Q4 2021 Carvana Co Earnings Call
[music].
Good day and welcome to the Carvana fourth quarter 2921 financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keep.
Pad and to withdraw your question. Please press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to Mr. Mike Levin. Please go ahead.
Thank you Chuck good afternoon, ladies and gentlemen, and thank you for joining us on Carvana is fourth quarter and full year of 2021 earnings Conference call. Please note that this call will simultaneously be webcast on the Investor Relations section of the company's corporate website at investors Carvana Dot com the fourth quarter shareholder letter is also posted on the IR website.
Additionally, following the announcement of our acquisition of a depth of U S. Physical auction business from car global today, we posted the press release and slide deck on the events and presentations page of our IR website, where more details can be found joining.
Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer before we start I would like to remind you that the following discussion contains forward looking statements within the meaning of the federal securities laws, including but not limited to carvana as market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially.
Really from those discussed here a detailed discussion of the material factors that cause actual results to differ from forward looking statements can be found in the room.
The forward looking statements and risks in this conference call are based on current expectations as of today and Carvana assumes no obligation to update or revise them, whether as a result of new up new developments or otherwise unless otherwise noted on today's call. All comparisons are on a year over year basis.
Our commentary today will include non-GAAP financial measures reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our investor Relations website, and now with that said I'd like to turn the call over to Ernie Garcia Ernie.
Thanks, Mike and thanks, everyone for joining the call 2021 was extraordinary year for Carvana full of landmark accomplishments, along our path to achieving our mission of changing the way people buy and sell cars. We started the year being named to the Fortune 500 tied to the third fastest company ever to do so we.
We sold our one millionth car through organic growth faster than any other automotive retailer in history. We.
We had our first positive earnings quarter, we had our first positive EBITDA year, excluding one time items and we became the fastest growing E Commerce company in U S history.
While I am extremely excited and proud of the team for that blockbuster list of accomplishments I'm, even more excited about the fact that we were also named the top 10 of Forbes best large employers to work for list. We ranked ahead of any other retail company and ahead of any other technology company.
That set of accomplishments can only be achieved with a clear customer focus mission and enormously scaled opportunity and the compounding that results from the efforts of great people, who care are directed toward long term value creation.
To everyone inside Carvana for always choosing to care and we're always giving that little extra effort that adds up to make a huge difference.
We've always framed our opportunity simply customers desire the experience we provide for them providing it as hard there are approximately 40 million used cars sold every year in the U S. The unit economics of the industry viewed over any reasonable time frame has been stable for a long time that unit economic stability at the industry level is structurally driven by the fact that there are tens of thousands of dealers out.
They're providing customers with similar customer experiences and who share similar cost structures that simple frame is clarifying to achieve our goals. We must continue to deliver great customer experiences. We must continue to differentiate our unit economics, and we must continue to scale that as our path in alignment with that path. We're extremely excited to announce the acquisition of a desk use <unk>.
Operations.
ADESA is the nations second largest auction company with 56 locations completing about $1 million auction transactions a year. This acquisition has four primary justification.
Number one it solidifies our path to becoming the largest and most profitable automotive retailer.
Number two it provides us with a nationwide inspection center network that we estimate will increase our production capacity by approximately 2 million units per year, when fully built out and number three it substantially improves our logistics network demonstrating the breadth of these locations. We will move from from currently having inspection centers within 200 miles of 56% of <unk>.
Population to eventually being within 200 miles of 94% of the U S population.
Demonstrating the quality of these locations, we will move from being within 50 miles of 16% of U S population to being within 50 miles of 58% of the population.
This will reduce shipping times to our customers nationwide and lays the foundation for eventually offering same day delivery to many of our customers number four it significantly increases our auction capabilities and kickstart or deepens, our relationships with many large and important players in the automotive industry.
We look forward to working with our new customers to creatively, finding new and interesting ways to work together and to valuing them at the same way, we have always valued all of our customers.
We also expect ADESA to accelerate our path to our long term financial model given the many powerful benefits derived from being closer to our customers for a perspective on how powerful proximity can be sales that are delivered to customers from an inspection center within 200 miles of our customers today have unit economics that are about $750 better than our average transaction as a result.
Lower inbound cost lower delivery costs, and higher conversion rates, leading to lower customer acquisition expense.
Now I would like to turn briefly to the current environment.
Starting in late fourth quarter, we like everyone else were hit pretty hard by the omicron variant at different points in time, we had up to 30% of our people in various operational teams simultaneously called out.
Honestly very difficult to deal with in any system, but in systems that rely on changed activity like our inspection centers. Our logistics network. It is even more difficult. This led to the most severe logistics network constraints, we have seen in our history.
We're largely out of the omicron wave it takes time to work out of our backlogs and this years severe winter storms have slowed our progress.
We remain severely constrained, but we're working hard to work through it as soon as we possibly can.
These constraints paired with the recent rapid appreciation vehicle prices as well as rapid increase in interest rates have colluded to make this a challenging time.
Well this is undoubtedly been complex operationally as our team has in the past they are rising to the challenge we've managed to grow our inventory available to our customers. We have grown our operational capacity to handle more volumes throughout our operating groups in anticipation of alleviating our logistics constraints and in anticipation of tax season, and we've made changes to the mix of cars, we are purchasing and reconditioning to help our customers find more.
Order book cars, despite the car pricing environment.
And our long term indicators continue to look incredible and our oldest cohort. We are now to three 5% market penetration. This may not sound like much at first but if we apply that nationwide extrapolates to about $1 4 million annual sales.
On top of that our oldest cohort grew by 50% in the last year and therefore, clearly has a long way to go lastly, 95% of our 311 markets are ramping faster than our 2013 cohort was at the same time in its life 2 million plus car sales per year is no longer. The goal. We are aiming higher we have the team the business model and the ambition to.
At the March continues Mark.
Thank you Ernie and thank you all for joining us today.
We are pleased to report another year of strong growth in both retail unit sales and revenue.
Revenue totaled $12 8 billion, an increase of 129% and retail units sold totaled 425237, an increase of 74%, making us the fastest used automotive retailer to sell over 400000 vehicles in one year.
For the fourth quarter retail units sold totaled 113016, an increase of 57%.
Total revenue was $3 8 billion an increase of 105%.
Our exceptional growth in 2021 was driven by rapid growth within our market cohorts in Q4 or 2013 through 2020 cohorts grew retail units sold by 52% and our oldest cohort of Atlanta grew by 51% to 353% market penetration.
As of Q4 2021, 95% of our 311 markets are ramping faster than Atlanta wasn't the same age and record numbers of markets are crossing key market penetration thresholds.
In 2021, we completed our eighth consecutive year of $400 more GPU improvement our eighth consecutive year of EBITDA margin leverage in our first full year of positive EBITDA margin, excluding one time items.
Total gross profit per unit for the year was 4500 37.
Our growth in GPU in 2021 was broad based including increases of $166 in retail $308 in wholesale and $811 and other.
Total GPU in Q4 was $45 66, an increase of $11 87 year over year.
Year over year changes in GPU were driven by gains across all components in Q4 as well.
Retail GPU increased by $230 in Q4, primarily driven by an increase in the percentage of retail vehicle sourcing customers, partially offset by higher reconditioning costs and higher wholesale acquisition prices.
Wholesale GPU increased by 4% to $41 driven by gains in buying vehicles from customers and wholesale market appreciation.
Other GPU increased by $516, driven by strong finance execution and higher industry wide vehicle prices on average loans.
As an additional impact.
In Q4, EBITDA margin was negative two 5%, including <unk>, 6% impact from one time items.
Sure.
An improvement of one 4%, reflecting gains in both GPU and SG&A leverage.
We ended the year with $2 3 billion and total liquidity resources, giving us significant flexibility to execute our plan.
Today, We also announced that we've signed a definitive agreement to acquire <unk> U S physical auction business the.
The acquisition is expected to close in the second quarter of 2022 and will be financed with $3 $2 75 billion in committed debt financing to fund the $2 2 billion dollar purchase price and an additional $1 billion and improvements across the 56 sites.
Upon development of these 56 sites.
We are expected to unlock approximately 2 million units of incremental annual production capacity at full utilization.
This year, we made significant progress scaling our vehicle production capacity.
In 2021, we added three inspection and reconditioning centers, increasing our total IRC count to 2014.
Following year end, we also opened our 15th IRC near Cincinnati, Ohio, bringing our total capacity at full utilization to approximately 880000 units as of February 24th.
We remain on track to open six additional <unk> by the end of 2022, we plan to open five of these on schedule, leading to more than $1 2 million units of annual capacity at full utilization at year end.
And with our addition, our acquisition of ADESA U S. We are currently evaluating our preferred timeline on opening the sixth.
In 2021, we also opened 45, new markets, bringing our year end total to 311.
With these new market openings, we now serve 81% of the total U S population up from 74% at the end of 2020.
We will continue to expand in 2022 and continue to expect to serve 95% of the U S population over time.
As we look towards 2022, we expect another strong year on retail units sold revenue GPU and EBITDA margin, we expect to grow retail units sold to over 550000 for the full year.
Following the first quarter in Q2 through Q4 taken in aggregate, we expect total GPU over 4000, and approximately breakeven EBITDA margin.
We expect the first quarter to be impacted by supply chain challenges brought on by the omicron variant and severe winter storms.
And the recent rapid increase in short term interest rates. We expect these effects to have a significant impact on Q1 total GPU and SG&A per retail unit sold leading to an expected EBITDA margin loss in the mid single digit range.
Since becoming a public company nearly five years ago, we've made tremendous progress toward our long term goals and achieved many major milestones such as achieving our first profitable quarter. This year.
We're excited about what comes next.
Thank you for your attention we will now take questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
We ask that you please limit yourself to one question and one follow up and.
And if you have additional questions you may reenter the question queue.
And at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Zach Fandom with Wells Fargo. Please go ahead.
Hey, good afternoon, so over the second half of 2021.
It had been averaging roughly 8600 unit sales per week and this number is obviously constrained by a host of factors that appear to have worsened in January but now that you've opened up two new facilities and a few more on the way in the upcoming months can you just talk about how this weekly run rate shouldn't change.
The new capacity comes on and how this dynamic.
The 22 unit outlook.
Sure. So what I would say is I think the primary driver is going to be how quickly we can alleviate the constraints in logistics network.
Yes, as I said in my prepared remarks, omicron really set us back, but logistics network is a system where.
Many drivers connect in order to deliver a car to a customer and add kind of the peak of the omicron wave we did have.
Very high call out rates and that made it hard for those connections to occur and then set us back and got us a bit behind.
And then I think we have been working hard the team has done a great job trying to catch up we've got a really strong network. When it's fully functioning that should enable us to catch up relatively quickly, but we've also been hit by a number of winter storms as recently as this week, we are hit by another one and those storms definitely set us back again, so I think when you look at the remainder of this year.
I think the primary driver right now is our logistics network, which is much more constrained than any other part of the business.
And then I think from there it's about catching up and then it's about figuring out where we are for the remainder of the year.
Right now the logistic network is absolutely constraining sales. We have also seen car price appreciation that was pretty meaningful in the back half of Q4, and then we've seen interest rates go up quite a bit as well and so we don't feel like the impact of that has been that severe honest just yet because we've been we've been kind of impacted by the <unk>.
Logistics network constraints, and that's really what's holding us back, but we have seen industry wide sales drop by kind of 15% to 20% relative to 2019 or 2021, depending on what your reference point is and so we're taking that all into account and trying to put together our outlook of 550000 units.
And that's what underlies that.
Ernie just to be clear should we assume that the average weekly units in Q1 is below Q4, and then improve sequentially throughout the year.
So I think we're going to stick with what we've got in the outlook in terms of specificity I do think Q1 is going to be a tougher quarter.
The way it is going to unfold.
Been heavily constrained and that's going to show up in the volume. It's also in the inspection centers that were they were hit really heavily in Q4 with the omicron. They were still able to produce a lot of cars because we built a lot of inspection centers and built out a very strong capability there, but the efficiency certainly went down and that will show up and impacts to <unk>.
So I think those impacts will show up in Q1, and that's how we're trying to guide to Q1 to provide kind of clarity there and then we expect to emerge from that and look forward to a really strong Q2 through four.
The next question will come from Sharon Zackfia with William Blair. Please go ahead hi.
Good afternoon, I got excited when I heard Zack so.
Zackfia Zach I don't know if you got that.
We are there.
Ali Odessa acquisition can you talk about the buy versus build kind of analysis you went through there.
Do you assume for the attrition potentially of customers of ADESA, they might not want to kind of line. Your pockets some of them and then the $1 billion in improvements on unlocking the $2 million in incremental capacity, what is kind of a reasonable timeline to get there.
Sure well I think first of all as as you can imagine we're extremely excited about this acquisition. We're extremely excited to welcome. The team we think it's a pretty incredible fit.
I think whenever businesses come together, you always talk about all the synergies and all the things that you hoped to occur, but I think what's so great about this one is it's very clear to see how we fit together they've got an unbelievable footprint of 56 locations around the country.
In great locations that are very close to our customers.
Out of those locations to over 4000 acres for perspective, if you add up all of our inspection centers today, its probably close to around 1000 acres, so a really meaningful increase.
Just kind of the physical infrastructure that we will have access to.
That obviously means incredible things, what we can do from a reconditioning perspective, both in terms of volume, where we expect to get 2 million units plus.
Incrementally out of there versus our existing capacity once we fully ramp it up.
And then also from a promote from a location perspective, because we can deliver cars to customers will be much closer to them. So I think thats really exciting and then we all think the business is a great fit we often use this.
<unk> model of the entire US market is basically a big machine with lots of players that helps customers trade cars with one another.
And there's all kinds of players inside that system Theres dealers Theres finance companies auctions are a really big player inside that system.
And when we talk about vertical integration, we generally meet as we want to be as big a part of that system. As we can be so that we can cut out as much expense and difficulty as possible for customers that are trading cars and we think working together with ADESA is is really interesting strategically for that reason as well.
When we think about build versus buy it is actually a fairly straightforward analysis, you can kind of walk through in that in that same kind of framework and I think the simplest way to think about is just with respect to our inspection centers.
In order for us to get similar production capacity out of inspection centers that we would build we would expect to need to build on the order of 30 inspection centers.
And we would we would expect that cost to be pretty high we would especially expect it to be pretty high when you look at the locations that we're picking up through this acquisition.
Acquisition, they've got many locations on the West coast, they've got many locations in the northeast areas of the country that are very expensive in dollars, but also very extensive and time in terms of how long it takes to find those locations in and get them zoned and get them built out and get them operational.
So we think that from a build versus buy perspective, with just that simple analysis youre probably pretty close.
You are probably very close actually and then we get the instantaneous logistics benefits and access to this great business. So we're really excited about it and just think it lays a very clear path to the future.
I talked a bit in my opening about our oldest cohort of Atlanta now being up to three 5% market share and we think thats really important context, because it does just very clearly like the path to $1 4 million units that you can just kind of see as long as we execute and then youll beyond that that you have the 50% growth.
It is continuing to happen inside of Atlanta.
We don't know exactly where that growth is going to compound out over the next many years, but I think if you look at other businesses that are growing even at rates materially slower than 50% and look out five or 10 years youll generally see businesses that grow by a pretty significant multiple to where they sit at that point in time, and so we think that lights the path to volume.
We think if you look at the unit economics, we just had our best GPU year ever which is extremely exciting, but I think every bit as exciting we've been March up year. After year after year very consistently we've been supporting all of this growth and all the investments we've been making and we've been marching up our EBITDA margin to the point, we had our first.
Positive earnings quarter, and our first positive EBITDA year, excluding onetime adjustments. So when you when you put all that together and then you lay that on top of this footprint that we're going to get access to that we think is acquired at a cost that is very reasonable relative to what it would cost to build out and then comes so much faster and with so many other great ask.
That's an opportunities we basically to think that this is even more clearly an execution game from here and so now the balls in our hands and we got a we got to run with it and we're extremely excited to be in that spot. Because this is a really big opportunity and the path has never been clearer.
The next question will come from Michael Montana with Evercore ISI. Please go ahead.
Hey, Thanks for taking the question I wanted to ask about if you can help to tease out a little bit the impact of the higher used car prices and rates. These are the some of the impact you saw to being able to process the vehicles in the quarter and kind of how you see that playing out over the course of the year and then I just had a follow up on costs.
Sure. So I think we are digging into.
The first quarter I think there are a number of different impacts and I think I would start with <unk>.
In particular.
Which is going to have.
Meaningful impact on our retail cost of goods sold in Q1, and Ernie touched on some of the reasons for that it's really about the efficiency of the inspection and reconditioning centers and then in this case with omicron, it's really been about the logistics network as well and so we're expecting to see higher reconditioning costs and higher inbound transport cost.
We expect to have a meaningful impact on retail GPU in Q1, I think as it relates to the <unk>.
Rapid rise in short term interest rates I think what we've seen over the last few months is.
A relatively historic.
Rise in terms of the magnitude and the speed I think you have to go back.
No.
Basically 10 to 15 years, the global financial crisis to see anything like this and so.
Because we <unk>.
Typically we'll offer a customer rate and then there is some lag time between when we offer that right and we monetize our loans on that rapid rise will impact other GPU in Q1, now we have raised rates.
Following the benchmark moves and we're also.
Scaled up our hedges.
To lessen the impact of future rate changes, but there will be.
Transitory impact there on Q1, so I would call out.
Those effects I think clearly had severe weather.
As Ernie mentioned as well in Q1 should be having an impact.
Our number of things that are impacting Q1, I think when we take a broader view obviously, we're very excited about the progress in the business made tremendous progress.
In 2021.
Expect to be over 4000, GPU for the Q2 through Q4 in total and so I think we're feeling really good about our overall progress.
Okay, and then if I could just on the behavior of your consumer as it relates to the credit side, we're seeing some signs of normalization.
Some of the filings as well as from some competitors. So just wanted to get some added color from you all about the credit behaviors that you are seeing in terms of delinquencies and charge offs.
How to think about that evolution as we get.
Further beyond stimulus payments.
Sure. So I guess I would start with.
Again like the way that our business model operates as is we generally sell that credit risk off at the time that we.
Complete our securitizations.
Through the sale of the residual asset kind of as well as the underlying bonds and so that doesn't flow directly to our financial statements. We kind of neither benefited from the extremely strong performance.
Over the last couple of years.
Nor would we necessarily get directly impacted.
If performance work to get worse in the future outside of kind of the expectations for future losses that would be kind of priced into any bonds that we sell so that doesn't kind of directly flow through our financial statements just for clarity I think what we're what we're generally seeing the same thing that the industry is seeing which is I think there is some approaching of normalization.
<unk> of consumer credit behavior.
Still on average is better than than historical if we define historical is kind of normal times pre 2019.
But it's not better by by as much as it was better in kind of mid 2020.
Through maybe mid 2021, where performance was unbelievable. So I think there may be some normalization of those trends, but it's been I would think very orderly.
So far.
And I don't think Theres any reason to expect something different just yet.
Thanks for taking the question.
Thank you.
The next the next question will come from Chris <unk> with Exane BNP Paribas. Please go ahead.
Hey, guys. Thanks for taking the question.
So first one is so thats already does title processing and fund clearing for dealers how does the title processing compare for dealer to dealer transactions versus dealer to consumer I'm trying to get at.
Synergies somehow that where this makes you more efficient on licensing titles out of your core business.
Utilize their people or is it the process of completely different.
Yes.
I have a follow up.
Sure so as it is.
I would say, it's a simpler process generally speaking doing dealer dealer transfers.
And so I think you can think about those processes as existing pretty independently certainly our teams will share learnings that we've that we found over the years and then maybe some benefits there, but but generally speaking I think the simplest way to think about that is separate now because you brought it up I do think.
The registration team entitled team inside Carvana definitely deserves a shout out they've done an unbelievable job over the last probably six months or so making a lot of progress.
We're now kind of approaching similar levels of success in title registration to what were experiencing pre pandemic. So I think that that's that's really exciting and that's hard to do in this environment. So there's a lot of great things going on there.
Working very well with with our partners in the various <unk>.
To make sure that we make the customer experience is as simple as possible. So I think we're excited about the progress we're making there and then I think on the ADESA front.
Plan to continue operating that business as we have or as ADESA has over a very long period of time so.
For all the people inside our ADESA it it'll be business as usual and they will continue to handle their title processing.
In the wholesale business the way that they the way to the App.
Got you okay.
Follow up question is I think I'm not sure I heard this incorrectly, but I think you said logistics benefit would be pretty instantaneous.
I'm not sure I heard that correctly and then two you were.
Already using auction companies for reconditioning prior to the acquisition. So my question is on day, one can these facilities handle reconditioning for you and your partners.
Or do you need to make that do you need to deploy some of that $1 billion to recondition cars.
Sure.
I appreciate you clarifying because I want to make sure that we don't generate too high expectations instantaneously I think probably that that language is referring to we instantaneously spin too.
And incredible network that will enable us to build.
Very meaningful recondition capacity and significantly improved logistic capabilities that will take time and I think we're not.
Planning to provide precise timelines on any of that just yet, but but but we certainly have plans in and our teams will be hustling to get as much benefit from that as we possibly can as soon as possible.
Okay.
Manheim or the.
Sure. So yes, so we do we do partner with.
With both Manheim and ADESA on third party reconditioning I do think that offer some capabilities, but again I think we'll stay away from giving too precise of guidance there.
The next question will come from Brian Nagel with Oppenheimer. Please go ahead.
Hi, good afternoon.
So my initial question is on the ADESA acquisition first of all congratulations.
And I think maybe a bit of a follow up some of the prior questions, but just wanted to stand to be kind of the mechanics here. So.
ADESA facilities you are acquiring.
All said and done we'll be at.
Just like in IRC that you build organically.
A function of the same or is there some type of relationship where you.
Got some facilities will operate differently than the degree.
The green from IRC.
Sure. So I think a good starting point is.
Yes.
We'll operate largely as kind of two businesses on the same land is maybe a good and simple way to think about it we've got our inspection center capabilities and we've got our logistic capabilities that we've built out over time.
And so I think we can go and we can kind of place those on these 4000 acres of land around the country and operate them very similarly to the way that we historically have and then I think the auction.
<unk> continued to run of the way that historically has as well and so it'll be business as usual for both sides. The place where we will be working together very quickly is in the retail recon work that ADESA does we will be working to kind of merge those teams together. So that's kind of the the single place of integration or at least the most <unk>.
In place of integration between US and then part of why this is such a great fit is theres kind of a secular and cyclical trend going on with auctions were sexually many more components of auction transactions are happening digitally even though there is a very large.
Xyrem by many customers both buyers and sellers to go actually transact in person and that often means the cars can spend less time on the ground at auctions, meaning that there is space can be utilized in other ways and then cyclically.
We're at a time, where auction volume is very low historically low in fact and.
And so that means theres a lot of excess land at these locations.
The average location is less than 50% utilized today, meaning theres a lot of opportunity for us to work together and for these functions to coexist.
Again, we think that the path of this lease for US is very very clear and now we need to just go execute and I think that's our job for the next many years take full advantage of this opportunity.
The next question will come from Rajat Gupta with JP Morgan. Please go ahead.
Great. Thanks for taking my question and congrats on the deal.
Maybe a question.
You talked about that on the last earnings call.
Where are we.
With that exercise.
Are you still.
To meet our sales.
Maybe if you could comment on you know.
How you are with respect to labor.
Logistics bottlenecks today.
And I have a follow up thanks.
Sure so.
The specific way.
Clinical metered.
Demand last quarter was in suppressing the amount of inventory that was visible to customers.
That tool is still being utilized to date.
A very similar degree in fact.
You've given the logistics network constraints that we see.
So we are continuing to utilize that tool that means that the inventory growth that we've seen that.
Thank you.
As evidence of.
The great work our team has done to expand our production capabilities is not really flowing through to customers yet in the form of as much growth in kind of available inventory. So we are very focused on alleviating the constraints in our logistics network and once we do that we have the ability to make more of that.
Inventory visible to more customers.
Which is something we look forward to being able to do.
Okay understood and then.
Around.
The second quarter to fourth quarter normalization.
On some of the metrics.
Yeah.
Getting to the 550000 units for the year.
Uh huh.
Assuming that.
Some of these bottlenecks go away and.
Is it primarily capacity driven.
And maybe if you.
You could comment on just the demand aspect you mentioned that the low end consumer are you seeing a bit of an impact due to the pricing environment do you expect the normalization.
In terms of demand from that consumer segment as well.
In order to.
Successfully hit the 550000 number.
Sure.
Again, I think we want to be careful about giving too much guidance on guidance, but but what I'll say is what basically underlies our expectations for the year is that we do resolve the constraints that we see in the logistics network and then the demand environment.
For the industry in total remained somewhat similar to what it looks like today.
So I think that's basically what's underneath our expectations.
As I said I think to date, we have were part of the industry. So when there is when there's affordability impact.
Impacts to the industry, that's going to impact us as well.
But given how constrained we are.
It's probably not impacting us as much as as it might be impacting the rest of the industry, but we have seen.
<unk> slow down quite a bit industry wide as car prices went up and interest rates went up and that impacted affordability and so.
Depending on what your comparison period is sales looked like they are down in the industry 15 years to 20% give or take on the new side and then we do see some evidence of that in our data as well.
While our sales are largely driven today by the logistic network and not by the demand environment. The demand environment still flows through to the sales that you realize and so if you if you look through.
At our customers that are making less than $50000. For example, they're growing about 30% slower than the company is year to date, if you look at customers, making 100000 or more they're growing about 30% faster than the company as year to date and normally when you kind of do any reasonable kind of demographic cuts you tend to see similar growth across.
All of these different.
Sumer segments.
And so I think that pretty clearly shows the impact that affordability had.
On consumers on lower FICO consumers on lower income consumers and younger consumers.
It's kind of showing up in the data. So we're assuming that that environment will remain somewhat similar.
We would actually hope for a decreasing price environment.
There's a lot of potential impacts that would result from that but most importantly, it would improve affordability for customers and most likely drive more customers.
To a place where theyre ready to buy again, and so we think that that that is probably what we're hoping for but our outlook assumes kind of a similar macro environment to what we see today.
The next question will come from Colin Sebastian with Baird. Please go ahead.
Alright. Thanks, good good afternoon, guys. So a couple of follow ups I guess first.
Curious if you could add some color.
In terms of unit sales and profit trends here later in February versus what you were seeing earlier in the quarter with omicron. If that's part of what's giving you the visibility into the material improvement expected beginning in Q2.
And then Ernie just on what you said right there around pricing.
Lower price environment, you think would sort of be a favorable trend.
In terms of embedding the current macro environment and the outlook, how would a faster declining pricing environment impact the guidance that you gave thank you.
Sure So I think.
A lot of these impacts we can start to see through <unk>. So the first quarter is going to be going to be tough for a number of reasons I think we will start with omicron in the inspection centers.
Just flows through in Cogs.
And kind of smaller COVID-19 waves earlier on we saw impacts on the order of 150 to $200.
Flow through Cogs. This was a bigger and more severe wave right. So so that means that the inspection centers are less efficient and so those costs get spread onto onto cars and then when those cars sell it shows up in lower margins, but as you kind of move through <unk>. The inspection centers are starting to recover and so.
You can already get visibility into into the direction that causes heading there we still have some work video, but you can get visibility I think.
Interest rates as Mark said earlier moved really quickly and when they move that quickly we tend to do a securitization is towards the end of the quarter.
And so the originations that we had earlier in the quarter where there.
They were originated in a different environment are expected to have a different spread and then.
You see that do you see that that impact.
As well.
So that can kind of flow through there and so I think when we look at <unk>.
Margins on the cars themselves. We've also recently seen a little bit for the first time in a while.
Car price reduction.
So we've seen kind of wholesale prices dropped by by maybe something like 5% for say 2019 model year cars year to date, we've seen retail prices dropped by maybe 2%.
And so we can start to see as well while car prices have started to reduce.
That at least little cohort of cars.
The margins, there look potentially a little bit better. Despite the fact the car prices are dropping so I think that that's that's helpful in giving us visibility.
Beyond Q1, as well and then from a units perspective, it's really all about or at least primarily about.
Alleviating constraints and our logistics network and then and then from there it's going to be about what is affordability look like and I think it's hard to know exactly what's going to happen over the next 12 months with car prices or with interest rates I think your guess is as good as ours, there, but but car prices going down is all else constant.
Helpful.
Sales interest rates going down all else constant helpful. The reverse is the opposite.
Then from a margin impact I think it's actually unclear how that cuts because generally speaking margins are driven by kind of the gap between wholesale and retail prices and so it's all about how those two <unk>.
<unk> move in relation to one another so I think.
We have pretty solid visibility.
Into the next several quarters from where we are because a lot of these impacts you can already see starting to abate a bit.
The next question will come from Adam Jonas with Morgan Stanley . Please go ahead.
Thanks, Ernie so look in our discussions with clients, including lie that survey results.
We're really concerned about two main things right grow.
And liquidity, let me take this one at a time one question for you journey on growth.
If I do this math, if I take your fourth quarter or frankly, even your third quarter retail units and I annualize them I guess I would get to around 450000 units. So your guide on retail for this year is about 22% above.
Kind of the annual ovation of either the third or fourth quarter give or take you with me Ernie and I think we agree that the second half of last year was capacity constrained and you are still experiencing those constraints now, but you anticipate they'll get better so you're only guiding to 22% growth on what should be over the balance of 'twenty to 2022.
Less capacity constraints and we've seen let's say in the fourth quarter. So.
Adjusted for capacity constraint.
<unk> is well below 22% in your guide, maybe 10 or 15%.
That's a big that's a big change from what people were thinking 30% growth not too long ago. So you.
You're citing logistics and price shock.
I just don't know.
It's just people are left with not much visibility on when the logistics get better you see it in real time, what kind of metrics can you watch out for in terms of people or the size of that logistics pipe.
We can determine whether this is an industry growth scare or cabana specific thing.
Sure.
I mean from a demand perspective.
We're very confident I think you saw all the kind of.
Market penetration growth in number of markets to crossover all of the different lines you saw.
Our average cohort grew by 50% last year Atlanta grew by 50%, it's our oldest cohort I mean theres a lot of signals that are very clear. If you look at web site traffic, which website traffic is not a perfect top funnel metric because website traffic quality can vary, but it's at least a reasonable top of funnel metrics.
We continue to see extremely fast growth there. So I think whats driving our forecast exactly what we said the first thing we have to do that as Carvana specific because we have to alleviate the constraints in our in our logistics network and then that will sort of get us to a baseline where we see where we are we are subject to the conditions of the industry.
And so I think when we look at the industry today, and we see that many retailers are down between 15, and 20%, which we attribute to these affordability issues.
We're taking that into account when we think about where things are likely to head for the remainder of the year and so that's what's built in.
Got it Ernie just to follow up on liquidity.
We've seen this with other companies like Tesla in the past too.
Kind of you get you get the market can get ahead of itself.
And your capacity for growth is kind of higher than what you are what you are bringing in.
I'm getting questions daily.
Is this peloton as carvana going to run out of money now you've got $2 3 billion of liquidity, you've got over $3 billion of used cars.
You've obviously got some great financing in place, presumably with with your financing partners for the acquisition, but just just level set here tell us why youre not running out of money or if you need money to kind of.
To do what you are planning over this over this year 80, you needed if you would.
How much and how you're going to get it. Thanks Ernie.
Thank you.
Sure, Yes, I can take that question. So at the end of the year, we had $2 3 billion in total liquidity resources I think.
If you look at the way we used money in.
In 2021.
It was primarily investment in inventory and investment and finance platform assets I think if you exclude inventory and finance platform assets.
Our cash flow from operating activities was only minus $82 million that was a $200 million approximately $200 million improvement year over year.
And so I think the core business got to a point in 2021, where.
Again.
Other than investments in inventory.
And investments in finance platform assets.
It's really not using.
A lot of cash from operating activities and so I think thats one important point to make I think we view the investment in inventory as a very positive thing for the business, obviously investment in inventory.
Increase in selection for our customers I think right now we're actually metering visibility meaningfully so we're not getting the full benefits of the investments that we've made inventory. So far I think we're looking forward to the logistics network.
<unk>.
Over time.
Coming off of these weather events and the impact of <unk>. So that we can unmeet or some of the limited visibility to inventory and getting EBIT, even more benefits, but I think we feel really good about that.
Think the.
One of the things that's frequently missed about our liquidity and cash needs that.
We are on automotive retailer that invest a lot in hard assets, we invest in inventory, we invested finance platform assets and we invest in real estate those are highly financeable assets.
Using traditional sources of financing that match those assets, which we used extensively in the past and expect to use in the future and so I think we feel really good about all of those elements of our business and those are some of the key things to be thinking about.
And then if I could jump in really quick to I do think we were lucky enough to have a very strong last couple of years and I think that sometimes we can get roped in.
As kind of a pandemic growth story, because those two years, we are a more visible company than we were prior.
But that said I think if you go back to 2017, we went public we were 110th the size that we are today we grew.
On the order of four times over the next two year period.
Pre pre pandemic and that growth was driven by.
The exact same forces that we expect our growth in the future would be driven by which is these cohort curves and visibility into the future as long as we execute so I think all these things will work themselves out it's all going to come visible overtime, but we feel like the visibility into demand is very clear and then hopefully that was helpful answer for mark on the on the cash front.
The next question will come from Seth Basham with Wedbush Securities. Please go ahead.
Thanks, a lot and good afternoon, I guess my question is around.
Gross profit per unit on the retail side in the first quarter and how we should think about that.
It's embedded in your expectations on used car prices, we see that even sharper drop in wholesale prices are really retail prices. How do you think that will have more negative impact on your GPO outlook.
Sure. So I can tell you some of the key factors.
That are going into it I think we've called them out previously on this call.
I think the the key factors are really going to be the Cogs impact of omicron.
Sure.
And to certain extent weather on reconditioning costs in inbound logistics costs I think that's going to be that's going to be the biggest impact on retail GPU in Q1.
Then we do think.
Moving moving to wholesale.
We are seeing higher depreciation rates in the wholesale market than we.
We have seen in the past.
A few quarters.
2021, and so we do expect that to have an impact on wholesale GPU in Q1.
We expect it to be lower as a result of the higher depreciation rates that we've seen in previous quarters.
Thank you and then my follow up is your decision on build versus buy with ADESA and you talked about the equivalent capacity of 36 Irc's with this acquisition, which is about $88 million per location, including me.
The additional improvement costs.
What does that compare to versus building.
Obviously, you can take into consideration the additional profit stream from their auction business, but can you help us frame that a little bit more.
I think I think as a very high level, it's probably not very different and the reason is that is more expensive than our historical average inspection center has been bye.
Bye bye have a pretty decent amount.
Our average inspections in the passive and more like <unk>.
40% to 65% or 70, something like that but these locations are oftentimes in.
In more expensive.
Cities and also in more expensive parts of town.
This footprint has been built over a 30 year period, and so a lot of it is infill locations a little bit closer to customers a little bit closer to employment than many of the locations that we would build out today, if we were going out and trying to find farmland for example, and to build a greenfield.
Again, wouldnt want to be too precise there, but but similar when you are just evaluating it through the inspection center lens is probably not way off.
The next question will come from Mike Baker with D. A Davidson. Please go ahead.
Okay. Thanks, Yeah, I just wanted to follow up on Seth question, maybe along the same lines.
I think based on the slide presentation here.
The acquired company did a $100 million in EBITDA.
You are paying $2 2 billion, if you exclude the additional capex.
That's about 22 times Theres.
Theres got to be some synergies in there so.
I suppose the sort of conspicuous by its options and that you didn't you talk about synergies, but you don't quantify it any way you can quantify it or give us some way to get through.
If this is accretive.
Oh accretive this is to earnings or when it would be accretive if you take the $3 3 billion in debt and put a reasonable interest rate on that.
Are we going to get incremental interest at or above the $100 million in EBITDA. So if you could give us some help with how to build this into a model in terms of accretion that would be great.
Sure So I think to.
To be honest I'd, probably go out the analysis are pretty different way I think you can you can the ebitdas present, but I think that thats and it's important and it represents.
The incredible business has been built by that's over a long period of time and I think it's.
An incredible asset that we're extremely excited to be getting but I think we also can think about it in terms of the value that will be created through our other pillars of rationale for this.
So there is a large portion of the real estate that is owned by a desk.
Very valuable asset that can be added to this end on that land. We can build these inspection centers.
To the extent.
The reason that we thought it was important to put our cohort curves into this presentation was to give visibility into.
Our ability to still that that production capacity and if you think about what 2 million units means to incremental EBITDA to the business if youre able to produce an incremental 2 million units because you do have the demand at our long term financial model. It's on the order of $5 billion annually and then if you just look at our logistics benefits.
Fits which today, if we look at sales to happen within a 200 mile radius of our customers and compare that to the average sale that we have across the entire country.
$750 better off in unit economics through lower inbound costs, lower outbound transport costs, and lower customer acquisition costs because of higher conversion due to faster delivery.
So that's a big number and so when you start to apply those sorts of numbers against our sales and when you start to imagine the incremental sales you can get a really big number is really fast and I think the math just kind of isn't even important right. The math isn't even what's important is our ability to execute to unlock those extremely <unk>.
<unk> possibilities.
So thats why I say our job now is to execute because the path is clear we can see the demand. We know the unit economics, we don't have the facilities to build on top of and now we have to go do that and so thats, where our work lies.
Okay well for them.
Appreciate that it's a follow up on that the cost to build is I think you just said.
Seth given given the great locations would be similar so is it more of that it just gets you there quicker I know, it's going to take some time to get these things ready for year Irc's, but.
If the cost would be somewhere and it's not really about the $100 million EBITDA.
Is it about the time or other photos synergies.
If you could just help us with that a little.
Yes, so I think all of the above I think time I think location and then I think.
Endpoint is.
So potentially different so I think that you can think about all of those all of those things is as being large benefits of this transaction.
If I say locations I mean quality of locations.
The next question will come from Nat Schindler with Bank of America. Please go ahead.
Yes, Hi, guys two quick questions one.
On the financing and other revenue in the GPU you've created from that it's been obviously very good this year.
How much of that is due to the fact that it.
This point.
Default rates are kind of.
Don't matter anymore, because you can sell the used car after someone has bought it for more than they paid for it.
So there how much was gain on sale from this unusual pricing environment not just the fact that the car price was higher to begin with the fact that the risk in the loan had disappeared because of rising prices on cars.
Sure. So I mean, I think that I think the simple answer that question is very little benefit.
At all and that benefit would have gone to the purchasers of our residuals, who then.
Observed better better performance on the loans that they purchase than was expected. The economics that we get are a function of the expected losses over the life of the loans at the time that they are purchased.
And as you can imagine youll. Despite the fact that the losses, we're great from kind of mid 2020 to even now they still are great generally across the industry.
Investors arent, assuming that that will be the case forever when they when they buy a multiyear asset class and so the underlying assumptions that have driven the prices that we have received.
Really haven't moved in a material way as a result of the loss.
Couple of years, but those who have bought the loans have significantly outperformed probably what they expected as a result of that great performance.
With the significant normalization in pricing significant not 2% here and there, but the significant normalization of pricing on used cars take it back so that there is a significant risk.
Credit hedge funds that are buying your loans that they simply can't get back.
The loans that they're used to because the car is going to drop in price.
So.
I'm going to try to answer concisely as I think we could talk about it for a long time, but I do think that's just all about kind of the.
The interest rates that exist on on loans that are originated which are set by the market and the market is generally.
Seeking interest rates that would allow a loan buyer in any form whether whole loan or partial owner of residual or whatever it is to receive the yield that they would expect given the losses that they would expect so I think.
That's just that's really a question of how market interest rates evolve and we will evolve with the market I think as long as our evolution is happening with the market. We wouldn't expect the impacts to two conversion to be all that high and we wouldn't expect the impacts to finance profits to be all that large where there is an exception to that rule is when you have a very.
<unk> rapid move like we recently saw which we expect to flow through in Q1 and impact us negatively but in general.
We would expect the market rate to absorb those sorts of expected changes.
The next question will come from <unk> Khan with <unk> Securities. Please go ahead.
Yes, hi, Thank you I have a.
A question on the if acquisition so if I if I can just say.
Realistically.
Focusing on just looking at the core auction business.
But he also buying.
How should I think about the <unk>.
The dealer participation when.
Operated by clarifying on the possibility that maybe it doesn't.
That's good.
And how should I think about that in the 100 million in EBITDA.
Generated last year and the rest of that.
So I would say first of all our plan there is business as usual as discussed for all the people inside of ADESA and also for for all of the customers of the desk. So that we're extremely excited to work with so that's the plan.
There's always risk in any business. So I don't think that we want to say that there is not risk. We also think that there is a lot of opportunity I think.
The transaction that we announced last quarter with Hertz maybe.
Maybe provide a bit of a window into the types of opportunities that could exist in the future.
And we think there may be other opportunities like that as well. So I think the plan is business as usual we.
We will see how that plays out in the immediate term we're excited to welcome the people of ADESA to the team and the customers of ADESA and we're excited to find.
Increasingly creative ways to continue to work together to take advantage of.
The incredible assets that we've both built independently that they now get to come together to give our joint customers, even better experiences and options. So we'll see how all that plays out.
Okay, and then a follow up question, maybe just on the consumer sourcing.
Just sort of give us.
Date on where you are.
Approximately what percentage of that.
Okay.
So as Eric from consumers as well.
From dealers.
Sure. So we haven't provided precise numbers there in a while but we have pointed to the fact that we've had extreme growth there across total transactions. This year, we had another year of over 100% growth.
That's happened every year in our company's history, except for 2020 and the pandemic year.
And we also we are excited to we bought our one millionth car from.
From a customer just yesterday.
Great milestone that was recently achieved so we continue to have a lot of success there.
Got an offering that is very high quality that customers love that is a very natural extension of our business because it just takes our logistics network in reverse.
And it's simple and easy straightforward and fair for our customers, which is the mark that we're always trying to hit and that's all showing up in the results that we see and the growth that we've seen in that business, which continues to be very strong.
The next question will come from David Bellinger with Wolfe Research. Please go ahead.
Hey, Thanks for taking the question.
That's on the 550000 unit guidance for 2022 does that include some type of.
Type of benefit from a desk and maybe in terms of a lift in conversion rates. Just given you you could get first look at some of these more attractive higher demand vehicles at auction is any of that embedded in your unit guidance.
I don't think we want to break out our guidance, but as a general rule not assuming super material benefits to the core business. In this first year as a result of the acquisition we think that.
More of that will come in the future then will come immediately we'll obviously be working hard to find those benefits as soon as we possibly can but but that's.
That's our operating assumption going in.
Got it Okay and then just can we get a quick update too on the marketplace initiative any any comment on the early progress there anything in regard to economics behind those sales.
I think we don't have a ton more to share there as we as we announced last quarter. We've got this really exciting partnership with Hertz.
Which we're excited about and where we're seeing.
Great results early on it remains early I think to do anything great with any partner both sides have to really lock arms and put the work into to build a great customer offering and I think so far both sides have done that and we're excited by that but there is certainly work left to do to unlock all the potential there so.
Essentially more updates there in the future.
Your last question will come from John Blackledge with Cowen. Please go ahead.
Great. Thank you two questions.
Well every of the 56 locations will they all have IRC type of capabilities or is there for some of them overlap.
Near existing IRS facilities, and how do you envision the $1 billion to be spent across 56 locations and then second question you referenced the $750 cost savings does that change the kind of the long term EBIT.
EBITDA margin range. Thank you.
Sure. So so on the first question I think we're not going to get too specific on our plans there yet.
We will be some locations that we do not add reconditioning capabilities too.
That is taken into account in our in our approximately $2 million incremental unit estimate.
And kind of the deal.
Billion estimate of Capex is also taken into account and all of that and then as it relates to $750 I would say that's more of an acceleration.
To our long term model than it is in addition to our long term model.
For those of you that remember at our analyst day in 2018, we had stimulations that assumed that we would have.
40, reconditioning centers around the country and getting those 40 reconditioning centers would drive down our transport distances, and therefore drive down a lot of the expenses that we expect to be driven down by this acquisition and that was built into our long term financial model. So this is more locations. There they are even better than we assumed the formula.
<unk> would be back then but that difference is very small relative to just a clear pathway to that benefit showing up in our numbers.
Meaningful way.
Faster than it otherwise would have.
Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks. Please go ahead.
Thanks, well first I want to address everyone on team Carvana.
Incredible year. Thank you for everything you guys do the last couple of years have been absolutely insane and you've continually risen to the occasion.
As I've told you before I could not be prouder of what we achieved with that Forbes list I think that that is such a cool achievement and it's very hard to do when we're all working as hard as we're working so I cannot thank you enough for for finding meeting and all the hard things that we do together and for having fun doing it and making them more fun for everyone around you.
That's incredible and it's the reason for our success.
And as I said I cannot thank you enough.
The ADESA team we are extremely excited to welcome you guys as well will be talk more over the next several days I think we have an incredible opportunity together I can imagine that this is always a bit destabilising change can always be scary.
But we want you to know that we're extremely excited we have a ton of respect for what you guys are built we really look forward to working together.
And we think it is going to be fun, and we think everyone is going to benefit and to a dentist customers I would say the same we're extremely excited to work with you. We think theres a lot that we can do together.
I can imagine the news is taking you a bit too can't wait to meet you in person and talk about the things. We can do together and again I want to make sure you hear our commitment that our goal is business as usual and not to shake things up too much too quickly.
So we're excited to welcome you guys just customers and as I said in my opening remarks, we will value the same way that we've always valued all of our customers.
Which is centrally so thank you to everyone and we'll talk to you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].
Sure.
[music].
Yeah.
[music].
Okay.
Okay.
Okay.