Carvana Co.

Good day and welcome to the Carvana first quarter 2020 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please proceed.

Thank you, Eric. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's first quarter earnings conference call. Please note that this call will simultaneously be webcast on the Investor Relations section of the company's corporate website at investors.carvana.com. The first quarter shareholder letter is also posted on the IR website. Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including but not limited to Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results that differ materially from those discussed here. A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the risk factors section of Carvana's most recent Form 10-K and Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise. Unless otherwise noted on today's call, our comparisons are on a year-over-year basis. Our commentary today will include non-GAAP financial measures Historically, we've used the non-GAAP measure X-GIFT, which excludes the impact of a 100,000-milestone gift to our employees. But beginning this quarter, that program has concluded and is no longer material to our results. And so any metrics for this quarter referenced on the call today will be inclusive of the 100,000-milestone gift. You can find the 100,000-milestone gift impacts called out in our reported financials. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our Best Relations website. And now, with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Thank you, Mike, and thanks, everyone, for joining the call. This has been a quarter unlike any we've faced as a company. The onset of the pandemic has led to unprecedented changes in our health and behavior, which in turn have significant and currently unquantifiable impacts on the economy. Accordingly, we will spend less time than we normally would discussing the specifics of the quarter. I will briefly hit on where we sit today and then spend more time discussing the ways we've reacted so far and the ways we are thinking about and planning for the future. We began to see significant reductions in demand in the back half of March with a sales trough in early April at approximately 30% reduction in sales year over year. From there, we have consistently improved week after week with sales in the most recent weeks being up about 20 to 30% year over year. It is difficult to get clear visibility into exactly how the industry performed over the last several weeks, but every indication is that Carvana has outperformed the industry quite significantly and grown our market share accordingly over this period. We believe part of this outperformance has been driven by transitory factors and that part of it has been driven by customer preference changes due to the pandemic. We don't yet know how perceived these customer preference changes will be, but we are optimistic. Viewed through a medium term lens, we believe customer behavior shifts are likely to accelerate our progress. Now let's turn to how we've reacted so far. In early March, it became clear that we were dealing with a very significant event. At that time, we determined that we were fighting a battle with two fronts, health and financial health. Our first priority is the health front, keeping our team and our customers safe. Along those lines, we have enacted work from home for corporate and customer care teams, have reconfigured our inspection centers and field locations to support social distancing, adopted CDC guidance, and implemented a touchless delivery experience for our customers. The second front is the financial health front. Here we've had three primary goals, to align expenses with this new environment, to manage our risks and uncertainties thoughtfully, and to ensure we preserve and continue to progress in those areas that are most important to our long-term success. We came into the pandemic expecting our biggest absolute unit growth year yet, and with the business positioned to deliver on those goals. Demand shock we started to see in mid-March has obviously necessitated some significant and difficult changes. In order to align expenses with the new environment, We eliminated overtime and travel budgets, reduced hours and paused hiring. Another important component of our strategy for managing through this has been to carefully manage our risks and uncertainties. We view the most important areas of uncertainty during this period to be industry demand levels, the credit and capital market environment, and inventory values. In an effort to manage demand uncertainty, we moved quickly on expense management, rolled out new commercials tailored to this environment, implemented a 90-day payment deferment promotion for our customers, and designed our expense reduction initiatives to be impactful while also being easily reversible to enable us to adapt to different demand scenarios. We've also been active in managing our credit and capital markets risk. In late March, we tightened credit significantly on the loans generated on our platform. In addition, we upsized our forward flow purchase agreement with Ally to $2 billion and broadened the set of customers covered under the agreement, and we completed a $600 million common stock offering to fortify our balance sheet. We view inventory values as another area that we want to be purposeful about managing. We ceased all purchases except for customer trade-ins in late March, which in combination with our outperformance in sales relative to the industry, have reduced our total inventory by about 30% in just five weeks since the quarter ended. This significantly reduces our exposure to inventory purchase prior to the pandemic. As we bring down expenses and manage our risks, we are also continuing to extend our leadership in the areas that are most important to our long-term success. The single most important is the quality of our customer experiences. Our customer experiences have three primary drivers, our culture, our technology, and our supply chain. We are continuing to invest in our technology to make buying a car even easier, more fun, and safe for our customers. This in turn enables a different, more efficient supply chain than has traditionally existed in automotive retail. We are also continuing to fill our real estate pipeline while holding off on growth capex, so we are prepared to return to rapid growth when the time is right. Culture is at the top of the list of drivers of our long-term success. It's at the top for a reason. Everything we do, all the things that come together to deliver incredible customer experiences are done by our people. People and the relationships and processes that connect them are the great fundamental in any business. An environment like this is a test for any culture. You learn more about people and more about a culture during these moments of intense direct pressure. Before I tell you what we have learned so far, I want to tell you what we hope. In mid-March, we set a goal that we would come out of this stronger, that we, our entire team across the country, would look back on this time as a period that we came together. To achieve this, we decided to use our values, most extensively our value, we're all in this together, as the lens for making tough decisions. We came into the pandemic poised for tremendous growth. This obviously made aligning expenses with this environment difficult. The only way we could achieve it was to significantly reduce hours for thousands of people across the company. This was undoubtedly the hardest and most painful decision any members of our management team have ever had to make. It's an unfortunate reality that the right decision for Carvana, given all of our goals, was to reduce the hours of the operators that work so hard every day to deliver the customer experiences that define us. That reality did not align with our value on this together. So we set up a fund where people across the company could volunteer a portion of their salaries that would go into this fund and offset lost wages for those who lost hours. We had hundreds and hundreds and hundreds of people across the company voluntarily contribute their wages into the fund, including the board of directors and the executive team that all contributed a hundred percent of their salaries during this time. I think there is no clear expression of our culture than this. In fact, many of the contributions came from people who lost hours themselves, but who knew others needed a hand more than they did. Really think about that for a minute. In a time of fear and uncertainty, these people, who are dealing themselves with reduced income decided to give more. They did it because they're incredible people, they did it because they're part of something, and they did it because we're all in this together. And the fact that they did it, that so many did it, is something that I think the entire team at Carvana should be tremendously proud of. This is the strongest and fondest memory I'll take from all this. Difficulty rarely leaves things as they were. It tears groups apart or brings them together. We've been brought together. There are undoubtedly more challenges that lie in front of us, but we head into those challenges confidently because of the people standing beside us. Mark.