PARTS iD, Inc. (NYSE:ID) Q3 2022 Results Conference Call November 9, 2022 4:30 PM ET
Company Participants
Nino Ciappina – CEO
Kailas Agrawal – CFO
Conference Call Participants
Maria Ripps – Canaccord
Mike Albanese – EF Hutton
Operator
Thank you for joining us today to discuss PARTS iD’s Third Quarter 2022 Financial Results.
On today’s call are Nino Ciappina, Chief Executive Officer; and Kailas Agrawal, Chief Financial Officer.
I would like to point out that certain statements made during the presentation are forward-looking statements. These forward-looking statements reflect management’s judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting PARTS iD’s business. Accordingly, you should not place undue reliance on these forward-looking statements.
For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in the conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our third quarter 2022 earnings release, which was furnished to the SEC today on Form 8-K as well as the company’s most recent annual report Form 10-K and other filings with the SEC. The company does not undertake any obligations to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, the company plans to refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics and reconciliations of GAAP metrics to those non-GAAP metrics can be found in the earnings release issued earlier today, which is also posted on the press release page of our website at www.partsidinc.com. Finally, as a reminder, a slide presentation is accompanying today’s prepared remarks.
This presentation is viewable from the webcast link located at www.partsidinc.com. With that, I’ll turn the call over to Nino Ciappina, Chief Executive Officer of PARTS iD. Nino?
Nino Ciappina
Thank you. Good afternoon, and thank you for joining us. It’s great to reconnect with you today to share the details of PARTS iD’s third quarter results. We remain intently focused on managing the elements of our business within our control to steer the organization in a financially responsible manner through this period of intense macroeconomic pressure. While an inflation-wary U.S. consumer resulted in lower top line results in the third quarter, the expense saving measures we implemented last quarter led to notable progress and profitability. As you’ll recall, in the second quarter, we undertook several cost-saving actions, including reducing headcount in light of the market slowdown, further optimizing advertising spend and reducing corporate overhead and select capital expenditure. These actions combined will provide an estimated $12 million in annualized savings. These efforts allowed us to achieve an improvement in third quarter adjusted EBITDA compared with a year ago despite net revenue declining 22% in the quarter. I am encouraged by this first sign of progress as we continue to focus on improving the business fundamentals around revenue, margin expansion and enhancing operational efficiency.
Since becoming a public company at the end of 2020, we have repeatedly stated our goal to drive long-term profitable growth. Our top priority is positive adjusted EBITDA and positive free cash flow. And the expense savings measures we’ve implemented over the last 120 days are significant steps towards achieving those priorities. We recognize that we have a long path ahead of us, but the team and I remain intently focused on executing the priorities that will guide PARTS iD towards sustainable and profitable growth.
Turning now to Slide 4. For investors new to the PARTS iD story, I’ll start with a very brief overview of our new — of our business, the technology platform and our operating model. PARTS iD is a technology-driven digital commerce company on a mission to transform the $400 billion-plus U.S. auto aftermarket and the $100 billion-plus adjacent complex parts markets we serve. Our platform business model brings together over 1,000 industry suppliers, more than 4,500 active brands, over 18 million product SKUs and over 14 billion product and fitment data points. With the customer at the center, we use proprietary technology and data to create unique user experiences where customers can quickly and easily find their parts and accessories through a blend of our easy-to-use platform and highly skilled sales and customer service agents.
There are several key points to highlight the attractiveness of our platform business model and underscore how PARTS iD is distinguished from the competition. First and foremost, our purpose-built digital commerce platform, combined with our proprietary fitment data, delivers a highly differentiated customer experience. This is evidenced by our product return rate, which continues to be approximately just 6% compared to industry averages of more than 20%. Second, our product catalog of more than 18 million product SKUs and over 4,500 brands is unrivaled. Third, our asset-light and capital-efficient fulfillment model with over 1,000 suppliers has enabled us to scale our catalog size quickly and to add adjacent verticals, unlike many others that have substantially more capital-intensive businesses.
With that brief background, I’ll walk through the key highlights from the third quarter of 2022 and then I’ll turn it over to Kailas for a review of our financials. After Kailas finishes, I will cover our key growth opportunities and the strategic initiatives to capture that growth. After that, we’ll open the line to questions. Turning now to Slide 5. Macroeconomic factors, including inflation and low consumer savings rates are impacting discretionary spending and continues to be a headwind for net revenue compared to 2020 and 2021.
Historically, car accessories have not fared well during the recessionary times. However, I’m encouraged by our success with repeat customers, which contributed 34.5% of revenue in the third quarter despite this challenging environment. Customers continue to demonstrate confidence purchasing from us and the number of them spending over $1,000 continues to grow. We’re excited about the positive — about the consistent positive trends we are seeing from repeat customers and we have a number of projects underway, including e-mail marketing programs to continue moving these important repeat customer metrics in the right direction. Compared to the third quarter of 2021, we saw a lower number of orders due to a 28% decrease in traffic and a 9.5% decrease in conversion rate that was partly offset by a 5.8% increase in average order value.
The decreases in traffic and site conversion rate are attributed to a widespread reduction in consumer discretionary spending, coupled with our purposeful reduction in advertising spending and a decrease in organic search traffic attributed to search engine algorithm changes. The 5.8% increase in average order value is primarily due to us passing higher shipping and inflation-related cost to the consumer. Turning now to Slide 6. Supply chain disruptions continue to impact the broader industry due in part to continued factory closures and port backlogs around the world. Our team continues to navigate through these challenges by partnering closely with key suppliers to more precisely forecast inventory availability and manage against back orders and cancellations.
We believe these efforts are working. In the third quarter, order cancellation rate decreased nearly 12% compared to the third quarter of last year and more than 6% compared to the second quarter of this year. Along with the supply chain challenges, the decline in new vehicle production and sales is also impacting the industry. While accessories sales have declined significantly as a result, we are building on the repair — on the repair parts momentum as consumers are increasingly choosing to hold on to and repair their existing vehicles rather than wait months and pay over MSRP for new vehicles. Last quarter, we launched a repair parts private label house brand called iD Select, which is now a top 10 repair brand by revenue with over 45,000 SKUs.
While this is still a small portion of our business, this quarter, originally equipment revenue increased nearly 15% year-over-year. Additionally, the combined repair and OE margin expanded by nearly 16% this quarter. For the first 9 months of 2022, repair parts sales and profit are both up 10% compared to the first 9 months of 2021. Inflationary pressures continue to be a sizable headwind. In response, we continue to raise prices judiciously across the most impacted segments of our business to offset margin pressure.
Next, as I mentioned earlier, PARTS iD has strong ties to 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 to other countries and are continuing to work remotely. PARTS iD had no physical assets in the country. And fortunately, we have managed this disruption with modest impact to regular business activities to date.
We are closely monitoring the situation, both the safety of our team members and the need to maintain operations and productivity. As the situation continues to evolve, we’ll adapt with any needed adjustments as appropriate. While these factors are a challenge today, we are intently focused on protecting profitability and prudently managing cash. Late last quarter, we implemented a global expense saving program, which reduced our personnel-related expenses by more than 20%. We also optimized our advertising investments to the most profitable opportunities.
In addition, late last month, we negotiated a new shipping contract that we anticipate will yield more than 15% net in lower outbound shipping rates. These measures together will create meaningful operating leverage that are projected to help offset the pressures I just detailed. While we have more work to do, the work we’ve completed over the last 2 quarters are intended to enable us to weather the current macroeconomic environment and positions us as a more profitable company once headwinds subside. With that, I’ll turn it over to Kailas.
Kailas Agrawal
Thanks, Nino. Good afternoon, everyone. Turning now to our performance on Slide 8. While we continue to experience demand pressure, we are pleased to have made progress with our profitability profile this quarter. When compared to third quarter of 2021, we made significant improvement in adjusted EBITDA, particularly considering the 22.1% decrease in top line revenue.
Adjusted EBITDA this quarter was a positive $159,000 compared to $138,000 last in the last — in the year ago period. We also saw a significant improvement in degree of operating loss this quarter as we improved gross margins, optimized our advertising spend and implemented additional SG&A saving initiatives. Compared to the third quarter of 2021, we reduced operating loss by nearly 30% this quarter. As we discussed last quarter, we took significant operating and capital expenditure optimization measures in mid-quarter 2 and expected the savings to materialize fully over the course of third and fourth quarter this year. At the end of quarter 3, we have realized approximately 84% of the savings.
In total, we anticipated that these actions will save the company $12 million on an annualized basis. We continue to make additional headway with our expense base this quarter. Recently, we negotiated an improved shipping contract that is projected to yield a 15% net reduction in outbound shipping costs. Turning to Slide 9, you can see that we improved gross margins by 20 basis points quarter-over-quarter for the second consecutive quarter. We also saw significant year-over-year margin improvements within our adjacent verticals and replaced an OE part business of 35.1% and 15.6% respectively.
While we believe that supply chain constraints will continue to be headwind for the remainder of this year, the actions we have already taken, combined with continued margin improvements within our adjacent verticals, repairs and OE parts of business are intended to protect and grow margins going forward. As a reminder, we primarily operate a capital-efficient, just-in-time inventory business model. Since we have negligible inventory, we do not have fulfillment costs in our operating expenses. To properly compare our gross margins with the competition requires an adjustment of completed gross margin for their fulfillment cost. Turning now to our balance sheet and cash flow dynamics on Slide 10, cash decreased by $3.1 million in the 3 months ended September 30, 2022, primarily due to change in working capital of $2.1 million, a significant improvement from $7.7 million decrease in working capital last quarter.
The cash used in the net working capital since December 31, 2021, primarily consisted of a decrease in customer deposits of $6.7 million, driven largely by 29.8% decrease in value of orders received in September 2022 compared to December 2021 and a reduction in average on shipped and undelivered days from 11.6 to 9.6 days and a decrease in accounts payable of $4.4 million. This brought total assets to $37.1 million at September 30 compared to $52.5 million at December 31. The company has recently implemented several measures to support its liquidity. Since June 2022, company implemented reductions in both operating and capital expenditures that are intended to drive operating profitability and achieve approximately $12 million in annualized savings. The new shipping contract will approximately be saving 15% net outbound shipping costs.
Additionally, the company recently announced a new $5 million senior secured term loan in a transaction led by JGB Capital, LLP intended to be used for working capital and liquidity needs. The company also has the ability in JGB’s sole discretion to receive up to additional $5 million of incremental senior secured debt pursuant to the credit agreement. I will now turn the call back to Nino for a review of our strategic initiatives. Nino?
Nino Ciappina
Thank you, Kailas. Turning to Slide 12. You can see that our runway for long-term growth is substantial. The specialty automotive equipment market in the U.S. was estimated to be a $48 billion market and is estimated that 52% of this market is online and is growing much faster than brick-and-mortar.
This is very promising as the specialty segment includes interior and exterior accessories, custom wheels and performance products, which together represent approximately 2/3 of our sales. The overall U.S. automotive aftermarket is estimated to be a $439 billion market. We’ve invested heavily in growing our aftermarket repair and original equipment product lines and we are seeing this work yield very positive results. We now have 34 major manufacturer brands, including Dodge, Jeep, Hyundai, Lexus and approximately 2 million original equipment product SKUs, which has significantly broadened our product selection to now provide customers with a diverse range of both aftermarket and original equipment parts, all in a one-stop shop platform.
Next, looking to the right of this slide is the estimated market size opportunity for the 7 adjacent verticals we launched in 2018. These verticals are highly fragmented and in most cases, there is no dominant online leader. This presents a substantial opportunity for us. With these adjacent verticals, we’re focused on boating, power sports, motorcycle and RV camper, which together represent an estimated $22 billion of total addressable market annually. Addressing these large and growing markets with our asset-light, capital-efficient business model is an enormous opportunity and we’ve only scratched the surface.
We believe we’re on the right path for long-term growth. Turning now to Slide 13. Despite the near-term macroeconomic challenges, there are many significant industry tailwinds at our back as well. First, the U.S. auto parts e-commerce market share is projected at over $22 billion by 2023.
This is up from $16 billion in 2020. Second, the specialty equipment segment of the industry is forecasted to grow to $55 billion by 2024, up from a record $50.9 billion last year. Third, miles driven rebounded back to pre-pandemic levels earlier this year, driving strong demand for repair and maintenance products. Through August of 2022, cumulative travel have increased by 1.7% or over 36 billion vehicle miles. Fourth, many of the adjacent industries we serve are experiencing growth and are projected to continue growing.
And finally, EV adoption is accelerating. This presents a challenge for our competitors who must add to their already capital-intensive inventory positions. We believe this category dynamic leaves us well-positioned with our asset-light platform model, which is purpose-built to easily and cost-effectively add new and emerging categories like EV to our catalog without large investments in inventory. Turning next to Slide 14. We’re orienting the business to succeed across each of these dimensions through a technology-first approach positioning our platform to adapt to the ebbs and flows in the macroeconomic environment.
Our aftermarket repair and original equipment catalog delivered impressive margin growth of nearly 16% this quarter. Not only are we growing margins in these 2 categories, but we are also growing the business. This quarter, we made further progress with our body parts and repair business by identifying and securing a new partner that will offer more fulfillment locations and increased margins in key categories. We plan to go live with this new partner in the first half of 2023. In our adjacent verticals, we continue to make progress developing the product catalog there as well.
This quarter, we added over 3,000 boating and marine SKUs with another 48,000 new SKUs in the pipeline. We also added more than 60 new RV-specific brands this quarter. Furthermore, this quarter, we increased our margin for our cumulative adjacent verticals business by 35.1%. With regards to customer acquisition and retention, repeat customer revenue remained strong at 34.5% of total revenue this quarter and the percentage of customers who spent more than $1,000 with us grew to 5.9%. We believe we can continue growing our base of loyal customers as we continue making progress with CRM and e-mail marketing initiatives.
Lastly, we continue to make progress in pricing and profit optimization. We delivered positive adjusted EBITDA and continuous gross margin improvement all year. Looking ahead, we are confident in our ability to drive increased profitability for the company despite today’s challenging operating environment. Turning next to Slide 15. Before we open up the call for Q&A, I want to leave you with the 6 key areas of our company’s strategic vision, private label expansion; online to offline do-it-for-me services; forward positioning of vendor inventory; international expansion; mobile app; and evolving our platform model to a 2-sided marketplace.
Private label expansion in online to offline DIFM services are some of the most exciting areas of future growth for the company. While our private label business is small today, the opportunity for improved gross margins long-term as we develop and scale these brands is substantial. The do-it-for-me segment remains very attractive to us and we are continuing to lay the foundation for further growth. As our tire installation program continues to gain momentum, we continue to examine new partners and additional products and services beyond tires that we can implement and scale in the future. Next, forward positioning inventory will drive lower cost and increased shipping speeds.
As we look to the future, we believe our tech-enabled digital commerce platform and data intelligence can be replicated internationally, further expanding our market. Additionally, serving our customers with the mobile app is expected to further enhance the customer experience while also increasing long-term purchase frequency. And finally, with respect to our long-term outlook, we are positioning ourselves to evolve our platform model into a parts and accessories marketplace, aided by our existing purpose-built technology and proprietary data. Turning now to Slide 16. In closing, as I mentioned at the top of the call, we are focused on controlling the things within our control in this challenging macroeconomic environment and we are making progress in doing so.
I’m encouraged by the headway we’ve made with our margin and profitability results this quarter and I’m excited about the additional steps we’ve taken in the past 90 days to drive further improvement. Before I open the call to questions, I’d also like to thank the entire PARTS iD team both domestically and internationally for their dedication, hard work and commitment to serving our customers. With that, we’ll open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Maria Ripps with Canaccord.
Maria Ripps
First, I know you recently announced new term loan financing, but can you maybe just talk about your current liquidity profile, especially given sort of the challenging macro backdrop? And then secondly, you touched on this a little bit, but any more color you can share on the revenue decline sort of in the quarter? And then how are you thinking about returning top line to growth?
Nino Ciappina
Kailas will take the liquidity. And I’ll jump in and cover the other 2 questions.
Kailas Agrawal
If I can say so our current cash balance as of yesterday is $6.5 million after this borrowing of $5 million. We continue to face macroeconomic headwinds and the resulting decline in revenue and profitability will substantially replace negative working capital. This consumed approximately $14.4 million in cash from our operating activities, of which $13.6 million was attributable to the 10 days in working capital during the 9 months ending September 30, 2022. At this point, even — demonstrates that our major cash consumption has been because of the decline in revenue and our negative working capital model. Of course, we continue to tightly manage operations given the liquidity constraints.
As we talked about in our script and the presentations, we implemented several measures to improve the liquidity. In June 2022, company implemented reductions in both operating and capital expenditures and that are intended to save approximately $12 million and we have a great acumen there, 84% has already been realized on an annualized basis. Second, we have negotiated a new shipping contract, which will save approximately 15% net in outbound shipping costs. Third, we — as you already stated, we took $5 million senior secured term loans. And we also have an option to receive another $5 million at the sole discretion of later. Also, the next stage, we filed the SC registrations and we are actively working on to activate raising the capital for addressing in liquidity or the growth investment.
Nino Ciappina
Maria, to comment on the revenue decline historically in these recessionary environments, car accessories have not fared well as consumers pull back on discretionary spending. In addition, as I’m sure you and the others know, new vehicle sales have been down. Based on the information we have in the third quarter, new vehicle sales were down 19% compared to the third quarter of 2019 due to shortages. So this directly impacts demand for car accessories. And while used car prices seem to have stabilized, these prices are still approximately 40% higher than pre-COVID prices.
So just new and used vehicle sales are directly impacting the accessories part of our business, which represents, as I said in our remarks, about 2/3 of our product mix. Despite all of this, we still delivered positive EBITDA. We improved the gross margin again. And year-to-date, we’ve grown our repair parts revenue and profit 10%. With respect to the third part of your question about returning to growth, so given the macroeconomic uncertainties right now it’s difficult for us to comment. However, when the macro environment begins to improve, we’re well prepared to capture discretionary spending for accessories given our extensive product catalog of 18 million SKUs and over 4,500 brands. However, we’re not sitting idle waiting for the external environment to improve. We’ve made significant progress growing our repair parts business, as I just said, which is up 10% year-to-date versus last year. Originally, equipment revenue is up 50% year-over-year. In addition, we’ve made progress on our online to offline do-it-for-me initiatives.
As we reported last quarter, we now have over 9,000 tire installation locations. And while this program is still small in terms of revenue, we’re laying the groundwork and architecting what we believe is the future of how this category will be shopped in terms of online to offline. And lastly, but certainly not least, in the third quarter, we added over 3,000 boating and marine SKUs. We have another 48,000 items in the pipeline, and we added over 60 new RV-specific brands to our Camper and RV vertical. Maria? Okay. Operator, perhaps we can take a follow-up question and she comes back, we can continue with her.
Operator
Okay. Our next question comes from Mike Albanese from EF Hutton.
Mike Albanese
And I appreciate all the context and color that you’ve provided on the call, particularly regarding the macro environment, which obviously remains to be difficult. You’ve highlighted a couple of times the addressable market in adjacent verticals. You’ve added a lot of SKUs, you’ve seen improving margins. Can you just help me understand kind of how much business you’re doing, I guess, outside of CARiD? And just help me put that detail on the context, I guess.
Nino Ciappina
Thank you for joining and the support. The adjacent verticals now represent approximately 8% of our product — of our sales in the third quarter. So this is down year-over-year. Last year in the third quarter represented approximately 10% of sales. But as I said, the discretionary spending is down.
So if you think about those categories, boating, motorcycle parts, power sports, these are all very much discretionary categories. But despite all that, we’re continuing to build the product catalog in all of those verticals, specifically in boating and in the RV category where we’ve added 3,000 new SKUs in boating and marine. And as I said, over 60 new RV-specific brands to CAMPERiD.com. So as that demand — as that consumer demand begins to improve, we’re going to be well-positioned to continue capturing it.
Mike Albanese
Yes, certainly. I mean it sounds like you’re positioning yourself well for a rebound on discretionary spending which those verticals would obviously benefit. And then just similarly, could you — and I’m sorry if I missed this, my phone kind of tuned out for a minute, but same thing with the private label business and OEM. Obviously, you’ve been seeing tremendous growth there, margin improvement. Can you just put that into context as well?
Nino Ciappina
Absolutely. The private label is a very small piece of our business today, it’s less than 5% of sales. So we see this as a very substantial opportunity for us to grow. And with that growth in private label volume, it will have a direct improvement in overall gross margin. So the gross margin on our private label products are, in many cases, more than 2 or 2x or 3x the margin on the rest of our assortment.
So long-term, as we continue building out brands like iD Select, like [Ricksu] and others, this is going to have a very positive impact to gross margin. And again, today, private label is less than 5%, so we have a lot of room for growth.
Mike Albanese
And then my last question, some nice metrics regarding your repeat customers. I mean, is this — are you seeing repeat customers in like a select number of SKUs? Is this in a particular area of the business or I guess any color you can provide around what these repeat customers are coming back for?
Nino Ciappina
We don’t have that — well, we haven’t disclosed or shared that previously. But what I would say is from a contribution mix, accessories still represents 2/3 of our business and repair parts now has grown to — in the third quarter to represent over 25% of our business. So it’s a combination of repair parts growing and there’s a higher frequency of repeat business on that side of the business. So as we continue to grow that contribution, we expect nothing but positive upward movement in our repeat customer metrics. That combines with the very intentional work we’re doing on CRM marketing and e-mail marketing.
Our marketing team has made a lot of progress on the e-mail marketing programs we kicked off at the end of last year. And even there, we’ve got still a lot of room for growth. That’s a 1-year-old program, so there’s a lot to still accomplish there as well.
Mike Albanese
Yes, you kind of hit the nail on that. I mean that’s where I was going with this repeat customers repair products. Is there correlation there? So that’s very helpful.
Operator
[Operator Instructions] Okay. There are no further questions at this time. I’d now like to turn the floor back over to you, Nino Ciappina, for closing remarks.
Nino Ciappina
Thank you, everyone, for joining the call today for us to update you on the progress we’re making and we look forward to everyone joining us again in March for an update on the fourth quarter and full year results. Thank you again to all of our teammates domestically and internationally for the hard work and dedication. Thank you.
Operator
Ladies and gentlemen, this does conclude today’s teleconference. You may now disconnect your lines at this time, and enjoy the rest of your day.
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