Carvana Co. (CVNA) Earnings Call Transcript & Summary

Yes, go on. Just trying to look at...

Okay. Great. I'm getting a question in from one of the investors on the point that you mentioned, Mike, on like the price mix optimization, which was somewhat of a function of the inventory constraint and the environment. And like some of the checks we have been doing show that you haven't needed to be competitive on price in this environment. Like all the other retailer like CarMax room, like franchise dealers, it doesn't seem like there's a lot of like price discounting going on. So when you mentioned about the price optimization, did you try to suggest that once you're back to a more normal supply environment you would revert back to some of that discounting that you had? Or did I not interpret that correctly? I just want to make sure.

Yes, sure. So a couple of things. One, I think we've always said that we have not been optimizing our pricing for real-time cash flows, i.e., if you were optimizing just on the basis of elasticities, we would have been raising prices in real time historically. But both because we see incremental value to additional purchasers, leading to repeats and referrals and were to map out and building the brand and having more people experience the great customer experience we're delivering, see incremental value beyond that real-time transaction for additional customers. And then in this period where we were constrained, we did optimize a little bit differently than we historically have, but still believe that we offered the best value to our customers within the quarter. And then as we move forward and our constraints and operational chains in a better place, we'll probably be looking to make that optimization more like we have in the past.

Got it. Great. And just to close out the discussion on the GPU. On the other GPU, very strong results the last couple of quarters. Finance, in particular, ahead -- well ahead of pre-pandemic levels. On finance, can you talk a little bit about the sustainability of these levels as ASPs or maybe the spreads and customer delinquencies start to come back to more normal levels. But as an offset, you've always talked about these new products or new ancillary products that are coming up and then penetration within those ancillary products. So just looking at it from an overall perspective, like the overall other GPU line item, do those 2 balance out each other in a more normal environment? As ASPs and spreads moderate, whereas like you get more penetration on the ancillary stuff, is that going to be enough of a driver to offset more normalization on the finance side?

I think I can take that one. I think we've overcome our technical difficulties. I can jump back in. Thanks, Mike, for taking the reins there. So on other GPU, I definitely think there are multiple things going on. So first, let me talk about what we saw in Q2, and then I can go on talk a little bit about the long-term opportunities, which we think are significant. So in Q2, we certainly feel like we saw a tailwind in Q2 from the higher overall used vehicle prices. And the way that impacts other GPU is higher used vehicle prices leads to -- typically leads to higher loan sizes for customers who finance, and then that increases finance, GPU other things within that other GPU component. And so I do think we saw...

Yes. I think saw a benefit in that quarter. But then as ASPs normalize at some rate, we'd expect that to be rolling off and kind of moving accordingly.

Got it. I guess we'll ask Mark again. But I'll just continue here. Just wanted to dive into just customer experience a little bit and some of the changes that you've been seeing across the industry. Clearly, you've set a benchmark across the industry in terms of the ease at which the consumer can buy or sell a vehicle. And then some of the recent acquisitions in the space, where DMS providers are combining with some of these online platforms like Gubagoo and Roadster, what's your take on that? And then looks like some public franchisers are also moving aggressively into online offerings, Lithia with driveway, Group 1, with AcceleRide. Penske's collaboration with Cox, Asbury with Clicklane. So just where -- how do you try to continue to maintain that edge versus these new and upcomers? And what kind of investments have you been making in order to continue to do that?

Sure. So I think that there's clearly been a lot of development within the industry and a lot of people kind of moving in our direction. I think what ultimately matters here is just what is the quality of the customer experience that you are able to deliver and how differentiated is that versus others once the incremental variable revenues that you have access to, and how is your variable cost structure compare. Across all those points, we've designed a very different model cost structure by vertically integrating across the supply chain, and that clearly delivers best-in-class customer experience in the industry, as you can see, through our NPS scores as well as excellent unit economics and also just greater scalability than we've historically seen. I think all of that also just feeds back on itself. As we get bigger, we generally are getting better, and it improves the experience for other customers throughout the system, we've been making all sorts of investments across our tech product platform and trying to continually increase the speed with which we're innovating and staying ahead. But I think others will absolutely be continuing to move in our direction, and we just need to be running faster and making sure that we are pressing those advantages along those points of differentiation that I just mentioned.

Got it. That's helpful. I'm getting a couple more questions from the audience. So one of them is asking, given the vast size of the market, we would suggest Carvana is only just nibbling on innovator or the early adopters. Is this how the team sees the scenario? And what has to be true for Carvana to open up the next segments of the marketplace? And where are you investing to meet the needs of these subsequent types of adopters?

Sure. So I can take that one. I definitely think we agree with the idea that we're in the very early days in terms of our growth trajectory and the opportunity to take our version of online car buying to more and more customers. I think some of the key things that we see as drivers, as we look forward, we want to have the best selection. We are constantly working to expand selection for our customers that come to the website to buy a car with us. We want to have the best experience, which means the fastest delivery times, the most seamless transaction experience available when purchasing a car. We want to have the best value and continue to provide transparency and provide great value to our customers. And in doing all that, we also want to continue to build our brand and make sure that all of the customers out there know about all the things that Carvana has to offer. And so we think that those levers of providing the best selection in the most convenient manner with the best value and making sure we're building a brand that allows everyone to know about that offering provides a very long runway to continue to expand to new customers over the coming many years.

Got it. That's helpful color. Another question coming in. Earlier you mentioned in the past some of the constraints across the business. Curious if you can dive a bit deeper here on the production constraints and share with us the specifics of those constraints? And what are you doing to address them? How are you able to increase your weekly hiring class by 20% in July in a way difficult labor environment? What types of incentives are you providing? And how should we think about the durability of these expenses? How much is transitory relative to the environment versus what you would expect at this stage of growth?

Sure. So we're very focused on expanding production capacity. We think it's one of the key drivers of the model and one of the key governors of our growth going forward. And so there's 2 phases to expanding production capacity. The first is expanding our infrastructure capacity, which means adding new inspection and reconditioning centers. We've had a lot of success with that over the years, and they expect to open 8 inspection and reconditioning centers in 2022, which will be our largest year ever. And we feel like we're on a very good path to do that. And then we'll be looking to expand beyond that as we march towards our goal of selling more than 2 million units per year. The second phase of ramping production is it is about staffing up the existing inspection centers with multiple lines of production. And so each of these centers, you can think of them as basically being 4 production lines wide and then each production line runs 2 shifts. So you have 8 shifts of staffing. And we're placing a lot of focus on recruiting and retaining team members in our inspection centers. We have a number of initiatives ongoing within the company, focused on career pathing to allow employees start at the simplest levels within the inspection center, but then learn new skills and actually build a career within the inspection centers working their way up to more and more skilled positions. We also have a number of initiatives around accelerating the pace of ramping up within these inspection centers, and that includes, for example, making sure that we have the process and capabilities to be able to ramp 2 production lines in a single center simultaneously. Whereas in past years, we typically ramped one production line within a facility at a time. So -- and there are a number of other things, but those are -- a couple of examples of the types of things that we're focused on to make sure that once we have built the facilities, we are ramping them up as quickly and effectively as possible.

We have like a couple more minutes left, but I have like several other questions coming in the queue. Just on the SG&A, clearly, for a growth company like yours, you're investing well ahead of growth. Could you help like visualize for us some of these investments that are happening be it related to allowing you to source better? Do your wholesale transactions much more better? Just add more back-end technology? Could you just give us a little more flavor of what exactly is the investment going into? And how much of that can we say is like more fixed versus variable in nature as well?

Sure. Yes. So there are several types of investment that we're undertaking. I would say the first is just laying the infrastructure groundwork for growth in the near term. So for example, we're already looking forward to 2022. And indeed, in Q2, we were already looking forward toward 2022 and making sure that we're making the necessary investments to be able to achieve our goals on selling as many cars as we'd like to sell. And that requires -- these scale that requires significant upfront investment. You can't just turn it out overnight. You really do have to plan ahead when you're growing at these rates at the scale. And so one component, a large component of investment is it's just laying the infrastructure before you need it for future growth. A second form of investment, and the one that is, I think, probably closer to the question that you were asking is we are investing in many different aspects of the business to improve the customer offering, generate incremental sources of revenue in GPU, buying cars from customers is a tremendous success story on that front. And then we're also making investments in every aspect of the business. We've pointed before to that idea, we have 70-plus independent technology teams that are working on various aspects of the business. We continue to add to those teams and come up with new ones to drive additional opportunities in the business. And so I think the -- STC is a great example, but certainly, we're always thinking ahead and always looking for [indiscernible] opportunities to improve the customer experience, improve long-term unit economics, drive further growth. And those are the...

Maybe, Mike, do you want to end the train of thought there? I think you'll have to...

Those are the base points. I think that was pretty much the end.

Got it. Got it. Maybe if I can just squeeze in one more. On advertising, getting a question in here, in terms of the leverage there. We know -- with inventory likely to come back in the future quarters. Does your advertising expense per unit move higher versus the second quarter level? And then another question is more around like just leveraging expenses in some of your older cohorts. Like is there any data or any surveys that you have done where some of those consumers and those cohorts are maybe like directly visiting carvana.com versus maybe starting their search on Google or like the Cars.com or like a remarketing website? I think we can end that then.

Sure. Big quick ending question. I'll try and do fast. So I think have talked about the significant majority of our traffic is kind of organic or branded. It feels like building the brand as well as just the selection and overall experience at Carvana is going to be a massive long-term advantage and something that has been underutilized as a powerful tool within automotive retail historically. I think when you're looking at our ad spend, probably just a couple of things to keep in mind. One, the corporate level has been very slowly kind of levering over the last couple of years. Some of that is driven by our investments in advertising buying cars from customers, which kind of started in 2019, where that ad channel is sourcing additional cars for the business, which benefits GPU and the wholesale side, but -- Is it showing up on a per retail unit basis. So I think some of that leverage is masked to a degree. Additionally, I think our ad budget is kind of more fixed than not, given the lead time in consideration of this purchase. So that's one where we will tend to keep a steadier hand on that budget, and maybe only adjust certain smaller local channels to the extent that you face constraints. And more easily better served by addressing those constraints, and then getting to the other side and we usually make it farther along than kind of chirping wheel up and down on our advertising budget. So a lot of times, that kind of steady investments in building the brand when you face constraints. And that leads to fewer unit sales in a given period. It shows up as a bit less leverage. But feel like given the low level of awareness that we still currently have and how early we are in terms of market share, I feel like that's a very important asset that we're kind of building towards. And already at least half, if not a little bit lower than that, the level that we see at the corporate level. So feel good about the ability to continue to lever down over time towards our long-term model.

Got it. Great. I think we're running out of time here. Thanks so much, Mike. Please convey my thanks to Mark as well, and thanks for joining us today.

Absolutely. Thanks.