Q4 2020 Carvana Co Earnings Call
[music].
Good afternoon, and welcome to the Carvana fourth quarter, 2000, and 'twenty 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 and Vice President of Investor Relations. Please go ahead.
Thank you Andrew good afternoon, ladies and gentlemen, and thank you for joining us on Carvana fourth quarter and full year 2020 earnings Conference call. Please note that this call will be simultaneously webcast and the Investor Relations section of the company as corporate website at investors Carvana Dot com and the fourth quarter shareholder letter is also posted on the IR website.
Joining me on the call today are Ernie Garcia, 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 carvana as market opportunities and future financial results that involve risks and uncertainties that may cause actual.
Our 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 and the risk factors section of Carvana is most recent form 10-K. The forward looking statements and risks and this conference call are based on current expectations as of today and Carvana assumes no obligation to update or revise them, whether as a result of <unk>.
New developments or otherwise unless otherwise noted on today's call and 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 and our shareholder letter issued today, a copy of which can be found on our investor Relations website, and now with that says I'd like to turn the call over to Ernie Garcia Ernie.
Thanks, Mike and thanks, everyone for joining our call 2020 was a defining year for Carvana and one that we will likely look back on as a significant milestone and our journey. When we launched the company eight years ago, we set out to be the first online seller of cars by building modern technology, a new optimized supply chain and integrating vertically to solve modern too.
Serve modern customer preferences and deliver the best customer experiences available.
And when we went public four years ago, we spoke of our most mature market of Atlanta as a proof point that we could build a sizable business given its 1% market penetration.
And we set a midterm goal for the company to reach 3000 dollar GPU.
And two years ago at our analyst day, we outlined the audacious goal of becoming the largest and most profitable automotive retailer a buying as many cars from our customers, we were selling and up selling more than 2 million cars per year.
Today, we are the leading online seller cars by a wide margin and for eight years, we've been the leading the leader and providing the best customer experiences available and buying a car today, we have over 100 markets above 1% market penetration for seven consecutive years, we've grown GPU by $400 or more and in 'twenty and 'twenty, we exceeded our $3000 GPU goal for a full year and hit.
4000, and our best quarter today.
Today, we are the second largest seller of used cars and the country, marking the final milestone on our path to becoming the largest and we've levered EBITDA margin for seven consecutive years, demonstrating significant and consistent progress on our path to becoming the most profitable.
And the second half of 'twenty and 'twenty, we bought more cars from our customers and we sold to them.
And we are celebrating our third consecutive year of being the fastest growing automotive retailer and the country lighting, our path to selling more than 2 million cars per year.
Over our life as a company, we have set goals and we have hit them.
And we have many more tools in front of us, but before diving into more detail about where we are now and how we plan to continue hitting our goals and the years ahead I want to talk for a moment about what got us here.
Our engine of growth has been incredible people with high ambition boundless energy and discipline who've chosen to care, a little more than most who learn and get a little better every day, who feel like they're part of something and who have fun along the way. This has always been a close group and we are proud to be a part of for 'twenty and 'twenty drew it's even closer and made us even prouder and we came into the year positioned for another year hype.
Growth before rapidly transitioning to a defensive posture when the pandemic hit and rapidly reverting back to growth posture as demand shifted and our direction.
<unk> made those adjustments manage through three waves of Covid and delivered another year of being the fastest growing automotive retailer in the country, while simultaneously growing GPU and levering EBITDA margin.
When we moved to a defensive posture our team stuck together, we manage through the pandemic without a single lay off and without furloughs.
And when we reduced hours for our operations teams. Our team came together, we created the wall and this together fund with contributions from hundreds and hundreds of people throughout the company that generated sufficient funds to ensure that the carvana team members that were impacted by reduced hours were still able to maintain over 80% of their take home pay over the entire affected period.
To every member of our team. Thank you you have an unbelievable amount to be proud of.
So where are we now and where do we go from here.
And the short term as a result of the accelerating adoption of our model and the strength of our customer experiences and our brand we have far more demand and we were able to satisfy with our current supply chain.
As evidence of this demand in January we grew sales by 80% year over year and did so with just half the immediately available inventory that we had a year ago.
This demand paired with the operational stresses of three successive waves of Covid have led to constraints across our operational chain, but given that they're most pronounced and hardest resolved and our irc's, we will focus our comments on our progress there.
We opened four Irc's and 2020 plan to open two more by the end of 2021 and the team is working at Mach speed to rent hiring and training to catch up to demand as quickly as possible.
Since December we've increased production by 40%.
And the medium term, we are working even faster than before to prepare the business to handle the demand and ham.
And with the demand and 2022, and we plan to open eight additional irc's, bringing our total irc's between now and the end of 2022 to 10, and bringing our total facility capacity to $1 million to $5 million per year at that time.
We're also scaling our logistics network capacity and capabilities further and making additional investments and technology to make our customer experiences, even better and make us more efficient and enable us to scale more quickly and the long term. The plan remains the same we built a platform that delivers the best customer experience is the best unit economics and is the most scalable this is a powerful combination.
We got here with execution innovation and ambition execution allows us to cover ground along our path innovation allows us to uncover additional opportunities and ambition and keeps us charging forward and we are charging forward the opportunities in front of us are broadening and are even bigger than they were in the past fully achieving our potential will demand that we continue to improve that we move even faster.
Our ambition is only growing but we must also maintain focus to move fast we will continue to prioritize growth and we must also stay disciplined to continue demonstrating operating leverage we will do all of that while always keeping our customers at the center of every decision, we make and while delivering to them the best customer experiences around and we will get a little bit better every day and have fun and along the way.
It'll be hard all important things our teams up for the challenge the March continues March.
Thank you Ernie and thank you all for joining US today, we're pleased to report another year of strong growth in both retail units and revenue.
Revenue totaled $5 6 billion and increase of 42% and retail units sold totaled 244111, and an increase of 37%, making us the second largest used automotive retailer and the U S.
For the fourth quarter retail units sold totaled 72172 and increase of 43%.
Total revenue was $1 8 billion and increase of 65%.
Our exceptional growth and 2020 was driven by rapid growth within our market cohorts.
This strong growth overpowered COVID-19 related headwinds and our significant supply chain constraints.
And Q4 or 2013 to 2019 cohorts grew retail units sold by 40% and our oldest cohort of Atlanta grew by 12%. Despite an industry wide decline and used vehicle sales and our election not to run our cyber Monday promotion this year.
Our growth accelerated as we exited the year with our 2013 to 2019 cohort is growing by 75% in January and our oldest cohort of Atlanta growing by 45%.
In 2020, we completed our seventh consecutive year of $400 or more and GPU improvement and our seventh consecutive year of EBITDA margin leverage.
Total gross profit per unit for the year was $32 52.
Our growth and GPU was broad based including increases of $132 and retail 43, and wholesale 134, and finance and 90 and ancillary products.
Our GPU performance was bolstered by buying cars from customers.
In 2020, we acquired 204000 vehicles from customers and increase of 95%.
Total GPU in Q4 was $33 79 and increase of $549 year over year.
Sequential changes and GPU were primarily driven by retail GPU, which saw approximately $300 of normal seasonal depreciation $100 of higher than normal seasonal depreciation and $200 of transitory costs, primarily driven by rapidly ramping our recent demand capacity and the midst of the third wave of COVID-19.
We expect these transitory costs flow into Q1, but to moderate beginning in Q2, as we ramp our new <unk> and move further away from the third wave.
And 2020, we took another meaningful step forward and our finance platform and Q4, we successfully completed our first SEC registered securitization selling $405 million and principal balance and contributing to a $421 increase and finance GPU year over year.
EBITDA margin was negative three 9% and Q4 and improvement of 4% versus the prior year, reflecting gains in both GPU.
And SG&A leverage.
We ended the year with $1 7 billion and total liquidity resources, giving us significant flexibility to execute our plan.
In 2020, we opened 120, new markets, bringing our year and total to 266.
With these new market openings, we now serve 74% of the U S population up from 67% at the end of 2019.
We will continue to expand and 'twenty 'twenty, one and expect to serve 78% to 80% of the U S population and more than 300 markets by year end.
And 2020, we also made significant progress scaling our vehicle production capacity and this continues to be and area of focus for the business.
We added four inspection and reconditioning centers and 2020.
Bringing our annual production capacity at full utilization to over 600000 units at year end.
We expect to open two <unk> and 2021, eight and 2022, ending 2022 with more than 1.25 million units of annual production capacity at full utilization.
Our eyes are squarely focused on achieving our goal of selling more than 2 million units per year, and we will continue to maintain a healthy pipeline of future <unk> to support our growth.
As we look forward to 2021, we expect another strong year on retail units sold revenue GPU and EBITDA margin.
We expect an acceleration of growth and retail units sold and 21 and expect the level of that growth to be governed primarily by the speed at which we scale our production capacity.
We expect revenue growth and 2021 to be in line with retail units sold growth.
Finally, we expect total GPU and the mid three thousands and a small EBITDA margin loss in 2021, improving both metrics year over year, while continuing to invest for the long term.
Since becoming a public company nearly four years ago, we've made tremendous progress across all aspects of the business and achieved many major milestones such as achieving our first EBITDA positive quarter. This year.
Since 2017, we are consistently rapidly grown retail units sold increased GPU and demonstrated operating leverage.
And we've made significant progress and are excited about what comes next thank you for your attention we will now take questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And the first question will come from Sharon Zackfia of William Blair. Please go ahead.
Hi, good afternoon.
Thanks for all of the commentary on the logistics and and the reconditioning and kind of what you're facing there I guess I'm curious as well.
And a lot of talk about stimulus checks and what that may or may not have meant to January of this year.
I know you talked about January and have you seen trends continue strongly into February and then as you think about delivery times and and I think this has commented on and the shareholder letter.
What is the kind of optimal delivery time and be aware of that line and the sand, where the customer starts to bulk and and looks elsewhere and could you give us some idea of what delivery times are now versus maybe pre pandemic.
Sure.
And so.
So January 1st with respect to stimulus I think it's hard to disentangle, probably all the different things that had been going on stimulus did not result, and a large discontinuous.
Super noticeable bump in demand. So I don't think that we would assign too much of what we saw in January just stimulus I think instead, what we would assign the majority of the January strength too is just ramping up our production capacity.
As I said in my remarks, we ramped up our production capacity or excuse me production level by approximately 40% from December.
January and that unlocked additional inventory, which then very rapidly sold so I think that would probably be the driver heading into February I think from a demand perspective, we've largely seen the same february can be a bit of a tricky month, because theres really nothing about February that you would expect to be different from January with the exception of the arrival of tax season, which this year.
Has reportedly been pushed back a couple of weeks, although I think we're starting to see some evidence that it's showing up.
At least moderately over the last couple of days so.
Prior to kind of taxis and hitting I would say February looked a lot like January and just the same trends continued.
These trends are just that we've got a lot more demand and then we're able to satisfy given our limited inventory and so our focus is definitely on trying to ramp that up and produce inventories by far and away. The biggest impact but you also brought up delivery times. The rest of the supply chain is also impacted that obviously includes logistics rough.
And speaking year over year.
More recently over the last couple of weeks logistics has probably been on the order of kind of deliberate and probably on the order of 40% give or take longer than they were a year ago.
I don't think that Theres, a magical moment, where delivery times get too long and that starts to materially crimp sales.
I think it's much more of a continuous effect and I think that part of that increase in delivery times is just due to the underlying strain and ramping the business as quickly as we are although I think a very meaningful portion of that strain has also just been the very large storms that we saw in the middle of the country over the last week or two which we would expect to be transitory and we would expect to work out of over the next week or so.
And I guess I'll follow up I mean, knowing what you know now and at what point do you think you've got a reconditioning, where it needs to be you've got logistics, where they need to be and and we're not talking about the pinch points related to demand.
Sure. So I mean, I think I didn't get the high quality problem I think.
We've dealt with supply constraints many times throughout the company life generally speaking the form that takes is we'll see some supply side constraints and then we will resolve those over maybe a three month period or so I think 'twenty and 'twenty was pretty unique in the sense that we came into the year positioned for our largest growth year ever and.
And then we were hit by the pandemic, we rapidly pulled in.
And then kind of customer preferences shifted and our direction, we saw more demand and we'd ever seen before and we tried to rapidly catch up.
And then that was kind of overlaid with three successive waves of Covid, which obviously have.
Kind of impact across our entire supply chain. So I think this has been a difficult year and I think we can almost think about it as being kind of three separate events that led to some supply side constraints I think the team has done an incredible job working out of all three of those different events and I think that's evidenced by the growth that we saw and the year. Despite the pandemic.
And then obviously the growth and we saw in January is tremendous and I think at different points and the year, we kind of worked out of some of the supply side constraints start to build inventory again and then we got hit with the next wave and we had to kind of go back and start again, so I think as long as we head into a more normalized world I think will work out of this pretty quickly.
Put some materials together and the shareholder letter.
And that are hopefully helpful about the IRC capacity that we're building.
That's facility capacity, which is different than active.
Production capacity is producing cars, but we're clearly building for a very large future and we're trying to make sure that we get in front of ourselves because when we look at our supply chain.
The longest lead time components of that supply chain is building the physical facilities to do the reconditioning. The second longest lead time is.
And the training and hiring all the people to turn that capacity into active capacity, but we're working very hard to get in front of it and I think we feel incredibly up the plan and then I would just reiterate this statistic again.
<unk> total production by 40% from December to today is a pretty incredible move and and I think as I said the team has done an unbelievable job in light of the circumstances to rapidly catch us up.
The next question comes from Jack Spade of Wells Fargo. Please go ahead.
Hey, guys. Thanks for taking the question so the quarter to date commentary.
And for January would suggest that you're tracking at about 6400 units per week and if we look back since you've been a public company you've been able to desktop that weekly run rate every single quarter. So when I think about the commentary around capacity and production and inventory constraints is there any.
Thing out there besides the things that would preclude you from continuing.
To ramp up that that weekly unit run rate.
And that's the first question could you could you talk me through that.
Sure. So we put some commentary and our outlook about the expected differences and shape this year.
And I think that kind of cuts directly to the point that you're making.
The demand that we're seeing I want to just reiterate is very very strong we're clearly seeing materially more demand and then we're going to be able to satisfy.
This quarter and probably for the remainder of the entire year and we're going to work very hard to try to catch back up.
And I don't think we want to dive into weekly sales rates, but kind of the numbers that you're pointing to you art unreasonable I think it's important to look at those numbers in light of the graph that we provided around immediately available inventory on the website and our shareholder letter where as of the end of January we had 9500 cars that were immediately available for customers that means cars that customer can purchase and.
We're ready to be loaded on a truck right when the customer purchase them.
And so selling that number of cars against AR and inventory of 9500 cars is an extremely rapid turn and there is just something to kind of a natural limit of how quickly customers can get on the site find the car they want and start to go through the purchase process. So I think our expectation.
Is that probably relative to previous years sales volumes will be pushed a little bit into the future, partially that's going to be because of taxes and being pushed back a couple of weeks, but I think the bigger impact is probably just us catching up to demand and catching up our production capacity and so I think you've seen these big discontinuous moves and the past.
And those really big just continues moves have been supported by a much larger ready inventory than we have today and so in order to take as big of a discontinuous step we would have to be turning inventory extremely extremely quickly. So it's likely that and the immediate term the step up will not be as severe but then because we have excess.
Demand as we move through the year and catch up production, we may see kind of a more beneficial shape later in the year.
Got it okay that that one makes sense and then mark as I look at your business today, you sold about 244000 cars last year and.
And it took the and operating expense base of about $1 1 billion.
Support that so as I look to 2021 can you talk about incremental SG&A per unit and walk me through how to think about the SG&A step up and what is expected to be a fixed cost, which I guess, we can call and investment and then how much would be variable costs.
Sure so.
As you sort of alluded to as we've grown the business.
We've been able to show leverage in SG&A, and we think that'll continue to be the case going forward as we March through our long term model as we take a narrower and narrower view into 2021.
I think one weighted that we think about this.
Question of Leverages is through our cohorts.
Where we've definitely seen leverage overtime as cohorts age I think that that happens and several of the line items one I think.
And that we've historically seen advertising leverage and our cohorts as they age as word of mouth grows as awareness grows and the cohorts. We've provided some data on that and the shareholder letter as it relates to some of the other expense line items.
We've also seen leveraging the cohorts there.
That takes the form of benefits from scale I think it takes the form of.
Benefits of utilization and logistics network.
And then there's also benefits.
As we scale of spreading some of our fixed cost base out over more and more units and more and more and more markets and so I think we've seen lots of great trends and leveraging the business.
Provided some guidance on EBITDA margin, where we expect another year of improvement.
We think that will be.
Coupled with improvement in SG&A as we March toward our long term model and.
And I think we feel pretty good about the path of Rob.
The next question comes from Michael Montana of Evercore ISI. Please go ahead.
Great. Thanks for taking the question.
First one I had was just to clarify a little bit you know and the guidance you had mentioned a small EBITDA margin loss does that basically mean.
Down low single digit EBITDA margin or were you talking about the actual dollar amount itself.
So I think the.
I think what we were guiding to is.
Mid 3000, and GPU and a small EBITDA margin loss.
I think the.
I think that that again will be driven by some of the sources and I was just.
Describing and response to Zacks question, and I think that will be our eighth consecutive year of EBITDA margin improvement.
Okay. Thank you and then.
The other question I had was on.
Total revenue growing roughly in line with retail units sold I was thinking it might be faster given the success that you've seen and wholesale and.
And so Larry and then just the Asps.
Asps being up year over year.
So I'm just wondering if there's something there that I'm missing that we need to consider as well on some of these other lines of business.
Sure. So I think you're hitting on a couple of good points there.
And I think the major drivers of revenue or vehicle Asps, and then wholesale and other revenues and.
And we've obviously made progress in all.
All of those really the latter two and I think one.
That I would make is we've seen asps drift up here, a little bit and the back half of the year part of that is just the supply and demand and our.
And our purchasing.
Algorithm is responding to what we're seeing and supply and demand part of that is also.
And intentional to a degree.
As we are constrained and reconditioning centers, we've tended to shade, a little bit more toward.
Some cars that may be required less reconditioning on occasion. So that's been a driver I think the gains that we saw and asps and the back half of the year, we expect to moderate a little bit and 2021 and so the balance of all of those things.
What led to our guidance.
The next question comes from David Palmer of True Securities. Please go ahead.
Thanks. This is Robert Taylor on for Nevada, Congrats on the good on the on the.
Great performance and a quarter a couple of questions. So can you just reiterate just discuss about what may and Atlanta, which is one of your first markets what made that market.
Very attractive to enter and then stepping back as we speak broadly about the rule of 40 and the Internet space, we've seen that become the rule of 50 to 60 day rule 70, and Carvana has showing really great topline growth and improving EBITDA margin. So curious how you're thinking about that journey.
<unk> phenomenon moving forward. Thanks.
Sure well first of all thank you I can tell you, we're internally debate and good quarter and great quarter. We appreciate your own with great quarter there.
Thank you for that.
And what landside distracted market to enter that's going way back and our history. The short story is basically we had some kind of operational benefits to scaling out of a preexisting reconditioning center in that area and so that's what kind of led to is choosing that market there was nothing.
Unique about the market that we thought would uniquely fit our model. It was more about just operational ease.
On the cause us to choose to go there and then obviously that market has responded really well ever sense and I think we put some commentary and the letter.
90% of the markets that we've launched our continuing ramp even faster than Atlanta did at the same point and its life.
And I think there was there is nothing special about the choice of that market. It's been a great market for US. It's continued to grow and had a great January growing at 45% and <unk>.
The other markets are performing very similarly.
Mark do you and I hit the rule of 40, 50, 60, I'm not sure Ed moving it up.
Sure Yeah, I mean I.
We're very happy with the comp too fast growing internet companies. Thank you for that I think historically.
We fared extremely well on any rule that you could put together I think.
Our growth has been historically strong compared to other ecommerce companies.
I think we'd continue that strong growth, while also showing significantly.
Narrowing EBITDA loss margins. So I think we continue to fair farewell and those metrics were going to look to obviously continue to make progress on both topline growth and simultaneously on EBITDA margin leverage and which is something we've been able to do for seven consecutive years now so we're going to keep.
And to keep that number as high as we possibly can.
The thing that I would just say is as I try to infer what the underlying drivers of that rule are I also think our business has the unique benefit of having visibility into the underlying cohorts as well and we shared data and the third quarter that our oldest cohorts, we're already approaching our long term EBITDA.
Target range and that several of our cohorts were positive from EBITDA perspective, So I think that really does help to clarify that kind of that while we're making all this progress and constantly narrowing our EBITDA margin losses, we have shown negative EBITDA over time, but that kind of investment is clearly going into the growth of the business.
Understood. Thank you.
Thank you.
The next question comes from Rajat Gupta of Jpmorgan. Please go ahead.
Hi, good evening.
Good afternoon, and thanks for taking my questions.
And I just had a couple on like the GPU.
The 200 and $200 transition any impact on retail GPU and the fourth quarter.
What is assumed for <unk> and 'twenty 'twenty, one mid 3000 guide with respect to bad does that all.
Come back do you still have an element of that flowing through.
And to the guidance and just related to me.
Can you give us a sense of like how that mid 3000 breaks up narrow across across the three different businesses.
And we help them and I have a quick follow up.
Sure, yes, so as it relates to the transitory costs, we do expect them to flow into Q1, but then to moderate beginning in Q2 and the moderation comes from now as we ramp our new <unk> and as we move further away from Covid and the third wave of Covid and we expect those impacts to moderate so that was.
On your first question on your second question.
Consistent with our past.
Outlooks that we've given for the year, we don't plan to break down the mid 3000 and GPU into various components.
But I think we've given given a pretty good sense there.
And the progress that we expect to make next year and I think we're feeling really good about that total GPU progress not unlike EBITDA margin next year will make our eighth consecutive year of improvements and total GPU and we're feeling really good about that.
Got it.
That's helpful.
And just on the February farm and you talked about.
Trends continuing late January.
And I'm not sure if I missed it but was there and the impact from the adverse weather.
And what's federally or despite that you'll continue to see the same level of grocery store in January and just just wanted to quantify that point. Thanks.
Sure, Yes, so I think there are several concepts and there so.
In terms of underlying demand, we've seen underlying demand be very consistent.
Throughout the early part of this year so far.
In terms of sales.
<unk> seen kind of the demand for sales and very consistent but there have been some delays related to the storms and middle of the country. We expect to resolve those over the next week or so.
As it relates to year over year growth that will be impacted.
By the storms that we saw which impacts the timing of sales, but then also by the timing of tax season.
Which is the major catalyst for growth that happens.
Sometime between kind of mid February and mid March and we expect to be later this year than last but.
As it relates to kind of modeling underlying demand and getting that signal for what that implies for the strength of the business and what we expect the year looking forward, it's been very consistent so far this year.
Got it that's helpful. Thanks, and I'll get back and Kipp.
Thanks.
The next question comes from Edward <unk> of Keybanc capital markets. Please go ahead.
Hey, good afternoon, and thanks for taking the question I guess two for me first.
The consumer sourced vehicles looks like you guys continue to push penetration higher just wondering if you're starting to get to the point, where the consumer potentially pricing against some of your competitors are you having to pay more for vehicles that your consumer sourcing and then maybe just as a second question.
And now that we're in a rising rate environment, how should we expect that to flow through the P&L, particularly in light of the fact that you are doing more of your securitization yourself and kind of net those two out thank you.
Sure.
First of all and on buying cars from customers that business, obviously continues to do incredibly well and grew.
At 96% for 2020, I do think the most impressive statistic there is that in the fourth quarter of the cars and we sold to customers, 65% had been thoughts and customers just to put that in context, and we had our analyst day two years ago, we set out a long term goal of 38% to 52%.
So for roughly two thirds of our cars that we sold to customers. We bought from other customers, that's a pretty remarkable number and something that we are.
Extremely excited about as it relates to the implications for the future and the remaining opportunity. Please keep in mind.
The retail side of the business, we're still about <unk>, 7% of the entire market, we remain very very small compared to the business and on the purchasing side of the business.
I'll be a little bit bigger than that but not materially bigger than that and those two businesses are largely independent they kind of intersect and move together as it relates to trade and when a customer simultaneously buys and sells a car but.
But the majority of each business runs independently. So I think looking forward we expect those.
As to grow independently to some degree.
Second to basically race against each other in moments of strain.
We are constrained and our logistics network, we will tend to favor retail transactions to vehicle purchasing transactions and our delivery scheduler. So that can have some impacts in the near term and kind of makes the businesses interact together, but over the medium and long term, we don't expect that to be a.
A big driver and we're just going to work to grow both those businesses as fast and we possibly can as we think that they are mutually reinforcing and and.
And enormous opportunities independently.
As far as selling loans goes there is a lot that goes into that I would say generally speaking over any kind of.
Yes.
Medium range period of time kind of consumer spreads.
Kind of interest rates that we would fund that and consumer facing rates have spreads that are fairly consistent and so I think generally speaking the expected finance margin is very similar across time, and I do think and a lowering rate environment, sometimes those margin and get a little bit bigger for a quarter or two and then a raising rate environment. They can get compressed a little bit for a COO.
Or two but those impacts are generally relatively small compared to the entire finance margin.
I think kind of the directional impact you're pointing to is a reasonable factor. Although there are many factors, including just the underlying improvement we've seen and that business over the last year or so.
So I think you can model that and but.
And I don't think it is a big contributor.
Thank you.
Thank you.
And next question comes from Chris Motl Glory.
Zane BNP Paribas. Please go ahead.
Hey, guys. Thanks for taking the question.
Of course some of it.
And I wanted to ask you about inventory selection and web site. Clearly there is very prolific levels are today, and it's outpacing our ability to scale production.
For my observations you've been testing third party partner inventory on the website for at least a year or two now.
Can you talk about any initial results that <unk> seen what are the benefits and tradeoffs with Carvana and a third party dealer from this arrangement and then from an investor standpoint, how do we evaluate the economic implications of allowing more third parties and their website.
Sure So there's a lot and there.
Let me start with it.
And any given quarter, we probably have 100 to 200 tests that we're running across the business. There is a much smaller set.
Of a potentially very large test, but we have many many tests that we're running we have depending on how you break it down probably 60 to 75 different independent product groups that are made up of and.
Engineering and product designers and visual designers and.
Analysts and infrastructure developers and database developers that are all running kind of and their own area and building their own technology. So there's always a lot going on and in general our policy is going to be to just discuss things.
We believe we will have.
Early to have the potential to have material impact on our P&L and the near term and prior to that we will probably just choose to not discuss.
And these underlying test too much.
That said the particular tests that you are talking about we are going to be moving into a second phase of that test to test it and slightly higher sales.
We still expect it to be.
Small and to not have material impact on the business to the extent that changes and we will start to discuss it with you more.
But we will be doing a little bit more of that as you may see some more partners and more inventory showing up there.
And then a question about how and how we collectively can evaluate all the opportunities that carvana faces and generally speaking there are many loans in many ways that we think about these different opportunities, but the lens that we use the most often.
We're always trying to pick.
The opportunities that we think offer the best customer experience those compelling unit economics, and the most scalability and we're trying to make good choices and the trade offs of those three dimensions.
And that's how we will determine where we put our energies and.
And oftentimes it will be many tests going on and the background, they're helping us to understand what some of those tradeoffs may be with some of the things that we could invest more energy into.
And that's really helpful. And then just a follow up is when I follow up on the Atlanta performance is really eye popping the 24% to 45% growth in January.
And what would you attribute the acceleration when I look at the two IRC as you opened and west Memphis, and Orlando they seem to flank Atlanta from a geographical perspective is it reasonable to think that Atlanta somebody earlier markets disproportionately benefited from these IRC is and are there.
And any other markets, where you feel like when you open IRC this year.
And sustaining similar benefit.
Sure. So I think theres a lot going on there let me start with what I think is most important and then we can talk about some of the other impacts as well the most important impact I think by long way, we talked a lot about the constraints that we face as we kind of dealt with Covid and then try to catch up and these three successive waves and I think the right way to look at.
And kind of the back three quarters of 2020.
Is is that we really arent seeing demand signals and we look at the markets. What we're really looking at is we're looking at the way that we're allocating.
And the very constrained supply that we had so if you see one market growing faster than other market.
And that's really telling US is just that we were constrained and total sales and the market grew faster had even more aggressive underlying demand and the market grew a little bit slower and so therefore more of the cars were shifted in that direction and so I think when you're trying to assess demand growth over the last nine months I just it's difficult looking at sales data because we <unk>.
Have been so severely constrained so that I think is the biggest thing and then I think that that.
And while we still are constrained I think what we saw in January is we saw the benefit of this 40% increase in production that happened from December to.
Now that has been very helpful. So I think and Thats, probably the biggest underlying driver I do think that in general as we've opened inspection centers near markets. Those markets have benefited from that because those cars are closer by and there's.
For offense those customers will buy them.
Because the delivery times are faster. So they may they may have more demand for those cars and customers and other market. So I think thats an impact and then we also launched a vending machine and Atlanta recently, so I think that that is probably an impact as well. So I think theres a number of things going on but I do think the most important is just kind of that while we remain very very supply constrained I think slightly loosening those can.
Strength was helpful and January.
The next question comes from Nick Jones of Citi. Please go ahead.
Great. Thanks for taking the questions.
And the demand for consumers and sell cars directly to you exceed your original goal and I guess, what have you learned and can you revise those goals potentially or where do you think.
Both ratios can go overtime and customer source ratio and then also the ratio as a percent of retail sold.
So I think let me start with how we how we arrived at our original goals. Our original goals were arrived at by looking at market leaders over time, and what they had been able to achieve.
And kind of using the heuristic that that was.
A good target for us to aim for.
And I think the results that we've seen over the last year are really really exciting and we think just speak to the extreme simplicity of our offering from a customer experience perspective, but also to the underlying strength of the model and when we've got a model, where we can sell cars across geographies and across makes and models and across.
The price spectrum and.
And we've got very efficient ways to sell even wholesale powers. It puts us in a position where we can be a very high quality buyer and so we've seen a lot of success.
And that business so.
So I think that we're excited about where we are I think going forward.
There is no until we get extremely large and there isn't necessarily a fundamental.
Ratio that we would shoot for.
With respect to cars bought relative to cars sold I think we will seek to grow both businesses as quickly as we possibly can because we set up the business to do so if we're buying.
Significantly more cars and we're selling then we have the capacity to sell the excess wholesale.
We're not and we have the capacity to buy cars from other channels and so we're just going to look to grow both businesses as quickly as we can independently.
Great Great and one follow up on I guess on <unk>.
And you expand to cover more population.
Should we think about that and that theyre going to be some maybe large new markets are these mostly adjacent where may be you know theres already kind of high coupon and brand awareness.
Okay.
Sure. So I mean I think.
<unk>.
And.
Like always it'll likely be a mix of both I think the way we've historically expanded our network after launching in Atlanta, and 2013 as sort of a contiguous.
Expansion out from from Atlanta, and now crossing most of the U S.
And Theres still some room for us to expand there is still some fill in markets available to us within the existing footprint of our network and so we're just going to keep marching forward here.
Toward our goal of.
Near nationwide coverage.
The next question comes from Ron Josey of JMP Securities. Please go ahead.
Thanks for taking the question, maybe one bigger picture, one and then and then more specific.
And where he led a lot of and some of that.
Hey, Ron shoot cannot I apologize can you hear me. We lost you had more specific if you could start though okay.
Sure.
Alright, well high level question and then one more specific question so.
And it gets to do has to do with just more demand and supply, but then alleviating that in January so just bigger picture.
Why is can the right number and the next two years for IRC is if the goal is $2 million why not just go after that build more in 'twenty, one more in 'twenty two et cetera.
You're clearly seeing the benefits here in January when more supply came on and then and then the second question is it looks like and advertising rose, 40% in the quarter and so mark.
And is basically demand outstrip supply can you just talk a little bit more about your advertising plans and just making sure that.
Awareness grows that you've got the supply to sort of back it up thank you.
Sure.
So at a high level I think we I think the right way to think about how we're drilling IRC capacity is basically as fast as we can and so.
That is a relatively long lead time undertaking you have to find different sites around the country and the areas, where you want to be you have to negotiate transactions you have to work with the city to get your zoning approvals you have to then.
Build the physical sites and then you have to.
Hire and train all the people and those sites. So I think the simple way to think about that as we're going as fast as we possibly can and I think that we recently have added more capacity than ever and our history and our plan over the next.
24 months is to add significantly more capacity and we've ever had and our history and we're working hard behind the scenes to to fill in a robust pipeline behind that so in general I think.
We don't intend to miss on the not ambitious side.
We're going to be we're going to be working really hard to try to build as much capacity as we possibly can.
Yes, and then on the advertising point, it's an interesting question that we always face whenever we get constrained and operations.
That question is hey, do you start to pull back in certain areas of the business.
And while you are constrained and.
I think when we're when we're balancing those questions.
We always first and foremost take a long term view I think we.
We want to continue to build our brand.
We want to continue to provide.
Great.
Experience of the customer and great value to the customer.
And we're going to and we're going to take Youre going to look at those things for a long term lens.
In addition.
As Ernie alluded to we're also we have many teams that are working as hard as they can do an amazing job working to scale. Our production capacity scale this up and the logistics network and the other parts of our supply chain to help us meet all the demand that we're seeing and so that's.
And that's where we're really focused and we know we have a tremendous amount of demand and we're working as hard as we can to make sure that we can fulfill at all and maybe just a little additional color there Ron and case helpful. I do think that we try to think a little bit differently about brand advertising and direct advertising and I think when we are severely constrained we will pull back a bit on some of the kind of direct response.
Rising.
We still got a really long way to go and brand advertising based on our internal surveys that we've done we still have we only have approximately 10% unaided awareness nationally. So theres still a lot of room to go there and.
And as part of the long term view, we do try to balance those things, even though we recognize it can look like.
Net of a conflict and the near term when we're clearly.
Constraint on the supply side and already have an excess of demand.
Super helpful. Thanks, guys.
Pardon me. This is the conference operator, the question queue with and it certainly cleared out if you were waiting to ask a question. Please press Star then one at this time to re enter the queue and please wait momentarily, while we reassemble that roster.
Thank you for waiting and our next question comes from John Cora and tolling of Jefferies. Please go ahead.
Hi, Thanks for taking my questions.
And capacity constraints should we think of the 80% growth in January as a decent proxy for what unit sales could have grown and Q4 had capacity not been a constraining factor and I have a follow up.
I wouldn't be a little careful about diving into too much.
A hypothetical but let's let's just talk about January because we've at least provided the underlying data for that we grew 80% in January and we had half of the available inventory that we had a year before.
We also have longer delivery times, and we had the year before so I think the underlying demand in January we believe with sufficient for sales to have grown materially more than they did in January.
And I think kind of on either side of that that is likely true.
And so.
I think that's the right way to think about it and as we look forward. We feel like this is really a question of how quickly can we ramp up production capacity and that's going to be what drives.
Our sales growth there seems to be.
Significantly more demand and then we're able to handle today.
Great and can.
Can you help disaggregate, the mid 3000, and GPO GPU expected in 2021 between retail wholesale and finance and other.
Yes, so consistent with our past.
Outlook that we've given over the last several years.
Break.
Total GPU components out and our guidance, but we hope that the.
And the mid three thousands total GPU guidance for the year will be helpful.
Okay. Thank you so much.
The next question comes from Brian Nagel of Oppenheimer. Please go ahead.
Hi, good evening and nice quarter congratulations.
So I apologize if it makes a bit repetitive.
With regard to the supply constraints.
You talked about and your letter and you and your comments here.
And it's somewhat January show sales improved significantly.
You referred to supply constraint and so is there a is there a delineation between.
And within your control and what Youre.
Would you are in the process of building out versus external factors that may be persistent for a while longer.
Sure I would say in our control would be the characterization of our supply side constraints and so just to be very clear, what we mean by that our supply chain means buying cars. It means transit cars to reconditioning centers.
Putting roughly $1000 and parts and labor into those cars photographing them preparing them for sale listing them on the website.
Our customer calling into two and advocate and asking questions about the car and then going through the purchase process.
And then that car being delivered to the customer that is the some of the chains and.
So I think the places where we historically have seen.
<unk> strengths are in customer care, the advocates and logistics and in the Reconditioning Center today. They are clearly most pronounced and the reconditioning centers and.
So thats, where the constraints are and and we collectively refer to that supply chain as supply side constraints, the constraints or not and just acquiring vehicles.
And generally we have ready access to vehicles.
Okay.
Our final question will come from Adam Jonas of Morgan Stanley. Please go ahead.
So ernie once upon a time people used to describe Amazon as an online book retailer.
Today Carvana has described as an online used car dealer.
Now look I think one of the themes from this call as you guys are really constrained.
To meet demand and so this question, obviously is quite long term and I'm not asking you to break.
Major new information on this call right.
But.
Could the Carvana vertically integrated software and logistics.
That form that you've built and are growing.
Could that have used and addressing.
<unk> or fleet management related markets.
Beyond just used cars, specifically, new or Mega fleet management stroke ride share et cetera.
So that's the big question. So let me start with this I think we are clearly constrained today and we clearly have an unbelievable opportunity in front of us.
Just kind of blocking and tackling and doing exactly what we know how to do we we have 7% market share, it's a $40 million year per year unit.
And a room to buy more cars from customers I think there is theoretical room to accelerate the rate at which customers turnover cars between each other and making the market larger.
But I do think that there is also no doubt that we have a lot of really compelling assets and I think there's probably lots of ways to think about our assets, but I think one way thats may be useful as to kind of think about.
And any transaction requires a customer it requires the transaction itself and that it requires.
Vehicle and I think when you think about the carvana business through that lens.
And of the customer is our brand, which I think we've built.
A pretty exceptional customer brand thats known for delivering great customer experiences and while there is still a ton of room to grow that and we're investing in it.
One of the better known brands now in automotive and so I think thats exciting I think when you look at the transaction I think we built a lot of technology that takes.
Very complicated vehicle purchase and makes it simple for our customer buy by kind of taking all of the things that go into purchasing a car and the surrounding transactions and just making that easy and so thats a tool set that we've built.
And then when you think about the supply side, we've got a supply chain that enables us to deliver a car to your customer's door with branded holler and a uniformed co.
<unk> team member to what we hope to be 80% of the U S population by the end of this year. So I do think that those are very very interesting assets and I think that as we think about the way the automotive the automotive industry at large evolve over the next decade, or so I think as you think about any of the opportunities there are many play.
This is where those assets or some combination of those assets may be and extremely important and highly differentiated part of various customer value chain and so I do think that it doesn't take a ton of creativity to see that.
Again, I want to reiterate the opportunity in front of US is really really large and I think that one of the great problems that we face and I think this is a very high quality problem as well is trying to find the balance between being extremely focused on the things that we know really well, but making sure that we are ambitious enough to take full advantage of the position, which we find ourselves and I think.
<unk>.
Our ability to manage that equation and to continue to move fast and continue to put space between us and others that are looking at the same problems that I think is going into being the story of carvana over the next decade. So we're aware of all that and we're trying to make smart decisions as we move forward.
Okay. Ernie if I can just have a follow up and then and then.
Just out here.
And as your Azure and no doubt aware there are a lot of new EV manufacturers entering the U S market and they all have one thing and comment they don't want to use franchise dealers right not at all.
They all want to go direct to consumer I mean, I count eight to 10 significant new Oems and the next three to five years and I'm counting 15% to 20 by the end of the decade and that that's a very open ended number.
I'm, just kind of and <unk>.
Guys as they come in to market their teaming up with partners I think sisters, using Cox from Manheim elusive to us and Clovis Lordstown, and I think camping World I mean give me a break so.
Again.
Okay could.
Could you confirm your super capacity constrained, but.
Is your team even at a high level entertaining discussions with this flood of new players that will need logistics and support and customer care support when they have products, but no way to kind of serve the customer.
Are there even advanced advanced discussions and not advanced.
Preliminary highly preliminary discussions at this time or would you care to avoid that question.
I think we're probably smarter to stick with the answer that we gave you. The previous question and then I would just reiterate that our supply constraints are generally in the reconditioning Center.
And generally where they are so anyway I appreciate the question.
I recognize that there are many opportunities out there and as I said I think it's something we got to do a really good job of over the next 10 years is finding the balance between focus and ambition.
And you Ernie.
Thank you Adam.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Great well. Thank you everyone for joining the call we really appreciate it and to the entire Carvana team.
Believable year. Thank you so much for everything you did this year through more at US then we could have possibly imagined and I don't think there will ever be a year that all work out of prouder and I Hope you feel the same way because you did an incredible job we start together as a team were and a great spot as a result, so thank you. So much talk to you next quarter.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.