Q2 2020 Carvana Co Earnings Call
Good afternoon, and welcome to the Carvana second quarter 2020 earnings call.
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Please note. This event is being recorded I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead.
Thank you Andrew good afternoon, ladies and gentlemen, thank you for joining us on Colorado second quarter earnings Conference call.
Please note that this call will be simultaneously webcasting investor Relations section of the company's corporate website investors Carvana Dot com. The second quarter shareholder letter is also posted on the IR website joining.
Joining me on the call today are earning Garcia, our Chief Executive Officer, and Mark Jenkins, Chief Financial Officer before we start I would like to remind you that the following discussion contains forward looking statements within the meaning of the federal securities laws, including but not limited to carbons market opportunity leaves the future financial results that involve risks and uncertainties that may cause actual.
That's a deferral what's your away from those discussed here a detailed discussion of the material factors may cause actual results to differ from forward looking statements can be found the risk factor section. Upon its 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 carbon assumes no obligations.
They will revise them, whether as a result, new developments or otherwise.
Unless otherwise noted on today's calls all comparisons are on a year over year basis. Our commentary today will include non-GAAP financial measures 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 on our investor Relations website.
Now with that said I'd like to turn call over to only Garcia alright.
Thanks, Mike.
Thanks, everyone for joining our call.
The first half of 2020 has been an unprecedented and trying time for so many of the world Grappled with Koby Nike is impacted all of our personal lives impact at the way, we in Iraq, where we live in the way we work.
As we manage through this dynamic period, we've put people first our operations and people ops team have done an unbelievable job taking care of our team and up our customers. Thank you to them for everything you've done every you continue to do.
In addition to the changes the way people interact live and work. The pandemic has also led to changes in the way people shop, it's created disruption that sports people out of their habits. These caused people to try new things you experience and they're having a resulting in change.
Suddenly buying cars online has become a normalize.
This is a big deal we came into 2020, the market leader with a bright future where the market leader because from the very beginning are guiding light has been delivering the best customer experiences available anywhere to do that we've recruited the best people to take up our mission alongside US we built a culture of tireless energy and ambition and we've invested in technology infrastructure that are necessary to deliver on.
Constantly changing preferences and expectations of our customers and we've done at all with a genuine just went a long term focus.
These things are easy to say it hard to do they are the things that mattered along.
There are enduring differentiator and the reason our future was right before and now we have added the tailwinds of rapidly changing customer behaviors, our future is even brighter now.
In the immediate term, we're working to alleviate the operational constraints that have emerged as a result of our choice defensive position the business at the onset of pandemic as well the complications of ramping up at record speed at the same time covert 19 continues to impact many of our markets.
The same production team that delivered over tax increase in production capacity over the last four years is up to the task.
Now I'd like to turn to our results in the second quarter, we grew units by 25% in the quarter, including decreases the sales year over year early April and growth of approximately 40% later.
This growth was achieved despite managing through the most difficult period of pandemic.
And facing severe inventory that's right.
The second quarter. We also saw rapid rebounded GPU, which demonstrates the resilience of our model across each of our gross profit contributors as well as the speed of our reaction at the onset abandon it.
[noise] managing through this unique environment has also led to efficiency on the expense side and demonstrate the long term strength of our cost model.
We continue to see exciting progress across our key metrics heading into the quarter. The most notable is that we hit our long term milestone of buying 100% as many cars more customers as we sold to them in July.
This is an unbelievable achievement that has come much more quickly than we had anticipated congratulations and thank you to sell to come on a team you're doing a truly amazing job.
Well going forward, there's a lot to get excited about as we always have what books on building enduring value. We're positioning ourselves for the shifts we are seeing customer preferences investing in our offering a buying cars more customers.
Focusing on simplifying the automotive value chain building out significant capacity in our supply chain investing in initiatives that make us even more efficient scalable and most importantly continually improving our customer experiences through better technology infrastructure and process.
The customer experiences, we deliver our execution other forces the matter most over time and they have our complete attention that focused on our long term lens of what brought it to this point they put us in the path to selling 2 million plus units per year and to become the largest and most profitable automotive retail.
They've made up the fastest growing retail in the country, they've driven incredible customer experiences over many years, they've generated a constant unwillingness to be satisfied with our own product that is pushed ceaseless improvement and the accumulation of all that made up the market leader.
We're not content being a market leader one of mission to change the way people like ours, our ambition and excitement is driven by the opportunity we see in front of us and today. We're more excited we're more ambitious than we've ever been before mark.
Thank you Ernie and thank you all for joining us today.
Q2 was a strong quarter for Corebody retail units sold in Q2 total 55098 units an increase of 25%.
Sales growth started to rebound in April and continue to improve to approximately 40% later in the quarter. Despite significant inventory constraints brought on by cobot.
Total revenue was 1.1 billion an increase of 13%.
Growth in units was higher than growth in revenue, primarily due to lower retail average selling prices driven by vehicle acquisition mix and lower wholesale volume driven by are pausing purchasing vehicles from customers earlier in the quarter.
Record demand for offering combined with production capacity constraints has let us to sell the available vehicles on our website faster than at any point in our history.
This demonstrates our ability to turn cars extremely quickly a noticeable positive for the long term model, but we believe our current inventory is meaningfully limiting sales, making growing inventory our top company priority.
Total gross profit per unit was 27 26 in Q2, a decrease of $406 year over year, and an increase of $86 sequentially.
Due to the dynamic nature of the current environment. We will focus are more detailed commentary on sequential changes.
[noise] retail GPU was 11 90, a decrease of $391 sequentially.
Early in the pandemic, we made the decision to reduce risk by pausing purchasing and lowering prices to reduce our inventory size.
This led to higher average states the sale in the quarter and lower retail GPU due to the lack of new higher margin inventory coming to the web site.
Within the quarter, we observed a V shape pattern of retail GPU with margins, reaching their low point in may and seeing a sharp rebound in June as new vehicles were added to the site.
We expect retail GPU declined further in Q3.
[noise] wholesale GPU was $137 an increase of $114 sequentially.
This was driven by record gross profit for wholesale units sold up $1036 or $695, excluding the impact of our wholesale valuation adjustment in Q1.
Gross profit for wholesale units sold was primarily driven by strong industry wide wholesale pricing in the latter part of the quarter combined with strong execution by our team.
Other GPU was 13 99, an increase of $363 sequentially.
Sequential gain was primarily due to a $337 increase in finance GPU driven by improved market conditions since the end of Q1 and credit tightening earlier in the pandemic.
EBITDA margin was negative 6.2% in Q2, an improvement from negative 12.6% in Q1.
Following the spread of Cobot 19, we pause corporate hiring and adjusted our hours in our operating groups to more closely matched expenses with current demand as opposed to bearing additional expenses for future demand as we have historically have.
In total we sold 2600 71 more retail units in Q2 than Q1, while reducing ask DNA spend by approximately 36 million sequentially.
This led to a 3.7% improvement and ask DNA as a percent of revenue compared to Q1 2020 any significant improvement in EBITDA margin.
We expect further improvement in EBITDA margin in Q3.
[noise] jimmied accelerating demand for our online offering we are actively taking steps to expand our production capacity.
Following quarter end, we opened our <unk> IR see their Columbus, Ohio, bringing our annual production capacity to nearly 500000 units at full utilization.
In addition, we're on track to open two additional Rcs by year end, adding more than 100000 additional units up capacity at full utilization and we have a pipeline of future facilities beyond those.
During the quarter, we completed two equity offerings, bringing our total liquidity resources to over $1.3 billion at quarter at.
There were 171.4 million weighted average shares outstanding in Q2 on a fully exchange basis, and we expect approximately 174.4 million shares on a fully exchange basis in Q3.
As we look forward, we're focusing on scaling our operations to meet demand on our way toward our long term goal. Thank you for our attention we will now take questions.
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At this time, we will pause momentarily to assemble our roster.
And our first question will come from Colin Sebastian of Baird. Please go ahead.
Great. Thank you and I hope everyone, there is healthy and well.
My question is since you're not yet at full utilization levels within the existing Iris jeez I wonder if there any process improvements or or other changes that you can make to improve throughput near term and then secondly related to offer advertising costs. Despite the inventory constraints you're still spending.
Fair bit per unit and wondering if we'll see more efficiency and advertising as we move into a third quarter. Thank you.
Sure.
So all the throughput fronts I would say I do think we're finding actually quite a few efficiencies now when we talk about when we came to the pandemic we reduced hours on the then we ramp those up a as we saw volume coming into the started to get in front of that and try to produce cars again I think anytime you go through an exercise like that you undoubtedly just fine process improvements and then I think the tension that we've recently.
He felt were clearly inventory constrained has also forced us to find efficiencies that we need weren't looking it's hard for the past, but there's been efficiency there.
We've also continued rollout a a number of different technology innovations, including an entirely new system that runs our inspection centers.
Oh that we expect to help us find additional efficiencies from there. So I think across the board. We we've always been finding efficiencies in that process and all others, but I think in this last time, we probably been able to find efficiencies even faster right now what's holding US back is just the managing through these core bars ways, which which have been impacting especially the sunbelt up.
The dramatically recently enough we have a lot of our are different especially centers and as we said prepared remarks, which used to put people first and we're missing on the conservative side, there were being very careful in contract racing and Sunny anyone home, who could have been exposed to any when it comes in with the case and giving them paid time off and so we're missing conservative there I think you got the right.
The Miss.
And so as that starts to calm down we think that's going to be very helpful. And then we're also working now to hire people as quickly as we can heal the facilities how to certain capacity as we said the nine to be able to now have nearly nine or 500000 or use the facility capacity, but we have to staff is up to get access that capacity will open to more by the end of year that'll add.
Roughly an additional 100000 units facility capacity began we have to south goes up so this unique environment to be hiring as well and were working as quickly as we possibly can were also innovating on the hiring process I think we've got a lot of things together we're excited about.
This is as a public company just the first time that we manage through.
In inventory and reconditioning.
Supply constraint, but but as a private company, it's not we dealt with similar situations.
15, and 16 and the team that we've got that they grew our reduction capacity by approximately 10. That's my screen. After four years is definitely up to the challenges. So we think is going to take a minute to grow through but we absolutely have all the off the world that we'll get through it on the advertising fund I can you bring up an interesting point and I think there is tension there as well.
We are clearly constrained inventory and that means that probably getting customer comes despite the odds and then seeing the card they're looking for is lower and therefore your conversion rates will be lower and so it makes a little bit less sense to advertise as much and especially when you have as much excess demand as we do there's there's even a very good chance that significantly less advertising would still lead.
You very similar levels of sale I think we're trying to balance that against kind of the long term value of building brands.
And so I think that's an equation that it's not a simple one to two optimized we clearly should be dramatically, reducing our marketing expense if we're optimizing.
It's much less clear what to do if you're optimizing the long term of independent the buying hard from customers. We have pulled back more on marketing there.
That's right not business as well and the reason we pulled back there is because there you have excess demand it starts to impact customer experience.
The way that is more costly becomes a site in doesn't see the car that they want that's not a perfect experienced but it's not a bad experience, whereas if they would like to tell you there car and it takes you along the whole the people along and get their title cleared et cetera.
That's not a great experience on the FTC side, and so we have elected to pull back a bit there and we definitely expect to see leverage over time as we continue to grow into this man and get the benefits of increase inventory that will increase conversion.
Alright, great. Thanks, sorry.
Thank you.
Our next question comes from Brian Nagel of Oppenheimer. Please go ahead.
Hi, good evening, thanks for taking my questions.
Of course.
First question want to ask.
Well, we talked a lot about the limitations within the business model right. Now is there we'd estimate to what extent that it's actually held sales back as the business has been asked me the trends have been rebranded your last several weeks or so.
So I think there are lots of waste estimate that and I think we probably want to stay away from tried to quantify to directly just because the different ways. That's meeting I think can cause you to arrive at fairly different answers.
So what I would think I would point to the graph that we put in our shareholder letter under objective one that should inventory efficiency kind of think of the shape of that graph is effectively just being the odds at any given car sold at any given day.
Clearly at levels that are much much higher than we've ever seen before that gives a sense of kind of the underlying demand that we're not able to access right. Now I think another stat that is probably very useful is yet the ended the quarter near the end of June we probably hasn't always been a quarter and a fit on as many cars.
Available for customers that wanted to buy cars as we had prior to and.
I think a lot of how we can from a fast perspective, we can look at balance sheet inventory of what matters to the customer just what what are the cars on the site that are not currently in the purchase process with another customer and the number of cars. We have ended the quarter. As I said was was between according to that so that's a dramatic reduction the amount of selection that they'd customers, we're able to have.
So we feel like there is probably a lot of excess demand sitting there and we're working very hard to try and walk.
That's very helpful. Then my second my follow up unrelated.
Just with regard to ask you know you having your letter I'm on page nine the table that shows the components of yesterday by bought.
You can see the S. J S. You may ex advertising DNA from them in the month of up April was about 376, so that moved down to about 2600, no doubt whether it would reflect cutting costs as the koby crisis with Citi.
How how much how should we think about that.
Going forward you mentioned in the limited guide you gave that we expect to see a better.
Better margin, but how how much of that that actually a decline, it's actually going to stick your.
Sure. So I think there's actually something that's really valuable revealed there its right. When we use the terminology cutting costs. What's imagine is a reduction in workforce that is probably not sustainable and so you wouldn't expect that future and I think that we should think about that kind of experiment that was running our data, they're a little bit differently. So normally.
When when we're growing as quickly as we have in the last several years and you're looking at growth an S. You need from quarter to quarter in that you're trying to look at it.
Unit basis, I understand what that means there's a lot going on there right normally we we're growing our fixed function. So we're growing corporate we're adding to our development teams were adequate analytic schemes. Yes, we can keep our analytics teams are doesn't teams the same size and continue to basically and best of the speed we have in the past.
But we continue believe it there's a lot of opportunity and so we are accelerating those investments we're growing those teams and so when you look at that in the past you're seeing growth in fixed operations as well in our growth in S. Yoo next thing you're seeing in there is our actual variable costs right. We have variable costs as he was selling cars and that flows through to Sq Nay, obviously as well and then.
Third element of what drives the rescue day growth over time is generally speaking, we're carrying more head count than we need at any point in time to service the demand that we see because we're preparing for what we anticipate to be growth. That's been how the stance we've been in for the entirety of our companies like I.
I think you're going to and then if we had to making choices about how do we want to position ourselves and I think the only thing that you really know going into endemic like this that you don't know it's going to happen and so you have to decide what kind of ours, you want to make and we decided with a long term lens that the better Airbus to make was missed conservatively and if you're thinking back than we would kind of deal with it but at least we wouldn't put ourselves in a bad spot they didnt and.
So we did we paused corporate hiring and so what that means when you're looking at S. unit growth are going from March April May June you're no longer seeing the growth in our fixed operations or in development or an analytics you normally see flowing through S. unit.
We also reduced hours to match the demand that we were seeing an end to have.
Capacity operational capacity to handle the sales were actually flowing through the system.
And then as we ramped up we increased those hours. So you start to see something it looked a lot more like variable costs and you didnt necessarily see the same overhead that we're carrying for future sales and so I think in that moment, we saw something that looks probably not precisely like variable cost, but it looks a lot more like variable cost and I think the story. There is very good I think it strongly bucks is a long term model.
I'm now going forward, we're going to go back to the gross dance, we're going to be carrying people or growth that we expect the future spending we now expect to be growing even faster than we are expecting the path.
We continue to make investments because we believe that we've got the best customer experience out there and we believe that experience can be improved upon a lot.
I think.
We will in the future look to continue to make very significant investments.
We continue to grow into this incredible opportunity and we'll expect to continue to lever as we have to the last seven years, but I don't think it's going to be exactly what you saw over the last several months heart, giving you that that.
No I think I think it covers a pretty well I think we're obviously very excited about yes. The leverage that we showed year over year and SGN a in light of I think are really significant development meant in the business.
We called out earlier, but we're now at the point in July where we're buying more than 100% as many cars from customers.
As we're selling to customers, which is a metric in a milestone that we laid out in our long term model in late 18, and it's almost unbelievable that weve achieved at this quickly.
Lets show leverage year over year, while also building that really substantial and long term value full business I think it's something that we're feeling pretty good about.
Our next question comes from Sarin, Sharon Zackfia with William Blair. Please go ahead.
Hi, good afternoon.
Thanks for taking my question I guess to dive into the the inventory issue a bit more.
Not really clear if the issue at this point is the speed at which you're turning the cars or if it's just the outsized demand or a combination of the too and I was hoping you could maybe quantify what throughput is now versus pre pandemic and whether or not there's.
Any additional levers you to pull the outsourcing or how long do you think at this point it would get it would take to get inventory into a situation, where you think you're actually able to me that's imagine we're talking about.
Sure. So let me first of all just isolate where the constraint is so the constraint is in our ability to take a car do we purchase and certify it and make it retail ready for a customer get it up on the website. So it's kind of your purchasing I would not say to work and strain today, especially is all gains we've seen.
Buying cars from customers, we've got ready access to lots bars there.
Constraint that we focused our ability to produce as far as we get them up on the website.
I would I would put you in general a good estimate of how fast with recent cars is basically the same speedily first on cars.
So if you're selling a 55000 cars in a quarter of your that means you're probably doing I'm on the order of 4600 cars, we give or take a minute inventory slots and you're producing I'm kind of that same amount.
So if you look back over time, that's we've got to see all of the growth that we've seen in retail sales has been accompanied by growth in production capacity. If we look forward at our at our facility capacity.
It's only about 500000 yesterday on the order of 10000 units a week and then by the end of the year, we're going to add capacity for and it's 100000 is roughly 2000 per week. So we have a lot of facility capacity the speed at which we can kind of get into that as a function. How quickly. We can can hire and train inside of facilities and so we're going to work to do you guys.
As quickly as we can but I don't think were yet prepared to provide specific timelines or goalpost because we're obviously in a unique environment with current affairs.
Can I ask a follow up is this manifesting in any way that the consumers. These other than a lack of inventory. So for example are they see an extended delivery times are there any ramifications for a customer satisfaction.
So I think.
I would see we also have some.
Constraints in the business in inside advocates ability to answer calls when customers call in and then in outlet advocates and last mile delivery and to a lesser extent in logistics network. Those constraints are more of the flavor that we've seen a different points in the past.
And they are not nearly as pronounced today as the production constraints.
So those are out there and those are driving our decision, making as well bore alleviating those much more quickly and those are that the type of constraints I think are much easier to alleviate and not something we're really concerned about over more than say a month or so period of time.
Our next question comes from Rajat Gupta of JP Morgan. Please go ahead.
Hi, Good afternoon Dreaming, Greg. Thanks for taking my question just wanted to clarify you know one clarification you know.
End of quarter, 40% number that doesn't really unit growth number another revenue number right.
Just to be clear correct.
And then how would you be able to quantify what July it looked like.
You said it would just came into the quarter ever just curious if there's a number you could put in July.
So we haven't quantified that I think we said at the strength that we saw in demand continued to push into July we actually continued to see inventory constraints.
Elevate early in the month working very hard we said to alleviate those so I think right now.
It's pretty clear demand is significantly higher than the sales that were seeing both in the system.
And we think that in the immediate term at least our ability to produce cars is going to directly drive the number of cars that were able to sell and it feels like we've got at least not a room. There. So we're focused on production right now we get that figured out we think that.
And we'll continue to grow pretty rapidly.
Got it and on the tricky on a current quarter GPU, you mentioned that would increase sequentially.
And driven by retail GPU.
But on the finance side.
It was pretty strong strong number here in the second quarter you know despite.
Despite some uncertainty earlier in the quarter and it looks like you monetized.
Lets significantly lowered amount then once you actually are as needed.
Despite that you had the strong number.
So and you noted in the release that the toward quarter increase is likely to be driven by retailers you'd be only.
But it looks like you should be able to sustain at least.
This level of finance, you view into the third quarter as well.
So just curious as to what you're seeing there and how should we think about no. The finance tribute to the remainder of the here.
Sure. So I think the biggest within assay view that really hope you'll take away is we think that demonstrate the resiliency in our program.
This was obviously in unbelievable events are going through the pandemic.
The rock capital markets and dramatically impacted thing.
And we were very pleased with the number that we had in Q1 in light of everything going on and then we think the rebound that we saw into Q2 is very exciting as well and seek the strength of the program and the diversity of our different ways to monetize our receivables as there were probably two drivers.
The growth from how do you want to Q2. The first is I think the speed, which we acted and a credit tightening that means my didnt in Q1.
When you you tighten credit all constant any given receivable is is generally more valuable.
So that was one of the drivers of the increase in in the value of our launch and then the second I think we've just the general macro environment on capital markets did improve and so that was helpful. As well going forward on the finance line item I think you can kind of thinking I think cost improvement would be how we would look.
Okay.
What's going on in the core businesses were constantly getting better at underwriting customers and its structuring crowded and assessing credit and attracting great customers I think theres kind of cost improvement there and then I think you kind of overlay that with all the capital markets and I think you should expect that impact us in whatever direction Coppermark moves are they.
Can you improve that would be a positive for us.
If they move in the wrong direction that would likely be negative.
We expect it to Mark's back to the levels than we were at 2019, and then to continue from there to the long term model, we outlined in late 2018.
Got it sorry, just one follow up if I may just on the competitive landscape.
I mean, clearly like for the last few years, you will be only major online player out there but.
Looks like the pandemic has accelerated plans for a lot of the brick and mortar retailers to enter into the space aggressively.
Have you seen any impact on your business because of that yet or I mean, do you expect to see anything.
In the near term you, particularly with respect to leveraging your advertising expense longer Jeremy just curious as to as to what your thoughts on that.
Thank you.
Sure fourth so I mean, I would start with this and I apologize for costly, beating the same drug here, but I do think this unique market and its unlike many other retail markets where on the you side, there's 40 million transactions and depending on what numbers you're looking at there's you know on the order 40000 dealers. This is a tremendously tremendously fragmented market and it.
The market that historically has had all of those players and has always been very competitive with offerings that are that are fairly undifferentiated at least from from a macro view.
I think as a result, I think it's very hard for any given competitor to materially impact anyone else.
Until market shares get much more concentrated I think that would be our expectation that it would that would continue to be the case of I can't think of a time in our history when we.
Look inside of a market or across time and determined that we think the major driver of some line item thats moving its competition and I do think that would be expected just given the structure of the market now I think as more and more people move online. What we've historically seen is your ecommerce is an expensive business to build and it requires a lot.
Out of time, and a lot of effort in a lot of tinkering and significant infrastructure and technology and that kind of investment.
Yes, generally is not invest into can be made by lots lots of players and so there does tend to be more mark concentration overtime I think that would be the first order effect. I also think these sorts of business models, where they're real economies of scale, where as you get bigger you have more selection for your customers and you have more of a brand.
You may see back into price that feedback faster delivery time.
Those are things also drive more concentration and so I think we would look at more concentration as the first order impact and to the extent that happens I think we're very happy and then I think the second order impact could potentially be additional competition on things like marketing dollars, but we would expect that to be at follow we're not a leader and we see no evidence of the contract.
Our.
Our next question comes from Michael Montana of Evercore. Please go ahead.
Great. Good evening, thanks for taking the question.
Wanted to ask about on the retail GPU side.
I had mentioned that you expected to see improvement I think quarter over quarter. There is that basically tied to the increased production capacity is higher.
Individuals back to increase throughput or is there more that goes into that with pricing dynamics and acquisition and then I had a phone.
Sure. So there's definitely some exciting trends in retail GPU I think the most exciting a is that as I mentioned earlier in July we bought more than 100% as many cars from customers as we sold to customers.
We think that that was basically.
Yes.
<unk> call it 10 to 10% to 15% in April when we pause purchasing from customers.
And it's just been on basically straight line upward. Since then I think that's obviously positive that drives wholesale GPU that drives.
Incremental retail GPU because cars that you acquired from customers typically.
More profitable than cars that you acquired auction, we're actually acquiring fewer cars from auction.
Now currently than at any point since early 2018, so I think I think that generally points to.
You know a pretty strong dynamic and retail GPU. In addition to that I'm just technically we do expect average day sale to come down in Q3 relative to a high in.
Q2, and that's just basically a technical dynamic with when we stop purchasing cars that led average daily sales the increase in Q2 and now that we're actively purchasing cars, particularly from customers but in general.
We expected that to come down.
In Q3, which also be a tailwind.
Okay, and then you had mentioned that the anticipation was meaningfully but the margin improvement quarter over quarter. So just wondering if you could dive into the SDMA side, a little bit further there because it sounds like there could be advertising opportunity, but then perhaps there's I'm the head count side going the other direction.
And.
So I'm just wondering you know is there opportunity in the other line item a best in a or where do you really see the benefits. There you know if there is as you know opportunities as well.
Sure, Yes, I think the way, we think about SDMA in the remainder of the year. So we do expect meaningful year over year leverage I think you know that comes from.
Some of the process efficiencies that we picked up.
During the cold period, some of the technology gains that we've made as our teams are focused in on and scalability and efficiency.
I think that.
I I think that we also do planting basket. So we expect meaningful leverage year over year, while also investing for growth into 2021.
Which is you know our lenses started to look toward 2021, and also while investing or technology pipeline I'm. So we expect.
No meaningful leverage year over year bid ask DNA.
In in the back half a and then you know meaningful improvement sequentially EBITDA margin versus what we saw in Q2.
Our next question comes from Armintas synthetic this of Morgan Stanley. Please go ahead.
Great. Thank you for taking the question I wanted to touch on the inventory briefly and Ernie I know you said that there's a variety of different outcomes here, So that's probably where.
Well I'm shaking out, but if I look at the 40% growth that you have going on.
If we were to assume that that carries through the rest of the quarter, you're looking at something like 65000 units for the third quarter.
But then if I look at the charge that you have there with regards to inventory efficiency. It looks like you know, it's about three and a half times for the month of June is about 11 12000 units online right now so if I would assume that 11 to 12000 at a three and a half times that gets me into the low 40000 range and so.
And you know.
How should we be thinking about the impact of the inventory constrained to your your third quarter.
I think I would just go back to what we said previously I think we're clearly constrained and that is clearly driving sales volume right now.
You can kind of in from what we are selling per week.
You know over the last quarter and how that was ramping up and so we're producing at roughly that rate as as inventory has has kind of bottom to just started to pick back up.
And so I think it's going to be driven I think more than anything by this our ability to produce cars and so we really think that's the driver I think given the uncertainty with credit bars everything else I think we're not prepared to a to precisely predict that for you right now.
Okay.
And then just market expansion you open up a 100 market last quarter.
Are you thinking about market expansion I know, where we're still in a in a bit of an uncertain environment year, but any markets. This year, where would you sort of you know look to resume next year, depending on other Corona Meyer just trending.
Sure Yeah, I think the our approach the market openings looking forward, we'll definitely depend on how things are going with a containment of corona virus and to a certain extend our you know are pacing on scaling up inventory I think we were able to open 100 markets in Q2.
Two fairly quickly with little in limited investment limited travel.
Even really live limited incremental hiring basically because those markets were supported from our existing logistics and last mile delivery network. So that was a great. Thanks for the customers in those markets to be able to bring our offering.
Two additional markets.
In the Cobot period, I think I think was really valuable but looking forward I think it will largely depend on.
A nationwide dynamics with Kogut as well there on inventory.
Thanks much appreciated.
Thanks.
Our next question comes from Ron Josey of JMP Securities. Please go ahead.
Great. Thanks for taking the question I've got I've got two please certainly understood as you ramp up operations, you know inventory should improve and the growth in trade is clear and we talked about 100%, but now you're acquiring fewer cars from auction really at any point I think you said since 2018 can you just talk about the potential of Carvana access, which launched in the quarter and how you view that.
And then Mark you know, we just talked about you know improving EBITDA margins and improving retail deep you I wanted to ask maybe some of the drivers in a different way from a product perspective, and we're seeing more delivery fees on the network than ever before we're seeing more inventory from dealer partners even older cars and so wondering how you can if you can talk about how these.
Of changes to the consumer experience or contributed overall profitability in maybe a better way of asking it that is.
How do you balance call it.
These benefits with the investments needed now that the balance sheet is significantly stronger benefits of greater margins. Thank you.
Sure let me start to come on ACA. So let me put come on access or maybe in the context of of buying cars from customers. So yeah as Mark said, we bought it make our customers as we sold in July that's really really exciting and that generates.
A lot of inventory for US now some of those cars going to fit our retail standards and some are not.
For those that fit our retail standards of that's pretty incredible because that's a very significant collapse of the entire automotive value chain, where we are now buying apart from a customer and then producing it and preparing the customer and delivering your rights next customer. There's a lot of friction that existed in historical system that is being cut out of that transaction and.
Thats really really exciting and the retail side feedback on the purchasing side and vice versa, because yes, because we have such a broad retail network and we can sell across brands across geographies.
Yes, we can bid a little more aggressively on cars that were buying and then.
Because we're buying cars from customers directly and we got that proprietary sourcing inventory, we've got higher quality inventory with larger margins on the retail side of business. So.
That's really really exciting, but there is this kind of fourq in inventory that you buy from customers that doesn't fit on the web site and so that's their freight car. They just don't fit our retail standards and so will come on access is it's a way for us to take those cars and get them to.
Dealers or other partners by wholesale inventory and deliver those cars to them in a way that that's also very efficient and that efficiency feedback in the same ways deficiencies of the retail business.
So that's what's going on there we think thats another exciting development and another step toward our long term goals in both retail and wholesale margin.
Sure and then on the EBITDA margin improvements so I called out earlier, we expect meaningful leverage on a per retail unit sold basis in M&A I'm comparing year over year. We also are expecting a step up in.
Retail GPU and we talked about some of the dynamics there some of the smaller items in terms of.
Merchandising or testing that we're doing on the web site I wouldn't see any of those as being particularly large contributor to the EBITDA margin improvement.
We called out again, I I think there will be mainly focused on growth contribute driven by retail and then EBITDA leverage on a per retail unit sold basis.
Sorry leverage on a per retail unit sold basis.
Thank you.
Our next question comes from Nick Jones of Citi. Please go ahead.
Alright. Thank you I was just two questions first I guess, you know you're you're back to being positioned for growth.
Coke cover that January kinda second wave over the winter or something like that.
Do you think you need to take this similar actions you took.
Back in April or do you have kind of a different liquidity position, where you can kind of be a little bit more aggressive.
If that were to happen and then the second question is if more I consumer behavior. She is shifting consumer behavior is is there. Some do you ever innovation or people opting for cars for safety reasons instead of taking public trends are they maybe being a little more patient and finding their cars online versus not if they're not really going to dealerships in dealing with that experience.
You can have more lead time, and you are able to kind of acquire cars more efficiently now and they'd be pretty covered thanks.
Sure. So all the second we point I think.
I think what we see there I think what is certain exact would you point of view, we would enter in a very different position. Then we entered last time, just because we've got you know well over $1 billion liquidity and I think we've been kind of hardened and we know what process, we need to rollout to handle these situations we dealt with the various state owned.
Earnings and closings and we know how to how to manage through all that so I think we would be position significantly better for other situations like this but obviously the details of matter a lot there and so.
Yeah, I don't think we'd give you more than just then just that we'd be positioned really well all the could you raised your side I think there's there's so much going on.
Inside of that question.
What I would say is I think people are asking questions about our people than to drive more now because they don't want public transportation that I want to you right here as much.
The answer that is probably our people going to drive less because Theres me more work from home to answer that is probably what some of those things I don't really feel like we necessarily know and there's probably 100 other impacts as well I think you know over the last seven years, we've grown this company by growing market share, but we have a differentiated offering this appeal to customers in a different way from what the traditional offer.
During has been able to offer customers and I think the biggest in most pronounced change it hasn't behaviors that there was this massive disruption that put people in position, where they had to try different things when they try different things. They like some of those different things that they try and that's accelerated ecommerce adoption across the board and so to us I think that preference yet.
Is the most powerful a customer behavior change that we're seeing and then in the immediate term as we're dealing with these waves in different markets. There is undoubtedly.
So different behaviors that we observe and different provinces the customers have but I think we're trying to see most focused on the enduring forces and we're trying to build to support doesn't during forces because because we've always bring a long term interviewed everything that we do and so that's what's on our focus today.
Great. Thank you.
Our next question comes from Seth Basham of Wedbush Securities. Please go ahead.
Thanks, a lot and good evening on my question first is around pricing given the tight inventory dynamics. What is your thought around a retail pricing do you have the ability to move pricing up with the market at least for above market given these constraints.
Sure. So I think pricing is a very interesting area right now I'm just across the board has been dramatic swings in wholesale and retail prices across the entire industry. Our position has been to to maintain significant discounts for our customers and continue with.
The long term view that Weve that we've always brought I do think we're in an environment now that is unlike an environment that we've seen at least in a very long time, where retail prices are going up.
And so that's fairly unique.
So we're trying to take that new account be thoughtful about it but in terms of our customer facing stance. We're trying to continue to liberty customers the significant value that we delivered to them the path.
Fair enough and secondly, as it relates to your financing options.
What are your thoughts about revisiting the ABS market.
Oh I think our thoughts are the same as they as they've always been I mean, I think the view that we had prior to the crisis was.
The ABS markets and a good environment always provide the most efficient monetization of the finance receivables and so we would likely show the highest fancy view if we.
It is marketing good times, but in not as good times if markets do tend to.
Be disrupted more and kind of close faster and and there is less ready access an access can be expensive.
So you know doing bulk purchases with the great partner like ally, while it's not quite as efficient in good times, it's it's very reliable and I think that.
That position that we had that it was important to have access to both channels. I think that was supported by what we saw going through the pandemic al I wasn't unbelievable partner for us and they were there when when we needed and we couldn't be more appreciable that and I think you will seek to be as good partners for for them that they've been for us going forward.
We also will still access ABS markets when when the timing is right.
And what does try to find balancing those different considerations.
Yeah. One last question if I may on financing.
Last quarter, you wrote down that's really interesting securitization fell in the balance sheet or did you change your valuation or those with it so.
Second quarter report.
[noise], yes, we.
Had an adjustment that increased devaluation of those by about 8 million.
In the second quarter that will show up in other income and expense.
[noise] dependent you make any changes to that potential bonus payouts that I eat huge change last quarter as well.
I don't believe we made any material changes to those.
Our next question comes from Daniel Powell of Goldman Sachs. Please go ahead.
Great. Thanks for taking my questions to if I'm on the first just wanted to get a sense. If you could sort of tell us quarter to date, how the inventory is trending.
Specifically relative to the comment you made about sort of being at a quarter to fit of sort of available for sale units relative to demand.
Earlier in the quarter.
Versus trico. Good and then second question is just around advertising maybe similar question just ask kind of a different way as you sort of look at your production capacity.
Covering and getting back to two level that you'd like to see you know, how how aggressive war or not might you consider being just given all the secular tailwinds you're seeing in your market right now thanks.
Sure So I think.
First order we've.
As we've seen additional demand. It is it is kind of immediately consumed our gains in production so far.
And so our inventory has been flattish would be I think a good starting point, maybe have seen a tiny tick up recently and we hope to be able to get in front of that and continue to grow it but I think it's also did story that when we when we kind of put additional inventory on the site it pretty instantly get grabbed by somebody so.
We're going to try to go out as quickly as we can and I do think that the speed at which our inventory growth can be a function first of production second of sales.
If sales are instantly consuming all the production that inventory is not gonna grow, but if we're able to grow production even faster than sales then we'll grow its I think you know we're really focused on hoping that we get as much demand deposit, Canada site, and hoping that we get as much productions, possibly Canada site and then I think inventory is kind of.
Output of that equation more so than the input that equation.
On the advertising side, yes, I would say I think there potentially could be some interesting opportunities that could take many forms I think.
We've already moved pretty quickly at the onset of the pandemic a within about I don't know a matter. We think two weeks, we put out a pandemic specific commercial that talks about our cassettes delivery and kind of spoke to the moment and I think you were really.
I'm proud of our marketing teams ability to get that out that quickly you more recently, we launched other commercial called the pioneers of online that kind of speaks to the fact that that we kind of started this trend that we've been working at this for seven years and we've built a lot of infrastructure that makes it very easy for has to go on our website.
Great selection to get incredible experience.
On an we're trying to make sure that that message is hard and so I think that there's there's opportunities like that from a messaging perspective from a distribution perspective or a advertising spend perspective.
We've also seen.
Cost per impression is definitely gone down more recently and kind of conversion rates at the top of the marketing funnel. This meeting onto the website have likely gone up and so I think those are exciting developments, but we're in such a unique environment that I don't know that we are smart to extrapolate that's the future and expect that to stay forever.
I think some of our kind of bigger longer term mental model that we've used the path where there's just there's 40 million cars is 40000 dealers. They all have seen economics the way they spend from a marketing perspective in the way they price cars. It have to support their cost structures that are effectively shared and their profit goals that are effectively shared and so there is just a lot of Dallas.
In this market that I think should always make a skeptical of short term swings in and whether or not they'll persist, but so far the swings that we've seen a pad if anything the positive [noise].
Thanks to really helpful. Appreciate it.
Good.
Our next question comes from Alex Potter with Piper Sandler. Please go ahead.
Guys wanted to touch on hiring you mentioned this is kind of interesting obviously, if you're you're ramping up your I actually capacity you have to put bodies in those facilities and this is a unique environment to be hiring in I guess I think it's how you put it presumably it should be easy to find people.
Given all the talk of unemployment, but I'd be interested in hearing the extent to which staffing as a potential constraint.
So I think.
There are a lot of people that are unemployed I think there also.
Dynamics going on with with unemployment payouts in different things that can be an offset to the ease lets you might be able to higher I'm right now and then I think obviously, it's a unique environment with with people are wondering if they want to go into work at all right now and when they are they're kind of ours waves in different parts of the country and so.
I think it's just it's a different environment and I don't think its environment that we should expect to persist but.
It's a different environment than we faced yeah. The way that you go out and.
Reach out to candidates and find people is different.
The way those people are feeling in and thinking about what they want from there from their job is different and so you know your messaging need to be different. It's I think it's just the different time and I think the team is doing an unbelievable job I think we've made a ton of progress already so I don't mean to give you all of that as a set of excuses, because it's really not but I do think it's a unique environment.
It's unique times it makes it a little harder than normally would be to forecast exactly how quickly will be able to make the progress that we anticipate making.
We are very optimistic and we are making progress right now and we haven't making progress over the last month and a half as we've been really focused on this.
But I think it's a little hard for us to be making precise promises in this moment in time.
Sure. Okay fair enough and then I guess, maybe a related question of the IRS. These that you currently have you know it's impossible to quantify the number of those or maybe a percentage that are being impacted from a workforce standpoint.
Because of covert outbreaks in those specific areas, maybe that number of people, who you would normally have showing up as a percentage of what you could have showing up something like that thanks.
I'll give you something a little more general then you're probably looking for but I would say your first order. It just when there is a a cobot outbreak in some cities we are likely going to be impacted by that if we have operations in that city in so the sunbelt has recently been impacted most recently, maybe the Midwest and we have inspection centers the Midwest as well.
So I think we can be impacted.
We are impacted when that happens in any given market I think the great News is I said my paired remarks, I do think our ops teams and our people. Our teams have done a really really good job with that we've had next to no transmission at any carve out of locations, but people in these markets.
Do you get caught a virus and then you know when they come in at the facility. We check their temperature, we do contract or contact racing and and have to figure all that out and that does disrupt things a bit and slow things down.
So I I don't want to give you a time more than that but I would say if theres a market, where there's significant outbreak of current ours happening.
And we have operations there were probably dealing with it.
Okay. Thanks, a lot.
Yes. Thanks.
Our final question will come from Brad Erickson of Needham and company. Please go ahead.
Hi, Thanks first just when you think about the traffic levels on the site lately, what's your sense on some of the demand that is getting turned away I would imagine because of the inventory constraints of those customers coming back to the site persistently or do you think some of those sales are just being lost what's your sense, there and then I've a follow up.
I think probably a little bit of both I mean, this is going to be something of a speculative answer, but because I think just tracking customers online as an imperfect science, but certainly a little bit of both of you know when customers come to decide they don't do the car they're looking for.
They likely will keep shopping and that means check in other places and checking with us.
Finally cargo and or somewhere else I think the odds they go somewhere else or probably pretty good but if they don't they are they come back or are also probably pretty good. So I don't know that I can give you something more satisfying than that I think that's probably the best we can do.
No no no work and then just related to the underwriting standards.
You talked about you know ratcheting up early on through the pandemic is it safe to say you fully relax those now back to the pre pandemic levels are they still somewhat elevated there with more to relax just any color on the pace of change around the underwriting standards. Thanks.
Sure. So I don't think we want to quantify that but we definitely are continuing to maintain a significantly tighter credit than we had a heading into the pandemic. It is not as tight as it was at the peak tightness kind of in I suppose early April and and maybe through April but it remains pretty tight I.
I think we feel like Thats, the right air to make right now as well you know we already had a lot of excess demand on the site and I think we don't know exactly where the economy is going to go over the next 369 18 months and so.
We're going to Miss a little bit careful there I'm.
So I think that is another potential release valve overtime or for even more demand.
That's great. Thanks.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to earning Garcia for any closing remarks.
Thanks for joining the call we really appreciate it to the entire Carvana team. Thank you you're doing in absolutely incredible job a couple specific call out to the FTC team you are on fire great work keep loss of ramping Oh, that's an inside joke that that understands I hope was the cheered room somewhere and.
Then to the inspection center teams of I know you list. This call and you probably heard a lot of discussions stressed you out we know that you're doing an unbelievable job working incredibly hard.
We're making a ton of progress and your this decision because of choices. We made so we could not be more appreciated. We thank you for everything you're doing and please keep it up thanks, everyone.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.