediately contribute to Vroom's consolidated financial results, as illustrated in today's first quarter announcement. We hope that by giving you this visibility on UACC's capabilities and earnings power today, you will gain increased confidence that Vroom's strategic and financial position has been dramatically bolstered. And then lastly, I believe that our greatest asset is the management team that is going to go after this vision to become a large profitable business. It starts with Tom here and it goes from him to every member of the Vroom management team. As I get ready to hand the call over to Tom, I want to give him a proper introduction by pointing you to our first slide of our earnings presentation. When you examine Tom's domain knowledge in the areas where we need management expertise and when you appreciate that Tom knows what great looks like, because he has been a leader at some of the greatest consumer branded companies that depend on world-class logistics and operations to succeed. I hope you will join me in concluding that we could not have found ourselves a person that is more out of central casting for what Vroom needs now. I'd like to close my remarks on one final note. I want to thank Paul Hennessy for his six years of service at Vroom. He is responsible for cultivating each and every one of those assets that I just recounted and he leaves a team behind, every one of which, including Tom that he recruited mentored and put in a position to take the baton for them. I know I speak for Tom and Bob and wishing him well in his next endeavors. And with that, please allow me to hand it over to Vroom's new CEO, Tom Shortt.

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 third quarter. We reached record e-commerce last mile of delivery in the first quarter at 76% and maintained a high level of consumer sourcing. Yesterday, we announced our realignment plan. As we look forward, our plan is to prioritize unit economics over growth, reduce operating costs and maximize our liquidity. Our outlook for 2022 reflects this realignment plan. As we focus on these three objectives, we will scale back the business while we focus on improving GPPU, improving our operating processes, reducing operating costs and dramatically improving our customer experience. Compared to Q1 annualized, we expect to end the year with higher ecommerce GPPU, lower operating costs and year-end liquidity of $450 million to $565 million. The high-end of our estimated liquidity range is approximately $35 million less, than our cash on hand at the end of Q1. Announcing our realignment plan, let's go over the foundation of our realignment plan on slide 5. As part of our realignment plan, we intend to live within our means while accelerating our path to profitability and dramatically improving our customer experience. First, we intend to prioritize unit economics over growth. We intend to leverage our national brand, while we focus on regional operations that drive density. As we drive density, we expect our operating costs to reduce, and we'll be able to provide faster delivery times to our customers. We believe we have significant opportunity to optimize our pricing engine, when we buy and sell vehicles. We intend to maximize the power of UACC. Second, we are focused on reducing our operating expenses, reducing marketing costs by focusing on our highest-ROI marketing channels, and aligning spend with reduced volumes, resizing the organization to focus on profitability over growth. Refocusing our technology spend to drive cost efficiency and productivity. Third, we will focus on maximizing our liquidity and preserving cash, while we position the business for profitability. We intend to reduce and convert major balance sheet items into unrestricted cash. We are focused on dramatically improving our customer experience including our titling and registration process, while we improve our liquidity by freeing up restricted cash. We expect to end the quarter with approximately $0.5 billion of liquidity at the midpoint of the range. Turning to slide 6, as we look to the future our goal is to build a profitable business model, and then accelerate growth. We believe four very, focused initiatives will position the company for a profitable business model. First and most importantly, in the short-term, we are investing in building a well-oiled titling and registration machine. As Bob indicated earlier, as we've scaled the business our processes, systems and infrastructure have struggled to keep up with the growth. We are focused on leveraging technology to improve our current manual titling and registration process. We expect to improve our cycle time, minimize manual steps and resources add significant automation to the process, improve our unit economics and most importantly, improve our customer experience. Second, we intend to build a well-oiled metal machine. How we buy, move, recondition, sell, deliver and price vehicles. We are rationalizing our near-term reconditioning capacity following the ADESA exit and our expected unit volume. We intend to maintain third-party partners while also pursuing low capital in-house opportunities and reconditioning line-haul and last mile. Our goal is to optimize the end-to-end supply chain by synchronizing how we buy move and recondition units to reduce cycle times reduce supply chain costs and improve customer delivery times. We intend to build into our pricing engine our end-to-end supply chain and UACC captive finance model to improve the customer value proposition while optimizing our unit economics. Third we will build a regional operating model, leveraging our national brand. We intend to sell nationally, but operate more regionally around our reconditioning centers and transportation hubs. We expect to build density in regions to drive marketing and supply chain economics, while improving customer delivery times. We have a significant opportunity to reduce the number of miles our vehicles travel which will reduce inbound and outbound shipping costs. And fourth, we will build a captive finance offering with our recent acquisition of UACC. We are very pleased with our acquisition of UACC and intend to continue to grow their core business, as well as grow our captive financing for Vroom customers. We believe, we can improve conversion rates and improve unit economics, while improving the customer experience. The US automotive market is massive, highly fragmented with low e-commerce penetration compared to other retail categories. We operate a broad assortment of thousands of vehicles with no haggle pricing purchased on your favorite device from anywhere our customers choose, delivering their vehicle right to their driveway. We believe e-commerce penetration will continue as it has in other retail categories. Like other e-commerce retailers, we believe key to delivering a compelling e-commerce value proposition and a profitable business model is a seamless buying experience, a seamless efficient and predictable supply chain with density as a key driver of supply chain economics and the ability to make credit available to our customers. We believe our four focused initiatives will position us to capitalize on the significant market opportunity. Turning to Slide 7. I look forward to providing everyone more detail on our forward outlook at our upcoming investor event on May 26. We will provide more detail on our three key objectives: prioritizing unit economics over growth, reducing operating expenses and maximizing liquidity. As well as our four focused strategic initiatives, most importantly build a well-oiled titling and registration machine, build a well-oiled metal machine build a regional operating model that drives density, build a captive financing offering. I'll turn it over to Bob now to go through our financial performance in the first quarter and give you more detail on the forward outlook. Bob?

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 associated with the realignment plan. The company expects to achieve at least $25 million in annualized cost savings as a result of these payments. In total, the realignment plan is expected to drive $135 million to $165 million in cost reductions and operating improvements to full year 2022 adjusted EBITDA versus our first quarter 2022 annualized rate. This represents approximately $180 million to $220 million in savings on a fully annualized basis. Finally, we anticipate approximately $17 million to $27 million in non-recurring costs for the year to address operational and customer experience issues. These costs should not be part of our 2023 run rate. Now let me share the components of our annual guidance. For the full year, we expect approximately 45,000 to 55,000 ecommerce units. This represents a reduction from first quarter levels as we prioritize unit economics over growth. We are expecting remaining units for the year to be spread fairly evenly by quarter with some modest seasonal variance. We anticipate an adjusted EBITDA loss for 2022 of approximately $375 million to $325 million. Within this, we forecast ecommerce GPPU to continue to improve for the second quarter and to be higher in the second half than the first half, as we normalize vehicle margins and expand product margins as we scale captive financing. We also anticipate lighter quarterly SG&A spend in Q2 through Q4 versus the first quarter, as we realized immediate benefits from the realignment plan. I will go through these savings shortly in more detail. We are also providing guidance on our year-end liquidity position. We anticipate approximately $0.5 billion of liquidity at the end of the year, which is only a $100 million reduction in liquidity over the next three quarters. Now let's take a closer look at our ecommerce performance in the first quarter on Slide 10. Our first quarter results demonstrated meaningful improvement from fourth quarter levels and came in ahead of our expectations. Ecommerce units increased 26% year-over-year to 19,473 units driven by increased inventory and ongoing demand for used vehicles. Units contracted sequentially as expected as we increased our focus on improved unit economics. Ecommerce revenues increased 60% year-over-year to $675 million driven by a 26% growth in units and the 27% increase in ecommerce average selling prices. Average selling prices decreased slightly sequentially yet remained elevated on a year-over-year basis. Ecommerce vehicle GPPU of $595 declined year-over-year yet improved 26% sequentially from fourth quarter levels. We have more work to do to fully restore our vehicle GPPU as we move through the year and expect improvement. Ecommerce product GPPU of $1,168 increased year-over-year and sequentially. The year-over-year increase was driven by higher attachment rates and higher average loan balances due to higher average selling prices. Next please turn to Slide 11. Before I go through our 2022 guidance in more detail, I wanted to provide some commentary on how our financial statements will be impacted by the acquisition of UACC. First, let's begin with the income statement. In the first quarter, you can see that we added a new Retail Financing segment. This segment includes UACC loans originated to independent dealership customers. Revenue for this segment includes gains and servicing income related to securitization of UACC originations as well as interest income for acquired loans that remain on the balance sheet. This segment also has expenses within cost of sales, which are related to historical securitization expense on the balance sheet. Over time captive finance will impact product revenue and gross profit for the ecommerce segment, as we scale UACC originations to finance vehicle sales. Since we completed our acquisition of UACC in February, the impact to Ecommerce segment results was insignificant in the first quarter for captive financing. Now a few highlights around loan originations in the balance sheet. In the first quarter, we originated approximately $118 million of new loans. We also have $350 million of unused capacity on warehouse credit lines available as of the end of the first quarter. We will continue to have a portion of legacy dealership loans and related securitization debt acquired from UACC that will unwind over the next 18 months or so. These loans and debt are marked at fair value each quarter. Since this loan portfolio will eventually run off and represents the prior on-balance sheet securitization model in contrast to the current off-balance sheet securitization model we are reflecting a $5.6 million fair value adjustment to adjusted EBITDA. I encourage you to review our recently filed 10-Q for more details on the incorporation of UACC's financials into Vroom's consolidated results. Turning to slide 12, I would like to provide some details on our realignment plan and provide more context on its financial impact. The business realignment plan is designed to position the company for long-term profitable growth by prioritizing unit economics over growth, reducing operating expenses and maximizing liquidity. All in, we expect to deliver approximately $135 million to $165 million in cost reductions into operating improvements versus our first quarter run rate for 2022. The full annualized rate of those savings would be approximately $180 million to $220 million. To achieve these savings, we are executing a number of actions. We are reducing our headcount by approximately 270 positions, which equates to 14% of our workforce. We will also improve unit economics, through a more disciplined pricing approach expanding vehicle and product GPPU. Next, we are focusing our marketing dollars to align with lighter throughput and acquisition expectations and pivoting towards our highest ROI channels. As we look at our core operating model, we will build a more regional approach, which will reduce logistics costs over time as we drive speed and shorter distances from node to node and to the customer. Finally, adding more automation into our sales process will reduce our number of manual transactions improve the customers' experience and drive further SG&A savings. Slide 13 explains our full year EBITDA guidance, which incorporates the realignment plan. We forecast significant improvement from our first quarter run rate. We began by comparing an annualized first quarter run rate for Vroom, excluding EBITDA for UACC. We are doing this, because we will not be issuing a securitization every quarter in 2022. I will add the first quarter impact of the securitization later in the bridge. Annualizing first quarter adjusted EBITDA results in a loss of $548 million. As I referenced, we expect approximately $135 million to $165 million of cost savings and operating improvements for the remainder of the year from the underlying Vroom business as a result of the realignment plan. Next, we anticipate approximately $65 million to $75 million from UACC Vroom financing for the full year, with $30 million already realized in the first quarter. We anticipate the next securitization to occur in the third and fourth quarter of this year based on market conditions. These benefits are partly offset by $17 million to $27 million of non-recurring costs for the year to address operational and customer experience issues. Taking these adjustments into account, we expect to end the year with a $375 million to $325 million adjusted EBITDA loss. Page 14 contains more information regarding the expected cash and cash equivalents at year-end. As I mentioned, we are forecasting approximately $450 million to $565 million of liquidity at year-end based on the following bridge. As of March 31, we have approximately $600 million in cash and cash equivalents. Based on the guidance I covered on the prior slide, we expect adjusted EBITDA loss for Q2 to Q4 in total to be between $268 million and $218 million, most of which is expected to be cash. This includes an expected gain on securitization from UACC of $35 million to $45 million in the second half of the year. Next, we expect CapEx to be approximately $35 million to $45 million for the rest of the year, as we continue to invest in improving our captive finance processes and anticipate capital for a dedicated Vroom reconditioning facility. We will partially offset those uses of cash with a transfer of $125 million to $150 million, of restricted cash to cash and cash equivalents, as we improve our transactional processes. In addition, we expect to see improvements in cash flow from UACC, Vroom financing and working capital initiatives net of realignment costs. Approximately $0.5 billion of cash and cash equivalents at year-end will position us well for 2023 and beyond. Turning to slide 15. In addition to the $600 million of cash and cash equivalents at the end of the first quarter, we have $700 million of capacity under our floor plan facility. Going forward, we expect continued incremental sources of liquidity from working capital efficiencies, future ABS and forward flow transactions and incremental borrowing availability on UACC's balance sheet. Finally on slide 16. In summary, during the first quarter, we exceeded our expectations on our first quarter financial guidance metrics. We began to position the business to focus on unit economics and improved profitability. Our 2022 guidance is underpinned by cost and operational improvements from the realignment plan. Our acquisition of UACC will be transformational for our business and will provide an additional source of cash. And finally improvements in our processes and working capital will position us to optimize our cash usage for the balance of the year. Thank you for your time and attention today. Operator, we are ready for questions.

[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

This is Sam Reid pinch-hitting for

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

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.