Q3 2020 Carvana Co Earnings Call
Good afternoon, and welcome to the cars on <unk> third quarter 2020 earnings call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Mike Levine, Vice President Investor Relations. Please go ahead.
Thank you Holly good afternoon, ladies and gentlemen, thank you for joining us on coupon third quarter earnings Conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors Bancorp on Dot Com third quarter shareholder letter is also posted on the IR website. Joining me on the call today are earning Garcia.
Yeah, 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 carbon as market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here a detailed discussion of the material factors that cause actual results to differ from forward looking statements can be found in the risk factors section of carbon as most recent form 10-K and form 10-Q.
Forward looking statements and risks in this conference call are based on current expectations as of today and coupon assumes no obligation to update or revise them, whether as a result of new developments or otherwise.
Otherwise noted on todays call all comparisons on a year over year basis.
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, and now with that said I'd like to turn the call over to Ernie Garcia right.
Thank you, Mike and thanks for joining the call. The third quarter was an exceptional quarter for us financially and operationally, let's start with the financial highlights the biggest headline it did it was our first EBITDA positive quarter as a company. We also across 4000 GPU for the first time.
These are incredible milestones in both carry significant meaning and implications for our long term financial performance and our strategic flexibility.
The numbers themselves are exciting we think they're even more remarkable and put them in context in the last four years, we've improved gross profit margin by almost 12%.
Asking in a the percent of revenue by over 12% and EBITDA margin by about 25% we.
We meet all of that progress, while simultaneously, making the investments necessary to grow the business more than 10 X.
In addition, the third quarter also saw incredible operational achievement. The first and most notable of these we bought more cars from our customers and we sold them for the first time in our history.
This is an amazing accomplishment there was only made possible by the quality of experiences we deliver to our customers. The quality brand. We created the infrastructure. We are building in a herculean effort put forth by our team.
In the third quarter, we bought almost twice as many cars from our customers as we bought at our previous peak in Q1 of this year and over three times as many cars, we bought more customers in the second quarter that kind of sequential growth is pretty unbelievable, but we think it even more impressive at our current scale in order to achieve it our operations team had to handle a one quarter sequential increase in cars.
Bottom customers over 50000 units.
In addition, the off steamy quick progress toward a leading alleviating our inventory constraints.
During the quarter production cost for retail sales. They grew further enabling us to substantially increase our inventory by the end of the quarter.
Well this impressive progress we still ended the quarter with just half the inventory that was immediately available for our customers as we had prior to the pandemic.
At our current demand levels, we prefer to be much higher than we were even that and therefore still have a lot of work to do in this area. The team is doing an unbelievable job do we expect to continue to make rapid progress over the next several months to position us very well for another big growth year in 2021.
Now I would like to take a step back while the results of the third quarter, our exciting and significant it's important to maintain or your perspective and to focus on what is underneath the numbers.
Our progress over the last seven and a half years from a fledgling startup in a single market to deliver one car to one of our customers. Once every several days to becoming the fastest growing automotive retailer. The U.S. with 4000 gross profit per unit and breakeven EBITDA has come from four powerful and persistent forces.
One our clear mission vision and values, we know we're going and we know how we're going to get there to our unwavering focus on our customers. We know that what really matters is meeting our customers' lives a little better we know their expectations are always rising and we're always working to keep up and to surpass those expectations.
Three our long term focus we aren't afraid to lay the foundations today that are necessary to build big things tomorrow, even when we don't see immediate results and for the strength of our team companies are collections of people our people choose to care. They believe in what we are doing it by meeting at it they dream big they aren't satisfied what they've done they don't.
I think it's good enough and they can't wait to make it better these.
These four forces are powerful there will really matter they provide the relentless pressure to drive long term progress there what brought us here.
So what does this mean for our future customer preferences have accelerated their shift in our direction, our financial performance and position are stronger than ever before our team is executing at the highest level in our history. We're delivering the best customer experience is available in buying or selling a car we have a scalable operating to get better as it gets bigger we demonstrate.
But the power of our mission our customer Centricity are long term focused and our incredible team we couldn't ask to be in a better position. Our job is to keep marching to never allow ourselves to be satisfied to overcome the challenges that will continually arise along the way to always get better. If we do that we're going to hit our goal of selling 2 million plus cars per year.
And becoming the largest and most profitable automotive retailer and we are going to fill our mission of changing the way people like ours Mark.
Thank you wording and thank you all for joining us today Q.
Q3 was a record quarter for Carvana, we made significant progress on all key financial metrics and reach several exciting financial milestones.
We achieved positive EBITDA for the first time in our company's history, a significant step on our path toward achieving our long term goals.
Retail units sold in Q3 totaled 64414, an increase of 39%.
Total revenue was 1.5 billion an increase of 41%.
Retail unit growth accelerated from 25% in Q2, but was nonetheless limited by constraints, our production capacity, which impacted the selection of vehicles available on our website throughout the quarter.
Total gross profit per unit was $4056 in Q3, the highest level in company history, and an increase of $1093 year over year.
Our record GPU this quarter drove our gross margin to 16.9% near the midpoint of our long term model.
Retail GPU was 18 57 in Q3, an increase of $552.
Growth in retail GPU was driven by a significant increase in the share of our vehicles sourced from customers.
Vehicle source from customers reached 56% of retail units sold in Q3 exceeding the high end of our long term target laid out in November 2018.
Total vehicles acquired from customers grew by 128% in Q3, leading us to buy 114% as many cars from customers as we sold to customers up from 69% a year ago.
We believe the high quality experience, we provide to customers creates a sustainable sourcing advantage, which we expect to continue to benefit GPU overtime.
In Q4, we expect retail GPU to have a seasonal change that more closely resembles Q4 2018, the Q4 2013.
Wholesale GPU was $266 an increase of $146. This.
This was driven by record gross profit per wholesale unit sold of $1113 and record wholesale volumes.
Record gross profit per wholesale units sold was primarily driven by strong industry wide wholesale pricing.
In Q4, we expect the wholesale market to transition to a more normalized depreciation environment accentuating normal seasonal trends in wholesale GPU.
At a higher level, we continue to see improvements in our wholesale channel and expect gains over time toward our long term goals.
Other GPU was 934 in Q3, an increase of $395 the.
The gain another GPU was primarily due to $337 increase in finance GPU to 14 15 from 10 78, driven by tightened credit standards and lower benchmark interest rates.
EBITDA margin was positive 1.4%.
Watching a nearly 7% improvement from a year ago.
The significant milestone to positive EBITDA margin was driven by our progress in both GPU and ask you today.
As DNA as a percentage of revenue grew by 1.6% in Q3, primarily reflecting benefits of increased volume and cost efficiencies gained during the pandemic, partially offset by renewed investments in growth for 2021.
Looking forward, we expect to make seasonal investments and ask DNA expenses in Q4, as we have in past years to prepare the business for 2021, leading to a similar seasonal pattern. While also continuing to show leverage versus 29 team.
In addition to strong GPU NFC and a leverage EBITDA was positively impacted by a $10.8 million increase in the carrying values of finance receivable related assets on our balance sheet. This.
This increase partially offsets the decrease in carrying values of these assets the impact that EBITDA in Q1.
During the quarter, we opened our ninth inspection in Reconditioning center for IR see near Columbus, Ohio, and following quarter end, we opened our campfire see near Orlando, Florida.
We also expect to open our 11th Irish Sea by year end, increasing our total annual production capacity to approximately 600000 vehicles at full utilization.
Rcs play a key role in our model by allowing us to expand our selection, while also speeding delivery times and increasing logistics network efficiency we've.
We remain focused on our plan of building out our network of buyer sees and scaling production capacity to meet demand for our offerings.
As we continue to focus on building inventory, we have elected not to run or cyber Monday promotion. This year as a result, we expect retail unit growth to face a headwind around the time of cyber Monday and the tailwind as we continue building selection on the web site.
Following quarter end, we issued $1.1 billion in new senior notes and redeemed $600 million of existing senior notes due 2023.
The new notes reduced our annual interest rate by more than three percentage points and extended maturities to 2025 and 2028.
As part of the refinancing we incurred a one time debt extinguishment expense of 33.7 million that we expect to be included in interest expense in Q4.
Following the issuance of our senior notes, we had more than $1.8 billion in total liquidity resources on our balance sheet, giving us significant flexibility to drive toward our goal of becoming the largest and most profitable auto retailer.
Thank you for your attention we will now take questions.
We will now begin the question and answer session. We do ask that you limit yourself to one question and one follow up.
To ask a question you May Press Star then one on your Touchtone phone.
Are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question you can press Star then two.
First question today will come from Zack Fadem with Wells Fargo.
Hey, guys. Thanks for taking my question and congrats on all the progress. So first question with respect to the inventory constraints and I are see bottlenecks that you've been dealing with curious if you're willing to comment on how much your demand outpaced vehicles on the website in Q3, and then can you talk about some of the things you're doing to.
Return the inventory back to pre pandemic levels and if you think Q4 is is the right time frame for your supply to catch up with that demand.
Sure.
I'll tell you that the Cam that's why I think we wouldn't want to quantify precisely what demand would have been in the third quarter had we had a significantly higher inventory levels, but there's no doubt that customers are sensitive to selection and if you have more carbon side. They are more likely to find what they're looking for and therefore conversion goes up.
So I think there's there's little doubt that it impacted things in it and.
Pretty material way, most likely I think our inventory as we exited the third quarter in terms of cars that were available for a customer to buy that were kind of ready to click on its of course process with.
That was roughly half what it was pre pandemic pretend that we had significantly lower sales volumes than we have today. So our ideal inventory would be higher than we were pre pandemic and then we believe we have that inventory our sales would be higher sales our ideal inventory would probably be higher again. So I think right now the goal is to build inventory as quickly as we can the team does.
An incredible job we've made a ton of progress last three months that we've laid the foundation to make even faster progress moving forward Mark talked in his prepared remarks about everything that we're doing in terms of opening new facilities. We opened our ninth in the quarter. We open our tend to quarter end, we plan to open our 11 before year end. So that's going to bring us to total capacity of about 600000 units.
And then we are doing our best to staff up.
And train and get ready to build out as many as we possibly can to serve the demand that we expect to come in the future. So I think we're really optimistic about about where we are right now are focused on continuing to build out that capacity as quickly as we can and to then fill it out with actual production, but I don't know that we want to quantify the precise impact.
That makes sense. Thanks, Thanks, Ernie and then a quick one for Mark on the GPU line I'm curious if there's any color that you can provide to bridge the gap from the Q3 GPU to your your Q4 expectations and to what extent you would describe any of the Q3 upside drivers are market forces that.
As transitory across all the various GPU buckets, and how would you go about quantifying those those impacts.
Sure, Yes, so starting with Q3 retail GPU I mean, I think we sort of looked at it in a number of different ways bridging to previous historical period. So I think if you look back at Q3 2019. The biggest driver. Since then was our progress and buying more cars from customers.
I think we saw some significant step off to our best ever 56% consumer sourcing rate.
This quarter, which is a meaningful increase.
You know from a year ago, and we also saw strong margins on the cars we source from customers. This.
This quarter I think if you look to Q2, there's a couple of other dynamics.
That enter into the the bridge I think one averages sale move down meaningfully you know on the order of 30 days.
Quarter over quarter, as we started to resume purchasing and.
You know we began selling cars in a much more normalized pace following that Pete pandemic period.
I think bridging to Q1.
You do that you know I think in Q1, we were roughly 700 and retail GPU prior to our end of quarter.
Kogan related balance sheet adjustment.
And so I think you're bridging from Q1 to Q3 sort of a similar story I think most of that but the change.
Primarily driven by more success buying cars from customers.
I think that sort of.
I think the major drivers as were looking from Q3 2020 retail GPU back at some previous periods.
I think when as we look forward to Q4 I think you know the way. We're currently thinking about is we're expecting.
Seasonality that's more similar to Q4 2018 than Q4 2019, I thinking you know eight in Q4 2019.
We're still at the early phases of optimizing our.
You know our buying cars from customers bidding and pricing I think that led to some non.
Non normalized dynamics, so when we're thinking about Q4 really thinking about.
Seasonality. That's that's that's more like Q4 2018, the Q4 2019.
I went seasonality you mean, it as you know GPU or gross profit as a percentage of the year I am just trying to get a sense of what you mean by that that seasonal step down.
Sure I mean, I I think I think we're sort of thinking about it in terms of seasonal changes.
In retail GPU.
True value creation in depreciation rates et cetera.
That makes sense I appreciate the time guys.
Thank you.
Our next question comes from Nick Jonas switch steady grip.
Great. Thanks for taking the questions. The first one I guess focusing on.
On Fourq you again.
How would you kind of rank you know the math.
Magnitude of you know the supply constraints.
Impact on kind of.
Unit growth versus not running the cyber Monday deal like there's this kind of finding supply kind of.
Maybe overshadowed the headwind from cyber Monday and the second question is you know I guess, maybe trying to read between the lines on investment higher season opening two and four Q. I mean is that is it fair to assume you know from a profitability standpoint, I guess kind of back to kind of aggressive aggressive investment.
Maybe not really replicating what we saw in Threeq you from here any color there would be great. Thanks.
Sure. So first with with Q4 volume I think you know the.
Outlook that we provided the shareholder letter was that we expect north.
Normal seasonal trends across all the major line items and so that would that would also relates to retail units.
And I think you outlined kind of two big differences that will be going on this year versus years. Prior one we don't plan to run the cyber Monday promotion as we focus more on building our inventory in preparing for a a big first half 2021, and then two as we continue to build our inventory, we do expect that to be a tailwind to conversion.
And so kind of that's what sits underneath our expectations for a similar seasonal shape to years past.
And then as like inspection centers I think we're clearly in a.
Indefinite mode in terms of trying to build out capacity.
Deliver cars to customers and produce cars that are ready for customers and have been for a while and that's been part of our long term plan.
Building out sections centers is the most operationally intensive and kind of longest lead time, a lever in the business and so in general we're always trying to stay out in front of that as best we can to from a from an investment perspective as you think about cash we've got a lot of different ways that we can finance that'd be we've obviously got roughly $1.8 billion liquidity resource.
On the balance sheet. So we can choose financials with their own cash or we can choose to finance those in the sale leaseback market. If we don't want to use cash for that purpose. So I think we're flexible there and then in terms of the way that it impacts earnings as we open.
More inspection centers, there can be marginal impacts as that kind of the cost those centers. This is and the depreciation of the centers flows through fewer units, but that's not a super material drivers I wouldn't expect that to be a huge part of our story.
Right. Thank you.
Thank you.
Our next question comes from Ron Josey with JMP Securities.
Hi, Thanks for taking my question. This is Andrew Byrne onto Ron.
If if I think about the flywheel that you guys laid out its kind of great selection better conversion, bringing more users to the platform. It seems that adding third party inventory would accelerate this effect and really improve selection and therefore conversion.
We're increasingly seeing third party dealer inventory on your site.
Can you just talk about carbone is willingness kind of at a high level. If not this kind of specifically to be more of a marketing platform for dealers.
And then additionally.
Now that you're acquiring more cars from from sellers versus buyers can you talk about your ability to convert those to a trade and meaning meaning you get the sale and the car buyer at the same time as well as any marketing efficiencies, you're seeing you're seeing leading with a kind.
Kind of we'll buy your car first message. Thank you.
Sure. Thanks for the question. So on the first I think we're very very focused on continuing to build out the business to deliver.
Certainly incredible customer experiences at growing scale and to get that flywheel going where we get better as we get bigger and I think there's lots of forms that takes in the letter we discussed kind of growing inventory, giving customers more selection of you having inventory more locations to the inspection centers.
Shortening delivery times. So there's a lot of different forms that takes I think there are also a lot of other theoretical forms that could take and there are lot of other things that we can do to build out.
Yes additional benefits for our customers, we will continue to invest in those tasks into to kind of look at opportunities to make our offering even better for our customers, but but at any point in time, we're running several tasks I was a bit into the bucket that you're describing.
In general we're running those tests, we are going to value those test through the lens of what do you mean for our customer experience what are they need from a scalability perspective, what do you need an economics perspective, and when we feel like Weve run those tests and gotten to a place where we feel really good about the outcome through those three lenses, then we'll likely for resources on them and we'll talk about them a lot more and we'll seek to grow them out in the same way.
That we've grown buying harsh and customers, but I don't think we have.
Any projects that have yet read into that level of discussion.
Discussion.
On your second question I think there's enormous opportunity there.
We're still very very small compared to the retail market in terms of the number of customers rather buying cars and the fraction of those customers that are buying cars from us. We're also very very small compared to the market of customers that are disposing of their cars and so I think those those two markets are to some degree independent and then they're connected when a customer chooses to you too.
You transaction simultaneously do a trade in what we are going to seek to do is is to make sure that we're giving customers. The best offering available on both sides. The transaction if they want to buy a car or if they want to sell a car and then as we get those customer interactions, we have an opportunity to explain to them. The other things that we do as well.
That could happen simultaneously and would look like its rate in where I think that it can happen with lag where a seller becomes a buyer six months down the road or a buyer becomes a seller of six months down the road and so again I think the thing that matters. Most there is we want to focus on our customers make sure their experiences are great make sure our offerings in a really good spot and then just scale both as quickly as we can because we're very.
Very small compared to the opportunity.
[noise]. Thanks.
Our next question comes from Adam Jonas with Morgan Stanley.
Everybody. So Ernie you know they say imitation is the ultimate form of flattery, if anyone's listen to these deal franchise dealer calls or any other auto retail call. It's it's like you really woken them up right. There always are talking about omni channel.
Digital touch less et cetera et cetera.
Are you seeing any sign at all that some of their admittedly nascent efforts, even if they're nowhere near the full flywheel that you have and they may never get there.
Have the attempts at least impacted your business in any way, including inventory acquisition or pressure at the auction to share anything.
I think its implants that question. So far is no and I and I'm not sure that that should be that surprising because I do think that were very small compared to this market in the quarter, depending on what you think from a market perspective, we're probably around 2.6% of the total transactions in the market and then probably the list.
Competitors this that you're referencing on if we added them all up you know I might add.
Five to probably not a lot more than 5% additional market share on top of that so I think all of the bigger players that I think you're starting to get more focus in this direction.
Even if you some of them are still small compared to the market. So I think the overall opportunity is is really really large and I think.
Think about what's most important for us yet to kind of decide what you focused on and we would like to think that we are the clear leaders in this space and we think that the important area our focus to be honest, it's just not our customers. They are telling us where we need to go.
And so we're continually really focused there and then we think that the dynamics of the market that we discussed in the past the fragmentation in the relatively few players that really have the capacity to make large national investments in building out a true E. Commerce platform suggest that's not necessarily the area, where we should be putting most of our focus.
We think that we offer the best customer experience that we have the most scalable model and that we've got the capacity now to our balance sheet also to our financial performance to be able to invest in our offering and so we're focused on us were books and execution were focused on our customers and I don't think we are you seeing anything that's impacting us from any competitive moves okay great.
And my follow up.
Kind of isn't the topic of these tests buckets that you talked about I know you guys look at a lot of different things to improve frequency and.
All sorts of different ways improve experiences beyond just you know you buying and selling of used cars.
There are a lot of car companies with an increasingly these electric car companies startups didnt, even some legacy companies that could get carved out and may want to engage with the consumer and a b to C way.
In a far better way than the traditional model right and I'm, just wondering if theres an opportunity and I know it doesn't exist right now it's not part of the 2021 story, perhaps but are you even having discussions internally if not externally with how the carvana platform could help a new entrant into the U.S. market anyway.
Engage with the consumer in a digital vastly superior way.
Is that is that an opportunity if were thinking you know 510 years out.
That's something relevant to talk about today. Thanks.
Yes. Thank you so what I would say is you know our focus has been and remains on delivering great experiences to customers that are buying used cars. I think our platform is you can think of as kind of being the the thing it's between cars and customers and I think everything that we do.
Our strategic lens is we're looking at different ways to acquire cars and actually we've got inventory available to our customers and we want to make sure that we have the best and simplest transaction or they can connect them connect our customers up to those cars and so I think that thats all kinds of interesting opportunities theoretically in the future, but I also think it's important for EPS.
Any given company to make sure that you stay focused on the things that are most important any point in time and you continually drive toward those things and so for US that thing is making sure that we're delivering great experiences to our customers want to buy or sell used cars.
Our next question comes from Daniel Powell with Goldman Sachs.
Great. Thanks for taking the questions one and a follow up.
Maybe another run at the detailed GPU in Fourq, you guess based on the drivers of the outperformance in Threeq, you being more consumer sourcing faster sell through and more work and we reconditioning efficiency, I guess, which which one of those drivers would you expect.
Got back enough.
Such that the depreciation schedules and things that you're talking about catching up in fourth you would actually drive some of that seasonality that you're expecting that at first glance. It looks like all three of those should should still be tailwinds for you and for Q.
So I would just start with normal seasonality normally there is variation in depreciation rates across the year with the fourth quarter tending to have the fastest depreciation rates you can think about depreciating depreciation happening in time and.
And kind of depreciation per day tends to be the highest in the fourth quarter and so if you look back at our historical numbers and kind of massage out.
His bottom customers day to sale, you just kind of see those sorts of trends in there and so I think thats the major driver.
That sits underneath our expectation and that that's something that we've seen over over many years since launching in 2013.
Okay. Thanks, and then on finance cheap you, obviously really strong performance similar type question, there with the interest rate environment that we're in.
Any any reason that the strength that you're seeing on the sale of the receivables there would deteriorate for any meaningful reason.
On a somewhat related note was there anything in the tighter credit standards that you felt like impacted conversion on the site in the quarter. Thanks.
Sure. So what I would start with there is I think we also gave some directional color for our expectations are for Nancy view in the shareholder letter and 72nd to follow normal seasonal patterns on there. There is some pattern there which relates to a number of relatively small factors, but that add up to create the seasonal seasonal patterns I will dive.
Moving to all those underlying factors right now I see in terms of what happened this quarter with an answer for you I think there were a lot of things that were moving and so I'll try to give you a quick list and hopefully it will be helpful in figuring out what.
We believe is sustainable for the long run so.
First and I think most importantly, I do believe that we made some fundamental improvements to our credit platform that includes improvements in credit, scoring and credit pricing and credit structuring.
Just getting more efficient at all those things I think there there was some fundamental improvement.
We would certainly expect to persist.
One is going to depend on if we tightened credit pretty dramatically, we maintain a tighter than normal credit standards.
And that are continuing today when you tighten credit all constant you generally would expect to be originating more valuable loans. You also it would tend to expect lower sales volumes, but.
But so I think as it relates to finance GPU that would be a tailwind advanced GPU that at some point, we would likely unwind as credit markets normalize and kind of macro environment becomes a little bit clear and then you'd expect that to be a tailwind to sales.
I think the the market clearly got better in terms of the execution of just credit markets in general. So I think that that was a tailwind going from a from Q2 to Q3, but I think it's that would kind of be just moving more to a more normal functioning market.
Interest rates clearly went down almost constant interest rates, reducing then and had benchmarks and spreads reducing generally would lead to increases in the value of finance receivables because consumer prices are or interest rates are generally stickier than the underlying benchmarks and so I think that that would be.
A tailwind that we can play out over a little bit longer period of time, but I would not expect that to be persistent in the long run.
And I think that that's offset to some degree by the fact that we did monetize in the ABS markets. This quarter, we monetize the vast majority of those words in our platform through our partnership with ally.
Which which is great partners as we've discussed in the past that provides so many benefits.
Including flexibility and strength and reliability, we saw going through the pandemic, but that channel generally speaking is not as economically efficient.
As as securitization. So I think that that was something that went a different direction and kind of worked against us in the quarter I think in the immediate term did a lot of things that potentially could move that make it a little bit hard to forecast, but operating under the assumption that kind.
Kind of big macro factors remain at similar spots, where they are now.
We would expect to see somewhat normal seasonal trends going from Q3 to Q4, and then taking a longer land, where we found ourselves refinanced GPU perspective. This quarter was basically the high end of the long term model, we put out in November 2018.
And I think that we clearly that is that at the time and thought about it pretty carefully and we believe that those are kind of long term sustainable numbers connecting the dots can hear there I'm sure there's going to be some bumps along the way, but but we don't think there's anything thats.
Clearly not sustainable in the long run and financing deal.
Thanks really helpful. Appreciate it.
Thank you.
Our next question comes from Raj Gupta with JP Morgan.
Hi, good afternoon. Good evening, Thanks for taking my question.
Just to follow up on the previous question on finance to view.
You mentioned the long term target.
No had had 1400 at the high end, but I.
I think when you put all those target narrow your benchmark rate assumptions were higher spread assumption were also higher.
But both are much.
Smaller and tighter now so.
Is it fair to assume that.
Right.
Lower for longer you know youre your upside potential there meaningfully higher.
That's what do you hundred.
Or not.
All right. Thanks.
First order I think we haven't seen enough yet to make us think that we should materially.
Materially change our long term financial targets I think that we should think about kind of the value of the loans being driven by.
The spread in cap trouble value between the consumer straight and the underlying benchmarks and so as benchmarks moved down the spread between those and kind of the loss adjusted.
Kind of interest stream that we get on doesn't necessarily move and so I think that when its rates are moving that can have a short term impact, but it probably shouldn't have a sustained long term impact. So I think that in a vacuum would not be sufficient to to change our long term model.
Got it got it Okay makes sense and then just on as DNA or leverage nice progress here in the fourth quarter.
Within the different buckets.
Are there any areas you know maybe around advertising or.
Other overhead expenses, where you might have tightened spending temporarily that should start does it start to come back in the future.
Or should we view it as being you know a more normalized level in the.
Quarter.
Curious as to the puts and takes there.
Thanks.
Sure. So I think on EPS you, Dave we're going into the fourth quarter. I think you know were sort of expecting normal seasonal patterns in total EPS DNA as we start to ramp up for 2021 first.
First half and normally Q3, and Q4, our investment periods for us where we start being.
The seasonal investment process to prepare for the next year and so we'd expect that to be the case this year as well and total SGN a while also showing leverage over 2019.
So I think that's sort of the the.
Leading.
You know pattern, but that would suggest for Q4 I think in a bigger picture sense I think we're very excited about the leverage that we're now showing year over year.
We've moved a couple of steps away from from co bid, we certainly expect to show more leverage looking forward into the future I think one thing that we're very excited about is the pattern that we're seeing in actually getting our cohorts where older markets tend to have significantly lower advertising expense per unit the newer markets six.
Typically lower last mile delivery and logistics expense per unit than newer markets and then much higher market shares.
Which means lower overhead per unit.
And all of that I think.
All those patterns that we're seeing in the cohorts I think give us a lot of excitement about where we expect SJ to head over time.
Our next question comes from Colin Sebastian with Baird.
Hi, guys. This is doesn't turn on for Colin.
Just another question on the kind of reconditioning capacity looking forward to Q4, I know it sounds like just acquiring inventory and getting it through the pipeline seems like the primary constraint rather than absolute capacity in the network, but can.
Can you give a sense for how much if anything that the Ohio in Orlando I or seeds are going to be able to contribute in the near term like how long does that take to kind of ramp up and bring them online and when should we expect that to start to help flow through and then separately just on the topic of the cohort profitability in essence, United specifically.
A lot of the scale benefits in proximity makes sense in terms of lower logistics expenses, but can you talk about how advertising in your older cohorts is trending relative to your long term targets and kind of you know anything you've learned there that you think is applicable to your longer term strategy and driving advertising leverage. Thanks.
Sure so.
On the new RC is what I would say is we're working hard to make sure that we're laying out that facility capacity as quickly as we can and then we have.
Kind of our goal is to ramp that up.
We're working to basically build the process to enable to ramp it up as quickly as we can but it also becomes a choice on how quickly we ramped up.
Once we have those facilities up and running now right now, it's a little harder to forecast normal because I do think.
One of ours has impacted things from a hiring perspective from a training perspective and in certain cases from an efficiency perspective.
I think that is more true when when caseload get get higher on which we have seen recently, we have seen that impact the inspection centers.
Today, but there are certainly some risk of that in the future and so I don't know that we want to be forecasting precisely how quickly will be ramping inventory right now our expectation is that it will continue to ramp as it has over the last several months.
Actually a little bit faster, but I don't think we want to quantify it more than that.
And Marc Hanover, too sure Yeah, and then on advertising expense in the older cohorts. So.
I think we're feeling pretty good about the patterns that we're seeing there I think you know we've always seen.
You know cohorts that are older and have had more time to accumulate awareness and word of mouth have meaningfully lower advertising expense per unit or add acts as a percent of revenue than newer cohorts, where we're just sort of you know.
Getting ramped up in terms of raising awareness of our offering.
I think.
What that that means is our older cohorts are significantly closer to our long term model than the company average as a whole.
Or certainly newer cohorts that are in that early phase I think in Q3, our older cohorts or you're probably on the order of maybe.
Maybe 50 basis points or so outside of our long term.
Target and so you know I think.
Obviously, we feel pretty good about that just given all the opportunities for continued improvement in continued growth that we have.
And as I was mentioning earlier I think we're very encouraged by.
The trends that we're seeing in cohort unit economics, which give us a lot of conviction about our path to long term model on SGN Act.
Perfect. Thank you.
Our next question comes from Chris Bottiglieri with Exane pair Abbas.
Hi, Thanks for taking the question.
Congrats on your early profitability milestones I like that they have you earliest markets with EBITDA margins of around 7% to 7%.
If your overhead was that your long term target youd essentially be at the midpoint of your long term margins get your market share in these early markets yes.
Still a bit below your long term targets. So I guess the question is that with that backdrop yeah.
Is there anything you've seen today. That's made you more constructive are bullish on your long term targets are there sort of like you know certain segments or or no cost structures, where you you have better visibility into than you might have two years ago.
I think we're obviously extremely happy with where we are we're extremely happy with how the company is performing we hit a bunch milestones this quarter I think the underlying cohorts.
Great works that were extremely happy about that.
I think it's early to be focusing too much on on kind of raising the long term modeling can get long term already put out there we put a lot of thought into.
We believe we've got a very clear path there with you could that that happens becoming clear at least the outside world. All the time, we feel like it's been clear for a while but I think it's getting cleared the outside world. All the time, so we're going to keep marching toward that at the company level. We still obviously have a lot of a lot of work to do as we continue to expand and lever that have seen a further but I think things are looking.
Being really good.
We're very confident I am not sure it would be prudent to raise long term financial model at this point, though.
Our next question comes from Lee crowd.
Security.
Great. Thanks for taking my questions first question.
The shareholder letter you mentioned consumer preference migration several times I wondered to get a little bit more detail on that particularly against the dynamics of kind of new versus used mixed as we've seen a shift over the summer.
But also just kind of the dynamic of purchasing digitally versus the dealership.
You know what have you guys seen what seems a little bit faster than expected and what seems a little bit more durable versus kind of the near term dynamics.
Sure. So I think it's probably the other thing is that it happened I think.
One is clearly has moved toward digital in everything not just buying a car, but and everything I think as people choose to stay home more and choose to to distance more from others. I think just more things in general are happening online and as more things happened online people get more comfortable doing things online and I think that that generates haddad formation I think generally speak.
Being the biggest inhibitor to change his preexisting habits and when you go through something like this where habits are forced to change.
People try new things, they like new things and new habits are created and so I think our expectation there would be that that is likely to be a persistent change and it's an acceleration of trends that were already clearly underway given the results that we've shown over the last six.
Six and a half years prior to the last year.
But I do think thats likely an acceleration I think another thing that is happening is that seems to be a shift toward personal car ownership.
I think it's hard to say exactly how how persistent that will be overtime, but that seems to be a trend that is that is real and seems fairly strong at the moment. It seems like inline drivers of that.
Have a had a high likelihood of being able to persist over.
Over time, I think the shift from from new to used is most likely transitory.
I think that the biggest driver is just the mechanical driver of there being fewer new cars and production being impacted with the manufacturers and then that's just kind of putting it.
Cap on how many deals you actually can have so thats, probably the biggest driver of the other driver is generally speaking in periods of economic distress, there tends to be substitution into less expensive cars.
And so that is probably also at play to a lesser degree.
I think both those we should think of as as transitory and those probably have implications for all kinds of different things, including the way that car prices will migrate over time, I think it's hard to forecast but.
But I think those are the major trends I think the other trend that was present early in the pandemic was basically the lack of other options there.
There there's weren't other places to buy a car I think we've moved through that and so I think that was the most transitory of the forces, but I think that that one is behind us at this point.
Got it and then just a quick follow up obviously the priority is to scale inventory.
And broaden the offering could you maybe just talk about shifting from your core kind of center inventory out into the value and luxury type skews that some of your competitors focus on and and perhaps the GPU implications of that.
Or what you know at high levels going back in the spring we discussed earlier I think we view our job is building the best transactions this between customers and cars.
And then we don't think our offering is specific in any way shape or form to a specific type of car. We think that we can go way up to more expensive cars and we think we can go way down to less expensive cars being customers. When they are when they are looking to buy a car. They want a great selection they want to find the car they're looking for they want a fair deal they want a simple process.
Assess they want to process fast once they decide what they're going to do they want confidence the cars in good shape, they want confidence that if they make a mistake it doesn't fit their life. They can return it and those things really have nothing to do with the specifics of a car. So I think we feel like we've got opportunity to serve a very broad swath of customers looking for all types of cars over time.
I think we're just trying to do the best job, we can with all of our other priorities.
Managing which things we're tackling it at what point in time, and we have been steadily broadening our car offering and Theres a lot of together.
To go, but especially buying cars from customers has given us access to both cheaper cars and more expensive cars and more diverse cars.
I think that that.
That is happening today, but there is clearly more room for that and then from a GPU perspective at a very high level I think the simplest way to think about it is the cars that were selling don't impact GPU in a super material way they would they would flow through.
Retail with a a kind of moderate impact will be related to.
The kind of expense level of the car more expensive cars should have moderately higher gpus and cheaper Carson have moderately lower gpus, but that's not a huge impact and it's even how to think of it as being a a large portion of the margin being decks than that a relatively small portion of margin being related to the price of the car and then from a finance GPU.
Dave I think generally speaking that one is more proportionate to the price of the car. So you can kind of think about that as as having the relationships that you'd expect there.
Wholesale I don't think has a a very strong relationship to the car.
Nor to the other so it's not a huge driver of that and I think inside of the likely bands that we would move at an aggregate company level I don't know that you should expect that to be a huge driver of GP migrations in the long run, but I do think as we broaden thats an opportunity to just broaden our offering and positively impact more customers.
Our next question comes from Brad Erickson with Needham and company.
Hi, Thanks, just a couple for me.
I guess another one on the oldest five cohorts in Q3, you called out in the letter, which I guess were solidly EBITDA positive.
Can you give us a sense of growth rates going on in those markets just relative to corporate average I guess a bit they maybe lower just inherently the more mature, but just curious if that's wrong any color you can provide there.
Sure. So I think generally that frame is correct that we see the trends. We've historically seen these newer markets tend to grow faster they benefit from a pre existing awareness and a lot of inventory early in their life and then your older markets tend to grow slower they get bigger.
That is working off of a bigger base. They continue to grow quickly I think right now we're in a.
Especially unique time, when you're looking at different markets different markets are impacted in different ways by the different operational constraint that we got in the business and so.
I think when we're looking at this internally what we're always focused on what's happening to underlying demand.
And we can kind of massage out what's happening underlying demand by wouldn't what's happening to sales and looking at the drivers of conversion that impact sales which include.
Where inventory is how much inventory is close to different markets what delivery times are in different markets, where inventory distribution looks like relative to the distribution that is traditionally sold in different markets.
What our credit policies are relative to the fusion of credits in different markets, it's going to be a lot of different drivers there that can impact things between those markets and that's why we generally outside of annual in aggregating at the corporate level, we haven't provided a ton of detail.
On individual market, but when you look at all that together and you see what's happening to demand generally across the country, whether it's looking at newer cohorts and older cohorts are looking at different geos or anything else, we're seeing very consistent trends in demand growth.
Got it.
It's helpful. And then just wanted to follow up a little confused on kind of what you're saying about the sustainability of the strong pricing you're seeing lately. So on one hand like it seems like some of the inventory constraints are going to persist a little bit here, you're not committing the sort of a magnitude of improvement in Q4 on the other hand, you mentioned wholesale channels.
Should sort of display a little more normal back half depreciation characteristics. So can you just tell us like which of those is a more important for us for pricing into Q4.
Sure. So let me I think what's also think EPS simpler.
There was clearly abnormal dynamics in the way that vehicle pricing migrated really over the last probably six months give or take.
And I think that that was probably if you had to look and what was the driving force.
It would have been stimulus by provide an extra demand for cars I think people spending more time at home and less time on on services gave them more money to spend on cars that was probably a positive boon to demand I think potentially the shifts toward personal ownership. What's helpful. There, but then I also think that there was less production capacity with the manufacturers, which meant there was.
Fewer new cars and so that was helpful for new car pricing into that kind of flows over into used cars and kind of down to cheaper used cars as well. So I think weve clearly seen abnormal dynamic in the market that we would not expect to persist in the long run if you look at our wholesale profit per wholesale unit.
We should record numbers by a long long way in the third quarter.
And so I think we called out in terms of our directional expectation there heading in the fourth quarter as we would expect it to be normal seasonal patterns, but but more pronounced than normal and the reason that they would be normal directionally is because normally you do move into higher depreciation environment.
Going from Q3 to Q4, but this year, we expect that delta in depreciation to be significantly higher in certain segments that was even vehicle appreciation in the third quarter and so.
Relative to previous perspective, we expect to be materially higher and so.
We think in the long run the types of products that we were able to show for wholesale unit. This quarter are likely achievable. That's what we've got at the high end of our long term model, but we think that between here and there were clearly in a step down in and start to build again as we've been building for the last several years.
'cause it just wasn't the normal environment.
When you are looking at retail dynamics are different in theory, they should be related because as we buy Carson customers. So that we've historically said is that the incremental margin that we get on cars bought from customers is similar to the wholesale margin that we got on cars that we buy from customers and sell wholesale.
In this quarter I think that that relationship wasn't as tight as it's historically been just because of different segments of cars were appreciating depreciating at different rates and then also because we weren't buying cars in the absolute trough.
That was in kind of late Q2, and Q3, we just weren't or sorry late Q1. Early Q2, we were buying cars during that period and that would have been the period, where you would have bought cars and seen the most appreciation and then there's also some dynamics with just the way that we handle pricing. We generally don't write cars up even if there is appreciation and we have time. These write downs that are.
Function not only of time these depreciation but also how that cars performing relative to other cars on our site. It's the way that we handle our retail pricing provides a lot more stability.
And kind of less exposure to the way the wholesale market is operating in so we expect retail to move back like we said similar to the seasonality. We saw in Q4 2018, but not nearly as dramatically as we would expect wholesale to move back which we you think was was powered by clearly abnormal forces.
Our next question comes from Brian Nagel with Oppenheimer.
Hi, good afternoon. Good evening, thanks for taking my questions.
Horse so the one question rule would ask.
Drive deeper to resist the whole the effort to buy more cars from customers me clearly a big driver here for a while particularly in a quarter, but how.
How significant how how large could that become per car volume and as you as you continue to drive that that effort.
Stronger or higher are there incremental.
Benefits, meaning are you could be able to buy cars, even better over time for customers.
Sure. So I think at this point I think the bins buy Carson customers that team has done an absolutely unbelievable job building out.
That customer experience the technology supports it and the operational capacity to handle it I really I want to talk again about that stat that I gave my fair Mark It's pretty remarkable do you think that from Q2 to Q3, we increase the number of cars about concussions by 50000 units in one quarter that that's a pretty incredible number and I think the team just did an.
Unbelievable job to enable us to do that so that's really exciting I think you know because of all that growth and because they were able to grow on the on top of the infrastructure that we've been building over the last several years to service the retail side of the business. They were able to catch up the retail really fast we've only been really investing in this business for a couple of years, it's made a ton of progress.
I do think these businesses are in theory at least largely independent as we discussed earlier they are connected through trade in.
But the majority of the volume in both cases is independent.
I think from here our goal is to grow each business as quickly as we possibly can and effectively how those businesses race each other.
So so everyone's winning I think it is in fact, we were trying to do.
And so I think it's worth stating these businesses as a ratio of one another that'd be a function of how one businesses is progressing relative to the other but we're going to be trying to move them. Both forward as quickly as we possibly can because we're very small compared to both opportunities and so we're excited about that.
As it relates to opportunity get better there is no doubt I mean, I think across the entire business there is opportunity to get better everywhere and I think.
Every group inside the business on the retail side and on the purchasing side I think has a million things they want to get done and looks at what we currently have in is mildly embarrassed by and really excited about what's about to come that so I think there's a tremendous amount of opportunity I think you have to some degree there has to be leaving more opportunity in buying cars and customers just because.
Thats, a younger business and so we haven't had as much time to to invest in that offering as we've had to invest in retail, but I think we're very early in both and then both businesses also benefit from volume as we get more volume, we get smarter it add bidding and we get smarter pricing, we get smarter merchandising. So I think we get better at a lot of different things I do think volume.
And we will make us better.
Okay very helpful. I appreciate it thank you.
Thank you.
Our next question comes from Nat Schindler with Bank of America.
Yes, hi.
Hi, guys. Thanks for taking my questions just a couple ones and I don't mean to belabor the point, but I know you've gone over this but.
Can you be a little more specific on the GPU guidance and I know, you're saying, it's going to be more like 20 in Q4 2018 in Q4 2019.
But I got to be clear is that gross profit per retail unit inclusive of the other revenue. The total gross profit per retail unit.
Which really wasn't all that much of a difference in the move sequentially and 18 versus 19 or 18. It was down 7% sequentially and 19 was down 5% or are you talking just the retail sales.
The just the retail part not including the other funds.
First of all I'll I'll take a crack at that I think the biggest thing that we are.
You don't expect to see is that wholesale GPU per wholesale unit number to return to more normal no more normalized levels, which you know is this sort of accentuated seasonality relative to what we've seen in previous years, because the wholesale market. We do think within that abnormal depreciation environment through most of Q3.
And we expect to see a return to sort of normal seasonality. So I think.
That I think we expect to see.
A change in wholesale GPU, it's going to be driven by that wholesale.
Gross profit per wholesale unit sold number in retail.
I think the way we're thinking about it is sort of within the range of normal seasonality.
And by normal seasonality, what we mean by that is sort of just looking at sequential changes in retail GPU and we think the normal seasonality is best reflected by 2018.
Because 2019 had number of other factors going on with you know of scaling up buying cars from customers. For example that we think let it did not have what sort of a normal seasonal seasonality in the retail component of GPU will look like.
I think those are some of the trends I think theres some little seasonal.
Trends it can happen in finance you view as well.
Which which already pointed too so I think like at a very high level.
We think.
Generally speaking, we expect to see normal seasonality, we expect except to expect to see Ics, you know sort of extend seasonality or accentuated seasonality in wholesale.
Gross profit per wholesale unit sold and when thinking about what historical seasonality looks like we think 18 is probably a better bet.
The benchmark than 2019 on the retail side, just because of the other dynamics that were impacting Q4 19 that that hopefully helpful summary.
I'm still actually compute so in what I'm confused about just simple definitions here when you're talking about retail units sold you're not talking about total retail gross profit, which is inclusive of other revenue the financing you're talking about just the retail so the car and in which case that fell sequentially.
In 2018, our Q4 2018 sequentially fell by 22% while in 2019 to grow.
So, but there isn't much of a seasonal pattern here to look out because the the earlier patterns are much are all over the place, but so but are you just saying just the retail side that number just like 1900 that number goes is going to go down similar to what it fell in fourq.
Q 18 from Threeq.
Yes, we're talking with that piece of the commentary we're talking about the retail component of GPU. That's correct and then we gave some separate commentary related to wholesale GPU, which is a another a separate line item and then you know.
With respect to finance and other GPU, we gave a little bit of commentary as well.
So that's that piece is related to the the retail component of GPU that's correct.
Got that Okay. Then just a couple more questions just very quickly.
In the last quarter, we no you gave us a July a unit growth.
So just tell us where trends were for the for the third quarter.
I know, you're not giving actual abducted much too much guidance in for the whole quarter, but is there any can you give us anything that happened in October just to give us a base line.
I know, it's totally over but.
Yeah, I think we want to stick with the commentary that we provided so far we think the Q4 sales growth is going to largely be a bunch of our ability to produce more cars and we're working very hard at that.
Okay and then just one final question. This is more of a kind of a long term how margins might slow out question as you do a whole lot more of this buying from consumers. So.
So obviously you've talked a lot about the Jeep you value. Your if you purchase a car from consumers if you get it for a much lower price them from auction, it's less sufficient market totally makes sense.
But how much incremental operating expenses are there when you purchase a car from auction.
It's not a lot of people use a lot of cars in a single place, they're often right near your IR see you soon.
So if you, but if you buy cars from consumers, they're all over the place you then and they also it takes people to negotiate not talk is there a lot of extra operating expenses not relative to buying that the auction.
Sure. So I think the biggest expenses associated with buying cars from customers as inventory source is exactly what you laid out it's basically the labor and deliberate or delivery slash pickup cost of going out from customers drive way to pick up the car and then.
Bring it into our logistics network and transporting it into one of our Rcs all of those expenses are actually.
You know those are reflected in our wholesale gross profit number as well as in our retail growth gross profit number and when we say that buying cars from customers is more profitable than buying cars from.
Auctions.
That's we what we mean by that is it's more profitable net of those expenses are going to get the car from a customer and bring it into the Rcs. So I think.
Yeah, I think I think thats. The most important point is the most significant expenses there are some other.
A little expenses.
And you know.
Call Center, and the like but the most significant expenses.
Our in picking up the car from the customer and transporting a drier season, which are all reflected in our GPU numbers and are also reflected when.
We say that those cars are more profitable than parcels from auction.
Our last question today comes from Alex Potter with Piper standpoint.
Oh. Thanks, Thanks, very much I'll just ask one here average days to sale and I guess the inventory glottal time, they've been also really strong lately, obviously that was a contributor to your retail GPU.
Just wondering if you could comment on how much of that is sticky I mean part of that it could just be that consumers are snapping up cars as soon as they show up on the website. The other part maybe of your own ability to process equals more quickly through inventory.
Yes, if you could just maybe talk to both sides of that equation, and let us know which ones are attainable versus not thanks.
Sure I think.
Instead of using the language of sticky I think I would use the language. It is largely a choice I think demand is growing and at any given level of demand paired with any given level of inventory of you're going to have some turn time that will emerge from that and then as you as you grow your inventory from they're going to increase conversion, but you're unlikely to increase conversion by as much.
Inventories your turn I may get a little bit longer.
We can use in a normalized environment, where we have as much inventory as we would like we can use inventory as.
A lever that we can think of similar to marketing to kind of have some incremental expenses. It flows through retail GPU that helps us to acquire more customers.
I think that that's a lever that in general we have today, we don't have that lever, it's not really an active lever because we're just trying to produce as many cars, we possibly can to catch back up to the demand levels that we're seeing but moving forward I think that that is largely a choice in that at at kind of equilibrium in the long run.
Once you've got a fulsome selection of cars, which takes many more cars. We have today. There is no real need to continue to build out selection of cars. We have again fulsome selection that located well across the country to minimize delivery times and so at that point I think there would be a kind of meaningful in and secular decrease in.
And in turn times, but between here and there it's largely a choice and it's one of the many levers that we have to drive customer demand.
Okay very good thanks.
Thank you.
This concludes our question and answer session I would like to turn the call back over to management for any closing remarks.
Thank you everyone for joining the call we really appreciate it.
One other on team Carvana I hope you're proud of the achievements that we had this quarter, it's pretty remarkable for us to have our first EBITDA positive quarter as a company for us to hit 4000 GPU, but.
But please remember that as incredible as those achievements our it's all a function of the things that we do everyday and have been doing for the last many many years and it's all because of how much you choose to care how you've made this mission. Your mission. So thank you. So much I hope you take a moment to enjoy the view and gloat a little bit, but then I hope we get back to it and we still have a lot of work to do.
Thank you for all that you do.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.