Q4 2019 Earnings Call
unless otherwise
Loaded on today's call all comparisons or on a year-over-year basis our commentary today will include non-gaap Financial measures including but not limited to X gift measures that excluding the impact of the hundred thousand mile Stone gift to our employees reconciliation between gaap and non-gaap metrics for our reported results can be found on our shareholder letter issued today copy of which can be found on our investor relations web site, please note that all gross profit sg&a and ebitda metrics mentioned by us on the call today are an Amex gift basis. And now with that says like to turn the call over to Ernie Garcia, Ernie Banks Mike and thanks for that extremely Lively reading of the risk factors. We appreciate it. Thanks to everyone else for joining the call to choose 19 was another incredible year for karvana with broad-based games and all key operational and financial metrics in the shareholder letter. We once again published our key metrics and are updated cohort graphs. Please take a moment to look over these charts the story they tell is compelling if the story of extreme
Consistently sustained over a long period of time the magnitude and consistency of these results are only possible because we have built a better business model that delivers the best customer experience available when buying or selling car 2019 was our sixth straight year of triple digit Revenue growth with over a hundred and seventy seven thousand cars delivered to our customer and just shy of four billion dollars in Revenue birth year.
We delivered more cars to our customers than we had in our entire prior history combined.
But it isn't just the percentage growth that is noteworthy at this scale. That growth rate means we sold an incremental 83,000 cars this year. That is the most organic growth of any Automotive retailer ever in the US this year. We expect another year of market-leading growth the powerful unit economics inherent in our model continue to show up consistently in 2019. We increase GPU by $750 off even more remarkably. It was our sixth straight year of over $400 of improvement in that metric this year. We expect to not our 7th.
We also saw another year of very strong leverage with ebitda margin improving over 4% lighting the way to achieving our long-term financial model. We achieve this while simultaneously managing the cost of support 9% unit growth our retail business and 230% growth and our business of buying cars from customers taking a longer view we have now lever nearly twenty points in the last four years this year to continue that March
You November 2018. We hosted our first analyst day on that day. We covered many topics but one area of discussion was our plans for buying cars from our customers. We knew it was an important area of focus that would dramatically improve access to inventory and cut costs from the system. Bring our long-term unit in margin goals and a much clearer site. We knew that we had a very strong Foundation to build on top of all the assets were building to deliver cars to customers off the same assets necessary to perform the reverse transaction in a whole new way, which we believe customers would love as much as they love buying cars from us. What we didn't know was just how many cars we could buy from our customers or how long it would take to make significant progress.
at the time only sixteen
None of the cars that we sold had been purchased from other customers looking at the numbers of the best-in-class companies in our space and taking into account the quality of our offering and our belief in our own ability to execute we put out an ambitious long-term goal sourcing 38 to 52% of the cars. We sell from our customers in the fourth quarter just four quarters after putting those goals out. We Source 43% of the cars we sold from our customers home this potentially most remarkable progress. We've made in any area of the business in any year. It speaks to the fundamental power of the brand the technology and the infrastructure. We are building.
And while there are short-term costs associated with expanding that business so quickly. It sets us up very well to achieve our long-term goals. We launched karvana just seven years ago and that short time. We've made a lot of progress. I made it while simultaneously making the Investments necessary to support our current growth and while building the foundations to enable many years of significant growth in the future. This progress is the result of our focus on our customers the long-term perspective. We bring to everything we do and the incredible people that poor so much of their energy into helping us build better and constantly improving Solutions.
Thank you to all.
Those people Thanks for believing in what we are building together. Thanks for working. So hard to deliver better experiences our customers. Thank you for caring. The machine were building is becoming easier for others to see from a distance may have about 35,000 cars for our website or for our customers to choose from this is up from about 7,500 when we went public three years ago by the end of the year, we expect to be serving about 250 markets and 3/4 of the US population with as soon as next day delivery. This is up from 21 markets and just one fifth of the population in Q4 2016. We built the technology and supporting Nationwide supply chain and Berkshire to our customers every where to buy or sell a car on their time with the best selection and the simplest and most transparent transaction available anywhere because we've invested in the fundamental economic advantages results the first party supply chain and a vertically-integrated e-commerce transaction. We are also able to take those benefits and redouble them by investing in a culture of true customer-centricity. This culture is what powers off.
Going to be the best and the most funny.
Periods available when buying or selling a car.
We are well on our way to becoming the largest and most profitable Automotive retailer to selling two million plus cars per year and to achieving our mission of changing the way people buy cars what we do not believe we are great company yet. Our standards are far too high is far too early, and we are not the ultimate Arbiters of that. We do believe we're on the path to becoming a great company and while there will undoubtedly be bumps along the way and many risks inevitable remain. We are steadfastly conditions that have powered up to this point, but she chance to build something great to the chance of U companies get and we will scrap and fight every day to stay on this path. We have the right plan and the right people were ambitious or motivated. We're energized and we're still just getting started Mark. Thanks, Ernie and thank you all for joining us today for please report another strong and both retail unit sales and revenue.
Retail units sold total $50,370 for an increase of 82% total revenue was 1.1 billion in.
You for an increase of 89%
In 2019, we complete our sixth consecutive year of triple digit Revenue growth Revenue totaled 3.94 billion an increase of 101% and Retail units sold totaled $107,549 an increase of 89% are exceptional growth in 2019 was driven by rapid growth in our Market cohorts our existing cohorts grew up by 84% are for oldest cohorts each more than three years old grew by 50% and our oldest cohort of Atlanta grew by 18%
Our cohort growth was broad-based with many markets Crossing key Milestones as of Q4 90% of our markets were ramping faster than Atlanta at the same age and 23 seven and two markets surpassed 1% 1.5% and 2% Market penetration, respectively. These Trends are a powerful demonstration of the positive feedback a throttle with inventory selection and expanded IRC footprint National brand awareness and great customer experiences driving games Nationwide.
total
CPU increased by $750 in 2019 to 2883 dollars or GPU gains were also broad-based reflecting increases off $325 and Retail 308 and finance 81 and ancillary products and thirty-seven in wholesale.
Even though a margin was negative 5.8% in 2019 and Improvement of 4.1% reflecting games and both GPU and sg&a Leverage.
2019 was an exceptional year for buying cars from customers in 2019. We acquired 104,000 vehicles from customers and increase of 231% wage bargaining total retail units sold with Standalone vehicle purchases. We transacted with over 250 6,000 customers an increase of 138%
the exponential growth we saw in buying cars from customers in 2019 brought many adjustments throughout the year in Q3 the outside growth and buying cars from customers led to pinch points and Thursday delivery Network impacting retail unit volume in queue for the rapid increase in inventory diversity brought on by buying cars from customers necessitated learning and adjustments to our approach is to begin pricing marketing Staffing and reconditioning while these adjustments led to some transitional costs. These costs were small compared to the enormous magnitude of the opportunity in front of us to change the way people sell cars.
fine
For some customers also brought the significant benefit of increasing the selection of cars available to customers on our website for our inventory diversity increased by nearly 50% driven by customer Source cars.
The net impact of this increase in diversity was a reduction in the average selling price of our vehicles which we expect to continue and have incorporated into our Revenue guidance for 2020.
In 2019. We open sixty-one new markets bringing our year-end total to $146 so far this year. We've opened an additional 15 new markets and one more time machine to reach a total of 161 markets and 24 vending machines.
With these new market openings, we now serve 69% of the US population up from 59% at the end of 2018.
We will continue to expand in 2020 and expect to end the year serving $73 to 75% of the US population on our way toward our long-term goal of 95%
In 2019. We also made significant progress scaling our vehicle production capacity. We added our sixth and seventh inspection and reconditioning centers near Cleveland and Nashville and began construction on our inspection and reconditioning center near Charlotte, North Carolina, which opened this week.
Our goal is to end 2020 with more than five hundred thousand units of annual production capacity at full utilization. We are squarely focused on achieving our long-term goal of two million plus units. We plan to continue to maintain a healthy pipeline a future ircs to support our growth.
2019 was an outstanding year for our finance platform. We introduced our first auto loan securitization in the first quarter and successfully executed three more securitizations wage further expanding our investor base and recognizing additional gains.
For the full year 2019. We increased Finance GPU by $308 to $962 compared to $654 in 2018.
We're excited about our progress and expect to make continued gains in our finance program overtime beginning in 2020. We plan to transition to a two shelves securitization program from a single shelf in 2019. Our transition to two shells is a valuable step forward for our securitization program that we believe will unlock and expand it investor base wage or liquidity more efficient Capital structures and lower cost of funds over time.
We ended the year with $460 billion in committed liquidity resources and held an additional $67 million of real estate and securities on our balance sheet as part of the transition to a to a job securitization program. We also held an incremental 110 million of loans at the end of the year that we plan to sell in q1, and we close to New revolving facilities with capacity of old one billion dollars to finance loans prior to Future securitizations as we look forward to 20 20. We expect another year of significant growth in retail jobs and revenue increase GPU and improved ebitda. Margin. Our outlook for retail units sold is $255,000 to $265,000 a year an increase from 177549 and 2019.
our outlook for total
Avenue is 5.6 to 5.8 billion an increase from 3.94 billion in 2019. We expect PPU to increase to Thirty 234,000 reflecting gains across all parts of the transaction and ebitda margin to improve to -1.52 - 3.5% reflecting gains in GPU and sg&a leveraging since becoming a public company nearly three years ago. We've made tremendous progress across all aspects of the business since 2016. We have grown Revenue by 10 times wage increase gross profit per car sold by more than $1,800 reduced sg&a expense per car sold by more than $1,400 all while providing exceptional customer experiences and building a large and rapidly growing offering of buying cars from customers. We've made significant progress toward achieving our financial goals and are excited about 20 20
Thank you for your time will now take questions.
We will now begin the question-and-answer session to ask you a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys off to withdraw your question, please press * then two and in the interest of time and to make sure everyone is question is asked please refrain from asking more than one question and one follow-up. Our first question will come from Zacks item with Wells Fargo, please go ahead. Hey guys. I'm curious if you could walk us through some of the broader assumptions in the unit guide and then maybe explains in in a little bit more detail why you expect unit growth to outpace total sales growth in 2020 and what the implications are for wholesale and other growth
Sure. So I think we're obviously very pleased with the growth that we're seeing across the business today. We put out our cohort charts again this year which we hope will be helpful as you try to decompose where growth is coming from and in markets and also growth coming from the markets themselves growing up. So I think that's what's driving our our assumptions. We feel really really good about those being uh, founded assumptions that we feel very comfortable with um, and then as it relates to the revenue moving a little bit relative to last year. I think we're trying to leave room in a s p as we buy more money from customers. We want to really understand exactly how that's good at my great. We've definitely seen a significant increase in the diversity of cars that were able to buy from customers. We grew that diversity by about 50% from cue-to-cue fog and generally speaking that's kind of a widening of inventory. But as that continues to evolve we want to leave a little bit of room there and since the major driver of our economic model is units anyway, uh, and we're guiding 4GB. Yep.
We thought that was a a prudent way.
The guide. Okay got it. And on the ship to a to Shell securitization model from a one shelf. I believe you said in in the shareholder letter that this had an impact to q54 units and and GPU curious how if you could explain explain that a little more detail and then also whether there's going to be an impact to 20 20 units in and GPU as a result.
Sure, so I would clarify one point there. It's revenue and GPU. We believed was impacted in Q4 by holding these loans over as we transition toward our securitization next year off and basically where that impact comes from is, you know, have you sold allows we believe we would have earned a premium that would have impacted revenue and GPU instead. We will earn that premium in in 2028. And so I think that's the primary impact on revenue and GPU from that transition. That would not impact retail units sold. Got it appreciate the time guys.
Thank you.
Our next question will come from Ron Josey with JMP Securities, please go ahead.
Hi, this is Andrew in on for Ron. Thanks for taking our questions. You guys now have thirty five thousand cars on the side and I think you highlighted 50% greater selection. Can you talk about the benefits of that as well as just the operational challenges of having more science at at the RC as well as DSO and then secondarily, you know, where is that coming from? Is there any change in the auction side, or is that all just from trade-in? Thank you so much.
Sure. So so we do have now thirty-five thousand cars on our website. I think you know something that's pretty unique about our business model that is powered by our our supply chain Logistics Network that connects all of our life together. Is it all those cars are available to customers everywhere. So that's a major source of positive feedback in the model is we continue to add markets and grow within market so we can justify larger inventories and those larger image of customers in every Market more and more selection when we talk about the diversity increase of 50% from cue-to-cue for that's driven by both the size of the inventory, which is grown but most importantly it's also driven by buying many more cars from consumers. Those do come from trade-ins and then also buying cars out right even the customers not buying a car from us simultaneously. We think that's a tremendous development in the model. If you take a a step back and just kind of say what is the entire market for consumers buying cars. It's all about consumers just trading cars with one another and there's all these different companies and mechanisms that that stand between 2 khong
They're trading cars whether it's all the deals.
Us playing this role all the finance companies the transport companies. There's many many companies that sit in between consumers that are trading cars and the more of that system that we can collapse off the more we can cut costs out of the system in the more valuable our platform becomes the the better offering we can give to customers to a simplified more transparent offering the more value we can share with them. And so we think that that's a a huge huge evolution of business that we're extremely happy with
Great. Thank you.
Our next question will come from with JPMorgan, please go ahead.
Good evening. Thanks for taking my questions here. Just wanted to ask my first question on The sg&a Leverage The sixty million dollars in spending that it talked about how long just to support, you know this increase retail sourcing. Can you give us a sense if majority of that spend is now behind you or or should we expect any more areas of incremental investment in 2020, and this relatedly looks like the other costs bucket within the engineer line, you know, it continues to grow again at a part of that is likely driven a sourcing initiative, but I should we expect that to lever in 2020 and Beyond and that that'll be all and have a follow-up. Thanks.
First let me let me start with this sixty million dollar incremental sg&a investment in buying cars from customers in 2019. So the majority of that was advertising the remainder was invested in a billion Auto technology adding to our our our people for for building this business as well as expenses related to actually executing the transactions fact that those expenses. Um, obviously we think uh yielded of a very good return the the growth in this business has been substantial. We were very excited to hit the middle of our long-term range for a customer Source cars as percent of total retail units in Q4. And so we believe those Investments are paying off as we look forward to next year. I think the way to think about it is that uh, the expenses related to be buying cars from customers are reflected in our guidance for 2020. We certainly plan to continue advertising the product of buying cars from customers. We believe that that yep.
Really great thing for us in the long run.
And then, you know, we'll continue to invest in the other areas Building Technology making sure that we're appropriately staffed and and and the other uh-uh, you know needs of of that business and so all deaf Incorporated in our guidance for 2020 and then I'll jump in as well. I think it's also worth we call it on the shareholder letter other transitional costs. I think it's worth kind of outlining those four years. Well, cuz they they played a role in the corner and then like to play a role in twenty-twenty as well. So, you know, Mark spoke to the direct cost of sixty million dollars, but I do think you know anytime you have a business is changing this quickly. There's going to be other expenses that flow through in other ways as well. And so just to quickly try to put a finer point on those. I think there's always opportunity costs. There's management bandwidth. There's prioritization of our Tech teams. There's different pinch point of this year the crowd it out sales cuz we were investing so much and in this business of buying cars from customers, and then I think another area is just adjustments and learning throughout the supply chain. So we've spoken about the diversity increased birth.
inventory that definitely
Drives other expenses that that show up in directly and and you can't kind of point to a line item for exactly what they are but it means we have to optimize the way that we're bidding on cars that we haven't seen before it means that we have to offer you run those cars through the inspection center and maybe we don't have as much experience certifying those cars through the inspections that are it means me the process price optimize as we sell those cars to customers and then there also is a little bit of a marketing machine balancing. So I do think all of that is you showed up in Q4 and into three it'll roll into twenty-twenty. It's in our guidance and then I think to me something that I think we're pretty proud of it. I want to make sure we point out here is we also did show you know reasonable sg&a leverage this year despite absorbing all of those costs associated with building this this business, you know, largely from scratch off, you know, we bought a hundred thousand cars from customers this year. That's a lot of incremental transactions that we added those transactions. Don't show up very much. They don't contribute much to revenue so through kind of traditional birth.
Average metrics have either dividing by retail units or dividing by Revenue those kinds of uh, Investments can largely be hidden a little bit. And so I think the progress we made this year is something we're extremely pleased with with um, and we think it's even better than it looks like At first plane.
On other sg&a. So other issues went up by about $166 from Q3 to Q4 roughly half that is just seasonal investment. We saw about $80 increase sequentially going from Q3 to Q4 last year the rest of that increase we largely attribute to this wrapping transaction growth that we're seeing driven by buying more cars from customers. I think there's three components in that other SDA bucket. There's technology. There's corporate overhead expenses including corporate office occupancy app transaction expenses buying cars from customers impacts all of those for reasons that we've discussed. We're investing in technology and buying cars from customers. We're expanding our our headcount to support that busy and then we're you know, also, um, there's some additional transaction expenses that go along with supporting that business as well. I think when you look at those are total expenses on a pro retail unit base wage,
As early was was laying out in this phase where we're really building this business up for the first time that's going to have an impact on for retail unit numbers that we expect to lever over time. And obviously we're very exciting all the progress, um, you know in that offering and uh, you know, expected to deliver significant benefits of the business in the long run. It just came on on the GPU guidance, you know, the $32 or $34 and pretty substantial 300 to 500 increase year-over-year. Is it possible to disperse out like how much of that wage from retail GPU versus Finance in any sense on that? That'll be all. Thanks.
Sure.
For so similar to past years, we expect gains to come across all parts of the transaction. I think that's been a pattern in our you know, March from 1023 GB you in 2016 long before we went public up to 2883 today is that we've been making progress across all parts of the transaction retail wholesale Finance ancillary products. We would expect that to be the case again in 2020.
Got a great time seeing my question and good luck.
Thank you. Our next question will come from please. Go ahead.
Thanks a lot and good afternoon.
I just want to follow up on the point around buying cars from customers you guys invest in incremental sixty million dollars investigating this year. You bought a hundred four thousand cars versus buying and selling it wholesale 15,000 cars in the prior-year. So an incremental 89,000 cars that were either died were bought from customers. What is the incremental profit you're earning on those cars if it's less than probably about seven hundred bucks. Then I don't see how you can make any Roi on it. I think a good place to start. It just a very high level is home using the numbers that Mark outlined and so, you know, you said we spent about sixty million dollars in in hard costs. I do think as part of building this this business, there's definitely indirect costs as well. But I think if we're trying to think of how the business rules for were probably looking at the Hard cost is is the smarter cost to zoom in on if you take that and divide by roughly 100,000 cars that we bought that implies around $600 of expense per car. So I think you can kind of
I think about it like that if you look at
The full year our average contribution on a wholesale unit that we bought from a customer and sold at auction. We made around $400 give or take and so I think you had a high level you can kind of do all the math you can see where it is right now. And then the question is where does that you go over time? And I think we expect a lot of things move possibly there one we expect the the kind of variable expenses per unit to to drop pretty quickly pack. The the largest some of those hard costs were basically all the Investments we made in marketing this offering to Consumers. We've seen those expenses lever very very quickly in the past on the retail side. We would expect for them to let them very well as well in the future. The remainder of the costs really are pretty small but there's definitely room for those two to level as well on the margin side. If you kind of zoom out and look at the progress we've made on our home units over a multi-year. You'll see a steady March of progress there. Um, I think that we expect to continue to Mark's that up steadily, uh, some of the best in class operators have that number. Yep.
and about a thousand dollars as as
Frame of reference and then we obviously expect significant gains in in units as well. So I think across the board we've you there being a lot of of potential there. We think potential or the the results Thursday this year are extremely exciting and we're very very proud of them. I think the the expectation to to build that business largely from scratch to grow it by, you know, three accent and to try to have it contribute cognitively in the in the very first year I think is it tough expectation, but we obviously expected to contribute very positively overtime and we think it's an enormous fundamental benefit to the businesses gives us access to all of the deepest most scalable most diverse source of inventory that exists those cars that are in consumers hands. And so we're we're really excited about that and that's roughly how the math works out her knee. When do you expect to turn the corner so that your expenses are less than the incremental proper you're making from buying cars from customers.
I I think you are are our results for the some of the business are taken into account in our guidance. And so, you know, I would point you there and I realize that's that's
You know a much more General frame than the question that you're asking. I think you know, I think it's smart for us to stay at that level of specificity because this is a business that for years ago. We outlined our long-term goal of being 38 to 2:52 % and then in four quarters, we jumped up to 43% that happened really really fast, you know, we gave these other staff that we increased inventory diversity by 50% last two quarters. There's just a lot of change happening there. We're seeing cars offered up to us from consumers that we've you have not seen many copies of in the past and we're learning how to build those properly. If you don't bend those, right they used cars. You should have one you give up margins certain places, you you give up conversion and others as they pull through the system. You've got all these different places expensive show up. So we're learning kind of very rapidly. I would say and Thursday and we expect to continue to make progress. But trying to give you the precise timing of when you know, we're going to see leverage in marketing. That's tough. I I think we feel really good about the offering the results. We've seen so far off.
Are very strong. We've got a lot of momentum movie like we got a very clear path to art or long-term model. And and so I think we're going to point to that and then as it relates to the business results will just point to the guidance office for the entirety of the business there enough very Dynamic and exciting. Thank you. Thank you. Next question will come from research, please. Go ahead.
Hey guys.
Just checking. The question. First one is on the you said pretty prolific wrote to the the trade-in ratio. When you look at your retail gross profit bring it in Q4 and whether you frame that box to 3 or Q4 18, do you think the increased trade in a ratio had the composure impact on the retail GP that you would have expected pick up based on Lower acquisition cost or similar to the home where they're like some in efficiencies that may be mitigated somewhat the near-term upside that you would have expected. I can add that one. So we certainly had a a very strong supporter for buying cars from customers. Like we're $30.49 for a key for 2019. It was more than $400 a year every year a Big Driver of that, um strength increase year-over-year, um was buying cars from customers who made a nice incremental gross profit on cars block from customers in Q4 and obviously the ratio of birth.
from customers to total sales has
Increase significantly, um, uh, not only year-over-year. Uh, but also even quarter-over-quarter just given the rapid growth in the business. And so that was certainly a key driver. There's some other Dynamics in the office GPU strength in Q4. For example, a cyber monday promotion units. We're a smaller fraction of total Q4 units this year than they were passed in the past year or last year. And so that is a positive impact on retail GPU when compared to two periods other things being equal. So definitely definitely some strength and you bought a 2019 and and the biggest impact there was buying cars from customers.
Yeah, that's helpful. And that somehow related obviously made it done a good job of you know, expanding the inventory selection or site by a trade ins, you know, there's been some, you know, it seemed like you're testing partner trade-ins on your website and having those fulfilled, you know from other dealers was willing to the extent you're willing to comment on that, you know, Highlandville, what are the puts and takes the trade-offs from, you know from allowing dealers on your website. Like how does it impact the consumer experience and then like that order the trade-off in terms of unit economics that you know if you do decide to take over this, thank you.
Sure. I'll I'll try to answer that one, too.
You say at any point in time. We probably got three to five pretty big projects that we're working on at karvana. We've got different technology teams working on all kinds of different things and we have many more than that other products that were testing at any point in time. So I think generally speaking our policy to date has been that that we're not going to dive into specific products that we're working on or or that are you know going on to the background, unless we expect them to kind of impact our results in a material way going forward or unless they're a big contributor to the results that we're we've just reported. So I think there's always a lot of investment going on many of those things, you know end up working out really well like like SEC and like all the games we've seen in finance over the last year and half and many of those things. We we roll out and we test and realize that they don't work great. And so I think as a general policy, I think you know, we're going to stick to what we've stuck to in the past and you know, just know that we're always working really hard to try to make sure that we're coming up with the the most Innovative and best products. We possibly can for our customers to constantly move the experience that they gave.
All the different ways that are important to them and as we have specifics that we feel like, you know warrants being addressed in a venue like this. We will certainly address them then that's cool. Thank you. Thank you.
Like 200. Dive into the the days to sale. Would you know, what are you targeting?
Sure. So in Q4, we were 62 average days of sale. That's actually the same as for the full year where we were also 62,000 sale Q4 is up slightly year-over-year Q4 is up slightly year-over-year the full years down by two days here every year. I think you know, our thought process on average sale right now is that we expect it to stay the relatively stable and reasonable range. We're very comfortable with the level of of inventory relative to sales that we have today. We think we're striking a nice balance between GPU which is obviously stronger than it's ever been. Um, and making a great selection of of cars available to customers on our site, which is really the key trade-off that we're balancing when we're thinking about inventory size. So we're very comfortable in the range that we're operating in today. We do see a significant long-term opportunity to meaningfully bring down average days to sail from from current levels, I think birth
model of having sex
Our next question will come from Rick Nelson with Stevens, please go ahead. Thanks.
Fertilize inventory pools that were able to make available to customers in many many markets Nationwide gives us an opportunity to have a very attractive average days to sales appointments of time. Thanks for that. So I'm seeing more older higher mileage cars on your website wage tires ten years old a hundred thousand miles. I'm curious if your return rates on those cars are different assume that's coming from your Source initiatives.
Let me get the second part of that first. I do think as we said before we've definitely seen more diverse access to inventory by buying cars from customers and that is driving a more diverse inventory out for customers to choose from on our website. And I think that that generally speaking is widening. We're seeing more expensive cars. We're also seeing older higher mileage cars as you brought up and and I think overall year-over-year that that I believe rrsp was very similar. But but you know, that is definitely dynamic as we can do by all these cars from customers. And and so we want to keep uh-uh an open mind or exactly how that's going way out as it relates to return rates and and reviews we've seen very very consistent reviews and return rates across time across across cars. I think you'll walk on four or five years ago a hypothesis would have been that we were going to be selling mostly one and two year old cars because it was the easiest cars for consumers to buy sight-unseen, um and have delivered to their door and I think that's been yep.
Surprised over time is we found that one. There are consumers that are definitely willing to buy older higher mileage cars online and and that's as fast growing part of our business is anywhere from a little bit faster even and then too.
The transaction technology that we built in the process that we build the supply chain that we built work very well for those customers where we're seeing very high quality reviews from them as well and return rates that are in line with the rest of our our population. So I think overall we view that as as exciting. We've always thought that are tan was very very wide with respect to different types of cars because are offering really is uh, it's it's kind of car. We're trying to give customers a broad selection a great price a great experience and that really has nothing to do with the specifics of Any Given car. So I always kind of hoped that would be the case, but I think we're continuing to see more and more evidence that points in that direction.
Our next question will come from Michael Montana with evercore is I please go ahead.
Great. Thanks. One question. Then one follow-up. The first question was about, you know, retention of customers. So now that you look at a market like Atlanta you getting kind of five six seven years and up in their, you know, just curious if you could share any percentage of those customers that that are actually being retained and returning to buy with you again, and then just had a follow-up. I'm sure so I think we definitely are seeing nice positive signals from our older markets that said if you go back to to Atlanta five or six years ago, we had, you know, very small counts of sales. And so I think you know, when we look at repeat sales the the data is still thin enough to where I don't think we want to be giving out numerical guideposts just yet, but but I'm seeing we we really like we also see a lot of kind of cross family purchases where one member of the family will buy a car than other members of the family buy cars. We see a lot of referrals. So I think you know the name
evidence for our experience resonating and consumers voting with their feet by coming back again is is strong, but I don't know that it's
You know numerically robots enough for us to want to quantify in a way that we feel confident. We'll be consistent across time given that it's still, you know early in the company's history and and we are only a seven-year-old company.
Okay makes sense. And then if I could just follow up on the retail GPU. So the increase there was a little bit more than we thought just based on mix alone. So I was going to ask, you know with any change to kind of the shipping fees or depreciation rates or even like reconditioning that would have you know, incrementally supported that that we should know and then just on a note, you know, obviously you mentioned some competitors that have a thousand plus GPU on the wholesale front but they tend to have their own auctions as well. So I'm just wondering, you know, if you see a potential to get to that level, you know, or if you would actually need to open your own auctions to do that.
Sure. So let's let's take this one of the time I think Mark kind of walk through some of the contributors to to the strong fourth-quarter retail GPU. The one of the things that I think I would point to that is that is useful, especially on a year-over-year. Basis. Is this year our Cyber? Monday promotion actually went very well for an operational perspective. We were very prepared going in. I think the team did a great job handling all that extra volume. We were just coming off of kind of, you know, some constraints that we had seen in the third quarter and we knew that we were going to be coming into another year of big growth of 2020. And so we didn't lean in as much with marketing dollars as we had in the past we chose to take a couple more careful approach there just to make sure that we were really positioning ourselves. Well heading into twenty-twenty and and so as a result, we saw a smaller percentage of our sales in the fourth quarter that they've got the Cyber Monday promotion discount. And so I think that was probably also something of a contributor that's worth noting the other line items that you pointed to I'm sure moving around a little bit but I don't think they were I think the two big contributors were mixed the FAQ.
And the smaller contributor from cyber.
Monday and then as well as the options what I would say is we've got a number of of great Partners we work with today to to take our wholesale cars and go sell them and also to to buy back any of our retail cars that were not buying from consumers are Instinct will always be to to find solutions that work great for us in our partners before going out and tackling another problem and trying to build something from scratch off. But I think the the point is well-taken that you know, the best-in-class operators that have $1,000 margin generally are also monetizing that portion of the transaction and and that's something which were we're well aware.
Our next question will come from Nick Jones with City, please go ahead. Hi. Thanks for taking the questions. I guess first. You know how much higher do you think the percentage of car Source can go if you want to revisit that Target, I mean you have a different view after you've seen kind of the demand for the offering and then I guess on top of that, you know, when you get source of car from a customer. Did you remind us how you know what process do those cars go through. Are you running it through the karvana checklist is you know, they're an opportunity to maybe not need to do that quicker or if you are running through that it seems like you know, I guess piggybacking off the last questions about auctions that if you're kind of already indexing the data, that's that's maybe more valuable through the wholesale Channel than some other issue. Is it hit hit the network?
Sure. So, let me let me take the first one and then maybe Market going to jump in on the second one. That'll help us with.
How high can this go? I think you know, we set our long-term Target, I guess now 4 and 1/2 quarters ago, give or take at thirty-eight 52% and that was a thoughtfully arrived at Target by looking at what best-in-class operators, you know had accomplished. I think the fact that we got to 43% disk quickly is something that we are extremely happy about and I think as I said in my remarks, we felt really good about Target early on because we felt like, you know, we built this supply chain that enables a customer experience that that we think at least exactly what customers want you can go onto our website we can use all of our different data sources in value that car intelligently we can give you a bit and then go to your house and we can pick it up and you know, you've got your money and and hold transactions over and you know, that was something that we were very confident would resonate well and I think that you know, the the proof of the pudding very clearly is resonating well, so we're very very pleased there that said we still definitely have a lot of wood to chop an earlier question from Seth. We talked about the expense. Yep.
Yeah per unit that something that will be attacking addressing over time. We clearly have room in margin as well getting smarter there and and you know being smart about getting those cars and pricing those cars and figure out exactly which ones we watch t v there's lots of room for us to to grow there. And then I think just at this pace trying to predict, you know, the continued speed of progress we're going to make is just very very hard. I think that we've definitely benefited to a degree from the brand that we've built up over the last seven years. It's delivering great experience as a customer and I think that's probably helped, uh this offering to accelerate so quickly off but it's it's hard to know exactly. You know, how quickly will Accelerate from here. So I think we're very very optimistic about the offering we're very excited about how fundamentally valuable it is to our entire platform until we really make progress very deep in our long-term ranges across the board. We're going to stick with those ranges. We still feel like we have you know work to do but but we're we're very very excited as I said.
yes, and then on your question about process so
Can we take a car in for from a customer if it's a wholesale car will typically sell it through one of the major wholesale options if it's a retail car will take it into one of our inspection and reconditioning sisters and put it through the normal process that we would we would use for any car that includes putting through 150-point inspection making sure that the car is reconditioned to our quality standards. We'd photograph card and posted up on the site just like a car that we bought through another wholesale Channel.
Great. Thank you for taking the questions.
Thank you. Our next question will come from Brian Nagle with Oppenheimer, please go ahead.
Good evening. Thanks for taking my questions. The first question. I wanted to ask I guess bigger picture but you're talking to your letter about the continued roll out of your IRC. So I think we're working on eight now off. So it's we're looking at your financials continue developing the financials against the backdrop some substantial growth. How should we think about the factor in the benefits of to say this this IRC roll off they showing up
I think the number one place that it shows up as in volume. I think you know as we're marching toward two million units one of the most important and frankly most challenging things that we have to do is scale production capacity. Uh, and so our IRC Ram is is focused first and foremost on giving us the capacity to scale our our volume down this path or two million units. Um, I think you know, there's potentially some other um, uh, you know impacts that you may be driving at so, um, when we launched an IRC wage initially it tends to take a little bit of time to get fully strapped up get up to capacity as well as there's you know, some learning at that, you know, the individual site level them are sort of um, you know learning by by doing and and getting better and more efficient over time is it when we're adding these ircs there can be some short-term transitory dead.
packed to the reconditioning size
Of retail GPU but those impacts have historically been somewhat small. Um, and and as I mentioned transitory
Cuz it's helpful. The second question your shorter-term mark, you'd be talked response to see any other questions about that the sixty million dollar investment this year to help support the growth and the African cars from customers. That's sixty million dollars how if we look at our models? How what should we think? That number is next year into in 2020.
Sure, so we haven't given specific guidance on that. I think the it is incorporated into our guidance for the full year for the business as a whole. I think they you know, just to break down that sixty million. The majority of it was advertising. We certainly intend to continue advertising this offering of buying cars from customers, you know, 2019 was basically year one off of making customers aware of of this product. We really started advertising in Earnest in the first quarter of this year. And so building awareness of this offering a certainly going to be a part of our plan in in 2020. So we'll continue to advertise will continue to invest in some of those other areas as well, um technology continue to to add people um, support this business, um, and all of that's incorporated into our guidance, um, having said all that we also do overtime expect this to you know, these expenses to lever wage.
You know, we were in Year One.
Grew incredibly quickly this year and are very happy with the progress and on the cost side certainly have expectations of laboring over time.
Thank you very much.
Our next question will come from harm in to think of this with Morgan Stanley, please go ahead great. Thank thank you for taking the call. When I look at the office, you know Atlanta's tracking at you know to spot 09 versus 1.9 for a year ago. So fifteen basis points Grothe over the last four quarters, the other markets are growing some Thirty basis points almost double that rate, you know, we we've been tracking some of the Google search Trends which would suggest Atlanta's been plateauing a bit. Maybe you could talk about that that cohort what have you seen their have a great team, you know competitive response after years of taking share or is it the dynamic around sourcing cars from customers, um anything else that that you know, we should be thinking of it as we look at, you know, that'd be at the rest of the courts and the Dynamics there and as well as you know, how you think about Atlanta going forward.
Sure, why would so this I mean Atlanta grew by 18% year-over-year when you look at the full year 19/4 year 18. So that's something that we're we're very excited about it grew faster than that. When you look at the first three quarters off and then I think in the fourth quarter due to a couple of reasons that I'll talk about in a moment. I need slow down a bit. But but at that point, you're pretty zoomed in, you know that we're talking about looking at a single market for a couple of months off and you know, I think we're trying to cut out a lot of data to give you a broader understanding of the the gains that we're seeing across the board because we think it's important to broaden that perspective a little bit, you know something we do internally all the time is, you know, we're obviously looking at individual marks. We've got a hundred sixty of them and we're tracking how those markets are doing, you know month-to-month all the time if we see a market, you know bouncing around in a way that starts to look like maybe it's not just noise or something to understand there we dig in and we try to understand exactly what's going on and we've been doing that for several years. I would say here we do that that exercise generally yields dead.
you're stopping problems, or
Or shipping delays or something macroeconomic in in that particular City. I can't think of a single time where that has yielded a belief where we think competition is is the fiber of what's happening and given city. So we really don't think it's that, you know, we think that Atlanta was probably impacted by the same things that impacted the entire business into for namely we need to the Cyber Monday promotion the last and then we did have some of these uh, you know costs associate with the transition to buying so many cars from customers and those took many forms that I think, you know slow things down including crowding-out sales which which is a a real thing in a market the size of Atlanta and then, you know, circling back to the Cyber Monday promotion. I always think that was actually more pronounced in Atlanta something that we've definitely observe or the last several years is, you know, older markets and marks we have more awareness tend to be less responsive to our promotions. Um, I think that's that's probably because a promotion kind of serves two purposes wage.
Purpose is it offers consumers the opportunity to get a great deal. Another purpose is that it serves as an opportunity to become aware of are offering at all. And I think in markets where we already have high levels of awareness package, uh,
Higher levels of awareness. I think that second value is is a little bit more muted. So we've seen over the last several years, you know, Atlanta's share of sales and fourth-quarter associated with the Cyber Monday promotion pretty strong decreasing. So I think that was that was another contributor there as well. So again overall, I would say that market perform very well in our eyes it grew at 18% growing faster than that and Qs one two, and three thousand and then I feel like when we zoom into Q4, we do understand it. We probably won't always understand what's going on at individual Market level there can be noise, but the growth has been pretty steady and and we're very excited about it.
Okay, and then you know when I look at the web traffic and the K and implies a slow down in the fourth quarter versus the third quarter any insights, they're obviously still strong traffic, but you know life which were you thinking about? You know what you're doing to drive traffic and and and maybe what happened in the 4th versus the third quarter.
Sure, why would go back to I would start with with sales. We we saw, you know healthy growth in in cars that we sold to customers and obviously very healthy growth in in cars. We bought from customers going through the third quarter to the fourth quarter and and that happened just to fight leaning into the Cyber Monday promotion a little bit less. So, you know, I think when you're seeing variation in uh in traffic that is kind of not cool with with sales that can often be just marketing channel mixed differences than and many other things so I wouldn't read too much into that. I think there can be a lot of variability in in case of traffic from different channels and sometimes you buy a lot of traffic at a low price per, you know, per visitor and sometimes you buy high-quality traffic at a higher price per visitor and you know just traffic alone is not necessarily the best measure to look at that said traffic is continue to grow very very quickly. And so, you know, we're happy with that as well.
Okay, great. And the last one here just you know with regards to raising Capital. You know, how do you think about the capital structure of the company over the next couple of years?
Sure, so we continue to be very focused on asset-based financing which we think is the best way to capitalize the business. I think we've talked about this before but both Automotive retail utilizes various types of of capital to fund it working capital and it's other Investments the main to being investment in inventory and investment in Georgia real estate. Um, you know, we have had made great progress over the years in um, financing both of those efficiently, uh, and and expect to continue to be able to do so in the future wage as one data point there. So we recently entered into a $200 sale leaseback agreement to finance our Charlotte Charlotte IRC and our next 3 RCS off that um, we we intend to continue doing that going forward. And so I think we've been very pleased with the way that we've capitalized the business making use of the most efficient Capital markets to fund. Yep.
That's that we have we think in the long run that that is the best way to maximize return on equity for our shareholders and we'll continue doing that go and going forward in terms of the way the the business's position today. We've over six hundred million in total liquidity resources, um, taking into consideration everything on our balance sheet, which we believe gives us significant flexibility. Appreciate it, Mom.
Have a good one.
Our next question will come from National with Bank of America Merrill Lynch. Please give us hi guys. Thanks for taking my question. Just wanted to dive into the retail unit growth projections that you're suggesting and compare it to kind of the market cohort data off seems pretty conservative that you're going to slow down that dramatically given that you're saying that your average 2013 to 2018 cohort was at 84% off even if it uh-huh, and I forgot what what was your other one in the second quarter cohort, even if that one goes the both of those go the wage Atlanta, you're still shifting a huge number of markets will be in that kind of core pretty high growth rate average that you're talking about including the 60. I would assume the 2019 number.
markets act like the into
420 like the 2018 markets acted in 2019 and if that's the case, how are you going to decelerate all the way down to well below your average for that even your three three year oldest cohorts?
Sure. I think you're looking at the same data that we're looking at. So I think you know that's what's informing our guidance and I think you know, the only layer that we would add on top of that is we did just have a very encouraging growth year in both retail units and buying cars from customers. We think that we're set up very well to have another growth here again, whenever you're growing that fast until it'll transactions. There's there's always going to be one or two things that pops up unexpectedly that we need to be ready for and we're trying to make sure that we take all that into account but I think you're looking at the same data you can characterize the cohort the same way that we would and then we're trying to roll that forward and make sure that we take into account just to the operational realities of growing at this scale and speed.
Okay, and just to clarify and I know not all looking at Market numbers is somewhat useless because not all markets are the same obviously, but if you're going to 73 to 75% coverage in this coming year, is it right to assume that you're going to add roughly the same number of markets kind of been the 60 range that you added this year?
We think we'll add more markets. Now. We expect to end the year at approximately 250 markets this year. So yeah. Yeah, so we think we'll add money. It's those markets will will not be super large market so you can kind of calculate the average size those markets given the amount of population that we expect to to serve but I think you know markets are getting continually easier for us to to add as our kind of fabric. Our our Logistics fabric spreads out across the country it gets easier and easier to to add new markets. And so, you know, that's another I believe it's in the twenties and in the forties and 60s now this year, you know, we expect to be approximately job market that will add so, uh, that's that's definitely getting easier for us. Sorry about that last question. I just misinterpreted that slide on page eleven or misled misread it so wage, obviously that data was there. Thank you. Thank you.
Our next question will come from Brad Erickson with Needham & Company. Go ahead.
Cards from retail customers obviously getting the the nice Tailwind the Jeep you giving you kind of talk about passing along some of those savings or in the form of savings to your customer. Is it fair to assume you're continuing to kind of incorporate those GPU Tailwinds at least partially in your prices. I guess making you even more competitive price-wise. That's the first one and the second one just related to the shift in the two the two shelves securitization wage about anything to be read into there in terms of just the mix of your financing business here in 20 20 going through Ally versus other investors that's contemplated in your guide. Thanks.
Sure, so I'll hit the first one and number two in terms of price competitiveness. If you look through 2019, we've got very similar discounts off of two two other competitors in the marketplace to what we've had in the past. And so I think our pricing policies have been pretty similar across time. And so I think you can kind of think of those benefits that we're getting more cars from customers is largely flowing through and and feeding GPU at least that's what's happened in the last twelve months. So hopefully that's that's helpful color and then Mark wants to jump in on number two. Yeah, and then on the transition to the edge of securitization, we think that's a very Natural Evolution for our program. Obviously. We're really excited to get the securitization program up and running in 2019 and saw great success from a program in terms of the number of investors that we were able to reach and the impact on finance CPU. We think that the you know, the transition to two shells is a natural Evolution as we move to the long-term model it expands. Yep.
I thinks just a couple of follow-ups one. Is you by you know more?
For investor base. Um
You give investors greater liquidity think there's an opportunity for more efficient Capital structures and all those things. Um enable lower cost of funds over time, uh, in terms of mixed with Ally we still have a great relationship with them or selling loads to them expect to continue selling loans to them. And um, uh, I think I would almost think of that as unrelated to the the move to two shells which we think is um, just a bulb the right next step in our Evolution and finance monetization. Our final question will come from the crowd with B Riley FBR, please go ahead.
Big guys, thanks for sneaking me in here. Last two questions first. Just wanted to focus on other GPU and and namely the auxiliary Services you guys attached to sales wage is how that's impacted as the inventory becomes more diverse, and especially as you're buying cars from customers in the age fluctuates relative to the last couple of years, and then my second question is as wage, you know, the seasonally stronger year particularly with tax curious on, you know, changes to strategy from a year-over-year perspective now that you have more capacity in place to handle the higher voltage from buying cars from customers. Thanks.
So first question, I'll take on ancillary products. That's obviously the place that you know, we've made nice progress. I think there can be found correlations between ancillary products GPU and um in vehicle Max for example, if a car is within limited, sorry, the manufacturer warranty extension warranty your vehicle service contract might be a little less attractive. Whereas if it's outside of manufacturer warranty might be a little bit more attractive. And so I think there can be some correlations between vehicle mix or Thursday. It's Larry Larry product attachment rates from all of those of course would be incorporated into our guidance. And then on the strategy Point heading into taxis and Beyond 2020. I think there's anything material to call out. I think you know, we feel really good about how we're positioned right now. We're we're coming in with a really big inventory. That's that's very diverse more diverse than any inventory we've ever had. I think we're always trying to ease.
Is appropriately sized business to be able to handle the volume that that we see today and and hopefully be able to quickly Flex to handle the volume that we see as we move through these high volume times. I think we're
Well positioned we're obviously growing extremely fast. So we'll be keeping a close eye on if we start to constrain in different places and will be, you know, reacting just like we have in the past. So I think nothing material to call out there, except for that. We're we're walking in tax season and in good shape operationally great. Thanks for taking my question.
Thank you. This will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Thanks everyone for joining the call, and I certainly thank you so much to everyone a team. Karvana. This is another incredible year, and it's only possible because of how hard all of you work every single day. We really do appreciate it. We really do recognize it. So, thank you so much. Have a good one.
The conference now concluded thank you for attending today's presentation and you may now disconnect.
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