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spk06: Thank you for joining us today.
spk11: Thank you. Good morning, everyone, and welcome to Vroom'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.vroom.com. The 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 Groom's operations and future financial performance. These and other forward-looking statements are subject to a number of risks, uncertainties, and other important factors that may cause actual results to differ materially from those in such statements. We direct you to the company's most recent SEC filings, including the risk factor section of Room's most recent Form 10-K for the year ended December 31st, 2021, for additional discussion of factors that could cause actual results to differ materially from those in the forward-looking statements. Please note further that today's discussion including the forward-looking statement, speak only as of the date of this call, and Vroom 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 2021 earnings release and management presentation. I'd now like to hand off the conference call over to Paul Hennessy, Chief Executive Officer. The floor is yours.
spk08: Thank you, Alan. 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, he's rolling up his sleeves and helping us shape our long-term vision as we build out a robust operational system. Tom brings expertise from Wal-Mart, where he served as senior vice president of supply chain for three years. During his time at Walmart, Tom focused on e-commerce supply chain, which is a great fit for us. Prior to Walmart, Tom served in senior leadership supply chain roles at Home Depot, Echo Brands, Unisource, Fisher Scientific, and Office Depot. I'm ecstatic to have him here on the team. Moving along to slide four, I want to step back and highlight our accomplishments in 2021. 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 e-commerce unit growth. We matched strong demand with scaling operations across the entire transactional ecosystem, further validating our customers' enthusiasm for the Vroom model. We grew total revenues by nearly 2 billion year over year, more than doubling our business. E-commerce gross profit per unit, or GPPU, 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've surpassed our key supply chain targets for the year. We doubled our reconditioning centers by year end to a count of 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 have 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 CarStory 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 UACC, beginning our transformation to fully captive lending. We also expanded our capital base to ensure future growth for Vroom. 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 have positioned us well for continued growth and investment. Now, a few high-level comments on 2022. Our 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 anticipate further tailwinds 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 74,000 units, more than double the units sold in the prior year. This strong growth was fueled by growing brand awareness in an exceptional demand environment, coupled with increasing capacity across our business. In turn, e-commerce 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 ASPs primarily to the extraordinarily heightened pricing environment for used vehicles in 2021. E-commerce gross profit per unit grew 25% as vehicle and product GPPU expanded year over year. Vehicle GPPU 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 e-commerce unit trend for the year on slide six. Similar to our last earnings call, we are focusing on total e-commerce transactions. We define these as e-commerce units sold plus retail-grade remote consumer source purchases and trade-ins. Transaction growth increased in absolute and relative terms in 2021, reaching a new high of 143,500. We more than doubled our unit sales in 2021, while our consumer source units nearly quadrupled. Our increase in marketing investments in 2021 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 build 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 a 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 in 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 a long-term goal of 85% deliveries by last mile. We realize you may have a few questions about the potential impact of the very recently announced acquisition of one of our reconditioning partners, who also hosts 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 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 as a key focus of our 2022 plan. Customers love our model. and we're working hard to deliver a fast, streamlined process. We've already kick-started 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 planned 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 UACC. We are building a strong, sustainable platform in 2022. We are going to focus on improving transaction speed and efficiency to improve the customer experience and drive enhanced profitability. We will test small and scale big. 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 UACC in our portfolio, we will begin a captive financing program to drive conversion and unit economic improvement. With that, I'll turn over the call to Bob to review our financial performance and our guidance. Bob?
spk02: Thanks, Paul. I'll start with the financial summary of the 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 as we faced headwinds from higher price depreciation for premium vehicles, as well as higher reconditioning costs and year end 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 as well as higher wholesale revenues. Fourth quarter e-commerce units of 21,243 surpassed 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 a constrained supply chain environment. This, in turn, put pressure on e-commerce GPPU. We came in approximately $600 below our e-commerce GPPU guidance. Roughly half of the variance is explained by auction units over $30,000 acquired during the third quarter for fourth quarter sales. These units were subject to higher retail price depreciation in November and December and 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 Omicron, 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 to e-commerce GPPU. 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 GPPU and 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 of our fourth quarter, I would like to spend some time discussing first quarter guidance. Please note this includes two months of estimated results from UACC since the acquisition closed on February 1st. We expect approximately $875 million in revenue and 18,000 to 19,000 e-commerce units as we focus on restoring e-commerce vehicle GPP towards higher profit transactions. For Q1, We anticipate e-commerce GPPU of $1,500 as we improve GPPU from December, which was at the lowest level during the fourth quarter. We anticipate approximately $130 million in 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, changes in the wholesale pricing market, investments in employees to improve our customer experience, increased reconditioning costs due to the pandemic, and rate and fuel increases for third-party carriers. These headwinds are partially offset by EBITDA and UACC 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 UACC acquisition and assessing the implications of the recent ADESA announcement. I do want to emphasize that although we are not providing full-year guidance, We do believe that our GPPU will continue to improve each quarter as we improve operations and transition to captive lending. 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 strategies and growth outlook. We look forward to sharing more details in the near future. Please turn to slide 12 for a summary of our e-commerce financial performance. E-commerce 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 e-commerce ASPs as used vehicle prices in the broader market remained elevated. E-commerce vehicle GPPU contracted to $473 for the reasons I explained earlier. E-commerce product GPPU increased 14% year-over-year to $1,075. Consistent with prior quarters in 2021, higher year-over-year product GPPU reflects higher attachment rates as our teams continue to execute on product improvements as well as a 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 25% year-over-year to 8,742 units, decreasing 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 at 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 per e-commerce transaction, where e-commerce transactions are defined as e-commerce units sold plus retail grade units sourced from consumers. Our SG&A per transaction rate was $3,818 in 2021, an 18% improvement from $4,633 in 2020. Pressure on logistics costs for market rate inflation was an approximate $140 per transaction headwind. Net, we booked approximately $1,000 of underlying leverage on SG&A spend per transaction. We are pleased to see leverage in our investments across our operations to handle new highs in transaction levels. While we are not providing a full financial profile of UACC today, we want 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 UACC's first securitization since being acquired by Vroom. We sold $318 million of finance receivables in an off-balance sheet transaction and anticipate a 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, UACC has unused warehouse lines of $350 million, 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 in cash, excluding restricted cash before we closed on the UACC acquisition for approximately $300 million. We upsized our floor plan from $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 forward flow transactions, and the ability to add modest leverage to UACC's balance sheet. In closing, we entered 2021 at a new level of scale. While we face near-term capacity constraints, we have increased our reach to consumers with record sales and new highs in consumer sourcing. In 2022, we believe that we will deliver sequential improvement in unit growth, GPPU, SG&A Leverage, and EBITDA. We continue to position the business for profitable growth. Thank you. With that, Paul and I are ready for your questions.
spk06: Thank you. If you have a question at this time, please press star then one on your touchtone telephone. If your 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 Rajat Gupta with JPMorgan.com. Your line is open. Please go ahead.
spk01: Great. Thanks for taking the question. I had a couple. The first one was on just contingency planning. You have $900 million in cash post-UACC. There's $600 million in converts. The 1Q guide implies a quarterly cash burn of roughly $150 million. The first quarter guide is pretty weak on GPU. Spending levels are still elevated. And due to the ADESA acquisition, you know, there is sufficient uncertainty for the second quarter to the fourth quarter, it seems like. So how do investors get comfortable owning the shares here given an already tough labor, logistics, capacity environment? And how do you plan to fund the business if the stock, if the shares do not re-rate in such an environment? And I have a follow-up. Thanks.
spk02: Sure, Rajat. Thanks for the question. So I think you've outlined it. We ended the year. So, Rajat, first of all, one of the things I think is really important to emphasize 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, GPPU, and revenue throughout 2022. To your point, you know, we ended the year with $1.1 billion, $132 million in cash. We spent $300 million on UACC. We see several opportunities for improvement to our liquidity. We have opportunities to continue to improve, increase capacity and improve 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 to UACC. If you look at... We believe we have more than enough cash to get through 2022, and 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 for Broom-operated vehicle reconditioning centers. So we'll have more to say about that, Rajat, at that time.
spk01: Got it. Yeah, looking forward to the details at the end of the day. The other question was on just GPU. You know, the fourth quarter number is pretty puzzling. You know, you guided in mid-November. So it's surprising that, you know, the premium vehicle depreciation was not anticipated to this degree. And the data that at least we've been tracking does not really suggest a sharp drop-off in pricing either to drive this kind of GPU impact. I'm just curious, was there some sort of miscalculation here on the acquisition of inventory? Our sense was that the card story acquisition was meant to avoid exactly these type of situations. And it doesn't look like the pricing environment is going to get any better. So how do we get comfortable that the GPU headwinds will not persist for the remainder of the year?
spk02: Yeah, so Rajat, thanks so much for the question. Let me give a little more detail on GPPU during the fourth quarter versus our guidance. So if you look at the MIS versus guidance, about half of the MIS, and I talked about it in my comments, but I'll provide a little bit more detail. So about half of the MIS was due to there were premium vehicles. So vehicles over $30,000 that we purchased in the auction market during the third quarter for fourth quarter sales. And we made a decision. So we've been talking 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 and process inventory in all the recon facilities. So we bought a lot of inventory in the third quarter to make sure that those facilities were full because we were getting thrown curveballs all the time with the pandemic and with facilities closing down. We were seeing a lot of demand for units, so we made the decision to invest in inventory. We were able to pull as many units through the system, given the hand that we were dealt. Those vehicles performed poorly in November and December. We did see premium vehicle depreciation on vehicles over $30,000 during that time period, and it was substantial and accounted for about half of the GPPU mix. So the other half, Rajat, 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 really a a one-time item with a year-end accrual around a profit-sharing accrual that we book for our extended warranty programs. So we do an actuarial analysis on a regular basis, and when we performed that analysis, Rajat, 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 and using their vehicles, and we saw the claim rate go up, and we had to make an adjustment to the to that accrual, and that's something that was more of a one-time adjustment. And then in addition to that, as a result of the inventory purchases that I was referencing earlier that we continue to make 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 you sell. So when you buy more vehicles than you sell, it gets amortized over that smaller growth rate and you take a hit to your GPP use. So that's the walk on the $600 from actual performance to our guidance.
spk01: Got it. Okay. Thanks for the call. Thanks, Rajat.
spk06: Thank you. And our next question comes from the line of Zach Fadum with Wells Fargo. Your line is open. Please go ahead.
spk09: Hey, good morning. Could you talk a little more about the impact of ADESA's change in ownership on your business? Specifically, how much of your current reconditioning runs through ADESA? And do you believe there is sufficient capacity at Mannheim or other third parties to offset what's being lost here? And then separately, could you talk to any plans to open your own facilities this year?
spk08: Sure. Zach, it's Paul. 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, you know, how we characterize the impact of ADESA, what it means to us overall. And, of course, we're thinking deeply about that. Roughly between 20% and 24% or so of our capacity currently sits with ADESA. And, look, it's our understanding that Carvana, over time, is going to repurpose the Odessa reconditioning, you know, predominantly for their own use. And so we're working with the Odessa team now on what that timeline looks like and what the near-term impacts are. We're confident that there is solutions in our third-party, you know, 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 thinking deeply about that. I think we'll be in a much better position again in our investor day when we walk you through kind of the analysis and the outcomes of our study and our discussions with other parties. But we're on our way. And as far as 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 and the timeline of those and the overall associated capital expense associated with those. I think we've sized them directionally, but we're going to be opportunistic on the right location, the right opportunity, and then the right level of relief around capacity with our own facilities. So all of that is on the table, and we're working through that.
spk09: 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 units as well as GPU and EBITDA, And then would it be helpful if you could, you know, layer in the USC acquisition impact, you know, starting with the ABS transaction in Q1 and then how you expect that glide path to GPU improvement to flow through the remainder of the year?
spk02: Yeah, Zach, so thank you so much for the question. So with respect to specific impact as a result to Omnicron, we have, So there is a relationship between the amount of our listed inventory that's available for sale and our ability and our sales volume, of course. And we have been impacted. Specifically in January, we were hit pretty hard with Omicron, as well as in addition to January, we also had some weather disruptions in February as well. In terms of So the overall impact, you know, we haven't quantified the overall impact, but really, you know, the guidance for the first quarter for us, it's really a combination of the weather factor, the reconditioning, you know, the overall constraint on reconditioning capacity, as well as just our focus on maintaining our margin and getting our margin up in Q1. And then with respect to your question on UACC, so again, I want to just give a little bit of detail on UACC. So, you know, we did include the, so we do not have final results with respect to the purchase accounting adjustments for UACC, but we put some estimates in our guidance for Q1. So, we did have a securitization in February. And, you know, for those of you that are familiar with securitizations, one thing that's important is to realize that, you know, we will not get the full benefit of the gain on the securitization. in February because that is subject to a fair value adjustment as part of purchase accounting. So what's in our numbers for Q1 in terms of the gain on the UACC securitization is about $16 million in EBITDA in Q1 as a result of that transaction. And in terms of the cadence of that, we are expecting we'll be back out in the market with another securitization from UACC in the second half of the year. And we're, you know, based on the current market conditions, we're expecting that the second securitization will be about 15% of the finance receivables that are sold as part of that transaction. And we won't have that same little nuance that we had in February where we've got a market to fair value.
spk09: Got it. Appreciate the color.
spk02: Thank you.
spk09: Thanks, Zach.
spk06: Thank you. And our next question comes from the line of Colin Sebastian with Baird. Your line is open. Please go ahead.
spk10: All right, 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, Bob, maybe you can break that out a bit, in particular with respect to per unit spending trends and marketing and logistics, which I think have been increasing over the past couple of quarters. And 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.
spk02: Yes. So, Colin, thanks for the question. So, we are, so in terms of the cadence of the EBITDA progression, you know, we are, as I said before on the prior question, that we're looking at first quarter as the, you know, as the trough in terms of our EBITDA performance. And at this point in time, in terms of our view, we view that we're going to be able to continue to build on that at a pretty ratable rate throughout the year. There's still more work that we need to do in terms of assessing what the recon strategy is going to be going forward and what that's going to be in terms of the overall impact of EBITDA versus capital. So there's 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 say more about it at investor day in the spring.
spk10: Okay. And then any commentary on sort of exit rate liquidity from, from this year?
spk02: Yeah. So, um, I, I, I don't have a comment on exit rate liquidity at this point as well, because of just the work that we need to do on, uh, on our reconditioning strategy and what the, uh, If it accelerates the investment that we have to make in our own reconditioning centers, obviously that's going to provide a different answer. So I'd like to withhold on that until we've had the opportunity to understand how the announcement is going to materialize for us over the next 60 days.
spk10: Okay, fair enough. Thanks, Bob. Great, thanks.
spk06: Thank you. And our next question comes from the line of Seth Basham with Woodbush Securities. Your line is open. Please go ahead.
spk04: Thanks a lot, Erin. Good morning. My first question is on inventory management. About a year ago, you guys had some missteps to inventory management, which caused a big hiccup in GPU, and you put in additional guardrails and safeguards to prevent the situation from recurring. Obviously, today's situation is a bit different, but what happened to those guardrails and safeguards today? to lead to such a massive sequential decline in GPU relative to your expectations?
spk08: Yeah, I think there are two different types of situations, Seth. Last year's was related to sales and sales operation capacity, which created an aged inventory environment. In this environment, we're dealing with the unprecedented demand highest used car pricing of all time. And that has an absolute downward pressure on affordability across our customers in various credit spectrums. And as Bob mentioned in his remarks, in some of the units that we bought for particular reasons to manage our work in progress to get finished goods ready for sale, put us into buying particular units that actually depreciated faster, and in that depreciation, you know, we had to appropriately price those units to move them, and so we did that. So there are two very different kinds of situations. The safeguards are in control for inventory management, and again, I think you'll see and hear as we move forward throughout the year, gross profit per unit again, 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.
spk04: Okay. And just to be clear, when we look at the first quarter and your guidance for sequential decline in e-commerce unit sales, that's driven by you 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 on the chronic weather?
spk02: Yeah, I want to be clear on that one. I mean, 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 with reconditioning constraints as a result of both of the weather and Omicron, number one. And then number two, I mentioned this in my comments, if you look at our GPPU for the fourth quarter, the GPPU came down September, October, November, December, it was basically trending down. So For us to get to the $1,500, we started at a lower base. We were at our lowest point during the fourth quarter in December. So we're working our way back up, and we're focused on maintaining our margin. So that's really the other reason for the unit reduction in Q1.
spk04: Got it. Thank you. You're welcome.
spk06: Thank you. And our next question comes from the line of Sharon Zaxia with William Blair. Your line is open. Please go ahead.
spk05: Hi. Good morning. I'm sorry if I missed this. My cell cut out a few times. But I was hoping, just given the fluidity of the Odessa situation, that you could update us on kind of the delta between the recon costs at your third-party providers versus your own facility on a per-car basis. And Could you also give us an update on where you are at capacity utilization on the 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, you know, logistics costs have been very, very elevated the last three quarters, and I understand part of that is self-inflicted. But, you know, 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 mid-term goal there?
spk02: Great. Thanks for the question, Sharon. So first of all, with respect to cost on our facility versus the third-party facility, those costs are relatively in line between the two. We don't see a significant difference between our overall third-party costs and our internal costs. If you look at... with respect to the own facility and our ability to expand capacity, we absolutely have the ability to add shifts and to expand capacity. Stafford at one point was running at roughly double the rate it's running today. The issue that you run into, Sharon, when you do that is you increase the average trip, both inbound and outbound. And that's part of the 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 to the mileage as a result of making that investment. So that's part of the, that's part of the work that we're doing. And then in terms of logistics costs, you know, we, you know, we have been investing in logistics. We've been investing in, especially in line haul, in inbound line haul. And of course our last mile delivery, we've talked about that. And, you know, we, you know, we, we've over the, over the past several quarters, we began the process of pulling those vehicles for line haul to get efficiency. So we are, We are expecting a significant amount of efficiencies in logistics, you know, on our inbound shipments as a result of the investments that we've made with our room line haul fleet.
spk06: Thank you. And our next question comes from the line of Ed Kahn with Truist Securities. Your line is open. Please go ahead.
spk03: Yes. Hi. Thanks. I had a question on the inventory guardrail comment that you guys made earlier. So your sold units were more than forecast for the fourth quarter across the board, across all the three segments. And yet you called out the impact of faster inventory growth on on GPU. So is it that you're just maybe overextended on inventory acquisition, or is it that you're buying the wrong type of vehicles in terms of when you forecast out what kind of vehicles are going to sell more, that projection is just kind of off?
spk02: Yeah. No, I definitely do not feel like we're buying the wrong types of vehicles. It's more of that we were trying to optimize a really difficult hand that we were dealt with the current reconditioning situation. So what we were What we were doing was we were looking all over the country, and each individual recon center is a story by itself. So you have some facilities that weren't operating at full capacity with our third-party partners. So we had conversations with them about, can we bring more vehicles in and can we get more reconditioning? So we really made decisions that we're going to bring in a lot more whip and make sure that we have adequate equipment We have adequate capacity because we have really strong demand from an overall unit perspective, and we weren't sure what was going to get thrown at us in terms of work disruptions. So really what it allowed us to do is we bought a lot more inventory. Inventory grew at a faster rate than our sales grew, and we had to book an increase to our LTM reserve because those though every unit that we buy gets amortized over the units that we sell. And when there's an imbalance there, the reserve goes up. So it's more of a transient issue as a result of the reconditioning situation that really caused the increase in this reserve more than anything else.
spk03: So as we work through this, should we expect inventory levels to be maybe even a drawdown maybe until you stabilize and maybe try to improve from there? And then I had a question on CapEx levels as well for 2022. I know you're not guiding the portfolio, but kind of the bigger question that ties into the liquidity question. So how should we think about 2022 CapEx? On CapEx for 2022, the way you should think about it is,
spk02: If you look at our level for 2021, it's around $30 million. We are making an investment in a general ledger system this year for the company. There's a significant capital project for general ledger, and we've got some additional investments to support the growth of UACC and convert it to a captive. We'll have more to say about that at Investor Day and The other piece to this is potential additional investments in Broom-owned reconditioning facilities as well that we are still working through, and we'll be able to talk more about that at our investor day in the spring. Got it.
spk03: And just a quick clarification on USCC. So are you going to also run the business as it was on a standalone basis and what kind of, uh, financial profile you would have with some top nine, bottom nine, just give us some sense.
spk02: Yeah. So if you, uh, if you look at UACC's performance, basically pre-tax profit last year, about $40 million, um, And if you look at the, you know, I'll comment a little bit on UACC's business. You know, they've had, you know, first of all, we're thrilled to have the UACC family as part of Room. It's going to be a great opportunity. It's going to be a truly transformational opportunity for us. There's just a great group of people over at UACC. I was there a couple weeks ago, spent some time with the team, and just more and more excited every time I visit. So, We're extremely excited about that opportunity. In terms of their business, they've seen the subprime segment has been a little bit challenging. At the beginning of the year, we continue to see price appreciation with subprime vehicles. And then on top of the price appreciation, we've seen interest rates are ticking up, so affordability is becoming more challenging. But The last couple weeks have ticked up, and we think that's just due to seasonality and what we've seen with the tax season. But the plan for them is to continue to grow the dealer base. They've got a large opportunity. They do business with 8,000 dealers across the country. They're going to continue to grow that dealer base, and then we'll get the benefits of converting them into a fully captive lender, which we've said that we believe we'll have comparable economics when we're fully transitioned to a captive that Carvana has, which would afford us an opportunity to increase our GPPUs in the $800 to $1,200 a vehicle from a financing perspective. All right. Thank you. Thank you.
spk06: Thank you. And again, if you have a question at this time, please press star then 1. And our next question comes from the line of John Kulitwani with Jefferies. Your line is open. Please go ahead.
spk12: Thanks for taking my questions. I just wanted to start with the cadence of 2022. Is the expectation that you'll 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 in 2Q as you work through these transitory headwinds? And then I have a follow-up.
spk08: Yeah, I'll take that one. I think the way to think about our business from this point, and again, Bob has articulated this pretty well, is we're going to be building momentum quarter over quarter over quarter over quarter. And that means if you think about the investment thesis and the work that we did last year, for instance, we went from 19 reconditioning locations in 2020 to 38. locations by the end of this past year. We took our last mile deliveries from a de minimis amount to over 60% of our deliveries now are handled 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 start to string these together, and then now the addition and integration of UACC, each one of these are building blocks for long-term growth, both in units, in unit economics, and in SG&A leverage. And so, again, we're investing to deliver all of that, and I think you'll see, you know, gradual improvement rather than, you know, V-shaped recovery in gross profit per unit.
spk12: That's helpful. And just to clarify on the first quarter, the $1,500 in e-com GPU, does that include the recent securitization? And if it does, maybe if you can quantify that.
spk02: It doesn't include the securitization in the $1,500. That would not impact GPU. Okay.
spk12: Okay. 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 e-com units does not use that definition. Is that correct?
spk08: No, I think you want to separate e-commerce units sold versus e-com transactions. And the transactions is the one that we were referencing earlier. 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 nomenclatures.
spk02: It was an important distinction for us just in terms of we have done a lot to ramp up the consumer-sourced vehicles 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 we're going to 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, you know, 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 the, you know, 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 to doing that relative to buying them directly in the auction market.
spk12: That makes sense. And just want to squeeze one high level question in. You know, I mean, obviously, a lot of the headwinds that you're facing are transitory in nature. But I think that there's obviously been some bumps along the way. And I'm just curious, 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. Thanks.
spk08: Yeah. Look, we really like the playbook that we're running, and we can see that when you add nodes to the network, build a distributed recon and logistics network, carry vehicles on our own trucks versus paying the premium of running on third parties, investing in the transaction system, to deliver, you know, very, very quick transactions and a streamlined transaction process. When you do all of that, the unit economics are attractive, as we see in the 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 third-party dealerships to advertise, you know, and participate and leverage the thing that Vroom is very good at, which is stimulating demand and driving transactions, that's something that we experiment and have talked about broadly and we'll continue to evaluate that. But I don't think because we've had transitory issues, we feel the need to pivot the model. Quite the opposite. I think we're as enthusiastic as I've been with the model because we can see the path forward from here.
spk12: Very helpful. Thanks for the questions.
spk06: Thank you. And our next question comes from the line of Ed Urema with Kingpink. Your line is open. Please go ahead.
spk07: Hi, this is Samantha Hanley. I'm Fred. How does the addition of UACC change what cars you can buy? For example, can you now pivot to less expensive vehicles and does that change what you make an offer on?
spk08: Yeah, a great question. We've said, you know, early on when we were in the process of acquiring UACC, this is going to open up a lot of opportunity for Vroom. I think we've gone on record that the demand that comes into the franchise for both lower-priced cars and subprime business versus what we've actually print, which turns out to be a predominantly prime business, is what actually brought us to – one of the reasons that brought us to UACC in the first place. So, yes, the benefit of UACC will – drive conversion north because we'll be converting that traffic because we're going to 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 if you think about an integrated system, it also drives a streamlined process for our customers as a end-to-end lender. So that, too, will drive conversion. So there's There's a lot of benefit of UACC, and we would expect then 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. So, yeah, we remain very bullish on the UACC acquisition.
spk06: Great.
spk07: Thanks.
spk06: Thank you, and I'm showing no further questions at this time, and I would like to turn the conference back over to Paul Hennessy for any further remarks.
spk08: Great. Thank you, and thanks, 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.
spk06: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
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