Q3 2021 Shift Technologies Inc Earnings Call
[music].
Thank you for standing by and welcome to shift technologies third quarter 2021 earnings call.
At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference maybe recorded should you require any further assistance. Please press star zero I would now like to hand the call.
Over to your host Vice President of strategy and Finance Henry Bird.
Yeah.
Good afternoon, and welcome to the shift technologies third quarter 2021 earnings call. Joining me on the call today are co Ceos, Toby Russell in Georgia, Ericsson CFO Oded shein.
During our remarks, we will make some forward looking statements, which represent our current judgment of what the future may hold and while we believe these judgments are reasonable forward looking statements are not guarantees of future performance and involve certain assumptions risks and uncertainties.
Actual outcomes and results may differ materially from what is expressed or implied any forward looking statements.
Refer to our filings with the SEC for a full discussion of the factors that may affect any forward looking statements. We undertake no obligation to publicly update any forward looking statements whether as a result of new information future events or otherwise. After this conference call. During the course of the call we will be referring to non-GAAP measures.
As defined and reconciled in our earnings materials.
I will now turn the call over to Tobi.
Thanks Henry Thank.
Thank you all for joining our call today.
Over the years at ship, we've had many team members who have served in the armed forces before choosing civilian career out yet.
First take a moment on this veterans day and thank all members of our armed services past and present for your sacrifice courage and the example of service you set for us all.
Turning to our quarterly results the third quarter with another great quarter for sure.
Once again, our team performed exceptionally well across all components of our business, we continue to aggressively take market share.
All while continuing to improve operating leverage toward our long term financial goal.
A quick summary of our Q3 results Rev.
Revenue of 180 million, representing three times year over year growth.
6487 E Commerce unit sold representing 10% sequential growth over Q2, and reporting our fifth consecutive quarter of exceeding unit sales expectations adjusted.
Adjusted G P of $2021 more than 50% year over year growth with this we exceeded the guidance we provided on our second quarter earnings call in August for all of our metrics.
We are happy to once again be raising our full year 2021 revenue expectation now to over $620 million, which represents more than three times year over year growth and nearly 50% more revenue than we had signaled at the beginning of the year.
Our topline unit and revenue growth is driven by a rapidly scalable business model, coupled with the accelerating shift in the used car market problem offline online.
Our focus on operational excellence has enabled our team to navigate the current unique and challenging market conditions very effectively.
Q3, we continued to observe complex dynamics in the consumer automotive industry, the first being a volatile pricing environment.
Early in Q3 prices started to drop from Q2 peaks only to quickly rebound and remained elevated throughout the rest of the period.
This was significantly different from the normal seasonality patterns the industry usually experiences.
Secondly competition for used inventory has been at all time highs throughout this our team has continued to work with extraordinary dedication exceeding targets and delivering on ship industry, leading customer experience.
Let me extend a huge thank you to every member of the shift team for delivering yet another exceptional quarter.
Our continued success can be largely attributed to our unwavering focus on providing a world class e-commerce experience for our customers and our firm commitment to our long term strategic business objectives.
First deepening penetration within our existing markets, where we continue to see significant opportunity.
We've just entered into an agreement for a new Bay area facility over two and a half times the size of our current hub in San Francisco that will expand service capacity for our northern California market.
Second growing our geographic footprint, we were excited to announce that we have begun to expand into Houston, Texas.
And expect to have that offering fully operational for the two sided market in the near term, which is buying cars from Houston customers. In addition to selling.
Them to them.
Third building lasting brand awareness, which has been a successful strategy and its first several quarters and will continue to be a major area of investment for us.
Finally, driving efficiencies in our full stack operation, while improving unit economics as demonstrated by our Q3 F&I dollars per unit, reaching the highest point in shifts history.
Looking forward, we expect to continue delivering on our growth objectives.
And as such are focused on investing in and building our team.
Hiring across all industries has been challenging over the last 18 months, especially so in retail and we've had to manage our way through that.
While our hiring throughout 2021.
Pace with our goals and delivered our performance on key metrics, we see opportunity in Q4 to set ourselves up for success in 2022 and continue building on our momentum Accordingly, we have launched a major hiring program across the board from our customer facing concierge teams. So our inside sales and support teams to our reconditioning.
Turning technician.
Finally on the topic of investing in our team I would like to take a moment to welcome Jeff climate to ship.
Jeff has been serving as shifts president since the beginning of October.
He brings over 20 years of experience, leading e-commerce and marketplace.
<unk> and senior leadership role at Walmart and Paypal.
He has an exceptional track record of leadership and operating efficiently delivering customer value and doing it with heart.
We're excited to welcome Jeff to the team and believe he will lead to sustainable growth for years to come.
And I wanted to take a moment to acknowledge that for me personally. This will be my last earnings call as co CEO of ship.
As you know from our announcement last week as of February one I will transition to a role as a board member and adviser.
I would like to take this time to extend my heartfelt and deep appreciation to everyone on the shifting today.
Everyone has worked it shift over the years to our investors who have put their trust in us and to our board members for their unwavering support during our journey from an idea to a public company and industry leader I.
I would also like to reiterate my confidence in what this incredible group can and will accomplish in continuing to transform the industry over the quarters and years to come.
At this point I'll turn the call over to Oded, our CFO to run through the quarter's financial results.
Yeah.
Thank you Tobey.
Our momentum continued into Q3 as our topline and profitability metrics came in ahead of our expectations.
I will first review, our third quarter results, and then share guidance for the fourth quarter and the fiscal year.
Total revenue for the third quarter grew to $179 8 million, an increase of 200% to last year's third quarter, and 16% compared to the second quarter of this year.
Total units sold were 8111, an increase of 100% year over year with the E Commerce channel growing to 6487 units.
120%.
E Commerce average selling price was 24086.
9% higher than last quarter as the strong price appreciation environment continued, especially later in the quarter.
Adjusted gross profit was $13 1 million versus $3 9 million last year and $16 5 million in Q2.
I'll focus my remaining commentary on sequential changes.
Adjusted gross profit per unit reached 2021 in the quarter down $788 from Q2.
The Q3, GPU results were well above our expectation as market pricing remained elevated throughout the quarter.
However, the impact of the market dynamics in GPU was less compared to Q2, where we saw unprecedented appreciation in car prices.
I'd like to spend a moment on our.
Acquisition inventory strategy throughout the quarter.
Because we were able to successfully manage our acquisition while preserving profitability.
On our Q2 call, we talked about our plans to slower physicians in anticipation of the typically negative seasonality effect, we see in late Q3.
We executed on this strategy and why we didn't see typical seasonal depreciation.
With us to take advantage of the elevated prices, resulting in stronger than expected front end margin.
Despite the unusual market dynamics.
We exited the quarter with a healthy inventory mix and we feel good about our position as we build our inventory heading into 'twenty to 'twenty two.
Given our consumer focused sourcing strategy, 95% of cars purchased in the quarter came from consumers and partners.
Other revenue, mostly F&I was $6 2 million in Q3 compared to $5 1 million in Q2.
We remain encouraged by the fundamental performance of F N.
Right.
Other adjusted GPU per unit in Q3 was 982, our highest quarterly result to date.
Total marketing expense for the quarter was $10 8 million customer acquisition cost was.
1650, 912% lower than Q2 is the new strategy, emphasizing brand marketing to cold and yielded impressive results.
This will continue to be an area of focus and investment for us.
Adjusted EBITDA loss for the quarter was $33 3 million or 18, 5% of revenue compared to a loss of 16, 9% of revenue in Q2.
But once again ahead of the guidance range, we provided on our Q2 call.
Turning to the balance sheet and cash flows we ended.
In Q3 with cash and cash equivalent of 247 5 million.
This represents a $9 3 million increase compared to the Q2 cash balance.
This increase in cash was primarily driven by a decrease in our inventory position as we ended the quarter with $88 9 million at $33 6 million decrease from our Q2 inventory.
A quick update on our floor plan facility.
On October 13th our floor plan agreement with U S Bank expired.
We're actively pursuing a new floor cleaning facility seems to be view it as an important part of our capital structure and expect to put one in place by the end of this year.
Turning to guidance.
For the fourth quarter, we expect revenue to be in the range of $180 million to $188 million or 145% to 156% higher than Q4 of 2020.
Adjusted GPU is expected to be in the range of 1600 to 1700 for the fourth quarter more than tripling, our adjusted GPU in Q4 of 2020.
Our adjusted EBITDA loss for the quarter is expected to be in the range of 40 to 44 million.
As we discussed earlier, we will be making significant investments in Q4 across the business to prepare us for a successful 2022.
Which will impact our EBITDA for the quarter.
This leads us to 2021 estimated revenue, which we are again raising to the momentum we are seeing across our business.
We expect total revenue to be in the range of $621 million to $629 million, an increase of approximately $14 million to our previous guidance.
We expect to sell 23 to 24000 E Commerce.
Adjusted Gpus for the full year is expected to be greater than 2000.
Ah raised over our previous guidance.
Adjusted Gpus greater than 1800.
We now expect adjusted EBITDA loss margin for the year to be around negative 22% versus our previous guidance of better than negative 23%.
I will now turn the call over to George for closing remarks.
Thank you Toby and Oded and thank you all for joining our call today.
In short our third quarter results exceeded our expectations, because we continue to capture market share.
Evidence of the fact that mission and business model is resonating with consumers.
We're also excited about finishing the year in a very strong way, while investing in key areas that will benefit throughout 2022 and in the years that follow.
Last week, we announced plans for Toby has transitioned out of his current role as co CEO I've.
I've had the great fortune to spend so many years working on my best friend on building the company we bought.
One thing I had my most about tobey termination to exceed its inability to sale superpowers that had been instrumental in shifts squirrel unsuccessful or the yes.
He's brilliant leadership stitching beside sacrificing grid had made shook what is today.
On behalf of all current and former employees shareholders and supporters. Thank you Tony.
As Tony discussed, we're fortunate to be welcoming guests to shift their newcrest just unique combination of technology and retail experience on a global scale will be instrumental in sustaining profitable growth and they used to come in.
I'm just so excited to have him on board.
With that operator, please now open up the line for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key again Thats star one on your Touchtone telephone to ask a question. We ask that you limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
Our first question comes from the line of Zach Fathom of Wells Fargo. Your line is open.
Hey, good afternoon, and Toby best wishes to you and in the new role and going forward. So with that can you talk about where you are on capacity utilization today and to what extent, you're seeing throughput and labor constraints and then as you think about the elevated demand youre seeing can you.
Walk us through the glide path for capacity expansion through 2022, and where you think capacity goes from where we are today.
Is that a good go to talk to you.
I'll start and then I'll, let oded I'll take it from there. So we've had obviously to deal with the same.
Labor issues that everybody else in the world and the country out, but so far this year, we've been very happy with how things have been.
And we're very happy with the team's performance and our ability to hire folks as we need to obviously be better labor market was not as tight, but we kind of it really well.
When you think about the future.
And in our prepared remarks.
We are working really hard to ensure that we have the team in place for at least a couple of 2022 part of that entailed changing our approach to how we hire normally we hire and just in time, meaning we aim to bring people in a few weeks before we need a specific a little felt especially when it comes to.
Field operations or reconditioning logistics et cetera.
Obviously, probably that's the manageable cost, but the decision we've made for entering 2022, especially high folks ahead of the curve. So we're going to do a lot of hiring in Q4.
Preparation for Q1 2022.
One time big push to bring a lot of folks on board.
A few months earlier than we normally would once we do that one can kind of have this larger team will be in a really good place for the rest of the year.
Thought that that was a prudent decision in light of the very tight labor market that we're dealing with it. So it's kind of a high level on where we are now kind of what to that to talk to some of the more detail.
So an important facet of capacity and where we made great progress has to do with reconditioning.
<unk>.
We have again as I mentioned made great progress to a point that reconditioning is no longer constrained.
And our ability to buy process and sell cars.
We have increased.
Capacity steadily throughout the year and we continue to do this working on opening a new facility in Texas and then as we launch further new markets, we'll be able to open facilities as they're in there as well as we said in our remarks, we're also.
In the process of putting a new facility in northern.
Northern California to replace the San Francisco facility and that would increase our capacity even further so at this point as I said not a constraint.
Gotcha, and then for the full year GPU outlook of about 2000 per unit I presume. The breakout is about 1100 retail about 900 and F&I and the question is whether you think these levels are a fair jumping off point for 2022.
Or if you think some of these unique 2021 dynamics result in any any departure from these levels one way or the other.
Yeah.
Well, we clearly exceeded our expectations for Gpus for this year.
Yes, there was price depreciation and favorable market conditions, but the key no secret sauce for our success has to be our operational efficiency improvement.
I talked about the conditioning before how much we reduced the cost there, but ultimately F&I so F&I.
Difficult area to grow, but we've done really well in growing steadily and gradually by small steps every quarter. We had a good success in Q3, and we expect to see further improvement in Q4.
So as we end the year at around 2000 GPU.
Important step.
Stepping stone to get to our mid term goal of 2500 GPU.
In order to get there because we shared in the past you need about 1200 1400 enough a night, though we still have some ways to go and you need the reconditioning to be 1200 or below where you know approaching that well. So we are in a good position to be able to it.
The midterm goal in the coming several quarters.
Got it very helpful. Appreciate the time.
Thank you.
Thank you Alright. Our next question comes from Marvin Fong of <unk>. Your line is open.
Great. Thank you for taking my questions. So first question I'm, just wondering on specific to the fourth quarter of GPU guidance.
I believe it's 16 to 1700 I'm just wondering if you could just break that down a little further and my thought is what you just did over 2000 this quarter and in the environment looks pretty favorable why the step down and specifically.
As a secondary question are you forecasting any drag from wholesale as occurred in the third quarter and your fourth quarter guidance.
And then I have one other follow up.
So 16 to 1700 in Q4 is still but more than.
Strip mall last year as a.
Result, though we are obviously.
Very happy about that.
In the fourth quarter, you see them.
The impact of seasonality you know people focus their discretionary spending on holiday spend rather than a purchasing used cars. So there is some pressure from that point of view on G.
Gpus to some extent and the last thing I would say is that you know there was a.
The level of conservatism here, just because of the experience we had in previous Q4s.
We wanted to make sure that we gave you our best estimate at this point.
So that's where we help them the wholesale I don't think you're going to see a lot of impact or negative impact of wholesale in our numbers in the fourth quarter.
Okay, great. Thanks, Oded and then.
Just looking at the inventory for sale.
I realize you have cars youre working on but arent yet on the site just curious if you could comment on your outlook for the.
If you'll be in good shape for inventory for the seasonally strong first quarter. Thanks.
Silver mine.
Go ahead of it.
Okay.
So look on the inventory side, we entered the quarter in a really strong position and we spoke in August about the fact that we had.
That is just for how we would approach.
Inventory going into Q3, and Q4, which was two <unk>.
Sell through inventory that we had bought over the summer at what we thought was very high places and slowed down acquisitions in late August and September when normally you see a decrease in pricing when we execute on our strategy and that benefited us dramatically with GPU in Q3, and we're really happy about that and then we all.
So we're able to enter Q4, and a very strong position with inventory and I'm really happy with with that at this point, obviously going into next year, we will need significantly more larger amount of inventory that we have are going.
Going into Q4, because we're going to be any correspond growth here in 2022, and we're doing what we need to do in order to.
Well our inventory.
All year, we've actually never had a problem with inventory.
For folks in the industry generally very used to how about people having accounts, but we've not really had a chance.
Has been very strong and would be very happy with that.
And it's really exciting to see them as conditioned to me, but keep up with inventory as needed and you're able to.
Get it ready to be sold in a quick way.
So I think one other thing you can kind of thing I think it ties to the point that you made regarding wholesale which is that we sell.
So a much broader set of cards in retail that caused.
All the way from zero to 11, and 12, you have an H, so that really kind of helps us with inventory, finishing as well, but result is that we can sell a lot less cost.
On wholesale because a lot of cars that come our way we sell retail.
So you know.
That I think that's helped me answered the question I also I'm excited hopefully to a day when we can do this from one room I'll cover them many different rooms, and we don't have a speaking over each other.
[laughter], Oh, I'm looking forward to that day too. Thanks, so much towards an audit.
Thank you. Our next question comes from Alex Potter of Piper Sandler Your line is open.
Perfect. Thanks, guys first congratulations Toby and good luck.
I had a couple of questions following up on the F&I.
<unk> as I say to see the trends there I guess this can be a relatively high friction sales process at least in the context of the traditional automotive retailing industry. So I'm wondering kind of the strategies, you're using there to get those higher F&I attach rates.
Hi, Alex So yeah, F&I is definitely not an easy thing to sell an actual sale involved versus peak.
People, just kind of choosing to do it.
It's true across virtually every service type of components like our vehicle service contract or anything else outside of the automotive industry.
We are seeing making really good progress in increasing our attach rates, but we need to continue to do that.
Including providing the right type of training for our team. This is something that the team need to learn how to do and obviously in an environment when you're trying to grow the team.
Keeping up with both girlfriend training and there's a little bit of a drag on that so we're working through that and we think that will be in a good position for that in 2022.
Additionally, we've spoken before about the fact that there are opportunities in the kind of concept behalf without partners.
Another area, where we're working through and overall, we think we're on a good path to increasing our friend numbers.
To where we want them to be by mid point, we should know about tougher Fortunately Dallas.
It's not the kind of thing where like one thing you do result in an additional 200 to 300 models.
Lot of.
All things that at $25 at a time and that ultimately adds up to the number that you want it.
Okay, Great and then maybe one follow up here on F&I.
Is it is it possible that obviously, we're seeing high transaction prices now some of that is market driven I don't know the extent to which maybe some of that is also favorable mix.
Generally speaking you have higher F&I attach rate.
On higher priced vehicles.
If you subscribe to this idea of that vehicle prices are going to come back down and normalize do F&I attach rates go down with them or is that not a risk.
I think it's certainly.
Through that for really inexpensive car F&I tax rates are slightly lower especially when it comes to vehicle service contracts things like that.
$7000 car or what maybe notwithstanding $49000 in light of inflation, the likelihood of a vehicle because it's kind of being attached to that vehicle because at that 10 year old 11, or 12 year old car is more there's also a possibility that the lower tax rate is lower on that as well because.
People have that kind of money to kind of spend.
It's certainly true on the kind of what we would call value on your balance of inventory attach rates are generally lower and we've spoken about that in the past like where everything else.
Price I don't think is the driver of the types of things the way people buy automotive.
Vivo is by thinking about that monthly payment I mean, what can they afford to pay on a monthly basis.
And obviously they look at it at the whole picture of what are they paying for vehicle what are they paying for any add ons I might add so while I don't have proof of this you could actually consider them. They argue that as prices increase much more quickly than people's salaries do actually folks have more concern about being able to do it amongst the payment is locked.
And might not do attachment as much.
Because they need to have a certain payment.
And then in that scenario you actually you can see that if prices kind of normalize and there are some.
Depreciation and prices as a result of this.
And the market any you could see higher attach rates because people's monthly payment would then be able to absorb those vehicles. So it was kind of more kind of data to back that up but I think that the hypothesis that we sell them, we thought about it internally and how this works, but overall you know I think the goal for us is to increase that attachment and as we do that we think that.
Well go up as well.
Great. Okay. That's super helpful. Thanks, a lot George good quarter.
Thank you. Our next question comes from Rajat Gupta of Jpmorgan. Your line is open.
Great. Thanks for taking my questions and congratulations to Tobey.
Yeah.
With Echo those comments in the call as well.
Just had a question.
Maybe a couple of questions Firstly, just to follow up on the 2500 GPU.
On what kind of volume level is that based.
Any thoughts on that.
So.
The 2500 is not volume specific it is has to do with the progression of our ability to be.
Efficient on the operational side now obviously scale helped to that end.
But we need to be able to staff and train and learn and improve.
All facets of our operations in order to be able to increase F&I and reduce reconditioning costs and we've done a really really good job there over many quarters and we should continue to do that.
Understood.
Got it that's helpful and then just on the hiring and staffing.
Investment significantly here and.
In the fourth quarter, you know in the shareholder letter you mentioned, adding sales support.
You know how do you manage like all the other functions to invest.
We're investing at a grow through adding salespeople, but.
Also you know hiring reconditioning stacks them like logistics trucks drivers like how do you manage all of the other piece of the puzzle.
Just so you're not caught in a situation where you have one and not the funnel is fully equipped to know you're hiring throughput issues on the other side.
So how should we think about that in the call.
So you know just a fourth quarter SG&A pickup.
And I had one.
Totally a hiring spoke with as possible the needs that we have as a company.
You know that includes drivers that influence.
Mechanics. It includes concierge salespeople customer service etcetera across kind of all areas, where we need people to execute on the business.
And I think the really important thing here is that almost everything we do is in house.
Conditions on in house.
Then how et cetera, so they look pretty good sense of what we need and unfortunately don't have dependencies on one of our people.
And I mentioned this because I think it's really important as a differentiator for how we operate we get into our country or our driver gets into the car and take that.
Drive them out to the customers right. So we don't put the corner on that truck and then drive it that way. So that's the type of Labor force. The hiring is different and then just how we operate in the field logistically the front as well.
So we are investing across all those pieces and ensuring that we have the right amount of people that we need for 2022 going into Q1, and obviously as you can imagine we've got really big focus to manage it.
Carefully.
And deliberately.
And I think we've been I think very well in that environment.
Like I said the market is not an easy market to hiring.
One of the things that we wanted to do by diversifying our patients.
And then they'll go into Texas for example, et cetera, we're still being able to not have a dependency in highland get them on location.
Including the fact that California, obviously has a lot more expensive than a lot of places and so we're definitely going to benefit from that as well because now we're not hiring just in California, but also hiring.
Oh locations that we've launched.
That's kind of my overall.
Hopefully that answered the question.
Okay. That's helpful.
That's helpful.
I'm, sorry, sorry to interrupt just a shout out to our people ops team.
About seven or eight months ago, we hired the new CPO and she brought in a whole team of seasoned.
Susan professional to really attack the issue of hiring hiring across the economy is difficult right now and they've done a fantastic job in addressing each part of our organization and really helping us. So we feel very confident with them in place leading us forward.
Great.
And then just on the Recon Center.
Large one day reopening.
In that case too it's going to be the commentary.
Due to delivery and just I mean is that an approach that you plan to replicate across other regions as well in terms of like just the size and scale of the Recon Center.
Yeah, so our approach towards finishing facilities.
I think quite unique among our peers, we rent space and then we put in less into that facility and then we operate that facility. The list can be moved from one facility to the other on our leases are down on a short of time so.
So that we can move from one location to another location based on our need as many as we can.
ROE and the capital investment that you make to get into but he is fairly limited.
As well so.
I think we said in.
So a whole lot of about 80% of the equipment can be used from one facility to the next.
That's kind of the approach we've had for a long time.
This is not to criticize and approach of building kind of a proxy for massive reconditioning facility and there's definitely value to that as well in the long term. There are cost savings that you see from that but the upfront investment that you make to that.
It is much larger and at the scale that we're at today, we don't think that's necessary.
In California Bay area, obviously is our very large market for us.
And we had a facility in or would have a facility in south San Francisco, we needed to go to a much larger facilities, you'll be able to continue to grow.
Almost all the growth that we've seen this yes. It came from existing markets and we think there's a ton of opportunity to continue to work in the market and so on.
Roche has been needed a pickup is related to achieve that and that's why we are moving cautiously that as you know to buy that's bigger than what we have now but the capital investment to do that is pretty limited.
Service, primarily bay area location, plus potentially a little bit of Sacramento, Southern and Northern California more properties now obviously consumers can buy car from shipped anywhere and then we'll ship it to them.
That is a kind of a way to buy from us upon a majority by any means but people choose to do that.
And so in that case, we'll put a comment truck and ship it to the consumer wherever the customer is across the country, but the overwhelming majority of customers who buy within our geographic footprint regions, We will drive the car to them with a concierge kind of like we have always done.
Got it okay, great. Thanks for all the color and good luck.
Thank you. Our next question comes from Seth Basham of Wedbush Securities. Your line is open.
Thanks, a lot good afternoon, and congrats to Tobey as well I just want to dig deeper into a couple of the prior questions. The first is on retail E Commerce, GPU and the guidance for the fourth quarter.
I'm trying to understand why there's such a step down understanding the seasonality effects, but the pricing environment continues to strengthen.
The level at which you bought vehicles over the last couple of months. So I think that your margin should be stronger than your forecasting is this just conservatism or is there something else that's going on from that additional reconditioning of transportation cost perspective or something else.
Okay.
So thanks for the question Seth as I.
I mentioned before we are very pleased to be able to guide to 16 to 1700, just because more than three times, our number from last year or so but the saga.
And then what happens in the fourth quarter is that there is a seasonality impact.
Just.
People spend their money in different ways and spending it on cars is.
Sometimes it's not their first priority so and if they decide to do so it becomes more competitive and it has an impact on the final price you get for the car.
And then finally is there an element of conservatism here, yes, just because you know we had some.
More challenging experienced in previous years in fourth quarter.
And we wanted to make sure that we guide you to the best of our ability and.
And give you our best take as it looks now.
Okay. That's helpful perspective, and then as it relates to F&I improvement in this quarter the third quarter, how much of that was simply from higher asp's relative to improvements in attachment rates.
Well, obviously, it's a little bit hard to tell exactly but the improvement was in many different ways that you can see it in many different products as we were able to increase the attachment both on the financing side and the other products themselves. So I would say it was across the board that nothing.
We're really focused on one thing and I don't think it's B is the main culprit there.
Got it thank you.
Sure.
Thank you. Our next question comes from Nevada Com.
<unk> Securities Your line is open.
Alright, Thanks, a lot.
You're hearing about more and more car buyers is getting priced out or.
Not ending up buying do you think the marketing efficiency can be higher and I'm sort of a more normalized.
Buying environment.
Maybe just talk about the advertising channels.
Which ones are you seeing.
There are more effective.
Great. Thanks for the question.
Look we certainly agree in hindsight as prices have gone up.
Creating a complicated environment for a lot of people and frankly, that's one of the reasons why we would hope that eventually things kind of go back to where they were before and normalize.
We are fortunate that our inventory is very broad, meaning you can buy a brand new cards from just six months old all the way to a 10 or 12 year old car with 100, plus thousand miles and so the price diversity that people can find that ship is very broad and so hopefully that's an opportunity for people who might not be able to afford.
A two or three old card given the price increase to buy and really good shifts certified for a five year old people and so we hope to serve them that way.
With regard to marketing.
As you know and we've spoken to in detail last Q1, we fundamentally changed how we approach marketing historically has been very focused on marketing through digital channels.
With this transition we have refocused ourselves too much warm on brand and building a long term sustainable brand that will pay off both today and over the long term.
Merry way and we can do that is through video advertising. Obviously TV is the one area and I don't mean, just TV in a normal sense when youre watching C. N N cable, but also over the top television with people consume on demand.
As well as our channels that people used to both brands.
That's where a lot of our focus is we obviously havent stopped doing digital only can do a lot less of it than we used to.
As a total percentage of our spend.
And the digital channels that we've always deployed.
To work really well for us and we will continue to utilize those as needed.
Thank you Josh.
Okay.
Thank you. Our next question comes from Brian Nagel Oppenheimer. Your line is open.
Hi, good afternoon.
Hi, Brian restaurant.
That's on the moves and congratulations on a nice quarter.
Okay. So one question just beginning.
It's really the basis I mean.
Well talking about.
Just here.
The significant elevation in used car pricing as you look at your business I mean, assuming that used car prices are all essentially normalized when you look at your business now.
It's the it's the.
The increase in use of the elevated used car prices is that more of a positive or negative for you.
I'll start and then I voted are told me want to chime in I'll, let them speak as well so certainly in Q2.
And we saw some tailwind from that because we bought cars.
Core price elevation started.
And then we had appreciation in crop prices virtually every week throughout the quarter.
And so that really helped us and we talked a lot about that during our call with you guys in August.
In Q3 than we saw some pressure on coal prices for a little while but then.
Just kind of came back in September and that tailwind helped us a little bit in Q3.
As well.
That said you know so from that point those are kind of positive on the flip side, though youre operating in an extremely unusual environment.
Environment that we've never been in before and a lot of the patterns and kind of history.
About how pricing works throughout the year are no longer applicable or has it been telling this to us for four months, but just throughout the the history book and assume that you don't know what what's going to happen based on history and that makes things much more complicated and so from that perspective I'm actually.
Even more proud of what the team's been able to do because in this very complicated environment that executed extremely well.
So from that point of view would we preferred to.
For things that would turn back to normal in many ways of course, because we could then use our historical patterns and things that we've learned over the years.
To predict better what is going to happen to pricing and that would meet everyone's lagged a little bit easier and frankly consumers would be in a better place as well because it wouldn't be paying this hydro price for cars.
Yeah, I would just add that.
Look I'm fairly new to the car industry, specifically, but what it occurred to me is that when you have change in the trajectory of prices then you're going to get headwind that we saw in Q2 or it could turn into a tailwind at some point in the future as long as prices continue their trajectory for a long period of time.
So you'll have to pay more to buy cars and you'll get more when you sell cars. So maybe its a small appreciation in between that you can gain on but if you get to normalized pricing.
So right now we are in more normalized pricing versus what we saw in Q2 for example.
That's all really helpful. I appreciate it and then the second question I have just with respect to new markets that Youre in your script you talked about Houston.
I guess, maybe a two part question, but I mean, just quad just just discussed is kind of the performance of these new markets I know you've said in the past.
Most of the growth still comes from your legacy markets is that still the case and is there any change in timing of when the new markets could become bigger contributors to your overall growth.
Certainly this year a vast majority of the growth has come from our existing market.
The market that we had prior to November.
November of last year.
Which makes sense because they are the ones who are studying on such a small handful.
That said, we've seen really strong momentum.
Some of the market that we launched.
Seattle and decided.
And I think in November of 2020, and then.
Some of the Texas markets.
Q2, David doing really well and we would expect them to be bigger contributors to the business.
Next year.
Not to in any way suggest that the market that we have.
Prior to that in California, Oregon won't grow we expect that market to continue to grow very well and there's still a ton of market share to be captured.
And in these markets, but given just the fact that they are growing and in the end from which they will be growing will be bigger we would expect market that we launched in late 2020, and first half of 2021 and should they become contributors to the business in 2020.
Yeah.
I appreciate it congrats again thank you.
Thank you.
Our next question comes from Ben Sherlund of Cantor Fitzgerald. Your line is open.
Oh, Hey, guys. Thanks for the question.
I was wondering is it the.
Increasing TPU is entirely related to your price appreciation or if you guys are also increasing the mix of higher relative price points vehicles.
So I think.
Playing in that that cheaper cars might have lower due to you is that kind of how you're thinking I know its not related not related to GPU I'm just.
Trying to think about PPE.
P. P. You going forward, if we were to say.
Used vehicle pricing to remain at the current levels should we assume your PPA would kind of remain at that $24000 range going forward.
Yes, so we have.
There are two things that happened this year that resulted in <unk> being higher than it was previously one where the choice that we strategically made so in 2020.
Kind of as Covid started.
We saw a really significant spike in demand for lower cost cars, which makes sense people sounds like an <unk> because it wouldn't be public transportation, but they also don't want to spend a lot of money for a car because they had no idea where the economy would be.
So we lean into that we have a unique ability to sell cheaper.
Chiba Cogs and so we made that would be a really big percentage of our cost so.
Going into 2021, we wanted to reduce that cheaper vehicles, what percentage of our costs, though.
And we did that partly because of the reconditioning and partly because we quite with a better mix to have as a business and so we have chosen throughout the year to reduce the nickel cheaper cars as a percentage of total, which obviously drove up our concurrently with that we saw this massive appreciation in corn prices, which then led.
Two to what we've seen this year, which is that everybody is asking jumped pretty significantly.
So those are the two things that kind of drove.
This appreciation.
In our ESP over the course of the year that said, we still sell a very broad spectrum of inventory, we have a ton of cost that are below $10000. In place for example, even in an environment where prices have gone up as much as they have.
And so.
We lead.
We can't predict what's going happen to feature from the choices that we can internally make we don't expect to make any changes we think that the mix that we have on inventory today is generally good and we'll continue to have that same mix.
In the foreseeable future, obviously, if demand from consumers changes like it did in 2020, and we will respond to that demand and you get a different set of inventory based on that.
Does that answer that that's great great. Yes. That's helpful. Thank you.
Maybe a follow up if I could.
You continue to scale and expand into new markets is there a point, where you need to acquire more inventory from wholesale channels or its early unconstrained on the number of cards you can source from consumers.
So going into this year, if you kind of look back at the modeling that we weren't doing in Q4 of last year.
We were planning on having roughly 15% of our costs come from auction.
Which you know we thought was reasonable now if you look at what actually has happened this year and we have not bought 15% of our private option.
Because we saw prices go up dramatically and auction and we just did not think it makes sense to pay at retail prices for option cost, which is what a lot of people had to do we made up for the quarter that we didnt mine auction from consumer and we ask that you ultimately will end up selling more cars than we bought with possible. This year.
So we were able to meet the demand forecast that we had from consumer cards. That's a unique competitive advantage that chip had for a long time, and we are able to do very well.
And we don't see any reason why we can't continue to scale that.
Strong way in a.
The quarters to come now, obviously prices normalized and <unk>.
Wholesale prices are not as high as they are today versus retail prices, which we would expect eventually to happen once new coproduction kind of increases again, then we would probably buy more cars at wholesale historically shipped had chosen not to buy a lot of wholesale because those costs have less front end margin and you have to have much better F&I.
<unk> to be able to get to the GPU that you want when you sell wholesale cars that you bought at an auction.
So when we didn't have there you would F&I, we were not able to lean into that as much now then in F&I numbers in a lot better and we will continue to improve we think there's an opportunity to ask me to grow our <unk>.
<unk> purchases and then turning them into a retail sales.
But we need the prices at auction to normalize before we're able to do that.
Great great. Thanks, guys.
Yes.
Thank you. Our next question comes from Mike Grondahl of Northland Securities. Your line is open.
Hi, guys. This is Owen on for Mike I, just had one quick one I know the lockout for sure getting closer but do you guys have an exact date yet.
Sure. So lockup expires on November 15th which is on Monday.
And you.
You know that that's been public for a long time ever since the transaction.
Great. Thank you congrats on the quarter.
Thank you.
Thank you and our next question comes from Tony Anderson of William Blair. Please go ahead.
Hi, Good afternoon could you talk a little bit more specifically about our reconditioning capacity I think it was had a.
600, a week last quarter and you mentioned increasing capacity. So I was wondering where it stands now and then when you put them in here you can move to the bigger facility in California, where you expect it to be and then can you remind me I mean, maybe I missed this what's the timing on this.
Switching over to that bigger facility.
Okay. So.
Let me start by saying, we did not update the capacity number because I'm, saying it continues to grow.
Not a constraint on our.
Our capacity to produce and <unk>.
Recondition cars, so we're doing really well and going to grow into next year. So this is one of our you know in my opinion strength as a business is our ability to do this efficiently and scale up as we and as we.
And as for the new facility.
It takes a little bit to just retrofitted and put all the equipment that we need.
Place and.
<unk> hired the staff, even though we're going to move some from the current facility there'll be some overlap between the two so.
Some point in the first half of next year will be fully operational.
Yeah.
Okay, and then can I follow up on that F N I G.
The improvement this.
This corridor and your midterm goals 12, or 1400 can you remind me of maybe the timing of that and I guess since your you mentioned like hiring initiative that includes like afternoon, I better training partners.
Is it.
Reasonable to I know you talk about Oh, it's incremental.
Improvement is it fair to think about it.
A little bit that incremental.
A little bit.
Better each quarter, but with all these things we're doing.
Towards that goal.
The other thing I'd like cross the $1 billion.
Maybe next year. So can you update us on your thoughts on just the timing.
Yeah.
Sure. So I'll start with a lot last 0.1st Yeah. We've always said that you know to be able to build counting would be anything yet because of $1 billion in rent when you get from that point of view and we don't really have a concrete update on that but certainly.
I think next year is when we will let's say et cetera, how can we think about when to go after this and in Holland, hopefully, we'll be able to provide an update that I can name a few quarters on that as far as F&I generally if you look at our F&I results.
Improved quarter after quarter I mean, the improvement is pretty significant from last quarter.
From last year due to this quickly and obviously you know, it's not exactly linear quarter, there might be a slight decrease.
As well, but overall you know, we think that to get to that 12% <unk> number one goal is to do that in 2023.
We think we're well on our way to make that happen.
Okay. Thanks.
Thank you at this time I would like to turn the call back over to George Ellison for closing remarks. Please.
Great well, thank you everybody for joining us.
Your questions and look forward to speaking to you I can't.
Q1.
Okay.
And this concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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