Q4 2021 Vroom Inc Earnings Call
Good day, and thank you for standing by welcome to the fourth quarter and full year 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need a press star one on your telephone please be advised that today's conference maybe recorded.
If you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, Alan Miller Investor Relations Officer. Please go ahead.
Thank you.
Good morning, everyone and welcome to the group's fourth quarter and fiscal 2021 earnings call.
Joining us on the call today are Paul Hennessy, Chief Executive Officer, and Bob Krakowiak, Chief Financial Officer. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at IR Docs Green Dot com, but fourth quarter and fiscal year 2021 earnings release and earnings presentation.
Are also posted to the IR website.
Before we begin please note that the discussion today includes forward looking statements within the meaning of the federal securities laws, including but not limited to statements about rooms operations and future financial performance. These and other forward looking statements are subject to a number of risks uncertainties and other important factors that may cause actual.
<unk> to differ materially from those in such statements. We direct you to the company's most recent SEC filings, including the risk factors section of rooms. Most recent Form 10-K for the year ended December 31, 2021 for additional discussion of factors that could cause actual results to differ materially from those in the forward looking.
Thanks.
Please note further that todays discussion, including the forward looking statements speak only as of the date of this call and Broom assumes no obligation to update such statements based upon future developments or otherwise.
The company May also discuss certain non-GAAP financial measures. During today's call you can find a presentation of the most directly comparable GAAP measures and a reconciliation of those measures in the fourth quarter and fiscal year 'twenty to 'twenty, one earnings release and management presentation.
I now like to hand off the conference call over to Paul Hennessy, Chief Executive Officer, the floor is yours.
Thank you Alan welcome.
Welcome everyone, Bob and I are going to walk through our full year and fourth quarter 2021 presentation outlining our recent performance and our outlook.
To kick it off I'd like to highlight the hard work our employees have put into building our business their contributions allowed us to reach levels of scale that seemed unattainable only a few years ago.
I'd also like to thank our board members and our investors for their ongoing support as we continue to grow and develop in a dynamic environment.
Let's start on slide three before we dive into results I wanted to highlight our recent hire of Tom short, our new Chief operating Officer, Tom joined US in January already is rolling up his sleeves, and helping us shape, our long term vision as we build out a robust operational system.
Tom brings expertise from Walmart, where he served as senior Vice president of supply chain for three years.
During his time at Walmart Com focused on ecommerce supply chain, which is a great fit for us fired a Walmart com served in senior leadership supply chain roles at home Depot, ACCO brands Unisource Fisher scientific and office depot I'm ecstatic to have them here on the team.
Moving along to slide four.
Wanted to step back and highlight our accomplishments in 2021 this.
This year was a tremendous year of growth for us not only in terms of units sold but in the operational breadth of our business.
We reached new markets increased consumer sourcing to new heights, and made new stage setting acquisitions.
In 2021, we delivered extraordinary triple digit ecommerce unit growth.
We met strong demand with scaling operations across the entire transactional ecosystem further validating our customers' enthusiasm for the room model.
We grew total revenues by nearly 2 billion year over year more than doubling our business.
E Commerce gross profit per unit or G. P. P. You increased 25% year over year for 2021.
That profitability expansion reflects both improved vehicle and product margins as our teams worked hard to execute on our goals.
We surpassed our key supply chain targets for the year, we doubled our reconditioning centers by year end to account is <unk> 38 versus 19 at the end of 2020.
We exited the year delivering over 60% of e-commerce deliveries with our own last mile program in the fourth quarter exceeding our 50% target.
We've also proven our ability to acquire units from consumers leveraging marketing conversion pricing algorithms and delivery experience to exceed customer expectations. We're pleased that 76% of the retail units sold in the fourth quarter came directly from consumers up from 40% in 2020.
I would be remiss not to mention our acquisition of car story earlier in 2021, as we look back at the year.
We successfully integrated this leading AI powered analytics platform into our company driving our pricing strategy forward with new data insights.
This acquisition was instrumental during a time of exceptional vehicle pricing dynamics.
More recently, we completed the acquisition of United Auto Credit Corporation, or UAC see beginning our transformation to fully captive lending.
We also expanded our capital base to ensure future growth for room.
In June we raised over $600 million through the issuance of convertible notes.
We ended the year with over $1 billion in cash excluding restricted cash and recently expanded our floor plan financing availability to $700 million and extended the term to 2023.
These steps that position us well for continued growth and investment.
Now a few high level comments on 2022.
2022 plan centers on improving the transaction holistically from a streamlined customer experience new in house financing capabilities, and scaling logistics, which will help reduce volatility in our business and improve unit economics.
We expect sequential profitability improvement as we move through the year in the first quarter, we are already stabilizing and improving from December exit rate levels and expect these improvements to compound as we progress we.
We anticipate further tailwind from captive financing and from alleviating medium term capacity constraints.
Now, let's move to the e-commerce business on slide five.
In 2021, we sold over 74000 units more than double the units sold in the prior year.
This strong growth was fueled by growing brand awareness and an exceptional demand environment, coupled with increasing capacity across our business.
In turn ecommerce revenues increased 167% year over year to $2 $4 billion as unit growth was compounded by significant expansion in average selling prices or asps.
We attribute the increase in E. S. P is primarily to the extraordinarily heightened pricing environment for used vehicles in 2021.
E Commerce gross profit per unit grew 25% as vehicle and product G. P. P. You expanded year over year.
Vehicle G. P. P. You increased nearly 30% as we benefited from improved pricing methodologies as well as more efficient reconditioning processes versus 2020.
Our higher product gross profit per unit is a result of strong execution of our product team as well as higher average loan balances.
Let's take a deeper look at ecommerce unit trend for the for the year on slide six.
Similar to our last earnings call. We are focusing on total ecommerce transactions. We define these as e-commerce units sold.
What's retail grade remote consumer source purchases and trade ins.
Transaction growth increase in absolute and relative terms in 2021, reaching a new high of 143500.
We more than doubled our unit sales in 2021 while our consumer source units nearly quadrupled.
Our increase in marketing investments in 'twenty 'twenty. One has paid off we reached a record website visitation of more than 2.3 million average monthly unique visitors by the end of the year.
We also increased our brand awareness by 50% year over year more recently you may have seen our advertisements on the Super Bowl, which will help us further builds long term brand awareness.
Moving on to our supply chain operations on slide seven.
We exceeded our 2021 targets.
Starting with Reconditioning, we opened 19, new third party reconditioning centers in 2021 with eight new additions in the fourth quarter.
This brings us to 38 total reconditioning centers, including our own facility, putting us well ahead of our initial target of 30 locations.
Our efforts to expand reconditioning capacity in a competitive environment resulted in the 70% year over year increase in the fourth quarter.
Still we faced incremental reconditioning costs and constraints as the effect of labor shortages continued during the pandemic.
In the immediate future, we will continue to address the evolving dynamics of our reconditioning capacity.
Turning to our last mile program, having already hit our last mile hub target for the year and the prior quarter, we exited the year with over 60% of e-commerce deliveries using this experience in the fourth quarter.
This put us well ahead of our 2021 exit rate target of 50%.
In 2022, we intend to expand our last mile experience as we work towards our long term goal of 85% deliveries by last mile.
We realize you may have a few questions about the potential impact of the very recent Li announced acquisition of one of our Reconditioning partners, who also host a number of our last mile hub locations. We are studying the situation and working on solutions that can include a combination of increased capacity with our third party providers.
<unk> and expanded proprietary capacity, given how new and fluid. The situation is there's not much more to say today, we expect to provide a more fulsome view of our approach at our analyst day presentation in the spring.
Moving on to slide eight I want to talk about the customer experience recent transaction growth has increased the need for a more efficient scalable customer experience system. That's why we are outlining this is a key focus of our 2022 plan.
Customers Love, our model and we're working hard to deliver a fast streamline process.
We've already Kickstarted, a number of strategies and tactics that target this vital part of our business.
Starting with the consumer facing sales experience, we undergo continuous a b testing to optimize our merchandising strategy.
We also have new functionality plan to streamline the sales funnel, including new account features enhanced E signature capabilities and more.
We're also investing in the backend by implementing automation for digital workflow solutions.
Additionally, incorporating a fully captive digital lending solution will help simplify the sales and lending process for our customers and our staff.
Let's recap the year on slide nine.
We delivered triple digit unit growth.
We fulfilled record breaking level of transactions with a step up each quarter.
We expanded gross profit per unit.
We exceeded our operational targets.
We also moved forward with two strategic acquisitions, completing the acquisition of car story and most recently closed on UA C C.
We are building a strong sustainable platform in 2022.
We're going to focus on improving transaction speed and efficiency to improve the customer experience and drive enhanced profitability.
We will test small in scale Bay as new initiatives take hold.
We will expand capacity across logistics and reconditioning.
This will include ongoing investment in supply chain enhancements, a faster and more streamlined user experience and with UAC C. In our portfolio. We will begin a captive financing program to drive conversion.
And unit economic improvement.
With that I'll turn it over the call to Bob to review, our financial performance and our guidance.
Bob.
Thanks, Paul.
I'll start with the financial summary of the <unk>.
Fourth quarter and provide some context for the guidance on slide 11.
We drove outsized revenue and unit growth during the quarter.
Coming in ahead of expectations.
However.
We experienced pressure on gross profit per unit.
We faced headwinds from higher price depreciation for premium vehicles.
As well as higher reconditioning costs.
And adjustments related to accruals for warranty programs and inventory reserves.
Starting with the top line.
Total revenues for the fourth quarter increased 130% year over year.
And 4% sequentially to $934 million.
This outperformed our expectations due to higher than expected retail unit growth.
Well it is higher wholesale revenues.
Fourth quarter E Commerce units of 21243.
Past the high end of our guidance and increased 93% year over year or 8% sequentially.
During the quarter.
We drove high demand with increased marketing spend.
We also grew vehicle inventories to optimize the constrained supply chain environment.
This in turn put pressure on ecommerce GPU.
We came in approximately $600 below our ecommerce GPP your guidance.
Roughly half of the variance is explained by auction units over $30000 acquired during the third quarter for fourth quarter sales.
These units were subject to higher retail price depreciation in November and December .
Performed well below our expectations.
The remainder of the variance to guidance was due to increased reconditioning costs as our partners continue to struggle with staffing levels due to omnipod.
As well as higher year end accrual adjustments to warranty profit sharing and inventory accounts.
We believe the reconditioning costs are transitory in nature.
And the warranty accrual is not expected to be a recurring impact ecommerce GPU.
Total gross profit of $45 million increased 122% year over year, driven by higher retail unit volumes and increased wholesale gross profit.
Adjusted EBITDA loss was $120 million for the quarter below our guidance.
Approximately two thirds of the variance versus our guidance was due to E. Commerce J P. P. You the reasons I previously mentioned.
The remainder of the variance was due to increased marketing spend which drove units above our expectations and supported our long term brand strategy.
Before I go into more detail on the fourth quarter I.
I would like to spend some time discussing the first quarter guidance.
Please note. This includes two months of estimated results from <unk> since the acquisition closed on February one.
We expect approximately $875 million in revenue.
It's 18000 to 19000 ecommerce units.
As we focus on restoring ecommerce vehicle GPU towards higher profit transactions.
For Q1, we anticipate e-commerce <unk> hundred dollars as we improve GPU from December which was at the lowest level during the fourth quarter.
We anticipate approximately $130 million and adjusted EBITDA loss during the first quarter.
The change in EBITDA versus Q4 is driven by the current economic conditions in the used car market.
<unk> is a wholesale pricing market.
And employees to improve our customer experience.
Reconditioning costs due to the pandemic and rate and fuel increases for third party carriers.
These headwinds are partially offset by EBITDA.
In February and March.
At this time, we will not be presenting full year guidance for 2022.
We are currently finalizing the impact of the UGC acquisition and assessing the implications of the recent announcements.
I do want to emphasize that although we are not providing full year guidance. We do believe that our GPP you will continue to improve each quarter as we improve operations and transition to captive blending.
We also believe our SG&A leverage will continue to improve throughout the year as we become more efficient and improve our customer experience.
We also believe we are positioned for sequential EBITDA improvement after the first quarter of 2022.
We will be hosting an investor day in the spring.
Senior management will present, our company's business strategy and growth outlook.
We look forward to sharing more details in the near future.
Please turn to slide 12 for a summary of our ecommerce financial performance.
Ecommerce units increased 93% year over year and came in ahead of our expectations.
E Commerce revenues increased 159% year over year to $739 million.
This was driven by higher units, coupled with a 35% increase in ecommerce asps.
As used vehicle prices and the broader market remained elevated.
E Commerce vehicles, <unk> contracted $473 for the reasons I explained earlier.
E Commerce product GPU increased 14% year over year to $1075.
Consistent with prior quarters in 2021.
Year over year product GPU reflects higher attachment rates as our teams continue to execute on product improvements as well as the benefit from higher average loan sizes with increased e-commerce average selling prices.
On slide 13, I'll go through our wholesale performance.
Wholesale units sold increased to 25% year over year to 8742 units decreased sequentially.
The year over year increase was primarily driven by a proactive increase in consumer sourced vehicles, resulting in higher trade ins coupled with strong wholesale market demand as prices at auction remained elevated in the fourth quarter.
Wholesale GPU of $890 increased sharply year over year from a $420 per unit loss.
Higher per unit profitability in wholesale was primarily driven by a favorable wholesale market and improved pricing practices.
Turning to slide 14.
Let's look at SG&A performance for the year.
Here, we show annual SG&A ecommerce transaction.
E Commerce transactions are defined as e-commerce units sold plus retail grade units sourced from consumers.
Our SG&A per transaction rate was $3818 in 2021 and.
An 18% improvement from $4633 in 2020.
Pressure on logistics costs for market rate inflation was an approximate $140 per transaction headwind.
That we booked approximately $1000 of underlying leverage on SG&A spend per transaction.
We are pleased to see leverage in our investments across our operations.
New highs in transaction levels.
While we are not providing a full financial profile of <unk> today, we wanted to provide a few key updates on this important acquisition on slide 15.
We closed on this acquisition at the beginning of February for approximately $300 million.
We also recently closed you agencies first securitization since being acquired by <unk>.
We sold $318 million of finance receivables and off balance sheet transaction.
And anticipate our net gain subject to final purchase accounting adjustments.
We expect to do another securitization in the second half of 2022.
Post the February securitization transaction, you ACC has unused warehouse lines of $350 million provide.
Providing further access to capital to grow our captive finance business.
Finally, let's review our year end liquidity on slide 16.
We ended 2021 with over $1 $1 billion of cash excluding restricted cash before we closed on the <unk> acquisition for approximately $300 million.
We upsized our floor plan for $450 million to $700 million with an extension to March 2023.
We see further opportunities for incremental liquidity through working capital efficiencies.
Future, ABS and <unk> transactions and the ability to add modest leverage acc's balance sheet.
In closing we ended 2021 at a new level of scale.
It would be near term capacity constraints, we have increased our reach to consumers with record sales and new highs and consumer sourcing.
2022, we believe that we will deliver sequential improvement in unit growth GPU SG&A leverage and EBITDA.
Continued to position the business for profitable growth.
With that Paul and I are ready for your questions.
Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone if your.
My question has been answered or you wish to remove yourself from the queue. Please press the pound key we ask that you. Please limit yourself to one question and one follow up question.
Our first question comes from the line of Richard <unk> with Jpmorgan. Your line is open. Please go ahead.
Great. Thanks for taking the question.
I had a couple of them first one good morning the.
The first one was on just contingency planning.
You have $900 million in cash you ACC.
$600 million and kind words.
The <unk> guide implies a quarterly cash burn of roughly RMB $50 million.
No the fourth quarter guidance is pretty weak and GPU spending levels are still elevated.
Due to the Odessa acquisition.
There is sufficient uncertainty for the second quarter to the fourth quarter it seems like.
How do investors get comfortable owning the shares you're given an already tough labor logistics capacity environment and.
How do you plan to fund the business and the stock.
Sure you know what we read in such an environment and I have a follow up thanks.
<unk>. Thanks for the question. So I think you've outlined it we ended the year. So so first.
First of all one of the things I think it's really important to emphasize with.
With investors is that.
I want to emphasize that we see Q1 as the trough for our EBITDA burn rate.
We expect sequential improvement in unit volumes GPU and revenue.
Throughout 2000 throughout 2022.
To your point, we ended the year with a $1.
$1 billion $132 million in cash we spent $300 million on UAC.
We see several opportunities for improvement to our liquidity.
We have opportunities to continue to improve our increased capacity and improved terms under the current floor plan facility.
We also have opportunities to improve working capital efficiency, there's significant opportunities on working capital and then adding modest leverage the U S. SEC.
<unk>.
If you look at.
We believe we have more than enough cash to get through 2022.
We'll talk about the specifics at our Investor day in spring. After we look at the impact of the ADESA announcement and really take a look at that and how that's going to impact our reconditioning strategy and the potential acceleration of investments.
The room for room operated vehicle reconditioning centers. So we'll have more to say about that.
Rochette at that time.
Got it looking forward to the details at the analyst day.
The other question was on just the GPU.
The fourth quarter number it's pretty puzzling you guided in mid November .
So it's surprising that you know the premium vehicle depreciation.
It was not anticipated.
Dream.
And the data that it is we have been tracking does not really suggests with sharp.
Drop off in pricing either.
To drive this kind of GPU impact.
Just curious like what was there like some sort of like a miscalculation here on the acquisition of inventory now.
Our sense was that the garden story acquisition was was meant to avoid exactly these type of situations. So and it doesn't look like the pricing environment is going to get any better. So how do we get comfortable that the.
The GPU headwinds will not persist through the remainder of the year.
Yes. Thanks.
Thanks, So much for the question, let me give a little more detail on GPP you during the fourth quarter versus our guidance.
So if you look at the the Miss versus guidance about half of them. This talked about it in my comments, but I'll provide a little bit more detail. So about half of the Miss was was due to it was it was it was a there were premium vehicles. So vehicles over $30000 that we purchased in the auction market during the during the third quarter for fourth quarter sales.
And it was we made a decision. So we we've been talking about are about our about our reconditioning capacity constraints. So.
We made a decision in the third quarter.
That we were going to make sure that we had plenty of work in process inventory and all the recon facilities. So we bought.
We bought a lot of inventory in the third quarter.
To make sure that those facilities work, we're full because we were we can throw curve balls, all the time with our with the pandemic and with facilities closing down.
So we were we were really and we were seeing a lot of demand for our units. So we so we made the decision to to invest in inventory and we were able to pull.
As many units through the through the system given the given the hand that we were dealt.
Those vehicles performed poorly in November and December we did see.
Premium vehicle depreciation on vehicles over $30000 during that time period and it was it was substantial and accounts for about half of the GP GPU mix GPU Miss so.
So the other half.
<unk> was primarily due to three factors.
We had increased supply chain costs.
Due to the reconditioning constraints that we've been talking about as well as rate hikes with our carriers.
We had a.
Really oh, a one time.
Item with a year end accrual around profit our profit sharing accrual that we booked for our extended warranty programs. So we do an actuarial analysis on a regular basis and when we perform that analysis or is that what we found was that.
Our claims were going up quite a bit and.
It's really attributed to the fact that people started going back to work and they started driving more use in their vehicles and we saw the claim rate go up and we had to make a we had to make an adjustment to the to.
To that accrual and Thats something that was more of a more of a onetime adjustment.
And then in addition to that as a result of.
Of the inventory purchases that I that I was referencing earlier that we continue to make in the in the fourth quarter as well we grew our inventories at a faster rate than we grew our sales in Q4, and we book a reserve for lower of cost or market on those vehicles and you amortize that.
Accrual over what yourselves. So when you buy when you when you buy more vehicles than you sell it gets amortized over that smaller growth rate and you take a hit to your GPU. So those are the I mean that is.
That's the walk on the $600 $600 from actual performance to our guidance.
Got it okay. Thanks for the color. Thanks.
Thanks Roger.
Thank you and our next question comes from the line of Zacks, Adam with Wells Fargo. Your line is open. Please go ahead.
Hey, good morning could you talk a little more about the impact of the desk. There's change in ownership there on your business specifically how much of your current reconditioning runs through a desk that and do you believe there is sufficient capacity at manheim or other third parties to offset what's been lost here and then separately could you talk to any plans to <unk>.
In your own facilities this year.
Sure.
It's Paul Thanks for the thanks for the question.
Here's the way, we think about the ADESA deal one.
It got announced a couple of days ago. So we want to be really thoughtful about.
How we characterize the impact of a death.
What it means to us overall and of course, where we're thinking deeply about that.
Roughly between 20, and 24% or so of our capacity currently sits with.
With the death, though and look at it is our understanding that carvana over time is going to.
Repurpose the ADESA reconditioning predominantly for their own use and so we're working with the ADESA team now on on what that timeline looks like and what the near term impacts are.
Hum.
We're confident that there is.
<unk> solutions in our third party.
Channel with Mannheim and others.
And we're confident as we run our own factory that we've got an opportunity to expand our own capacity. So we're we're thinking deeply about that I think we'll be in a much better position and then you know again and in our Investor day. When we we walk you through kind of the analysis and the outcomes of our of our study in our discussions with other part.
But we're on our way and as far as our.
Our own locations as I've mentioned in the past, we think that's going to make a lot of sense for us to continue to balance our distribution and reconditioning capacity with our own locations, we're not ready to say how many of those are at this point in the timeline of those in the overall.
The added capital expense associated with those I think we sized them directionally, but we're gonna be opportunistic on the right location the right opportunity and then the right level of relief around capacity with our own facilities. So we're all of that is on the table and we're working through that.
Got it thanks for that Paul and also one for Bob on the comment that GPU and EBITDA should gradually improve through the year first of all could you parse out the specific impact of the omicron disruption on your business in Q1, both in terms of unit.
As well as GPU and EBITDA and then.
Yeah.
It'd be helpful. If you could layer in the U S C acquisition impact starting with with the the ABS transaction in Q1, and then how you expect that glide path to GPU improvement to flow through the remainder of the year.
Yes. So thank you so much for the question so with respect to specific impact as a result of on the crime and we have.
So there is a relationship between the amount of our listed inventory that's available for sale in our ability and our in our sales volume of course.
We have been.
We have been impacted specifically in January we were we were hit pretty hard with.
With I'm the crime as.
As well as.
In addition to January we also had some weather.
In February as well.
In terms of.
Although the overall impact we haven't we haven't quantified the overall impact, but really the you know.
The guidance for the first quarter for us, it's really a combination of all.
The weather factor the reconditioning.
The overall constraint on reconditioning capacity as well as just our focus on maintaining our margin and getting our margin.
We are updating our margin up in <unk>.
In Q1, so and then with respect to your question on <unk>. So.
I wanted to just give a little bit of detail on U S. C. So we did include the.
So we do not have final results with respect to the purchase accounting adjustments for you ACC, but we've put some estimates in our guidance for Q1. So we did have a securitization in February and for those of you that are familiar with Securitizations. One thing that's important is.
To realize is that the.
And we will not get the full benefit of the gain.
<unk> nation in.
In February because that is subject to a fair value adjustment as part of as part of purchase accounting.
So what's in our numbers for Q1 in terms of the gain on the <unk>.
On the ACC securitization to $60 million about $60 million in EBITDA in Q1, as a result of that transaction and then in terms of the cadence of that.
We are expecting will be back out in the market with another securitization view ACC.
In the second half of the year and were based upon the current market conditions, we're expecting that the second securitization will be about will be about 15% of the finance receivables that better sold as part of that transaction then we won't have that.
That same little nuance that we had in February where we where we've got a market to fair value.
Got it appreciate the color.
Thank you.
Thank you and our next question comes from the line of Colin Sebastian with Baird. Your line is open. Please go ahead.
Alright. Thanks, Good morning, guys I guess two for me as well in terms of the operating leverage you expect through the course of the year, but maybe you can break that out a bit in particular with respect to per unit spending trends in marketing and logistics, which I think have been increasing over the past couple of quarters.
Then I know you're not giving full year guidance at this point, but given some of the broader market issues based on where you're expecting to be from a liquidity perspective at the end of the year.
And maybe you can talk about that position and whether that factors in any additional capital raises thank you.
Yes, so Tom Thanks for the question. So we are so in terms of the the <unk>.
So the EBITDA progression.
We are.
As I said before on the prior question that we're looking at first quarter as the as the trough in terms of our in terms of our EBITDA performance and we at this point in time in terms of our view, we view that we're going to be able to.
To continue to build on that at a at a pretty ratable rate throughout throughout the year there is still.
Still more work that we need to do that.
We need to do in terms of assessing.
What the what the recon strategy is going to be going forward and what that what's that going to be in terms of the overall impact to EBITDA versus capital. So theres still some more work that needs to be done on that and I'd like to withhold my comments on that until we have an opportunity to do that and we'll see more about that at investor day in the spring.
Okay, and then any commentary on sort of exit rate liquidity from from this year.
Yeah. So.
I don't have a comment on exit rates liquidity at this point as well because of just the work that we need to do on a on a recondition strategy and what is.
If it accelerates that assessment.
Investment that we have to make it.
And our own reconditioning centers, obviously, that's going to provide a different that's been provided different answers. So I would like to with hold on that until we've had the opportunity to understand what the Oh you.
What are.
Hum.
Javier desperate announcements didn't materialize for us over the next 60 days.
Okay fair enough. Thanks, Bob.
Thanks.
Thank you and our next question comes from the line of Seth Basham with Wedbush Securities. Your line is open. Please go ahead.
Thanks, a lot and good morning. My first question is on inventory management about a year ago, you guys had some missteps inventory management, which caused a big hiccup in GPU and you put it in the channel guardrails and safeguards to prevent situation from recurring.
Today's situations that different but what's happened.
Those guardrails and safeguards to lead to such a massive sequential decline in GPU relative to your expectations.
Yeah, I think there there are two different types of situations Seth last year's was related to sales and sales operation capacity, which created an.
In aged inventory environment.
In this environment, where we're dealing with the unprecedented.
Highest used car pricing of all time.
And that has an absolute and downward pressure on affordability across our our customers and in various credit spectrums and.
The.
Bob mentioned in his remarks, and some of the units that we bought for particular reasons to manage our work in progress to get finished goods ready for sale.
Let us into buying particular units that actually depreciated faster.
And in that depreciation we had to appropriately priced those units.
To move them and so we did that so but there are two very different kinds of situations that the safeguards are in control for inventory management and again I think you'll you'll see and here as we as.
As we move forward throughout the year gross profit per unit.
Again, we'll will increase and again, Bob and I have articulated a series of reasons on why that is and so I would say that the safeguards are in place.
Okay, and just to be clear when you look at the first quarter and your guidance for sequential decline in E. Commerce unit sales, that's driven by cutting way back on inventory purchases to try to improve your GPU.
Or are there other explanations for why you expect units to decline besides that omicron and weather, yeah, I want to be clear on that one.
It's not really it's not cutting back on inventory purchases in the first quarter, it's more along the lines of just.
The two factors that I referenced earlier around capacity constraints around reconditioning and vehicles that are available for sale as a result of the.
The current situation.
With.
Reconditioning constraints as a result of both both of the weather and the <unk>.
Number one and then number two I mentioned this in my comments, we if you look at our GPU for the fourth quarter, we were at.
The the GPU came down September .
October November December was it was it was basically trending down so you know for us to get to for us to get to the 1500, we started at a lower base, we're at our lowest point.
During the during the fourth quarter in December So, we're working our way back up and and where we're focused on maintaining our margin.
So that's that's really the other reason for the for the.
For the unit for unit reduction in Q1.
Got it thank you.
You're welcome.
Thank you and our next question comes from the line of Sharon Zackfia with well with William Blair. Your line is open. Please go ahead.
Hi, good morning, I'm, sorry, if I missed this myself cut out a few times, but I was hoping just given the fluidity of the ADESA situation that you can update us on kind of the delta between the recon costs of your third party providers versus your own facility.
On a per car basis and could.
Could you also give us an update on where you are in capacity utilization.
Owned facility and how quickly you could ramp up or get a new owned facility operational.
And then secondarily second line of questions is just.
Logistics costs have been very very elevated the last three quarters and I understand part of that is self inflicted but.
What is your line of sight to starting to see logistics costs start to come down on a per car basis, and what would be a reasonable kind of midterm ball there.
Great. Thanks, Thanks for the questions sure. So first of all with respect to cost on our in our facility versus a third party facility those costs are relatively in line.
Hum between the two.
We don't see a significant difference between our overall third party costs in our in our internal costs.
If you look at.
With respect to the the one facility and our ability to expand capacity, we absolutely have the ability to add shifts and to expand capacity Stafford at.
At one point was running at roughly double the rate it's running today.
The issue that you run into sharing when you do that is you you increase the average trip both inbound and outbound.
And that's part of the work that work that we're doing we're assessing what is the net impact if you look at that investment what is the net impact to the.
So the mileage.
As a result of making that investment so that's part of the that's part of the work.
And that we're doing and then in terms of logistics costs.
We have been investing in logistics, we've been investing in especially in line haul.
And bottom line haul and of course, our last mile delivery, we've talked about that and we.
We've over the over the past several quarters, we began the process of pulling those vehicles for line haul to get efficiencies. So we are.
We are expecting a significant amount of efficiencies.
In logistics.
On our inbound shipments as a result of the investments that we've made with our with our with our room line haul fleet.
Okay.
Thank you and our next question comes from the line of Nevada Kahn with <unk> Securities. Your line is open. Please go ahead.
Okay.
Yes, hi, thanks.
I had a question on the inventory got very common that you guys made earlier so.
You're a small units.
We're more than forecast.
Fourth quarter across the board across all the three segments.
And yet you called out the impact of.
Paths to the inventory growth.
On GPU.
So is it that maybe.
Maybe what extended our inventory acquisition what is it that drove buying the wrong type of vehicles in terms of when you forecast out what kind of it because they were not selling more debt for the tenants just kind of walk us yeah.
No I definitely do not feel like we're buying the wrong types of vehicles. It's more of that we were we were trying to optimize a really difficult and that we were dealt with the current reconditioning situations. So what we were what we were doing was we were looking all over the country and there's you know each individual Recon center was the story.
It is a story by itself. So you have some facilities that were in operating at full capacity with a third party partner. So we have conversations with them about.
Can we bring more vehicles in and can we get more reconditioning. So we've made.
He made decisions that we're going to bring in you know we're going to bring in a lot more with it make sure that we have.
That we have.
That we have adequate.
We have adequate capacity because we've got because we havent really strong demand from that from an overall unit perspective, and we werent sure what was gonna get thrown at us in terms of work disruptions, so really what it what it what it allowed us to do is we bought a lot more inventory inventory grew at a faster rate than our sales group.
And we had to book an increase to our to our LTM reserve.
Cause those.
Every unit that we buy gets amortized over the over the units that we sell and when when there's an imbalance there.
The reserve goes up so it's more of a.
It's more of a transient issue as a result of the reconditioning situation that really caused us the increase in this in this reserve more than anything else.
So as we work through.
Should we expect inventory levels to be.
Maybe even in drawdown maybe can.
Can you stabilize and maybe.
You can go from there and then I had a question on Capex as well for going into I know you are not getting the full year.
The Midland.
Question on the towers into into the liquidity question. So how should we think about 'twenty going into Capex yet.
Okay.
For 2022, the way you should think about it as well.
Look at it.
It's our so if you look at our level for for for 2021 was around $30 million. The venue, we are making an investment in.
A general Ledger system this year for the company.
So there's a significant capital project for general Ledger, and we've got some additional investments for.
To support the growth of USB C and convert it to a captive.
Then we will have more to say about that at Investor day.
Yeah.
The other piece.
The other piece to this is.
Potential additional investments in his room owned.
Reconditioning facilities as well that we're still work that we are still working through and we will be able to talk more about that at our investor day in June .
In the spring.
Got it and just a quick clarification on the U S. D C. So.
You can also run the business as it was on a standalone basis, and what kind of financial profile at anytime with some top line bottom line, let's give us some sense yeah.
Yeah. So if you are if you look at <unk> performance basically pre tax profit last year of about $40 million.
And if you look at the I'll comment a little bit on your <unk> business.
Yes.
They've had.
First of all three.
Thrilled to have the the ACC family as part of the room.
It's going to be a great opportunity, it's going to be a truly transformational opportunity for us.
There was just a great group of people over at Usu C. I was I was there a couple of weeks ago spent some time with the team and just more and more exciting every time. We every time. We go every time I visit so, whereas we're extremely excited about that opportunity in terms of their business.
Sin.
The subprime segment has been a little bit challenging at the beginning of the year we've seen.
We continue to see price appreciation or with subprime vehicles.
Then on top of that on top of the price appreciation. We've seen interest rates are ticking up so affordability is becoming more challenging but.
The last couple of weeks.
<unk> have ticked up and we think that's just due to seasonality what we're seeing with the with the tax season, but the.
The plan for them is to continue to grow the dealer base.
They've got a they've got a large opportunity that do business with 8000 dealers across the country that are going continue to grow that dealer base and then we will get the benefits of.
Of converting them into a full the captive lender, which we've said.
That we believe will.
We'll have comparable economics, when we're fully transition to a captive that carvana has which will afford us an opportunity to increase our gpus.
800, $1200 a vehicle from a financing perspective.
Yeah.
Thank you.
Hugh.
Thank you and again if you have a question at this time. Please press Star then one and our next question comes from the line of John Quealy.
'twenty with Jefferies. Your line is open. Please go ahead.
Thanks for taking my questions.
Just wanted to start with the cadence of 2022.
Is the expectation that youll see a gradual improvement in E Comm unit sales and GPU on a sequential basis, each quarter or should we see kind of a quick recovery into Q as you've worked through these transitory headwinds in the Niagara Falls.
Yeah, I'll take that one I think the way to think about our business from this point and again, Bob has articulated and that's pretty well is we're gonna be building momentum quarter over quarter over quarter over quarter and that means if you think about if you think about the investment thesis.
And the work that we did last last year for instance, we went from 19 reconditioning locations and in 2020 to 38 locations by the end of <unk>.
This past year, we took our last mile deliveries from a de minimis amount to over 60% of our deliveries.
Now our handle on our own last mile and then when you combine that with our ability to buy cars from consumers.
Which we put up a number like 76% in the fourth quarter, where cars sold that were originally acquired from consumers you're starting to string. These together and then now. The addition, and integration of UAC see each one of these are building blocks for long term growth.
Both in units and unit economics, and in SG&A leverage and so we're again, we're in that we're investing to deliver all of that and I think you'll see.
Gradual improvement rather than V shaped recovery in gross profit per unit.
That's helpful and just to clarify.
On the first quarter, the 1500 and E Comm GPU does that include.
With the recent securitization and if it does maybe you could if you can quantify that and then it got.
It doesn't it doesn't include the securitization in the 1500 that would not impact your view.
Okay. Thanks.
Thanks for that and then just also the new definition of E. Com units that includes remote consumer direct purchases and trade ins just want to also clarify the Q1 guidance for economy and it does not.
Use that definition.
Correct.
No I think.
You want a separate e-commerce units sold versus E comm transactions and the transactions is the one that we were referencing against total purchases of cars that are used in retail for e-commerce .
Versus just a straight up e-commerce sale.
They're two different two different nomenclature.
It was an important distinction for us just in terms of we have done.
We've done a lot to ramp up the consumer source vehicles over the course of the last over the course of the last year and.
And we've also spent a lot of SG&A I mean, it is you know there are costs associated with ramping up on the consumer source side, but the good news is working.
We're gonna be heading into a zone now where when we're comping. If you just look at our total transactions because the consumer source number is.
It is up so high and it'll continue to be a high number you'll be able to when you just look at the units that we sell you'll see.
It'll be a much more apples to apples comparison than it has been over the last year. This last year has been an anomaly and if we just look at vehicles sold it just doesn't tell the whole story, because we've quadrupled the number of vehicles that we purchased directly from consumers and there are costs of doing that relative to buying them directly in the auction market.
That makes sense and just want to squeeze one high level question.
You know I mean, obviously.
A lot of the headwinds that you're facing or are transitory in nature.
But I think that there's obviously been some bumps along the way.
And I'm just curious is there a.
Is there any reason why you might want to look to pivot the business model a little bit maybe create a marketplace model that's ancillary to your core business I mean, you're generating plenty of unit growth. So why not start partnering with dealerships to improve the margin profile of those units being sold.
And I'll just end there.
Yeah look we we are we really like the playbook that we're running and we can we can see that when you add nodes to the network build a distributed recon and logistics network.
Cary vehicles on our own trucks versus paying a premium of running on third parties.
Vesting in the transaction to.
To deliver.
Very very quick transactions and a streamline transaction process. When you do all of that the unit economics are attractive as we see in this space.
You know associated with our current model and then when you scale that model that creates a path for profitability and that's what we're laser focused on.
That being said.
Would we be open to experimentation of allowing a.
Third party dealerships to advertise.
And participate.
And leverage the thing that room is very good at which is stimulating demand and driving transactions that that's something that we experiment and I've talked about broadly and we'll we'll continue to evaluate that but I don't I don't think because we've had transitory issues.
We feel the need to to pivot the model quite the opposite I think whereas enthusiastic as as I've as I've been with the model because we can see the path forward from here.
Very helpful. Thanks for the questions.
Thank you and our next question comes from the line of Ed <unk> with Keybanc. Your line is open. Please go ahead.
Hi, this is going to have family I'm glad.
How does the addition of U S. C change Macquarie you can buy for example can you now pivot to less expensive vehicles and does that change where you can make an offer on.
Yeah, a great question. We've said early on when we were in the process of acquiring you ACC. This is going to open up a lot of opportunity for a room.
I think we've gone on record that the demand that comes into the franchise for both.
Lower price cars and subprime business.
Versus what we've actually print, which turned out to be a predominantly prime business.
Is what actually brought us two to one of the reasons that brought us <unk> in the first place so yeah.
Yes, the the benefit of you ACC will drive conversion north because we will be converting that traffic because we're gonna have tools to be able to convert that traffic. It drives unit economic improvement and then it drives aggregate gross profit. So there's just and then and then if you think about an integrated system.
It also drives drives a streamlined a streamlined process for our customers as a as a end to end lender. So that too will drive conversion. So theres there, there's a lot of benefit and our view ACC and we would expect that over time.
In a more normalized market, our average selling prices will start to decline and in doing so we expand the amount of Tam and opportunity that we have.
Yes.
We remain very bullish on the <unk> acquisition.
Great. Thank.
Yeah.
Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Paul Hennessy for any further remarks.
Great. Thank you and thanks to everyone for joining the call and special Thanks to all of our employees for all of their hard work in 2021 and all of the hard work. We've got ahead of us in 2022, thanks, everyone.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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