Q1 2022 Carvana Co Earnings Call
Good day and welcome to the Carvana first quarter 2022 earnings conference call.
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I would now like to turn the conference over to Mike Levin VP of Investor Relations. Please go ahead.
Thank you Betsy and good afternoon, ladies and gentlemen, thank you for joining us on Carvana first quarter 2022 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 Dot com. The first quarter shareholder letter is also posted on the IR website also we posted it.
Additional information on the ADESA U S acquisition transactions, which can be found on the events and presentations page of the IR website.
Joining me on the call today are already 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 carve out as market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those disk.
Just 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. Its most recent Form 10-K .
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 it over to Ernie Garcia Ernie.
Thanks, Mike and thanks for joining our call. The first quarter was a challenging quarter for Carvana. There were a number of impact from the business some internal and some external that combined to negatively impact our financial results. We view. These impacts are transitory setbacks and I'll hit them first secondly, I will discuss we are working on internally to address each of these impacts next I'll touch on the underlying demand for our offer.
And finally I'll close in our thoughts on the long term.
First let's discuss the impacts of our results. There were three primary drivers of our results in the first quarter. The first is our operational constraints than most severely impacted our inspection centers and logistics network. These began with omicron were exacerbated by winter storms and then the path to recovery has been slowed by our inspections that our logistics network and inventory growth, causing us to produce and move.
Inventory to newly opened IRC that are further away from our average customers leading to additional network complexity.
These effects had a negative impact on both sales volumes and retail GPU. The second was industry wide impacts affordability in general consumer sentiment combined to drive fewer industry wide sales in prior periods. While we continued to rapidly grow market share throughout the quarter. The combination of these economic factors and our operational constraints caused our growth to come in lower than we were anticipating.
Yeah.
Because of the operational requirements of our business, we generally plan and build for growth six to 12 months in advance depending on the lead times necessary to ramp each operational team on average across our history. This has served us well as it has enabled us to maintain much higher levels of growth in businesses with our operational complexity historically, you've been able to achieve.
But given the internal and external factors described above this quarter. It caused us to carry more expenses than we had sales offset them with this.
This led to total SG&A levels that were largely on plan in total dollars being much higher per units in prior periods and to a lesser degree also flowed through Cogs driving downhill GPU.
Thirdly interest rates moved up rapidly in the quarter as we originated loans our customers used to buy parts from us and then sell them later interest rate increases between initially showing our customers their financing terms and ultimately selling those loans leads to a reduction in the value of the loans, we sell which had the impact of reducing other GPU.
These factors combined to lead to a clear step back in our financial results. While this isn't what we're shooting for is straightforward to understand and it suggest straightforward solutions.
We're turning to positive EBITDA and resuming our March to our long term financial model from there requires that we resolve our operational constraints, if we get our expenses and sales back into balance through a combination of sales increases and cost efficiencies and then we adjust our processes and our finance group to reduce the impact of rapidly rising rates on GPU until we return to an environment with more stable rates.
We have detailed plans that are already in motion and each of these areas. Our logistics team has clear plans in several key areas to catch up level, our metrics were a year ago, and then to move significantly beyond them. The addition of ADESA to our network will help to accelerate these plans further logistics progress will also unlock the ability to make more of our inventory visible to more of our customers, which is a straightforward way to drive.
Up faster and faster delivery times larger selections increased customer conversion.
Beyond that the team is working on several near and medium term plans to improve the selection of more affordable cars, we have for our customers. These plants start as simply as buying a greater quantity of less expensive cars and extend the changes to our inspections at our processes to produce more of those cars and other product enhancements that make it easier for our customers to find and purchase less expensive cars. In addition, we are using.
Our temporary excess capacity as an opportunity to gain additional cost efficiencies. While we are always aiming for cost improvement the constant pressure of growth often dominates our priorities and slows our progress across the company. We have each of our operational teams focused on process and product improvements to increase efficiency in an effort to reduce costs and improve our scalability as part of project catapult.
We are determined to make the most of this opportunity.
Next I want to touch on the underlying demand for our offering here designs continue to look great. We continue to rapidly gain market share in this difficult environment as we grew by 14% while the market around us are shrinking.
Further we can look at subpopulations of our customers that are less impacted by affordability and interest rates to get a deeper view into demand our customers with FICO scores over 700 grew approximately 50%, despite our logistics constraints and our ongoing suppression of inventory visibility.
Lastly, I want to close with a couple of thoughts on the long term at any point in time. The Companys success is driven by the some of the structural forces that define an industry by the macroeconomic backdrop and by company specific factors in the long run the macroeconomic backdrop disappears in that equation as it just becomes its average structurally nothing has changed.
Fragmented 40 million unit per year market with significant margins and customers, who are open to and excited about something new.
From a company specific perspective, we continue to make constant progress. During this period, we have excess capacity, we have a transitory reduction in the amount of energy necessary to keep up with growth, while we will not allow that to reduce our energy output, but we will not allow that to reduce our energy output in the least we will simply point more of our energy toward system and process improvements to maintain the same aggregate level of her leg.
This improvement in nine years, we've gone from an idea to a company with over $12 billion in revenue and we're still just 1% of our market and nine years. We went from a company with negative gross profit to a company with over 4500 gross profit per unit and.
In nine years, we went from a company lost 30 cents of EBITDA for every dollar revenue to accompany that approximately EBITDA breakeven just last year.
At constant progress has been the result of the opportunity our market has presented us the power of the business model. We have built the quality of the team we've assembled and the endless effort creativity and passion of the team as port in some quarters are bumpier than others. Unfortunately in the real world. There are rarely perfectly straight lines to anywhere while it might be a little harder to see this quarter than most we remain squarely on the path to building the largest <unk>.
Most profitable automotive retailer and to changing the way people buy and sell cars. The March continues mark.
Thank you Ernie and thank you all for joining us today.
<unk> continued to gain market share in Q1, but several external and internal factors impacted our financial results.
Some of these impact of used vehicle industry as a whole such as omicron used vehicle prices interest rates and other macroeconomic factors and others were more specific to carvana, such as reconditioning and logistics network disruptions.
The impact of these factors on retail units sold volume was the primary driver of our results in Q1.
We generally prepare for sales volume six to 12 months in advance, meaning we build capacity in most of our business functions for significantly more volume than we fulfilled in Q1.
With our costs relatively fixed in the short term the lower retail unit volume with a higher cost of goods sold per unit and higher SG&A per unit. These effects combined with rapidly rising interest rates and widening credit spreads to lead to lower EBITDA margin.
In Q1 retail units sold totaled 105185, an increase of 14%.
Total revenue was $3 497 billion an increase of 56%.
Total gross profit per unit in Q1 was $28 33, a decrease of <unk> 23 year over year. This total gross profit included a $76 per unit impact from earnings 1 million unit milestone guests to Carvana employees.
Retail GPU was eight eight in Q1, a decrease of $403 retail GPU was impacted by a more than $600 per unit increase in reconditioning and inbound transport costs relative to the prior year and a more than 100.
Per unit decrease in shipping revenue driven by refunds to customers falling extended delivery times.
Retail cost increases in Q1 were primarily due to inefficiencies in the inspection and reconditioning centers and logistics network, which in turn were driven by omicron severe weather events and the extended timelines required to recover from these events and due to lower retail units sold volume, which increased per unit cost.
We believe the factors impacting Q1 were transitory and we expect to see retail cost move toward more normalized levels over the coming quarters as our logistics network normalizes and our expense levels are better balanced with sales volumes.
Wholesale GPU was $219 in Q1, a decrease of $8 driven by higher volume offset by lower profit per unit.
Other GPU was $18 six in Q1, a decrease of $412.
Year on year changes in other GPU were primarily driven by higher benchmark interest rates at the time of loan sale relative to origination interest rates and widening of credit spreads following the onset of the conflict between Russia, and Ukraine, partially offset by the impact of higher <unk>.
Industry wide used vehicle prices on average loan size.
Looking sequentially the rapid rise in benchmark interest rates and widening credit spreads had a significant impact on the spread between funding costs and origination interest rates in Q1 versus Q4.
This increase in spread had a more than 600 dollar impact on other GPU in Q1.
We expect this spread to move toward more normalized levels over the coming quarters.
The same factors that impacted retail units sold in total GPU also impacted EBITDA margin in Q1.
EBITDA margin was minus 11, 6% a decrease from minus one 3%.
EBITA margin included.
8% negative impact from earnings 1 million unit milestone gift to Carvana employees.
While we face a uniquely difficult environment in the first quarter, we are already seeing positive trends across our key metrics and we expect meaningful sequential improvement in Q2 versus Q1 in retail units sold revenue total GPU SG&A per retail unit sold and EBITDA margin.
And our last shareholder letter, we provided an expectation that we would achieve over 4000, GPU and approximately EBITDA breakeven in the last three quarters of 2022 taken an aggregate.
We now expect to return to over 4000, GPU and positive EBITDA to be pushed back a few quarters and then to resume our march toward our long term financial model.
We are on track to close our adapt our acquisition of <unk> in May and are excited about the role that <unk> will play in our path toward our long term goals.
The ADESA U S footprint includes 56 sites with approximately $6 5 million square feet of buildings on more than 4000 acres.
We expect to be able to build approximately 2 million units of annual reconditioning capacity in these locations, while still operating <unk> wholesale auction business.
This is the equivalent of approximately 30 Greenfield Carvana IRC locations in terms of the production volume that we expect to unlock over time.
Adding the ADESA U S footprint will dramatically improve our logistics network over time.
With the addition of these locations we will eventually have have reconditioned inventory within 50 miles of 58% of the U S population and within 200 miles of 94%.
This will have the benefit of reducing shipping distances times and costs accelerating us to our long term financial model.
We expect the ADESA U S purchase price can be financed primarily with $2 $2 75 billion and unsecured notes.
In addition, we expect to raise an additional 1 billion in preferred equity and $1 billion in common equity for future real estate improvements on the ADESA U S sites and for general corporate purposes.
These financing transactions will place us in our strongest total liquidity resources and production capacity position ever giving us a strong foundation for profitable growth and significant flexibility to execute our plan.
On March 31, we.
We had approximately $1 $7 billion in total liquidity resources, including cash revolving availability and Financeable real estate and securities.
In total we expect the transactions to generate approximately $1 9 billion of net cash proceeds after payment of the ADESA U S purchase price and more than $900 million of Financeable real estate, bringing our total liquidity resources to approximately $4 5 billion pro forma for the transactions.
In addition, we estimate that the ADESA U S locations have approximately 200000 units of facility capacity that is available for use with limited incremental site improvements.
Combining our own higher fees with these ADESA U S locations, we expect total annual capacity at full utilization.
To be approximately $1 4 million units by the end of 2022.
We are excited to join forces with the ADESA U S team on the path toward our long term goals of buying and selling millions of cars per year, and becoming the largest and most profitable auto retailer. Thank you for your attention we will now take questions.
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At this time, we will pause momentarily to assemble Iraq.
Yeah.
The first question today comes from Zach <unk> with Wells Fargo. Please go ahead.
Hey, Good afternoon, guys. This is John Park on for Zach.
I guess, what the Johnnie Walker and you just announced it doesn't sound like it sounds like it hasn't really changed.
Financing the acquisition, but can you guys kind of sharing how youre thinking about it at that.
<unk> I guess, the incremental interest expense as well as any associated Capex plan with this acquisition and 22.
Jeremy So yeah I think.
We.
Have announced our plans for financing.
Purchase as well as.
Future real estate improvements on the ADESA site.
Additional funds for general corporate purposes, we expect that to take the form of $2 to $75 billion in unsecured notes.
1 billion of preferred equity and 1 billion of common equity I think the specific terms on that.
We will discuss in the coming days, but.
I think thats the basic transaction structure I think we feel really great about that transaction structure I think it gives us a lot of flexibility to execute our plan I think.
I think we feel.
Really great about the trajectory that we're on we feel really great about joining forces with ADESA U S and all the benefits that that brings to our core business.
So yes.
Yes, I think we feel grateful about the acquisition and the financing structure and then in terms of some of your questions on specifics on the Securities I think we'll talk more about that in the coming days in terms of Capex one of the nice benefits of the <unk>.
Okay.
ADESA acquisition is we do expect it to meaningfully reduce our.
Quarterly Capex outflows from the levels that we've been at over the past several quarters and the reason for that is we have been spending a significant amount through 2021 in early 2022 on building out our own Carvana Greenfield Irc's.
That's been a meaningful use of capital expenditures for us now with the ADESA locations online.
We do expect to be outlying meaningfully less capex on certainly Carvana Greenfield <unk> and then in general.
I think thats, the directional guidance that I would give there.
Great and then just switching gears a little bit on like the financing <unk> you guys talked about the $600 sequential impact on the compressing ABS spreads normalizing I guess and then is there any way to kind of help us think about like what a normal level of other GPO GPU shandy.
Sure.
I think we have talked a little bit about other.
Other GPU I think we had a strong year on other GPU in 2021 we do think.
There was a tailwind to our other GPU in 2021 and that came from elevated industry wide used vehicle prices.
Because basically the way that that works is higher.
Our used vehicle prices lead to higher average loan sizes, which leads to higher other GPU other things being equal we sized at about $150 per unit.
And then I think the I.
I think the other point that I would I would make on other GPU.
As we see significant opportunities in front of us too.
Spanned other GPU from a fundamental perspective.
What we've seen historically.
I think that takes the form of fundamental improvements in the finance platform other fundamental improvements.
And ancillary products.
<unk> existing and new ancillary products so.
I think.
I think overall, we feel like we built the business to generate very significant other revenues and very significant other GPU.
Overtime I think Q1 was certainly an outlier not representative at all of what we would expect to see on a normalized basis.
The next question comes from Chris <unk> with BNP. Please go ahead.
Hey, Thanks for taking the question.
Yes, I guess the first question is one of your peers today highlighted that there's been some chatter that ADESA is losing.
A bunch of its OEM relationships because of the acquisition.
So what I was wondering in a sense for like as you think about the EBITDA you've acquired.
What type of attrition standards that you've.
Attrition estimates you've assumed in the two.
I guess just bigger picture.
Is there any opportunity to restructure the deal to incorporate some of this you have to pay a breakage fee. If you walk away from the deal.
Just be helpful to think through that before you approach the capital markets. Thanks.
Sure let me see.
Start with a reiteration of how excited we are about this transaction, we do think it is.
Has the potential to be a truly transformative transaction, giving us a nationwide footprint the capacity to produce a lot more cars the ability to put those cars closer to customers to shrink delivery times to reduce delivery costs.
Enhance the customer experience and to do it at greater volume and to do it all faster.
And also to accelerate our path to our long term financial model because of the benefits of those locations. So we're extremely excited about that and then we're also excited about the auction business itself and the way that that kind of works when paired with the Carvana business. So I want to start there and that dominates anything that happens kind of quarter to quarter or day to day or any other results.
I do think that there has been across the auction business in general across all different auction groups. There has been something of a reduction in volume over the last quarter much like we've seen in.
In retail and I think it has not been immune to that I think there have been a small handful of both buyers and sellers.
<unk> elected at least in the short term to not do business with the desk as part of this transaction.
That's actually probably been maybe a little less than we would have anticipated. So far we've heard some really positive news as well.
We don't think that that's actually flowing through and impacting our results in a way that is noticeable as of yet. So I think most importantly, we are extremely excited about the transaction.
It's very much a long term foundational view that is generating that excitement.
And that extends across reconditioning logistics and the exciting things that we can do together with the auction. So we.
We're excited I think there'll probably be some of that noise, maybe theres, a little bit more of that in the future, but it's been it has not been at a level that is concerning the lease us.
Got you that's helpful. And then just a related follow up it looks like there's an extra $1 billion of capital being raised now.
Can you maybe talk about that as just because.
Frankly scary the macro backdrop is it just being a little conservative at the balance sheet or would you look to kind of repay some debt outstanding with some of the proceeds to understand what the extra bill you touched on this apologize if you already addressed this.
So what I would say is I think.
The way that we've chosen to structure.
This purchase and the capital raising is aimed at giving us maximum flexibility.
Dramatically enhances our liquidity position I think it does give us a lot of flexibility in the future to do interesting things.
Undoubtedly this quarter is not we're planning for.
We both hitting our prepared remarks since the shareholder letter.
We do plan for growth six to 12 months in advance.
World looks very different 612 months ago.
So we built for a different environment than we find ourselves in today.
That had cost.
And those show up in the results that we're reporting and now we're starting from a worse place than we would like to start and so I think for the remainder of this year. When we have to kind of dig out of that hole a little bit so that also generates.
The rationale for a little bit of additional cushion.
And then obviously the macro backdrop is uncertain and I think that extends to the broader macro economy and also to the.
The way the auto industry is going to evolve from here. There is some pretty unique things happening in the auto industry. These days that I at least I haven't seen in my career.
And so we think that given the opportunity we've got the size of that opportunity the strength with which our customers have responded to our offering over the last nine years the market share that we've seen continually growing across our markets. The continued market share growth that we've seen the addition of ADESA.
And the ability for us to build into that opportunity. We just want to make sure that we position ourselves very well to ride out whatever storm may or may not come to and so I think that this structure gives us the ability to do that.
It gives us the ability to continue to run our play and that's what we're going to do because we think the opportunity is absolutely massive.
The next question comes from John Coleman to Oney with Jefferies. Please go ahead.
Thanks for taking my questions.
Yeah.
So the shareholder letter mentioned aligning revenue and costs over the coming quarters, while also mentioning their profitability suffered somewhat in Q1 from having a high level of fixed costs.
Maybe you could just help square those two comments.
And also help detail some of the levers you have to become more efficient over the coming quarters.
Sure So I mean.
First of all let's walk through how.
I think the numbers work and the simplest way we can so as we said we aim for growth six to 12 months in advance and that's because we've grown at a very fast rate and we do have real ops, our growth is not continuous and smooth it tends to be discontinuous.
Around tax season, which is the end of February early March so that requires planning.
And we have to build up our operational capacity ahead of time.
If we go back in time to Q4, we grew at 57% in Q3 were growing at 74%.
So we clearly we are growing at higher rates than we were anticipating higher rates of sales in Q1, because we didn't appreciate what what happened industry wide with affordability and interest rates and consumer sentiment everything pushing overall volumes down and so we built more capacity and so one way to look at that is if you look at our SG&A per unit.
It's at levels that we haven't been out in a really long time and we've been at much much lower levels, we have been.
On the order of $2500 less many times in our history and so even if we just kind of do the simple math, there and say we would have aimed for this level of growth and not kind of built for a higher level of growth across 100000 sales thats $250 million, that's a really big difference.
And so we built for more then showed up.
And I think Thats, we find ourselves today, the other impact that kind of drove the results was some of that.
It kind of extra capacity, we built also does flow through Cogs and it impacted various GPU line items and then we saw interest rates move back and so to some of those things kind of led us to where we are.
I think going forward. The most important thing that we can do is we just need to align.
Our cost levels with sales.
And the good news is we've been growing market share very consistently even through this environment. So the underlying business continues to grow.
Relative to market, we grew at 14% in the quarter, which isn't isn't as fast we would have liked but it is very solid in light of a shrinking environment.
We continued to see more evidence of the underlying demand growth. If we look a bit deeper we pointed to this statistic of customers over 700 FICO grew at.
That 50% in the quarter across all of our cohorts, we saw growth year over year in the quarter. Despite the shrinking market. So I think we have to do now is we have to continue to position the business to benefit from that growth. We have to try to do our best to understand what's going to happen in the macro environment, because we're continuing to take market share. There is a question about what's going on with the aggregate levels of sales.
Across the industry.
As long as that's still shrinking that will be.
A headwind to growth when that abates, and even stabilizes somewhere that should be less of a headwind, which will be beneficial and then at some point.
But that will reverse it'll turn into a tailwind.
And then we also have some operational levers that we have that are in our control.
We talked about we definitely took a hit from OMA Toronto Logistics network.
And then that was extended by by Winter storms and then as we've opened three inspection centers in the last quarter and one quarter before it.
That kind of inventory in different places that grew a little faster than we anticipated that put a little bit of extra strain on the network.
Fortunately that extra strain has put us in a position where we have not yet.
Increased visibility of inventory across our network to customers everywhere.
So those are operational undertakings that we're very focused on we want to try to get our logistics network back to where it was a year ago and then continue to proceed positively from there that would lead to faster delivery times and greater sales all else constant and then that puts us in a spot to be able to make inventory visible, which should also lead to greater sales of content. So.
That's the kind of easiest and most important way to get back to balances to drive up sales and then I think something that were trying to internally and something that I'm incredibly proud of the team for US every moment, whether it's the moment you plan for if it's a little bit different at the moment you anticipated. It is some sort of an opportunity and as a company for the last nine years, we've been characterized by.
Sprinting as fast, we possibly can to keep up with the demand that we've seen and I think the company has done a great job. The team has done a great job keeping up with that growth and growing your GPU and levering EBITDA.
But undoubtedly when youre growing that fast there are just tradeoffs to get made and there are priorities that you that you have to kind of surrender too and so growth usually wins and that means that kind of cost reductions at times do take a back seat and we haven't had a lot of opportunities where there is less immediate pressure on us to grow and I think the advantage there.
We have today and the opportunity. We have today is we do have excess capacity and so we've got the team pointing their energy at let's find ways to get more efficient faster than we otherwise would have because we still got all this effort and now we have this new opportunity, where we're not pointing a lot of that effort in the direction of just keeping our head above water with growth and so that's the other big opportunity that we've got and somewhere.
In the mix there between growing sales as a result of our market share growth growing sales result of continuing to improve our operations.
With the overlay of whatever happens in the market and then getting more efficient on expenses because of this opportunity that we've got we expect to get back in balance and then we'll continue to build from there. So thats our plan and we feel really good about it.
Thanks for that.
Just wanted to quickly ask about the proposed offering from this morning. This afternoon, sorry, it sounds like last quarter, the $1 billion of additional financing was being mostly invested into the ADESA assets, but the proposed offering mentioned that you'll also be now investing that $1 billion into work.
<unk> capital and general corporate purposes. In addition to that the investments in the ADESA assets.
Two question and Thats also in addition to raising an additional $1 billion in equity.
Two questions here can you just quantify how much of that 1 billion, you'll be investing in each of the buckets that you outlined in the proposed offering and then second what what changed since last quarter.
Necessitating an additional $2 billion in cash.
Sure. So on the construction improvements to the ADESA locations, there's nothing changed there so.
We still expect to invest.
Approximately $1 million over a period of multiple years in the.
The ADESA locations in order to move them from what we estimate is about 200000 infrastructure capacity today.
Fully staffed from a annual retail reconditioning perspective up to $2 million.
Annual units of production capacity at full utilization when fully staffed which is R.
Our goal for the ADESA locations so.
That is exactly the same as as we've always thought about it.
I think that yes, we do plan to.
Yes fill up locations, we expect that cost about $1 billion over a period of multiple years.
In terms of the.
Additional.
The additional capital.
I think the the way we are thinking about that is we have a very big opportunity as a company I think we're.
Streaming is excited about the opportunity in front of us to take meaningful market share to drive strong unit economics to take advantage of Odessa acquisition.
To get additional.
Our reconditioning capacity closer to more customers to improve.
<unk> experience in fact, the speed delivery times take advantage of the logistics network benefits that come from having a more broadly distributed.
Footprint and so.
Thank you.
We.
Decided to raise additional capital.
<unk> just to allow us to completely focus on that goal building toward our.
Our long term model and to stop having.
Conversations about liquidity and what happens in a deep recession in a prolonged recession and all those sorts of things.
We feel really good about the transaction structure that we've put together I think we feel great about the.
The ADESA acquisition.
And the overall trajectory that that places us on.
The next question comes from Michael Montanan with Evercore ISI. Please go ahead.
Hey, great. Thanks for taking the question I had two questions. The first one was around the demand side. So last quarter you had given some color around how units grew four.
Household was 100000 plus of income versus those with 50 K. So I was wondering if you could discuss that and or.
The impact of stimulus, which we think could have been 500 bps to 1000 bps and then I had a separate question.
Yeah.
Sure So what I would say at a high level.
Those those kinds of metrics remain the same or kind of even more severe where those with higher incomes have outgrown those with lower incomes by by even more recently, so I think.
This kind of theme of affordability.
<unk> has continued to get stronger over the last several months, so whether youre looking at that.
In in income in in credit, we provided the statistic with with customers over 700 FICO.
In Asia, I think that basically shows up anywhere so.
That is clearly.
Something that is very active in terms of what's going on in the auto industry today those with.
Higher incomes and better credit.
Are still buying cars at a much higher level than those with lower incomes and lower credit in this environment.
I think it's hard to disentangle the stimulus.
That there were several different ways of stimulus.
Last year and the year before and it's hard for us to precisely disentangle that clearly that is something that we're comping over the last year was it was tax season, and there's a little bit of stimulus shortly thereafter.
And this year tax season in general I would say it was.
Much softer in terms of impact.
Then tax seasons historically have been I think it's hard to disentangle that kind of comping stimulus effect from the the affordability issues in the general consumer confidence and just kind of so so.
The economic issues and everything going on in the world, but clearly it all played something of a role.
Okay. That's helpful. And then just on the head count front, we had seen a pretty significant kind of quarter on quarter reduction in job openings.
And I'm just wondering if you could talk to kind of if you assume volumes are relatively similar or improve kind of only modestly how long do you think it would take to kind of rightsize the cost structure for that kind of environment is it kind of a one quarter thing or is it more of a two to three quarters.
Sure. So I don't think we can give precise timelines on that what I'll say is we're going to be working hard in every direction, we've been growing market share quickly.
We clearly have operational opportunities that we expect will drive additional growth all else constant.
We're clearly focused from a product perspective on driving additional affordability, which I think will be helpful. For customers and then we're also very focused on gaining cost efficiencies as quickly as we can.
I would say our plan right now is sprint and.
And all of those different directions and then.
We'll see where that all comes I think historically, it's been easier for us to provide specific guidance and forecast when we're trying to predict what's going on with our demand and what's going on with our execution I think today, we have a significant overlay of dynamism in the economy broadly and I think we want to be careful about.
Being too specific in any of our projections as a result of that.
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We also ask that you please limit yourself to one question and one follow up.
The next question today comes from Brian Nagel with Oppenheimer. Please go ahead.
Hi, good afternoon.
Thanks for taking my questions.
So I apologize.
Our focus has been short term but.
There was a lot of comment you made a lot of comments a lot of detail with regard to the effects in the quarter be transitory could you help us.
Could you talk more about the trends through the quarter, then even into Q2, both with unit sales as well as GPU.
Maybe some of the early improvements are already starting to see is some of these factors speaking to abate.
Okay.
Sure well I think yes.
Definitely happy to talk about Q1, I mean, Q1, I would say it was for the most part just kind of continually it looks like the industry environment was deteriorating throughout.
Is I think probably the simplest way to characterize that.
And again Disentangling, how much of that was affordability how much of that was.
Just general consumer confidence or interest rates is very very hard.
But I think just looking at.
Auto sales across the industry auto sales our peers.
It looks like it was deteriorating throughout the quarter.
I think it's very very early in Q2. So I don't think were going to provide too specific of a view there but.
But I do think that from the time that we last spoke in our last earnings call things clearly continued to deteriorate from an industry perspective now we do think that's transitory.
Yes, there is a question of duration, but but this industry is a $40 million transaction industry. It's been that way for a very long time, if you kind of zoom out over any reasonable period of time.
What it averages in kind of that those transactions come from the fact that there is 270 million cars on the road and consumers trade with each other once every six and three quarters years, and that's kind of the math it works out.
In a moment like this it gets very easy for many people kind of put off the decision to purchase the car for many possible underlying reasons and so historically you can see car sales slow for a period and generally that generates pent up demand and it alleviates relatively quickly I think we do have extra dynamics going on right now we have.
We have reduced new car production, we have car prices.
Our massively of outpacing inflation in terms of price increases. So I think it's hard to know exactly how those forces will all play out in the near term.
From our perspective, we made this comment in his prepared remarks. The most important thing. We can do is continue to build toward the structural opportunity that sits in front of us which is this $40 million opportunity and continue to make gains as a company and they just position ourselves to be resilient to whatever the macro economy brings us and we think capital is a big part of that and we think we've positioned ourselves well.
For whatever that does bring.
Okay. That's helpful. And then so just to follow up on that.
You're talking primarily about the unit sales, but with regard to on the GPU side and particularly the reconditioning costs have you started to see that dynamic improved yet.
Sorry, so yes, so on the on the retail cost side. So I mean, I do think that <unk> had very acute effects. For example on the reconditioning centers and we are moving further away from that so I think thats beneficial all other things being equal.
We definitely have been seeing improvements in the in the logistics network.
Versus the most disrupted points and so I think thats.
Beneficial all things being equal so I would say we are seeing some some positive <unk>.
Data there.
Yes.
The next question comes from Rajat Gupta from Jpmorgan. Please go ahead.
Hi, good afternoon. Good evening, thanks for taking the question.
Just.
First wanted to go.
The consumer environment in the near term.
In the shareholder letter you mentioned that.
A pretty substantial sequential improvement already.
<unk>, including building sale.
Is that primarily a function of just.
<unk>.
We'll be capacity constrained.
Thanks or.
Is there something in the demand environment.
Just wanted to clarify that.
Hello.
Sure. So I think again some of those things are a bit difficult to disentangle, but from a logistics perspective. For example, we have made some gains.
Yes.
If we kind of look at where we were a year ago, and then compare ourselves to the peak.
Depending on what metric you're looking at maybe made kind of half the gains back to where we would like to be if we were in the same styles were a year ago and then we've got room to go from there. So I think there have been some benefits that are specific to carvana that we believe are driving some benefits and then we also do believe that.
We are growing market share and so as long as even kind of the rate of industry wide sales shrinking reduces all else constant that should be that should be positive for us as long as we continue to execute on our side. So I think like I said, it's very early in the quarter, we don't talk too much about it but I think they're having some at least.
Operational gains that we are making and they are likely having a positive impact.
Got it thanks for clarifying that.
The other thing you mentioned.
GPU.
You are.
To successfully back on the benchmark increases.
<unk> in the month of April .
Have you havent seen any impact on demand because of <unk>.
Good.
What you would've expected.
Some of your competitors had some.
The different perspectives on that so I was just curious like what youre seeing in Mike.
How's that been going through the mountain if at all or.
Sticking pretty nicely.
Okay.
Sure well I would say all of them.
Constant there as there is no question that the.
Increasing interest rates negatively impact demand and thats something that we try to make sure that we're measuring.
Carefully all the time inside the company.
I think the other thing that's true is as benchmark rates go up and as risk spreads go up.
The rest of the market also raises interest rates.
No.
From a kind of competitive option perspective consumer options just in general kind of go up and so I think there is kind of this term thats often used that we've used in the past as well that interest rates are somewhat sticky where when theyre going up it's sometimes difficult to pass all of the the increases on to customers instantly in a way that is economically.
<unk>.
Optimal.
They just tend to take a little bit longer because different different groups do kind of take different views and it takes a little bit of time to adjust but generally that adjustment period is not super long and then the same is true on the other side as well so I think undoubtedly.
We would expect to see more demand if we were not racing integrates with the environment, but I think that that would be the rest of the market is also raising integrates with the environment and so I think that we are not seeing the same impacts that we would see if we were raising its rates by ourselves off the market rasen constraints alongside us.
The next question comes from Adam Jonas with Morgan Stanley . Please go ahead.
Okay Ernie.
Can you tell us about project catapult. Please.
Referring to a lot of the cost actions.
Just on the emails I'm getting Tonight.
Your your quarterly cash burn and how and what you can control to manage that.
Even if it wasn't part of the plan.
Is it has a big impact on how how long.
The capital that you are in process of raising can last year, depending on outcomes. So it sounds super important, but you mentioned logistics teams and some stuff, but I didn't know if it could be a little more specific what those efficiency levers in terms of dollar terms or how we can dynamic that.
Sure well first of all project catapult the internal term that we use for the project that is running across all of our different operational groups right now that was a little bit of an internal call out to our teams.
There's a lot going on across.
Across every single.
Operational team there are very clear goals, and very clear metrics and a cadence of kind of catching up and accountability to make sure that we can gains as quickly as we possibly can and we really are excited internally about using this as an opportunity to make gains that are hard to make in moments, where you have as much pressures we've had on average from growth. So I.
There are there are many many different sub components.
To that that plan.
And it does cross every operational team in several product teams as well so I don't even really know where to begin but I would say that the overall theme.
Is coil to catapult and put ourselves in a spot where we were really ready to efficiently grow when the market supports us and where we get gains in the near term in all these areas, where we know we can be better and we finally have an opportunity to focus on it. So that's the general theme.
I'm interpreting that as it is not.
Clearly a cost cutting program.
It's it's an efficiency program that.
Can yield savings.
Prolonged period of AR.
Half half the growth that you would have anticipated if that 14% of that if that was prolonged and not where your capacity is for that you could lower the burn rate.
In the next couple years.
Is that right.
I think.
<unk> is kind of lower cost and.
Simpler to scale up and so I think it is the pursuit of efficiencies across all of our different operational teams.
The next question comes from Seth Basham with Wedbush Securities. Please go ahead.
Thanks, a lot and my first question is just a clarifying why on the last one. So you are in the process of cutting costs in certain areas of the business too.
It reduced the cash burn.
I'm sorry, if that was your question. Yes. So we are we are working.
Working on these projects that I discussed hate to find.
Efficiencies across the business.
That extends that every operating team and all else constant we do expect that to reduce variable costs.
Okay. Thank you and then my follow up question is just understanding when you announce.
ADESA deal you.
You.
You were thinking of financing at that point in time from my understanding that's only with debt and now you're financing it part of the preferred equity.
Additional equity cushion.
What changed related to that financing component for the ADESA acquisition and the improvements from the debt component to preferred equity component between then and now.
Sure. So I think we can maybe separate that into two so one is the addition.
The equity and I think that that was driven by giving us more flexibility as discussed earlier, we do think our opportunity is enormous we think the market around US has moved a little bit. We think that suggests that we should put ourselves into a position where we can operate as flexibly as possible to take full advantage of of the opportunity that we've got and so I think that's an addition, and then.
I think.
In the capital structure, we evaluated a lot of different possible solutions and.
And evaluated those do a lot of different lenses.
Cost efficiency flexibility pre.
Prepay ability.
And came down with this being the right capital structure. So I think there are a bunch of considerations there.
The next question comes from Michael Baker with D. A Davidson. Please go ahead.
Okay. Thanks, a couple are real quick ones here I wanted to follow up just on used car pricing in the industry. What's your view on where it's going some of the indexes are seem to be coming down on a sequential basis and then the year over year growth has been a little bit less than it has been yet you're saying the opposite your used car.
Our asps are up and up at an accelerating rate one of your competitors that reported this morning.
Same thing year over year.
Increases were higher than last quarter and sequentially the prices are getting higher so.
Why the discrepancy do you think and where do you see used car prices going.
Well, that's a very hard question.
So let's start with maybe the discrepancy I think the discrepancy could be partially in timing and then it can also be the gap between wholesale markets and retail markets. So we.
We definitely saw car prices.
Let's start with wholesale prices, we definitely.
Wholesale prices kind of move up in the end of last year.
Early this year and then more recently, we've seen wholesale prices kind of start to fall back a bit.
But I think when you are comparing quarter over quarter year over year.
It just kind of depends on the blend of of where car prices were across the sum of that period and so I think maybe some of those discrepancies could just be a function of.
What different periods youre looking at what different companies Youre looking at I think.
Generally speaking retail prices have been lagging.
Wholesale prices and generally speaking they move down a little bit more smoothly or up a little bit more smoothly.
That a large portion of the market operators.
Cars are kind of purchase at a point in time and then their finance on our floor plan and they are kind of sold cost plus for lack of a.
The kind of more complicated description and there's a lot more that goes into it I think that's a good first of all the way to think about it and so oftentimes if wholesale prices drop.
Not necessarily clear that retail prices will immediately follow because many of the cars that are sitting on dealer lots were bought in the previous period.
Debt against those cars that are at a price that was the.
The prevailing price of that previous period, and oftentimes dealers are not in a position to take losses on those cars or choose not to get lost on those cars and so I will just hold the prices longer than and then sell them at a higher price you tend to see a little bit more stability than retail prices.
Those.
I started with kind of the historical prices and then move on to the dynamics and what can sometimes create a gap between wholesale and retail as far as where it goes from here I think the simple answer is I certainly don't know.
I think today, depending on what kind of bucket of used car prices youre looking at many cars are 40% more expensive than a year ago, whereas.
Economy wide you know inflation is closer to 8% so youll relative to other goods cars are more expensive today than they have historically been you would I.
I would at least expect that over a medium period of time.
<unk> will likely kind of have the same relationship to other goods, they've historically had and so that would mean either more inflation or or car prices will come down at some point.
And then I think probably the single biggest input to car prices today and the single biggest input I think to a lot of the unique dynamics that are happening across the new car market and the used car market is just new car production levels, which are obviously much lower than they've historically been.
So I think that.
It's hard to figure out how all that's going to balance out.
And I think we'll be we'll be paying very close attention to try and do the best job, we can to predict it and trying to manage the business in a way that is resilient to whatever.
Ever directions, those things could move.
But I don't think were.
We're confident in precisely how it will work out I will say our hope is that car prices come down I think all else constant you would we would certainly FERC car prices to come down I think in transition. There is there is a chance that that would provide.
There's something of a headwind to retail GPU I also think because of the dynamics discussed with kind of the gap between the wholesale market in the retail market, it's not obvious that headwind would be as strong as it might look if you saw wholesale prices move down and then also would clearly be a benefit to our customers if car prices were lower and that would.
Probably play a big part in returning the industry to normal which would.
Caused kind of the industry dynamics.
Reverse from what's been a headwind recently to a tailwind, which we think would be great for the business. So I think our hope is a car prices go down I think we would like to stay away from trying to precisely call. It yes.
Yes.
It makes sense just to follow up on that you said in the past Ernie.
The ideal environment is lower used car prices as you just reiterated but also lower interest rates I think what we might get here is one of those lower car prices, but but I think we're seeing higher interest rates, how would you characterize that environment.
Honestly I want to turn let's say as being 10 being the most ideal environment.
I mean I think.
If at all with one to 10, I think 10 would have to be everything is low end competition gives up and consumers are excited I think the ft that would that would be 10, I think youre moving off of that that ideal I think the most important thing is cars that people can afford because of the some of vehicle prices and interest rates, which the vast majority of.
Consumers are financing their purchases and so.
Affordability for them is kind of the intersection of or the combination of both car prices.
Interest rates and then I just think stability.
We feel like we've got an enormous opportunity and we want to build into that opportunity, but building into that opportunity as efficiently as possible.
Is made easier if we have clear visibility into what the future holds and so.
If we had more stability in the market I think that would be easier for us to just kind of stably grow and to be able to rely on what the markets can do around us.
More about that probably then.
Then levels of of either rates or.
Oil prices, but certainly wed love for affordability to get better for our customers as well.
The next question comes from Chris <unk> with Needham. Please go ahead.
Hi.
Two on the first one we've talked a lot about efficiency you guys spent $21 million more dollars or 8000 less cars as far as advertising I. Just wanted to think about advertising is that something that was preplanned and that kind of the day.
And environment Snuck up on you guys or that's something that's kind of a bigger picture a sacred cow.
And the second question would be around credit.
Credit spreads.
Sure. So what I would say on that is I think as I said across the board we build our plans out in advance and then something that we've.
We've learned to do over time is be careful about yanking wheel too much too quickly because generally you regret it when you do and I think when when we talk about marketing in particular.
We still remain a relatively young brand its building a lot of awareness.
And we think that Theres a lot of value in continuing to build awareness and understanding of what we do and trust in what we do.
And we also think that offense marketing is something that has a potentially long payoffs I think a lot of times marketing dollars are thought of us as kind of a <unk>.
Correct investment where the dollar goes in at a sale comes out.
Truth is a lot of what youre doing with marketing is getting impressions on people and communicating what you do and how you do it.
And those impressions add up and you build a brand with that.
The payoff of marketing can be long and so we will look to make moves that we think are intelligent across the board.
Across time is we're as we're managing the business, but we also try to be careful to not yank the wheel too much. So thats part of what Youre seeing.
Understood and then if I look at Q1, API securitization versus Q4.
And we're talking about higher FICO score customers being a larger part of the growth.
I guess, Ken API move higher because.
As interest rates move higher even these customer or your best customers, let's see if higher rates and just trying to figure out how the spread can widen because you've only got to lever then the yield levels. The level you don't really have much control over.
Yes.
Sure. So I think the simplest way to probably think about that.
Customers with higher FICO as are our different customers than customers lower FICO and so the interest rate spread that matters. There is the spread between their rates and their funding cost and.
On other customers.
They are right in their funding cost and so I think what matters is keeping the spread between those two things.
In a place that you can monetize in a in a consistent way.
I think what happened in the quarter that is that is unique in the <unk>.
Shift effects don't matter all that much because the spreads are kind of priced in a way that is thoughtful and the mix shifts don't matter too too much.
What happened in the quarters when we originate alone we have an interest rate that we show to our customer and there is an expectation of the underlying funding cost and then if the actual funding cost ends up being different than that expectation because either benchmarks.
Or risk premiums or expected losses move between the moment of origination and at the moment of sale then that ends up being a headwind.
So what we saw obviously was pretty dramatic and straight moves I believe it's the most dramatic benchmarks have moved since the great financial crisis.
And that that had an impact but I think that we're if you look at the actual rates that were charged to customers at any point in time and the expected funding costs.
Throughout the quarter, we originating loans in a very similar spot to where we were previously.
Our last question today will come from <unk> Khan with Suntrust. Please go ahead.
Thanks. This is Robert Taylor on for an event.
So just I was just curious on the well.
So you guys are planning six to 12 months in the head.
What short term measures you guys have what operational measures you have in place to react.
Near term market swings are exogenous market macro conditions and then separately.
Have you said publicly or can you give us some sort of understanding of where the.
The ADESA location, what they're operating at today so.
Appreciate the projections and forecasts.
They can do at full capacity, but maybe what they're what levels theyre, they're operating at today, but not full capacity.
Sure. So I think in the near term our goal is kind of as outlined earlier on the call. We will do everything we can to improve.
The operational constraints that we think are constricting sales that we can show customers more cars and drive sales up and then we're working hard to drive.
As much cost efficiencies, we possibly can.
And we'll see how that all kind of plays out on the ADESA side.
<unk> currently has facility capacity.
Approximately 200000 cars per year, a little over 200000 cars per year, and so that kind of already exist in these sites.
Then over time, we will be making the investments to be able to ramp up that facility capacity.
To the 2 million that we that we outlined.
Earlier in our deck of the actual.
Utilization is far below the capacity they have and so there is there is an ability for us to hire and train and unlock.
More of that capacity.
But there are steps between where we are in doing that that the facilities exist and are ready to go but there's still a need for hiring and training to unlock the the 200 K plus and then just would reiterate again I think we put our shareholder letter.
Kind of our footprint in the ADESA footprint and I really think that Thats, a powerful page to take a look at it because it's if you look at our footprint today and use of our reconditioning centers are and you think about this through the through the lens of the logistics constraints that we've seen over the last four or five months you can really see how that works. So we're buying cars nationwide.
We're shipping a lot of those cars to the middle of the country to get recondition them, we ship them all the way back out to customers and when you kind of look at that ADESA footprint and you overlay. It on the map you can see how all of those kind of inbound and outbound transport legs really reduce and to just kind of maximally get advantage of our business model our logistics network.
It does require a coordination between.
Where cars are produced and logistics network and Weyerhaeuser purchase and we think that this gives us an incredible opportunity to coordinate that much better much more tightly.
And with lower distances and times.
Between cars and customers. So we're obviously really excited about that and we will look to gain the benefits from that as quickly as we can.
Okay. Thanks.
Thank you.
This concludes our question and answer session I would now like to turn the conference back over to management for any closing remarks.
Yes.
Great well, thank you everyone and thanks for joining the call to everyone on team Carvana.
Let's really take advantage of opportunity we've talked about it a lot internally, but this is this is an opportunity that we have and if we take advantage of and we're going to look back on a very fondly and I think theres a huge chance that that we can make this into a big positive. So let's do that I. Appreciate everything you guys do I appreciate it for taking the time to listen to the call and we'll talk to you again next quarter. Thanks.
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