Carvana Co.

Good day and welcome to the Carvana fourth quarter 2021 financial results conference 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 telephone keypad. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Mike Levin. Please go ahead.

Thank you, Chuck. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's fourth quarter and full year 2021 earnings conference call. Please note that this call will simultaneously be webcast in the investor relations section of the company's corporate website at investors.carvana.com. The fourth quarter shareholder letter is also posted on the IR website. Additionally, following the announcement of our acquisition of Odessa's U.S. physical auction business from Car Global today, we posted the press release and slide deck on the events and presentations page of our IR website where more details can be found. Joining 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 to 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 written 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, all comparisons are on a year-over-year basis. Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our Investor Relations website. And now with that said, I'd like to turn the call over to Ernie Garcia. Ernie.

Thanks, Mike. And thanks everyone for joining the call. 2021 was an extraordinary year for Carvana, full of landmark accomplishments along our path to achieving our mission of changing the way people buy and sell cars. We started the year being named to the Fortune 500, tied for the third fastest company ever to do so. We sold our one millionth car through organic growth faster than any other automotive retailer in history. We had our first positive earnings quarter, We had our first positive EBITDA year excluding one-time items, and we became the fastest growing e-commerce company in US history. While I'm extremely excited and proud of the team for that blockbuster list of accomplishments, I'm even more excited about the fact that we were also named the top 10 of Forbes best large employers to work for list. We were ranked ahead of any other retail company and ahead of any other technology company. That set of accomplishments can only be achieved with a clear, customer-focused mission, an enormously scaled opportunity, and the compounding that results when the efforts of great people who care are directed toward long-term value creation. Thank you to everyone inside Carvana for always choosing to care and for always giving that little extra effort that adds up to make a huge difference. We've always framed our opportunity simply. Customers desire the experience we provide for them, Providing it is hard. There are approximately 40 million used cars sold every year in the U.S. The unit economics of the industry viewed over any reasonable time frame have been stable for a long time. That unit economics stability at the industry level is structurally driven by the fact that there are tens of thousands of dealers out there providing customers with similar customer experiences and who share similar cost structures. That simple frame is clarifying. To achieve our goals, we must continue to deliver great customer experiences, we must continue to differentiate our unit economics, and we must continue to scale. That is our path. In alignment with that path, we are extremely excited to announce the acquisition of Odessa's U.S. operations. Odessa is the nation's second largest auction company with 56 locations, completing about one million auction transactions a year. This acquisition has four primary justifications. Number one, it solidifies our path to becoming the largest and most profitable automotive retailer. Number two, it provides us with a nationwide inspection center network that we estimate will increase our production capacity by approximately two million units per year when fully built out. Number three, It substantially improves our logistics network. Demonstrating the breadth of these locations, we will move from currently having inspection centers within 200 miles of 56% of the US population to eventually being within 200 miles of 94% of the US population. Demonstrating the quality of these locations, we will move from being within 50 miles of 16% of the US population to being within 50 miles of 58% of the population. This will reduce shipping times to our customers nationwide and lays the foundation for eventually offering same-day delivery to many of our customers. Number four, it significantly increases our auction capabilities and kickstarts or deepens our relationships with many large and important players in the automotive industry. We look forward to working with our new customers, to creatively finding new and interesting ways to work together, and to valuing them in the same way we have always valued all of our customers. We also expect Adesna to accelerate our path to our long-term financial model given the many powerful benefits that derive from being closer to our customers. For perspective on how powerful proximity can be, sales that are delivered to customers from an inspection center within 200 miles of our customers today have unit economics that are about $750 better than our average transaction as a result of lower inbound costs, lower delivery costs, and higher conversion rates leading to lower customer acquisition expense. Now I'd like to turn briefly to the current environment. Starting the late fourth quarter, we, like everyone else, were hit pretty hard by the Omicron variant. At different points in time, we had up to 30% of our people in various operational teams simultaneously called out. It's obviously very difficult to deal with in any system, but in systems that relay on chained activity, like our inspection centers and our logistics network, it is even more difficult. This led to the most severe logistics network constraints we have seen in our history. While we are largely out of the Omicron wave, it takes time to work out of our backlogs, and this year's severe winter storms have slowed our progress. Today, we remain severely constrained, but we're working hard to work through it as soon as we possibly can. These constraints, paired with the recent rapid appreciation of vehicle prices, as well as rapid increase in interest rates, have colluded to make this a challenging time. While this has undoubtedly been complex operationally, as our team has in the past, they are rising to the challenge. We've managed to grow our inventory available to our customers. We've grown our operational capacity to handle more volumes throughout our operating groups in anticipation of alleviating our logistics constraints and in anticipation of tax season. And we have made changes to the mix of cars we are purchasing and reconditioning to help our customers find more affordable cars despite the car pricing environment. And our long-term indicators continue to look incredible. In our oldest cohort, we are now up to 3.5% market penetration. This may not sound like much at first, but if we apply that nationwide, it extrapolates to about 1.4 million annual sales. On top of that, our oldest cohort grew by 50% in the last year and therefore clearly has a long way to go. Lastly, 95% of our 311 markets are ramping faster than our 2013 cohort was at the same time in its life. Two million plus car sales per year is no longer the goal. We're aiming higher. We have the team, the business model, and the ambition to do it. The march continues. Mark. Thank you, Ernie, and thank you all for joining us today.