Carvana Co.

Good day and welcome to the Carvana first quarter 2022 earnings 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 a touch-tone phone. 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 Mike Levin, VP of Investor Relations. Please go ahead.

Thank you, Betsy. Good afternoon, ladies and gentlemen. Thank you for joining us on Carvana's first quarter 2022 earnings conference call. Please note that this call will be simultaneously 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. Also, we posted additional information on the ADESA U.S. acquisition transactions, which can be found on the events and presentations page of 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 and may cause actual results that differ materially from those discussed here. A detailed discussion of the material factors that cause actual results that differ from forward-looking statements can be found in the risk factors section of Carvana's most recent form 10-K. 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 it over to Ernie Garcia. Ernie?

Thanks, Mike, and thanks everyone for joining our call. The first quarter was a challenging quarter for Carvana. There were a number of impacts on the business, some internal and some external, that combined to negatively impact our financial results. We view these impacts as transitory setbacks, and I will hit them first. Secondly, I will discuss what we are working on internally to address each of these impacts. Next, I'll touch on the underlying demand for our offering, and finally, I'll close on our thoughts on the long term. First, let's discuss the impact to our results. There were three primary drivers of our results in the first quarter. The first is our operational constraints that most severely impacted our inspection centers and logistics network. These began with Omicron, were exacerbated by winter storms, and then the path to recovery has been slowed by our inspection center, logistics network, and inventory growth, causing us to produce and move more inventory to newly opened IRCs that are further away from our average customers, leading to additional network complexity. These effects had negative impacts on both sales volumes and retail GPU. The second was industry-wide impacts. Affordability and general consumer sentiment combined to drive fewer industry-wide sales than prior periods. While we continue to rapidly grow market share throughout the quarter, the combination of these economic factors and our operational constraints caused our growth to come in lower than we were anticipating. Because of the operational requirements of our business, we generally plan and build for growth six to 12 months in advance, depending on the lead times necessary to ramp each operational team. On average, across our history, this has served us well, as it has enabled us to maintain much higher levels of growth than businesses with our operational complexity historically have been able to achieve. But given the internal and external factors described above, this quarter, it caused us to carry more expenses than we had sales to offset them with. This led to total SG&A levels that were largely on plan in total dollars being much higher per unit than prior periods, and to a lesser degree also flowed through COGS driving down total GPU. Thirdly, interest rates moved up rapidly in the quarter. As we originate the loans our customers use to buy parts from us and then sell them later, interest rate increases between initially showing our customers their financing terms and ultimately selling those loans leads to a reduction in the value of the loans we sell, which had the impact of reducing other GPUs. These factors combine to lead to a clear step back in our financial results. While this isn't what we are shooting for, it is straightforward to understand, and it suggests straightforward solutions. Returning to positive EBITDA and resuming our march to our long-term financial model from there requires that we resolve our operational constraints, that we get our expenses and sales back into balance through a combination of sales increases and cost efficiencies, and that we adjust our processes in our finance group to reduce the impact of rapidly rising rates on GPU until we return to an environment with more stable rates. We have detailed plans that are already in motion in each of these areas. Our logistics team has clear plans in several key areas to catch up to level our metrics for a year ago and then to move significantly beyond them. The addition of Odessa to our network will help to accelerate these plans further. Logistics progress will also unlock the ability to make more of our inventory visible to more of our customers, which is a straightforward way to drive sales up faster as faster delivery times and larger selections increase customer conversion. Beyond that, the team is working on several near and medium term plans to improve the selection of more affordable cars we have for our customers. These plans start as simply as buying a greater quantity of less expensive cars and extend to changes to our inspection center processes to produce more of those cars and to other product enhancements that make it easier for our customers to find and purchase less expensive cars. In addition, we are using our temporary excess capacity as an opportunity to gain additional cost efficiencies. While we are always aiming for cost improvement, the constant pressure of growth often dominates our priorities and slows our progress. Across the company, we have each of our operational teams focused on process and product improvements to increase efficiency in an effort to reduce cost and improve our scalability as part of Project Catapult. We are determined to make the most of this opportunity. Next, I want to touch on the underlying demand for our offering. Here, the signs continue to look great. We continue to rapidly gain market share in this difficult environment as we grew by 14% while the market around us was shrinking. Further, we can look at subpopulations of our customers that are less impacted by affordability and interest rates to get a deeper view into demand. Our customers with FICO scores over 700 grew approximately 50% despite our logistics constraints and our ongoing suppression of inventory visibility. Lastly, I want to close with a couple thoughts on the long term. At any point in time, a company's success is driven by the sum of the structural forces that define an industry, by the macroeconomic backdrop, and by company-specific factors. In the long run, the macroeconomic backdrop disappears from that equation as it just becomes its average. Structurally, nothing has changed. We're in a fragmented 40 million unit per year market with significant margins and customers who are open to and excited about something new. From a company-specific perspective, we continue to make constant progress. During this period, we have excess capacity. We have a transitory reduction in the amount of energy necessary to keep up with growth. Well, we will not allow that to reduce our energy output, but we will not allow that to reduce our energy output in the least. We will simply point more of our energy toward system and process improvements to maintain the same aggregate level of relentless improvement. In nine years, we've gone from an idea to a company with over $12 billion in revenue, and we are still just 1% of our market. In nine years, we went from a company with negative gross profit to a company with over 4,500 gross profit per unit. In nine years, we went from a company that lost 30 cents of EBITDA for every dollar of revenue to a company that was approximately EBITDA break-even just last year. That constant progress has been the result of the opportunity our market has presented us, the power of the business model we have built, the quality of the team we have assembled, and the endless effort, creativity, and passion the team has poured in. Some quarters are bumpier than others. Unfortunately, in the real world, there are rarely perfectly straight lines to anywhere. While it might be a little harder to see this quarter than most, we remain squarely on the path to building the largest and most profitable automotive retailer and to changing the way people buy and sell cars. The march continues. Mark.