Carvana Co (CVNA) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to the Carvana Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded. I'd now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead.

Thanks so much. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Second Quarter 2021 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 second quarter shareholder letter is also posted on the IR website.

Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer.

Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results 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-K and Form 10-Q.

The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise. Unless otherwise noted on today's call, 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. The second quarter was a landmark quarter for Carvana and one that will always play a central role in our story. It was the first quarter we delivered over 100,000 cars to our customers. It was our first quarter of over $3 billion in revenue. It was the first quarter we achieved $5,000 total GPU. It was the first quarter we hit $100 million EBITDA, and it was our first quarter of positive net earnings.

It was also the first quarter we made the Fortune 500 list. And to top it all off, we're now one of the 4 fastest companies to ever make the list organically along with Amazon, Google and Facebook. Those are some pretty great headlines, and they demand that we take a step back for a minute to put it on context. Five years ago, the year before we went public, we sold 18,000 cars in the full year. We just sold over 5x that many in a single quarter. Five years ago, our total GPU was $1,000. This quarter, it was $5,000. Five years ago, we lost $0.25 for every dollar of revenue we made. This quarter, we made money for the first time. That's a lot of progress in a short amount of time. When we evaluate that progress, sometimes we all have a tendency to zoom in too far and miss what really makes it all possible. So I want to try to tell the simplest version of our story that I can.

When we started 8.5 years ago, we were a bunch of ambitious kids with a shocking amount to learn. With the benefit of hindsight, it is now clear we had no idea what we were getting into. But we did know a couple of things. We knew customer preferences were changing. We knew technology was evolving. We knew the traditional way of buying a car had changed less than it should have. We believe we could do better for our customers. We knew that we are working for them and we had a plan.

We also knew we had a great team. We knew how to get the best out of each other. We knew how to spot people that could make us better. We know how to have fun. We believe in what we are doing. We knew we could figure out the rest along the way, and we didn't know how to quit. Those are important things to know. That simple knowledge got us to today, and today is a pretty good day. Along the way, we've learned a lot. One of the important lessons is that everything worth doing is hard. So doing worthwhile things means there are often more hard days than easy ones.

From here, I hope we don't get complacent. I hope we keep fighting. I hope we take on the hard days and keep doing things worth doing. I hope we keep learning. And I hope that we never let the new lessons crowd out the things that we knew at the beginning. It seems like that might be the classic mistake that people make over time. I hope we avoid it. And I believe that we will.

If we do, our future is bright. The things that were true at the beginning are all still true today. Customer preferences will always change, and technology will always evolve. As a result, there will always be opportunity. We're nowhere near realizing the opportunity -- the potential that we saw from the beginning and additional potential reveals itself all the time. We'll keep chasing it. And as long as we keep our eyes open wide enough, we'll never catch it. The march continues. Mark?

Thank you, Ernie, and thank you, everyone, for joining us today. Q1 was a record quarter for Carvana. We set company records across many key financial metrics and made significant progress toward our long-term goals. Retail units sold in Q2 totaled 107,815, our first quarter over 100,000 units and an increase of 96%.

Total revenue was $3.3 billion, an increase of 198%. This strong growth came despite operational constraints we faced during the quarter. Total gross profit per unit was $5,120 in Q2, the highest level in company history. It increased $2,394 year-over-year and $1,464 sequentially. Since Q2 2020 was impacted by COVID-19, I will focus my remaining commentary on sequential changes. Retail GPU was $2,022, an increase of $811. Our growth in retail GPU was primarily driven by 4 factors: one, increased buying cars from customers; two, an appreciating retail market pricing environment, which was partially offset by higher wholesale acquisition prices; three, optimizing our vehicle mix and pricing to match our production capacity and available inventory goals; and four, moving beyond the majority of the COVID-19-related transitory costs we experienced in Q4 and Q1.

Wholesale GPU was $547, an increase of $320. This was driven by record gross profit for wholesale units sold of $1,254 and record wholesale unit volume. Record gross profit for wholesale units sold was primarily driven by strong industry-wide wholesale pricing and increased wholesale unit volume came from growth in buying cars from customers. Other GPU was $2,551 an increase of $333. This sequential increase was driven by a positive impact of higher industry-wide vehicle prices on average loan size and another strong quarter of execution by our finance team.

The EBITDA margin was positive 3.4%, an improvement from negative 6.2% in the prior period. We achieved our second quarter of positive EBITDA and our first ever quarter of positive net income. On July 1, we upsized our inventory floor plan facility by $500 million to $1.75 billion, bringing total liquidity resources to nearly $2 billion, giving us significant flexibility to execute our plan. We are executing well and remain focused on building our network and increasing our production capacity to meet demand.

This quarter, we demonstrated significant progress on these fronts, but our rapid growth in both retail units and buying cars from customers led to strains throughout our operational chain that we are also focused on alleviating. In Q2, we grew average weekly vehicle production by 20% sequentially. This increase was driven by additional staffing efforts and the opening of our 13th IRC near Cleveland, Ohio. Across these 13 IRCs, our total annual production capacity is approximately 750,000 units at full utilization. We remain on track to open 8 additional IRCs by the end of 2022, bringing our total capacity at full utilization to over 1.25 million units.

Looking forward, we expect to complete a record year on retail units, revenue, total GPU and EBITDA margin in 2021. We expect retail unit growth to continue to be governed primarily by our operational capacity. In the second half, we expect revenue growth to be more closely aligned with retail unit growth as we move beyond prior year comparison periods that were most impacted by COVID-19. We expect total GPU over $4,000 for the full year, significantly exceeding our mid- $3,000s outlook at the beginning of the year and marking our eighth consecutive year of substantial gains.

Finally, given the demand we are seeing, we plan to continue to invest in the business, both to catch up with current demand and to prepare for growth in 2022 and beyond, leading to a typical seasonal pattern in SG&A per retail unit sold in the second half and close to breakeven EBITDA margin for the full year. We are extremely proud of the progress we have made as a company over the last several quarters, navigating the COVID-19 pandemic and the unique environment, all while delivering rapid growth and managing through operational constraints.

Zooming out, our results relative to the industry leave us more optimistic than ever about our long-term model and path toward our goal of delivering more than 2 million retail units per year and becoming the largest and most profitable auto retailer.

Thank you for your attention. We will now take questions.

(Operator Instructions)

Our first question comes from Zack Fadem of Wells Fargo.

Congrats on the progress. So it's been 2.5 years now since you gave your $4,000-plus long-term GPU target and 8% to 12% EBITDA margin. And if you think about all the impressive progress you've made, particularly with $5,000-plus GPU today, and then you think about all the ways to take profitability structurally higher, added scale, ancillary services, maybe a marketplace offering. Curious how you would frame today the long-term guidepost for the business. And to what extent it's now fair to assume that they could be higher than you initially thought in 2018?

Sure. Well, so let me start with -- yes, I think that model that we put out in late 2018 was built on kind of deep structural forces inside automotive retail. We did a lot of work trying to understand what normalized margins are across all the different products and what different groups were able to achieve. And I think that it's pretty deep and foundational. And so we feel really good about that model. And so let me start there. I think we've undoubtedly made a ton of progress. I think if you look at 2016, the year before we went public, we had $1,000 GPU. We just had $5,000 for the full year. We're expecting $4,000-plus. I mean, that's obviously a lot of progress. And it's happened across every single one of the line items.

We've also made a lot of progress and some of the expense line items as well as we continue to make progress there while we're simultaneously growing. So I do think that things look really good there. We feel like it's a bit early to update the long-term model, given that this is the first quarter that we've been inside the long-term gross margin target. So I think we want to stick with that model, but we're obviously extremely pleased with the progress we've made so far.

Got it. And then on the pricing environment, obviously, a big tailwind today for both the top line and gross profit per unit. But as we look to the second half of the year and anticipate some softening in the wholesale and likely retail market, curious, first of all, if you could talk about where you think pricing is headed. And then can you talk us through just what to expect in terms of the sales and gross profit outlook if the top line -- or if the pricing environment were to soften? Would appreciate the color there.

Sure. So let me start by trying to characterize the environment. I do think what characterized this environment is very rapid vehicle price appreciation in both the wholesale market and the resale market. And it's unlike anything that I've at least ever seen in my career. So I think we've seen very dramatic price appreciation. Now in a normalized environment, that doesn't have huge implications for margin. Generally speaking, the gap between wholesale and retail markets are fairly stable. And as price levels move up or down, kind of both markets move in tandem, and you don't see super dramatic differences.

I think what's unique now is the change happened so quickly. And I also think many different acquisition sources for vehicles perform differently. So if you look at many franchise dealers, for example, that are buying many cars off-lease or buying many cars off-trade in, you've seen pretty dramatic increases in margin. If you look at some independents that are heavily reliant on just the auction market, you're generally seeing a deterioration in margin despite the increasing price environment because wholesale prices moved up faster than retail prices moved up.

So I think what's unique in this environment is the speed at which things have moved and then the way that, that has played out differently across different vehicle acquisition channels. For us, we've built this channel of buying cars from customers that has performed very well for us over a long period of time. We've made continual high-quality progress in both the number of cars we're buying, the cars we're buying relative to retail sales and the profits that we're making on cars that we buy from customers. But I think that channel is especially valuable in this environment where kind of auction spreads collapsed so much.

So I do think that there was something of a tailwind that we experienced there. The size now precisely is difficult, associating that precisely with kind of the ASP movements is also difficult because I do just think that these are abnormal moves that we're seeing right now. But I think that it also led to another kind of interesting impact that has implications for the remainder of the year and kind of our overall financial performance. And so what that was is because vehicle prices were appreciating so quickly, there were more customers that were willing to sell their car, interested in selling their car in this environment than in any other environments.

And that led to record increases in the number of cars that we were buying from customers, faded anyway in absolute terms or relative to cars that we are selling to customers. So we saw a lot of volume there, that did drive some expense. That expense was more than offset by the margins that we were able to realize on those cars.

And then that also led to constraints across the business, which showed up in a little bit higher SG&A than we probably would have otherwise experienced as we've tried to catch up to the demand that we're seeing because a lot of times those kind of incremental levers that you pull are a little more expensive than the levers that you pull if you are able to kind of move in a more orderly fashion.

So I think those are all the things that we feel like are unique in this environment are moving. I think it is difficult to precisely call the way that will all unwind and unfold in the back half of the year, but our best estimates are taking into account the outlook we provided.

Our next question is from Sharon Zackfia of William Blair.

Congratulations on profitability. I guess a question on how consumers are dealing with the pricing environment, I mean, are you seeing any increased bulk at prices? Are you having to adjust your inventory mix at all? And is there any kind of change in the average credit that you're seeing?

So I think in general, the adjustments that we've made have been relatively subtle, and they've been more focused on trying to alleviate constraints and trying to be able to grow inventory faster than they've been driven by differences that we're seeing in different demand pockets. I think in general, we feel like we've got more demand than we've been able to satisfy across all demand pockets. So we've made some subtle changes in the mix of cars that we're buying to try to get them through the reconditioning centers faster so that we can kind of scale inventory more quickly.

But other than that, nothing too dramatic. On the credit front, I think across the industry, there's been high-quality credit performance. The loans that we originate, we've seen the same, but we do sell those loans off. And so the direct impact of that after the moment of sale is not something that flows through our financial statements.

Our next question is from Ron Josey of JMP Securities.

Great quarter, guys. Ernie, I just wanted to ask, I think we're a quarter in the launching of the Pacific Northwest. Just as you launch newer markets, and Carvana is now, what, 75%, 80% of the population in terms of reach, just talk about the benefits of awareness that comes with these newer markets? In other words, is it easier -- it's easier now to launch new markets. You're seeing that every single new market that you launch. But when you open up a whole new quarter like the Pacific Northwest, talk to us more about how the brand has reacted there. That would be helpful.

Sure. I mean, I think we're continually building the brand out. I think if you look at our website traffic, for example, it grew 25% quarter-over-quarter and very significantly year-over-year, more than 100% up year-over-year.

So I think that's at least a reasonable measure of the brand that we're building. And I think that we still probably remain in relatively early innings of kind of building that brand. I think as we've discussed in the past, the way that we like to think about that is step 1 of building a brand is generating awareness. Step 2 is generating understanding for what you do, and step 3 is generating trust.

And I think we're making positive headway all the time in all those different dimensions. But we're still just an 8.5-year-old company that's growing very fast. And even in this last quarter, we sold over 100,000 cars. But when you look at that relative to the size of the market, that was still roughly 1% national market share.

So I think it's still very early days. But undoubtedly, the progress that we're seeing in building brands does help us. We've seen these trends across time where our newer cohorts ran faster than older cohorts. We continue to see that.

All the other trends we've seen across cohorts, we continue to see -- we're obviously seeing very rapid market share increases across all of our cohorts that are supporting the growth that we're seeing. So I think what's most important now is just continuing to grow and then getting the positive feedback that shows up across the model through that growth by being able to have more inventory available for our customers, faster delivery times for average customers.

And I think adding the Pacific Northwest was kind of the last big chunk of the U.S. that we weren't connected to and connecting that up is a big deal. And now we've just got fill-in to do from here, and then we just got to keep scaling.

Our next question comes from Brian Nagel of Oppenheimer.

Great quarter, congratulations. So the question I have -- you talk again, I mean, just despite the -- just the utter strength in the quarter, to the degree of which sales were still held back by some spike trade. So I guess the question I have there is, how did that progress through the quarter? So as you exit the quarter, how well are you running against -- is your supply running against the demand?

So I think we probably through the quarter, for the most part, got progressively more constrained. And I think the driver of that is what we discussed in kind of earlier in the call, which is we saw so much growth in our offering of buying cars from customers. We grew retail units by 17% quarter-over-quarter, but we grew very dramatically in the number of cars that we bought from our customers. And that is really what led to increasing constraints. That was hard to foresee, and we weren't prepared for that degree of growth that quickly.

So I think that's what led to increasing constraints and those constraints can kind of show up across the business just because they're driven by buying cars from customers, doesn't mean that's the only impact they have. When customers are selling their car to us, they're calling in and they're talking to advocates. There's market ops going up and picking out those cars. We've got the logistics networks involved with that.

So as we see growth in any part of the business, it generates constraints across the rest of the business. So I do think we saw those constraints show up. I also think this is a relatively difficult environment to alleviate constraints, but we've made a ton of headway that we're extremely excited about.

So for perspective, in July, we increased our average weekly hiring class by about 20% versus what we saw in the average of Q2. We're extremely proud of that. The speed of that move is really strong. The team has done a tremendous job just kind of leaping to action and trying to get back in front of this.

And I think it's been a tough environment to do it. I think that's a testament to the quality of opportunity that we offer to applicants that are looking to come to Carvana. I think it's testament to the career path that we've built over time and a testament to the team that's been ramping up very quickly.

So I think we're making a lot of progress. We're extremely focused there for the last year. We've been talking about the constraints of inventory, and we've been working hard to alleviate that. This last quarter, we grew inventory, which was exciting. We would like to grow it a lot more from here.

But then kind of the benefits of kind of alleviating that constraint to a degree as well as the massive growth that we saw in buying cars from customers led to constraints in other places and now we got to get to work alleviating those and I think we're well on our way.

That's very helpful. I appreciate it. My follow-up question, just maybe moving to [latest deals] just with regards to market share. So clearly, on the Carvana models, [the company is] in the space for some time now. So the [query] is the economy starts or pulls out of COVID, obviously not a big store situation, but are you seeing with your model and increased market share opportunities, maybe as a result of some less efficient retailers having struggled further through the crisis?

Sure. So I think there may be some like very high-level macro trends that result from the crisis and persist that have some impacts on the opportunity. But I think that, that's very secondary to just what we can do as a company. I think a useful way to kind of think about how things are moving is -- so far in the first half of the year, roughly speaking, sales volumes across the industry have been roughly flat to 2019. So that just gives you a sense of kind of where we are, obviously, they dropped in 2020, and they've come back and they're kind of level to 2019 right now, give or take a little bit.

In that time, we've increased our population coverage by about 21%, but we've increased sales by more than 2.5x. So we're clearly taking very significant market share. I spoke earlier a bit about the cohorts, if we look at our individual markets or cohorts, those continue to ramp up very nicely. The trends that we've seen are in place there. We now have a handful of markets that are over 3% market penetration, including some of our oldest and most mature markets.

So I think that's all really exciting, and that's all happening in the context of us being heavily constrained right now. So I think the opportunity is really, really large. We feel like as long as we keep delivering great customer experiences and executing and growing, that's going to be the primary driver of our growth.

Some of the macro factors you pointed to may also kind of push in our direction a bit, but we think it's mostly about the customer experiences we deliver and our own execution.

Our next question is from Rajat Gupta of JPMorgan.

Congrats on the strong quarter. Just the $2,000 retail GPU number, is there any way to unpack that a little bit in terms of how much of that is temporary versus structural improvements that you might have seen in the business that might sustain not just like in the second half but into next year and beyond? And then just as a follow-up on the SG&A leverage, you talked about like some of the incremental transaction that it cost you to do more sourcing. But in terms of just looking at the fixed cost leverage, if I just look at like the comp and benefits and the other SG&A buckets, both of those buckets seem to grow more than the number of units you have grown over 2Q '19.

So the question there is like, are you -- do you feel like you're having to do a lot more handholding of the customer during the transaction that you may have liked? I'm just curious how that's going and how that's progressed over the last couple of years. And really like when can we see that fixed cost leverage start coming through in the model?

Sure. Great. Yes. Well, let me start by taking the retail GPU question, then we'll move on to the SG&A question. So on retail GPU, we had our first quarter over $2,000 retail GPU. We've come close a couple of times before. I think we've done $1,850 before and $1,700, not including adjustments also in 2020. But the $2,000 is a record for us. I think if we think through the drivers, I think maybe it's helpful to think through it sequentially from Q1. The biggest driver there was certainly the performance buying cars from customers.

Ernie talked a little bit about that, but we had a great quarter for buying cars from customers, set record volume, both in the absolute sense and as it ratios to retail units. And so that was a big driver. There were several other factors that drove retail GPU as we compare to Q1. Those include -- we think there was a net tailwind from the appreciating retail environment, but that was certainly partially offset by rapidly rising wholesale prices.

And so -- as Ernie alluded to, I think we haven't seen, when we look out across the industry, dealers who rely heavily on auction or have a higher auction share of inventory do quite as well as those that are really buying a lot of cars off lease and enough trade in. So -- but we do think there was some impact there.

In addition, we made some vehicle mix and pricing optimizations, doing things like trying to buy cars that we think could get through the reconditioning centers more quickly, for example. And then finally -- we did finally move beyond the transitory cost -- or the majority of the transitory costs that we experienced in Q4 and Q1. And so I think when -- and those costs being related to COVID-19, particularly the later waves in Q4.

So I think when you put all that together, I think we feel really great about our retail GPU progress. Buying cars from customers continues to be a strong driver of the improvements in the business, it's something we're going to look to continue to do going forward. Obviously excited about our progress. So I'll stop there on retail GPU.

Moving to your question on SG&A. So I think there's several drivers of our investment in SG&A. So as we take a narrow view into Q2, there's a few things I'd point to. The first is that we bought significantly more cars from customers in Q2 than we did in the prior quarter. And there are expenses associated with that. So obviously, there's big selection and GPU benefits associated with it as well. There's also expenses associated with that. And so looking at SG&A on a per retail unit basis doesn't necessarily capture the investment that we're making to drive the business of buying cars from customers as well. So that's point one.

Point 2 is we are absolutely investing for the future. That investment takes a couple of different forms. First, we're already preparing for 2022. And we're a large business that's growing at extremely fast rates. And what that means is you have to plan ahead to ensure that you have put the necessary infrastructure into place to be able to satisfy very large amounts of demand at large scale.

And so we're already investing for '22, that's a component of it. And then finally, I would say, we're also investing for the long term. So as Ernie alluded to in some of his prepared remarks, we see opportunities everywhere in the business. I think opportunities to improve the customer offering, opportunities to drive additional revenue in GPU, by making the business more efficient. I think there are many, many places where over a multiyear horizon, we see very significant opportunities. And we're going to invest in those opportunities. We think it's the right thing to do for the business and for our long-term shareholders. And so those would be the 3 points that I would make on SG&A.

Our next question is from Michael Montani of Evercore ISI.

Congrats on the quarter. I just wanted to ask about on the GPU front, maybe one way to come at it would be $1,500 step-up sequentially, so sort of a 40% improvement versus 1Q. And then if you do the same kind of math versus 2019, 2Q stepped up $750, which was like a 30% increase. So does the incremental 10% relate basically to the price appreciation in the market. Is that kind of a fair way to think about it?

First of all, I think probably when you're thinking about margin, thinking about it in dollars instead of percentage terms is probably a better way to think about it. I think generally speaking, margins kind of move more in dollars than they do in percentage terms across the industry. So I would start there. I think there's a lot that is different this year than 2019. But I think the thing that we would point to is that is the biggest by a long, long way, is just buying cars from customers.

We just saw a massive, massive increase in the number of cars we're buying from customers and in the profitability of buying cars from customers. And I think that flowed through. And I think I want to be careful to not be too repetitive with the GPU answer that Mark just provided. But I think everything that he outlined is also correct.

And I think you can kind of look back at how some of those line items have moved historically and kind of what some of our different high watermarks have been and get a sense of what the size of some of those impacts might have been. But I think that's probably the best I can do to try to be helpful there.

And then maybe to follow up on that, I guess, in terms of the second half outlook for the GPU, it seems to be implied like $3,500 to $3,700 in the back half. And so I guess I just wanted to understand, is that kind of -- how much of that is sort of normal seasonality would you say, versus maybe some other factors we just need to be mindful of?

Sure. So I think at a high level, we're trying to provide you a sense of how things moved in the quarter and what we think are some of the unique drivers in the quarter. And then I think from here, we basically expect some normalization of some of those factors paired with normal seasonality. And then that's taken into account in our outlook, which we raise from mid-$3,000s to over $4,000 for total GPU for the year, which is obviously a huge move for us to be making is something that we're extremely excited about.

Our next question is from Nick Jones of Citi.

Maybe 2. One, how are you thinking about inventory levels normalizing? Is this kind of over the next couple of quarters? Is this going to go into next year? I guess, how are you thinking about inventory availability normalizing kind of from here? And then as it does normalize, there's kind of fits and spurts of kind of choke points in the logistics network, do you feel like you'll be well positioned when things do normalize and you can really kind of meet the demand particularly in your new markets because in the past, there has been times where there's been some logistical choke points? Just any thoughts on that would be great.

Sure. So maybe let me try to break that in a piece. I think what's going on at the industry level is probably most specifically kind of driven by OEM new car manufacturing issues. And I think that, that is likely kind of the key driver that has led to vehicle price appreciation in both new and used. I think trying to figure out when that will normalize is a very difficult question. I think everybody who has tried to do it over the last years has at least so far, been wrong.

And I think maybe simplified model to use for thinking about that is just that those OEMs have complicated global supply chains, which obviously includes the microchips that everyone is paying close attention to but include many other parts as well. And as we've seen different waves of COVID, kind of move through different parts of the world. We've generally seen supply constraints show up in their supply chains, and that's kind of driven vehicle price appreciation. That seems like that's probably the number one driver of kind of the unique behavior that we're seeing in the market right now. And I -- we wouldn't want to make a specific estimate of when that's likely to normalize and how that would work through their supply chains. But we think that that's probably the underlying cause.

As it relates to our inventory, I think we're in a pretty simple place right now where what we want is more. We feel like we've got significantly more demand than we're able to handle. And we think that we have a good understanding of the relationships between inventory size and conversion. And so we [would] have significantly more inventory.

And we're working incredibly hard through the addition of additional inspection centers to adding lines at inspection centers. We've got a plan to have 1.25 million production capacity by the end of next year. So we're working really hard to build up more capacity and also to ramp up our production as quickly as we possibly can. I think we've seen great progress there. We grew retail units by 17% last quarter, but we were able to grow production capacity by more than that, which allowed us to build inventory. So we're just going to keep moving as fast as we can there and trying to build inventory as quickly as we can.

And then as it relates to the other constraints that emerge across the business, I think inventory is definitely the stickiest and hardest to resolve of the constraints that we can face because once you kind of get behind the production relative to sales, you've got to work to do to catch back up to sales. And while you're doing that work to catch up, you're shrinking your inventory. And then once you're there, you're still just kind of holding flat. Now you've got to get in front of it to build inventory. That's a long process.

And then it's also obviously a very complicated operational undertaking. So we've been hard at work on that one for the last year-plus. And I think we've made tremendous progress, especially in light of the several COVID waves that we've seen. But we'll keep working on that one.

On the other constraints, historically, at least, we've generally been able to resolve those much faster. Those are generally not as complicated. They don't necessarily have physical facilities related to them, they don't necessarily have zoning and construction timelines associated with them. So generally, we can move faster than the other operational groups. As I said earlier, we've made a lot of progress heading into early Q3.

We did get pretty behind in Q2 as we saw so much growth in both retail and buying cars from customers, but I think we're making a lot of progress right now. So on that one, I think our goal is also just to move as quickly as we possibly can. And we think that when we look at the back half of this year, we think that sales volume is likely to be driven by the speed at which we can alleviate those constraints. So it has our full attention.

Our next question is from Chris Bottiglieri of Exane BNP Paribas.

So I was hoping you could talk more about your third-party listing business. This seems to have really grown a lot recently. Like what are your early learnings from this business? Are you seeing your third-party partners change their behavior like in terms of their business model any way to kind of adapt to this third-party model? Then I have a follow-up question.

Well, I apologize in advance, but I think we're going to probably disappoint you a little bit with our answer there. So I think we've continued to make progress there. We're testing different things. We're interested by the results that we're seeing, and that's why we continue to test it, but we don't have anything additional to add at this time. So I apologize there and hopefully, we can do better on your follow-up.

Got you. I was going to follow up to that, so I'll pivot and do a different angle here. So let's go to the financing business instead then. So it seems like, like just looking at your latest deals, like the risk spreads versus the swap rates have gone lower the agencies lower than loss expectations on your kind of cumulate net losses. It seems like you're paying lower returns to residual buyers. So I kind of want to get a sense like how much of this is a product of the environment just lower losses and just like we're in this weird credit bubble versus how much of these like recent improvements I'm speaking to, how much of that do you think is structural and kind of sticks beyond kind of COVID if there's a way you can kind of answer that or frame that?

Sure. Well, I think we've made continual progress on our other GPU line item over a long period of time. And I do think that, that's driven by many things. I think the finance team has done a great job, both kind of the operational finance team that optimizes our credit scoring and pricing and structuring and then the kind of finance -- finance team, for lack of a better description that executes our deals. I think both those teams have done an unbelievable job and driven a ton of progress. I also think the market is obviously a pretty solid financial market. So I think that all is constant, that's helpful.

And then I think as a result of the environment, we've seen some increases in ASP and then that does lead to increases in average loan sizes. And generally speaking, the premiums that we earn on those loans are kind of percentage premiums, is probably the easier way to think about it. And so there's probably some scaling that goes with increasing prices. I think -- if we take a step further back from there, this line item along with all the other GPU line items is a multiyear constant progression toward our long-term financial model. And I think that there's a lot of really positive long-term drivers there.

I think in the immediate term, trying to forecast exactly how that will evolve over the next 2 quarters, I think, is not simple to do in light of all the different drivers that are causing it to move around. But again, that's taken into account the outlook that we provided in the shareholder letter.

Our next question is from Edward Yruma of KeyBanc Capital Markets.

Before I ask the question, I actually sold a car to you guys the other week and it was the most painless experience I've ever had with anything with car-related, so my hat's off to you. I guess just tipping back a little bit, I know you guys are in the process of setting up, I think, 8 more IRCs before the end of '22. From a staffing perspective, I understand there's a lot of technical know-how and expertise required. How difficult is it to staff those and maybe more importantly, staff existing centers to get productivity higher?

Sure. So I mean I think opened up this call with everything worth doing is hard. So I think nothing is easy. I don't want to make it sound easy at all, but I think that we've built a really strong team that helps us do this over time. We've built really strong recruiting functions, really strong training functions. And I think we've also taken advantage of the structure of our business model to be able to offer really interesting opportunities to people out there that are looking for a new job. And so what I mean by that is our inspection centers are really big kind of assembly line facilities. And what's nice about that is it lends itself to building a career path inside the facility. And the rest of automotive retail, generally speaking, at least, you have very skilled technicians that kind of take any car with any problem and put on a single lift and they kind of do all the work associated with that car. And that requires that they have a lot of deep knowledge across everything that they would need to know about that car and any other car that might show up.

What's really nice when you've got to scale at these large inspection centers, is we can kind of break down those tasks into many little pieces, whether it's inspecting the car or photographing the car, different parts of the reconditioning process, figuring out what options and features are on the car so that we can merchandise it. We've got all these different steps in the process so we can really build a career path that is exciting for people. So we can bring people in early in their career and then they can build a career with us.

And we've put a lot of effort into that, not just in kind of building the facilities in that way, but in being able to market ourselves in that way to possible applicants. And in building check-in and development milestones and compensation milestones to support that as well.

So I think we've really worked hard at that. And that same story is true in customer care with the inside advocates. It's true in market ops with the outside advocates, it's true in logistics. We've redoubled our efforts in all those areas to kind of really push for what we're calling careers, not jobs inside of Carvana. So we're putting a ton of effort into that. I think that it's enabled us to build a foundation that is scaling very quickly, and it's enabled us to build a foundation that is scaling in an environment where a lot of companies are having a tough time right now, finding talent.

And I think that we're doing a [good job] at least so far at finding talent.

So that's something that we're extremely proud of. And then on your comment of selling your car to us, really appreciate that. Thanks for giving us a shot. Glad it went well, and you are partially responsible for the constraints that we are facing.

Our next question is from Mike Baker of D.A. Davidson.

Okay. Two questions. One, it looks like if my numbers are right here, the ratio of like inventories that's immediately available for sale versus the inventory that's on your website, it's about 30%. It's been actually pretty consistent in that range, although at the beginning of 1Q '20, it was closer to like 75%. I understand this because you're having any trouble with the constraints because you're sourcing the inventory so quickly. But I guess the question is, what's the right ratio? What should that look like? And what gets it more in balance? Is it that you obviously can produce things quicker? Or as ASPs come down, is there a risk that fewer people are going to want to sell their car to you because right now, everyone knows you can sell your car for tons of money to you guys and your competitors?

Sure. So I think the most important metric is driving inventory up. That's the most important. And inventory in the eyes of the consumer is immediately available inventory. So just getting the absolute number of immediately available cars up is the most important measure. I think the ratio that you're referencing, you want to head as close to 1 as you can head, and you'll never get there, right?

And the more constrained you are, the lower you'll be because that means that you've got a larger percentage of your cars that are kind of in the process of customers checking them out and locking them and they might be in the purchase process. And that's because you have a very high level of demand relative to the cars you have on your website. If you're constrained in logistics, then your delivery times might be a little longer than you would like and so that will show up in kind of longer lock times and a lower proportion of inventory immediately available as well.

So I think as we alleviate constraints, that proportion should go up. But I think the number that is kind of most precisely important is just the absolute number of cars that are available to customers as that's what a customer sees and that's what represents the probability that a customer with any given set of desires finds a car they're looking for when they look through our site.

Okay. Okay. That makes sense. A follow-up and a little bit different, perhaps. As you guys get more mainstream and your advertising a lot, and everyone sort of, I think, is learning about Carvana. Are you seeing a different customer, and is it less of an early adopter, the sort of online early adopters maybe were earlier in the process? And so now it's a different kind of customer, and this follows up on a previous question. How does that impact -- how you need to staff or how you need to think about operations as people who're maybe less online-savvy or sort of newer to the whole online thing start to learn about Carvana?

Sure. Well, so let me start with this. Our goal is to build an experience for customers that's better in ways that I think are independent of demographics or psychographics. So we want to deliver to customers the best value, the best selection and the best experience. And so we're working very hard to build an offering that is appealing to absolutely everyone. I think from the earliest days, we saw a mix demographically and psychographically that was pretty similar to the mix of the average used car buyer in the U.S.

And generally speaking, that's been pretty true across time as well. I do think there's more evidence as we get a little bit bigger that we're seeing some of the SKUs emerge that we probably expected from the beginning. We're seeing a little bit of a younger buyer, all those comps, and not by a lot, but I think a little bit younger than any other competitor out there. We're seeing [more diverse buyer], again, not by a huge amount, but more diverse than anyone else out there, at least according to our surveys, what we're generally seeing a more affluent buyer directionally.

But I think that we do have some directional SKUs. Again, they're not super strong. And so that would be what we're seeing from a demographic perspective.

From a psychographic perspective, we've got our values and one of those values, your next customer could be your mom, something that we think is really important is that we build an offering that works great for -- all use it, personally in this case, my mom. And I think for this to work great for my mom, we can't be building something that's just for early adopters. And I think, our scale and kind of our continued growth suggests that we're continually making progress there. And that psychographically, we are broadening our appeal. And I think that's what's driving the growth that we're seeing.

So I think we're working hard to just continue to improve in all those dimensions that we think matter the most, which is best price, best experience, best selection. And if we do that, we think that we've got an offering that's going to appeal to a lot of people over time.

Our next question is from Naved Khan of Truist Securities.

I might have missed it, but did you guys talk about -- maybe share any trend from July, how the other growth looks like so far into the quarter? And then I have a follow-up.

So we did not provide any color on July. We obviously provided Q2 numbers and our outlook for the remainder of the year. And so that's taken into account in the outlook.

Okay. In terms of just us trying to model it out, obviously, there are a lot of moving parts. But is it -- is it fair to assume that at least the capacity increase that you've already put in place, that's how you're thinking about growing the business for the balance of the year kind of fulfilling that and driving utilization higher?

We're certainly positioning to try to alleviate operational constraints as quickly as we can. I do think that we've got work to do to catch up to where we are. As I said, the growth that we saw across the business, but most specifically in buying cars from customers was very dramatic in the quarter. And so we got behind. And now we're working very hard to alleviate that. And I think we're making a lot of progress and feel good about it.

Our next question is from Seth Basham of Wedbush Securities.

My question is also around inventory because if I'm on the site today, I can see as many as 50,000 units listed for sale. What is the available-for-sale inventory today? And a follow-up to that is, what percentage of the 50,000 units are marketplace? And when do you define that as being material?

Sure. So first, let's start with just units that are available for sale. So in the shareholder letter, we provided data for the average of Q2, which was 12,800. That was increasing throughout the quarter. The average of Q1 for perspective was 9,300 cars that were immediately available for sale. So we're on an upward trend there, and we expect to continue that upward trend.

So hopefully, that's at least directionally helpful there. We don't break out different inventory types. And I think, generally speaking, our thought on that would just be when we expect some feature that we've built to start to -- when we expect that it could materially impact our results, we'll probably spend more time discussing it. But until that time, we'll just stick with the higher-level metrics.

And then also, maybe helpful. Yes, sorry, let me look -- hopefully helpful as well. So our inventory peak in terms of total available inventory for perspective was approximately 25,000, kind of immediately prior to and immediately after the onset of COVID in March of last year. So even with the inventory growth that we have seen -- in Q2, we were still approximately half the peak that we were prior to the onset of COVID. So we're obviously at much, much lower levels than we'd like to be at. I apologize I interrupted, please go ahead.

Okay. Yes, that's a pretty dramatic difference to 12,500 quarterly average in the second quarter versus over 50,000 listed for sale right now. I can't imagine that over 35,000 units are not available for sale right now, either by yourselves or by a third party. Am I missing something there?

So I think I would stick with the kind of the numbers we've given you on immediately available units. And then there are obviously a number of units as well. The customers are checking out at any point in time considering purchasing or maybe in transit to those customers in different locations. So hopefully, that's at least directionally helpful.

Our next question comes from John Colantuoni of Jefferies.

I just wanted to make sure I understand the interplay between production capacity and unit sales. So the directional outlook says second half unit sales will be governed primarily by production capacity. And then separately, it looks like you ramped your operational team hiring rate by 20% in July and set a record for weekly additions in the most recent week. I know there's a lot of moving parts to ramping production aside from hiring, but should we interpret the comments about hiring to infer the unit sales could see a sizable increase sequentially in the third quarter relative to the second quarter?

Sure. Yes. So I think you should interpret the increase in hiring to suggest that we're booking up across the sum of our operational groups and across our corporate and technology groups as well. But obviously, the vast majority of people are across the operational groups.

So that includes inspection centers that will show up first in kind of increased production capacity, which will allow us to kind of work through the cars that we've already purchased, but we have not yet produced. And then that will cause those cars to show up in available inventory. And then it will also show up in alleviating the other constraints that we have across our other operational groups where we're behind today but working hard to catch up.

Our next question is from Billy Kovanis of Morgan Stanley.

This is on behalf of Adam Jonas. Just one question, Ernie, from the feedback you're getting from customers, what are the 1 or 2 areas of the consumer experience where you can make the biggest improvement?

I think I'm going to -- there's probably 1 million areas across the experience where we can make it continually better across time. But if I had to pick one thing that is most important today, it's alleviating our constraints. I think our constraints can show up -- despite our constraints, we continue to deliver experiences that are meaningfully above anything else available anywhere in automotive retail, and we're continuing to see NPS scores that are meaningfully above anything else in automotive retail. But those constraints can lead to friction versus what we would otherwise be able to deliver if we didn't have constraints.

So those constraints can show up in longer delivery times, slightly higher odds of missing a delivery time and having to reschedule it. They could show up in registration delays. They can show up in all kinds of different ways. So I think the most important thing that we can do right now is catch up to the demand that we're seeing because the machine that we have delivers extremely high-quality customer experiences. And it's also built in a way that it absorbs errors that we make in any given customer experience. You always make mistakes here and there. And we're built in a way to be able to absorb that as well when we're properly staffed to the volume that we're seeing. And today, we're behind, so I think that would be the number one area to focus.

I think taking a longer-term lens, we've spoken before about how we have 70-plus product groups across Carvana, I think every single one of those product groups has a multiyear road map that is extremely exciting with myriad improvements all over the place. So I think there's a lot of things that we're investing in today to try to continually make this experience even better for customers. And I wouldn't want to single any of those out, but I think there's a lot of opportunity.

That concludes our question-and-answer session. I'd like to turn the conference back to management for closing comments.

Thanks, everyone, for dialing into the call and thanks for your questions. To the Carvana team, we only get to have our first profitable quarter onetime. And I think I always find myself thanking you on these calls, and I can always hear that it doesn't come across as completely sincerely as I wish because it's an odd venue. And so I hope that you hear our absolute gratitude. This is an unbelievable milestone.

For those of you who have been here for a long time, there was -- there was times 6, 7, 8 years ago when today it was extremely hard to see. And we fought a million battles together, and we a lot of things out, and we've continually improved. And the whole time we've stayed together, we fought through COVID together, we've just done so much, and I'm so proud of it. And so thank you all for your contributions, and please always remember that this just does not happen without you, [it's a sum of its parts]. And we together make up the parts of Carvana.

So thank you so much. We have a ton to be proud of. I hope you put your feet up and kind of take a moment to be proud, and then I hope you take them down and kind of don't let it go to your head and kind of get your head in the right space because we still got a lot of building to do. But we've done a lot so far. We really appreciate it. Thank you all.

Thank you. That concludes today's call. Thank you for joining us. You may now disconnect your lines.