Q1 2020 Earnings Call
For the Carbone first quarter 2020, <unk> earnings call all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star keep all about easier.
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Please note today's event is being recorded I would now like to turn the conference over to Mike Levin, Vice President Investor Relations. Please proceed.
Thank you Eric good afternoon, ladies and gentlemen, thank you for joining us on carbon as first quarter earnings Conference call. Please note that this cold simultaneously be webcast from Investor Relations section of the company's corporate website investors Dr. <unk> Dot com.
First quarter shareholder letter is also posted on the IR website <unk>.
Joining me on the call today are only Garcia, our Chief Executive Officer, and Marc Jacobs, Chief Financial Officer before we start I'd like to remind you. The following discussion contains forward looking statements within the meaning of the federal securities laws, including but not limited to carbon as market opportunities in the future financial results that involve risks and uncertainties that may cause actual results to differ mature.
Really from those discussed here detailed discussion of the material factors could cause actual results to differ from forward looking statements can be found in the risk factor section of carbon as most recent form 10-K and form 10-Q.
Forward looking statements in risk in this conference call are based on current expectations as of today and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise.
Unless otherwise noted on today's call our comparisons are on a year over year basis.
My commentary today will include non-GAAP financial measures historically, we've used the non-GAAP measure X gift, which exclude the impact couple hundred thousand milestone gift to our employees what beginning this quarter that program has concluded there is no longer material to our results.
So any metrics for this quarter reference on the call today will be inclusive.
Thousand milestone gift you can find 100000 milestone gift impacts called out you know reported financials reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found under investor Relations website now.
Now with that so I'd like turn call over Q Ernie Garcia right.
Thank you Mike Thanks, everyone for joining the call.
There's been a quarter. Unlike any we've faced as a company the onset of a pandemic has led to unprecedented changes in our health and behavior, which in turn have significant it currently unquantifiable impact in the economy.
Accordingly, we will spend less time than we normally would discussing the specifics of the quarter I will briefly hit on where we sit today and then spend more time discussing the ways. We've reacted so far and away, we're thinking about and planning for the future.
We began to see significant reductions in demand in the back half of March with the sales trough in early April at approximately 30% reduction in sales year over year.
From there we have consistently improved we got a week we sales the most recent weeks being up about 20% to 30% year over year.
It is difficult to get clear visibility into exactly how the industry performed over the last several weeks, but every indication is that carvana has outperformed the industry quite significantly and grown our market share accordingly over this period.
You believe part of this outperformance has been driven by transitory factors and the part of it has been driven by customer preference changes due to the pandemic.
We don't get know how percent these kinds of Robins changes will be but we are optimistic you through a medium term ones. We believe customer behavior shifts are likely to accelerate our progress.
Now, let's turn to how we reacted so far in early March it became clear that we're dealing with a very significant events.
At that time, we determine that we're fighting the battle with two fronts health and financial health. Our first priority is to help keeping our team and our customer safe along those lines. We've been I could work from home for corporate customer care teams have reconfigured, our inspection centers and field locations to support social distancing adopts easy guidance and implemented a touchless deliver experience for our customers.
The second onto the financial help right.
Sure we'd had three primary goals to align expenses with this new environment to manage our risks uncertainties thoughtfully and to ensure we preserve and continue to progress in those areas that are most important for long term success.
We came into the pandemic expecting our biggest absolute unit growth year, yet and what the business position to deliver on those goals.
A man shock we started to see in mid March is obviously necessitated some significant difficult changes.
In order to align expenses with the new environment, we eliminated over time in travel budgets reduced hours and pause hiring.
Another important component of our strategy for managing through this has been to carefully manage our risks uncertainties. We view the most important areas of uncertainty during this period to be industry demand levels, the credit in capital market environment and inventory values.
In an effort to manage the man uncertainty we moved quickly on expense management rolled out new commercials tailored to this environment implemented a 90 day payments for promotion for our customers and design to our expense reduction initiatives to be impactful will also be easily reversible to enable us to adopt adapt to different demand scenarios.
We've also been active in managing our credit in capital markets risks in late March we tightened credit significantly on the loans generated on our platform. In addition, we upsized our portfolio purchase agreement with Allied to $2 billion and broaden the set of customers covered under the agreement and we completed a 600 million dollar common stock offering to fortify our balance sheet.
We view inventory values as another area that we want to be purposeful about managing.
We ceased all purchases except for customer trade ins in late March which in combination with our outperformance the sales relative the industry have reduced our total inventory by about 30% in just five weeks since the quarter end.
This significantly reduces our exposure to inventory purchase prior to the pandemic.
As we bring down expenses and manage our risks. We're also continuing to extend our leadership in the areas that are most important to our long term success.
The single most important is the quality of our customer experiences our customer experiences have three primary drivers our culture, our technology our supply chain.
We're continuing to invest in our technology to make buying a car even easier more fun and safe our customers. This internet able to different more efficient supply chain that has traditionally existing automotive retail. We're also continuing to fill our real estate pipeline, while holding off on growth Capex. So we're prepared to return to rapid drop from the time is right.
Culture is at the top of the list the drivers of our long term success.
Is it the talk for a reason everything we do all the things that come together to deliver incredible customer experiences are done by our people people in the relationships and process to connect them or the great fundamental in any business.
And environment like this is a test for any culture, you learn more about people and more about a culture. During these moments of intense direct pressure.
Well I tell you what we've learned so far I want to tell you what we hope.
In mid March we set a goal that we would come out of the stronger that we our entire team across the country would look back on this time as a period that we came together to.
To achieve this we decided to use our values most extensively our value. We're all this together as the lens for making tough decisions.
We came into the pandemic poised for tremendous growth. There's obviously made aligning expenses with this environment difficult. The only way we could achieve it was to significantly reduce hours for thousands of people across the company.
This was undoubtedly the hardest imos painful decision any members of our management team have ever had to make.
It's unfortunate reality the right decision for Carvana, given all of our goals is to reduce the hours of the operators. The work so hard everyday to deliver the customer experiences that define us.
That reality did not align with our value on this together so we set up a fund where people across the company could volunteer a portion of their salaries that would go into this fund and offset lost wages for those lost hours, we had hundreds and hundreds and hundreds of people across the company voluntarily contribute their wages into the fun, including the board of directors and executive.
In the all contributed 100% of their salaries during this time.
I think there's no clear expression of our culture mess in fact, many of the contributions came from people who lost hours themselves, but when do others needed a hand more than they did.
Really think about that from it.
In a time, a fear and uncertainty. These people who are dealing themselves were produced income decided to give more they did it because their incredible people. They did it because they're part of something and they did it because we're all this together and the fact that they did that so many did it is something that I think the entire team of Carvana should be tremendously proud of.
This is the strongest in fondest memories I'll take from all this.
Difficulty rarely leaves things that they work it tears groups apart or brings them together we've been brought together they are undoubtedly more challenges lie in front of us, but we head into those challenges confidently because the people stand beside us mark.
Thank you, earning and thank you all for joining us today.
Q1 was a strong quarter for Carvana in light of the extreme disruption to our nation industry and company brought on by Cobot 19.
Retail units sold in Q1 total 52427, an increase of 43%.
Total revenue was 1.1 billion an increase of 45%.
Both of these numbers reflect significant gains in market share, which are continuing through April and the first week of Matt.
Total gross profit per unit was 26 40 in Q1, an increase of 232.
Our growth and GPU was driven by strong retail GPU, which increased $299 to 15 81, our highest ever driven primarily by buying cars from customers.
Wholesale GPU was $23 a reduction of $60 primarily impacted by declines in industry wide wholesale prices in late Q1.
Other GPU was $1036 a decrease of $8.
This included a 97 dollar reduction in finance GPU to $528 offset by an 89 dollar increase and ancillary products the $508.
In March we completed our first Nonprime securitization and sold our prime loans that were originally intended to be part of our two shelf securitization program under our existing for flow agreement.
While lower than recent quarters, we believe our Q1 finance GPU demonstrates the resilience of our finance platform during an extremely volatile period.
EBITDA margin was negative 12.6% in Q1, a decrease from negative 7.8%.
EBITDA margin was significantly impacted by the reduction in demand brought on by Cobot 19 during a key selling period in March.
In addition, EBITDA margin in Q1 was impacted by 2.4 percentage points or $26 million due to cobot 19 related non cash adjustments the asset carrying values that we do not expect to recur in future periods.
In late Q1, we took several measures to better align our expenses with customer demand.
Following the spread of Cobot 19, we immediately pod discretionary growth investments, including new hiring travel and new facilities Nike investments.
We also made the prudent but difficult decisions to rebalance staffing and marketing to better match demand.
Although we made these decisions early and quickly lower volume outweighed the expense reductions and led to a 4.6% increase and ask you today as a percent of revenue.
In light of the uncertainty generated by Cobot 19, our expansion strategy has shifted to one that prioritizes risk reduction while also ensuring that we're prepared for growth when a normalized environment returns.
We have pause acquiring new inspection and reconditioning centers and vending machines.
However, we are continuing construction on our sees that were already in process and that have existing sale leaseback agreements in place.
Additionally, due to the positive customer response to our touchless delivery offering we plan to open many smaller markets that could be served by our existing logistics and delivery infrastructure with limited incremental investment.
Following quarter end, we completed a registered direct offering of 13.3 million shares raising $600 billion and bringing our total liquidity resources on April 1st to over $1 billion.
These liquidity resources provide us with significant flexibility to operate our business under a wide range of operating and macroeconomic scenarios.
In addition, we upsized and extended our existing pork low agreement with ally, providing additional flexibility to serve our customers.
We expect 169 million on a fully exchange basis shares in Q2.
As we look forward, we're focused on positioning the business to be lean and flexible as we march toward our long term goals.
Thank you for your attention we will now take questions.
Thank you we will now begin the question and answer session to ask a question you. Many press Star then one on your Touchtone phone.
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In the interests of time, please limit yourself to one question and one follow up if you wish to ask another question you may do so by re entering the Q, we will pause to one moment to assemble a roster.
Our first question today will come from Zacks for them of the Wells Fargo. Please proceed with your question.
Hi, I'm.
I'm curious if you could talk us through the inventory management and a little more detail.
You know how you went about 500 dollar per unit inventory charge and then curious if you could talk us through whether the environment has evolved into Q2, and if you see any reasons to believe the GPU.
Environment can improve from here.
Sure. So I think in general the wave is that we assess our inventory and determine its carrying value is is a function of basically looking at what our pricing is and then what that would that means for what we're likely to receiving proceeds relative to the value we acquired inventory.
And that's kind of standard accounting framework for determining that so so that's how we go about assessing our inventory charges reserve level.
In terms of how the the situation has evolved I think it's been a very dynamic situation in terms of what's going on with inventory pricing.
We saw right in the pandemic hit basically volume kind of dried up in the wholesale markets I'm pretty significantly dropped down to probably 20% of normal levels. It stay down those levels for a while we've seen it more recently climb up to closer to 50%.
It's probably pre pandemic expected levels over the last couple of weeks and that's been kind of Oh linear March up. We've also seen wholesale pricing I'm kind of move up a little bit over the last couple of weeks as well we've seen sell through rates, which is likely the any given cards going through auction is actually sold to a buyer also go up a little bit. So I think there has been.
Some signs of stability, there, but I think we still remain in a highly uncertain environment as it relates to do vehicle values on it's not something that we're assessing very carefully and watching on the retail side. There has definitely been much more stability in pricing.
So probably a number of technical reasons, but we've seen much more stability there.
I think what we've attempted to do by by stopping our purchases and trying to put your inventory values are actually the Android levels down it's as quickly because it is just make sure that we minimize our exposure to all that inventory that was purchased in the in a pre pandemic world as we view that as as a potentially large exposure.
I think we've had incredible.
Progress there, marking that down 30% sense since the end of March it's like it's something that we're really excited about but you've got somebody were paying very close attention to.
Got it thanks, Ernie and then I wanted to talk about than than 90 day no payment offer I'm curious if it all all customers.
Qualify for that and maybe you can walk through the impact there in terms of topline and I was also curious how that works in terms of financing.
Those receivables and if there is that delayed and they're on those transactions.
Sure so on that I promo.
That is something that there are qualifying requirements for that.
So for many of the customers that are then being sold through our forward flow purchase agreement. Most of them are qualifying and then they have an option to a locked into that or not.
In the loans that are not being sold to our portfolio purchase agreement, which is approximately a third of the loans originating today a significant minority of other customers are qualifying for that.
We do believe that's probably had a positive impact I think quantifying. It precisely is is difficult in light of the many many different things that we've we've done over the last several weeks.
To ensure that were putting our best support in front of our customers I think that's been one of many steps that we've taken.
The impacts too.
Ooh flows through finance GPU, and so indicates being sold ally. That's that's something that is predetermine and we worked with them given their experience with these kinds of operating customers in the past two size that appropriately.
It's not that how that how that's all been working.
Got it appreciate the time guys.
Thank you.
Our next question will come from Colin Sebastian with Baird. Please proceed with your question.
Great. Thanks, and hope everyone, there is safe and healthy.
I guess, one follow up on on the April trends.
How much have you been able to take advantage of some of the AD pricing deflation.
How much has that been a catalyst for.
To connect with potential buyers and then looking beyond the current environments.
Curious on what you think might be liquidity needs incrementally for the balance of the year.
Different scenarios around the economy.
And in general is that Myron changing any of your strategic priorities, whether that's related to market expansions and vending machines things like that thank you.
Sure. So there's clearly been a reduction in advertising cost I think there's also clearly been.
Increase in impressions more consumers are consuming more media than they historically have been so I think that cost or impressions of falling pretty dramatically I think that impacted at least directionally offset.
But that consumers are also purchasing less in this environment across the economy on that up until several weeks ago, a especially in automotive, although we've clearly seen price reductions.
Those price reductions have.
Continued over the last month or so and so I don't think we know exactly where that's going to go but but there's clearly been reductions and the cost to get your message in front of consumers. That's something we'll continue to monitor very carefully going forward.
Sure and then on on the liquidity question I would start with the the fact that we had about a billion dollar is actually a little bit more than a billion dollars in total liquidity resources as of April 1st of all inflows of our 600 million dollar offering that gives us ample resources to operate it even.
Deep stress scenarios I think we think those deep stress scenarios or are looking less likely than perhaps they were three or four weeks ago, but we have a lot of flexibility even a deep trust area scenarios due to operate flexibly and then of course, an upside scenarios I have a lot of flexibility there as well I think some of the some of the drivers of that flux.
Ability have been the operational changes that we have made to respond to the cobot 19 environment.
These include.
Limiting capital expenditures as I mentioned in my prepared remarks to focus primarily on inspection of reconditioning centers, where we already have sale leaseback agreements in place.
And then from an operating expense perspective.
Obviously, taking a number of steps.
To match, our operating expenses to the current demand environment and so the combination of those things, which really started to be put into action.
In the second half of March and then we're you know we're sort of.
Playing out those plans through the second half of March and then through April leave us feeling.
Really good about our liquidity position EBIT in de stress scenarios because of those levers that we have the business.
Thank you.
Our next question will come from me CRO of B. Riley FBR. Please proceed with your question.
Great.
Thanks for taking my questions one kind of wanted to just a kind of a high level demand picture thoughts as we have arguably lower.
Air travel coming over the holiday season of summer or thoughts on.
Implied demand from more few calls on the road more miles driven and then also just the kind of thoughts around this shift in the tax date from April to July.
Oh on your first point I think there's there's a lot of uncertainty a lot of questions about what this new world means both me determinant in the longer term I think we'd say there yeah. There's a lot of different data source out there you can read about expectations that personal ownership actually accelerate.
As a result of all this and an increase of because more people don't want to take public transportation.
Or or choose not to to partake in ride sharing.
There are probably other effects like those outlined where people are traveling lessen the air and taking road trips instead I think all of those things are possible, they're very very hard to size and they're they're very hard to rely on I think what we are most excited about his first and foremost the market share that we've kind of always been planning to to go after and take over time.
Yeah, we'd be growing our business very quickly prior to this as a result of.
Our extremely differentiated offering.
And all the customer preferences that that serves and I think that in this new world. We now know the direction of a new customer preference, which is a preference for safety and and minimizing unnecessary.
Impact with other people that customers don't know as well, we know that that's likely to push demand in our direction and aid our goals of increasing our market share. We don't know how strong that impact will be we don't know how persistent will be.
But it's pretty clear that's a directional NPAC and we think that overall when assessing carvana what matters. Most is our market share gains the market around us is extraordinarily large we're still very very small compared to that market.
And then your second question as you might clarifying im not sure I totally understood.
The tower.
Yes.
Okay perfect yeah. So.
We the tax day do you mean tax refunds that should have a week or so later.
This year is that you're referencing [noise].
Correct.
Or perhaps you're referencing the that that does the fact the change in the filing deadline from 15 to July 15th I. I think I think that could have some impact on customer behavior.
We did see some tax refund certainly come through before covert 19.
You know really came into force in the U.S. in Q1.
But I think that any impacts from the shift in the deadline from April to July I would think would just be very much melded in with the probably much bigger impacts.
That come from shelter in place orders being lifted consumer starting to get out there and spend again.
I think it'll be hard to disentangle does impact since I and I actually think the cobot impacts will will win out over any.
Any impacts related to the tax deadline chip.
Got it thanks for taking my question.
Our next question will come from a Brian Nagel of Oppenheimer. Please proceed with your question.
Hi, good afternoon. Thank you for taking my questions.
So the first question I wanted I guess, it's more geared towards Mark just on the financials.
You know clearly as you talked about a lot significant disruption during the first quarter, but.
As we look at the quarter and some of the maybe areas of costs are there are there are there larger call outs that we should be thinking about as we try to get to what it would have been a more normalized earnings.
Earnings trajectory for Carvana, either positives or negatives color as that business how to flex the second half a month of March.
Sure Yeah. So the largest expense call out is the adjustment to asset carrying values totaled about $26 million that that I alluded to in my prepared remarks that was really split between two things. The larger portion was related to adjustments in the valuation of finance receiving.
More related assets that we hold on our balance sheet, obviously the end of.
March which is when we do that evaluation was a very turbulent time and financial markets and so.
We took an adjustment to some finance receivable related assets that we hold on the balance sheet.
The second largest category was.
We did.
Observed toward the end of March significant changes in.
The wholesale trading prices have used vehicles.
And then we also saw a significant reduction in demand, which changed some of our expectations about.
A number of days the sale that we expected to experience in our retail business and so when taking both of those things into consideration.
We made some adjustments store inventory value.
And the that some of those totaled $26 million. So that was that was a a very large impact on the expense side.
In terms of SGN today, I think the two biggest places where we saw an impact.
We're really in a advertising per car sold and compensation and benefits per car sold the way to think about both of those is you know.
Q4, and then early Q1.
The first couple of months of Q1 is a big investment period for us as we invest in staffing and invested marketing in preparation for one of the busiest times of the year, which is tax season and so this year, we made significant investments, but then demand in March was was you know nothing like what we anticipated.
For obvious reasons related the cobot 19, and so we certainly saw elevated levels of compensation and benefits an advertising expense per unit relative to what we otherwise would have expected. We also saw elevated.
Levels on a per unit basis in the other expense line items, but those are the biggest too.
That's very helpful. I appreciate it and then my follow up question here as we look at that the rebounding sales you called out here in Q2, so congrats on that.
Of course, I have is again and I understand it's fluid right now but is it are you seeing just is it just more of a return to normal your your normal customers coming back or is there some type of shift within that.
The demand is returning and then the second is isn't ramp.
Is it continued to ramp here or is it basically just we set back a bit.
So I think there are many different data sources that you can look at to try to get a sense of what sales looked like a across the industry in April and in the last several weeks I think many those datasets circle around the same answers, but don't precisely agree it for used car sales I think they range from a <unk> estimates of.
These higher month April being down, 55% give or take to do as little as 45% and in more recent weeks, depending on what dataset, you're looking at maybe down.
35% to maybe only down 20% to 25%. So I think those would be the estimates of what's happening in the industry over the last several weeks.
In the month of April we as we said, we troughed at approximately down 30% year over year early in the month.
We then came back very strongly to ended the month barely down year over year at all and in most recent weeks have been up 20% to 30% and have seen.
Pretty healthy steady consistent growth over the last several weeks. So it's clear that we are outperforming the industry based on all data we look at when we look at the demographics of our customers and kind of try to get a sense of.
Where that share maybe coming from our demographics were pretty broad base before and so there maybe some some very subtle differences that we're able to observe but I don't think any those differences are strong enough to where we have certainty that there's real information in number or certainly that they would be worth calling out on this call. So I think in general it feels like it's been a broad.
Based improvement.
There have been surveys out and there is many of these surveys out. So you can look in many different ones, but one that came out several weeks ago, others put out like hargreaves on prior to the pandemic one of the questions asked customers with something along the lines of would you consider buying a car online and at that time, something like 32% of customers raise their hand, instead I would consider doing that so.
Several weeks ago, which we still relatively early and all this but several weeks ago that number had jumped up to about 61% of customers that they would consider buying online. So we do think that in this new environment, we have a very very desirable offering.
And so you do we think that bodes well for the medium term, but undoubtedly.
The market the entire industry took a big surprising unexpected hit in late March and April and I think now we're marching down pretty steadily and I think if you take these lines and extend them out I think they suggest a pretty exciting next couple of quarters in several respects, but we think theres still a fair amount of.
Risk left but we still have a permanent solution for the virus, we still don't really know the degree of the economic impacts I think there's a number of micro impacts in automotive to watch very carefully we called out our prepared remarks.
So I think we are enthusiastic about the response than we've seen and most importantly honestly the way that the company has responded to all of this.
But I think we're still trying to make sure that we're looking at the future through the lens of different scenarios and making sure. The businesses is flexible and able to adapt quickly to different scenarios. This as we're not sure exactly what you expect out of the next several months.
Got it looks very helpful. Thank you.
Thank you.
Our next question will come from Sharon Zackfia of William Blair. Please proceed with your question.
Hi, good afternoon could you.
Does any perspective on what retail GPU like for you in April as you were kind of unwinding the inventory and then secondarily on the finance business I mean, obviously the end of March was really rough how do we think about finance revenue per car.
I am going into the second quarter and the rest of the year should that normalize back towards levels that look more similar to last year, there or something else that we should consider as kind of hampering Matt.
Sure, let's start with retail GPU. So I think first of almost I think we're very pleased with retail GPU.
And I think absent.
Part of ours, it would have been higher still.
But but we do that is a very healthy number.
It was it was marginally impacted by our choice to stop purchasing inventory in late March is something that's kind of always happening.
In our retail GPU informed your financial statements is that you're constantly buying cars than if you buy those cars those cars get recondition at the at the inspection reconditioning centers. They get put on the site and then they have some probability of being sold at any given day. The cars that you put up there. So quickly turned up higher margins the cars to take longer to sell tend to have lower margins and so when you stop buying cars.
You are kind of freezing your inventory in time and that inventory starts to age out.
So all those constant you know the average margin that you observe flowing through the income statement is going to drop because time is moving in new cars. Appreciate with respect to time and so I do think that probably had a marginal impact that will likely be a larger impact in the second quarter than it wasn't the first.
If you just kind of run a very simple mental model. It thing you don't buy any cars in the quarter. Then you on average per day sale would go up by approximately 45 days, you're selling those cars to out a nice quarter.
And seeing how to do the math on what would happen. There. We are starting to now turn purchase is back on given both the stability. The we're observing in the wholesale markets or at least a relative stability that we're observing the wholesale markets and the strong demand that we're seeing as well as the fact that we've now brought our inventory down reduced our exposure there considerably so.
That will provide an offset to just that depreciation, but but that is an impact in Q1 and is likely to be a larger impact in Q2.
As any about finance revenue per car.
I think I'll start with we're extremely pleased with how our finance platform held up.
In this environment, we went and did our first nonprime securitization in the quarter, we did that in an extremely turbulent market.
But we didn't get that done before markets to shut for a short period of time.
And so we did not get the premium that we that we were expecting are likely would have gotten in previous periods, but we still got a very solid premium and were and we're pleased with that and then we pivoted as securities markets closed for short period of time and instead of doing a prime securitization. We we sold those loans to our portfolio purchase agreement.
As would be expected in this new environment when when kind of yields are moving up in spreads are moving up and loss expectations are moving up the premium. We received was was less than we might have otherwise received.
But it was again a premium that we were pleased with so.
I would view that as actually Oh in excellent test in a sign of resiliency of the finance platform.
Yes, we certainly wish you would have been as high numbers. It was in Q4 and always do and believe that it will continue to go up in Q4 levels.
But I also think that that number represents a very strong number compared to what the traditional a dealership model gets and it also represents a relatively small decrease relative to what many finance models that that would take charges to your credit being held on balance sheet would take and so I think.
The us that's a very resilient number that we think.
It is a great Ah moment for the finance platform to demonstrate its strength not only in a in a positive scenario, but also on the downside case.
Okay.
Thank you. Our next question will come from Armintas think of Vcs of Morgan Stanley. Please proceed with your question.
Great. Thank you for taking the question.
I'm just looking at as DNA and other is defined as I see expenses corporate occupancy professional services insurance limited warranty title registration and.
I'm assuming that.
On their own none of these items really greater than 8 million for market occupancy, but this line, it's been a bit of a black box here and I was hoping that you could shed some color on what goes into other why doubled over the past year capitalized software, there's something else driving that growth higher.
Sure, Yes, we had just a little bit on last call as well. So I think theres basically three big buckets that you can think of as being in other the first is technology. The second as corporate and then Theres also some transactional expenses in there.
I think in terms of.
The way that thats grown over the last year or so.
We definitely had been investing in all of those areas and so one of the big sources of investment in 2019 was essentially building almost from scratch this business of buying cars from customers.
Definitely impacted all three of those big buckets that I just walked through that was a major innovation in a major add to the business in in 2019.
And so it was a big big driver of all the line items, but certainly the other SJ line items well. That's also true in Q1, all those things that I, just walked through or certainly be expenses that we'd be bearing in Q1.
And other us unit per car sold actually it was it was up a little bit in Q1. Despite a.
A pretty significant drop off in demand in March.
Those are the major buckets, that's certainly a bucket that we expect to lever significantly overtime as we march toward our long term model.
Okay.
And just.
For the first quarter every single line item and SDMA was higher than the prior quarter you mentioned some of the costs related to the advertising.
Comp and benefits, but looking ahead to the second quarter.
Yeah, what what levers are you calling year to manage the what you see as an appropriate burn rate for the company any of these line items that we should be thinking of trending lower sequentially into the second quarter.
Sure. Yes, so we certainly expect declines on a per car sold basis and those SGN a line items.
I think where does that come from I think a big a big part of the expected decline on a per unit basis is the response that we've taken a cobot 19. So in Q1, we were in a period, where we were significantly investing March is often one of our best if not our best month of the year.
Which is a common in the used car industry and so we were investing really significantly in advance of.
Expected a busy season and when that busy season, Didnt materialize, obviously that had a significant impact on our expenses per car sold that were ultimately realize in the quarter of course, we do expect as I alluded to.
The actions that we've taken for per car sold expenses to decline in Q2.
Our next question will come from Ron Josey of JMP Securities. Please proceed with your question.
Hi, This is Andrew been on for Ron Thanks for taking my question.
With April sales rebounding to that plus 20% to 30% level that you guys talked about and understood things are yet to kind of normalized.
But with significant share gains that you guys are saying can you talk about kind of what the recapitalized balance sheet, why you guys aren't leaning into advertising more.
Is there a change in ROI or is there something else there.
And then secondly, just kind of a big picture question. So Ernie the whether you've built this business is really a fixed cost model.
As you go through something like this does this make you want to push more cost to a variable model or do you think about that any differently. Thank you.
Sure So what I would say they I think.
I will start with were extraordinarily happy with the way last several weeks have gone from a demand perspective, we're being 20 or 30% year over year.
After being down 30% year over year to several weeks before is up is a pretty dramatic reversal and has us back to pretty significant levels of sales I think.
As we look forward what we're trying to do is we're trying to balance.
The uncertainty that remains in the industry and the economy and with the virus with the upside potential that we clearly see.
And I think that has as monitoring many different things very closely we've talked a little bit about how we're monitoring.
And Tory prices in market, we're definitely monitoring the credit markets. We're clearly.
Very closely falling demand that we're seeing on our website were paying close attention to marketing costs.
We're trying to get a good handle on all those things we're trying to make sure that we move forward in ways that we believe allows take advantage of the situation. When it's positive but also ensure that we cut off the worst downside cases, if things do turn a little bit negative and I think that's the equation that would try to balance really carefully because we do feel like why.
I'll trends are very positive.
It is still entirely possible that were in the somewhat early stage. The this and we want to make sure that we get a good look at it before we we make sweeping moves.
But but we will be monitoring all that and we have been making changes very rapidly and I would anticipate it we will continue to make changes very rapidly as information becomes available.
I think it this business is designed to swap.
Variable costs are fixed costs relative to the traditional model and we think that is absolutely the right move and in no way shape or form what do we want to change that at all.
I think the degree to which that ends up being the right choices is a function of the size of the business that you believe you can ultimately build add prior to this we believe that we could build the business. It would sell 2 million plus cars per year and that that would lead us being the largest most proplet move retailer and I don't think we have any information.
That would cause us to question that any way shape or form I think if anything that the information that is change would potentially make us more optimistic about your the speed to getting there even the possible ultimate upside. So I think we feel very good about the way we've designed the business and thank you.
It positions us incredibly well you have to continue growth.
I think we've also you demonstrate a lot of flexibility in the model.
His point is right that we've built a business is set up have higher fixed costs lower variable costs that incredible set up when you're growing very quickly and you're looking at the long term. If these large market shares that's a really tough set up when you're looking at a discontinuous demand shock like the one that we just saw about five or six weeks, but I think the business also demonstrated its flexibility in our ability to.
It's a pull levers and kind of size it down and pulling our wings and adjust quickly to a lower demand environment and then it's shown its ability to spring back up over the last couple of weeks. So we feel great about the business that we've designed and think if anything the futures brighter.
Thank you.
Our next question will come from Rozof group of JP Morgan. Please proceed with your question.
Hey, good evening, Thanks for taking my question.
Just had a couple of follow ups on the finance TPL questions.
All right could you break out what would the difference in finance you'd be awards.
In one Q between the forward flow and the non binding scale and related to that no moving into the second quarter and beyond is the plan still to monetize.
The majority of them through ally in the near term or what have you seen.
Change and be in one yes markets that you might want to tap into.
The second quarter, as well, but what kind of impact.
Do we expect a similar kind of premium in the second quarter as well.
Thank you so in the first quarter.
Hello. Thanks.
Sure. So at high level I would say is you know on on both pools, we received a premium on both pulled it was less than we would've anticipated. Prior we historically have been kind of dove in at greater detail than that so I don't think start now but.
Generally speaking the those tools, we tend to monetize it at somewhat similar levels.
Looking forward at first I want to I want to start with Al I think.
Allies been an athlete tremendous partner for us and reacted very quickly with us when we saw.
The difficulty it was emerging in the in the economy generally as a result of the pandemic and also on credit markets and.
Worked with us to upsize that board will purchase agreement to appeal to billion dollar agreement.
As you would expect in this environment, they're going to do better financially on those loans they originate as they should.
Because the environment be because there were there for us.
To make sure that we can massage out that risk.
Which were extraordinarily grateful for so they will do better and that will have all else constant impact.
Finance GPU, you know over the coming quarters, a quarter or to.
That said the market also tends to react in interest rates move in the interest rates that were.
Able to charge in the market may offset that it's it's hard to know exactly what's going to happen there.
Looking into Q2 and trying to figure out exactly with Nancy view is going to be.
Is definitely difficult I don't think we have perfect clarity there in any way shape or form we wouldn't anticipated or our best guess with fairly wide uncertainty bars around it would be for to be somewhat similar onto what it was in Q1. The securitization markets have begun to open up again, there have been several deals.
On over the last couple of weeks and there is anticipated to be many more deals done over over the next several weeks.
And so I do think those markets are opening up and the ability to monetize receivables seems to be improving so I think there there are reasonably optimistic there, but I also think that that remains an area, where it's wise to kind of expect the unexpected there and plan for a little bit of uncertainty. So I don't think want to give you.
Precise expectations, what that will look like in Q2.
That's great color.
Thanks for that and then just more for housekeeping question.
The other expense line item node that that was up materially moving some of that was given the loss on the beneficial interest and securitization will do anything else that went into that that was material to call out and and also was that part of the 26 million Oh non cash that you talked about as well just.
Just want to drive play that thanks.
Yes that was that that 70 million as part of the 26 million. That's a larger portion that I was referencing earlier.
And then that that 17 million is related to these finance receivable related assets.
The biggest part of that is.
Retained beneficial interest and Securitizations and then there's a portion that's.
Another.
Finance receivable asset bonus payment essentially.
Got it says so basically but.
9 million was the impact on like just said the retail and wholesale GPU into the rest as mail refinance driven.
That's correct.
Okay. Thank you for clarification and good luck.
Thank you.
Our next question comes on Rick Nelson of Stephens. Please proceed with your question.
Hi, Thanks.
Right.
Follow up.
Uh huh.
Yeah.
Sales to decline.
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Seems much more.
And what's happening on overall you just carbon.
You know carry on.
How about you where they're trying to their stimulus.
That.
The 90 day.
Promotion on how you got.
Correct.
Sure. So I think those are among the things that are difficult to disentangle I think we saw a rapid demand shock that push sales down and then I think from there.
We implemented a 90 day promotion.
We've we've put out different marketing materials that are tailored to this moment to to reach out to customers through these less expensive marketing channels.
The stimulus checks were received by customers there seems to be general recovery happening in the market.
Well either a number of forces that are flowing through there that are that are difficult to separate.
I think what we're excited about is it does seem clear that that we are outperforming the market generally in terms of the severity of the decrease in sales and in terms of the speed with which sales are climbing back up and so I think we're excited by that and we think that speaks to our these these shifts in customer preferences.
Direction, but trying to disentangled. The other impacts I think is is too difficult for us to to want to think it's one at that.
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Illiquid Archie bunker other trailers.
Through the web site.
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Great.
Hi.
Clark.
Thank you.
Our next question comes from Nick Jones of Citi. Please proceed with your question.
Hey, Thanks for taking my question I guess, one on a competition you pointed to the card Gorilla survey.
On Dolly, that's a marketing tool for them to try to get other dealers that started delivering or have you changed your views on.
What competition is going to do to kind of it the new way to sell cars. It seems like you might have more entrance now. After this are there any updated thoughts there. Thanks.
Yes.
I think.
Hey across the economy across different retail verticals and certainly in automotive I think there seems to be a broadly held expectation that E. Commerce will be a relative outperformer. During this time and coming out of this time and so I don't think of that the secret I think the survey that that came from car crews is.
One of many surveys like it as this is clearly a very topical a point to at the moment. So I think well we would start with is we think thats really really good news I think the first order impact of consumers wanting to transact in the way that we specialize for the last seven years.
It is a big positive and then I do think that you have to some degree you do need. It then think through the second order effect, which is others.
Being more inclined to try to build similar offerings due to the offering that we've built.
So I think our expectation would be that that will likely happen I think that was already happened with some degree and artificial would be that will likely happen of debatably more now I think it's important to look at.
The market generally this is a market with tens of thousands of dealers, where the top 100 players have on the order of a seven or 8% market share. So it's an enormously fragmented market. It's a very large market depending on your definition on the order of a trillion dollar market.
So it's really really large and so we think that.
Also points the direction of not becoming overly competition focus because they're just so many small competitors as opposed to one or two large competitors.
As they are generally are in many of these other industries.
We spent the last seven years investing in the technology that gives customers a great experience online and investing in the supply chain that did that great online experience unlocks the delivers selection to customers and building a brand for doing exactly that.
You know building E Commerce business is inexpensive undertaking it takes a lot of time. It takes a lot of money. This is clearly visible across industries.
And it's hard to aid to hard thing to do so I think.
We expect more competition as result of all this I think the answer directionally be yet would we view the underlying drivers that competition that consumers are more excited about buying cars online that that transition has been accelerated as a much bigger positive. Then then increasing competition if it definitely negative absolutely. So so I.
Overall, we're we're feeling very optimistic about the long term ambassadors.
Well at least the being different backs of that.
In the long term perspective is hard to know that this will play out.
Great. Thank you.
Thank you.
Our next question comes from Mike Montani of Evercore. Please proceed with your question.
Great. Thanks for taking the question questions I had or similar lines of two different areas one would be yeah with the ally deal in place now just trying to get a handle on the magnitude of profit pressure.
We might anticipate on kind of like for like loans and is that something that would remain in place over the course of the next year and then there's a follow up.
Sure. So I don't think we want to quantify that right now because I think what happens in an environment. Like this is several fold loss expectations. It tend to go up which you all those costs. It would reduce premiums on the yields that risk takers expects to earn tend to go up.
Which all those constant would would reduce premiums and then consumer interest rates tend to go up as well, which all constant tends to increase premiums and the balance of those things in a little bit hard to predict historically or the value of loans originated through automotive retailers and finance companies to that kind of combine.
And staff has been fairly stable.
And so our expectation would be for that to your converged back to where it was prior to this and then continues its upward journey from there I think the exact.
Timing of all that is unclear I think whether the next step is a pause the water negative one is unclear book, but we definitely taking steps to try to make sure that the loans originating are very desirable loans, we've tightened credit.
Pretty significantly going into this in an effort to make sure that we were positioning ourselves conservatively, we modeled the way that we were tightening credit off of the way that credit was ultimately tightened in performed in the chose Nate just nine financial crisis and so we we made the assumption that losses will deteriorate a similar degree.
That's a more severe assumption that the most rating agencies are making securitization that are getting done today, we made the assumption that investor yields would would go up to where they weren't just natures nine prices.
That seems to be similar to or more severe.
Then the implied yields that seem to be clearing and securitization market today, although that is a a volatile market. So I think in terms, what we're originating we feel very good about it we feel like we thought carefully about what we wanted to do to credit we believe that tight credit in those ways.
Has likely reduce our overall volume by something on the order of 25%, which is very very significant and I think also speaks to how strong the demand is that we're seeing because we.
From all indications it seems that we have likely tightened credit more than the rest of the industry has and so absent that tightening we may be perform even better but we've made those moves to ensure that were position.
Defensively as we continue to monitor what's going on and then we'll we'll figure out with Rightmove with right next move is from here.
Okay, great Thanks and.
Just some additional color in the wholesale front I'm just curious to see.
What you all are finding in terms of pricing over the past couple of weeks on wholesale pricing and then what's the read through for that in terms of two areas. One would be gpus. So should we anticipate any further kind of mark to market adjustments and gpus into Q or you know if you assume.
Kind of current trends persist you know that one Q a markdown was enough and then the second question would be on the consumer side and the trade inside.
Is the 70% and 40% ratios kind of good to go again now given that you guys are once again in the market and purchasing cars for consumers or are you trying to be more deliberate and and not scale that up as quickly as it was.
Sure I'll take the question on wholesale GPU. So we don't expect any of the adjustments that we talked about earlier to recur in future periods. However, I do think it's reasonable to assume that wholesale GPU will.
It will be lower than a normalized level in.
In Q2, I think there's still an awful lot of uncertainty around how exactly the wholesale market is going to have all from here I I think we started to see some volume come back.
It's certainly not as normalized levels, yet and so I think I think.
We'll see what happens in the market, but there's certainly a lot of uncertainty right now and I think.
Reasonable expectation is is that Q2 will be lower than normalized levels.
And then as it relates to the customer source of vehicles I think neither the 70% which was the percentage of cars, we're buying relative to them or cars. We are selling up north of 40%, which is a percentage of cars were selling to customers that were previously bought from customers. Neither of those numbers were our long term goals in both those numbers wrong steep positive trajectory is heading into this.
We did pause purchasing through all channels, except for customer trade ins.
Early in this cycle.
And so that will clearly pushed down that 70% number.
Yes, just directly because we're not buying cars, we are selling cars thats kind of mechanically drops.
At least in a transitory way and then the 40% number is a function of when we turn purchasing back on what ratio first thing is coming from customers versus what is coming from other sources and I think that there is uncertainty in what that ratio will be in the near term in the medium term and long term, we would expect it to go back to where it was before into.
We continue to climb because buying cars from customers is the most fundamental most economic source of cars that there is and so that's where you want to be buying cars.
Given the dramatic moves in the market buying cars from customers is effectively happening at a much less liquid market, where you have a single seller selling a single car once every many years.
Whereas the wholesale markets are much more liquid and so if you have rapid price disruptions those wholesale markets tend to virtually instantaneously adapts to two that new environment, where the consumer market tends to be a little stickier in both directions, and so we will be monitoring both of those markets and getting a sense of where the better marketing.
Fire inventory in the near term.
But in the medium and long term, our expectations would be to tomorrow's back where we weren't continue from there.
Thank you. Your last question today will come from Brad Erickson of Needham and company. Please proceed with your question.
Hi, guys. Thanks have a couple of Bolivar, Ernie or just kind of talking about a little bit on the auction the wholesaler, but just wanted to go a little further what needs to happen really before those physical auctions can function normally again, and just kind of how vital that is for you to have enough inventory to keep driving growth and then I've a follow up.
Sure I think the auctions or function fairly normally a again in the sense that you can buy and sell cars and the volume is on the order of half of what it would have likely otherwise been if it weren't for all of it.
Prior to this the majority of buyers to many of the larger auction houses were already buying cars.
Online and so many many more buyers have moved to buying cars online, but the auctions are functioning and so I don't think that is a fundamental limit or to moving back up to two whatever levels. Yeah. We would like to in terms of acquisitions I think the thing that we won't be careful about is our expectations look it happened to pricing.
As.
Prices have stabilized and started to recover.
But there are still reasons to believe that prices could drop again, there are many sellers that sellers are shadow sellers that are out there that have not moved inventory yet and so we want to be mindful of of watching that carefully and getting a sense of what that's why do you have the market. That's something we're keeping a a careful eye on and that's part of why.
We've we've made the decision to match, our inventory levels down and reduce our exposure. There now that the opportunity is also extraordinarily large because the wholesale market has dropped pretty significantly in most recent weeks down probably on the order of about 12% and the retail markets have have only dropped a couple of percent. So the implied wholesale retail spread is is much.
Much wider on the order of 9% wider than it normally is and that does generate a lot of opportunity because it suggest that there are much larger margins that are normally available.
For the taking there and so we're trying to balance the rests with the upside opportunity and I think you know all that coming together into our strategy that we've been discussing on the call.
Got it and then just one last one I apologize if you touched on this earlier I jumped on late but.
Can you just give any sort of the question really from Mark can you give any sort of EBITDA loss expectation for the year under some plausible scenario the business were to stay where it that today with the growth rates, just any guard rails and how to think about that or even like on a basis, where you know what level. The business would have to be at from here Uh Huh.
Be say EBITDA breakeven might be another way to get into any help on that mark would be great. Thanks.
Sure, Yes, so I think all I'll start with Q2.
And I think maybe a way to summarize some of the directional things that you should be keeping in mind as it relates to that question and a lot of these we've had on.
On this call. So far so we do expect GPU to drop somewhat meaningfully from Q1 did you too as a result of some of the dynamics that we were talking about earlier on this call, particularly in retail GPU I think we also expect expenses per unit to meaningfully drop.
Going from Q1 to Q2, and you know there I think just to give a rough ballpark of order of magnitude dropping down to sort of second half 2019 levels on X gene a per car sold.
And then we think the combination of those two things will certainly lead to reduced EBITDA a dollar losses in Q2, and then we would expect things getting better from there as well.
Got it that's great.
Thank you. This concludes our question and answer session I would now like to turn the conference back over to management for any closing remarks.
I'd like thank you again for joining the call we really appreciate it.
And then I want to turn to team Carvana out there and telephone land. Thank you to all of you for the job you've done over the last six weeks, we have pram so much into that very short period on everyone's been working unbelievably hard the results speak for themselves. We've made tremendous tremendous strides in the business and that's 100% because of how hard you guys are.
Our working so I truly can't thank you enough. It's is admirable and we really really appreciate it let's keep fighting through the rest of this weren't a great spot. Thank you everyone.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.
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