Q2 2021 Carvana Co Earnings Call
These hold we will start shortly piece continued to hold at this call will start shortly.
[music].
Good afternoon, and welcome to the call volume that second quarter 2021 earnings conference call for.
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A conference specialist by pricing the store key for that bought the Cri.
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Please note that this call is being recorded and I'd like to turn the conference over to Mark Levin, Vice President of Investor Relations. Please go ahead.
Thanks, so much and good afternoon, ladies and gentlemen, and thank you for joining us on Carvana of second quarter 2021 and earnings conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website for investor to stop Carvana Dot com and the second quarter of 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 results to differ materially from those discussed here of detailed discussion of the material factors that cause actual results to differ from forward looking statements can be found on the risk factors section of Carvana is most recent form 10-K and form 10-Q. 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 new developments or otherwise unless otherwise noted on today's call. 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 said I'd like to turn the call over to Ernie Garcia Ernie.
Thanks, Mike and thanks, everyone for joining the call.
For second quarter was a landmark quarter for Carvana and 1 that will always play a central role and our story. It was the first quarter. We delivered over 100000 cars of our customers. It was our first quarter of over $3 billion and revenue. He was the first quarter, we achieved $5000 total GPU. He was the first quarter, we hit 100 million EBITDA and it was our first quarter of positive net earnings.
He was also the first quarter, we made the fortune 500 list and of top of at all off we're now 1 of the for fastest companies to ever make the list organically, along with Amazon, Google and Facebook.
Those are some pretty great headlines and.
And the demand and we take a step back for a minute to put it on context 5 years ago. The year before we went public we sold 18000 cars and the full year.
We just sold over 5 times at many in a single quarter 5 years ago. Our total GPU was $1000. This quarter. It was $5000.5 years ago. We thought 25 for every dollar of revenue. We made this quarter, we made money for the first time.
And that's a lot of progress and a short amount of time, when we evaluate that progress sometimes we all have a tendency to zoom and too far and Miss what really makes at all possible. So I want to try to tell the simplest version of our story that I can.
When we started 8 and a half years ago, we were a bunch of ambitious kids with the shocking about to learn with the benefit of hindsight is now clear we had no idea of what we're getting into but we didn't know of couple of things with new customer preferences are changing we knew technology was evolving we knew the traditional way of buying a car had changed less and it should have we believe we can do better for our customers. We knew that we were.
Of working for them and we had a plan.
We also knew we had a great team, we knew how to get the best out of each other when you're at a spot people that can make us better we knew how to have fun, we believe and what we're doing we knew we can figure out the rest of along the way and we didn't know how to quit.
Those are important things to note that simple knowledge got us to today and todays of pretty good day, along the way we've learned a lot of 1 of the important lessons at everything we're doing is hard so doing worthwhile things means they're often more hard days and easy ones.
From here I hope, we don't get complacent I hope, we keep fighting and we take on the hard days and keep doing things worth doing I hope, we keep learning and I hope that we never let the new lessons crowd out the things that we knew at the beginning it seems like that might be the classic mistake that people make over time I hope, we avoided and I believe and we will if we do our future is bright and the things that we're too at the big.
<unk> are all still true today customer preferences will always change and technology will always at all.
As a result, there will always be opportunity, we're nowhere near realized and the opportunity the potential that we saw at from the beginning and additional potential of revealed itself. All the time, we will keep chasing it and as long as we keep our eyes open wide enough will never catch at the March continues mark.
Thank you Ernie and thank you everyone for joining us today.
Q1 was a record quarter for Carvana, We set company records across many key financial metrics and made significant progress toward our long term goals.
Retail units sold in Q2 totaled 107815, our first quarter over 100000 units and an increase of 96%.
Total revenue was $3.3 billion and increase of 198%.
This strong growth came despite operational constraints, we faced during the quarter.
Total gross profit per unit was 5120 and Q2, the highest level in company history.
And it increased 2000 and $394 year over year, and 1004 hundred $64 sequentially.
Since Q2, 2020 was impacted by COVID-19, I will focus my remaining commentary on sequential changes.
Retail GPU was $2022 and increase of $811.
Our growth and retail GPU was primarily driven by 4 factors.
1 increased barring cars from customers.
2 and appreciating retail market pricing environment, which was partially offset by higher wholesale acquisition price was 3.
<unk>.
Optimizing our vehicle mix and pricing to match, our production capacity and available inventory goals and for moving beyond the majority of the COVID-19 related transitory costs, we experienced in Q4 and Q1.
Wholesale GPU was $547 and increase of $320.
This was driven by record gross profit per wholesale unit sold of $1254 and record wholesale unit volume.
Record gross profit for wholesale unit sold was primarily driven by strong industry wide wholesale pricing and increased wholesale unit volume came from growth and buying cars from customers.
Other GPU was 2000, and 551 and increase of $333.
This sequential increase was driven by a positive impact of higher industry wide vehicle prices on average loan size and another strong quarter of execution by our financing.
EBITDA margin was positive 3.4% and improvement from negative 6.2% and the prior period.
We achieved our second quarter of positive EBITDA and our first ever quarter of positive net income.
On July <unk>, we upsized, our inventory floor plan facility by $500 million to $1.75 billion.
Bringing total liquidity resources to nearly 2 billion, giving us significant flexibility to execute our plan.
We are executing well and remain focused on building, our network and increasing our production capacity to meet demand.
This quarter, we demonstrated significant progress on these fronts, but our rapid growth in both retail units and buying cars from customers led to strains throughout our operational chain that we are also focused on alleviating.
In Q2, we grew average weekly vehicle production by 20% sequentially.
This increase was driven by additional staffing efforts and the opening of our 13th IRC near Cleveland, Ohio, Okay.
Across these 13 IRC and our total annual production capacity is approximately 750000 units at full utilization.
We remain on track to open 8 additional <unk> by the end of 2022, bringing our total capacity at full utilization to over 1.25 million units.
Looking forward, we expect to complete a record year on retail units revenue total GPU and EBITDA margin in 2021.
We expect retail unit growth to continue to be governed primarily by our operational capacity.
And the second half, we expect revenue growth to be more closely aligned with retail unit growth as we move beyond prior year comparison periods that were most impacted by Covid 20, COVID-19.
We expect total GPU over 4000 and for the full year significantly exceeding our mid 3 thousands outlook at the beginning of the year and marking our eighth consecutive year of substantial gains.
Finally, given the demand we are seeing we plan to continue to invest and the business bolt of catch up with current demand and to prepare for growth in 2020, 2 and beyond leading to a typical seasonal pattern and SG&A per retail unit sold and the second half and close to breakeven EBITDA margin for the full year.
And we're extremely proud of the progress we've made as a company over the last several quarters navigating the COVID-19 pandemic and the unique environment, all while delivering rapid growth and managing through operational constraints.
Zooming out and our results relative to the industry leave us more optimistic than ever about our long term model and path toward our goal of delivering more than 2 million retail units per year, and becoming the largest and most profitable auto retailer. Thank.
Thank you for your attention we will now take questions.
Yes.
Thank you we will.
And now begin the Q&A session to ask a question you May Press Star then 1 on your telephone keypad, if youre using a speakerphone. Please pick up the handset before pressing the keys to withdraw your question, please price stalled and too.
Also of note.
Please limit yourself to 1 question and 1 follow on.
First question comes from Zack <unk> of Wells Fargo. Please go ahead.
Hey, guys good afternoon, and congrats on the progress.
So it's been 2 and a half years now since you gave your 4000 plus.
Long term GPU target and 810, 12% EBITDA margin and if you think about all of the impressive progress you've made particularly with 5000 plus GPU today and then you think about all of the ways to take profitability structurally higher at.
And at scale.
Ancillary services, maybe of marketplace offering curious how you would frame today and the long term guidepost for the business and to what extent at its now fair to assume that they could be higher than you initially thought and 2018.
Sure well so.
Let me start with Yeah, I think that model and we put out in late 2018.
Was was built on kind of deep structural force inside of automotive retail.
Did a lot of work trying to understand you know what normalized margins are across all of different products and end with different groups were able to achieve and I think that it's pretty deep and foundational and so we feel really good about that model and so let me start there I think we've undoubtedly made a ton of progress I think if you look at you know 2016 year before we went public.
At $1000 GPU, we just had 5000 and for the full year, we're expecting 4000, plus I mean, that's obviously a lot of progress and it's happened across every single 1 of the line items and we've also made a lot of progress and some of the expense line items as well as we've continued to make progress there while we're simultaneously growing so I do think that things look really good there we feel like it's.
A bit early.
To update the long term model given that this is the first quarter that we've been inside.
The long term gross margin target. So I think we want to stick with that model, but we're obviously extremely pleased with the progress we've made so far.
Got it and then on the pricing environment, obviously, a big tailwind today for both the topline and.
And gross profit per unit, but as we looked at the second half of the hearing and anticipate from some softening in the wholesale and likely retail market curious first of all of it. If you could talk about where you think pricing is headed and then can you just talk us through just what to expect in terms of.
On the sales and gross profit outlook at the top line or at the pricing environment were to soften.
I appreciate the color there.
Sure. So let me start by trying to characterize the environment I do think what characterize this environment is.
Very rapid and vehicle price appreciation of about the wholesale market and the retail market and.
It's unlike anything that I've at least ever seen.
And in my career, so I think we've seen very dramatic price depreciation now in a normalized environment that doesn't have huge implications for margin generally speaking the GAAP between wholesale and retail markets are fairly stable.
And as price levels move up or down kind of both markets move in tandem and you don't see super dramatic differences.
I think what's unique now is the change of happened so quickly and I also think many different acquisition sources for vehicles performed differently.
If you look at many franchise dealers for example that are buying many cars off lease are.
Buying many cars off trade in and of you've seen pretty dramatic increases and margin. If you look at some independents that are heavily reliant on just the auction market youre generally seeing deterioration and margin despite the increasing price environment, because wholesale price and moved up faster than retail pricing moved up so I think what's unique in this environment is the speed of it.
Things have moved and then the way that that has played out differently across different vehicle acquisition channels.
For us we.
We built this channel buying cars from customers.
That has performed very well for us over a long period of time, we've made continual high quality progress and both the number of cars for buying the card for buying relative to retail sales and the profits that we're making.
On cars and we bought from customers, but I think that channel is especially valuable in this environment.
And kind of auction spreads collapse. So much. So I do think that there was something of a tailwind that we experienced there.
And that precisely it is difficult associating that precisely with.
With kind of the Asps move.
<unk> is also difficult because I do think of it. These are abnormal moves that we're seeing right now but.
But I think that at also led to another kind of interesting impact that has implications for the.
And the remainder of the year and kind of our overall financial performance and so what that wasn't because vehicle price of appreciate and so quickly. There are more customers that were willing to sell their car interested and selling their car and the environment, then and many other environments and that led to record increases and the number of cars that we're buying from customers.
On the state at any way and in absolute terms or relative to cars that we're selling and customers. So we saw a lot of volume there that did drive some expense.
That expense was more than offset by the margins and we were able to realize on those towers and then that also led to constraints.
Across the business.
<unk> showed up in in and a little bit higher SG&A and then we probably would have otherwise experienced as we've tried to catch up to to the demand that we're seeing because of lot of times, those kind of incremental levers that you pull or a little more expensive.
And the levers that you pull it if you are able to kind of move and a more orderly fashion. So I think those are all of the things that we feel like our are unique in this environment of our moving I think it is difficult to precisely call. The way that will all unwind unfold the back half of the year, but our best estimates are taken into account and the outlook we provided.
Thank you. Our next question is from Sharon Zackfia of William Blair. Please go ahead.
Hi, good morning, and and good morning, and a long day.
And and congratulations on on profitability.
A question on on how consumers are dealing with the pricing environment and are you.
Seen any increased bulk at prices are you having to adjust for inventory mix at all.
And is there any kind of change and the average credit that youre seeing.
So I think in general the adjustments that we've made have been relatively subtle and they've been more focused on trying to alleviate constraints and trying to be able to grow inventory faster than they've been driven by differences that we're seeing in different demand pockets I think and generally feel like we've got more demand and we've been able to sat.
Across all of demand pockets. So we've made some some subtle changes and in the mix of cars that we're buying to try and get them through the reconditioning centers faster.
And then we can kind of scale inventory more quickly.
Other than that and.
Nothing nothing too dramatic on the credit front I think across the industry Theres been high quality credit performance.
The loans that we originate and we've seen at the same but but but we do sell those loans off and so the direct impact of that after the moment of sale. It is not something and flows through our financial statements.
Thank you on.
Next question is from Ron Josey of JMP Securities. Please go ahead.
Great. Thanks for taking my question and Great quarter, guys. Ernie I just wanted to ask I think we're a quarter into launching the Pacific Northwest just as you launched newer markets and you know Carvana is now what 70.580 per cent of the population in terms of reach just talk about the benefits of awareness that comes with these newer markets. In other words is it easier it's easier now to launch new markets you are seeing that.
Single, you know new market that you launch, but when you open up a whole new quarter like the Pacific Northwest Northwest talk to us more about how the brand has reacted there that'd be helpful. Thank you.
Sure.
We're continually building our brand out I think if you look even at our website traffic for example at grew 25% quarter over quarter and very significantly year over year more than 100% up year over year. So I think that's at least of reasonable measure of the brand that we're building and I think that we still probably remain at relatively early innings of kind of building that brand and I think as we've discussed.
And the pathway and we like to think about that as you step 1 of building a brand is at generating awareness step 2 is generating understanding of what you do and step 3 is generating trust and I think we're making positive headway all the time and and all of those different dimensions, but we're still just need and a half year old company.
Growing very fast and and.
And even in this last quarter, we sold over 100000 cars, but when you look at that relative to the size of the market that was that was still roughly 1% national market share.
So I think it's still very early days, but undoubtedly the prior.
This that we're seeing and building brands does help us we've seen these trends on a cross time, where of our newer cohorts ramp faster than older cohorts. We continue to see that all of the other trends that we've seen across cohorts. We continue to see were obviously seeing very rapid.
<unk> share increases across across all of our cohorts that are supporting the growth that we're seeing so I think what's most important now is just continuing to to grow and then getting the positive feedback that shows up across the model through that growth by being able to have more inventory available for our customers faster delivery times for our average customers and I think adding the Pacific northwest.
And what kind of the last big chunk of the U S debt.
And that we weren't connected to and connecting that up at the big deal and now we've just got failing to do from here and then we've got to keep scaling.
Great. Thank you Ernie.
Thank you. Thank you.
Our next question comes from Brian Nagel Oppenheimer piece kind of hit.
Hi, good afternoon, great quarter congratulations.
Thank you.
So at the question I have.
You talk again, despite the other strength in the quarter day notice.
And the degree to which sales were still held back by some spikes right. So I guess the question I have there is.
How did that progress through the quarter. So as you exited the quarter.
How well are you running at against.
Your supply at running against the demand.
So I think we probably through the quarter for the most part got progressively more constrained and I think the driver of that as we discussed and <unk>.
Kind of earlier on the call which is.
We saw so much growth in our offering of of buying cars from customers and we grew retail units by 17% quarter over quarter, but we grew very dramatically and the number of cars that we bought from customers and that is really what led to increasing constraints that was hard to foresee and.
And we weren't prepared for that degree of growth that quickly.
And so I think that's what led to increase and constraints and those constraints can kind of show up across the business.
Just because they are driven by buying cars from customers doesn't mean, that's the only impact they have.
And when customers are are selling their car to us they are calling in and theyre talking to advocates.
And there is market ops going up and picking up those cars.
We've got the logistics network gets involved with that so yeah, as we see growth and any part of the business. It generates constraints across the rest of the business. So I did and we saw those constraints show up I also think of it. This is a relatively difficult environment to alleviate constraints, but we've made a ton of of headway that we're extremely excited about so for perspective.
In July we increased our average weekly higher and class by about 20% versus what we saw in the average of Q2.
We're extremely proud of that.
The speed of that move is really strong the team has done a tremendous job just kind of leaping to action and and trying to get back and front of this and I think it's been a tough environment to do at I think that's a testament to the quality of opportunity that we offer for you to applicants that are looking to come to Carvana I think it's a it's testament to the career pathing that we've built over time and at <unk>.
Testament to the team that has been ramping up very quickly. So I think we're making a lot of progress. We're extremely focused there for the last year, we've been talking about the constraints of inventory and we've been working hard to alleviate that this last quarter. We grew inventory, which was exciting we would like to grow at a lot more from here, but then kind of the benefits of of kind of alleviating that constraint.
For a degree as well as the massive growth and we saw and buying cars from customers led to constraints and other places and now we've got to get to work at alleviating those and I think we're well on our way.
And that's very helpful. I appreciate and my follow up question.
Each of them.
Mortgage sales, so poorly and the coupon of bottles.
At this stage for for some time now.
And those economies.
Pulls out of Covid, obviously, it's still a fluid situation.
And with your model.
Increased market share opportunities.
And as a result of some of what sufficient retailers have you been having struggled further 2 of the crisis.
Sure. So I think there may be some.
And the like very high level of macro trends that day.
Result from the crisis and persist at that have some impacts on on the opportunity, but I think that that's very secondary to what we can do as a company.
I think of useful way to kind of think about how things are moving is so far the first half of the year roughly speaking of sales volumes across the industry have been roughly flat to 2019 of sex gives you a sense of kind of where we are obviously dropped in 2020 and they've come back and they're kind of levels for 2019, right now give or take a little bit.
In that time, we've increased our population coverage by about 21%, but we've increased sales by more than 2 and of FX. So we're clearly.
Taking very significant market share.
I spoke earlier of bit about the cohorts, if we look at our individual markets of cohorts.
And those continue to ramp up very nicely the trend that we've seen are in place. There. We now have a handful of markets that are over 3% and market penetration, including some of our oldest and most mature markets. So I think that's all really exciting and that's all happening in the context of us being heavily constrained right. Now. So I think the opportunity is really really large we feel like as long as we keep.
Delivering great customer experiences and executing and growing that's going to be the primary driver of our growth of it.
Some of the macro factors you can point to May also kind.
Kind of pushing our direction a bit but we think it's mostly about the customer experiences we deliver and are on execution.
Our next question is from Rajat Gupta of Jpmorgan. Please go ahead.
Great. Thanks, Neil and thanks for taking the question and congrats on the strong quarter.
The $2000 of retail GPU number.
Is there any way to unpack that a little bit and turn.
How much of that is temporary and worsening of structural improvements that you might have seen and the business.
And that might sustain.
And second half, but you know and <unk>.
Next year and beyond.
And then you know.
I think of following up on the SG&A leverage you talked about like some of the incremental transaction data quality of the more sourcing.
But in terms of for now just looking at the fixed cost leverage.
If I just look at like the comp and benefits and the other SG&A buckets, both of those buckets seem to grow.
More than the number of units you have grown over 2019.
And so the question. There is are you do you feel like you're having to do a lot more handholding of the customer.
During the transaction that you may have liked and just curious how that's going and how that's broadcast of the last couple of years.
And and really like when can we see that fixed cost net of insurance.
And that's coming through and the model.
Sorry for the long question.
Great Yeah, well, let me start by taking the retail GPU question and then we'll move on to the SG&A question. So on.
On retail GPU, we at our first quarter over 2000 and retail GPU.
Closed a couple of times so for I think we've done 18, 50 before and <unk> hundred.
Not including adjustments also in 2020, but on.
For 2000 is a record for US I think if we think through the drivers.
I think maybe it's helpful to think through at sequentially from Q1.
The biggest driver of there was certainly the performance of buying cars from customers or and he talked a little bit about that but we had a great quarter for buying cars from customers.
I was at record volume bolt on and absolute sense and as a ratio of <unk> to retail units and.
And so that was the big that was the big driver there were several other factors.
It drove retail GPU.
Compared to Q1 and those include.
I think there was a net tailwind from the appreciating retail environment, but that was certainly partially offset by rapidly rising wholesale prices.
And so as we as Ernie alluded to I think we haven't seen when we look out across the industry.
<unk>.
Dealers, who rely heavily on auction or have a higher auction share of inventory do quite as well as those that are really buying at a lot of cars off lease and of trade and so but.
But we do think there was some impact there.
And in addition, we made some vehicle mix and pricing optimizations.
Doing things like.
Trying to buy cars, and we think could get through the reconditioning centers more quickly.
For example, and then finally, we did finally move beyond the transitory costs of the majority of the transitory costs, we experienced in Q4 and Q1.
And so I think when and.
And those costs being related to COVID-19, and particularly the later waves and Q4. So I think when you put all of that together I think we feel really great about our retail GPU progress.
Brian cars from customers continues to be of strong driver of.
Of.
The improvements and the business, it's something we're going to look to continue to do going forward.
And obviously excited about our progress.
I'll stop there on retail GPU moving to your question on SG&A. So I.
I think there are several drivers of.
Our investment and SG&A, so as we take a narrow view into Q2 and Theres a few things I'd point to the first is that we bought significantly more cars from customers and Q2 that we did and the prior quarter and there are expenses associated with that sort of obviously there is big.
Selection and GPU benefits associated with it as well, but there was also expenses associated with that and so.
Looking at SG&A on a per retail unit basis doesn't necessarily capture.
The investments that we're making to drive the business of buying cars from customers as well. So that's 0.1.0.2 is we are absolutely investing for the future that investment takes a couple of different forms burst.
And we're already preparing for <unk>.
2022.
Sure.
Large business, that's growing at extremely fast rates and what that means is you have to plan ahead.
To ensure that.
Have put the necessary infrastructure into place to be able to satisfy.
Very large of large amounts of demand at at large scale and so we're already investing for 'twenty 2.
That's a component of it and then finally I would say we're also investing for the long term so as.
And as Ernie alluded to and some of his prepared remarks, we see opportunities everywhere in the business I think opportunities to improve the customer offering opportunities to drive additional revenue and GPU baked and the business more efficient.
There are many many places where over a multiyear horizon, we see very significant opportunities and we're going to invest and those opportunities. We think it's the right thing to do for.
For the business and for our long term shareholders and so those would be the 3.
Points that I would make on SG&A.
Our next question is from Michael of on Tommy Evercore ISI. Please go ahead.
Okay.
Hey, good.
Good evening and thanks for taking the question congrats on the quarter.
Wanted to ask about on the GPU front.
Maybe 1 way to come at it would be.
<unk> thousand 500 dollar step up sequentially, so sort of of 40% improvement versus <unk> and.
And if you do the same kind of math versus 2019.
<unk> stepped up 750, which was like a 30% increase so does the incremental 10% relate basically to the price appreciation and the market is that kind of a fair way to think about it.
First of all I think probably when youre thinking about margin thing.
At about at $1. Instead of percentage terms is is probably a better way to think about at I think generally speaking.
Margins kind of move more in dollars than day than they do and percentage terms across the end of season I would start there I think there's a lot that is different.
This year than 2019, but I think the thing that we would point to is that is the biggest by a long long way is just buying cars from customers. We just saw a massive massive increase.
And the number of cars were buying from customers and and the profitability of of buying cars from customers and I think that flow through and I think I.
I want to be careful to not be too repetitive with the GPU answer that Mark just provided but I think and.
Everything that he outlined is also correct and I think you can kind of look back at all on how some of those line items have moved historically and kind of what some of our.
Different high watermarks had been and and get a sense of what the size of some of those impacts might have been.
But I think that's probably the best I can do to try and would be helpful. There.
And then maybe to follow up on that I guess in terms of the second half outlook for the GPU. It seems to be implied like 3500, 3700, and the back half and so I guess I just wanted to understand is that kind of.
How much of that is sort of normal seasonality would you say versus maybe some other factors, we just need to be mindful of.
Sure. So I think at a high level, we're trying to provide you a sense of how things move and the quarter and what we think are some of the unique drivers in the quarter and.
And then I think from here, we basically expect some normalization of some of those factors paired with normal seasonality and then that's taken into account in our outlook, which we raised from mid 3 thousands to over $4000 for total GPU for the year, which is obviously a huge move for us to be making it is something that we're extremely excited about.
Our next question is from Nick Jones of Citi. Please go ahead.
Great. Thanks for taking the questions maybe.
Maybe to 1.
How are you thinking about inventory levels normalizing at this kind of.
Over the next couple of quarters, and it's going to go into next year I guess, how are you thinking about.
And Detroit availability normalizing kind of from here and then as it does normalize.
The other kind of fits in.
Burts of of kind of choke points and the logistics network do you feel like you'll be well positioned when things do normalize and you can really kind of meet the demand.
And you know, particularly on your new markets and in the past there has been times, where there's been some logistical checkpoints just any thoughts on that would be great. Thanks.
Sure. So maybe let me try to break down on a piece I think whats going on at the industry level is probably most.
Specifically kind of driven by of OEM.
OEM, new car manufacturing issues and I think at that is likely kind of the key driver of that has led to vehicle price appreciation and both new and used I think trying to figure out when that will normalize is at very difficult question and I think everybody's trying to do over the last years is at least so far have been wrong.
And I think maybe simplified model to use for thinking about that as just that.
Those Oems have complicate and global supply chain, which obviously include the microchip that everyone's paying close attention to but include many other parts as well.
And as we've seen different waves of Covid.
Kind of move through different parts of the world, We've generally seen some.
Apply constraints show up and their supply chains, and and that's kind of driven vehicle price depreciation and that seems like that's probably that the number 1 driver of of kind of the unique behavior that we're seeing and the market right now and we.
We wouldn't want to make a specific estimate of when that's likely to normalize and how that would work through their supply chains, but we think that that's probably the the underlying cause as it relates to our inventory I think we're on a pretty simple place right now what we want is more.
We feel like we've got significantly more demand and we're able to handle and we think we have good understanding of the relationships between inventory size and conversion and so we would look to have significantly more inventory.
Working incredibly hard.
Through the addition of of additional inspection centers to adding lines and inspection centers.
We've got a plan to have 1.25 million production capacity by the end of next year. So we're working really hard to build up more capacity and also to ramp up our production as quickly as you, possibly can I think we've seen great progress. There. We grew retail units by 17% last quarter, but we were able to grow production capacity by more than that which was allowed us to build inventory.
So we're just going to keep moving as fast and we can there and trying to build inventory as quickly as we can and then as it relates to the other constraints that emerge across the business I think inventory is definitely the stickiest and hardest to resolve of the constraints that we can face because once you kind of get behind on production relative to sales you've got worked for you too.
Catch back up to sales and and while Youre doing that work and catch up you're shrinking your inventory and then once you're there you're still just kind of holding flat and now you've got to get in front of it to build inventory.
It's a long process and then it's also obviously a very complicated operational undertaking so we've been hard at work on that 1 for the last year, plus and I think at.
We made tremendous progress, especially in light of the.
And the several COVID-19 waves that we've seen.
And we'll keep working on that 1 on the other constraints historically at lease we've generally been able to resolve those much faster of those are generally.
Not as complicated they don't necessarily have.
And youll physical facilities.
Related to them they don't necessarily have.
Zoning and and construction timeline associated with them. So generally we can move faster and the other operational groups.
As I said earlier, we've made a lot of progress heading into early Q3, we.
We did get pretty behind in Q2, as we saw so much growth and in both retail and buying cars from customers, but I think we're making a lot of progress right now so on that 1 I think our goal is also just to move as quickly as you, possibly can and we think that when we look at the back half of this year. We think that sales volume is likely to be driven by the speed at which we can alleviate those constraints.
So it has our full attention.
Our next question is from Chris, particularly of Exane BNP Paribas. Please go ahead.
Hey, guys. Thank for taking the question.
See I was hoping you could talk more about your third party of listing business that seems to have really grown a lot recently like what are your early learnings from this business are you seeing of third party partners change of behavior in terms of their business model any way to kind of adapt to this third party model, but I have a follow up question.
Well I apologize in advance, but I think there and I'll, probably disappoint you a little bit with our answer there. So I think we've.
Continue to make progress there we're testing.
Different things at work.
And we're interested by the results that we're seeing and and that's why we continue to test at but we don't have anything additional to add at this time, so I apologize there and hopefully we can do better on your follow up okay.
Got it Okay, I was going to follow to that at all pivot and do a different angle here.
So let's go to financing this is instead of them.
So it seems like just looking at your latest deals like the <unk> the risk spreads versus the swap rates have gone lower the regency's lower the loss expectations on your on your kind of cumulative losses. It seems like you are paying lower returns to the residual buyers so kind of on and get a sense like how much of this is a product of the environment just lower loss.
And just like we're and this weird credit bubble versus how much of these like recent purpose I'm speaking to how much of that do you think of structured on.
And of sticks beyond kind of Covid.
Because of what you can sort of answer that and frame it.
Sure I think we've made continued progress on our other GPU line item of over a long period of time and I do think that that's driven by many things I think the finance team has done a great job.
And both kind of the operational finance team that optimizes, our credit, scoring and pricing and structuring and and then the kind of finance finance team for lack of of better description debt.
And that executes our deals I think both of those teams have done an unbelievable job and driven a ton of progress.
And I also think the market is obviously, a pretty solid financial market. So I think that all of this constant that's helpful.
And then I think as a result of the environment, we've seen some increases and Asps and then that does lead to increases in average loan sizes and generally speaking the premiums that we earn on.
And those loans are kind of percentage premiums at probably an easier way to think about it and so there's probably some scaling that goes with increasing prices I think if we take a step further back from there.
This line item along with all of the other GPU line items is of multi year constant progression.
Toward our long term financial model and I think that there's a lot of of really positive long term drivers. There I think in the immediate term trying to forecast exactly how that will evolve.
Evolve over the next 2 quarters I think it is.
Not simple to do in light of all of the different drivers that are that are causing it to move around.
But again, that's taken into account and the outlook that we provided and the shareholder letter.
Our next question is from.
All of the Keybanc capital markets. Please go ahead.
Hey, Thanks for taking the question before I asked the question actually sold at car T. You guys. The other week and it was the most painless experience I've ever had with anything with a correlated so my hat's off to you.
I guess for thank you back a little bit.
I know you guys are in the process of being up I think eat more iron ore at the end of 'twenty 2 from a staffing perspective I understand there's a lot of technical knowhow and expertise for quiet how difficult it at to staff those and maybe more importantly staff existing centers to get productivity higher. Thank you.
Sure. So I mean I think.
Yes.
Opened up this call with everything we're doing is hard so I think nothing is easy and make it sound easy at all but I think that we've built a really strong team.
That helps us do this over time, we built a really strong recruiting functions really strong training functions and I think we've also taken advantage of the structure of our business model to be able to offer really interesting opportunities too.
At 2 people out there that are looking for.
For a new job and so what I mean by that is our inspection centers are are really being kind of assembly line facilities and.
And what's nice about that is it lends itself to building a career path inside the facility and in the rest of automotive retail generally speaking at least of.
You have very skilled technicians, they kind of take any car with any problem and put it on a single lift and and they kind of do all of the work associated with that car and that requires that they have a lot of deep knowledge across.
Everything that they would need to know about that car of any of the car of the might show up and what's really nice when you've got scale. At these large inspection centers is weak and kind of break down those tasks and at many little pieces.
Whether it's inspecting the car photographing the car of different parts of the reconditioning process and figure out what.
What options and features are on the car. So that we can merchandise at we've got all of these different steps of the process. So we can really build a career path that is of exciting for people. So we can bring people and early in their career and then they can build of career with us and we've put a lot of effort into that and youre not just in and kind of building the facilities and that way, but in being able to market ourselves and that way too parcel applicants and and bill.
<unk>.
Check in and development milestones and compensation milestones and support that as well.
I think we've really worked hard at that and that same story is true.
And customer care with inside advocates, it's true and market ops with the outside of advocates it's true and logistics.
And we've redoubled, our efforts and all of those areas to kind of really push for what we're calling youll careers not jobs inside of Carvana. So we're putting a ton of effort into that I think that it's it has enabled us to build a foundation that is scaling very quickly.
And it's enabled us to build a foundation that is scaling and an environment, where a lot of companies are having a tough time right now finding talent and I think that.
We're doing a ground lease so far finding talent so that that's something and we're extremely proud of it and then on your comment on selling of your car to US really appreciate that thanks for giving US a shot glad and went well and you are partially responsible for the constraints that we are facing.
Thanks very much.
Our next question is from of.
D. A davidson. Please go ahead.
Okay Hi.
Thanks.
2 questions 1 and it looks like if my numbers are right here.
The ratio of inventories.
And that's immediately available for sale versus.
The inventory that's on your website, it's about 30%, it's been actually pretty consistent in that range. Although at the beginning of <unk> 'twenty was close to about 75% of Einstein and that's because you're having trouble with the constraints because of your sourcing of the inventories so quickly, but I guess the question is what's the right ratio what should that look like and what gets it more and.
Balance is at that you've obviously you can can can produce things quicker or piece come down is at risk that fewer people are going to want to sell their car to you because we know everyone. Everyone knows you can some of your current for tons of money to you guys and your competitors.
Sure. So I think the most important metric is driving inventory up that's the most important and inventory and the eyes of of consumer is immediately available inventories. So just getting the absolute number of immediately available cars up is the most important measure I think the ratio of that Youre referencing.
You want ahead as close to 1 is you can head and you'll never get there right and and the more constrained you are the lower youll be because that means that you've got a larger percentage of your cars that are.
They're kind of in the process of customers checking them out and locking them in and they might be and the purchase process and thats. Because you are of very high level of demand relative to the cars you got on your web site, if you're constrained in logistics and your delivery times might be a little longer than you would like and so that will show up and in kind of longer lock times at a lower proportion of inventory and easily available as well so I think as we <unk>.
<unk> constraints that proportion should go up but I think the number that is.
And kind of most precisely important is just the absolute number of cars that are available to customers is that sort of customer sees and that's what represents the probability that at Hudson with any given set of desires fines of car, they're looking for when they look through our site.
Okay, Okay that makes sense.
Follow up and an end.
Different perhaps.
And as you guys get more mainstream and you know you advertise a lot of them on sort of you know I think is learning about carvana.
Are you seeing of different customer and.
And as at less of an early adopter.
Sort of online and really doctors maybe.
Earlier in the process and so now it's a different kind of customer and this follows up on a previous question how does that impact how you need to staff or on how you need to think about operations. As you know people who are maybe less online savvy are sort of newer to the whole online thing start to learn about carvana.
Sure well, let me start with at our goal is to build and experience for customers that debt.
Better and ways that I think are.
Independent of of demographics psychographics, So we weren't delivered customers of the best value of the best selection of the best experience and so.
Working very hard to build and offering that is appealing to absolutely everyone. I think from the earliest days, we saw a mix demographically and Psycho graphically that was pretty similar to the mix of the average used car buyer and the U S and generally speaking that's been that's been pretty true.
Across time as well I do think there's more evidence as we get a little bit bigger that debt. We're seeing some of the skus emerge that we probably expected from the beginning.
And we're seeing a little bit of of younger buyer all else constant not by a lot, but I think of little bit younger than any other.
Competitor out there, we're seeing of more of aspire.
And again, not by a huge amount, but but but more diverse than anyone else out there at least according to our surveys what we're generally seeing of more affluent buyer of Directionally.
We do have some directional skus again, they're not super strong and so that would be what we're seeing from a demographic perspective from a psychographic perspective, we've got our values and 1 of those values of our next cost of would be your mom and something that we think is really important is that we build and offering that works great for you all use it personally on this case my mom and I.
For this to work great for my Mom, we can't be building something that's just for early adopters and I think our scale and and kind of our continued growth suggested we're continually making progress there and that cycle graphically. We are broadening our appeal and I think that's what's driving the growth that we're seeing so I think we're we're working hard to just continue to improve and all of those dimensions and we.
And out of the most which is best price best experience best selection and if we do that and we think that we've got and offering thats going to appeal to a lot of people over time.
Our next question is from nothing to call on of Truth of Securities. Please go ahead.
Thanks, a lot I might have missed it but did you guys talk about.
And maybe a minute share any trend from July on the growth.
It looks like.
So far and for the quarter and then my other follow up.
So we did not provide any any color on July.
We obviously provide a Q2 numbers and our outlook for the remainder of the year and so that's taken out of count and the outlook.
Okay.
So just a strain.
And trying to model and now and obviously.
And none of them wind project.
Is at.
Fair to assume that at least the capacity increase of that they wanted to put in place.
And that's how we're thinking about.
And the business for the balance of at <unk>.
And kind of fulfilling that and driving utilization higher.
Okay.
We're certainly positioning to try to leave you at operational constraints as quickly as we can I do think that we've got worked for you to catch up to where we are.
As I said the growth and we saw across the business, but most specifically and buying cars from customers was very dramatic in the quarter and so we got behind and now we're working very hard to alleviate that and I think we're making a lot of progress and feel good about it.
Our next question is from fast fashion of what.
Bush Securities. Please go ahead.
Thanks, a lot and good afternoon. My question is also on inventory and if I'm on the site today I can see US money at 50000 units listed for sale what is the available for sale inventory today.
And a follow up for that is what percentage of the 50000 units our marketplace and when do you define that as being material.
Sure. So so first let's let's start with just units that are available for sales. So in the shareholder letter we provided.
Data for the average of Q2, which was 12800 that was increasing throughout the quarter. The average of Q1 for perspective was 9003 hundred cars that were immediately available for sales. So we're on an upward trend there and we expect to continue that upward trend.
So hopefully that's at least directionally helpful. There.
We don't break out different.
Inventory types and I think generally speaking our thought on that would just be when we expect.
And some feature that we built 2 to start to when we expected at could materially impact our results, we'll probably spend more time discussing it but all of them until that time, and we'll just stick with the higher level metrics.
Okay and then also maybe helpful. Yes, sorry, let me go to hopefully help as well so our inventory peak in terms of total available inventory for perspective was approximately 25000.
And kind of immediately prior to and immediately after the onset of Covid in March of last year, So even with the inventory growth that we have seen.
In Q2, we were still approximately half of the peak that we were prior to the onset of Covid. So we're obviously at much much lower levels and we'd like to be at I apologize interrupted. Please go ahead.
Okay, Yeah, that's a pretty dramatic difference at 12, 5000 quarterly average and the second quarter versus North of 50000 net listed for sale right now I can't imagine that over 35000 units are not available for sale right now either by yourselves of by a third party.
And I am I missing something there.
So I think I would stick with the kind of the numbers. We've given you on an immediately available units and then there are obviously a number of units as well of the customers are checking out at any point in time.
At our purchasing or maybe.
In transit to those customers of different locations.
So hopefully that for at least Directionally helpful.
Our next question comes from John Tony of Jefferies. Please go ahead.
Thanks for my question.
Just wanted to make sure I understand the interplay between for production capacity and unit sales. So the directional outlook says second half of unit sales will be governed primarily by production capacity and then separately it looks like you've ramped your operational team hiring rate by 20% of in July and set a record for weekly additions.
And the most recent week I know, there's a lot of moving parts to ramping production of aside from hiring but should we interpret the comments about hiring and for.
The unit sales could see a sizeable increase sequentially and a third quarter for the second quarter.
Sure Yeah. So I think you should interpret the increase and hiring to suggest that we're bulking up across the sum of our operational groups.
And across our corporate and technology groups as well, but obviously the vast majority of people are across the operational groups. So that includes inspection centers that will show up first in.
And kind of increased production capacity, which will allow us to kind of work through the cars that we've already purchased but we have not yet produced.
And then that will cause those cars to show up and available inventory and.
And it will also show up and alleviating the other constraints and we have across our other operational groups, where we're behind today, but working hard to catch up.
Great. Thanks, so much.
Our next question is from belly coupons of Morgan Stanley. Please go ahead.
Thanks. This is on behalf of Adam Jonas just 1 question any from the feedback you're getting from customers and what are the 1 of 2 areas of the consumer experience, where you can make the biggest improvement. Thanks.
I think.
I am going at.
And there's probably a million areas across the experience, where we can make it.
Continually better across time, but if I had to pick 1 thing that is most important today, it's alleviating our constraints I think are constraints can show up.
Despite our constraints, we continue to deliver experiences that are meaningfully.
Above anything else available anywhere and automotive retailer and we're continuing to see NPS scores that are meaningfully above anything else on automotive retail, but those constraints can lead to friction versus what we would.
Otherwise be able to deliver if we didn't have constraints. The constraints can show up in longer delivery times of slightly higher odds of of missing of delivery time, and having to reschedule. It. They can show up and registration delays. They can show up at all kinds of of different ways. So I think the most important thing that we can do right now is catch up to the demand that we're seeing.
The machine that we have delivers extremely high quality of customer experiences and its also built and a way that it absorbs.
Errors that we make at any given customer experience you always make mistakes here and there and were built and wait to be able to absorb that as well when we're properly staffed for the volume that we're seeing and today, we're behind I think that would be the number 1 area to focus I think taking a longer term lens.
We've spoken before about how we have 70 plus product groups across Carvana and I think every single 1 of those product groups has a multiyear roadmap that is extremely exciting.
And with myriad improvements all over the place. So I think there is a lot of things that we're investing and today to try to continually make make this experience even better for customers and I wouldn't want to single any of those out, but I think theres a lot of opportunity.
Helpful. Thank you.
Thank you.
A question and answer session I would like to turn the conference back to management for closing comments.
From a well thanks, everyone for dialing into the call and thanks for your questions.
2 of the Carvana team and we only get to out of our first profitable quarter, 1 time and I think of I always find myself thinking you on these calls and I can always hear that it doesn't come across as completely sincerely as they wish because it's an odd venue and so I hope that you hear our absolute gratitude. This is an unbelievable milestone for those of you have been here for a long time there was.
There was times 678 years ago, and today was extremely hard to see and we fought a million battles together and we figured a lot of things out and we've continually improved and the whole time. We stayed together we fought through Covid together, we've just on so much and I'm, so proud of it and so.
You all for your contributions and please you'll always remember that this does not happen without you.
Some of its parts and and we together make up the parts of Carvana. So thank you. So much we have of tend to be proud of and I hope you put your feet up and and kind of.
Take a moment to be proud of and then I hope you take them down and and kind of Deloitte at Goodyear head and kind of get you ahead of the rate space, because we still got a lot of building to do but we've done a lot so far and we really appreciate it. Thank you at all.
Thank you.
Today's call. Thank you for joining US you may now disconnect your lines.
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