Good afternoon, and welcome to the Carvana Second Quarter 2020 Earnings Call. Please note, this event is being recorded. I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead.

Thank you, Andrea. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's second quarter 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 our call. The first half of 2020 has been an unprecedented and trying time for so many as the world grapples with COVID-19. It has impacted all of our personal lives, the way we interact, the way we live and the way we work. As we've managed through this dynamic period, we've put people first. Our operations and people ops team have done an unbelievable job taking care of our team and our customers. Thank you to them for everything you've done and everything you continue to do. In addition to the changes in the ways people interact, live and work, the pandemic has also led to changes in how people shop. It's created a disruption that has forced people out of their habits, resulting in change. Suddenly, buying cars online is becoming normalized. This is a big deal. We came into 2020 as the market leader with a bright future. We are the market leader because from the very beginning, our guiding light has been delivering the best customer experiences available anywhere. To do that, we've recruited the best people to take up our mission alongside us. We built a culture of tireless energy and ambition, and we've invested in technology and infrastructure necessary to deliver on the constantly changing preferences and expectations of our customers. And we've done it all with the genuine discipline of a long-term focus. These things are easy to say and hard to do. They are the things that matter in the long run. They are an enduring differentiator and the reason our future was bright before. And now, we have added the tailwinds of rapidly changing customer behaviors. Our future is even brighter now. In the immediate term, we are working to alleviate the operational constraints that have emerged as a result of our choice to defensively position the business at the onset of the pandemic, as well as the complications of ramping up at record speeds while COVID-19 continues to impact many of our markets. The same production team that delivered over a 10x increase in production capacity over the last four years is up to the task. Now I'd like to turn to our results in the second quarter. We grew units by 25% in the quarter, including decreases in sales year-over-year in early April and growth of approximately 40% later in the quarter. This growth was achieved despite managing through the most difficult period of the pandemic while facing severe inventory constraints. In the second quarter, we also saw a rapid rebound in GPU, which demonstrates the resilience in our model across each of our gross profit contributors, as well as the speed of our reaction at the onset of the pandemic. Managing through this unique environment has also led to efficiency on the expense side and demonstrated the long-term strength of our cost model. We continue to see exciting progress across our key metrics heading into the quarter. The most notable is that we hit our long-term milestone of buying 100% as many cars from our customers as we sold to them in July. This is an unbelievable achievement that has come much more quickly than we had anticipated. Congratulations and thank you to the sales team at Carvana, you're doing an amazing job. Moving forward, there's a lot to get excited about. As we always have, we're focused on building enduring value. We are positioning ourselves for the shifts we are seeing in customer preferences, investing in our offerings for buying cars from our customers, focusing on simplifying the automotive value chain, building out significant capacity in our supply chain, investing in initiatives that make us more efficient and scalable, and most importantly, continually improving our customer experiences through better technology, infrastructure, and processes. The customer experiences we deliver through our execution are the forces that matter most over time, and they have our complete attention. That focus and our long-term lens are what brought us to this point. They put us on the path to selling over 2 million units per year and to becoming the largest and most profitable automotive retailer. They've made us the fastest-growing retailer in the country. They've driven incredible customer experiences over many years. They've generated a constant unwillingness to be satisfied with our product that has pushed ceaseless improvement, and the accumulation of all that has made us the market leader. We are not content with being a market leader. We're on a mission: To change the way people buy cars. Our ambition and excitement are driven by the opportunity we see in front of us. And today, we are more excited and ambitious than we have ever been before. Mark?

Thank you, Ernie, and thank you all for joining us today. Q2 was a strong quarter for Carvana. Retail units sold in Q2 totaled 55,098 units, an increase of 25%. The sales growth started to rebound in April and continued to improve to approximately 40% later in the quarter, despite significant inventory constraints brought on by COVID. Total revenue was $1.1 billion, an increase of 13%. Growth in units was higher than growth in revenue, primarily due to lower retail average selling prices driven by vehicle acquisition mix and lower wholesale volume, driven by our pause in purchasing vehicles from customers earlier in the quarter. Record demand for our offering, combined with production capacity constraints, has led us to sell the available vehicles on our website faster than at any point in our history. This demonstrates our ability to turn cars extremely quickly, a noticeable positive for the long-term model. But we believe our current inventory is meaningfully limiting sales, making growing inventory our top company priority. Total gross profit per unit was $2,726 in Q2, a decrease of $406 year-over-year and an increase of $86 sequentially. Due to the dynamic nature of the current environment, we will focus our more detailed commentary on sequential changes. Retail GPU was $1,190, a decrease of $391 sequentially. Early in the pandemic, we made the decision to reduce risk by pausing purchases and lowering prices to reduce our inventory size. This led to higher average days of sale in the quarter and lower retail GPU due to the lack of new, higher-margin inventory coming to the website. Within the quarter, we observed a V-shaped pattern of retail GPU, with margins reaching their low point in May and seeing a sharp rebound in June as new vehicles were added to the site. We expect retail GPU to climb further in Q3. Wholesale GPU was $137, an increase of $114 sequentially. This was driven by record gross profit for wholesale units sold of $1,036 or $695, excluding the impact of our wholesale valuation adjustment in Q1. Gross profit for wholesale units sold was primarily driven by strong, industry-wide wholesale pricing in the latter part of the quarter, combined with strong execution by our team. Other GPU was $1,399, an increase of $363 sequentially. The sequential gain was primarily due to a $337 increase in finance GPU, driven by improved market conditions since the end of Q1 and credit tightening earlier in the pandemic. EBITDA margin was negative 6.2% in Q2, an improvement from negative 12.6% in Q1. Following the spread of COVID-19, we paused corporate hiring and adjusted our hours in our operating groups to more closely match expenses with current demand rather than bearing additional expenses for future demand as we have historically had. In total, we sold 2,671 more retail units in Q2 than Q1, while reducing SG&A spend by approximately $36 million sequentially. This led to a 3.7% improvement in SG&A as a percent of revenue compared to Q1 2020 and a significant improvement in EBITDA margin. We expect further improvement in EBITDA margin in Q3. To meet the accelerating demand for our online offering, we are actively taking steps to expand our production capacity. Following the quarter-end, we opened our ninth IRC near Columbus, Ohio, bringing our annual production capacity to nearly 500,000 units at full utilization. Additionally, we are on track to open two additional IRCs by year-end, adding more than 100,000 additional units of capacity at full utilization, and we have a pipeline of future facilities beyond those. During the quarter, we completed two equity offerings, bringing our total liquidity resources to over $1.3 billion at quarter-end. There were 171.4 million weighted average shares outstanding in Q2 on a fully exchanged basis, and we expect approximately 174.4 million shares on a fully exchanged basis in Q3. As we look forward, we are focusing on scaling our operations to meet demand on our way toward our long-term goals. Thank you for your attention. We will now take questions.

And our first question will come from Colin Sebastian of Baird.

Great. And I hope everyone there is healthy and well. My question is since you're not yet at full utilization levels within the existing IRCs, I wonder if there are any process improvements or other changes that you can make to improve throughput in the near term? And then secondly, related to advertising costs. Despite the inventory constraints, you're still spending a fair bit per unit. And I'm wondering if we'll see more efficiency on advertising as we move into the third quarter.

Sure. So on the throughput front, I would say I do think we're finding actually quite a few efficiencies now. We talked about when we came to the pandemic, we reduced hours. And then we ramped those up as we saw volume coming in, we started to get in front of that and tried to produce cars again. I think any time you go through an exercise like that, you undoubtedly find process improvements. And I think the tension we've recently felt, where we're clearly inventory-constrained has also forced us to find efficiencies that we maybe weren't looking at closely before, but there's been efficiencies there. We've also continued to roll out different technology innovations, including an entirely new system that runs our inspection centers that we expect to help us find additional efficiencies from there. So I think across the board, we've always been finding efficiencies in that process and all others. But I think in this stressed time, we've probably been able to find efficiencies even faster. Right now, what's holding us back is managing through these coronavirus waves, especially in the Sun Belt, where we have quite a few inspection centers. As we mentioned in our prepared remarks, we're choosing to put people first, and we're missing on the conservative side there. We're being very careful in contact tracing, sending anyone home who could have been exposed to someone with a case, and giving them paid time off. As that calms down, we think that'll be very helpful. We're also working to hire people as quickly as we can. The facilities have a certain capacity—currently, the nine we have open can nearly accommodate 500,000 units—but we have to staff those up to access that capacity. We plan to open two more by the end of the year, which will add roughly 100,000 units of facility capacity. However, staffing is crucial, so this unique environment makes hiring challenging. We're innovating on that front as well. This is the first time as a public company we’ve faced these inventory and reconditioning supply constraints, but as a private company, we’ve dealt with similar situations before. The team that grew our production capacity by about 10x in the last three and a half to four years is definitely up to the challenge. It may take a little time to grow through this, but we’re confident we will. On the advertising front, you raised an interesting point. We're clearly constrained in inventory, which means, for any given customer visiting the site, the odds of seeing the car they're looking for are lower, leading to lower conversion rates. Therefore, it makes less sense to advertise as much when we have excess demand as we do. We're trying to balance that against the long-term value of building our brand. It’s not a simple optimization equation. We should dramatically reduce our marketing expense if optimizing for short-term results. It's less clear what to do if aiming for long-term value. In the business of buying cars from customers, we’ve pulled back more on marketing there since we face constraints in that sector as well. We expect to see efficiencies over time as we continue to grow into demand and achieve the benefits of increased inventory, which will improve conversion.

Our next question comes from Brian Nagel of Oppenheimer.

First question I want to ask is about the limitations within the business model right now. Can we estimate how much that has actually impacted sales as the trends have been rebounding in the last several weeks?

I think there are lots of ways to estimate that. We probably want to stay away from trying to quantify too directly just because the different ways of estimating can cause you to arrive at fairly different answers. So I would point to the graph that we put in our shareholder letter under Objective 1 that shows inventory efficiency. You can kind of think of the shape of that graph as effectively just beating the odds that any given car is sold at any given day. That's at levels much higher than we've ever seen before. That gives a sense of the underlying demand that we are not able to access right now. Another useful stat is that at the quarter's end, near the end of June, we probably had somewhere between a quarter and a fifth the number of cars available for customers compared to prior to the pandemic. Generally, from a financial perspective, we can look at balance sheet inventory. However, what matters to the customer is the cars not currently in the purchase process with another customer. At the end of the quarter, as I stated, the number of cars was between a quarter and a fifth, a significant drop from where we were before. We feel there's significant excess demand that we are currently unable to capture, and we're working hard to unlock it.

That's very helpful. For my second question, which is unrelated, I want to discuss SG&A. In your letter on Page 9, there’s a table showing the components of SG&A by month. In April, SG&A excluding advertising was $3,760, which then decreased to about $2,600. This clearly reflects cost-cutting measures taken during the COVID crisis. How should we anticipate this trend moving forward? You mentioned in the limited guidance you provided that we can expect improved margins. How much of this SG&A decline do you think will be sustainable?

Sure. There's actually something valuable to reveal there. When we use the terminology cutting costs, what's imagined is a reduction in workforce that’s probably not sustainable. You wouldn't expect that in the future. We should probably think about that kind of experiment running our data a bit differently. Normally, when we're growing as we have been over the last several years, looking at growth in SG&A from quarter-to-quarter, there’s a lot going on. We're often growing our fixed functions while adding to development teams. We can keep our analytics teams the same size and continue to basically invest as we have in the past. We continue to see a lot of opportunities, and we're accelerating those investments. When looking at SG&A growth over the last months, you’re seeing something resembling variable costs. The story there is very good and strongly legitimizes our long-term model. Going forward, we'll shift back to a growth stance and carry people for growth we expect in the future. We've also decided to pause corporate hiring. We expect to make significant investments to continue growing into this incredible opportunity, leveraging as we have done for the last seven years, but it won't exactly be what we've seen over the last several months. Mark, do you have anything to add to that?

No, I think it covers it pretty well. We’re very excited about the leverage we showed year-over-year in SG&A in light of the significant development in the business, which we called out earlier. We're now at the point in July where we're buying more than 100% as many cars from customers as we're selling to customers, which is a metric and milestone that we laid out in our long-term model in late '18, and it's almost unbelievable that we've achieved it this quickly. Showing leverage year-over-year while also building a substantial and long-term valuable business is something we feel pretty good about.

Our next question comes from Sharon Zackfia with William Blair.

I guess to dive into the inventory issue a bit more, I'm not really clear if the issue at this point is the speed at which you're turning the cars or if it’s just the outsized demand or a combination of the two. And I was hoping you could maybe quantify what throughput is now versus pre-pandemic and whether or not there's any additional levers you could pull via outsourcing. Or how long do you think at this point it would take to get inventory into a situation where you think you're able to meet that demand you were talking about?

Sure. So let me first isolate where the constraint is. The constraint is in our ability to take a car we purchase, certify it, make it retail-ready for a customer, and get it up on the website. It's not a purchasing constraint today, especially with the gains we’ve seen in buying cars from customers. The constraint is focused on our ability to produce those cars and get them up on the website. Generally, a good estimate of how fast we're producing cars is roughly equivalent to how many we’re selling. If you're selling 55,000 cars in a quarter, that means you’re producing about 4,600 cars per week. All the growth in retail sales has historically accompanied growth in production capacity. Looking ahead, we now have a facility capacity of 500,000 units, equating to about 10,000 units a week. By year-end, we will add capacity for an additional 100,000, roughly 2,000 per week. Our challenge, therefore, is how quickly we can hire and train within those facilities. We're aiming to do so quickly, but we're not prepared to provide specific timelines given the unique environment created by coronavirus.

Can I ask a follow-up? Is this manifesting in any way that the consumer sees other than a lack of inventory? For example, are they seeing extended delivery times? Are there any ramifications for customer satisfaction?

I would say we have some constraints in the inside advocates' ability to answer customer calls and, to a lesser extent, in outside advocates and last-mile delivery, as well as in the logistics network. Those constraints are similar to issues we've seen in the past and are not nearly as pronounced today as the production constraint. However, we're alleviating those much more quickly, and they’re not a concern over more than, say, a month or so.

Our next question comes from Rajat Gupta of JPMorgan.

I just wanted to clarify that the end-of-quarter 40% number was a unit growth figure, not a revenue figure, right? Just to be clear.

Correct.

Can you quantify what July looked like? You mentioned it sustained into the quarter, but I'm curious if there's a specific number you could provide for July.

So we haven't quantified that. I think what we said is the strength we saw in demand continued into July. We actually continued to see inventory constraints elevate early in the month. We're working hard to alleviate those. It's clear that demand is significantly higher than the sales that we're seeing flow through the system. We believe our ability to produce cars directly influences the number of cars we can sell. We feel there's room for growth there. So we're focusing on production.

Got it. And then on the third quarter GPU, you mentioned that it would increase sequentially and be driven by retail GPU. But on the finance side, I mean, it was a strong number in the second quarter despite some uncertainty there. It seems likely that you should be able to sustain at least this level of finance GPU into the third quarter as well. Just curious about how you’re viewing that.

Sure. The key takeaway from the finance GPU is that it demonstrated the resiliency of our program. The pandemic obviously shook capital markets and had a strong impact. We felt positive about the numbers we had in Q1 despite everything. The rebound we saw into Q2 is exciting and highlights the strength of the program and the diversity of our various ways to monetize our receivables. The growth we saw, I believe, had two drivers. First, the speed with which we acted and the credit tightening we implemented in Q1, which made receivables more valuable. Second, the general macro environment improved, benefitting us as well. Looking ahead, you can expect constant improvement in the finance line item because we continually get better at underwriting customers and structuring credit. Capital markets will impact us, but we expect to return to 2019 levels and continue progressing toward the long-term model we outlined in late 2018.

Got it. Just one follow-up, if I may. Just on the competitive landscape. For the last few years, you've been the only major online player. Have you seen any impact on your business due to more brick-and-mortar retailers entering the space? Do you expect to see anything in the near term?

Sure, of course. I would start with this: I apologize for constantly reiterating the same point, but I do think this is a unique market, quite different from many retail markets. On the use side, there are 40 million transactions and, depending on what numbers you look at, around 40,000 dealers. This is a tremendously fragmented market that has historically had many players and has been very competitive with relatively undifferentiated offerings. As a result, it’s hard for one competitor to materially impact another until market shares get more concentrated. Our expectation is that this will continue to be the case. I can’t remember a time in our history when we've looked across time and determined that major competition was a driver of some line item that's moving. As more and more people turn online, it’s generally been shown that e-commerce is an expensive business to build requiring significant time and effort, along with infrastructure and technology. Such investment can’t typically be made by many players. So, we foresee a tendency for more market concentration over time. Furthermore, these types of business models benefit from economies of scale. As you grow larger, you provide better selection to customers and improve your brand, which can enhance price and delivery speed. All of this drives concentration. So, we view more concentration as the first-order impact, and if that happens, we'll be happy. One potential second-order impact is additional competition for marketing dollars, but we expect that to lag rather than lead in the market. We haven't seen evidence of this yet.

Our next question comes from Michael Montani of Evercore.

I just wanted to ask about the retail GPU side. You mentioned that you expected improvement, tied to increased production capacity as you hire individuals back to improve throughput. Is there more that goes into that, like pricing dynamics and acquisition?

Yes, there are some exciting trends in retail GPU. The most exciting is our achievement in July, when we bought more than 100% as many cars from customers as we sold to customers. This was initially around 10% to 15% in April when we paused purchasing. It has been on a straight line upward since then. That is a positive development which drives wholesale GPU and increases retail GPU since cars acquired from customers are generally more profitable than those purchased at auction. We're actually acquiring fewer cars from auction now than at any point since early 2018, which indicates strong dynamics in retail GPU. Additionally, we expect average days of sale to decline in Q3 compared to Q2, due to our proactive purchasing of cars, particularly from customers.

Then you mentioned meaningful EBITDA margin improvement quarter-over-quarter. I'm wondering where you anticipate SG&A benefits coming from, particularly in advertising versus headcount increases.

Yes, we expect meaningful year-over-year leverage in SG&A, driven by process efficiencies we picked up during the COVID period and technology gains as teams focused on scalability and efficiency. We also intend to invest, so we expect significant leverage while focusing on growth into 2021 and further investment in our technology pipeline. We expect to see improvements in SG&A in the back half of the year while improving EBITDA margin sequentially from what we saw in Q2.

Our next question comes from Armintas Sinkevicius of Morgan Stanley.

I wanted to touch on the inventory briefly. Ernie, I know you said that there are several outcomes here. If I look at the 40% growth that you have going on, if we were to assume that continues through the rest of the quarter, you're looking at something like 65,000 units for the third quarter. But if I refer to your chart regarding inventory efficiency, it shows about 3.5x for June, around 11,000 or 12,000 units are online now. Assuming 11,000 to 12,000 at 3.5x leads to the low 40,000 range. How should we think about the impact of the inventory constraint on your third quarter?

I think I would reiterate that we are clearly constrained, which is driving sales volume right now. You can infer the sales we were generating over the last quarter and how that was ramping up. We're currently producing at roughly that rate given inventory has kind of bottomed and just started to increase. The sales we generate will largely stem from our ability to produce cars, and we believe that’s our main driver, so we need to work quickly to grow production.

Okay. And then just regarding market expansion, you opened up 100 markets last quarter. How are you thinking about future market expansion in light of the uncertain environment? Will there be any markets opened this year, or do you plan to resume next year based on the coronavirus trend?

Our approach to market openings will largely depend on how COVID is contained and how our inventory scales up. We were able to open 100 markets in Q2 quickly with minimal investment, travel, or hiring because those markets were supported by our existing logistics and last-mile delivery network. It was beneficial for customers in those markets to access our offering during the COVID period. As we move forward, the situation with COVID and inventory levels will guide our decisions.

Our next question comes from Ronald Josey of JMP Securities.

I've got two, please. So Ernie, understood that as you ramp up operations, inventory should improve, and growth in trade is clear. However, given that you're acquiring fewer cars from auction, can you discuss the potential of CarvanaACCESS, which launched in the quarter?

Sure. Let me put CarvanaACCESS in the context of buying cars from customers. As Mark mentioned, we bought more cars from customers than we sold in July, which generates a lot of inventory for us. Some of those cars fit our retail standards, which is a major advantage as we've collapsed parts of the automotive value chain. We're now buying a car from a customer, preparing it for sale, and delivering it to the next customer efficiently. This removes a lot of friction that historically existed in the system. The retail side backs onto the purchasing side and vice versa. With our broad retail network, we can bid a bit more aggressively on customer cars, leading to higher quality inventory with larger margins on the retail side. For cars that don’t meet retail standards, CarvanaACCESS provides a way to get them to dealers or partners that purchase wholesale inventory efficiently. That innovation is another one of many steps toward our long-term goals in both retail and wholesale margins.

Regarding EBITDA margin improvements, we expect substantial leverage on a per retail unit sold basis in SG&A compared to year-over-year. The enhancements will stem mainly from retail GPU growth while experiencing SG&A leverage on a per retail unit sold basis. Additionally, any smaller items regarding merchandising or testing we’re doing on the website won’t be particularly large contributors to the EBITDA margin improvement discussed.

Our next question comes from Nick Jones of Citi.

Just two questions. First, I guess you’re back to being positioned for growth. If COVID-19 presents a second wave over the winter, would you take similar actions to those in April? Or are you in a different liquidity position allowing for aggressive moves, if necessary?

I think we'll have to see how the situation unfolds. I can assure you that we are in a significantly better position now than we were then. We have well over $1 billion of liquidity. We know the processes needed to manage through these situations and have dealt with varying state openings and closures before. We’re in a much better position.

Then my second question is just about shifting consumer behavior. Are you seeing any signs of deurbanization or customers choosing cars for safety over public transit? Are they being more patient in their online searches versus visiting dealerships, and can you acquire cars more efficiently than pre-COVID?

There's a lot happening within that question. On one hand, people may drive more now due to a reluctance to use public transportation or rideshare; conversely, they could be driving less if they're working from home more. We're still trying to determine the particulars of these shifts, as well as their ramifications. However, the most significant and notable change in customer behavior due to the disruption has been a shift towards online car buying, which we believe is accelerating e-commerce adoption overall. In the immediate term, we’re observing different behaviors and preferences from customers in relation to local COVID waves, but we're focusing on longstanding trends, working to support those enduring forces.

Our next question comes from Seth Basham of Wedbush Securities.

My first question pertains to pricing. Given the tight inventory dynamics, what is your thought regarding retail pricing? Do you have room to increase prices with the market at least or above market, taking these constraints into account?

Pricing is an interesting area right now. Across the board, we've seen substantial shifts in wholesale and retail prices across the industry. Our position has been to maintain considerable discounts for our customers consistent with our long-term view. However, we will take into account that we're in a unique environment where retail prices are rising, so we’re being thoughtful about that. Still, we aim to continue delivering significant value to our customers.

My second question is about your financing options. What are your thoughts about revisiting the ABS market?

Our sentiments remain the same. The ABS market, in a favorable environment, provides the most efficient monetization of finance receivables. In ideal times, we would likely show higher finance GPU if we accessed those markets. However, when times are not as favorable, ABS markets tend to be disrupted more quickly and can be expensive to access. Partnering with a trusted entity like Ally, while not as efficient in good times, has proven reliable. We will access ABS markets when conditions are favorable and seek to balance our approach between those considerations.

Last question: Last quarter, you wrote down eventual interest and securitizations on balance sheets. Did you change the valuation of those with this second quarter report?

Yes. We adjusted those upward, increasing the valuation by about $8 million in the second quarter, reflected in other income and expense.

Did you make any changes to the potential bonus payouts you adjusted last quarter as well?

I don’t believe we made any material changes to those.

Our next question comes from Daniel Powell of Goldman Sachs.

Two questions, if I may. First, can you tell us quarter-to-date how inventory is trending relative to your earlier comment regarding being at 1/4 to 1/5 of available units compared to demand?

As additional demand flows in, it has consumed our production gains. Consequently, inventory has remained flat, with a small increase recently. When we add inventory to the site, it gets swiftly removed by buyers. Our solution lies first in our ability to produce and then in sales dynamics. If we can produce faster than sales consume our output, we will begin to see a rise in inventory.

My second question is about advertising. As you look at your production capacity recovering to the desired levels, how aggressive might you consider being, given the secular tailwinds you're experiencing?

I believe there are intriguing opportunities to pursue. We moved swiftly to adapt our marketing efforts at the pandemic's onset. Within two weeks, we launched a pandemic-specific commercial focused on our touchless delivery. Recently, we introduced a new commercial highlighting that we've been pioneers of online car buying for seven years. We strive to make this message known. Currently, we see the cost per impression declining and top-of-the-funnel conversion rates increasing. Such developments are promising. However, we’re in a unique environment, making it challenging to extrapolate future expectations from current trends. Our historical understanding of the market, with 40 million cars sold and 40,000 dealers, suggests we must be cautious of short-term swings.

Our next question comes from Alex Potter of Piper Sandler.

I wanted to touch on hiring. You mentioned you've made considerable progress, but I’m interested in the potential constraints staffing might represent. It should be easier to find people given the unemployment situation, but can you discuss those dynamics?

There may be unemployment, but factors like unemployment payouts can complicate hiring efforts. It's a unique time that alters how people are approaching jobs. Our messaging must also adapt. That said, while we've made progress over the last month and a half, it's difficult to predict how quickly we’ll achieve our goals due to this unusual environment.

In terms of existing IRCs, can you quantify how many or what percent are impacted from a workforce standpoint due to COVID outbreaks?

It’s challenging to quantify that precisely. Generally speaking, wherever COVID outbreaks occur, we’re likely impacted if we have operations in that area. Recently, the Sun Belt has been affected significantly, and we have inspection centers in that region. Our operations and people ops teams have done an extraordinary job managing this situation, so we've had minimal transmission at our locations. Clients do get COVID, and when they come to the facilities, we check temperatures and help with contact tracing, which can cause disruptions.

Our final question will come from Brad Erickson of Needham & Company.

First, when assessing traffic levels on your site, how much demand is currently being turned away due to inventory constraints? Are those customers returning, or might some sales be permanently lost?

It may be a bit of both. Tracking customers online isn’t precise, but customers not finding their desired vehicle may shop elsewhere, leading to a loss of sales. That said, if they don't find what they're looking for, they may return later. It's a mixture of losing customers and retaining some to return.

Sure. My follow-up focuses on underwriting standards. Have those relaxed back to pre-pandemic levels, or are they still somewhat elevated?

We don’t want to quantify it precisely, but we continue to maintain significantly tighter credit than we had pre-pandemic. While it’s not as tight as it was during the peak, it remains cautious. This conservative approach is necessary as we don’t know where the economy will go in the coming months.

This concludes our question-and-answer session. I would like to turn the conference back over to Ernie Garcia for any closing remarks.

Thanks, everyone, for joining the call. We really appreciate it. To the entire Carvana team, thank you, you're doing an incredible job. I want to call out the STC team; you're on fire! Keep ramping! I know the inspection center teams are listening to this call; you've heard discussions that stress you out. We recognize the hard work you’re doing and sincerely appreciate it. Thank you for everything, and please keep it up.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.