Operator: Ladies and gentlemen, thank you for standing by and welcome to the Shift’s Fourth Quarter and 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Henry Bird, Vice President of Strategy and Finance.

Please go ahead sir.
Henry Bird : Good afternoon and welcome to the Shift Technologies fourth quarter and full year 2020 earnings call. Joining me on the call today are co-CEOs George Arison and Toby Russell and CFO, Cindy Hanford. During our remarks, we will make some forward-looking statements which represent our current judgment on what the future may hold and while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statement.

Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statement. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise after this conference call. During the course of this call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. With that said, I will now turn the call over to George.

George Arison: Good afternoon, everyone.

Thank you everyone for joining us today. 2020 was an unusual year for everyone corporations, employees and consumers. The pandemic disrupted our lives and was particularly challenging for those working on the front lines, like Shift’s operational team members. At the same time, the pandemic accelerated the economy’s digital transformation. Shift’s online solution for buying and selling used cars was well positioned to continue servicing customers when many others could not.

While this period has been hard for everyone, the last twelve months has made me confident that this digital adoption in the used car market is here to stay and we believe that Shift is uniquely positioned to thrive in the years to come. In the fourth quarter, we delivered meaningful growth and not only on our top-line, but also internally as a company. In 2020, we prioritized top-line while investing to improve the business in alignment with our strategic growth objectives. We grew the company pinpointed where we can do better. 2021 will also be a high growth year and we are acutely focused on execution.

Ultimately, we believe we laid the foundation for strong results both in the near and long-term, which is reflected in our guidance for Q1 and full year 2021. I want to thank everyone for continue effort to making 2020 the milestone year that it was for the company. The way our business has adapted and grown makes me more excited than ever about the opportunities lie ahead as we embark on another record-breaking year for Shift.

Toby Russell: Thank you, George, and hello everyone. Through the many challenges of 2020, we at Shift found opportunities to grow our business and create shareholder value.

In October, we completed our merger with Insurance Acquisition Corp in connection with which we started trading as a public company. At that time, we outlined our three core drivers of growth, which are; to increase penetration in our existing markets; expand our business to new markets and; grow our ancillary product offering to provide the additional support our customers expect while enhancing our revenue and margins. In Q4, we made progress on each of these growth drivers while strategic and tactical actions we took have set the business up towards significant growth and success in 2021 and beyond. In many respects, the fourth quarter was a record-setting period for the company. We set new records for both units sold, and revenue selling 4,666 total used cars and earning $73.4 million in revenue, representing 147% and 168% year-over-year growth respectively.

It was also the first time in our history where we’ve grown the business sequentially from the third quarter to the fourth quarter overcoming the negative seasonal effects we typically experienced at this time a year. That said, the quarter had challenges, some we anticipated, others we did not that primarily impacted our unit gross profit. As indicated on our third quarter earnings call, we expected our fourth quarter results to be impacted by our significant use of third-party reconditioning during Q3 and slightly less in Q4 as we work to increase and maintain our sellable inventory levels, following COVID lockdown and Q2 furloughs. Throughout the second half of 2020, while we were very successful in acquiring and growing total inventory, our sellable inventory remained well below target levels since mid-summer. All in, our adjusted GPU came to $514 for the quarter, below our expected range.

Reconditioning cost and the short-term trade-off we were willing to make in our Q4 pricing strategy to attract customers and grow the Shift ramp despite lower than desired sellable inventory were the primary drivers, along with a few other dynamics that Cindy will discuss in a few minutes. There were three core drivers of GPU that were focus areas for operational improvement in Q4 that I’d like to discuss. The first operational focus of Q4 was to improve reconditioning. And this has paid off very quickly. Our reconditioning throughput has increased dramatically and the benefits of that will be reflected in our Q1 GPU guidance that I will speak about shortly.

Cindy Hanford: Thank you, Toby. I will walk through our fourth quarter results and provide additional color and then review our first quarter and full year 2021 business outlook. Unless otherwise noted, all comparisons are year-over-year. In the fourth quarter revenue grew 168% to a record $73.4 million. Total units sold were 4,666, up 147%.

This included ecommerce and the wholesale unit sales growth of 134% and 186% respectively. In addition to the unit growth, we also saw our ecommerce average sales price increase 14% year-over-year in Q4 to $18,188. This higher ASP is reflective of changes to our inventory mix as we worked towards a distribution of inventory across the pricing spectrum. While we have seen meaningful swings in our ASP throughout 2020, and expect this trend to continue, it is important to note that we continue to provide a full-spectrum of inventory to our customers, including lower cost value cars, which continue to differentiate our inventory compared to other ecommerce and offline used-car branded peers. Adjusted gross profit in the fourth quarter of 2020 was $1.7 million, or 2.3% of sales as compared to $476,000 or 1.7% of sales in the prior year period.

The increase in adjusted gross profit was due to growth in other revenue as a result of growth in our high margin F&I products, partially offset by gross profit loss in ecommerce, primarily as we had a temporary high usage level of outsourced reconditioning in Q4 and we felt the impacts of COVID-19 restrictions on our operations. However, as mentioned earlier, we have made significant improvements in our reconditioning capabilities and we have since returned to the desired levels of in-house reconditioning. Fourth quarter adjusted GPU was $514, up from $335 in the prior year period. While this was an increase year-over-year due to higher sales of ancillary products, as Toby mentioned, it was below our initial expectations due to the impacts of high reconditioning costs and low sellable inventory. In addition, the reconditioning capacity constraints compounded by the COVID-19 surge in Q4, resulted in us taking more cars to wholesale than originally anticipated, which created an additional drag on adjusted GPU for the quarter.

The benefit of this action was that we cleared out aging inventory which improved inventory health heading into Q1. And Toby has already spoken the improvements we’ve made to reconditioning in the periods so that today, we no longer face similar constraints. Moving to expenses, SG&A was $31.8 million in the fourth quarter, or 43.3% of total revenue as compared to $17.6 million or 64.4% of total revenue in the prior year period. The absolute dollar increase in SG&A is primarily due to increased marketing spend as we made strategic investments to increase Shift’s brand recognition, as well as higher personnel expenses as we’ve grown our team over the past year. The decline in SG&A as a percentage of revenue indicates the power of the operating leverage we will achieve as we continue our rapid revenue growth throughout 2021.

Net loss for the quarter was $4.5 million compared to $20.5 million in the fourth quarter of 2019. Net loss includes a non-cash net benefit of $31 million related to changes in the fair value of financial instruments. This was primarily attributable to the change in fair value of the earn out shares that are held in escrow to release the legacy Shift investors upon the achievement of certain stock price milestones. Adjusted EBITDA loss was $28.9 million in the fourth quarter, as compared to $12.8 million last year, driven largely by the increase in marketing costs previously mentioned, as well as increased general and administrative costs associated with being a public company, including legal, recruiting, and other professional service fees which totaled approximately $2.2 million for the quarter. While we expect to incur increased general and administrative costs as a public company when compared to previous levels as a private company, we expect to see a decrease in certain costs that are non-recurring in nature including recruiting, legal and consulting fees on a quarterly basis in 2021, compared to Q4 levels.

Moving to the balance sheet, as of December 31, 2020, cash and cash equivalents totaled approximately $234 million. In the fourth quarter, cash flows from operations were a use of approximately $39.9 million of cash. This use of cash was primarily due to building inventory to meet increasing demand. In the fourth quarter, we used cash to finance this inventory versus utilizing our floor plan, as the rate at which we were acquiring outpaced the rate at which we could get all the cars floored. As a result, cash use was meaningfully higher than usual in the fourth quarter.

During the fourth quarter, we used $15.6 million to acquire inventory, and made net payments of $6.6 million on the flooring line. As of year-end 2020, we had approximately $24 million of cash sitting in inventory. We do not expect this to be an ongoing trend and will look to leverage our flooring line more as we move through the first half of 2021. In addition, we paid off our $25 million delayed draw term loan and a $6.1 million PPP loan during the quarter. On December 24th, we completed an exchange offer for publicly traded warrants of approximately 93% of total public warrants outstanding for approximately 1.8 million shares of common stock and $7.2 million in cash.

We exchanged all remaining warrants in early January. As of December 31, 2020, we had 83.9 million shares outstanding. Now turning to our business outlook. As Toby mentioned, for the first quarter of 2021, we are guiding to a total revenue of $90 million to $95 million, which represents 3x year-over-year growth and 24% growth from Q4 of 2020. For adjusted GPU, we expect to be in the range of $1,200 to $1,350, and more than 2x improvement over Q4.

We expect the adjusted EBITDA loss will be in the range of negative $33 to negative $35 million, with the primary drivers being sustained high in-market OpEx during COVID, and the near-term impact as we invest in our new marketing strategy to drive sustained long-term growth. To put this guidance in context with our expectations for full year 2021, we expect to deliver over $450 million in revenue, a 130% increase over 2020. We expect to sell over 20,900 ecommerce units, while predicting ASP is difficult as that metric varies based on inventory mix, our revenue expectations do assume that ASP will come down in the coming quarters from a Q1 high. Adjusted GPU expect to come in above $1600 representing a 19% year-over-year improvement over our full year 2020 adjusted GPU of $1350 with substantial upside opportunity in F&I as we make certain planned vendor changes in H2. We are still trending on track for our targeted mid-term adjusted GPU of $2500.

Finally, we will continue to see operating leverage as we scale and expect adjusted EBITDA margin better than negative 25% for the full year demonstrating continuous improvement in our adjusted GPU and CAC metrics from where we started in Q1. While our top-line results and outlook reflect the demand for Shift’s product offering, our profitability metrics reflect the reality of managing a high growth company and the challenges of operating in the COVID-19 environment. We expect 2021 to be a big year for not only investing for future growth, but also continuing to pursue improving our GPU and establishing operating leverage as we scale the business. With that, I will now turn the call back over to George.

George Arison: Thank you, Cindy, and thank you, Toby.

We remain focused on what will drive Shift’s growth over the long-term in reaching brand awareness, growing our presence in existing markets and expanding into new markets, and driving F&I. On behalf of the Board and the management team, I want to thank our employees for their tremendous efforts and dedication in 2020 throughout the year of ups and downs amidst the pandemic. Their hard work is paying off and we continue to lay the foundation for our long-term success. I would also like to thank our partners and shareholders for their support. Operator, please open up the lines for questions.

Operator: And our first question coming from the line of Mike Grondahl with Northland. Your line is open.
Mike Grondahl : Yes. Thank you guys. Could you go into a little bit more detail on Sacramento in sort of the marketing strategy deployed there? It sounds like your CAC was 50% lower and you had better than average unit growth.

A few details there and then just how quickly and how aggressively do you plan to roll that out to other cities?

Toby Russell: Thanks for the question, Mike. This is Toby. The Sacramento approach was actually meaningfully different from what we’ve done in the past at Shift. We typically had a very digital heavy approach and in Sacramento, that particular test cell, tested out doing much more of a 360 approach to customer. We did everything from TV, out of home, a much more full cycle marketing approach.

We saw tremendous success and that’s the nature of that thing. Based on that, we’ve actually – and this is to get to your second part of your question, we’ve rolled that out very rapidly by the middle of this Q1, we had that rolled out across all of our other markets and are seeing early signs of really good success of that new marketing strategy.
Mike Grondahl : Got it. And would that include Seattle and the Texas markets? Or only Texas when you begin to sell cars?

Toby Russell: The fundamentals of that marketing strategy do apply to all markets. But in Texas in particular, we are only acquiring select cars at this time.

So, we are working through the process on the regulatory front to get Texas to the point that we are going to be selling cars there in addition to acquiring select models. But primarily it’s the Seattle and the West Coast footprint. But I do want to say that we are doing – we’ve launched our first campaign on national TV. And that is part of the strategy that we have over the course of the year. That benefits and it’s a classic rising time this although, that’s an investment not just for Q1, but for years to come because of their non-perishable, brand accretive impressions and we see that as a long-term investment.

Mike Grondahl : Got it. And do you have enough mechanics today? And maybe how many more do you need over the next 90 or 180 days?

George Arison: Hey, Mike. This is George. So, as Toby mentioned in the prepared remarks, we had really great progress in hiring mechanics and we’ve been able to move our reconditioning to be vast majority in-house within January we’re down to only 15%. All our reconditioning being outsourced, which is in line with what happened in January of 2020, so a year ago shedding equipped.

We are in a very good place in terms of hiring. We’ve got the right hiring numbers in terms of mechanic hiring much faster than we had anticipated and we thought that would take through the end of Q1 for us to get to the right employee levels and we’ve been able to do that much sooner. So the end result has been that, we in the middle of Q4 we were processing roughly 300 cars per week. And today, we are processing about 500 cars per week. And so, we are in a very good place from the production perspective and we continue that, we expect that to grow as the year progresses.

Obviously, we will be launching our in-house reconditioning in new markets like in Texas as we scale those markets. And so, our production numbers will increase as the year progresses.
Mike Grondahl : Got it. Okay. Thank you.

George Arison: Okay. Thank you.

Operator: And our next question coming from the line of Sharon Zackfia with William Blair. Your line is open.
Sharon Zackfia : Hi, good afternoon.

I was hoping to bridge the drivers of the GPU improvement from the first quarter through the remainder of the year and kind of maybe breaking those into three different parts and that there is one I am missing and what I am thinking of for those three parts would be, kind of the lots of reliance on the third-party recon. And then, it sounds like you made some pretty substantial reconditioning cost improvements just in general in your owned reconditioning and then, lastly improved pricing algorithms. So can you help us understand kind of how those will interplay or contribute through the remainder of this year?

George Arison: Hi, Sharon. This is George.
Sharon Zackfia : Hi.

George Arison: I think it’s correct. There is really three components to improving GPU. Number one conditioning, number two pricing and number three F&I. So, when we think about that, reconditioning being in-house is really critical and that’s by far the biggest portion of the changed guessing between Q4 and Q1, because that’s something that was already been drag on us in the latter half of last year. And we are in a really good place today.

Number two, around pricing, we were very inventory constrained in Q4 anxiously. When I say inventory constrained I am specifically refer to sellable inventory meaning because reconditioning was behind and couldn’t where we produce at the level that we needed. We couldn’t get all the cars that we were buying to become sellable cars. That limited our ability to price things well and price heads high as we want to price. Given that we’ve moved from having roughly 800 cars in sellable at the beginning of December, to having over 2000 at the beginning of March.

We think that really helps us with improving our GPU. And then, third will be F&I, we are on a big push to increase our F&I numbers. The Q4 F&I was about 716 and which was about a 60% improvement over the last year. But we’ve spoken there that’s kind of appreciation to be had there. And so, all three of those pieces kind of are part of the longer term story.

So, we believe there is still cost reductions to be had in reconditioning. I think for Q4 and the first half of this year as this was on getting throughput high. For the rest of the year, that focus will be more on getting cost down on the conditioning and number two, we think that both with the marketing efforts and with more inventory, we can price higher and generate more GPU that way. And then lastly, we do expect significant improvements in our F&I numbers as the year progresses which is how we see as of getting at least $1600 and hopefully more in GPU by – as the year progresses and obviously in line of what have to be higher than $1600 to get to an average of $1600 for the full year.
Sharon Zackfia : That’s helpful.

Thanks. And then, I heard you talk about new markets and I assume that’s Texas contributing more in the second half of the year. I am just wondering with the new marketing, I mean, how do you project Texas? Are you projecting Texas based on how historical markets have debuted or is there an expectation for kind of a steeper ramp for Texas?

Toby Russell: It’s a great question, Sharon. In terms of Texas, we are really excited about it as I mentioned and we are primarily projecting growth and in particular in the current quarter it’s driven by our current and existing footprint. That is our kind of view for the whole year and part of the guidance that Cindy shared for the year is that the bulk of that unit and revenue growth is going to be coming out of the existing West Coast footprint.

So, we are actually not – I should say, banking on so to speak the steep growth per se, in any one new market, instead, what we are doing is, driving growth from existing footprint, deepening market penetration and we’ve demonstrated that already, because we’ve had deeper market penetration. It shows that we are able to sequentially roll out across the U.S., drive that deeper penetration and sustainably grow. In terms of Texas and other new markets, we do see a lot of goodness happening there and we actually think they are going to be advantaged relative to previous market launches due to our new marketing strategy but we haven’t released specifics about the exact growth market-by-market, because we are not – we are not sharing that at this time.
Sharon Zackfia : Okay. Thanks.

And then, just one last question, Cindy, do you have the amount of advertising that was spent in the fourth quarter?

Cindy Hanford: Thank you, Sharon. In the fourth quarter, total advertising – total marketing was about $10.9 million.
Sharon Zackfia : Thank you.

Cindy Hanford: We don’t provide a breakdown to whether those are brand or digital. Sharon Zackfia : Okay.

Thanks.

Operator: And our next question coming from the line of Marvin Fong with BTIG. Your line is open.
Marvin Fong : Hi. Thanks for taking my question.

A couple for me. Just clear so, I think you spoke to five – your reconditioning capacity of 500 a week now, basic math says that’s capacity of about 26,000 a year versus your guidance a little under 21,000. So, just curious what kind of cushion in terms of reconditioning capacity do you like to operate at just to make sure that you don’t have to go back to third-party reconditioning? And then, I want to follow-up off on what you were saying about improving the F&I. I think George mentioned that some changes coming to the vendor side. Just wanted to drill down on how you see F&I growing.

Are you going to be doing more on the financing side or the service contract side or both? And do you see improvement coming in terms of better monetization from your vendors or better attach rate? Just some more color on that would be great. Thanks.

George Arison: Absolutely. Thank you for those questions. So, on the first question regarding the reconditioning, to be clear, 500 is the actual number of cars that we are through putting in Q2 during the middle – sorry, in Q1 during middle of the quarter that we are actually reconditioning 500 cars.

We definitely have capacity for more, but obviously we are managing inventory acquisition with that as well. I think, your numbers are correct and you have to consider that we do want to have more cars in inventory going into any given month or any given quarter than you intend to do in that particular month. And you know, as we’ve said in our prepared remarks, our goal is to be in roughly 48 to 58 days of turn per unit on average. To do that you have to have reconditioning at outpacing sales in a reasonably strong way. We believe that being in a kind of that range of 48 to 58 days allowed us to price in an appropriate manner to generate the most profit that we can at this time as a business.

So, we do aim to be ahead of it. As I mentioned earlier, as we launch our own facilities in Texas, we would expect to have additional reconditioning throughput added to what we can do and we still have – believe we had more reconditioning throughput in our existing markets as well. So, we can increase on that 500 number. We think that 500 was a great place to be in Q1, but that’s expected to grow as the year progresses and so we will be continuing to build inventory throughout the year. And obviously, it’s kind of logical, but you want to end Q4 2021 in a way that’s substantially more sellable inventory than we ended Q4 2020 with, because obviously next year we’d expect to continue to grow in an aggressive way and we’d want to have a lot more inventory as sellable on January 1, 2022 than we did on January 1, 2021.

So that’s on the reconditioning question. With regards to F&I, we have seen really good progress on F&I as I mentioned, about a 60% improvement year-over-year in Q4 on net F&I. We are going to be making some changes to our vendors in the second half of the year. That’s on mostly on areas around vehicle service contracts and other insurance contracts. Those will be – will allow us to monetize better and that we believe will also help ensure a better customer experience, which over time improves your overall F&I pitch.

And so, I don’t want to get into too much details about what changes we are making since some of this is kind of proprietary thoughts until we make them and we think will be an important change for the business and from the consumer experience perspective. But we think that it will add a reasonable amount of dollars to our F&I. Our overall attach rates are in a very good place on the vehicle service centers and insurance side. We obviously continue to push to improve that on a regular basis and there is a lot of training and then we still need to do with our team and to help make it better. Historically speaking, that was not a big focus for us in terms of how would we join to meet for F&I sales that we’ve seen as a big opportunity in that area, as well.

Marvin Fong : Great. Thanks, George. And if I could ask one more follow-up. Just on the increase in the ASP this quarter and I think Cindy indicated it climbed back down, could you just kind of elaborate on the dynamics behind that? It seems like maybe you acquired more younger cars this quarter, your plan is to maybe reverse that in the balance of the year, if you could help us with that, that’d be great.

George Arison: There is going to be two base things that have driven the increase in ASP.

Number one is, higher amount of sales in luxury and highline vehicles. Historically, Shift has done really well with highline vehicles which I think makes sense given the kind of high touch wide well service that provide if understandable licensing love that type of an experience. And so, we’ve always done well with that in kind of latter part of 2019 and most of 2020. We did not really focus on highline and luxury vehicles, because we were capital constrained and didn’t want to put dollar behind cars that are very expensive post the completion of the stack process, when the capital constrain is lifted, and we felt that we could go after those cars more, and I think that’s overall good because it allows us to have more inventory that’s in demand and consumers will like and ties well to our consumers. And so, that’s part one.

And part two, we spoke to earlier, we actively pushed to make value with only 20% of our total sales in Q1 and for at least the first half of this year. That move was done in order to help support the reconditioning team’s efforts to increase throughput. Value cars generally take more time to recondition and they have a very high percentage of your total acquisitions and they can impact and you are going seeing throughput and will clog you up. And so we wanted to kind of manage that in a very active way. We still obviously will believe in having a full supplemental inventory and 2021 value for high percentage.

Obviously, it’s a lot higher than anybody else in our overall industry. But it’s not as high that had been in various parts of last year when that reached 30 plus percent at various points in the year. So, those two things combined together led to a higher ASP. As reconditioning continues to improve, we would anticipate that we will increase the percentage of value in total inventory and that we believe will help drive ASP price down. But again, obviously, we are not managing the business for a specific ASP.

We are managing the business for having really good inventory that consumers want and then ASP will be what it is format and will be – doesn’t really fundamentally matter for us and what the ASP is from the perspective of how the business is growing.
Marvin Fong : Very helpful. Thank you, George.

Operator: And our next question coming from the line of Zack Fadem with Wells Fargo. Your line is open.

Zack Fadem : Hey guys. I am curious if you could update us on market share in your mature regions? And when you think about the $450 million in top-line for the year, could you talk through what’s embedded here for share gains in your mature regions like San Francisco relative to the ramp up in newer markets like Portland, Seattle, or Texas?

George Arison: Thanks Zack. Great question. So, I don’t think we are in a position to update on market share numbers specifically. We don’t actually buy that data every month.

We did last year as we were going through our actual investment process, because we thought that will be helpful to have. But that is not something that we normally buy every month. So we can’t give you specific numbers and certainly and I consider that for the future. But we don’t have that today. What I can say however is

the following: all the growth that we’re seeing in Q1 which is obviously very substantial year-over-year growth.

It’s coming in the existing markets except for Seattle, which is a new market compared to last year and the vast majority of the growth that we are projecting for the year is coming in existing markets as well. So, the projections are assuming really substantial and significant increase in market share in our existing markets is that the only way we could drive for the kind of growth that we are projecting in existing markets. Obviously, as we ramp up some of the new markets that we’ve talked about, and those will add to the revenue but we don’t expect them to be significant in the first half of the year. And then they will ramp from there in the second half of the year. So, in the summer of last year and the fall and we would even analyst and investors spoke when often times that ask are there – what’s the assumption for growth here and we would say, 75% of the growth we expect in the model will be coming from existing markets and I think that’s been still the case, maybe perhaps even more and then some investments come from these markets.

They are performing extremely well and we’ve seen there is a ton opportunity for growth in our existing markets.
Zack Fadem : Thanks, George. That’s good color. And next question, on the improvement in days to sell, I think it was 43 this quarter versus I think 53 last year. Curious if you could talk through the drivers and when you are looking at days to sell, I am curious what percentage of your sales involve a test drive versus those that don’t involve a test drive and whether that has an impact of – to days to sell, as well?

George Arison: So, last year was an unusual year and demand was extremely high and as that we mentioned several times over the many months, we’ve have sellable inventory constraints last year, which kind of inevitably leads to a lower days to sell as a result of the moving the car that you have and then you don’t have many in sellable mode.

So that’s kind of was a big driver of what happened last year. We think that there is a kind of – I think yield time for how long it takes you to do to move cars through kind of the range that Toby gave in the prepared remarks like 48 to 58 we think kind of is that fair way number. The reason being that that allows you to price cut is a little big higher in the beginning, keep them at a high price for a little while, see if you generate demand for that car at a higher price than your average price to market. If you can, great, then you are going to make really great gross profit on that vehicle and you can kind of sell at that way. But if a car does not able to generate demand at that higher price, and you can lower it more to the kind of midpoint of way you normally expect to transact at and then sell the car at that point.

That’s the kind of focus for us in how we manage our time to sell. In the last year, when we didn’t have a nice sellable inventory, we didn’t have the flexibility and the opportunity to price cars higher at that slightly above typical percentage to market that we transact at, which we – which is something like we wanted to get back to with having more sellable inventory and we’ve now been able to achieve that. So, we think 48 to 58 is a good place to be and that’s what we are going to be managing to this year. Last year, while in some respects they are lower days to sell, it did have a negative implication on the GPU and we kind of correct that this year with slightly higher time to sell. As far as the difference between cars that sell with a test ride and cars that sell without a test ride, there is not really any meaningful difference in the time to sell for those two approaches in terms of the consumer experience.

They generally kind of roughly mind each other.
Zack Fadem : Okay. That’s good color. I just want to square that the lower days to sell with liquidating cars through the wholesale channel. Was that just a one-time dynamic around COVID? Or is that’s something where we should – something that you would more regularly do if you have aged that inventory?

George Arison: No.

So, what we did in last Q4, is we liquidated cars that otherwise could have been sold to retail to wholesale prior to reconditioning those vehicles. Right, so, we bought them from consumers, that could have – sold them as consumer cars after being reconditioned, but instead we chose to not do that and not to keep them through reconditioning and did wholesale them. The reason being that we needed to help our reconditioning or have a smaller percentage of value cars than use recondition and that we picked cars that otherwise we are having kind of high amount of recon needed value vehicles and we pushed them off to wholesale. As the reconditioning improves, and we are able to address them on the additional thing that it needs to, work on in the coming quarters such as cost reductions, we would expect to then allow for more of value cars to come in through recon. Like I said this year, we are kind of managed about 20%, but that number could increase.

The reconditioning team is in a better position to handle a high percentage of value in which case we would not wholesale those cars, we would try to bring them into the retail segment. But we have acquired a bit too many of the late-stage value vehicles in Q4 and we made the decision that it will make sense to move them through recon given that that would take too long and instead it make them to your sample to have those in Q4.
Zack Fadem : Got it. That makes sense. Appreciate the time George.

George Arison: Thank you.

Operator: Our next question coming from the line of Seth Basham with Wedbush. Your line is open.
Seth Basham : Thanks a lot and good afternoon. My first question is just around your guidance for 2021 which implies EBITDA loss is more of doubling guys just a few months called at the time of your SPAC transaction over $110 million.

Can you give us some sense of what gives you confidence that you are creating shareholder value?

George Arison: So, our guidance implies that we will have EBITDA loss of below 25%, which is a significant improvement over last year and we will be showing very significant improvement in our overall operating leverage which we are very excited about. At the same time, we believe that investing in marketing is really important and we have launched significant marketing efforts as we spoke to earlier and we believe that investing in that makes sense and we’ll continue to do that. Building brand for Shift we think will be very valuable over time and it has pay back in the short-term and then pay back for the long-term. But we’ve seen peers in this industry achieve really strong results through marketing efforts, because you can all the time drive your price to market up if you are able to build brand if you try identical strategy and we are pushing in that in a rest of the way because we think the results will be strong as we have seen in the tests that we’ve run so far.
Seth Basham : So it seems that kind of that transaction, the biggest thing that changed in how you are looking at 2021 is a natural branding strategy and that’s driving much higher losses than you pre-anticipated?

George Arison: That’s the primary driver of additional dollar losses in 2021for us.

Seth Basham : Okay. Thank you. And then, my last question is just in terms of your inventory management, what’s likely fell short of your expectations this quarter, as you think about your strategy going forward, what safeguard have you put in place to better manage your inventory avoid, in fact the losses that you experienced on even cars that are in your retail. It seems like the selling margin on retail cars were down this year negative.

George Arison: Toby, I think you’re speaking about

Toby Russell: I am sorry.

That’s a great question, Seth. One of the biggest things that drove down our inventory to historic lows was the COVID environment. Uncertainty around the market caused us to take a cautious approach during the high of COVID around inventory acquisition. That structurally put both our inventory position and our recon operations behind. So, as we start to ramp up, going into the latter part of Q3, and the latter part –and into Q4, we were actually working to make up a tremendous amount of ground that was created or a gap that was created by COVID.

How we do that going forward is, we’ve enhanced our supply chain planning and in particular our forecasting around our expected number of vehicles on hand going into any given week relative to how many cars we want to sell that week. We used through these projections more on a monthly basis, but during the COVID time period, we realized we use to be much, much more about much higher fidelity both forecast and execution in that area, because we recognized sensitivity therein. And so, we’ve changed the way we do our supply chain planning, the fidelity with which we’ve done it and we’ve exited the historic change that was COVID that caused us to really deplete our inventory to levels here before unseen.
Seth Basham : Thank you.

Operator: And our next question coming from the line of Mike Baker with D.A.

Davidson. Your line is open.

Mike Baker: Hi. Thanks, guys. So, maybe little bit of a follow-up on Seth’s question.

But I am just – could you explain again where the –why the GPU came in so much lower than your plan? I am going to guess that you got the third-party reconditioning and all that that, but you knew that and it sounds like it actually went better than you expected. So, what was lower than you expected. And I guess, to Seth’s question, some of that was the pricing. But was that really the biggest factor in the delta between your guidance and where you came in or was it, again, you knew about the reconditioning issue. I found three of this you work to quicker than expected but maybe it was just more expensive to work through.

Thanks.

George Arison: Absolutely. So, the fact that we test reconditioning in Q4 helps us in Q1 of 2021. It doesn’t really help in Q4, because the vast majority of the cars that you recondition is say in December once things started to improve and were going be – the car they are going to sell in 2021 not in 2020, right. And one of the challenges with Q4 going into that quarter was that very large portion of the inventory have to be sold meaning sellable inventories going into Q4.

And then inventory as recondition in October of Q4 is something yet to be sell in Q4 had an external reconditioning component and that is much more costly and much more challenging. So that really hurts you. The second point is, as Cindy discussed in her prepared remarks, we had wholesale losses in cars because we took a certain set of inventory that otherwise could have been sold through retail and decided to wholesale it rather than pushing it to recon in order to help our reconditioning team improve its throughput overall setting us up for a better Q1 and a better 2021. And then thirdly, this is not going to impact much of the rest of the country, but California being our biggest market that there were much more significant COVID lockdowns in California in late November and in December than anywhere else. And those have definitely had impact on the business overall and on the leads coming in.

So, not the most significant by any means, but some level of impact from that, as well.

Mike Baker: Okay. So, I guess, if I could summarize that, yes, you dig it through the three P situation in the quarter, but a little bit too late in the quarter to help the fourth quarter. But the good news is that it will help this first quarter. So I think that’s right.

George Arison: Correct.

Mike Baker: Correct.

George Arison: That sounds correct. I think when we were asked this question when do you expect to kind of solve the third-party reconditioning, the most comfortable that we have found thing sometime in Q2 of 2021. We believe it would be solved.

In practice, it got fixed faster and we – in January, already we were down to only 15% external reconditioning which is just slightly higher than external reconditioning that we used a year ago in January. So, obviously, we continue to improve in what we do in recon. But the benefits of getting recon to be where it is now are going to be more significant in Q1 than we would have anticipated at the same time as we did this call a quarter ago. There is still obviously some cars that we sold in January of 2021, that were external recondition and obviously that’s still hurting a little bit, but that’s going to be all gone by the time if you to roll that on and then we still had some wholesale sales that are from – that are what might have gone to retail in that value segment in January. But overall, we think that the reconditioning getting to where it is now is a huge improvement and we are seeing the improvement in the gross profit guidance that we’ve given for Q1.

Mike Baker: Okay. Understood. One more if I could. Longer term question I guess, but, so I understand that your losses which in a dollar amount might be more significant in 2021 than you maybe thought previously, because you are ramping up the advertising, I think that makes sense. Eventually, you leverage it, but if you think about the time to profitability, I know you haven’t necessarily given the timeframe, but does this get you to profitability quicker? Or does it get you profit, because you’ll eventually leverage this quicker than you expected because the sales go up or does it lengthen the time to get to profitability?

Cindy Hanford: Mike, this is Cindy.

George Arison: So – go ahead Cindy.

Cindy Hanford: Go ahead. Well, George, you want to take it?

George Arison: No. Please go ahead.

Cindy Hanford: All right.

I don’t think it’s necessarily longer. I think what we are doing is we are focusing on getting the economics, getting the GP up and tracking to the original blends as we can.

Mike Baker: So, same timeframe, just different way to get there, more market share and then I presume over time as you have that market share that the long-term profitability would probably be enhanced as we start to leverage that advertising?

Cindy Hanford: Yes. I think that makes sense.

Mike Baker: Okay.

Thank you.

Cindy Hanford: And I think critically, we are probably looking somewhere in the 20, 23 range.

George Arison: And at the same time what we do think the value is here that, going back to an earlier question that was asked, we do believe that investing in market now allows us to grow faster and allows us to drive better gross profit over time by selling at a higher price to market than how we are likely be able to do.

Mike Baker: Makes sense.

Operator: And I am not showing any further questions.

At this time, I would now like to turn the call back over to George Arison for closing remarks.

George Arison: Great. Well, thanks everybody for joining us and we appreciate your questions and your attention and we look forward to speaking to everybody in the coming weeks as we do some other meeting that we have planned.

Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation.

You may now disconnect.