Q4 2020 Shift Technologies, Inc. Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the shift in the fourth quarter and 'twenty 'twenty earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation.
There must be a question and answer session to ask a question day in the session you will need the press star one on your telephone. Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star zero I would now like to hand, the call. Vince you speak of today, Henry Byrne, Vice President of strategy and finance.
Please go ahead Sir.
Good afternoon, and welcome to the shift technologies fourth quarter and full year 2020 earnings call. Joining me on the call today are co Ceos, Georgia, Ericsson and Toby Russell and CFO Cindy Hanford.
During our remarks, we will make some forward looking statements, which represent our current judgment on what the future of May hold the while we believe these judgments are reasonable. These forward looking statements are not guarantees of future performance and involve certain assumptions risks and uncertainties.
Actual outcomes and results may differ materially from what is expressed or implied in any forward looking statements. Please refer to our filings with the SEC force full discussion of the factors that may affect any forward looking statements. We undertake no obligation to publicly update any forward looking statements whether as a result of new information.
Future events or otherwise after this conference call. During the course of this call we will be referring to non-GAAP measures of defined and reconciled in our earnings materials with that said I will now turn the call over to George.
Okay.
Good afternoon, everyone. Thank you for joining us today.
2020, without the airport, everyone Corporation's employees and consumers depending.
The pandemic disrupt paralyzed and was particularly challenging for those working on the front line items.
The operational team members at the same time, the pandemic accelerated the economists digital nation.
The only solution for buying and selling used cars and is well positioned to continue serving customers when many others couldn't.
On the cricket has been hard for every one of the last 12 months has made me content that the digital adoption in the used car market in the state and we believe should shift that shift is uniquely positioned to fight the needs to come.
In the fourth quarter, we delivered meaningful growth.
And the only on our top line, but also internally as a company in 2020, we prioritize topline while investing in the business.
With the strategic objectives.
The group because we pinpointed the way we can do better.
2021 will also be of high growth here and we are acutely focused on execution of.
The community we believe we laid the foundation for strong myself the open the near and long term, which is reflected in our guidance for Q1 and full year 2021.
I want to thank everyone for.
The who contributed to making 2020 the milestone year than it was for the company.
The way our business of adopted and grow when it makes the more excited than ever.
As we embark on the another record breaking year of a shift.
With that I'll hand, the call over to Toby to provide a detailed update on our Q4 performance in 2020 performance.
Thank you George and Hello, everyone.
Through the many challenges of 2020, we had shift and opportunities to grow our business and create shareholder value.
However, we completed our merger with insurance acquisition Corp, and connection with which we started trading as a public company.
At that time, we outlined our three core drivers of growth, which are two <unk>.
The increased penetration in our existing markets.
Expand our business to new markets and grow our ancillary product offerings to provide the additional support our customers expect while enhancing our revenue and margins.
In Q4, we made progress on each of these growth drivers, while strategic and tactical actions. We took have set the business up for significant growth and success in 2021 and beyond.
In many respects the fourth quarter, where the record setting period for the company.
We set new records for both units sold and revenue selling 4666, total new cars, and earning $73 4 million in revenue, representing 147 and of 168% year over year growth respectively.
It was also the first time in our history, where we've grown the business sequentially from the third quarter two of the fourth quarter overcoming the negative seasonal effects. We typically experience at this time of year.
That said the quarter had challenges some we anticipated others, we did not the primarily impacted our unit gross profit.
As indicated on our third quarter earnings call, we expected our fourth quarter results to be impacted by our significant use of third party reconditioning during Q3 and slightly less in Q4, as we work to increase and maintain our sellable inventory level following COVID-19 Lockdown and Q2 furloughs.
Throughout the second half of 2020, while we were very successful in acquiring and growing total inventory our sellable inventory of remained well below target levels since mid summer.
All of them are adjusted GPU came to $514 for the quarter.
Below our expected range.
Reconditioning cost in the short term trade off we were willing to make in our Q4 pricing strategy to attract customers and grow the shift brand despite lower than desired Sellable inventory were the primary drivers along with a few other dynamics that Cindy will discuss in a few minutes.
There were three core drivers of GPU that were focus areas for operational improvement in Q4 that I'd like to discuss.
The first operational focus of Q4 was to improve reconditioning.
This has paid off of very quickly.
Reconditioning throughput has increased dramatically and the benefits of that will be reflected in our Q1 GPU guidance that I will speak about shortly.
We have steadily and dramatically reduced our use of third party reconditioning in favor of our in house capabilities.
By January of 'twenty 'twenty, one we returned to pre Covid utilization levels were only 15% of our vehicles were processed using external reconditioning as compared to a peak of 45 per cent in August and September.
The remaining 15% of external reconditioning consist of inventory in new markets for which we use sublet reconditioning as well as certain specialty mechanical repairs on an interim basis as we build our reconditioning function in those markets.
We've been able to accomplish this because our hiring of reconditioning technicians has accelerated and we achieved the head count targets required to be fully in house in our core markets of January months ahead of schedule.
In addition, we brought on new reconditioning leadership that drove the significant operational efficiencies, including changes in our processing clubs scheduling and production time management, which has dramatically improved our performance.
As a result, we've seen dramatic week over week improvements and our in house reconditioning of capacity and steady cost reduction.
Well in October 2020, we were processing 250 cars of weekend house by the Middle of Q1, 'twenty 'twenty. One we are processing over 500 cars per week, and we expect to continue to grow our capabilities.
These reconditioning changes will continue to benefit shift throughout the year and for the long term as we continue to execute on our aggressive growth trajectory.
We believe there are significant efficiencies to be had in reconditioning in the future and are excited to see those coming into place.
We should note that as we launch our own reconditioning capabilities of new markets. They are frequently not fully efficient while the market growth, which can impact early profitability metrics.
As a reminder, our model assumes a temporary of GPU headwind from new market launches, while we scale build optimize our reconditioning operations in those regions.
Our experiences with reconditioning of 'twenty 'twenty further demonstrates that having in house reconditioning capabilities is a key differentiator the success for automotive ecommerce and doing so through our hub approach has the strategic advantages.
The second operational focus of Q4 was growing our sellable inventory.
By early December when we had greater confidence in our reconditioning operations ability to process more cars than how we started to invest significantly in accelerating our vehicle acquisitions.
The goal of this was the exit the low sellable inventory position we've been in since initial COVID-19 restrictions were lifted in the summer of 2020.
We have increased sellable inventory, 148% from the beginning of December to the beginning of March the.
The number of units we acquired in December was double the monthly average for the first nine months of the year.
While driving such rapid acquisition of cars in December required of higher marketing expenditure targeted at consumer car sellers. We believe this investment will pay off significantly in 2021.
In Q3 2020, our days to sell inclusive of time spent in reconditioning was very low at 37 days and while it was slightly longer in Q4 at 43 days he was still faster than our ideal.
We remain very focused on striking the optimal balance of speed of sale and maximizing GPU.
Now that our Sellable inventory position is more in line with what we need and sets us up for strong growth into 2021, we expect days the cell to be in the 48 to 58 day range throughout the year.
With a higher Sellable inventory base, we can less cars at the optimal prices, which has improved and will continue to improve our front end margins.
The third operational focus area in Q4 with growth in other revenue, which remains a key long term strategic priority to meaningfully increase our profit at all.
In the fourth quarter, we grew other revenue more than 300 per cent.
As we continue to increase our attach rates of ancillary products to our sales.
We continue to invest in these offerings, including F&I solutions to improve monetization per unit over time, increasing attach rate and driving gross margin expansion.
We are very confident in our ability to continue to drive improvements in this space.
The 791 per unit of F&I. We are reporting in Q4 is a meaningful improvement and represents 65 per cent year over year growth.
But there is still tremendous upside to be had here and we remain very excited about the opportunity we're seeing.
Through all of the ups and downs of the fourth quarter, we exited the year in a position of strength and in real time, we are witnessing the investments we made in 2020 bear fruit and our 2021 performance so far.
We are intent on communicating to the market of what we feel are achievable objective.
I will provide a high level view on our expectations for revenue and adjusted GPU on Q1, while Cindy will discuss details for both Q1 as well as the full year guidance in a few minutes.
For the first quarter 2021, we expect total revenue of 90 million to 95 million, which represents three times. The revenue. We did in Q1 2020 at 24% growth from Q4 2020.
On the adjusted GPU side, we expect to be in the range of $213 50 of more than two times improvement over Q4 of 2020.
As I mentioned, Cindy will later provide more detail on guidance for the quarter, including expected adjusted EBITDA for the quarter.
And how this fits within the context of our full year expectations.
In addition to the improvements of the GPU drivers. We also made important progress in other key areas with a very significant impact on our business of 'twenty 'twenty, one and for years to come.
As we've said since last summer building brand awareness is key for both growing our presence in existing markets and laying a strong foundation for new market expansion.
It is also highly cost efficient and delivers the lasting ROI compared to the alternative of digital marketing.
In Q4, we initiated this major transition in our marketing strategy, we began by setting up several test sales and deployed our creative brand assets through various channels in several California markets, including a multi touch brand awareness strategy Sacramento as a test cell the.
The results of our tests and enabled us to make critical strategic decisions about how to get the most leverage from our marketing investments.
For example interest.
Sacramento Test, we found that our cash in Q4 was about 50% lower compared to the blended average across all markets.
And the market unit growth rate.
Over the quarter outpaced shift total.
As a result of our successful testing we've begun deploying our new strategy highly concentrated on investing in brand awareness, including a national TV campaign that we are seeing resonates with customers and we'll build our brands for the long term.
While we expect our investments today to pay off in the long term, we've already seen very positive early indications for where we're heading.
Website visits and leads have seen a meaningful uptick since we launched our new strategy.
We're creating nonperishable brand impressions that are going to carry forward and benefit us throughout 2021 and beyond.
We do expect total CAC.
To remain high in Q1 as this is a transitional period for us, but we see a clear path to shedding a significant portion of the expensive digital media as brand awareness growth, bringing down cash over the course of the year.
Shifts platform is also well positioned to support of National brand awareness campaigns.
While the majority of our sales include an at home test drive, which we believe continues to be of major differentiator of our e-commerce product offerings are.
Our direct to consumer sales channel whereby consumers totally transact online without a test drive has grown substantially over the course of 2020.
Despite our hubs today being concentrated on the West Coast, we have delivered cars in the 41 states plus the district of Columbia.
This has been a core advantage of our omni channel fulfillment model.
While we remain focused on growth in our core markets and we think that our core markets will be the primary beneficiaries of our new marketing strategy.
We also believe our product is well positioned to provide additional leverage as we build the national brand and areas to which we will expand as we add new core markets.
Okay.
Turning to our market expansion efforts Q4 marks the beginning of the largest geographic expansion plan in the shifts history.
In late October, we launched the buyer market and Seattle, which solidified our presence on the U S West coast spanning board of the border from Canada to Mexico.
Additionally, in Q4, we launched the war seller markets, where we acquire select the cars only in Texas Dallas forth worth.
San Antonio and Austin.
Given the timing of this expansion these markets Walt the a meaningful growth driver in the first half of the year, but we expect sales levels to gradually ramp up.
Over the latter part of 2021.
As mentioned earlier when entering new markets. It's important to note that part of our launch playbook does utilize third party reconditioning.
In the beginning as we build out our in house capabilities.
'twenty 'twenty, one will be a pivotal year for building ships brand and our investment will be reflected in our marketing spend over the course of the year.
Our efforts to increase our brand awareness and geographic footprint will impact EBITDA in the near term, but over the long term. We believe this investment and increasing shift exposure will lead to success in growing our existing markets successfully launching new ones and yielding more favorable unit economics.
The final note on the business, we continue to make significant improvements to our product with a strong focus on helping the web and mobile app visitors find the car they love and making easy the purchase of car once they found it.
As a technology company by nature, we are constantly making major steps to improve on the machine that powers all aspects of our operations and our customer experience. We are committed to and believe that we are creating the best car buying experience for our customers, while continuing to be on the leading edge of innovation in the spa.
Yes.
We believe the companies who will thrive after the pandemic are the ones that use this period to try new things adapt and improve and the investments we continue to make into our platform all work towards that end.
We have learned a lot from the challenges of 2020 and are now moving forward to applying those learnings of 2021.
Seeing how our team remains solutions oriented has given us confidence that we have the right people in place the gross shift effectively we.
We have hired great talent in 2020, and we expect to continue to invest in our team hiring strong talent across the organization, including leadership and operations sales and finance.
With that I will now turn the call over to Cindy to review our financial results.
Thank you Tobey.
I won't walk through the fourth quarter results and provide additional color and then with the our first quarter and full year 'twenty 'twenty, one business outlook unless otherwise noted all comparisons are year over year.
In the fourth quarter revenue grew 168 per cent to a record $73 $4 million total units sold were 4666 up of 147%.
This included E Commerce, and wholesale unit sales growth of 134 per cent and 186% respectively and.
In addition to the unit growth. We also saw our ecommerce average sales price increased 14% year over year in Q4 to $18188.
This higher ASP. He is reflective of changes to our inventory mix as we work towards the distribution of inventory across the pricing spectrum.
While we have seen meaningful swings in our S. P. Throughout 2020 and expect this trend to continue it is important to note that we continue to provide the full spectrum of inventory to our customers.
<unk> lower cost of value cars.
Continue to differentiate our inventory compared to other e-commerce and offline used car branded peers.
Adjusted gross profit in the fourth quarter of 2020 was $1 $7 million or 2.3 per cent of sales as compared to 476000 or one 7% of sales in the prior year period.
The increase in adjusted gross profit was due to growth in our other revenue as a result of growth and of high margin F&I products, partially offset by gross profit loss in E Commerce.
Merrily as we had a temporary high usage level of outsourcing reconditioning in Q4, when we felt the impacts of COVID-19 restrictions on our operations.
However, as mentioned earlier, we have made significant improvements in our reconditioning capabilities and we have since returned to the desired levels of in house reconditioning.
Yeah.
Fourth quarter, adjusted GPU was $514 up from 335 in the prior year period.
While this was an increase year over year due to higher sales of ancillary products as Tobi mentioned it was below our initial expectations due to the impacts of higher reconditioning costs and low sellable inventory.
In addition, the reconditioning capacity constraints compounded by the COVID-19 surge in Q4 resulted in us taking more cost of wholesale than originally anticipated.
Create an additional drag on adjusted GPU for the quarter.
The benefit of this action was that we carried out aging inventory, which improved inventory of health heading into Q1, and Toby has already spoken to the improvements we've made the reconditioning in the period, so that today no longer stay similar strength.
Moving to expenses SG&A was $31 8 million in the fourth quarter or 43, 3% of total revenue as compared to $17 $6 million or 64, 4% of total revenue in the prior year period.
The absolute dollar increase in SG&A is primarily due to increased marketing spend as we made strategic investments to increase shifts brand recognition.
As well as higher personnel expenses as we've grown our team over the past year.
The decline in SG&A as a percentage of revenue indicates the power of the operating leverage we will achieve as we continue our rapid revenue growth throughout 2021.
Net loss for the quarter was $4 $5 million compared to $20 5 million in the fourth quarter of 2019.
Net loss includes a noncash net benefit of $31 million related to changes in the fair value of financial instruments. The.
This was primarily attributable to the change in fair value of the earn out shares that are held in escrow to be released the legacy shift investors upon the achievement of certain stock price milestones.
Adjusted EBITDA loss was $28 9 million in the fourth quarter as compared to $12 8 million last year, driven largely by the increase in marketing costs previously mentioned as well as increased general and administrative costs associated with being a public company, including legal recruiting and other professional service fees.
Which totaled approximately $2 2 million for the quarter.
While we expect to incur increased general and administrative costs as a public company when compared to previous levels as a private company. We expect to see a decrease of certain costs that are non reoccurring in nature, including recruiting legal and consulting fees on a quarterly basis in 2021 compared to Q4 levels.
Moving to the balance sheet as of December 31, 2020, cash and cash equivalents total of approximately $234 million in.
In the fourth quarter cash flow from operation were a use of approximately $39 9 million of cash. This use of cash was primarily due to building inventory to meet increasing demand.
In the fourth quarter, we used cash to finance the inventory versus utilizing our floorplan is the rate at which we were acquiring outpaced the rate at which we could get all the cars, Florida.
As a result, kashyap was meaningfully higher than usual in the fourth quarter. During the fourth quarter, we used $15 6 million to acquire inventory and made net payments of $6 6 million on the flooring line.
As of year end 2020, we had approximately $24 million of cash sitting in inventory.
Do not expect this to be an ongoing trend and we will look to leverage our flooring line more as we move through the first half of 2021. In addition, we paid off $25 million delayed draw term loan and of $6 $1 million of PPP loans during the quarter.
On December 24, we completed an exchange offer for publicly traded warrants of approximately 93% of total public warrants outstanding for approximately one 8 million shares of common stock and $7 2 million of cash.
We exchanged all remaining warrants in early January.
As of December 31, 2020, we had $83 9 million shares outstanding.
Now turning to our business outlook as Tobi mentioned for the first quarter 2021, we are guiding to total revenue of $90 million to $95 million, which represents three ex year over year growth and 24% growth from Q4 of 2020.
For adjusted GPU.
Expect to be in the range of 1200 to 13 50 more than two ex improvement over Q4.
We expect the adjusted EBITDA loss will be in the range of negative <unk> 33 to negative $35 million with the primary drivers being sustained high in market Opex during COVID-19 and the near term impact as we invest in our new marketing strategy to drive sustained long term growth.
To put this guidance in context of our expectations for full year 2021, we expect to deliver over $450 million in revenue of 130% increase over 2020.
We expect to sell over 20900 ecommerce units.
While predicting a S P as difficult as that metric varies based on inventory mix, our revenue expectations do assume that asps will come down in the coming quarters from a Q1 high adjusted GPU, we expect to come in above $600, representing a 19% year over year improvement over our full year 2020, adjusted G. P U of 13.
50 with substantial upside opportunity in F&I as we make certain planned vendor changes in each to.
We are still trending on track for our targeted mid term adjusted GPU of $2500.
Finally, we will continue to see operating leverage as the scale and expect adjusted EBITDA margin better the negative 25 per cent for the full year, demonstrating continuous improvement and a range.
Adjusted GPU and CAC metrics from where we started in Q1, while our topline results and outlook reflect the demand for ships product offering our profitability metrics reflect the reality of managing a high growth company and the challenges of operating in COVID-19 environment.
We expect 'twenty 'twenty, one to be a big year for not only investing for future growth, but also continuing to pursue improving our GPU and establishing operating leverage as we scale the business.
With that I will now turn the call back over to George.
Thank you Cindy and thank you Tobey.
We remain focused on what will drive <unk> growth over the long term.
The brand awareness growing our presence in existing markets.
Spending into new market and driving F&I.
On behalf of the board and the management team I want to thank our employees for their tremendous efforts and dedication in 2020 throughout the year of ups and downs of Mint.
And that make the.
The hard work is paying off and we continue to lay the foundation for long term success.
I would also like the thank our partners and shareholders for their support.
Operator, please open up the line for <unk>.
<unk>.
Thank you ladies and gentlemen at this time I'd like to ask the question you will need to press. The Star then the one key on your Touchtone telephone to withdraw your question press the pound key please standby, while we compile the Q&A of us term.
Now the first question coming from the line of Mike Grondahl with Northland. Your line is open.
Yeah. Thank you guys.
Could you go into a little bit more detail on Sacramento in sort of the the marketing strategy you deployed there it sounded like your CAC was 50% lower and you had better than average unit growth.
A few details there and then just how quickly and how aggressively do you plan to roll that out to other cities.
Thanks for the question Mike This is Toby the.
The Sacramento approach was actually meaningfully different from what we've done in the past that shift.
We typically had a very digital heavy approve.
The approach and in Sacramento of that particular test cell test it out doing much more of a 360 approach the customer.
We did everything from TV out of home are much more full cycle marketing approach, we saw tremendous success.
And that's the nature of that thing based on that we've actually and this is to get to your second part of your question, we've rolled that out very rapidly.
By the Middle of this Q1, we have that rolled out across all of our other markets and are seeing early signs of.
Really good success of that new marketing strategy.
Got it.
Would that include.
Seattle, and the Texas markets or only Texas, when you begin to sell cars.
The fundamental of that marketing strategy do apply to all markets.
But in Texas in particular, we are only acquiring select cars at this time.
So we are working through the.
The process on the regulatory front to get Texas to the point that we're going to be selling cars. There. In addition to acquiring select model the primarily the Seattle and the West coast footprint.
But I do want to say that we are.
Doing.
We've launched our first campaign on National TV.
And that is part of the strategy.
We have over the course of the year that benefit from the classic a rising tide lifts all boats.
That's an investment not just for Q1, but for years to come because those are non perishable.
Brand accretive.
Impressions.
And we see that as the long term investment.
Got it and.
Do you have enough mechanics to day, and maybe how many more do you need over the next.
The 90 or 180 days.
Hey, Mike This is George.
So as Toby mentioned in the prepared remarks, we've had really great progress in hiring of the mechanics.
And we've been able to move our reconditioning to be.
Vast majority of in house in January we're down to only 15% of lot of the conditioning being outsourced which is in line with what happened in January of 2020, So a year ago, which I think is great.
We are in a very good place in terms of hiring we got the right hiring numberless of it in terms of the mechanics falling much faster than we had anticipated and we thought they would take through the end of Q1 for us to get to the right.
Employee levels, and we've been able to do that much sooner and.
Some of the end result has been that we in the middle of the twin of Q4, we are processing roughly 300 cars.
Per week and today, we are processing Tibet.
About 500 cars per week. So we are in a very good place from the production perspective, and we continue that we expect that to grow as the year progresses.
We will be launching an enhancement of conditioning in new markets like in Texas, as we scale those markets and so our production numbers will increase as the year progresses.
Got it okay. Thank you.
Thank you.
And our next question coming from the line of Sharon Zackfia with William Blair. Your line is open.
Hi, good afternoon.
I was hoping to bridge the drivers of the GPU improvement from the first quarter through the remainder of the year and kind of.
Maybe breaking into isn't day to three different parts of unless there's one I've ever seen it and what I'm thinking of for those three parts you'd be kind of the the lesser reliance on the third party recon.
And then it sounds like you've made some pretty substantial reconditioning cost improvements just in general in your owned Reconditioning and then lastly improved pricing algorithms. So can you help us understand kind of how those will interplay or contribute through the remainder of this year.
I assume the good to talk to you soon so I think it's correct, there's really three components to improving GPU. The number one reconditioning number two on pricing and number three ethanol.
So when we think about that reconditioning of being in house.
Is really critical and that's by far the biggest portion of the change that you see between Q4 and Q1.
Because that's something with the really big drag on us.
In the latter half of my share.
And we haven't really good place today.
The number two around pricing, we weren't very inventory constrained.
In Q4, and Q3, when I say inventory at this very nice specific reported sellable inventory, meaning because we've been listening was behind them and couldn't really produce at the level that we needed. We couldnt get all of the kinds of we were buying to become the Sellable karnes.
That limited arent the lead to price things.
Well.
And no price as high as we wanted to price given that we've moved from having roughly 800 cars in sellable at the beginning of December to having over.
2000 at the beginning of March.
Think of that really helps us with improving the GPU.
And then thirdly, we are on a big push to increase our F&I numbers the.
Q4 in F&I was at about $7 60, which was the minus 60% improvement of over the last year, but we still think of that kind of appreciation to be had there.
All three of those pieces kind of.
Our part of the longer term story. So we believe there is still cost reductions to be had in reconditioning.
For Q4, and the for the comp of this year. The focus was on getting throughput high for the rest of the year the focus will be more on getting costs down on reconditioning.
Number two we think that both with the marketing efforts and with more inventory, we can price higher and generate more GPU that way and then lastly, we do expect.
Significant improvements in our F&I numbers of the of progresses, which is how we see ourselves getting to at least $600 hopefully more in GPU by as the.
Progress isn't obviously in light of what other will have to be higher than 60, hundreds to get to an average of $600 for the full year.
That's helpful. Thanks, and then I heard you talk about new markets in the I assume that that's Texas contributing more in the second half of the year I'm just wondering you know what.
With the new marketing I mean, how do you project taxes are you projecting Texas based on Hall historical markets have have debuted or is there an expectation of kind of a steeper ramp for Texas.
So it's a great question share.
And in terms of Texas, where we are really excited about it as I mentioned and we are.
Primarily projecting growth.
And in particular in the current quarter.
Is driven by our current in the existing footprint that is our kind of view for the whole year.
And part of the guidance and the shared for the year is that the bulk of that unit.
<unk> revenue growth is going to be coming out of the existing west coast footprint.
So we're actually not.
How should we say of banking on so to speak the.
The.
Steep steep.
The per se in any of any one new market instead.
Instead, what we're doing is driving growth from existing footprint deepening market penetration and we've demonstrated that already because.
Because with the deeper market penetration it shows that we're able to sequentially rollout across the U S drive that deeper penetration and sustainably grow.
In terms of Texas and other new markets.
We do see a lot of goodness happening there and we actually think that theyre going to be advantaged relative to previous market launches due to our new marketing strategy, but we havent released specifics about the exact growth market by market because we're not we're not we're not sure on that at this time.
Okay. Thanks, and then just one last question Cindy do you have the amount of advertising that was spent in the fourth quarter.
Yeah.
Thank you Sharon.
In the fourth corner the check.
The total advertising total marketing was about $10 $9 million.
Thank you and we don't provide a breakdown to whether it was a brand or digital.
Thanks.
Hmm.
And our next question coming from the line of Marvin Fong with the Tid. Your line is now open.
Hi, Thanks for taking my questions.
A couple for me I'm just.
Just curious, though I think you spoke to five.
The reconditioning capacity of 500 of week now basic math says that's the capacity of about 26000 of year.
Versus your guidance a little under 21000. So just curious you know what kind of cushion in terms of the reconditioning capacity do you like to operate at just to make sure that you don't have to go back to third party reconditioning.
And then.
All of the follow up also on what you were saying about <unk>.
Improving the F&I I think George mentioned, the some changes coming to the vendor side I'm. Just just wanted to drill down on how you see F&I growing are you going to be doing more on the financing side or the service contract side or both.
And you.
Do you see the improvement coming in terms of better monetization from your vendors or better attach rate of just some more color on debt would be great. Thanks.
Absolutely.
Thank you for some of those questions. So on the first question regarding the reconditioning to be clear. The 500 is the actual number of cars that we of throughput in Q2 during the middle of 17 Q1 during the middle of the quarter the way.
Actually in the conditioning 500 cars we tech.
When we have capacity for more but obviously, we are managing inventory acquisition with that as well.
I think you number of aircraft and you have the consider that you do want to have more cars in inventory going into any given month of any given quarter. Then you intend to do in that particular month.
And as.
As we said.
In our prepared remarks.
Our goal is to be in roughly 48 to 58 days of of turn per per unit.
On average.
To do that you have to have reconditioning, that's outpacing sales in a reasonably strong way, we believe that being in a kind of that range of 48 to 58 days allows us to price in an appropriate manner to generate the most gross profit that we can at this time as the business.
So we.
We do aim to be ahead of it.
As I mentioned earlier as we launch of our own facilities in Texas, We would expect to have additional reconditioning sort of what added to what we can do and we still have believed to add more reconditioning throughput in our existing markets as well so we can increase.
The net 500 number we think that 500 was.
The great place to be in Q1, but that that's expected to grow as the progresses and so we will be continue to build inventory.
Throughout the year and obviously you know it's kind of logical but you want to end of Q4 2021 with substantially more sellable inventory than we ended Q4 2020 with because obviously next year, we would expect to continue to grow.
Rest of the way and we'd want to have a lot more inventory sellable on January 1st 2022 than we did on January the first 2021.
That's the one on the reconditioning question with regards to F&I.
We have.
I have seen really good progress on F&I as I mentioned in light of 60% improvement year over year in Q4 on a net F&I.
We are going to be making some changes to our vendors in the second half of the year.
That's on mostly on the areas around.
Vehicle service contracts and other insurance related contracts.
Those will be.
It will allow us to monetize the better.
And we believe will also help ensure a better customer experience.
Over time improves your overall F&I it take.
So I don't think I want to get into too much detail about what the changes were making since some of this is kind of proprietary to us until we make them.
And I think will be an important change for the business and from the consumer expense perspective.
We think that.
It'll add a reasonable amount of dollar store F&I.
Our overall attach rates are in the very good place on the vehicles. So this kind of insurance side, we obviously continue to push to improve that.
On a regular basis and there's a lot of training that we still need to do it with our team to help make it better.
Historically speaking that was not a big focus for us in terms of how.
How do we train up team for F&I sales that we've seen hasn't been the opportunity in that area as well.
Yeah.
Great. Thanks, George and if I could ask one more follow up just kind of all the increase in the <unk>.
S T. This quarter and I think Cindy indicated it would be coming back down could you just kind of.
Elaborate on the dynamics behind that it seems like maybe you acquired more younger cars. This quarter as your plan is to maybe maybe reverse of that and the balance of the year. If you could just help us with that that'd be great.
Total is there's really two big things that have driven the the increase in ASP.
Number one is higher amount of sales in the in luxury and highlight the vehicles historic mix shift has done really well with highway and vehicles, which I think makes sense given the kind of high touch White glove service that we provide at least I understand about one of my consumers would love that type of an experience.
And so we've always done well with that in kind of.
Part of 2019, and most of 2020, we did not really focus on my line on luxury vehicles, because we were capital constrained and didn't want to put download the behind kind of at or they're expensive.
Post the completion of the process from the capital of concern it was lifted and we felt that we could go after those kind of more and I think that's the overall good because it allows us to have more inventory that's in demand and consumers really like anti swaths of the consumer expense. So that's part one and part two.
We spoke to earlier.
We actively pushed to make the value beaten the 20% of the total sales.
In the Q1 and for at least the first half of all of.
This year that move was done in order to help support the reconditioning team's effort to increase throughput of value kind of generally take more time to recondition and if they have a very high percentage of your total acquisitions. They can impact in the note.
The finishing to put in really all of you up and so we wanted to kind of manage that.
The way, we still obviously really believe in having the full spectrum of inventory and 20% of value still pretty high percentage and obviously, it's a lot higher than anybody else in our kind of overall industry.
But it's not as high as it had been in various parts of last year. When it reached 30 plus percent and various points in the year. So those two things combined together led to a higher ASP.
And the reconditioning continues to improve and we would anticipate that we will increase the percentage of value in total inventory.
We believe it will help drive the ASC price down again, obviously, we're not really managing the business force specific ASP, we are managing the business for having really good inventory of that consumers want and then ask you will be what it is from that it's not really doesn't really fundamentally matter of for us on what the S. P is from the perspective of how the businesses.
Yes.
That was very helpful. Thank you George.
Our next question coming from the line of sight of paint them with Wells Fargo. Your line is open.
Hey, guys.
Curious if you could update us on market share in your mature region and when you think about the $450 million in top line for the year could you talk through what's embedded here for per share gains in your mixture region like like San Francisco relative to the ramp up in newer markets like Portland, Seattle or Texas.
Thanks, That's a great question. So I don't think we're in a position to update on market share numbers specifically.
You don't.
So the after we buy the data every month we did.
Last year as we were going through our transaction process because it would be something we'd be helpful. The hump, but that is not something that we normally buy every month. So we can't give you specific numbers on when considering the kind of consider that for the future, but we don't have that today, what I can say however is the following.
All of the growth that we've seen in Q1, which is obviously very substantial year over year of growth.
<unk> is coming in the existing markets, except for Seattle, which is a new market compared to last year.
And the vast majority of the growth that we're projecting for the year is coming in existing markets as well so the.
The projections are assuming really substantial and significant increase in market share in our existing markets and that's the only way we could drive for the kind of growth that we're projecting in existing markets.
Obviously as we ramp up some of the new markets that we've talked about and those will add to the revenue, but we don't expect them.
Them to be significant in the first half of the year and then they will ramp from there in the second half of the year. So in a kind of in the summer of last year in the fall when we would meet with analysts and investors folks would oftentimes the ask.
Are there.
What's the assumption for growth here, and we would say 75% of of the growth that we expect in the mono will be coming from existing markets and I think that's very much still the case.
Perhaps even more than seven months of income from the market.
They are all performing extremely well and with either of the ton of opportunity for growth.
Right.
Thanks, George that's that's good color and next question.
On the improvement in day to sell I think it was 43 debt this quarter versus 63 last year curious if you could talk through the the drivers and when you are.
Looking at.
Dave to sell I'm curious.
What percentage of your sales involved the test drive.
Versus those that don't involve a test drive and whether that has an impacted.
Two two days to sell as well.
So look last year was an unusual year and demand was extremely high and as we mentioned several times now.
The many months.
We had been sellable inventory constrained them last year.
Which kind of inevitably leads to a lower base to sell as the result of the idea of moving the car that you have and you don't have that many.
In Sellable mode.
So that kind of.
The big driver of what happened last year, we think that there is a kind of an ideal time for how long. It takes you to do.
The two to move cars through kind of the range that the Toby gave in the prepared remarks of like 40% to 58, we think kind of is the that bandwidth number the.
The reason being that the that allows you to price kind of the little bit higher in the beginning keep them at a high price for a little while.
C P generate demand for that current at a higher price than your average price to market. If you can great that means youre going to make really great gross profit on the vehicle and you can kind of some of it that way, but even kind of does not it does not.
Unable to generate the.
Demand at that higher price and you can lower it more to the two of them kind of midpoint of where you normally expect to transact at and then sell the current debt.
That's the kind of focus for us in how we manage our.
Our time to sell.
In the last year, when we didn't have it in my global inventory, we didn't have the flexibility and the opportunity to price current higher at that slightly above.
The typical percentage to market that we transact pack.
Which.
You know, which we which is something that we wanted to get back to with having more sellable inventory volume, we've not been able to achieve that.
So.
You know, we think 48% to 58 is a good place to be.
And that's what we're going to be managing to the this year.
You know last year, while in some respect with the low basis out of it did have a negative implication on the GPU and we're trying to correct that this year, which might be higher time to zone as far as the difference between kind.
Kind of the itself with the test drive and part of the itself without the transcribed.
<unk>.
There's not really any meaningful difference in the time to sell for those two approaches in terms of the consumer experience. They generally kind of roughly in line with each other.
Okay. That's good color and I just wanted to square the the lower days to sell with with liquidating cars through the wholesale channel was that just of one time dynamic around COVID-19 or is that something where we should.
Something that you would more regularly do if you have aged inventory.
No. So when we did last Q4 as we liquidated cars that otherwise could have been sold the retail to wholesale prior to reconditioning those vehicles. So we Boston from consumers, who could have tech only sold them as consumer cause.
Reconditioned, but instead, we chose to not do that not to keep them through the conditioning and just wholesaling. The reason being that we needed to help our reconditioning monetization have a smaller percentage of the value cars with unusually condition and so we picked the cars that otherwise would have been kind of tie the amount of <unk>.
Con needed value vehicles, and we pushed them off the wholesale.
As of the reconditioning.
The improved and is able to address some of the additional things that it needs to work on in the coming quarters, such as the cost reductions we would expect to then allow for more value.
Value cost to come in the recon and like I said this year, we're trying to manage the about 20%, but that number could increase the reconditioning team is of ne.
We're in a position to handle a high percentage of value in which case, we would not wholesale those kangoo would try to bring them into the retail segment, but we just had acquired a bit too. Many of these late stage value be it both in Q4, and we made the decision that it makes sense to move them to <unk> given that they would take.
Too long.
Of that it makes sense of just kind of wholesale of those in Q4.
Got it that makes sense appreciate the time George.
Thank you.
Our next question coming from the line up.
And with what Bruce Your line is now open.
Sure.
Thanks, a lot and good afternoon. My first question is just around your guidance for 2020, one, which implies EBITDA losses of more than doubling guidance just a few months ago at the time of your spec transaction. The over $110 million can you give us some sense of what gives you confidence that youre, creating shareholder value.
So our guidance implies that we will have <unk>.
EBITDA loss of below 25%, which is a significant improvement over.
Last year, and we will be showing significant.
The significant improvement in our overall operating leverage which we are very excited about it.
At the same time, we believe that investing in marketing is really important.
And we have launched a significant marketing efforts as we spoke to earlier and we believe it didn't seem that makes sense and we'll continue to do that building brand per shift we think will be very valuable over time and you know what.
The payback.
Short term and is capable of the long term, but we've seen peers in this industry achieve really strong results.
Through marketing efforts because you can over time drive the of price to market up if you are able to build.
Build brand, it's a tried and true strategy and we are pushing in that arena and the rest of the way because we think will be the results. The strong as we have seen in the test that we've run simple.
Yes.
So since the time of your factor interaction the biggest thing that changed in how you're looking at 2021 is of national branding strategy and thats driving much higher losses than you'd previously anticipated.
And that's the primary driver of our of additional dollar losses in 2021 correct.
Okay. Thank you and then my last question is just in terms of your inventory management, which likely fell short of your expectations This quarter.
As you think about your strategy going forward, what safeguards have you put in place the better manage our inventory and avoid the types of losses that you experienced the on.
Even.
Cars that the retail.
But the selling margin of our retail cards was down this year negative.
Tobey I think you're speaking of we can't hear you.
I'm sorry.
That's a great question Seth one of the biggest things.
That drove down our inventory to historic lows was the COVID-19 environment.
Uncertainty around the market price.
As the us to take a cautious approach during the height of Covid around inventory acquisition.
That structurally put both our inventory position and our re kind of operation behind.
So as we start to ramp up going into.
The latter part of Q3 and the latter part of at end of Q4, we were actually working to make up a tremendous amount of ground there.
It was created or a GAAP that was created by Covid.
How we do that going forward is we've enhanced our supply chain planning.
And in particular, our forecasting around our expected.
Number of vehicles on hand going into any given week relative to how many cars, we want to sell that week.
Two of these projections more on a monthly basis, but during the Covid time period, but realized we needed to be much much more.
Have you had much higher fidelity of with forecasts of execution in that area, because we recognize the sensitivity of the area.
So we've changed the way, we do our supply chain planning, the fidelity with which we've done it and we've exited the historic change that was COVID-19 that caused us to really deplete our inventory to levels here of two four unsafe.
Thank you.
And our next question coming from the line of Mike Baker with D. A Davidson your line is open.
Hi, Thanks, Scott, So maybe a little bit of a follow up on <unk> question, but I'm just could you explain again.
The why the GPU came in so much lower than your plan.
You have the third party reconditioning and all of that but you knew that and it sounds like it actually went better than you expected. So what was lower than you expected I guess to seth's question some of that.
Was the pricing.
Was that really the biggest the biggest factor in the delta between your guidance and where you came in or was it.
Again, you knew about the reconditioning issue I it sounds to me as if you've worked through a quicker than expected book, but maybe it was just more expensive to work through.
<unk>.
No absolutely. So the fact that we've faced reconditioning in Q4 helped us in Q1 of the 2021. He doesn't really help in Q4, because vast majority of the cars that you reconditioned. The same December once things start of the improvement.
We're gonna be the car that you're going to sell in 2021 non in 'twenty 'twenty right in the one of the challenges with with Q4 going into that quarter was a very large portion of the inventory that had to be sold meaning sellable inventory going into Q4, and then inventory as we condition in October.
The Q4 of the yet to be selling Q4 had an external reconditioning component.
And that is much more costly.
One challenge was that the it really hurts you.
Second point is as Cindy discussed in her prepared remarks, we had wholesale losses.
Harder because we took a certain set of inventory and otherwise could have been sold the retail and decided to wholesale it rather than pushing at the recon in order to help our reconditioning the team improve throughput overall setting us up for a better Q1, and a better 2021, and then thirdly.
This does not really impact much of the rest of the country, but California being our biggest market. There were much more significant COVID-19 lockdowns in California in late November and in December than anywhere else and those are definitely had impact on the business overall and on the leads coming in.
So not the most significant by any means but some level of impact from that as well.
Okay. So so I guess, if I could summarize that yeah, you did get through the.
<unk> situation in the quarter book, but a little bit too late in the quarter to help the fourth quarter, but the good news is it'll it'll help the first quarter.
Uh huh.
I think that's right.
That's the 100% Brent I think when we were asked the question when do you expect to kind of solve the third party reconditioning the.
The most comfortable the way he found the thing that sometime in Q2 of 2021, we believe it will be solved in practice the had got fixed.
Easter and we in January already we were down to only 15% external reconditioning, which is just slightly higher than external reconditioning.
We used a year ago and genuine so obviously, we continue to improve.
True and what we do in recon, but the benefits of getting recon to be where it is now going to be more significant in Q1 than we would have anticipated.
The same time, we did this call headquarter items.
There's still obviously some cars that we sold in January of 2021.
That were external definition and that's obviously, that's still hurting a little bit, but that's going to be the all gone by the time Q2 rolls around and then we still had some wholesale sales of it.
All of that otherwise might have got the retail and the value segment in January but overall, we think that the reconditioning getting to where it is now is the huge improvement and we're seeing the improvement in the gross profit.
No guidance that we're giving for Q1.
Okay understood one more if I could.
Longer term question, I guess, but so I understand that your losses loosen the dollar amount might be more significant in 2021 than you maybe thought previously because you're ramping up the advertising I think that makes sense of eventually you leverage it but if you think about the times of profitability I know you haven't necessarily given the timeframe, but does this get you to profitability quicker.
Or does that get you profit because you'll eventually lovers. This quicker than you expected because of the sales go up what does a lengthened the time to get the profitability.
This might be so.
Go ahead.
Go ahead, well George you want to take it.
Please go ahead alright.
Alright.
Don't think it's necessarily necessarily longer I think what we're doing is we're focusing on getting the unit economics getting that GP up and tracking to the original plan as best we can.
<unk>.
So the same timeframe just different way to get there more more market share and then I presume over time as you have that market share. The the long term profitability would probably be enhanced as you start to leverage the advertising.
Yeah, I think that that makes sense.
And I think of critically where we're probably looking somewhere in the 2023 range.
And then at the same time of what we do think the value is here that you know going back to an earlier question that some of that we do believe that investing in marketing non allows us to grow faster.
And allows us to.
The drive to better gross profit of a time by selling at a higher price to market than we otherwise would be able to do.
Makes sense.
And I'm not showing any further questions at this time I would now like to turn the call back over to Mr. George The Allison for closing remarks.
Great well, thanks, everybody for joining us when we appreciate your questions and your attention.
We look forward to speaking to everybody in the coming weeks as we do some of the meaning of that was in the plant.
Ladies and gentlemen that does conclude the conference for today. Thank you for your participation you may now disconnect.
Goodbye.
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