Earnings Call: Q1 2020

May 6, 2020

Good day, and welcome to the Carvana First Quarter 2020 Earnings Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. 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 Q1 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 Q1 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 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 Risk Factors section of Carvana's most recent Form 10 ks 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 ex Gift, which excludes the impact of 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 Investor Relations website. 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 face 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 impact 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 are thinking about and planning for the future. We began to see significant reductions in demand in the back half of March with the 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 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 precipice these customer preference changes will be, but we are optimistic. Due 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 are dealing with a very significant event. At that time, we determined that we are fighting a battle with 2 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 3 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, 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 $2,000,000,000 and broadened the set of customers covered under the agreement, and we completed a $600,000,000 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 5 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 3 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 to 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've 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 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 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 100 and 100 and 100 of people across the company voluntarily contribute their wages into the fund, including the Board of Directors and the executive team that all contributed 100% 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 lying in front of us, but we head into those challenges confidently because of the people standing beside us. Mark? Thank you, Ernie, and thank you all for joining us today. Q1 was a strong quarter for Carvana in light of the extreme disruption to our nation, industry and company brought on by COVID-nineteen. Retail units sold in Q1 totaled 52,427, an increase of 43%. Total revenue was $1,100,000,000 an increase of 45%. Both of these numbers reflect significant gains in market share, which are continuing through April 1st week of May. Total gross profit per unit was $26.40 in Q1, an increase of 232. Our growth in GPU was driven by strong retail GPU, which increased $2.99 to $15.81 our highest ever, driven primarily by buying cars from customers. Wholesale GPU was $23 a reduction of $60 primarily impacted by declines in industry wide wholesale prices in late Q1. Our other GPU was $10.36 a decrease of $8 This included a $97 reduction in finance GPU to $5.28 offset by an $89 increase in ancillary products to $508 In March, we completed our first non prime securitization and sold our prime loans that were originally intended to be part of our 2 shelf securitization program under our existing forward flow agreement. While lower than recent quarters, we believe our Q1 finance GPU demonstrates the resilience of our finance platform during an extremely volatile period. EBITDA margin was negative 12.6% in Q1, a decrease from negative 7.8%. EBITDA margin was significantly impacted by the reduction in demand brought on by COVID-nineteen during a key selling period in March. In addition, EBITDA margin in Q1 was impacted by 2.4 percentage points or $26,000,000 due to COVID-nineteen related non cash adjustments to asset carrying values that we do not expect to recur in future periods. In late Q1, we took several measures to better align our expenses with customer demand. Following the spread of COVID-nineteen, we immediately paused discretionary growth investments, including new hiring, travel and new facilities and IT investments. We also made the prudent but difficult decisions to rebalance staffing and marketing to better match demand. Although we made these decisions early and quickly, lower volume outweighed the expense reductions and led to a 4.6% increase in SG and A as a percent of revenue. In light of the uncertainty generated by COVID-nineteen, our expansion strategy has shifted to one that prioritizes risk while also ensuring that we are prepared for growth when a normalized environment returns. We have paused acquiring new inspection and reconditioning centers and vending machines. However, we are continuing construction on IRCs that were already in process and that have existing sale leaseback agreements in place. Additionally, due to the positive customer response to our touchless delivery offering, we plan to open many smaller markets that could be served by our existing logistics and delivery infrastructure with limited incremental investment. Following quarter end, we completed a registered direct offering of 13,300,000 shares, raising $600,000,000 and bringing our total liquidity resources on April 1 to over $1,000,000,000 These liquidity resources provide us with significant flexibility to operate our business under a wide range of operating and macroeconomic scenarios. In addition, we upsized and extended our existing forward flow agreement with Ally, providing additional flexibility to serve our customers. We expect $169,000,000 on a fully exchange basis shares in Q2. As we look forward, we are focused on positioning the business to be lean and flexible as we march toward our long term goals. Thank you for your attention. We will now take questions. Thank you. We will now begin the question and answer session. I'm curious if you could talk us through the inventory management in a little more detail and how you went about the $500 per unit inventory charge? And then curious if you could talk us through whether the environment has evolved into Q2? And if you see any reasons to believe the GPU environment can improve from here? Sure. So I think in general the way that we assess our inventory and determine its carrying value is a function of basically looking at what our pricing is and then what that means for what we're likely to receive in proceeds relative to the value that we acquired inventory at. And that's kind of a standard accounting framework for determining that. So that's how we go about assessing our inventory charges reserve level. In terms of how the situation has evolved, I think it's been a very dynamic situation in terms of what's going on with inventory pricing. We saw right when the pandemic hit, basically volume kind of dried up in the wholesale markets pretty significantly dropped down to probably 20% of normal levels. It stayed down at those levels for a while. We've seen it more recently climb up to closer to 50% of its probably pre pandemic expected levels over the last couple of weeks and that's been kind of a linear march up. We've also seen wholesale pricing kind of move up a little bit over the last couple of weeks as well. We've seen sell through rates, which is likely that any given car that's going through auction is actually sold to a buyer, also go up a little bit. So I think there's been some signs of stability there, but I think we still remain in a highly uncertain environment as it relates to vehicle values. And so that's something that we're assessing very carefully and watching. On the retail side, there's definitely been much more stability in pricing for probably a number of technical reasons, but we've seen much more stability there. I think what we've attempted to do by stopping our purchases and kind of trying to push our inventory values or excuse me, inventory levels down as quickly as we could is just make sure that we minimize our exposure to all that inventory that was purchased in the pre pandemic world as we view that as a potentially large exposure. I think we've had incredible progress there, marking that down 30% since the end of March. And so I think it's something that we're really excited about. But I do think that's something that we're paying very close attention to. Got it. Thanks, Ernie. And then I wanted to talk about the 90 day no payment offer. Curious if all customers qualify for that and maybe you could walk through the impact there in terms of top line. And I was also curious how that works in terms of financing those receivables and if there's a delayed impact there on those transactions? Sure. So on the 98 promo that is something that there are qualifying requirements for that. So for many of the customers that are then being sold through our forward flow purchase agreement, most of them are qualifying and they have an option to elect into that or not in the loans that are not being sold through our forward flow purchase agreement, which is approximately a third of the loans originating today, a significant minority of the customers are qualifying for that. We do believe that's probably had a positive impact. I think quantifying it precisely is difficult in light of the many, many different things that we've done over the last several weeks to ensure that we're putting our best foot forward in front of our customers. So I think that's been one of many steps that we've taken. The impact to GPU flows through finance GPU And so in the case of an insult to Ally, that's something that is predetermined and we worked with them given their experience with these offerings to customers in the past to size that appropriately. And so that's how that's all been working. Got it. I appreciate the time guys. Thank you. Our next question will come from Colin Sebastian with Baird. Please proceed with your question. Great, thanks. And hope everyone there is safe and healthy. I guess one follow-up on the April trends. How much have you been able to take advantage of some of the ad pricing deflation? How much has that been a catalyst for your ability to connect with potential buyers? Think might be liquidity needs incrementally for the balance of the year in different scenarios around the economy? And in general, is the Myron changing any of your strategic priorities, whether that's related to market expansions and vending machines, things like that? Thank you. Sure. So there's clearly been a reduction in in advertising costs. I think there's also clearly been an increase in impressions, more consumers are consuming more media than they historically have. And so I think that cost per impressions have fallen pretty dramatically. I think that impact is at least directionally offset by the fact consumers are also purchasing less in this environment across the economy. And up until several weeks ago, especially in automotive, but we've clearly seen price reductions. Those price reductions have continued over the last month or so. And so I don't think we know exactly where that's going to go, but it's there's clearly been reductions in the cost to get your message in front of consumers. And that's something we will continue to monitor very carefully going forward. Sure. And then on the liquidity question, I would start with the fact that we had about $1,000,000,000 actually a little bit more than $1,000,000,000 in total liquidity resources as of April 1, following close of our $600,000,000 offering. That gives us ample resources to operate in even deep stress scenarios. I think we think those deep stress scenarios are looking less likely than perhaps they were 3 or 4 weeks ago. But we have a lot of flexibility even in deep trust scenarios to operate flexibly. And then of course, in upside scenarios, have a lot of flexibility there as well. I think some of the drivers of that flexibility have been the operational changes that we have made to respond to the COVID-nineteen environment. Those include limiting capital expenditures, as I mentioned in my prepared remarks, to focus primarily on inspection and reconditioning centers where we already have sale leaseback agreements in place. And then from an operating expense perspective, obviously taking a number of steps to match our operating expenses to the current demand environment. And so the combination of those things, which really started to be put into action in the second half of March. And then we're sort of playing out those plans through the second half of March and then through April, leave us feeling really good about our liquidity position even in destress scenarios because of those levers that we have in the business. Thank you. Our next question will come from Lee Crowell of B. Riley FBR. Please proceed with your question. Great. Thanks for taking my questions. One, kind of wanted to just kind of a high level demand picture of thoughts as we have arguably lower air travel coming over the holiday season of summer. Thoughts on implied demand from more vehicles on the road, more miles driven? And then also just the kind of thoughts around the shift in tax date from April to July? On your first point, I think there's a lot of uncertainty and a lot of questions about what this new world means, both in the immediate term and in the longer term. I think what we say there's a lot of different data source out there, you can read about your expectations that personal ownership actually accelerates as a result of all this increases because more people don't want to take public transportation or choose not to partake in ride sharing. There are probably other effects like those outlined where people are traveling less in the air and taking road trips instead. I think all of those things the market share that we've kind of always been planning to go after and the market share that we've kind of always been planning to go after and take over time. We've been growing our business very quickly prior to this as a result of our extremely differentiated offering and all the customer preferences that that serves. And I think that in this new world, we now know the direction of a new customer preference, which is a preference for safety and minimizing unnecessary impact with other people that customers don't know as well. We know that that's likely to push demand in our direction and aid our goals of increasing our market share. We don't know how strong that impact will be. We don't know how persistent it will be. But it's pretty clear that's a directional impact. And we think that overall when assessing Carvana, what matters most is our market share gains. The market around us is extraordinarily large and we're still very, very small compared to that market. And then your second question, would you mind clarifying, I'm not sure I totally understood. Yes. Okay, perfect. So we the tax rate, do you mean tax refunds that showed up a week or so later this year, is that what you're referencing? Correct. Perhaps you're referencing the change in the filing deadline from March 15 to July 15. I think that could have some impact on customer behavior. We did see some tax refunds certainly come through before COVID-nineteen really came into force in the U. S. In Q1. But I think that any impacts from the shift in the deadline from April to July, I would think would just be lifted, consumers starting to get out there and spend again. I think it will be hard to disentangle those impacts. And I actually think the COVID impacts will win out over any impacts related to the tax deadline shift. Got it. Thanks for taking my questions. Our next question will come from Brian Nagel of Oppenheimer. Please proceed with your question. Hi, good afternoon. Thank you for taking my questions. So the first question I wanted, I guess it's more geared towards Mark, just on the financials. Clearly, as you talked about a lot, significant disruption here in the Q1. But as we look at that quarter and some of the maybe areas of cost, are there larger call outs that we should be thinking about as we try to get to what would have been a more normalized earnings trajectory for Carvana, either positives or negatives call it as the business had to flex in the second half of the month of March? Sure, yes. So the largest expense call out is the adjustment to asset carrying values totaled about $26,000,000 that I alluded to in my prepared remarks. That was really split between 2 things. The larger portion was related to adjustments in the valuation of finance receivable related assets that we hold on our balance sheet. Obviously, the end of March, which is when we do that evaluation, was a very turbulent time in financial markets. And so we took an adjustment to some finance receivable related assets that we hold on the balance sheet. The 2nd largest category was we did observe toward the end of March significant changes in the wholesale trading prices of used vehicles. And then we also saw a significant reduction in demand, which changed some of our expectations about the number of days to sale that we expected to experience in our retail business. And so when taking both of those things into consideration, we made some adjustments to our inventory value and some of those totaled $26,000,000 So that was a very large impact on the expense side. In terms of SG and A, I think the 2 biggest places where we saw an impact were really in advertising per car sold and compensation and benefits per car sold. The way to think about both of those is Q4 and then early Q1 or the 1st couple of months of Q1 is a big investment period for us as we invest in staffing and invest in marketing in preparation for one of the busiest times of the year, which is tax season. And so this year, we made those significant investments, but then demand in March was nothing like what we anticipated for obvious reasons related to COVID-nineteen. And so we certainly saw elevated levels of compensation and benefits and advertising expense per unit relative to what we otherwise would have expected. We also saw elevated levels on a per unit basis in the other expense line items, but those were the biggest 2. That's very helpful. I appreciate it. And then my follow-up question, as we look at the rebound in sales you called out here in Q2, so congrats on that. The question I have is, and again, I understand it's fluid right now, but is it are you seeing just is it just more of a return to normal, your normal customers coming back? Or is there some type of shift within that the demand is returning? And then the second is, is it ramping? Or is it continuing to ramp here or is it basically just reset back a bit? So I think there are many different data sources that you can look at to try to get a sense of what sales look like across the industry in April and in the last several weeks. And I think many of those data sets circle around the same answers, but don't precisely agree. For used car sales, I think they range from estimates of the entire month of April being down 55% give or take to as little as 45%. And in more recent weeks, depending on what data set you're looking at, maybe down 35% to maybe only down 20% to 25%. So I think those would be the estimates of what's happening in the industry over the last several weeks. In the month of April, as we said, we troughed at approximately down 30% year over year early in the month. We then came back very strongly to end the month barely down year over year at all. And in most recent weeks have been up 20% to 30% and have seen pretty healthy, steady, consistent growth over the last several weeks. So it's clear that we are outperforming the industry based on all the data we look at. When we look at the demographics of our customers and kind of try to get a sense of where that share may be coming from, our demographics were pretty broad based before. And so there are maybe some very subtle differences that we're able to observe, but I don't think any of those differences are strong enough to where we have certainty that there's real information in them or certainly that they would be worth calling out on this call. So I think in general, it feels like it's been a broad based improvement. There have been surveys out and there's a million of these surveys out, so you can look at many different ones. But one that came out several weeks ago, those put out by CarGurus prior to the pandemic. One of the questions they asked customers was something along the lines of would you consider buying a car online. And at that time, something like 32 of customers raised their hand and said I would consider doing that. Several weeks ago, which was still relatively early in all this, but several weeks ago that number had jumped up to about 61% of customers said they would consider buying a car online. So we do think that in this new environment, we have a very, very desirable offering. And so we think that bodes well for the medium term, but undoubtedly the market, the entire industry took a big surprising unexpected pretty exciting next pretty exciting next couple of quarters in several respects. But we think that there's still a fair amount of risk left. We still don't have a permanent solution for the virus. We still don't really know the degree of the economic impacts. I think there's a number of micro impacts in automotive that we're watching very carefully, we called out in our prepared remarks. So I think we are enthusiastic about the response that we've seen and most importantly, honestly, the way that the company has responded to all of this. But I think we're still trying to make sure that we're looking at the future through the lens of different scenarios and making sure the business is flexible and able to adapt quickly to different scenarios as we're not sure exactly what you expect out of the next several months. Got it. That's very helpful. Thank you. Thank you. Our next question will come from Sharon Zackfia of William Blair. Could you give us any perspective on what retail GPU might have looked like for you in April as you were kind of unwinding the inventory? And then secondarily on the finance business, I mean obviously the end of March was really rough. How do we think about finance revenue per car kind of going into the quarter and the rest of the year? Should that normalize back towards levels that look more similar to last year? Or is there something else that we should consider as kind of hampering that? Sure. Let's start with retail GPU. So I think, 1st and foremost, I think we are very pleased with retail GPU. And I think absent coronavirus, it would have been higher still. But we view that as a very healthy number. It was marginally impacted by our choice to stop purchasing inventory in late March. It's something that's kind of always happening in our retail GPU and flowing through our financial statements is that you're constantly buying cars and then as you buy those cars, those cars get reconditioned at the inspection and reconditioning centers, they get put on the site and then they have some probability of being sold at any given day. The cars that you put up that are sold quickly tend to have higher margins and the cars that take longer to sell tend to have lower margins. And so when you stop buying cars, you're kind of freezing your inventory in time and that inventory starts to age out. And so all else constant, the average margin that you observe flowing through the income statement is going to drop because time is moving and cars depreciate with respect to time. And so I do think that probably had a marginal impact. That will likely be a larger impact in the 2nd quarter than it was in the first. If you just kind of run a very simple mental model of saying you don't buy any cars in the quarter, then on average your days of sale would go up by approximately 45 days if you are selling those cars throughout a 98 quarter. And so you can kind of do the math on what would happen there. We are starting to now turn purchases back on, given both the stability that we're observing in the wholesale markets or least the relative stability that we're observing in the wholesale markets and the strong demand that we're seeing, as well as the fact that we've now brought our inventory down and reduced our exposure there considerably. So that will provide an offset to just that depreciation, but that is an impact in Q1 and is likely to be a larger impact in Q2. As we think about finance revenue per car, I think I'll start with we're extremely pleased with how our finance platform held up in this environment. We went and did our first non prime securitization in the quarter. We did that in an extremely turbulent market, but we didn't get that done before markets shut for a short period of time. And so we did not get the premium that we were expecting or likely would have gotten in previous periods, but we still got a very solid premium and we're pleased with that. And then we pivoted as securitization markets closed for a short period of time. And instead of doing a prime securitization, we sold those loans to our forward flow purchase agreement As would be expected in this new environment when kind of yields are moving up and spreads are moving up and loss expectations are moving up, The premium we received was less than we might have otherwise received. But it was again a premium that we were pleased with. So to me, I would view that as actually an excellent test and a sign of resiliency of the finance platform. We certainly wish it would have been as high a number as it was in Q4 and always do and believe that it will continue to go up even from the Q4 levels. But I also think that that number represents a very strong number compared to what the traditional dealership model gets. And it also represents a relatively small decrease relative to what many finance models that would take charges to credit being held on balance sheet would take. And so I think to us that's a very resilient number that we think is a great moment for the finance platform to demonstrate its strength not only in a positive scenario, but also in a downside case. Thank you. Our next question will come from Armintas Sinkevicius of Morgan Stanley. Please proceed with your question. Great. Thank you for taking the question. I'm just looking at SG and A and other is defined as IT expenses, corporate occupancy, professional services, insurance, limited warranty, title registration. And I'm assuming that on their own, none of these items really greater than $8,000,000 for market occupancy. But this line has been a bit of a black box here. And I was hoping that you could shed some color on what goes into other, why it's doubled over the past year? Is it capitalized software or is there something else driving that growth higher? Yes, we hit this a little bit on the last call as well. So I think there's basically 3 big buckets that you can think of as being in other. The first is technology, the second is corporate and then there's also some transactional expenses in there. I think in terms of the way that that's grown over the last year or so, we definitely have been investing in all of those areas. And so one of the big sources of investment in 2019 was essentially building almost from scratch this business of buying cars from customers. That definitely impacted all three of those big buckets that I just walked through. That was a major innovation and a major add to the business in 2019. And so it was a big driver of all the line items, but certainly the other SG and A line item as well. That's also true in Q1. All of those things that I just walked through are certainly be expenses that we'd be bearing in Q1. And other SG and A per car sold actually was up a little bit in Q1 despite a pretty significant drop off in demand in March. But those are the major buckets. That's certainly a bucket that we expect to lever significantly over time as we march toward our long term model. Okay. And just for the Q1, every single line item in SG and A was higher than the prior quarter. You mentioned some of the costs related to advertising and comp and benefits. But looking ahead to the 2nd quarter, what levers are you pulling here to manage what you see as an appropriate burn rate for the company? Any of these line items that we should be thinking of trending lower sequentially into the Q2? Sure. Yes. So we certainly expect declines on a per car sold basis in those SG and A line items. I think where does that come from? I think a big part of the expected decline on a per unit basis is the response that we've taken to COVID-nineteen. So in Q1, we were in a period where we were significantly investing. March is often one of our best, if not our best month of the year, which is common in the used car industry. And so we were investing really significantly in advance of expected busy season. And when that busy season didn't materialize, obviously that had a significant impact on our expenses per car sold that were ultimately realized in the quarter. Of course, we do expect, as I alluded to, through the actions that we've taken for per car sold expenses to decline in Q2. Our next question will come from Ron Josey of JMP Securities. Please proceed with your question. Hi, this is Andrew Bin on for Ron. Thanks for taking our question. With April sales rebounding to that plus 20% to 30% level that you guys talked about and understood things are yet to kind of normalize. But with significant share gains that you guys are seeing, can you talk about kind of with the recapitalized balance sheet, why you guys aren't leaning into advertising more? Is there a change in ROI or is there something else there? And then secondly, just kind of a big picture question. So Ernie, the way that you've built this business is really a fixed cost model. As you go through something like this, does this make you want to push more cost to a variable model? Or do you think about that any differently? Thank you. Sure. So what I would say is that I think I would start with we're extraordinarily happy with the way the last several weeks have gone from a demand perspective. We're being up 20% to 30% year over year after being down 30% year over year just several weeks before is a pretty dramatic reversal and has us back to pretty significant levels of sales. I think as we look forward, what we're trying to do is we're trying to balance the uncertainty that remains in the industry and the economy and with the virus with the upside potential that we clearly see. And I think that has us monitoring many different things very closely. We've talked a little bit about how we're monitoring the inventory prices in markets. We're definitely monitoring the credit markets. We're clearly very closely following demand that we're seeing on our website. We're paying close attention to marketing costs. We're trying to get a good handle on all of those things. We're trying to make sure that we move forward in ways that we believe allow us to take advantage of the situation when it's positive, but also ensure that we cut off the worst downside cases if things do turn a little bit negative. And I think that's an equation that we're trying to balance really carefully because we do feel like while trends are very positive, it is still entirely possible that we're in the somewhat early stages of this and we want to make sure that we get a good look at it before we make sweeping moves. But we will be monitoring all that and we have been making changes very rapidly and I would anticipate that we will continue to make changes very rapidly as information becomes available. I think this business is designed to swap variable cost for fixed cost relative to the traditional model. And we think that is absolutely the right move and in no way shape or form would we want to change that at all. I think the degree to which that ends up being the right choice is a function of the size of the business that you believe you can ultimately build. And prior to this, we believe that we could build a business that would sell 2,000,000 plus cars per year and that that would lead to us being the largest most profitable automotive retailer. I don't think we have any information that would cause us to question that in any way, shape or form. I think if anything, the information that's changed would potentially make us more optimistic about the speed to getting there or even the possible ultimate upside. So I think we feel very good about the way we've designed the business and think it positions us incredibly well to continue growth. I think we've also demonstrated a lot of flexibility in the model. This point is right that we've built a business that is set up to have higher fixed costs and lower variable costs. That's an incredible setup when you're growing very quickly and when you're looking at the long term with these large market shares. That's a really tough setup when you're looking at a discontinuous demand shock like the one that we just saw over the last 5 or 6 weeks. But I think the business also demonstrated its flexibility in our ability to pull levers and kind of size it down and pull in our wings and adjust quickly to a lower demand environment. And then it's shown us ability to spring back up over the last couple of weeks. So we feel great about the business that we designed and think if anything the future is brighter. Thank you. Our next question will come from Rajat Gupta of JPMorgan. Please proceed with your question. Hey, good evening. Thanks for taking my questions. I just had a couple of follow ups on the finance GPO questions. Could you have a breakout what the difference in finance GPO was in 1Q between the forward flow and the non prime ABF deal? And related to that, moving into the Q2 and beyond, is the plan still to monetize a majority of the loans through Ally in the near term or have you seen any change in the environment in the ABS markets that you might want to tap into in the Q2 as well? And then like what kind of impact do we expect a similar kind of premium in the Q2 as well overall as you saw in the Q1? And then I have a follow-up. Thanks. Sure. So at a high level, what I would say is on both pools, we received a premium. On both pools, it was less than we would have anticipated prior. We historically haven't kind of dove in at greater detail than that. So I don't think we'll start now, but generally speaking those pools we tend to monetize it at somewhat similar levels. Looking forward, 1st I want to start with Ally. I think Ally has been an absolute tremendous partner for us and reacted very quickly with us when we saw the difficulty that was emerging in the economy generally and as a result of the pandemic and also in credit markets and worked with us to upsize that forward flow purchase agreement to a $2,000,000,000 agreement. As you would expect in this environment, they are going to do better financially on those loans they originate as they should, A, because of the environment, B, because they were there for us to make sure that we can massage out that risk, which we're extraordinarily grateful for. So they will do better and that will all else constant impact finance GPU over the coming quarters quarter or 2. That said, the market also tends to react and interest rates move and the interest rates that we're able to charge in the market may offset that. It's hard to know exactly what's going to happen there. Looking into Q2 and trying to figure out exactly what finance GPU is going to be is definitely difficult. I don't think we have perfect clarity there in any way shape or form. We wouldn't anticipate it. Our best guess with fairly wide uncertainty bars around it would be for it to be somewhat similar to what it was in Q1. The securitization markets have begun to open up again. There have been several deals done over the last couple of weeks and there is anticipated to be many more deals done over the next several weeks. And so I do think those markets are opening up and the ability to monetize receivables seems to be improving. So I think there are reasons to be optimistic there, but I also think that remains an area where it's wise to kind of expect the unexpected there and plan for a little bit of uncertainty. So I don't think we want to give you precise expectations for what that will look like in Q2. That's a great color. And then just more of a housekeeping question, did the other expense line item, that was up materially, I believe some of that was due to the loss on the beneficial interest in securitization. Was there anything else that went into that that was material to call out? And also is that part of the $26,000,000 non cash that you talked about as well? Just want to clarify that. Thanks. Yes, that was that $17,000,000 is part of the $26,000,000 That's the larger portion that I was referencing earlier. And then that $17,000,000 is related to these finance receivable related assets. The biggest part of that is retained beneficial interest in securitizations and then there's a portion that's another finance receivable asset bonus payment essentially. Got it. Got it. So basically, the so $9,000,000 was the impact on like the retail and wholesale GPU, but the rest is mainly finance driven? That's correct. Okay. Thanks for the clarification and good luck. Thank you. Our next question comes from Rick Nelson of Stephens. Please proceed with your question. Thanks. Good afternoon. I'd like to follow-up on this dramatic shift from sales declines early in April to the increases that you're seeing later come up seems much more dramatic than what's happening in the overall used car business. I'm curious about GPU, were there changes there, stimulus checks to that impact the 90 day promotion, how you think that impacted? Sure. So I think those are among the things that are difficult to disentangle. I think we saw a rapid demand shock that pushed sales down. And I think from there, we implemented the 90 day promotion. We've put out different marketing materials that are tailored to this moment to reach out to customers through these less expensive marketing channels. The stimulus checks were received by customers. There seems to be general recovery happening in the market. And so I believe there are a number of forces that are flowing through there that are difficult to terms of the terms of the severity of the decrease in sales and in terms of the speed with which sales are climbing back. And so I think we're excited by that and we think that speaks to these shifts in customer preferences in our direction. But trying to disentangle the other impacts, I think is too difficult for us to want to take a swing at that. Got you. And I'm also curious, do you reduce retail inventory exclusively through the website or do you use the wholesale channel to liquidate auctions or other wholesalers? Through the website. All through the website. Our next question comes from Nick Jones of Citi. I guess one on the competition. You pointed to the Card Guru survey. So on DALLE, that's a marketing tool for them to try to get other dealers to start delivering. Have you changed your views on what competition is going to do to kind of the new way to sell cars? It seems like you might have more entrants now after this. Do you have any updated thoughts there? Thanks. So what I would say is that I think across the economy, across different retail verticals and certainly in automotive, I think there seems to be a broadly held expectation that e commerce will be a relative outperformer during this time and coming out of this time. And so I don't think that that's a secret. I think the survey that came from CarGurus is one of many surveys like it as this is clearly a very topical point at the moment. So I think what we would start with is we think that's really, really good news. I think the first order impact of consumers wanting to transact in the way that we've specialized for the last 7 years is a big positive. And then I do think that to some degree, you do need to then think through the second order effect, which is others being more inclined to try to build similar offerings to the offering that we've built. And so I think our expectation would be that that will likely happen. I think that was already happening to some degree and our expectation would be that will likely happen debatably more now. I think it's important to look at the market generally. This is a market with tens of thousands of dealers where the 100 players have on the order of a 7% or 8% market share. So it's an enormously fragmented market. It's a very large market depending on your definition on the order of a 1,000,000,000,000 dollars market. So it's really, really large. And so we think that that also points in the direction of not becoming overly competition focused because there are just so many small competitors as opposed to 1 or 2 large competitors as there generally are in many of these other industries. We spent the last 7 years We spent the last 7 years investing in the technology that gives customers a great experience online and investing in the supply chain that that great online experience unlocks that delivers selection to customers and building a brand for doing exactly that. And building e commerce business is an expensive undertaking. It takes a lot of time. It takes a lot of money. This is clearly visible across industries and it's hard. It's a hard thing to do. So I think would we expect more competition as a result of all this? I think the answer directionally would be yes. Would we view the underlying driver of that competition that consumers are more excited about buying cars online that that transition has been accelerated as a much bigger positive than the increase in competition is potentially negative, absolutely. So I think overall we're feeling very optimistic about the long term impacts of this or at least the medium term impacts of this. From a long term perspective it's hard to know exactly this will play out. Our next question comes from Mike Montani of Evercore. Please proceed with your question. Great. Thanks for taking the question. The questions I had are along the lines of 2 different areas. One would be with the Ally deal in place now, just trying to get a handle on the magnitude of profit pressure that we might anticipate on kind of like for like loans. And is that something that would remain in place over the course of the next year? And then there's a follow-up. Sure. So I don't think we want to quantify that right now because I think what happens in an environment like this is several fold. Loss expectations tend to go up which all else constant would reduce premiums. The yields that risk takers expect to earn tend to go up, which all else constant would reduce premiums. And then consumer interest rates tend to go up as well, which all constant tends to increase premiums and the balance of those things is a little bit hard to predict. Historically, the value of loans originated through automotive retailers and finance companies through that kind of combined stack has been fairly stable. And so our expectation would be for that to converge back to where it was prior to this and then continue its upward journey from there. I think the exact timing of all that is unclear. I think whether the next step is a positive one or negative one is unclear. But we've definitely taken steps to try to make sure that the loans originating are very desirable loans. We've tightened credit pretty significantly going into this in an effort to make sure that we were positioning ourselves conservatively. We modeled the way that we were tightening credit off of the way that credit was ultimately tightened and performed in the 2008 and 2009 financial crisis. And so we made the assumption that losses will deteriorate a similar degree. That's a more severe assumption than most rating agencies are making and securitization that are getting done today. We made the assumption that investor yields would go up to where they were in the 2008, 2009 crisis. That seems to be similar to or more severe than the implied yields that seem to be clearing in securitization market today, although that is a volatile market. So I think in terms of what we're originating, we feel very good about it. We feel like we thought carefully about what we wanted to do to credit. We believe that the tidy credit in those ways has likely reduced our overall volume by something on the order of 25%, which is very, very significant. And I think also speaks to how strong the demand is that we're seeing, because we from all indications, it seems that we have likely tightened credit more than the rest of the industry has. And so absent that tightening, we may be performing even better. But we've made those moves to ensure that we're positioned And if And if I could, just some additional color on the wholesale front. Just curious to see what you all are finding in terms of pricing over the past couple of weeks on the wholesale pricing? And then what's the read through for that in terms of two areas? One would be GPUs. So should we anticipate any further kind of mark to market adjustments on GPUs in 2Q? Or if you assume kind of current trends persist that 1Q markdown was enough? And then the second question would be on the consumer side and the trade in side, is the 70% 40% ratios kind of good to go again now given that you guys are once again in the market and purchasing cars for consumers? Or are you trying to be more deliberate and not scale that up as quickly as it was? Sure. I'll take the question on wholesale GPU. So we don't expect any of the adjustments that we talked about earlier to recur in future periods. However, I do think it's reasonable to assume that wholesale GPU will be lower than a normalized level in Q2. I think there's still an awful lot of uncertainty around how exactly the wholesale market is going to evolve from here. I think we started to see some volume come back, but certainly not at normalized levels yet. And so I think we'll see what happens in the market, but there's certainly a lot of uncertainty right now. And I think a reasonable expectation is that Q2 will be lower than normalized levels. And then as it relates to the customer source vehicles, I think neither the 70%, which was the percentage of cars that we're buying relative to the number of cars that we were selling nor the 40%, which is the percentage of cars that we're selling to customers that were previously bought from customers. Neither of those numbers were our long term goals and both of those numbers were on steep positive trajectories heading into this. We did pause purchasing through all channels except for customer trade ins early in this cycle. And so that will clearly push down that 70% number just directly because we're not buying cars, we are selling cars. That's just kind of mechanically drops at least in a transitory way. And then the 40% number is a function of when we turn purchasing back on, what ratio of purchasing coming from customers versus what is coming from other sources. And I think that there is uncertainty in what that ratio will be in the near term. In the medium term and long term, we would expect it to go back to where it was before and to continue to decline because buying cars from customers is the most fundamental and most economic source of cars that there is and so that's where you want to be buying cars. Given the dramatic moves in the market, buying cars from customers is effectively happening in a much less liquid market where you have single seller selling a single car once every many years, whereas the wholesale markets are much more liquid. And so if you have rapid price disruptions, those wholesale markets tend to virtually instantaneously adapt to that new environment, whereas the consumer market tends to be a little stickier in both directions. And so we will be monitoring both of those markets and getting a sense of where the better market is to acquire inventory in the near term. But in the medium and long term, our expectations would be to march back to where we were and continue from there. Thank you. Your last question today will come from Brad Erickson of Needham and Company. Please proceed with your question. Hi, guys. Thanks. I have a couple of follow ups. Ernie, you were just kind of talking about a little bit on the auction, the wholesale there, but just wanted to go a little further. What needs to happen really before those physical auctions can function normally again and just kind of how vital that is for you to have enough inventory to keep driving growth? And then I have a follow-up. I think the auctions are functioning fairly normally, again, in the sense that you can buy and sell cars and the volume is on the order of half what it would have likely otherwise been if it weren't for all of this. Prior to this, the majority of buyers to many of the larger auction houses were already buying cars online. And so many, many more buyers have moved to buying cars online, but the auctions are functioning. And so I don't think that, that is a fundamental limiter to moving back to whatever levels we would like to in terms of acquisitions. I think the thing that we want to be careful about is our expectations for what's going to happen to prices. Prices have stabilized and started to recover, but there are still reasons to believe that prices could drop again. There are many sellers that sellers or shadow sellers that are out there that have not moved inventory yet. And so we want to be mindful of watching that carefully and getting a sense of what that's going to do to the market. And so that's something we're keeping a careful eye on and that's part of why we've made the decision to manage our inventory levels down and reduce our exposure there. Now the opportunity is also extraordinarily large because the wholesale market has dropped pretty significantly in most recent weeks down probably on the order of about 12% And the retail markets have only dropped a couple percent. So the implied wholesale retail spread is much, much wider on the order of 9% wider than it normally is. And that does generate a lot of opportunity because it suggests that there are much larger margins that are normally available for the taking there. And so we're trying to balance the risk with the upside opportunity and I think all that coming together into our strategy we've been discussing on the call. Got it. And then just one last one and I apologize if you touched on this earlier, I jumped on late. But can you just give any sort of this is a question really for Mark. Can you give any sort of EBITDA loss expectation for the year under some plausible scenario if the business were to stay where it's at today with the April growth rates? Just any guardrails as to how to think about that or even like on a basis where what level the business would have to be at from here to be, say, EBITDA breakeven might be another way to get at it. Any help on that, Mark, would be great. Thanks. Sure. Yes. So I think I'll start with Q2. And I think maybe a way to summarize some of the directional things that you should be keeping in mind as it relates to that question. And a lot of these we've hit on this call so far. So we do expect GPU to drop somewhat meaningfully from Q1 to Q2 as a result of some of the dynamics that we were talking about earlier on this call, particularly in retail GPU. I think we also expect expenses per unit to meaningfully drop going from Q1 to Q2. And there, I think just to give a rough ballpark of order of magnitude, dropping down to sort of second half 2019 levels on SG and A per car sold. And then we think the combination of those two things will certainly lead to reduced EBITDA dollar losses in Q2 and then we would expect things getting better from there as well. Got it. That's great. Thank you. This concludes our question and answer session. I would now like to turn the conference back over to management for any closing remarks. I'd like to thank everyone for joining the call. We really appreciate it. And then I also want to turn to team Carvan out there in telephone land. Thank you to all of you for the job you've done over the last 6 weeks. We have crammed so much into that very short period. Everyone's been working unbelievably hard. The results speak for themselves. We've made tremendous, tremendous strides in the business and that's 100% because of how hard you guys are all working. So I truly can't thank you enough. It's admirable and we really, really appreciate it. Let's keep fighting through the rest of this. We're in a great spot. Thank you, everyone. The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.