Operator: Hello. Thank you for standing by, and welcome to Shift Technologies First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Henry Bird, Vice President of Strategy.

Please go ahead.

Henry Bird: Good afternoon, and welcome to the Shift Technologies First Quarter 2021 Earnings Call. Joining me on the call today is our CEO, George Arison and our CFO, Oded Shein. During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties.

Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statement. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call. During the course of this call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. With that said, I will now turn the call over to George.

George Arison: Thank you, Henry, and good afternoon, everyone. Thank you all for joining us today. The first quarter represents solid execution by our team and a challenging operating environment. With revenue of $220 million and adjusted GPU of $1,681. We beat our first quarter guidance ranges, while our adjusted EBITDA loss of $46.6 million came within our guidance range.

We are pleased with the progress we made on each of the 3 strategic priorities we detailed in our March earnings call, which were expanding adjusted GPU through operational efficiencies and improving F&I. In Q1, adjusted other gross profit per unit was 13.2%, up 41% from Q1 2021. This is a fantastic result, and I want to give a huge chat out to all Shift team members working on F&I for their efforts. Second, optimizing our personalized sales and fulfillment experience to drive higher conversion rates. In a moment, I'll get into some more details around improvements we're making there.

Third, driving unit sales were increasing our in market penetration and expanding into new markets. Our e-commerce unit sales grew 51% year-over-year in Q1 and we saw a nice balance of growth from our legacy West Coast markets and our newer Texas markets, which accounted for about 70% and 30% of the 51% growth, respectively. You can find further details on our strategic priorities in our Q1 shareholder letter posted on our Investor website. I'll spend the rest of my prepared remarks talking about the macro environment and actions we are taking today to maintain strong business performance with this changing industry backlog. As we discussed in our March earnings call, 2022 for Shift is going to be a year of balanced growth and profitability with a keen purpose in driving operational efficiencies, cost savings and improving our liquidity position.

However, this has always been our plan for 2022 since we began planning for this year back in 2021, the evolution of the macro environment over the first several months of the year have made these initiatives all the more important. There are 4 meaningful actions on this theme that I want to highlight. First, we have executed on a comprehensive performance management and cost reduction initiative that led to a leaner, more efficient corporate and sales organization. There were 2 components. Firstly, a transition in our sales and fulfillment teams to return to an in-person sales team from the remote team format that we've been operating in over the past 2 years, because of COVID, which we expect to meaningfully improve conversions.

Concurrently, in order to maintain operational excellence, we eliminated a number of corporate positions in April, about 10% of the corporate team, mostly through a normal course of performance management. These actions, coupled with hiring initiatives we completed in Q4, primarily to staff up our logistics and reconditioning teams give us confidence that we are appropriately staffed to meet customer demand while maintaining a cost-effective lean organization. Second, we are prioritizing focus on our existing markets. There is still meaningful opportunity to capture share in our core West Coast markets and notably a massive opportunity in Texas. We are further encouraged by our strong performance in Texas, as I spoke to earlier.

In the near term, we have positive expansion into Las Vegas. While we still think this will be an attractive market over the long term, we found the regulatory environment to be more challenging than anticipated. We also did not deem this market to be essential to meet our 2022 goals. Third, in response to the well-documented macroeconomic factors impacting vehicle affordability that have impacted both the customer and the auto market as a whole, we are increasing the number of value cars in our inventory. Vehicles 8 years or older or over 100,000 miles.

These vehicles are significantly more affordable. While we are certainly not immune from challenges posed by the pricing environment, our ability to leverage our full spectrum inventory to cater to changing consumer needs gives us a greater advantage relative to peers more concentrated inventory effects. We do not expect the increase in percentage of value cost to create any reconditioning challenges, but it's possible that selling more value class will result in an F&I decline quarter-over-quarter, which we view as a worthwhile trade-off given the higher funding margin we typically see on value vehicles. Fourth, as you saw via an 8-K last week, we've put in place an ATM or at-the-market facility for up to $150 million in new equity capital that we can draw upon over the next 3 years. This is really gives us flexibility as we continually evaluate all potential financing options.

We are highly focused on balance in capitalizing on the massive market opportunity, improving profitability and prudently investing our capital. Our team's focus on sustainable growth while marching forward on our path to profitability has enabled Shift to achieve strong results despite market challenges. Today, we are reaffirming our full year guidance across revenue, units, GPU and EBITDA while we are very cognizant of the significant macroeconomic factors that are impacting consumer behavior and our industry, we feel confident about our strong execution for the year and our ability to adjust to the changing environment to ensure that we continue to execute successfully. A quick comment on our pending acquisition of Fair. The closing process has proceeded nicely, and we expect to close in May, in line with our original time line.

We are really excited about the next phase here, and we expect to pirate the market-based products in Q2. As we work towards the close, we've continued to ensure that this acquisition will be cash neutral the Shift. I want to congratulate the Shift and Fair teams for their effective execution on the closing preparation for the pilot. Now I'll turn the call over to Oded to review our first quarter financial results and second quarter and full year 2020 guidance. over?

Oded Shein: Thank you, George, and good afternoon.

We had another strong quarter of execution. Total revenue for the first quarter grew to a record $219.6 million, an increase of 107% versus the prior year period. E-commerce units sold grew to 6,714 up 51% year-over-year. Adjusted gross profit per unit reached $1,681 in the quarter versus $1,706 last year. The slight decrease in adjusted GPU was driven by e-commerce GPU of $330 versus $723 last year.

As discussed on our last quarter's call, this was driven by sell-through of inventory acquired in 2021 during periods of higher relative pricing, which we sold early in the first quarter when the relative prices were lower. E-commerce GPU is expected to recover in the second quarter as prices normalize. As is key to our long-term strategy, we delivered a significant increase in adjusted other gross profit per unit, mostly F&I, growing to $1,322 in Q1 versus $1,162 in Q4 and $938 in fiscal 2021. Our strategic investment in enhancing our ancillary product offering by hiring and training a high-performance F&I team is showing great results. SG&A expenses were $64 million or 29% of sales versus $50.2 million or 47% of sales last year.

Marketing expense declined versus last year by $3.4 million to $11.9 million due to our transition to brand marketing in the first quarter of 2021, which resulted in overlapping marketing expense. Adjusted EBITDA loss for the quarter was $46.6 million or a loss of 21.2% of revenue compared to 32.5% loss rate last year. The improvement in adjusted EBITDA margin year-over-year reflects continued operating leverage as we grow revenue. We ended Q1 with cash equivalents of $106.8 million, including $11.9 million in restricted cash. The cash used in the quarter was unusually high due mostly to a $38 million investment in inventory to ensure a proper capacity for the busy spring selling season and the annual incentive payment for the 2021 performance year.

This cash use is expected to be reduced significantly for the coming quarters as we convert the high point of inventory achieved in Q1 into sales and cash, while many of the annual or nonrecurring payments are behind us. Now turning to guidance. For the second quarter, we expect revenue to be in the range of $225 million to $235 million. Adjusted GPU is expected to be in the range of 1,800 to 2,000, and adjusted EBITDA loss for the quarter is expected to be in the range of $37 million to $39 million or 16.5% of revenue at the midpoint. For the year, our guidance is unchanged.

Revenue in the range of $1 billion to $1.1 billion, retail units for the full year in the range of 34,000 to 38,000 adjusted GPU ahead of our 2021 GPU of $2,126 and we expect adjusted EBITDA loss margin to be in the range of 12% to 15%. With that, I'll turn it back to George.

George Arison: Thanks, Oded. I'd like to thank our Shift team for a strong Q1 performance and in an ever-changing macro environment. We believe we have the right team and plan in place to meet our long term vision.

With that, we are now happy to answer your questions. For this portion of the call, Oded and I are joined by our President, Jeff Clementz. Operator, can you please open up the line for Q&A.

Operator: Thank you. [Operator Instructions] Our first question comes from Naved Khan with Truist.

You may proceed with your question.

Naved Khan: Hi, thanks for that. A couple of questions. So George, as you think about your marketing spend this year versus last year, I guess Q1, you saw a decline because of -- you called out the overlap that you had last year. But how should we think about cadence for the rest of the year as it compared to last year? And then on the guidance, Oded, if I have to kind of think about the shape of the year, it seems like the EBITDA margin improvement is more back half loaded.

And given the environment we're in pretty volatile with respect to pricing and all that. How much confidence do you have in kind of hitting the midpoint of the guidance you talked about?

George Arison: Oded, I'll let you take that.

Oded Shein: You want me to? Let me start talk about EBITDA and then we can talk about marketing as well. So we feel good about the guidance we have provided, right? We put in place a lot of initiatives in the first quarter that would serve us very well for the remainder of the year, both on GPU and selling and marketing and G&A overhead. So all of those should show continuous improvement throughout the year.

Of course, the guidance we provided second quarter is significantly better than first quarter from an EBITDA loss rate, and then we expect to see continuous improvement throughout the rest of the year. Specifically to marketing, the CAC in Q1 was about half of what it was a year ago in Q1, right? Because last year, as we mentioned, we had this dual strategy that was going on in the transition. Again, and we expect the CAC to continue to improve as we go throughout the year. You've seen in our long-term plans, it's still going to be significant, so we can support our growth going forward, but it's going to be lower -- expected to be lower than the $1,770 or so that we printed in Q1.

Naved Khan: Maybe just on that -- since you're not expanding into new markets, would you get greater efficiency just by -- on marketing just by being in the market that you're currently and kind of getting more share there, would that make you more efficient?

George Arison: Yes.

So just to add to what Oded said and I'll answer that question as well. So I mean, you saw our kind of midterm plan and long-term plan and we need to get marketing down every year to achieve those numbers and to get to profitability, which is very much the focus at that kind of in 2024, 2025, the market numbers are still higher than I think would be ideal because we want to make sure that we can sustain growth in the future. Beyond that, you probably could maintain the business as it is at that point with much less CACs than is in the model. As far as this year is concerned, we would expect marketing numbers to come down every quarter as we progress at least for the next couple of quarters, we'll see how Q4 shifts up. And part of the reason is that we are continuously aiming to improve our marketing and become better at that.

We are -- last year was more elevated in light of the things that we've spoken about in the past. And so we feel really good about marketing being down versus Q1 and Q2, for example, and then in Q3. We are refreshing our brand campaign a little bit this year. We're not going to have a sub-risk spokesman in the new ads that we're launching. And these are, as a result, less expensive ads to put together and are more nimble, we have a new tagline, "If you know, You Shift", which we think is going to be quite eye-catching and very clever and then we'll be very fun for consumers to see.

And hopefully, we'll break through in the market really well. We're very excited about that. And then as far as new markets, we're not launching any brand new markets right now. But obviously, Texas is still a fairly new market. We've only been there for a little bit.

And so we do anticipate Texas to grow pretty significantly. So, I think that will be probably continue -- continue the investment we'll continue make.

Naved Khan: Got it. Thank you.

Operator: Thank you.

[Operator Instructions] Our next question comes from Sharon Zackfia with William Blair. You may proceed with your question.

Sharon Zackfia: Hi, good afternoon. I guess a question on the cars over 8 years old. Can you kind of refresh us on where you are now in terms of percentage mix in that kind of age cohort and where you would ultimately want that to be as we go throughout this year? And any refresher on kind of the difference in front-end profitability that you've historically seen for that age of car versus where you've been more so over the past 1.5 years?

George Arison: Sure.

Hi, Sharon. Good to talk to you. So maybe I'll start even more back in 2020. So in 2020, the number definitely became quite elevated. We were up to 40-plus percent in value cars at various points.

But we thought that made sense given the uncertainty that COVID was presenting in Q2 and Q3 of 2020. But the implication of that, of course, was that our reconditioning got a little bit clogged up. So as we then in Q4 of 2020 and throughout of last year, we're getting a reconditioning to improve significantly, which I'll talk about in a minute. One of the things we did was to reduce the value mix in a significant way down to about 20%, 25% in order to give the reconditioning team time to improve. They were able to achieve some really remarkable results last year, our reconditioning throughput increased 2.5x.

And with 90-plus percent of reconditioning done in-house, for example, towards the end of last year. And doing all that while cutting costs in a pretty significant way. So reconditioning, which is some really awesome results. When we talked about the fact that we'd reduce the value as a percentage of our total sales in 2021, I also said that hope was that once recon was able to achieve the things that they need to achieve last year, we'll be able to scale it up to be more. And we seem really good about where recon is today and their ability to do a larger portion of value.

So we're not talking about a huge increase. We're talking about getting to maybe 35%, 40% on value, whereas for the last few months, it's been more like 30% and earlier in 2021 was more like 25%. So it is a change from where we had been in '21, but not a massive change. But we think that it is the right thing to do in light of where the market conditions are today and where consumer demand is. Value cars sell really, really quickly.

We get more leads per value vehicle versus all the other vehicles. And so from all those perspectives, its inventory that makes sense to sell. Usually, on the front end, we do a lot better with value. There are 2 reasons

for that: number one, because we are able to buy them for a lower percentage to market versus non-value vehicles. And secondly, because, we're able to sell them at a high percentage to market than everything else because the demand for those cars is so strong in this scarce environment.

They do have lower back-end margin, which makes sense because they cost less money. So you originate less financing, Fewer people buy an extended service contract like a warranty for those cars. But we think that, that is a reasonable trade-off to make, given the strength in the front end and also given the strength in the consumer demand. So we don't expect the increase in value from, say, 25 30% to 35%, 40% to have a meaningful impact on the overall gross profit, but it is possible that has an impact on the F&I gross profit because of what I just discussed.

Sharon Zackfia: That's really helpful.

I guess one other question. There's obviously a big shift between kind of implied GPU in the second half of the year versus the first quarter and what you're expecting for the second quarter. Can you talk about the pushes and pulls that you've seen? I mean, some of them we know, obviously, for the March quarter, but what you're still experiencing in June and why you're expecting that big step-up in the back half?

George Arison: So as we mentioned in the prepared remarks, a lot of the pressure that we've seen was at the beginning of the year, January time frame, based on cars that we bought in the fourth quarter of last year that we paid a little bit more for them and then there was some pressure in January to sell them back. So the margin was -- had some pressure. But that abated as we went through the quarter and actually towards the end of the quarter, we did well going into Q2, and that explains why we were able to raise the guidance for Q2 above the numbers from in Q1.

We also expect that to continue throughout the year. You've seen the F&I results in Q1. We were extremely pleased with the growth in that. It's much higher than we've seen in previous quarters, definitely last year. And that should continue, should continue to be strong for the rest of the year and should help our GPU.

So based on that, we expect the second half to be higher than first half and progressing throughout the year with quarter.

Sharon Zackfia: Okay. Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Zach Fadem with Wells Fargo.

Unidentified Analyst: Thanks, guys. It's actually Sam Reid here [ph] for Zach. I wanted to actually quickly touch on the Fair acquisition. I totally get that the acquisition hasn't yet closed. But could you perhaps still gauge the level of interest you've been able to at least glean from some of the dealers since the transaction was announced, any learnings that might help as you go through -- as you go about integrating this acquisition into your business?

George Arison: Sure.

So I won't give any specific numbers, but I can give you directionally kind of what we know. Fair team before the acquisition was done, had already signed up a fairly large number of dealerships to work with them on the marketplace. And so they were kind of all set up and ready to go whenever -- whenever the business was ready to launch. Those dealerships all know, obviously, the acquisition is happening, and they are excited to continue working with the product. And so we are really excited about launching the beta kind of the launch later this quarter.

I can't give you a date yet, but obviously, we'll announce that when we are ready to go with that. And we think that it will be a very good test of the product with a great inventory of dealer cars listed on that.

Oded Shein: George, I would just add that the assortment mix will really complement the Shift inventory. And so we're very excited as we've kind of profiled and work with the dealers in our launch market on how the customer value prop will play out when we launch the marketplace.

Unidentified Analyst: No, that's super helpful, guys.

Really appreciate the color. Maybe pivoting really quickly over just a macro question here that's kind of broad. Obviously, we're seeing a lot of pressure on the consumer in conjunction with some rising rates, et cetera. Kind of at what point do you think we might see this translate into consistently lower ASPs for used vehicles? And are you seeing any sign of a sustained negative inflection in pricing? Or is that still likely a few quarters out?

George Arison: I mean, certainly, those things impact our business and consumers are really focused on monthly payments. So 1% to 2% increase in interest rate, obviously, impact the month they came in, in a pretty significant way for customers.

And so one of the reasons why we've decided to move towards a higher percentage of value is to be able to address the customer needs to be able to still afford the car that they are buying. We think that broadly speaking, the typical depreciation trends that happen in the industry, meaning inventory does not increase in price all the time are broadly happening and -- already. But we don't expect prices to kind of massively collapse. And so meaning like to go down 10%, 20% because the things that caused the price spike last year haven't fundamentally changed. The new car supply is not that different now than it was a year ago.

Unidentified Analyst: No, that's super helpful. Much appreciated, guys.

Operator: Our next question comes from Seth Basham with Wedbush. You may proceed with your question.

Seth Basham: Thanks.

Recognizing that you have some macro and sector-specific challenges, and you guys have taken some action to reduce some of your costs. But how are you balancing further cash burn that is likely relative to the growth prospects that you see? Is there a point at which you feel you need to slow your growth further and further reduce expenses to conserve capital.

Oded Shein: So let me start by talking about -- you mentioned the cash use. And obviously, that's an important point. We feel very good about where we are for 2022 from a liquidity and cash point of view.

But we also realized expectation to strengthen our liquidity position going into next year. That being said, what you've seen in Q1 was building up inventory, we used more cash than we expect to use in further -- in future quarters for that purpose. We also had some onetime things. So I wouldn't model the rest of the year based on Q1, it's going to be significantly lower used than that. In addition, as we described on the last call, when we showed our path to profitability, we have taken a number of initiatives in order to improve our unit economics and financial situation, including on the selling to fulfillment process that George spoke in his opening remarks, also on marketing and G&A.

So we have taken great steps to make sure that our cost structure is aligned with our strategic objectives. And we executed very well in Q1. We think we're in a good position to execute in Q2 and for the rest of the year, and we feel good about that.

George Arison: And I'll just add that I think we have a really good plan that is an optimal balance between growth and profitability for 2022 as well as a long-term plan that gets us to profitability as a business in 2025. So we're really happy with what we put forward, and it's a good balance between growth and not trying to grow at a massive rate, but still at a good rate, while also driving towards improvement on the profitability side in a pretty significant way, far more so than anything else we've seen in the second half.

Seth Basham: Got it. Now that plan to profitability in 2025, what could change that plan and lead you to those volumes by reducing your cost structure.

George Arison: Seth, for some reason, neither of us heard the second part of you said.

Seth Basham: Sorry, just regarding 2025 plans, -- what could change that plan and lead you to try to become profitable more quickly by reducing your cost structure and on lower sales plans?

George Arison: Well, certainly, we like the plan we put together. We think it's responsible and the right plan for the business.

And it would be necessary we'll change it, we'll consider it. But at this point, we are executing towards what's in the plan, and we think it's right and a good plan to pursue.

Seth Basham: Fair enough. Thank you.

Operator: Thank you.

And I'm not showing any further questions at this time. I would now like to turn the call back over to George Arison for any further remarks.

George Arison: Great. Well, thank you, everybody, for joining us, and we'll look forward to talking to you guys again in August.

Operator: Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.