LMP Automotive Holdings, Inc. (NASDAQ:LMPX) Q2 2020 Earnings Conference Call August 14, 2020 5:30 PM ET
John Mattio – IR
Sam Tawfik – President and Chief Executive Officer
Conference Call Participants
Thank you for standing by. This is the conference operator. Welcome to the LMP Automotive Holdings Inc. Second Quarter 2020 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to John Mattio, Investor Relations for LMP Automotive Holdings. Please go ahead.
Thank you, operator. Welcome everyone to LMP Automotive Holdings’ second quarter 2020 earnings call. Joining us from the company is Mr. Sam Tawfik, President and Chief Executive Officer. After the company’s prepared comments, we have allocated time for questions in the Q&A session.
Before we begin, I’d like to remind everyone that some of the statements in this conference call including statements regarding expected future financial results and industry growth may contains forward-looking statements.
Forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could negatively affect its business, operating results, financial condition, and stock value.
Factors that could cause actual results to differ materially from those currently anticipated includes the company’s dependence upon external sources for the financing of its operations; its ability to effectively execute its business plan; its ability to maintain and grow its reputation and to achieve and maintain the market acceptance of its services and platform; its ability to manage the growth of its operations over time; its ability to maintain adequate protection of its intellectual property and to avoid violation of the intellectual property rights of others; its ability to maintain relationships with existing customers and automotive suppliers and develop relationships; and also its ability to compete and succeed in the highly competitive and evolving industry; as well as other risks and uncertainties described in the company’s SEC filings.
There is no assurance that any forward-looking statements will materialize. You are cautioned not to place undue reliance on forward-looking statements, which reflect expectations only as of this date.
The company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations or any changes in the events, conditions or circumstances on which any such statement is based, except as required by law.
I would now like to turn the call over to Mr. Sam Tawfik, LMP Automotive Holdings’ Chairman and Chief Executive Officer. Sam?
Thank you, John and thank you operator and welcome everybody to LMP Automotive second quarter earnings call. I’m pleased to announce a record quarter. It’s a pivotal point in the company’s short time being public. We’ve officially turned profitable and we’ve had record numbers on practically every metric in our financial statements, and we’re very pleased with that.
Our revenue increased 44% quarter-over-quarter to $7.7 million. Gross profit increased 85% to $1.5 million. What’s also impressive is our EBITDA margins. It was an increase of $1.4 million, quarter-over-quarter and adjusted net income increased approximately $1.3 million.
I want to note our gross margins, we’re very proud of those at 19.7% and much of that is attributable to our high margin subscription leasing product. Consumers like it very much and they see it as a great alternative to financing or leasing a car.
Our cash position at the end of the quarter and shareholder equity was very strong, in our view, equity being around $32 million and cash close to $18 million.
Our adjusted EBITDA margin was a respectable 8.1% which is a significant increase from the previous quarter of minus 14% and our adjusted net income margins were 3.1% for the quarter, which is higher than the industry average.
This record performance illustrates the immense opportunity that exists within the industry that we’re exploiting and our continued growth of the activation of our e-commerce sales strategy. The way the team handled this dynamic and difficult environment is really a testament to what the future can bring and I’m extraordinarily proud of our team. Thank you all.
In July, we announced an agreement to purchase our first franchise dealership in the Southeast region of the United States. We’re seeing a robust acquisitions market as we continue to build a pipeline of prospective dealership acquisitions and we intend on accelerating our acquisition strategy moving forward.
Looking forward, we’re optimistic as ever and focused on next generation of innovation and growth as we roll out, our e-commerce home delivery, site-to-store, and ship-from-store delivery strategies.
It’s — we’ve only just begun. This is the beginning of our growth as we close on acquisitions and overlay our strategy on those acquisitions. I think we’ve proven that it can be very accretive to the acquired targets earnings given our standalone organic growth. What’s also impressive here is our net inventory at the end of the quarter was about $11.5 million. If we add leverage and increase our inventory, we should see much better results.
As far as our 2020 outlook, we saw a significant rebound in April through these endemic times, which continue to improve throughout the quarter. We also saw strength — the strength continue in July and the first part of August. So, quarter-to-date, we’re still seeing that sales growth trend.
As far as e-commerce, we expect to launch our e-commerce app available at the App, and Google Play stores and our next generation website this quarter. We expect this to enhance our customer experience as well as onboarding and processing our customer orders quicker, which we believe can result in future sales growth.
As far as acquisitions, we’re seeing a robust pipeline like I’ve mentioned and we intend on accelerating our acquisition strategy moving forward, as well as integrating their inventory onto our main LMP Motors online and App Store.
This is intended to reach our objective of creating an online superstore for more organic growth and lead conversion.
And those are the highlights of the quarter. Thanks again, and we’ll open it up for Q&A.
We will now begin the question-and-answer session. [Operator Instructions]
The first question comes from David [Indiscernible] from First New York. Please go ahead.
Yes, how are you doing? I like the story here because I’m also involved in some of your competitors and stuff like that. They mentioned that they had inventory problems because the demand was so high that they couldn’t keep up with it and some of the people were questioning whether that’s a good thing or a bad thing? How was the demand situation for you guys and the inventory that you guys had to fulfill for those demands?
Thanks David. That’s a very good question, because it really is a fundamental issue in the business. Early on in March and early April, we witnessed press clipped, indicating that automobile prices would decline because of Hertz and the pandemic et cetera. And when we really looked out into the future and saw the dynamics, we realized that given the factory shutdowns for several months, but there won’t be much new car delivery to the franchise dealership operators.
So, we bought as much as we can during that period knowing that it would be the exact opposite, where if the economy opened up again, that there would be a huge shortage of vehicle as well as an increase in pre-owned vehicle prices and vehicle prices in general. And that’s what is going on. That’s what you see right now. So, we purchased the inventory during that time and what happened is exactly what we predicted.
Prices went up. And now inventory is available, but it’s at higher price, pre-owned inventory. New car inventory is not so available. So, the new car dealers are actually buying used cars, and that’s why the prices are being bid up. So, what we’re doing is we’re carefully buying inventory. Fortunately, we have some inventory being delivered from the factories because we’ve preordered early in the year and we accept the delivery.
So, we have that inventory that we’re moving as we speak right now. As time goes on, we’re assessing the situation and potentially buying into the late model pre-owned market. Granted, it’ll be at higher prices, but that’s passed on to the consumer. We’re just being careful not to buy too much, because prices will normalize in our view. — is our projection.
I see and what’s the cash position like? Are you guys looking — I mean, you mentioned you’re looking to do acquisitions, what type of acquisitions — what what’s the price picket on it and give me a little bit color? Appreciate it.
I’m sorry. What was the last part of your question?
No, I was just saying, if you could just add a little bit color between what kind of acquisitions you guys are planning to do and how big is it going to be? Is it going to be? You’re going to be — you’re going to be –you’re going to raise more money to do it, if you can give me some color on that, that’d be great?
Absolutely, it’s very important part of our strategy. It’s probably what we spend time on the most. We’re looking for acquisitions that are in our targeted footprints, which is the southeast, the northeast, and the eastern third of the United States for logistical efficiencies, because we’re not a believer that you can have four legs of logistics and make money on a pre-owned car, any car, which is what the others have to do if they’re buying it from the auction, they have to get it to reconditioning. And they have to get it to their selling facilities, and they have to get it to the consumer.
So, our plan is to cluster dealership in regions to have a hub-and-spoke type distribution, where you can ship in a 300-mile radius. So, we can basically implement our web-to-store store-to-consumer or web-to-consumer strategy. It’s always been our business plan before — even from several years ago. So, that’s our target regions.
As far as target dealerships, we prefer larger ones with large footprints, because expanding the pre-owned and subscriptions of these dealerships is very lucrative and this way as well, we can have enough inventory and flow it, recondition it, where, in our view, it should be flowed and recondition at a franchise dealership because they’re equipped to do that.
So, you get the cost efficiency of that. And then when you ultimately dispose of the vehicle, you’re getting the highest retail price, even higher than some of the popular Publix because new car dealers actually get more for a pre-owned car than used car dealers. So, that’s the geography. That’s the criteria. Occasionally, we’ll take smaller stores if they’re add-on stores to a region.
As far as multiple and financing, we’re reviewing and negotiating anywhere from mid-three and a half pretax multiples, all the way up to seven and a half, depending on the region and the dealership, obviously luxury gets the higher multiple, the domestic brands get a lower multiple, et cetera. So, that’s the — those are the ranges that Toyota that we just announced an agreement with is commands a premium, it’s greater than the five. Obviously, it’s a premium brand and it’s a very stable earner and a large footprint nice facility.
There are others that were negotiating that are large footprints that are four and a half and we’re spending a lot of time on this because we believe in doing quality-only, and we’re very disciplined as far as what we buy or not buying it if it does not fit in our business plan.
As far as financing, typically, it’s 50% debt to finance, the goodwill, and the working capital. And that’s typically through large banks, factories or finance sources. It’s a product that they have, it’s a common theme.
And then the balance of that being equity, a combination of equity debt in our balance sheet. And the last deal we announced the seller is staying in for 25%. We like that because A, they have skin in the game. B, you have the same management there. And C, it’s obviously easier to finance.
Right. And as far as competition, how do you guys set–? No, it does. It does. You mentioned some figures, but pretty much worse things that I was looking for. And you mentioned them and I appreciate that.
And as far as competition goes, aside from public ones, there’s a lot of private ones or how do you guys separate yourself from the pack? Like, we all know a Carvana says, we all know what Vroom says, TrueCar say? What makes you guys think that you’re different, or you guys are same? And it’s just a question of inventory and execution and growth profit margins that makes people — that makes you guys different? If you can answer that, appreciate it.
We took a completely different approach. Some claim they are pure e-commerce, pre-owned automotive dealers. I’ve mentioned the multiple legs of logistics. Logistics are not anything to take lightly. To ship a car, even if it’s 150 miles, it can be greater than — it could be anywhere between $200 and $300. So, you have — if you use $250 and you have four legs, that’s $1,000 for logistics.
I’ve just noticed in a recent IPO. If you look at the logistics line, they only put one leg of logistics in there. And that was $5 million for the quarter, one leg. It is in our view, I can’t see it being cost effective having multiple legs of logistics.
It’s been a problem for Amazon. I’ve been following Amazon since they started. And it’s always been a logistics issue. How do you ship a $20 ride, I mean it cost you $7. It’s always been an issue. Their solution was Prime, when you have 200 million users paying $10 a month. Now, that’s real money. It solves your logistics problem.
And that’s if you notice when they announced prime, that’s when you saw a 4 or 5x over the next few years with Amazon and performance. So, there is really no magic to this. We’re not a believer that you can email a car like Priceline. It has to be stored in a facility, that’s the fact. You have to have logistical legs. When you buy it, recondition it, and then ultimately get it to the consumer, that’s a fact.
We analyzed this years ago. So, our model is hybrid, we are completely different when it comes to e-commerce. It’s a hybrid model. And that’s why that web-to-consumer web-to-store, store-to-consumer is a very important sentence in our strategy. That’s the Walmart model. That’s how Walmart competes with Amazon, because they have the logistical facilities already, they are called stores.
And there — and that’s how they accommodate it and Walmart has been doing very well in e-commerce as you may be aware. So, our model is similar to Walmart. I don’t believe there’s an Amazon model in automotives. So, we don’t have the luxury of losing $50 million and $100 million a quarter. And even if we did, we wouldn’t invest it that way. Because I don’t see a path to profitability in pure e-commerce, because of the reasons I’ve mentioned, we were one of the early pioneers in the space. We chose to go slow and test with several million versus several hundred million.
And then all the tests are — and all the data collection we have and I’ve built multiple fortune 1000 companies in the past. I just don’t see a path to profitability in that pure play model.
I have not seen any clarity on a path to profitability, either. When I look at the financial metrics of the others, I just — I don’t see it. We’re not in this to risk getting financed by the capital markets, or you’re out of business. We’re in this to grow in a discipline, strategic, and focused away. And it is a straightforward model.
When we acquire dealerships, we are adding to income. Adding to income as the shareholder value, enabling e-commerce adds to momentum. It’s the Walmart hybrid model, except we’re rolling up the stores. Walmart had that already. Does that make sense?
Yes, of course. And [Indiscernible] any other questions. Initially, I mean, an IPO went up like crazy. It was probably during a time where people were just blindly buying things and, and the stock kind of took a hit on.
You see, I’m new to this company. So, I don’t know the story that well, what happened during that period of underperformance? And the numbers now look amazing. This boost in metrics that you guys have right now, was that mostly the demand — the pent up demand post-COVID? Or is it’s mixed with some other things that you guys are doing better? If you could give me a little bit of history also that be appreciated. And that’d be my last question.
Well, we’re still at an early stage as we start there. We — as I’ve mentioned, which is to do it in a discipline way and just have blinders on. If you execute, everything else will follow. And that’s what I’ve been doing with every company I’ve started and ran.
With that said, when you start a company, you’re in an early stage; you’re not getting the efficiencies of money much. I’ll give you an example. You buy $11 million worth of inventory. It’s depreciating day one. You’re reviewing acquisitions. You’re incurring expense day one. You don’t have much revenue. You have this expense prospects bill, whether it’s real estate, your offices, your personnel, et cetera.
So, in the early stages, you’re just not efficient. You’re doing low volume; you’re not getting any economies whatsoever. And in this industry, especially, you’re getting depreciation on your inventory without the benefit of having it fully utilized yet — your utilization rate.
Over and above that, a significant part of last quarter’s expenses. We’re from our secondary stock offering, one; two, from our acquisition pipeline, which we believe is bearing fruit and will bear further fruit because most of the deals are getting done are pipeline deals, not new deals, and we have enough in our pipeline.
So, it’s a combination of being early stage and deploying your plan. As well as not having the expenses of the M&A expenses and the one-time offering fees and all of that. So, part of it is COVID, a small part of that. I believe if there were, if COVID didn’t exist, would have grown more obviously, because it practically had disruptions for half of the — decent part of the first quarter and decent part of the second quarter is a difficult environment to operate. But we’ve managed to execute through it.
As we build scale, there are many more efficiencies to be derived, we’re not even close to the efficiencies we should have. Given for carrying $11 billion worth of inventory, that’s not efficient. If you triple that inventory, we kick-in a lot more efficiencies, simply your fixed and variable overhead versus your capacity utilization, if that makes sense.
The next question comes from Ariel [Indiscernible] Safe Capital. Please go ahead.
Very nice core gentlemen and appreciate your color here. I didn’t quite catch that earlier if — we were asking about the financing question and know that you have a great robust pipeline, but is there going to be potentially need for raising capital in the next couple quarters? That’s my first question.
It all depends on the deal we have on the table to finance deals, if it requires raising capital, then we will, depends. That’s what M&A on average buyout business is all about. I believe that’s a positive thing.
Got it. Okay, thank you for that. And then other question, I want to ask, a little more color on the e-commerce app that you’re launching. I found that quite interesting considering you haven’t had that before, you’re about to launch it. You said you’re going to be launching in Q3, is that correct, Q4? And how are you looking at that app to help increase your sales or just more of like a cog in the wheel?
There’s the app, and there’s the website launch as well. And what that’s going to do is automate certain functions, such as customer credit approvals. An example would be on a subscription, you would just go on the app, you can get approved right on the app and get instant approval, and then we’ll move on to the next steps and then fill out all the documentation.
So, it’ll onboard the customers quicker and for a seamless customer experience and then in the back office, less overhead, obviously, because we’re automating the application and credit approval function as well as the billing function, we can go — simulate it Uber, you can change your credit card, view your account, et cetera. Less interaction with the customer, less overhead and faster onboarding. Does that make sense?
Thank you. Yes, it does. I guess my last question would be mostly to do with the most recent quarter. Obviously, is quite a change from the quarter before that, COVID obviously played a pretty big role? I wonder maybe you could help us investors look at the next couple quarters, what kind of catalysts do we need to look for? How do we kind of more or less extrapolate this current $7 million plus number into the future and apply a certain way of approach rate and I know sales type leases were — sorry sales type revenues because a lot to account for your success. I’m trying to get a little bit of a better handle on the future and I’m not counting there yet.
Okay. What to expect? We just announced an acquisition agreement for a dealership that does approximately $100 million a year and $5.6 million dollars in pretax income. It has a footprint. And if we close that deal on target, we will integrate those financials into ours.
So, our company will look significantly larger, significantly more profitable. And we intend to have significantly more subscriptions and sales back leased. And then looking further out, it’s basically a repeat. We’re rolling up dealerships, which earn their accretive to earnings when you accrete earnings; it typically is accretive to the stock price and shareholder value. And then you overlay and web-enable and overlay the technology and products on that dealership that generates greater demand for the product line and you sell more product. It’s a straightforward strategy
That’s great. Thank you so much.
It’s foreseeable to add many dollars in income quarterly as the others have. The difference here is the-commerce generating top and bottom-line growth, which creates same-store sales growth. Does that make sense? Thank you.
This concludes the question-and-answer session. I’d like to turn the conference back over to Sam Tawfik for any closing remarks.
Well, thank you all. Thanks for participating. I know it’s Friday and I know it’s 6 o’clock already. Thanks for joining the call and looking forward to our next quarter.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.