Q3 2021 Vroom Inc Earnings Call

[music].

<unk> initiatives as we announced last month, we entered into an agreement to acquire you ACC with.

With you a C C in our corner will be able to build out a captive finance business commencing in 2022, driving greater profitability and expanding our reach to consumers.

We are on track to exceed our key 2021 supply chain targets. We completed our 2021 rollouts of last mile hubs are ahead of our expectations, reaching over 40% of our customers during the third quarter. Additionally.

Additionally, we grew consumer sourcing to a record high of 81% of our vehicles sold during the quarter.

Looking ahead, we are bullish about the fundamentals of the underlying business and we will continue to take a disciplined sustainable approach to our unit targets, we'll talk more about our outlook later in the presentation.

Now on slide five I'm going to go through a few of our e-commerce highlights.

E Commerce units grew 123% year over year to 19683 units as we capitalize on marketing investments and increased our listed inventory levels in a high demand environment.

Our e-commerce revenue growth outpaced our unit as average selling prices accelerated through the quarter.

Which we attribute mainly to elevated vehicle prices in the broader market.

E Commerce gross profit per unit increased 17% year over year to 2000 and $560.

We hit a record high in product gross profit through higher attachment rates, while our vehicle GPU slightly increased.

We will get further into GPU puts and takes later in the presentation.

Let's go deeper into unit trends on slide six.

As we look across our business Holistically, we like to think about total ecommerce transactions. This means units sold plus units sourced from consumers.

We've experienced tremendous growth in total transactions year to date in excess of 200% as we executed our consumer sourcing initiatives and scale, our selling and processing capabilities.

As you can imagine our consumer sourcing programs has been a key driver of growth for our transactions in the third quarter, we sourced 81% of retail units sold directly from consumers nearly triple our rate in the third quarter of last year and up significantly from 65% in the prior quarter.

Our competitive algorithm based pricing methods make us a compelling option for consumers wishing to sell their vehicles.

Our seles your car and other marketing efforts have also catalyzed seller demand for our model in a favorable market environment.

We amplified marketing this quarter with increased investments in national campaigns. As a result, we achieved a record high and website visitation with over $2 2 million average monthly unique visitors in the third quarter up 28% compared to the prior quarter.

Turning to slide seven as we announced previously we entered into an agreement to acquire you ACC expecting to close late this year or early next year.

We expect our business to reach several benefits from this acquisition first and foremost you ACC combined with room will allow us to build captive finance capabilities, increasing our product gross profit opportunity as we capture more economics of the transaction.

We also expect scale benefits and an improved conversion rate.

Currently we have significant potential with lower credit score consumers, who make up over half of the credit applications we receive.

The acquisition of UA C. C will allow us to increase our reach across the entire consumer credit spectrum.

Integration planning is well underway once the acquisition is complete we expect to begin integrating our back end systems and processes in the first half of 2022.

In the second half of the year will scale E Commerce loan originations as we begin to develop you ACC into an integrated captive finance operation.

We remain committed to an asset light funding strategy for our direct to consumer lending business and will provide more specifics on the combined opportunity of room and you ACC after the transaction closes.

Back to our current operations on slide eight.

I'm proud of our logistics accomplishments this year, our rollout of our last mile program continues we opened our 30th last mile hub in the third quarter, achieving our annual target for 2021 ahead of schedule.

We also accelerated deliveries with our own last mile experienced a 41% of e-commerce deliveries.

Meaning above our 26% last mile delivery rate achieved in the second quarter as we head into the fourth quarter. We are already nearing our 2021 exit run rate target of 50%.

Our last mile program allows us to deliver a superior customer experience and paves the way to better unit economics by improving delivery efficiency.

In addition, we've also made further investments in our line haul program, adding new trucks and drivers to our network this quarter.

I would like to point out that we are currently experiencing reconditioning constraints due to labor shortages and historically high demand levels at our third party reconditioning centers.

We view this as a transitory issue.

While we continue to like the Optionality of third party sites and we'll continue to work with our partners to expand capacity as part of our hybrid approach, we acknowledged the increasingly competitive environment for reconditioning capacity.

Growing interest in selling cars online will also require a room to invest in selective dedicated reconditioning capacity.

Our hybrid approach is the best strategy to scale for the future.

On slide nine is an update on our sales support and technology in the near term, we continue to invest in people to scale, our business and improve our processes are.

Our ability to process higher volumes of transactions on the support side has improved significantly since the beginning of the year as we work towards providing a touchless experience for both buying and selling vehicles.

Going forward, our investments today will move us towards a seamless end to end ecommerce experience as well as driving improved scale economics.

Stepping back I want to recap the themes for this quarter on slide 10, we.

We had strong year over year ecommerce unit growth.

We achieved exceptional gross profit per unit results versus our guidance, we advanced our supply chain strategy and Kickstarted plans to build a captive finance arm for our business in 2022.

In the near term, we continue to navigate through the current supply constrained environment to continue to grow our business.

Now I'll hand, it over to Bob to walk you through the financials of the quarter and our outlook.

Bob.

Thanks, Paul.

It's great to be a member of the pit crew room.

Join everyone for the third quarter earnings call.

I would like to begin on slide 12 with.

With our financial highlights.

We have a strong quarter as we drove healthy year over year unit growth.

It outperformed our expectations for the quarter on revenue.

E Commerce gross profit per unit pool.

Total gross profit and adjusted EBITDA.

Total revenues of $897 million increased nearly 180% year over year and 18% sequentially.

Coming in above the high end of our guidance.

Our overall growth was principally driven by growth in retail units.

Other than expected average selling prices further drove the outperformance relative to our expectations.

Third quarter ecommerce units 19000.

683 grew 123% year over year, and 8% quarter over quarter.

We experienced healthy growth for the quarter as consumer demand remains high for used vehicles and as we delivered strong execution and a healthy demand environment.

During the quarter.

Focus on our strategic objectives drove increased listed inventory and amplified marketing.

Our ecommerce GPP you hit $2560.

Up 17% year over year.

Meaningfully higher product GPU and slightly increased vehicle Gpus.

I'll go further into the drivers of ecommerce units and ecommerce performance on the next slide.

Total gross profit for the quarter of $58 million increased 128% year over year and came in ahead of our expectations.

This was driven primarily by the expansion of ecommerce GPU and higher unit volumes.

As expected our per unit profitability contracted versus the second quarter as we experienced transient macro headwinds to sales margins.

Despite the headwinds we surpassed our gross profit guidance for the quarter, thanks to better than anticipated performance across all three lines of our business.

EBITDA, which was adjusted for acquisition costs related to our announced you ACC transaction came in at $87 million loss versus a $36 million loss in the prior year.

This was also ahead of our expectations for the quarter.

Third quarter adjusted loss per share of <unk> 70 was better than our guidance due to improved revenues gross profit and expense levels.

At the bottom of page 12.

You can see the primary highlights of our fourth quarter outlook.

For more details regarding our fourth quarter guidance. Please see our earnings press release.

We're expecting 20000.

2500 e-commerce units in the fourth quarter.

This implies 84% year over year growth at the midpoint.

As Paul mentioned, we are experiencing transitory events that are reducing throughput in our supply chain.

As a result of these temporary issues, we anticipate total revenues of $865 million to $900 million.

Our year over year midpoint increase of 117%.

Primarily driven by unit growth.

Current elevated average selling prices.

We expect e-commerce gross profit per unit in the range of $2100 to $2300.

Implies 21% year over year growth at the midpoint.

We are guiding to a total gross profit of $50 to $58 million, primarily driven by our annual growth in ecommerce units and GPU.

We remain focused on achieving over 200% gross profit growth for 2021.

Slide 13 provides a summary of our third quarter E Commerce performance.

As we've discussed previously on today's call.

E Commerce units grew 123% year over year, but came in slightly below our expectations.

E Commerce revenues hit $702 million.

An increase of 216% year over year, driven by strong unit growth and higher average selling prices.

Our third quarter ecommerce average selling price of approximately $34400 expanded significantly year over year and was higher than our guided range as we continue to improve our pricing algorithm and the historically strong vehicle pricing market.

E Commerce vehicle GPU of $1315 increased slightly from $1302 in the prior year.

During the quarter, we continued to deliver improved productivity on reconditioning costs, which was partially offset by lower sales margins as the cost to acquire vehicles in the current environment, we're higher than the prior year.

E Commerce product GPU of $1245 increased $359 or 41% from $886 a year ago, and also showed quarter over quarter gains.

Our higher product profitability was primarily driven by higher attachment rates as well as higher average loan sizes due to higher ecommerce average selling prices.

Moving to the other segments on slide 14.

Wholesale unit of 9760, <unk> grew 58% year over year.

Wholesale gross profit per unit up $215 contracted year over year as expected and came in ahead of our guidance of 50 to $100.

Because of our pricing strategy has kept pace with increasing prices in the used vehicle market through the quarter, we were able to book higher gross profit on wholesale units than we originally anticipated.

We sold 1740 <unk> units in the third quarter growing 20% year over year and surpassing our expectations.

We saw a positive customer response to our inventory selection improvements for TBA.

<unk> also increased to $2175 for the quarter.

Up $347 over the prior year and well ahead of our guidance range of $1650 to $1750.

TDA GPU benefitted from lower per unit sourcing costs year over year.

As well as higher product profit due to higher average loan balances.

Turning to slide 15.

I would like to provide some additional color on our SG&A performance.

On an absolute spend basis, our SG&A increased as we continued to make key strategic investments in staffing and new technology to keep pace with demand as Paul discussed earlier in his comments.

The chart on slide 15 shows our SG&A spend per total ecommerce transaction year to date for 2021 versus 2020.

For 2020, our total SG&A spend per total ecommerce transaction was $5401.

Year over year increases in logistics rate inflation and expenses related to the announcement of the acquisition of <unk> added $169 per unit on a year to date basis.

Our total ecommerce transactions, which we define as ecommerce vehicle purchases plus E. Commerce units sold has more than tripled year to date versus 2020.

Purchases include trade ins and straight buys and exclude auction source units.

The increase in logistics and transaction expenses, we are seeing the benefit of leveraging our scale by reducing per unit cost by $1617 year over year.

On a net basis. This benefit resulted in a 27% reduction to our year to date SG&A per total ecommerce transaction versus 2020.

In closing on slide 16.

Im pleased with our performance during the third quarter we.

We are working tirelessly to continue executing our growth strategy.

Our fourth quarter guidance continues our track record of strong year over year growth and.

And we're looking forward to closing the UAC acquisition and welcoming their team as partners in the future growth of our company.

We are excited to share with you the transformational aspect of the <unk> acquisition and will do so after the transaction closes late this year or early in 2022.

Thank you for your time, everyone. It is great to be a growth with that Paul and I are ready for your questions.

To ask a question you will need to press star one on your telephone to withdraw your question press the pound key again Thats star one on your Touchtone telephone to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of.

Zach freedom.

Wells Fargo. Your line is open.

Hey, good morning, So if I take your current output of about 1500 E com units per week. It suggest youre running at about 52% of your reconditioning capacity and I realize there are some near term labor constraints that are bogging down today, but can you talk about what needs to happen to unlock that full.

And whether it's reasonable for us to expect breakthrough that 60% utilization level in the upcoming quarters.

Yes, Thanks, Zach I'll take that one.

Whats required to unlock that capacity is doing what we've been doing which is we've been adding additional facilities. We've been ahead that adding additional head count to us facility and we've been adding additional head count to our own facilities and then when you think about that that's the near term outlook. We continue.

To work with our third party partner.

His scale scale, our origination capacity and we've been we've been absolutely successful in doing that throughout the year, even quarter to quarter growing that express capacity from 2800 units to 3200 unit. So that is really doing what we've been doing where we see a challenge in our business, we lean in on that challenge.

And we think that the problem and we see this again as a as a transitory short term issue not a long term mission. Yes. That's the one thing I just want to add to that is.

Paul commented on what we're seeing is.

There is a significant piece of this that is the labor issue with.

With our partners at the end of third party locations, so to the extent that.

We're working hard as Paul mentioned in our own facilities in the Permian with the with our third party partners.

To do everything we can to get the get the staffing levels correct. So that's that's one one key driver then Paul had mentioned in his comments as well just the current demand situation.

That we're facing.

Nationally is.

Is it driving very competitive situations in the reconditioning centers at this point in time as well.

Got it and then I like the way that you guys framed the total E com units, both both buys and sells and I'm curious if you could talk about 80% of cars now source from customers. In Q3 can you talk about how you are managing through that.

Strengths on resources and your infrastructure, just given that sharp horizon customer sourcing and then how you think about the trade offs between the GPU benefits of higher customers sourcing versus the added SG&A and capacity constraints and.

To what extent do you think this pivot is accretive versus dilutive.

Absolutely. Thanks for the question so the way the way that we look at it it's basically a dial for us and right now with the with the current situation.

In the in the auction market geological showed upper option lots of bids on vehicles extremely price competitive so really the tradeoff that you do when you do the when you do a transaction like this when you buy from a consumer generally speaking you incur higher a higher inbound logistics into the recon centers, you get a better vehicle.

But you also spend some additional SG&A as well so really the trade off is better vehicle versus the additional cost from an SG&A perspective, and from an amount logistics perspective, and we're constantly looking at that and making a determination in terms of what's the right trade off but right now with the.

With the current auction market.

The tradeoff is definitely to our benefit to move.

Moving now towards the consumer sourcing, but we'll continue to tweak that and adjust that based upon.

Based on current market conditions as they develop.

Overtime.

Got it thanks for the time guys.

Thank you for the question.

Thank you. Our next question comes from Rajat Gupta of Jpmorgan. Please go ahead.

Great. Thanks for taking the question just had a follow up on the reconditioning question.

The dedicated centers that you're adding.

Could you give us a sense of.

The timing.

The capacity.

And just you know the cash needs for that.

Although dedicated centers how those ramp.

I have a follow up thanks.

Yeah, Thanks, Scott, Yeah, I'll take that one.

First and foremost.

I signaled in our second quarter earnings that we would start to contemplate this.

And look we're going to be incredibly thoughtful about.

Where we're putting these reconditioning centers will obviously be matching supply opportunity and demand opportunity. So that they are super strategic in our location and the size and scale and their ability to coordinate with our logistics requirements. So we're going to be thoughtful on that and when I think about the.

The investment thesis.

The language that we've been using it.

Six of 60 locations. So our hybrid approach our asset light approach still rule. The day here so that we're aligning the.

The needs of the business and being judicious in our.

In our capital deployment. So we think of these as.

Our $100 million, maybe is as great as $150 million in total capex not $2 billion and we don't see this to be a fixed.

61.

Room Reconditioning centers again, we think call it call it half a dozen or so in all of the places that you might expect would be strategic areas that have high demand and high supply.

Rich I just want to add to that.

Just to Pauls comments, we really view this as just responsible capacity.

Perhaps the planning for the company, where we have a.

A high demand area, it's going to make a lot of sense for us to make.

To make some reasonable investments to support to support the company's because what will happen will be able to have very stable operations in the reconditioning centers and with stable operations mean anything higher throughput and it means lower cost. So it basically addresses more volume to our customers and more of our top volume.

It's better for our shareholders as well.

Understood. Thanks for the color there or just one question on the GPU or E Commerce Gpus particular.

For the fourth quarter, you are guiding to roughly $350 drop at the midpoint.

<unk>.

Presumably that's all on the retail side.

Is that primarily baking in some seasonality.

Even higher reconditioning in inbound logistics.

Or is there some conservatism around the direction of used vehicle pricing for the remainder of the quarter, just trying to get a better sense of that bridge.

From <unk> to <unk> did you view, particularly given my used vehicle pricing remains elevated.

And do into October and November yes.

Yes. Thanks for the question most of the Delta that we're seeing between the third quarter and the fourth quarter with respect to the GP is really being driven by additional additional cost.

As a result, our reconditioning and logistics, so that's really what you're seeing.

<unk>.

Got it right vishal, thanks for the color.

And just let me be let me be very clear about the reconditioning and actually shipping vehicles as well.

And our founders and inflation and what we're seeing in terms of in terms of rate inflation.

Just on a year over year basis, and what the trend looks like.

Understood that's fair, thanks, I'll jump back in queue.

Thank you. Thank you.

Thank you. Our next question comes from Sharon Zackfia of William Blair. Your question. Please.

Hi, Good morning, a couple of questions I guess first.

Would be helpful to get an update on kind of how the recon cost is trending at your third party partners versus your own the facility, particularly as you contemplate opening more owned facilities and then secondarily I guess.

It's obviously difficult to control, what's going on with their third party partners, but where is the staffing level now versus where you would ideally want it to be.

How confident are you in kind of those parties getting the staffing up to the level you need in order to prepare for tax refund season.

Great I'll take that one thanks Sharon.

In terms of the cost structure, we continue to.

Deploy the hybrid approach because we see we see attractive cost structures, both within our own and with it with our third parties and so we're managing that well and are comfortable with.

The reconditioning cost in terms of trend.

The overarching trend for reconditioning in terms of efficiency will start to decline as we scale in the near term as you have heard from our from our prepared remarks and from the debt in the near term there is pressure, which leads to your second question.

How confident are we in our third party, we're working with them directly to make sure that we.

We've got the.

The mechanics that we need the staff that we need to get our our output to where we needed to be and to dimensionalize.

That.

We are modestly off of where we wanted to be in Q3, and again modestly from where we want it to be in Q4.

And then in the couple of hundred units, maybe to a 1000 units and when you spread that across 30 reconditioning location. It's handfuls of unit by location. So we don't again, we see this as a transitory issue that our teams are working to solve rather rather than something that is structural in nature.

And long term, yes, sure and just to add on what Paul said, I think you really kind of put the.

Put the unit.

If you look at the units in context.

We were about 400 units below the low end of our range for the quarter and then Dubuque were spread across 30 reconditioning centers over over a 90 day period, you're basically talking about one vehicle every 90 days.

In terms of the overall impact that will drive that will drive that kind of shortfall.

Well really when you look at the when you look at it that way to look at the data.

The labor constraint it has it has impacted.

It has impacted our unit volume.

As Paul mentioned earlier.

Working hard to continue to expand our capacity with other third party partners with our existing third party partners and then making those strategic responsible strategic investments with the with our own dedicated capacity as well.

That's really helpful. I guess one other question are your agreement structure is such that if the third parties are having labor pressure. That's passed on to you is that like a cost plus arrangement or how does that kind of work.

Yes, we don't we don't care, the particular risk sharing.

Have any of our agreements.

But we're confident we're working through that we're working through the problem without it without it.

Impacting cost in a material way for the long term. So we're I think we're in good shape there with our agreements.

Thank you.

Thank you Sharon.

Thank you once again to ask a question. Please press star one on your Touchtone telephone again star one on your Touchtone telephone to ask a question.

Our next question comes from the line of Seth Basham of Wedbush. Your line is open.

Thanks, a lot and good morning, I have a question around GPU ecommerce GPU in the third quarter to start just.

Thinking about that huge increase in mix of vehicles that you sold that were sourced from consumers.

Those usually come with much higher Gpus.

But that didn't seem to be reflected on a year on year basis improvement or even sequential improvement in your E Commerce.

Vehicle Gpus can you help us understand why.

Sure Seth this is really along the same lines, what we talked about in the <unk> in the third and fourth quarter.

What's baked into our guidance in the fourth quarter. It's just the incremental costs, we're seeing on the logistics on the logistics side and on the reconditioning side as well as really driving the difference.

Okay, and just a follow up on that if we look at your E Commerce GPU guidance for the fourth quarter 2200 at the midpoint relative to $25 60 that you're poised for a third quarter. That's a $360 decline and you were attributing that primarily to the higher reconditioning logistics costs, that's pretty substantial increase.

On a three month basis.

Okay.

That's correct. It is a substantial increase in the debt. If you look at the trends that's what we're seeing.

Especially as more so on the reconditioning side on the logistics side, but that's those are the those are the primary drivers.

Okay, and then lastly, if you look at the guidance for the full year round gross profit increase from over 200% that would imply that gross profit dollars.

For the fourth quarter, we need to be at the high end of that guided range unless I'm doing the math wrong.

So if you do the math correct.

We'd look at.

Correct.

Thank you.

Thank you.

Thank you. Our next question comes from Edward <unk> of Keybanc capital markets. Your line is open.

Hey, good morning, guys. Thanks for taking the question I guess first good progress on the consumer source vehicles that 81%, though is that kind of ahead of where you would plan longer term are there some downside to having a high consumer source.

Percentage I guess second given you guys talk through these reconditioning issues are you slowing the buy.

Or are you expecting that inventory levels of vehicles in progress should increase in the interim and then the final. One you guys have really transformed the business. This year, how should we think about the longer term algorithm or on profitability given all the services you brought in house.

Okay, great great.

I'll start with that and Bob can add comments.

At the end.

Terms of consumers are.

And Bob articulated earlier.

Earlier.

We're going to be good stewards of the business. So we're going to dial that in as appropriate based on what we're seeing on demand and we're using all of our R.

Our data scientists and algorithm to be to be good buyer and whether that number remains at 80 or 81% of dropdown to 70 or 75% of our actually creeps up that's something that we'll be evaluating over time, and we're going to be opportunistic on the market. So if it turns out that there are cards that Lee.

Don't that are good deals when they happen to be an option, we will do that and and.

And if we continue on our on our kind of consumer care.

We'll do that as well as it makes sense for our business in terms of the are we ahead of schedule.

We've been good at it's been in our DNA buying cars from consumers, we think thats super strategic for us not only because of the unit economics associated with those cars, but also because that becomes a great target audience for us to sell cars too and so we think it's strategic.

Got the marketing right. We've got the algorithm and then we've got the people and process now working right that allows us to get to 81%.

<unk> of our mix. So we're we're really proud of that and again.

<unk>.

We'll be thoughtful.

What the what the perfect mix it by quarter based on the market environment.

Regarding the slowing by again, we're buying inventory based on our forecast and what we what we see not only in the fourth quarter, but what has been.

Historically Q1, typically is a strong quarter for us. So again, we're buying supply to match, what we forecast the demand to be and so we.

That's reflected in the number of cars that you see on our website and as we scale that business. We ultimately know that more cars drive a better conversion. So again, we will we will be thoughtful quarter to quarter on what that right number is so that we don't get into an oversupply situation.

Or a missed opportunity situation in terms of under some lines of business in terms of long term profitability again, I'll, let I'll, let Bob comment on that but I think we'll be in a much better position as we complete the year.

And complete our potential our acquisition and our transaction with <unk> to give you a <unk>.

Better view on.

Not only 2022 in the aggregate, but also what this business looks like going forward multiple years out yes. The only thing I would add to what Paul said is.

On the SG&A side and I referenced it in my in my comments on slide today that we are starting to deleverage on a totally.

Total ecommerce transactions.

We continue to.

We continue to look at it on a per transaction basis and expect to continue to see that leverage as we continue to ramp up volume.

Next year, but I will have I will have more to with respect to.

Longer term outlook.

I'll have more to say after the after the UAE to transaction close.

Thanks, so much.

Thank you again.

Okay.

Thank you. Our next question comes from Alex Potter of Piper Sandler Your line is open.

Hey, guys one more question on the.

I guess the implied Gpus guide in Q4.

No that's clear the labor the reconditioning costs.

Logistics costs are a headwind what are you expecting for F&I attach rates.

The ancillary products things like that do you expect that to be flattish versus Q3 are ticking down also.

Yeah, well so so thanks. Thanks for the question, we don't we don't guide specifically on what the attachment rates are going to be.

For our for our product revenue, but I do want to say just a little bit more on the logistics aspect of the cost increase from the third quarter to the fourth quarter.

If part of the part of the additional expense as well. The reason. This is transitory we are doing some things shipping vehicles. Some additional distances between some of the some of the reconditioning centers because of.

Just because of capacity constraints. So we are incurring we arent, giving some additional mileage on an average transaction and thats driving up costs as well as some.

The rate of inflation, but on top of the rate of inflation as we go into the holiday season.

You generally see rates get.

I'll move up a little bit around the around the Thanksgiving and the Christmas holiday, but in addition to that we are doing some things in terms of shipping it gives us some additional businesses to make sure that that we have enough.

Vehicles as possible to satisfy them.

The great demand that we have from our customers.

Okay. Good that's helpful.

And then maybe one last one on <unk>.

Marketing.

Looks like if I'm doing my math correctly, it looks like your marketing expense per E Commerce unit.

<unk> <unk> hundred or a little bit about that in Q3, it looks like guidance implies similar level of spending maybe.

Maybe a little higher again in Q4, just wondering if you can comment maybe a qualitatively what are you working on you've referenced a couple of national campaigns and things like that but then also looking forward is this a run rate level of spending is this something that youre sort of choosing in the near term and then we'll come back down.

Any qualitative or quantitative comments would be helpful. Thanks.

Yes, great I'll take that one.

Yeah.

We're building a separate brand and so we will be good marketers Bolton and building our brand and telling our story and the various media channels, whereas that worked well as well as being.

Very very strong digital marketers to drive transactions in our business and so.

We mentioned that.

We're working on a national campaign.

That led to some of the increase in the spend.

In the third quarter.

And I'll tell you. This we're very pleased.

With the way that the marketing is not only building brand awareness of the trend in our brand awareness is exactly where we want it to be but also as you can see in the total transactions of our business. We are both buying and buying a lot of car and selling a lot of cars. So we're feeling very very positive.

About the.

The job that the marketing is doing for us and so we'll continue to be and use that as a lever in our business.

To scale, our business in the future and so.

I'm very pleased with the outcome of our of our marketing initiatives.

Great. Thanks, Scott.

Thank you. Thank you.

Thank you. Our next question comes from John.

Tony of Jefferies. Your line is open.

Thanks for taking my questions just a quick one on capex, the $100 million to $150 million that you mentioned.

Can we think about that as a 2022 investment or multiple years, maybe you could just give us a little bit more sense of the timing there.

And then related to that based on the results from the last mile Buildout, which seems to be going well is the expectation that youll continue to build the percentage of units delivered bye bye from trucks over time.

Sure follow up thanks.

John Thanks, so much for the question with respect to the Capex. So the first thing.

We talked about in the Q that if you look at our in our capacity in a normal situation, where we were fully staffed with our with a third party locations. We've got capacity for about 3200 units a week.

So we take that and you basically you basically annualize it.

That's why we're really focused right now.

Possible capacity additions.

So we're.

The primary focus right now is helping our partners to step up the current locations that we have and making sure that our.

The doctors that are dedicated through facility is fully staffed.

And productive as possible so that as that.

It's always the lowest capital alternative and Thats. The first thing that we look at it.

Terms of the investments that Paul referenced.

This is the overall this will be over a few years. So there is no. We're not we're not saying that we're going to spend it all we are not going to spend it. All next year. This is over this over the next three years to four years.

With.

The addition of.

Probably the one one maybe.

Maybe two facilities were profitable.

One or two.

Next year, but not fully operational.

And that would probably not not firing on all cylinders, but we're looking at this over a overview of year period.

I'll, let Paul take the second part of your question, yes on the on the last mile.

Couldnt be happier with the progress that we've made we're running ahead of schedule, we're delivering customers a great experience and.

We feel great about our our run rate of hitting our 50% target.

At year end.

And we're going to keep going because the customers love it.

At scale, you get efficiencies in air logistics.

Can schedule not only the day of the delivery, but at the time of the delivery and it's just a fundamentally better experience and as a result, our business gets much more predictable and with predictability kind of efficiency. So we're going to keep going on last mile.

And we're really pleased with how it's going so far.

Great and just had one more on the wholesale looks like the midpoint of guidance for the wholesale segment.

Lying roughly a 30% sequential decrease in the number of units sold.

Could you just talk about kind of the puts and takes here.

This is a reflection of.

Need to sell down a bit.

Inventory buildup.

From the ramp in consumer purchases during Q3.

Maybe some elasticity headwinds to conversion from increased retail prices, particularly given rooms inventory mix already skus to vehicles that are close to new vehicle prices.

Yes, I'll take that one and the answer is no thats not how we think about wholesale.

We didn't have an inventory buildup that then we ended up getting into the into the wholesale market.

When we put a price on every car that come to us right and we're seeing massive demand for our product again, because we've got this marketing mix and the machine cranking in terms of buying cars from consumers. We are an outstanding place to go.

We get a disproportionate amount of wholesale cars that come into us and when we and when we buy those cars, we sell them into the wholesale market and so that.

And then were.

We're obviously looking to buy for retail because that's what fuels our.

Our growth business.

But we're not we're not doing anything adverse to the retail business can move it into the wholesale market and what you see in terms of the.

The return on the gross profit per unit associated with the wholesale market.

That's because of the broader market and that effectively moved with the with this unprecedented all time high market that we're operating in and that's what's reflected there.

Thanks, so much.

Sure.

Thank you. Our next question comes from Nick <unk> of Raymond James Your line is open.

Hey, guys. Thanks for taking my question just a couple of quick ones.

Can you just talk about that.

Timeline and give us some more detail around.

It sounds like for integration and when you would expect to start to see some benefits in terms of.

Market share gains and increased conversion.

Subprime market.

And then secondly, just on used.

Used car inventory.

As that potentially it starts to normalize perhaps next year, obviously, you've seen a significant ASP growth.

This year, how do you think about that dynamic kind of if pricing starts to normalize is that a headwind.

22, Thanks a lot.

Sure Nick Thanks for the question so on the ACC, we talked about it a little bit so from the timing of the transaction closing late late this year early next year and then in terms of.

We've talked about it is our goal.

We will set up.

Yes.

Our captive finance structure to support to support our company.

We will do something initially.

Debt.

That will allow us to go after some.

Low hanging fruit and the teams are working together.

But we're not going to comment on what the long term outlook is going to look like until after the transaction closes.

Okay.

Daniel Nick as far as the.

The used car inventory returning to some normalcy.

We welcome that I think when we think about the inflated average selling price that we're seeing now that that is really market driven in that market as you know.

On the wholesale side is up.

In excess of 45% since the beginning of the year.

And on the retail side up approaching 40% since the beginning of the year. So it's been it's been frothy.

We've been good executed in some crazy markets. We've been we've done an outstanding job navigating a tough waters of Covid, we've done an outstanding job navigating the top markets of Covid resurgence and Varian.

And then it was microchip a new car and we will again continue to navigate those.

That supply and pricing environment by leveraging our data science and our ecommerce platform and the smart close we've got in our business and so what we expect in the longer term is that A&P as we will start to come down again, and we know that the bigger broader market.

Ultimately in the in the 20% to 20 $25000 range and we expect that at scale, that's exactly where everyone will be operating so we'll be taking advantage of the highest chunks of the demand of that market and you also asked the UAC question as we're better able to serve the subprime market that will also move.

<unk> down in an average selling price as well because as you can imagine subprime customers are buying cars that are closer to the $20000 range. So we expect to move with the market and move with the acquisition.

Thanks, a lot.

Thank you. Thank you.

Thank you. Our next question comes from Nevada Com <unk> Securities. Your line is open.

Alright, Thanks, a lot maybe.

Turning to the GPU.

And e-commerce.

Can you just maybe talk about the different puts and takes there it seems like.

You had been able to realize some efficiencies and announcing.

Price fluctuations.

You could you could one could argue that this is a very favorable environment.

From a pricing and therefore.

It should be a tailwind to <unk>, but maybe just.

Caught on the different factors, how should we think about the sustainable GPU.

Building on this.

The noise from.

ASP fluctuations how should we think about that.

In a more normalized yes.

I'll start and Bob will chime in and again, you said is a bit of a there's a bit of a broken record here when logistics when there is when there is.

Capacity constraints in the supply chain.

It adds delays in time and cost so whether that's in our logistics or in our reconditioning or as Bob said, even in our logistics costs are up even if we're moving inventory to make sure that we're balancing.

Our work in progress and capacity. So we can drive throughput and those are all drivers of expense.

We're also operating in a very very high price market and just because we're paying a high price as you can imagine that means you have to sell those cars for high prices too. So there are not absolute clear games. When you are paying a premium for inventory and I just would make one more.

About the challenge.

Our used car prices average selling prices now.

At or above new car pricing and so you can imagine that just puts a.

Chilling effect on how much you can ultimately charge. So that's created some pressure in our in our sales margin. So look I think the data science toward our ability to buy cars from consumers our ability to manage our business. These are all structural fundamental improvements we've made to the business and.

These incremental costs that we're seeing in logistics in recon are transitory.

And that's really the way to think about it.

Great.

Maybe another question on the on consumer sourcing.

Can you maybe just touch on how much are you relying on third party for the pickups.

Scope.

<unk>.

In doing this.

Okay.

Yeah.

We have got a hybrid approach as you know we use third parties and we pick up cars ourselves and you can imagine with a growing fleet of last mile that drops off par that's a logical time to pick up cars that drives efficiency in our network as well so.

It's a mix, we don't articulate exactly what that mix is.

I can tell you is if we're if we're leaning in on last mile and building that out.

That mix will shift to.

To our own fleet to gain those efficiencies at scale.

Thank you at this time I would like to turn the call over to Paul Hennessy for closing remarks, Sir.

Great. Thanks, everyone for joining the call and a special thanks to all the <unk> employees and room partners that helped us deliver a.

<unk> Q3 end.

We're going to deliver a great Q4, thanks, everyone.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Yes.

[music].

[music].

[music].

Good morning, and thank you for standing by welcome to the rooms third quarter 2021 earnings Conference call.

At this time.

All participants lines are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Joining us on the call today are Paul Hennessy, Chief Executive Officer, and Bob Krakowiak, Chief Financial Officer. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at IR Dot group Dot com, the third quarter earnings release and earnings presentation.

Patients are also posted to the IR website.

Before we begin please note that the discussion today includes forward looking statements within the meaning of the federal securities laws, including but not limited to statements about rooms operations and future financial performance.

These and other forward looking statements are subject to a number of risks uncertainties and other important factors that may cause actual results to differ materially from those in such statements.

We direct you to the company's most recent SEC filings, including the risk factors section of rooms. Most recent Form 10-K for the year ended December 31, 2020 as updated by our quarterly report on Form 10-Q for the three months ended September 32021 four.

For additional discussion and factors that could cause actual results to differ materially from those in the forward looking statements.

Please note further that todays discussion, including the forward looking statements speak only as of the date of this call and room assumes no obligation to update such statements based upon future developments or otherwise.

The company May also discuss certain non-GAAP financial measures during today's call.

You can find a presentation of the most directly comparable GAAP measures and a reconciliation of those measures in the third quarter earnings press release.

I'll now hand, the conference over to your first speaker today, Paul Hennessy, Chief Executive Officer. The floor is yours. Thank you and welcome everyone to Brown <unk> third quarter earnings call.

Hey, Bob and I will walk you through our presentation reviewing our third quarter performance and provide an updated outlook on the balance of this year.

Before I dive in I'd like to thank our employees and board members for their incredible efforts this quarter as we built an outstanding customer centric company.

I'd also like to thank our investors for their ongoing support as we scale our business.

Let's start on slide three I wanted to take a minute to formally introduce our new Chief Financial Officer, Bob Krakowiak well.

While many of you have heard from Bob on our United Auto Credit Corporation are you ACC acquisition call.

This is his first time joining us for earnings.

He's been with us for two months now and his experience and guidance have already been a tremendous asset for them.

Bob joined US from Stoneridge Corporation, a designer and manufacturer of electronic systems for the automotive industry, where he served as CFO for over five years previously he served in finance and Investor Relations leadership roles at Visteon Owens Corning and Kmart Corporation.

I'm thrilled to have Bob on the team is seasoned track record a results driven leadership will help propel grown to the next level.

Let's turn to slide four.

We are proud of our performance during the third quarter, we drove triple digit year over year E. Commerce unit growth as we ramped output across the business to keep pace with record demand.

While we are slightly light of our guidance on E. Commerce units, we feel good about taking a disciplined approach to our acquisitions pricing and supply chain.

Our E Commerce gross profit per unit or G. P. P. You came in well ahead of our guidance as we preserve vehicle margins and expanded product margins. We delivered strong results on the expense side as well coming in better than our initial expectations, while still investing in our long term objectives.

We're making progress on our strategic initiatives as we announced last month, we entered into an agreement to acquire UAC C with.

With you ACC in our corner will be able to build out a captive finance business commencing in 2022, driving greater profitability and expanding our reach to consumers.

We are on track to exceed our key 2021 supply chain targets. We completed our 2021 rollout of last mile hubs are ahead of our expectations, reaching over 40% of our customers during the third quarter.

Additionally, we grew consumer sourcing to a record high of 81% of our vehicles sold during the quarter.

Looking ahead, we are bullish about the fundamentals of the underlying business and we will continue to take a disciplined sustainable approach to our unit targets, we'll talk more about our outlook later in the presentation.

Now on slide five I'm going to go through a few of our ecommerce highlights.

E Commerce units grew 123% year over year to 19683 units as we capitalize on marketing investments and increased our listed inventory levels in a high demand environment.

Our e-commerce revenue growth outpaced our unit as average selling prices accelerated through the quarter.

Which we attribute mainly to elevated vehicle prices in the broader market.

E Commerce gross profit per unit increased 17% year over year and $2560.

Hit a record high in product gross profit through higher attachment rates, while our vehicle GPU slightly increased.

We will get further into G. P. P. You puts and takes later in the presentation.

Let's go deeper into unit trends on slide six.

As we look across our business Holistically, we like to think about total ecommerce transactions. This means unit sold plus units sourced from consumers.

We've experienced tremendous growth in total transactions year to date in excess of 200% as we executed our consumers sourcing initiatives and scale, our selling and processing capabilities.

As you can imagine our consumer sourcing programs has been a key driver of growth for our transaction in the third quarter, we sourced 81% of retail units sold directly from consumers nearly triple our rate in the third quarter of last year and up significantly from 65% in the prior quarter.

Our competitive algorithm based pricing methods make us a compelling option for consumers wishing to sell their vehicles.

Our seles your car and other marketing efforts have also catalyzed seller demand for our model in a favorable market environment.

We amplified marketing this quarter with increased investments in national campaigns. As a result, we achieved a record high and website visitation with over $2 2 million average monthly unique visitors in the third quarter up 28% compared to the prior quarter.

Turning to slide seven as we announced previously we entered into an agreement to acquire you ACC expecting to close late this year or early next year.

In fact, our business to reach several benefits from this acquisition first and foremost UAC C. Combined with room will allow us to build captive finance capabilities, increasing our product gross profit opportunity as we capture more economics of the transaction.

We also expect scale benefits and improved conversion rate.

Currently we have significant potential with lower credit score consumers, who make up over half of the credit applications we receive.

The acquisition of U S. T C will allow us to increase our reach across the entire consumer credit spectrum.

Integration planning is well underway once the acquisition is complete we expect to begin integrating our back end systems and processes in the first half of 2022.

In the second half of the year will scale E Commerce loan originations as we begin to develop you ACC into an integrated captive finance operation.

We remain committed to an asset light funding strategy for our direct to consumer lending business and will provide more specifics on the combined opportunity of room and you ACC after the transaction closes.

Back to our current operations on slide eight.

I'm proud of our logistics accomplishments this year.

Rollout of our last mile program continues we opened our 30th last mile hub in the third quarter, achieving our annual target for 2021 ahead of schedule.

We also accelerated deliveries with our own last mile experienced a 41% of e-commerce deliveries.

The above our 26% last mile delivery rate achieved in the second quarter.

As we head into the fourth quarter, we are already nearing our 2021 exit run rate target of 50%.

Our last mile program allows us to deliver a superior customer experience and paves the way to better unit economics by improving delivery efficiency.

In addition, we've also made further investments in our line haul program, adding new trucks and drivers to our network this quarter.

I would like to point out that we are currently experiencing reconditioning constraints due to labor shortages and historically high demand levels that are third party reconditioning centers.

We view this as a transitory issue.

While we continue to like the Optionality of third party sites and we'll continue to work with our partners to expand capacity as part of our hybrid approach, we acknowledged the increasingly competitive environment for reconditioning capacity.

Growing interest in selling cars online will also require a room to invest in selected dedicated reconditioning capacity.

Our hybrid approach is the best strategy to scale for the future.

On slide nine is an update on our sales support and technology.

In the near term, we continue to invest in people to scale, our business and improve our processes are.

Our ability to process higher volumes of transactions on the support side has improved significantly since the beginning of the year as we work towards providing a touchless experience for both buying and selling vehicles.

Going forward, our investments today will move us towards a seamless end to end ecommerce experience as well as driving improved scale economics.

Stepping back I want to recap the themes for this quarter on slide 10, we.

We had strong year over year E Commerce unit growth.

We achieved exceptional gross profit per unit results versus our guidance, we advanced our supply chain strategy and kick started plans to build a captive finance arm for our business in 2022.

In the near term, we continue to navigate through the current supply constrained environment to continue to grow our business.

Now I'll hand, it over to Bob to walk you through the financials of the quarter and our outlook.

Bob.

Thanks, Paul.

It's great to be a member of the pit crew. It drew him join everyone for the third quarter earnings call.

I would like to begin on slide 12 with.

With our financial highlights.

We had a strong quarter as we drove healthy year over year unit growth.

Performed our expectations for the quarter on revenue.

E Commerce gross profit per unit.

Total gross profit and adjusted EBITDA.

Total revenues of $897 million increased nearly 180% year over year and 18% sequentially.

Coming in above the high end of our guidance.

Overall growth was principally driven by growth in retail units.

Higher than expected average selling prices further drove the outperformance relative to our expectations.

Third quarter ecommerce units 19000.

683 grew 123% year over year, and 8% quarter over quarter.

We experienced healthy growth for the quarter as consumer demand remains high for used vehicles and as we delivered strong execution and a healthy demand environment.

During the quarter.

Focus on our strategic objectives drove increased listed inventory and amplified marketing.

Our ecommerce GBP $2560.

Up 17% year over year.

Meaningfully higher product GPU and slightly increased vehicle Gpus.

I'll go further into the drivers of ecommerce units and ecommerce performance on the next slide.

Total gross profit for the quarter of $58 million increased 128% year over year and came in ahead of our expectations.

This was driven primarily by the expansion of ecommerce GPU and higher unit volumes.

As expected our.

For unit profitability contracted versus the second quarter as we experienced transient macro headwinds to sales margins.

The headwinds we surpassed our gross profit guidance for the quarter, thanks to better than anticipated performance across all three lines of our business.

EBITDA, which was adjusted for acquisition costs related to our announced you ACC transaction came in at $87 million loss versus the $36 million loss in the prior year.

This was also ahead of our expectations for the quarter.

Third quarter adjusted loss per share of <unk> 70.

It was better than our guidance due to improved revenues gross profit and expense levels.

At the bottom of page 12.

You can see the primary highlights of our fourth quarter outlook.

For more details regarding our fourth quarter guidance. Please see our earnings press release.

We're expecting 20000.

2500 e-commerce units in the fourth quarter.

This implies 84% year over year growth at the midpoint.

As Paul mentioned, we are experiencing transitory events that are reducing throughput in our supply chain.

As a result of these temporary issues, we anticipate total revenues of $865 million to $900 million.

Our year over year midpoint increase of 117%.

Primarily driven by unit growth.

Current elevated average selling prices.

We expect e-commerce gross profit per unit in the range of $2100 to $2300.

This implies 21% year over year growth at the midpoint.

We are guiding to a total gross profit of $50 to $58 million, primarily driven by our annual growth in ecommerce units and GPU.

We remain focused on achieving over 200% gross profit growth for 2021.

Slide 13 provides a summary of our third quarter E Commerce performance.

As we've discussed previously on today's call are E. Commerce units grew 123% year over year, but came in slightly below our expectations.

E Commerce revenues hit $702 million.

An increase of 216% year over year, driven by strong unit growth and higher average selling prices.

Our third quarter ecommerce average selling price of approximately $34400 expanded significantly year over year and was higher than our guided range as we continue to improve our pricing algorithm and the historically strong vehicle pricing market.

Ecommerce vehicle GPU of $1315 increased slightly from $1302 in the prior year.

During the quarter, we continued to deliver improved productivity on reconditioning costs, which was partially offset by lower sales margins as the cost to acquire vehicles in the current environment, we're higher than the prior year.

E Commerce product GPU of $1245 increased $359 or 41% from $886 a year ago, and also show quarter over quarter gains.

Our higher product profitability was primarily driven by higher attachment rates as well as higher average loan sizes due to higher e-commerce average selling prices.

Moving to the other segments on slide 14.

Wholesale unit of 9760, <unk> grew 58% year over year.

Wholesale gross profit per unit up $215 contracted year over year as expected and came in ahead of our guidance of 50 to $100.

As our pricing strategy has kept pace with increasing prices in the used vehicle market through the quarter, we were able to book higher gross profit and wholesale units than we originally anticipated.

We sold 1740 <unk> units in the third quarter growing 20% year over year and surpassing our expectations.

We saw positive customer response to our inventory selection improvements for TD yet.

<unk> also increased to $2175 for the quarter.

Up $347 over the prior year and well ahead of our guidance range of 1006 hundred $50 to $1750.

TVA GPU benefitted from lower per unit sourcing costs year over year.

As well as higher product profit due to higher average loan balances.

Turning to slide 15.

I would like to provide some additional color on our SG&A performance.

On an absolute spend basis.

SG&A increased as we continued to make key strategic investments in staffing and new technology to keep pace with demand as Paul discussed earlier in his comments.

The chart on slide 15 shows our SG&A spend per total ecommerce transaction year to date for 2021 versus 2020.

For 2020, our total SG&A spend per total ecommerce transaction was $5401.

Year over year increases in logistics rate inflation and expenses related to the announcement of the acquisition of <unk> added $169 per unit on a year to date basis.

Our total ecommerce transactions, which we defined as ecommerce vehicle purchases plus ecommerce units sold has more than tripled year to date versus 2020.

Purchases include trade ins and straight buys and exclude auction source units.

The increase in logistics and transaction expenses.

We are seeing the benefit of leveraging our scale by reducing per unit cost by $1617 year over year.

On a net basis. This benefit resulted in a 27% reduction to our year to date SG&A per total ecommerce transaction versus 2020.

In closing on slide 16.

I am pleased with our performance during the third quarter.

We are working tirelessly to continue executing our growth strategy.

Our fourth quarter guidance continues our track record of strong year over year growth.

We are looking forward to closing the <unk> acquisition and welcoming their team as partners in the future growth of our company.

We are excited to share with you the transformational aspect of the ACC acquisition and will do so after the transaction closes late this year or early in 2022.

Thank you for your time, everyone. It is great to be a growth with that Paul and I are ready for your questions.

To ask a question you will need to press star one on your telephone to withdraw your question press the pound key again Thats Star one on you touched on the telephone to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of.

Zach freedom.

Wells Fargo. Your line is open.

Hey, good morning, So if I take your current output of about 1500 E. Com units per week. It suggests youre running at about 52% of your reconditioning capacity and I realize there is some near term labor constraints that are bogging down today, but can you talk about what needs to happen to unlock that full.

And whether it's reasonable for us to expect break through that 60% utilization level in the upcoming quarters.

Yeah, Thanks, Matt I'll take that one.

Whats required to unlock that capacity is doing what we've been doing which is we've been adding additional facilities. We've been at adding additional head count to the facility and we've been adding additional head count to our own facilities and then when you think about that that's the near term outlook. We continue.

We need to work with our third party partner.

To scale scale, our origination capacity and we've been we've been absolutely successful in doing that throughout the year, even quarter to quarter growing that express capacity from 2800 units to 3200 unit. So that is really doing what we've been doing where we see a challenge in our business, we lean in on that challenge.

And we think that the problem and we see this again as a.

As a transitory short term issue not a long term mission, yes. That's the one thing I just wanted to add to that as Paul commented on what we're seeing is.

There is a significant piece of this that is the labor issue with.

With our partners at the end of third party locations, so to the extent that.

We're working hard as Paul mentioned in our own facilities and partnering with their with our third party partners.

To do everything we can to get the staffing levels correct. So that's that.

One key driver then Paula mentioned in his comments as well just the current high demand situation that we're facing.

Nationally is.

This is driving very competitive situations in the reconditioning centers at this point in time as well.

Got it and then I'll.

Like the way that you guys framed the total E com units, both both buys and sells and I'm curious if you could talk about with 80% of cars now source from customers. In Q3 can you talk about how you are managing through the constraints on resources and you're in.

For structure, just given that sharp rise in customer sourcing and then how you think about the trade offs between the GPU benefits of higher customers sourcing versus the added SG&A and capacity constraints and.

To what extent do you think this pivot is accretive versus dilutive.

Absolutely. Thanks for the question so the way the way that we look at it it's basically a dial for us and right now with the with the current situation in the in the auction market a lot of people showed up for auction lots of bids on vehicles extremely price competitive so really the tradeoff that you do when you do the.

When you do a transaction like this when you buy from a consumer generally speaking you incur higher a higher inbound logistics into the recon centers you get it.

Better vehicle.

You also spent some additional SG&A as well so really the tradeoff is better vehicle versus the additional cost from an SG&A perspective, and from an inbound logistics perspective, and we're constantly looking at that and making a determination in terms of what's the right trade off but right now with the <unk>.

With the current auction market.

The tradeoff is definitely to our benefit to EBITDA.

For the consumer sourcing, but we'll continue to tweak that and adjust that based upon.

Just on current market conditions.

Overtime.

Got it thanks for the time guys.

Thank you for the question.

Thank you. Our next question comes from Rajat Gupta of Jpmorgan. Please go ahead.

Great. Thanks for taking the question.

Had a follow up on the reconditioning question.

The dedicated centers that youre, adding.

Could you give us a sense of you know the timing.

<unk>.

And just you know the cash needs.

Although dedicated centers how those ramp.

And then I have a follow up thanks.

Yeah, Thanks, Scott, Yeah, I'll take that one.

First and foremost.

I signaled in our second quarter earnings that we would start to contemplate this and.

Look we're going to be incredibly thoughtful about.

Where we're putting these reconditioning centers will obviously be matching supply opportunity and demand opportunity. So that they are super strategic in our location and the size and scale and their ability to coordinate with our logistics requirements. So we're going to be thoughtful on that.

And when I think about the investment thesis.

The language that we've been using is.

Six of 60 locations. So our hybrid approach our asset light approach still rule the day here so that.

We are aligning the.

The needs of the business and being judicious in our.

In our capital deployment. So we think of these as.

Our $100 million, maybe is as great as $150 million in total capex or.

<unk> 2 billion and we don't see the VA 60.

61.

Grew our reconditioning centers again, we think call it call it half a dozen or so in all of the places that you might expect with the strategic areas that have high demand and high supply.

Rich I just want to add to that.

Just to Pauls comments, we really view this as just responsible capacity.

The planning for the company, where we have a.

High demand areas, it's going to make a lot of sense for us.

To make some reasonable investments to support to support the Companys goodwill will have it will be able to have very stable operations in the reconditioning centers and with stable operations mean, it means higher throughput and lower cost. So it basically addresses more volume to our customers and more lower cost volume and that's better for our shareholders as well.

Understood. Thanks for the color there.

Just one question on GPU E Commerce Gpus particular.

For the fourth quarter, you are guiding to roughly $350 drop at the midpoint.

Presumably that's all on the retail side.

Is that primarily baking in some seasonality or.

Maybe even higher reconditioning in inbound logistics.

Or is there some conservatism around the direction of used vehicle pricing.

For the remainder of the quarter, just trying to get a better sense of that bridge.

From <unk> to <unk> <unk>.

<unk>, particularly given like used vehicle pricing.

It's really on EBITDA.

Into October and November. Thanks, Yeah. Thanks for the question most of the Delta that we're seeing between the third quarter and the fourth quarter with respect to the GP <unk> is really being driven by additional additional cost.

As a result, the reconditioning and logistics, so thats really what youre seeing.

Three 2%.

Got it right this time.

Okay.

Well if you can just let me let me be very clear about the reconditioning and actually shipping the vehicles as well, so inbound and outbound just inflation and what we're seeing in terms of in terms of rate inflation.

On a year over year basis, and what the trend looks like.

Yes.

Understood that's fair, thanks, I'll jump back in queue.

Thank you. Thank you.

Thank you. Our next question comes from Sharon Zackfia of William Blair. Your question. Please.

Hi, good morning.

Couple of questions I guess first it might be helpful to get an update on kind of how the recon cost is trending accurate third party partners versus your own the facility, particularly as you're contemplating opening more owned facilities and then secondarily I guess.

It's obviously difficult to control, what's going on with their third party partners, but.

There is the staffing level now versus where you would ideally want it to be and how confident are you in kind of those parties getting the staff in up to the level you need in order to prepare for tax refund season.

Great I'll take that one thanks, Sharon in terms of the cost structure, we continue to.

Deploy the hybrid approach because we see we see attractive cost structures, both within our own and with it with our third parties and so we're managing that well and are comfortable with with the <unk>.

Reconditioning cost in terms of trend.

The overarching trend for reconditioning in terms of efficiency will start to decline as we scale in the near term as you have heard from our from our prepared remarks in front of the debt in the near term there is pressure, which leads to your second question.

Confident are we in our third party, we're working with them directly to make sure that.

We've got.

The mechanics that we need the fact that we need to get our our output to where we need it to be.

And to Dimensionalize.

That.

We are modestly off of where we want it to be in Q3, and again modestly from where we wanted to be in Q4.

And then in the couple of hundred units may be to a 1000 units and when you spread that across 30 reconditioning locations. It's handfuls of unit by location. So we don't again, we see this as a transitory issue that our teams are working to solve rather rather than something that is structural in nature.

And long term, yes, sure and just to add on what Paul said I mean, if you really kind of put the.

Put the unit.

If you look at the units in context.

We were about 400 units below the low end of our range for the quarter and then if you spread that across 30 reconditioning centers.

Over over a 90 day period, you're basically talking about one vehicle every 90 days.

In terms of the overall impact that would drive that would drive that kind of shortfall.

Well really when you look at the when you look at it that way to look at the data.

The labor constraint it has it has impacted.

It has impacted our unit volume.

As Paul mentioned earlier.

Working hard to to continue to expand our capacity with other third party partners with our existing third party partners and then making those strategic responses strategic investments with the with our own dedicated capacity as well.

That's really helpful. I guess one other question are your agreement structure is such that if the third parties are having labor pressure. That's passed on to you is that like a cost plus arrangement or how does that kind of work.

Yes, we don't we don't share the particular risk sharing.

Any of our agreements.

We're confident we're working through the we're working through the problem without it without it.

Sure.

Impacting cost in a material way for the long term so.

We are in good shape, there with our agreements.

Thank you.

Thank you Sharon.

Thank you once again to ask a question. Please press star one on your Touchtone telephone again star one on your Touchtone telephone to ask a question.

Our next question comes from the line of Seth Basham of Wedbush. Your line is open.

Thanks, a lot and good morning, I have a question around GPU ecommerce GPU in the third quarter to start just thinking about that huge increase in mix vehicles that you sold that were sourced from consumers are those usually come with much higher gpus.

But that didn't seem to be reflected on a year on year basis improvement or even sequential improvement in your E Commerce.

Vehicle GPU can you help us understand why.

Sure that demand is really along the same lines, what we talked about in the <unk> in the third and fourth quarter.

What's baked into our guidance in the fourth quarter. It's just the incremental costs, we're seeing on the logistics on the logistics side and on the reconditioning side as well as really driving the difference.

Okay, and just a follow up on that if we look at your E Commerce GPU guidance for the fourth quarter 2200 at the midpoint relative to $25 60 that you're poised for a third quarter that's a.

$360 decline and you were attributing that primarily to the higher reconditioning logistics costs, that's pretty substantial increase on a three month basis.

Yeah.

That's correct. It is a substantial increase in the debt. If you look at the trends that's what we're seeing.

Especially as more so on the reconditioning side on the logistics side, but that's those are the those are the primary drivers.

Okay, and then lastly, if you look at the guidance for the full year around gross profit increase of over 200% that would imply that gross profit dollars.

For the fourth quarter, we need to be at the high end of that guided range unless I'm doing the math wrong.

So if you do the math correct.

We'd look at it correct.

Thank you.

Thank you.

Thank you. Our next question comes from Edward <unk> of Keybanc capital markets. Your line is open.

Hey, good morning, guys. Thanks for taking the question I guess first good progress on the consumer sourced vehicles that 81%, though is that kind of ahead of where you would plan longer term are there some downside to having a high consumer source.

Percentage I guess second given you guys talk through these reconditioning issues are you slowing the buy.

Or are you expecting that inventory levels of vehicles in progress should increase in the interim and then the final. One you guys have really transformed the business. This year, how should we think about the longer term algorithm or on profitability given all the services you brought in house.

Okay, great great.

I'll start with that and Bob can add comments.

Sure.

At the end.

Our consumers are.

And Bob articulated earlier.

Earlier.

We're going to be good stewards of the business. So we're going to dial that in as appropriate based on what we're seeing on demand we're using all of our R.

Our data scientists and algorithms to be could be good buyer and whether that number remains at 80 or 81% of our dropdown to 70% to 75% of our actually creeps up that's something that we'll be evaluating over time, and we're going to be opportunistic on the market. So if it turns out that there are cards that we.

<unk> that are good deals when they happen to be an option, we will do that and and.

And if we continue on our on our kind of consumer care.

We'll do that as well if it makes sense for our business in terms of the are we ahead of schedule.

We've been we've been good at it's been in our DNA buying cars from consumers, we think thats super strategic for us not only because of the unit economics associated with those cars, but also because that becomes a great target audience for us to sell cars too and so we think it's strategic.

Got the marketing right. We've got the algorithm then we've got the people and process now working right that allows us to get to 81%.

<unk> of our mix of work.

We're really proud of that and again.

We'll be thoughtful.

What the what the perfect mix it by quarter based on the market environment.

Regarding the slowing by again, we're buying inventory based on our forecast and what we what we see not only in the fourth quarter, but what has been.

Historically Q1, typically is a strong quarter for us. So again, we're buying supply to match, what we forecast the demand to be and so we.

That's reflected in the number of cars that you see on our website and as we scale that business. We ultimately know that more cars drive a better conversion. So again, we will we will be thoughtful quarter to quarter on what that right number is so that we don't get into an oversupply situation.

Or a missed opportunity situation in terms of under supply in the business in terms of long term profitability again, I'll, let I'll, let Bob comment on that but I think we'll be in a much better position as we complete the year.

And complete our potential our acquisition and our transaction with UAC. He gave you.

Better view on.

Not only 2022 in the aggregate, but also what this business looks like going forward multiple years out yes. The only thing I would add to what Paul said is.

On the SG&A side and I referenced it in my head.

I commented on a slide today that we are starting to deleverage.

Totally.

Total ecommerce transactions.

We continue to.

We continue to look at it on a per transaction basis and expect to continue to see that Leverages, we continue to ramp up volume.

Next year, but I will have I will have more to with respect to.

Long term outlook.

I'll have more to say after the <unk> transaction closes.

Thanks, so much.

Thank you. Thank you.

Thank you. Our next question comes from Alex Potter Piper Sandler Your line is open.

Hey, guys one more question on the.

<unk>.

I guess the implied GPU guide in Q4.

Clear the labor with the reconditioning costs and logistics costs are a headwind what are you I guess expecting for F&I attach rates.

The ancillary products things like that do you expect that to be flattish versus Q3 are ticking down also.

Yeah, well so so thanks. Thanks for the question obviously, we don't we don't guide specifically on attachment rates are going to be for grant for our for our product revenue, but I do want to say just a little bit more on the logistics.

The cost increase in the third quarter to the fourth quarter.

As part of the part of the additional expense as well as the reason. This is transitory we are doing some things.

Shipping vehicles, some additional distances between some of the some of the reconditioning centers because of.

Just because of capacity constraints. So we are incurring.

Arent, giving some additional mileage on an average transaction and thats driving our costs.

The rate of inflation, but on top of the rate of inflation as we go into the holiday season.

We generally see rates get.

I'll move up a little bit around the around the Thanksgiving and the Christmas holiday, but in addition to that we are doing some things in terms of shipping will give you some additional businesses to make sure that that we have enough.

We have enough vehicles as possible to satisfy that.

The great demand that we have from our customers.

Okay.

Okay. Good that's helpful.

And then maybe one last one on <unk>.

Marketing.

Looks like if I'm doing my math correctly, it looks like your marketing expense per E Commerce unit.

<unk> <unk> hundred or a little bit about that in Q3, it looks like guidance implies similar level of spending maybe.

Maybe a little higher again in Q4, just wondering if you can comment maybe a qualitatively what are you working on you've referenced a couple of national campaigns and things like that but then also looking forward to this run rate level of spending is this something that you're sort of choosing in the near term and then we'll come back down.

Any qualitative and quantitative comments would be helpful. Thanks.

Yes, great I'll take that one.

Yeah.

We're building a super brand and so we will be good market or both.

In building, our brand and telling our story and the various media channels, whereas that worked well as well as being.

Very very strong digital marketers to drive transactions in our business and so.

We mentioned that.

We're working on a national campaign.

That led to some of the increase in the spend.

In the third quarter.

And I'll tell you that we're very pleased.

With the way that the marketing is not only building brand awareness of the trend in our brand awareness is exactly where we want it to be but also as you can see in the total transactions of our business. We are both buying and buying a lot of cars and selling a lot of cars. So we're feeling very very positive.

About the.

The job that the marketing is doing for us and so we'll continue to be and use that as a lever in our business.

To scale, our business in the future and so on.

I'm very pleased with the outcome of our of our marketing initiatives.

Great. Thanks, guys.

Thank you. Thank you.

Thank you. Our next question comes from John <unk>, Tony <unk> of <unk>.

Your line is open.

Thanks for taking my questions just a quick one on capex the $100 million to $150 million that you mentioned can we think about that as a 2022 investment or multiple years, maybe you could just give us a little bit more sense of the timing there.

And then related to that based on the results from the last mile build out which seems to be going well is the expectation that youll continue to build the percentage of units delivered bye bye from trucks over time and have a clear at all.

Thanks.

John Thanks, so much for the question with respect to the Capex.

First thing we talked about in the Q that if you look at our in our capacity in a normal situation, where we were fully staffed with our with a third party locations. We've got capacity for about 3200 units a week.

So you take that and you basically you basically annualize it.

That's why we're really focused right now responsible capacity additions.

<unk>.

Sure.

The primary focus right now is helping our partners to step up the current locations that we have and making sure that our.

That our dedicated through facility is fully staffed.

And productive as possible. So that is that's always the lowest capital alternative and Thats. The first thing that we look at.

In terms of the investments that Paul referenced.

This would be over this would be over a few years. So there is no. We're not we're not saying that we're going to spend it all we are not going to spend at all next year. The silver this over the next three years to four years.

With.

The addition of.

Probably the one one maybe.

Yes.

Yes.

Maybe two facilities were profitable.

101 to two.

Next year, but not fully operational.

And that.

Probably not not firing on all cylinders, but we're looking at.

This over a overview year period.

Paul I'll take the.

The second part of your question.

On the on the last mile.

We couldnt be happier with the progress that we've made we're running ahead of schedule and we are delivering customers a great experience and we feel great about our run rate of hitting our 50% target.

At year end, and we're going to keep going because.

Because the customers love it.

At scale, you get efficiencies in your logistics.

Can schedule not only the day of the delivery, but at the time of the delivery and it's just a fundamentally better experience and as a result, our business gets much more predictable and with predictability comes efficiency. So we're going to keep going on the last mile.

And we're really pleased with how it's going so far.

Great and just had one more on the wholesale it looks like the midpoint of guidance for the wholesale segment.

<unk> roughly a 30% sequential decrease in the number of units sold could.

Could you just talk about kind of the puts and takes here is this a reflection of.

I need to sell down a bit of an.

And inventory buildup.

From the ramp in consumer purchases during Q3.

And then maybe some elasticity headwinds to conversion from increased retail prices, particularly given rooms inventory mix already skus to vehicles that are close to new vehicle prices.

Yes.

Take that one and the answer is no thats not how we think about wholesale.

We didn't have an inventory buildup that then we ended up getting into the into the wholesale market.

<unk>.

When we put a price on every car that come to us right and we're seeing massive demand for our product again, because we've got this marketing mix and the machine cranking in terms of buying cars from consumers. We are an outstanding place to go.

We get a disproportionate amount of.

Wholesale cars that come into us and when we and when we buy those cars, we sell them into the wholesale market and so that and then.

We're obviously looking to buy for retail because that's what fuels our.

Our growth business, but.

But we're not we're not doing anything adverse to the retail business to move it into the wholesale market and what you see in terms of.

The return the gross profit per unit associated with the wholesale market, that's because of the broader market and that effectively moved with the with the unprecedented all time high market that we're operating in and that's what's reflected there.

Thanks, so much.

Sure.

Thank you. Our next question comes from Nick <unk> of Raymond James Your line is open.

Hey, guys. Thanks for taking my question just a couple quick ones.

<unk> can you just talk about.

The timeline and give us some more detail around.

Sounds like for integration and when you would expect to start to see some benefits in terms of.

Market share gains and increased conversion.

Subprime market.

And then secondly, just on used.

Used car inventory.

As that potentially it starts to normalize perhaps next year, obviously, you've seen a significant ASP growth.

This year, how do you think about that dynamic kind of if pricing starts to normalize or is that a headwind.

22, Thanks a lot.

Sure Nick Thanks for the question so on the ACC, we talked about it a little bit so from the timing of the.

The transaction closing late late this year early next year and then in terms of.

And we've talked about it is our goal.

We will set up.

Our captive finance structure to support to support our company.

We will do some things initially.

Debt.

That will allow us to go after some of the low hanging fruit and the teams are working together.

We're not going to comment on what the long term outlook is going to look like until after the transaction closes.

Okay.

And you're correct, yes, Nick as far as the.

Used car inventory returning to some normalcy.

We welcome that I think when we think about the inflated average selling price that we're seeing now that that is really market driven in that market as you know.

On the wholesale side is up.

In excess of 45% since the beginning of the year.

And on the retail side up approaching 40% since the beginning of the year. So it's been it's been frothy.

Well, we've been good executed in some crazy markets. We've been we've done an outstanding job navigating the tough waters of Covid, we've done an outstanding job navigating the top markets of Covid resurgence and Varian.

And then it was microjet to the new car and will again continue to navigate those.

Uh huh.

That supply and pricing environment by leveraging our data science and our ecommerce platform and the smart close we've got in our business and so what we expect in the longer term is that Asp's will start to come down again, and we know that the bigger broader market.

Ultimately in the in the 20% to 20 $25000 range and we expect that at scale as exactly where everyone will be operating so we will be taking advantage of the hyatt chunks of the demand of that market and you also asked the UAC question as we're better able to serve the subprime market that will also move.

<unk> down in an average selling price as well because as you can imagine subprime customers are buying cars that are closer to the $20000 range. So we expect to move with the market and move with the acquisition.

Thanks, a lot.

Thank you. Thank you.

Thank you. Our next question comes from Nevada Com <unk> Securities. Your line is open.

Alright, Thanks, a lot maybe.

Turning to the GPU.

And e-commerce.

Can you just maybe talk about the different puts and takes there it seems like.

You had been able to realize some efficiencies and allow saying.

Price fluctuations.

You could you could one could argue that this is a very favorable environment.

From a pricing and therefore.

Should be a tailwind in <unk>, but maybe just.

Caught on the different factors, how should we think about the sustainable GPU.

Joining on this.

The noise from.

ASP fluctuations how should we think about that.

And the more normalized yes.

I'll start and Bob will chime in and again is it is a bit of a there's a bit of a broken record here when logistics.

When there is.

Capacity constraints in the supply chain it adds delays and time and costs. So whether that's in our logistics or in our reconditioning or as Bob said, even in our logistics costs are up even if we're moving inventory to make sure that we're balancing.

Our work in progress and capacity. So we can drive throughput those are all drivers of expense.

We're also operating in a very very high priced market and just because we're paying a high price as you can imagine that means you have to sell those cars for high prices too. So there are not absolute clear gains when you are paying a premium for inventory and I just would make one more.

About the challenge.

Our used car prices average selling prices.

At or above new car pricing and so you can imagine that just puts a <unk>.

Killing effect on how much you can ultimately charge. So that's created some pressure in our in our sales margin. So look I think the data science hillard, our ability to buy cars from consumers our ability to manage our business. These are all structural fundamental improvements we've made to the business.

These incremental costs that we're seeing in logistics in recon are transitory and.

And that's really the way to think about it.

Great.

Maybe another question on the on consumer sourcing.

Can you maybe just touch on how much are you relying on third party pickups.

Scope.

<unk>.

In doing this.

Okay.

Yeah.

We have got a hybrid approach as you know we use third parties and we pick up cars ourselves and you can imagine with a growing fleet of last mile that drops off par that's a logical time to pick up cars that drives efficiency in our network as well so.

It's a mix, we don't articulate exactly what that mix is.

I can tell you is if we're if we're leaning in on last mile and building that out.

That mix will shift to.

To our own fleet to gain those efficiencies at scale.

Thank you at this time I would like to turn the call over to Paul Hennessy for closing remarks, Sir.

Great. Thanks, everyone for joining the call and a special thanks to all of the drone employees in room partners that helped us deliver a.

<unk> Q3.

Going to deliver a great Q4, thanks, everyone.

This concludes today's conference call. Thank you for participating you may now disconnect.