Q3 2022 Carvana Co Earnings Call

Good day and welcome to the Carvana third quarter 20, twenty-two earnings conference call. All participants will be in a listen only mode should you need assistance. Please take note of conference specialist by pressing Star then zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then too.

The interest of time, please limit yourself to one question and one follow up.

Please note this event is being recorded.

Now like to turn the conference over to Mike <unk>, Vice President of Investor Relations. Please go ahead.

Thank you, Matt good afternoon, ladies and gentlemen, and thank you for joining us on Carvana third quarter of 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 Dot Carvana dotcom occurred the third quarter shareholder letter is also posted on the I R. A web site.

Additionally, we posted a set of supplemental financial tables for Q3 to exist investors and understanding the moving pieces with our first full quarter.

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Which can be found on the events and presentations page of our I R website. Please note that with the full consolidation of ADESA now complete we do not intend to provide this supplementary tables going forward joining me on the call today are Ernie Garcia Chief Executive Officer add Mark Jenkins, Chief Financial Officer, before we start I would like to remind you that the following discussion contains Ford.

The 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 discussed here a detailed discussion of the material factors that cause actual results to differ from forward looking statements can be found in the risk factor section of carve out as much.

Recent Form 10-K, and our quarterly report on Form 10-Q for the first quarter of 2022.

Looking statements and risks in this conference call are based on current expectations as of today and Carbonara assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

Otherwise noted on today's calls all comparisons are on a year over year basis.

Our commentary today will include non-GAAP financial measures reconciliations between gap and non-GAAP metrics for a reported results can be found in our shareholder letter issue today, a copy of which can be found on our investor Relations website.

And now with that said I'd like to turn the call over to Ernie Garcia Ernie.

Thanks, Mike.

One for joining the call the third quarter was a quarter of strong operational progress against the difficult industry and economic backdrop, we're on track with our goals from an expense and operational efficiency standpoint, but industry demand interest rate in depreciation headwinds are slowing our progress on overall profitability. We made gained here, but they were slower than we would have like and he's headwinds are likely to persist over the near term.

Making precise forecasting of that progress more difficult.

To organize these remarks I plan to provide our thoughts on five important questions.

One what is driving our expense and operational games.

Two what are the key headwinds, we face and how to change his nose dynamics impact us three how do we believe we are doing relatively industry for what does all this mean for the near term and five what does it all mean for the long term.

First what is driving our expense and operational games in the letter we provide a number of data points, including that we reduce expenses by about $90 million in the quarter $360 million on an annualized basis as well as many underlying operational metrics that are making those expense reductions possible.

Extremely proud of this progress is the result of an intense focus on efficiency throughout the company and the way that we manage the business the way that we organized and set our priorities and where do we eschew day to day as we are faced the changes in the economy or industry and in markets over the last several quarters. The People's Carvana have come together and are doing great work, we have a lot of work left to do but we know it and we know how we're going.

Go about doing it thanks.

Thanks to everyone inside the company for all the hard work you're putting in we still have a long way to go in there would probably be additional unexpected difficulties between here and the end of all this we've gotta keep our heads down and keep marching.

Next what are the key headwind, we face and how to change those dynamics impact us.

There are three key headwinds that we're facing right now industry level of demand interest rate increases and vehicle price depreciation let's take these one at a time first industry level of demand. There are many data sources available to assess industry level demand, but regardless of the source demand is slow.

Industry data sources estimate you sales down approximately 10% to 15% year over year in the third quarter and many of the forward looking indicators that we use internally, including web searches an active activity on carvana dotcom indicate further swelling recently cars are an expensive discretionary often finance purchase that inflated much more than other goods and the economy over the last couple of years and is clearly.

Having an impact on people's purchasing decisions.

The good news is that historically used cars within a relatively resilient category and the depressed level of sales that we see today are similar to periods of fairly severe economic difficulty in the past potentially suggesting that there is less medium term downsides and there may be for other categories. There's possibilities also supported by higher depreciation rates that should overtime may cause more affordable.

Again and afford industry curve. It suggests the majority of the interest rate increase their behind us.

<unk>. This we are building our plans around assumptions that the next year is a difficult one in our industry and and the economy as a whole.

Interest rate increases.

Interest rates have risen rapidly with the two year Treasury, a good benchmark for automotive loans rising 3.9% over the last year and 2.6%. Since 2019. In addition credit spreads have risen about 1% in the last year to.

To put this in perspective for a customer utilize in financing the moves and two year to re yields plus credit spreads of last year are equivalent in their impacts the customers monthly payment of about a 3000 dollar price increase.

As a result for customers using financing cars ended the quarter at their most on affordable point ever. Despite the fact, the retail prices have dropped roughly 10% this year.

S benchmark interest rates risk spreads and market expectations for future credit performance evolve over time, we do expect those changes to impact our other GPU in sales volumes before the market fully adjust which is built into our expectation that other GPU moved down in the fourth quarter relative to the third.

Lastly vehicle depreciation.

Over the medium term, we believe vehicle depreciation is good as it is necessary to bring cars back into line with other goods in terms of cost and affordability and therefore as healthy for volume in the near term. It is less clear juki dynamics that have a big impact on retail Gpus, the average spread between acquisition prices and retail prices and the rate of daily depreciation historically on average the.

Till retail spread roughly captures the depreciation dealers expect to see prior to selling a car, which creates stability in industry retail margins. It can be seen over time.

We've seen this in action recently as depreciation rates of increase of last two quarters and in both wars, we saw acquisition spreads wide and in a way that was approximately offsetting looking forward. We expect this to continue to be the case on average, but we don't know exactly we will play out quarter to quarter. We've recently seen wholesale retail spreads widened further and I've also seen daily depreciation rates move up meaningfully given these.

Moves our expectation for the fourth quarters of retail GPU will decrease relative to the third quarter over time, we expect us to normalize it is as it historically has but the recent volatility is making it tougher to call then it usually is.

Moving onto how do we believe we are doing relative to the industry.

This is much more difficult question to answer simply with our results and it normally is given the dynamics discussed above as well as the volume impacts of our focus on profitability. We discussed much of this the shareholder letter in a way that we hope provide some clarity and understanding but to summarize our beliefs. They are this.

To realize sales volumes year over year, we are clearly taking market share relative to the industry quarter over quarter. We are most likely not taking realized sales market share relative to the industry as a whole, but it depends on which date of sources, we compare to if we use our best understanding of the differential impacts to conversion for our customers versus the average customer and industry due to the choices, we are making in setting interest rates as well as the.

Impacts driven by our folks on profitability. It is likely we are seeing somewhat meaningful gains in top funnel demand market share. We expect this to begin to show up and realized sales when the interest rate in general industry environment approaches more stability and we stopped further decreasing conversion through our profitability initiatives.

Now heading to what does this mean for in the near term.

In the near term our goal is clear to March toward profitability as quickly as we can regardless of industry level sales volumes to achieve this we plan to continue to rapidly reduce expenses to continue to put our focus on efficiency gains throughout every area of the company and to continue to evaluate and test what levers we should pull to maximize the number of our more profitable sales and to minimize the number of less profitable sales.

Lastly, I won't hit the question of what does this mean for the long term.

This is an easy question escape in a difficult environment, but in the end is the most important question. Our belief is this if we manage through the current environment as we intend to the long term will be even brighter all the things that define our opportunity. We started carvana and were true a year ago and the environment felt very different are still true today nothing focuses us like difficulty in the last several quarters have undoubtedly been difficult.

The next couple of maybe as well, while it's never fun, while we're in the middle of a difficult time, if we use the clarity and folks who provide will be better on side of it is our intention the marks continues mark.

Thank you Ernie and thank you all for joining us today.

We made significant progress in Q3, executing our plan of reducing SG&A expenses and progressing toward profitability.

Despite significant volume headwinds driven by a variety of external and internal factors.

In Q3 retail unit sold totaled 102570, a decrease of 8% we gained market share versus the comparable period in 2021, despite the impact of high used vehicle prices rising interest rates and several initiatives focused on improving near term profitability.

Total revenue was 338 $6 billion in Q3, a decrease of 3%.

Little revenue included $193 million from ADESA, which was included in our results for the full quarter in Q3.

Although gross profit per unit was $3500 in Q3, a decrease of 11 72 year over year and an increase of $132 sequentially.

Due to the dynamic nature of the current environment, we will focus our more detailed commentary on sequential changes.

Following the acquisition of Odessa, We're reporting total GPU retail GPU, and wholesale GPU bolt, including and excluding depreciation and amortization expense or DNA and share based compensation expense associated with Ernie has 1 million unit milestone gift or gift SBC.

Historically Carvana has reported GPU, including DNA, while ADESA has reported gross profit excluding DNA.

For the purpose of clarity we are now providing both.

Total gross profit per unit, excluding DNA and gift SBC was 38 70 in Q3, an increase of $221 sequentially.

Retail GPU was 11 31 in Q3.

<unk> compared to 11, 31 and Q2.

Retail GPU, excluding DNA and gift SBC was 12, 67, and Q3 compared to 12 76 and Q2.

Sequential changes in retail GPU, we're primarily driven by higher spreads between retail prices and acquisition prices and lower retail cost of sales offset by higher retail depreciation rates in Q3 compared to Q too.

Wholesale GPU was $448 in Q3 compared to $383 and Q2.

Sequential increase of $65.

Wholesale GPU, excluding DNA was 682 and Q3 compared to 519 and Q2.

Sequential changes in wholesale GPU, we're primarily driven by consolidating a full quarter of a desktop in Q3.

Other GPU was 1921 in Q3 compared to 18 54 in Q2.

Sequential changes in other GPU, we're primarily driven by higher origination rates relative to benchmark interest rates and improve securitization credit spreads relative to cue to partially offset by lower ancillary product attachment rates.

Looking toward Q4, we expect to maintain flexibility to optimize our long nails channel mix as the quarter progresses.

Made significant progress reducing SG&A expenses in Q3, Carvana only SG&A expense, excluding impacts from Odessa declined by $89 million compared to Q too.

These SG&A expense reductions were broadbased, including in payroll advertising logistics and other SG&A expense.

We expect to make continued progress on reducing SG&A expense and the coming quarters as we continue to execute our plan across all areas of the business.

Our progress in the quarter led to an adjusted EBITDA improvement of $39 million in Q3 compared to Q2, despite lower retail units old.

Adjusted EBITDA margin was minus 5.9% in Q3 compared to minus 6.2% in queue to an improvement a 0.3%.

Adjusted EBITDA excludes impacts from Ernie gift of personal stocked carbone employees as well as other income and expense, which primarily includes changes in the fair value of securities, but it includes non gift sure based compensation.

And May 2022, we outlined a stretch goal for Q4 2022 of $4000 SG&A expense for retail unit sold excluding DNA SBC and a desk expenses.

This equated to a stretch goal of 43 50 to 44 50, including ADESA expenses.

We are making strong progress, reducing SG&A expenses on an absolute dollar basis, but due to the current volume environment. We do not expect to reach this stretch goal on a per unit basis in Q4.

Our goal is to manage the business to achieve greater than $4000 total GPU and significant adjusted EBITDA profitability at current volume levels, while also building and flexibility to achieve profitability at higher or lower volume levels through our efficiency and cost savings initiative.

On September 30th we had approximately $4.4 billion in total liquidity resources, including $2.3 billion in cash and revolving availability and $2.1 billion in Unpledged real estate and other assets, including approximately $1 billion, a real estate acquired from Odessa.

We also ended the quarter with approximately 1.2 million units of inspection and Reconditioning center capacity at full utilization Gimme.

Giving us substantial infrastructure for future profitable growth.

They are strong liquidity position are significant production capacity runway and are clear and focused operating plan positions as well on our path to achieve our goal of driving positive cash flow and becoming the largest and most profitable auto retailer. Thank.

Thank you for your attention will now take questions.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you're using a speaker phone please pick up your handset before pressing the keys.

If it anytime you question that's been addressed and you would like to withdraw your question. Please press Star then too.

In the interest of time, please limit yourself to one question and one follow up.

At this time, we will pause momentarily to assemble our roster.

And our first <unk>.

And our first question will come from Chris bought a glaring with P. N B a pair Abbas. Please go ahead.

Hey, guys, taking the question.

Yeah. So the first one is it appears that the broader used vehicle market may be facing incremental pressure in Q4 above and beyond what you've seen in Q3 that seems to be that since the habits that you're seeing as well in Q4.

I guess my question is like what's changing right now are there certain pockets the market.

No no I've taken Carvana, specifically, you were pretty clear there, but but what are you thinking the market itself is at the lower income consumers dropping out as it is every customer segment be hitting similarly, like what are you seeing in a market environment itself in queue for relative to Q3.

Sure why I think there is certainly a lot of headwinds I think we've seen a tremendous amount of appreciation car price over the last several years, we put a statin the shareholder letter that Yo for a customer that is looking at car prices today in utilizing financing their payment is up about 160% of what it would have.

Pre pandemic.

And I think recently, we've seen car prices depreciate near to the tune of give or take 10%. So far this year, but we've also seen interest rates shoot up very rapidly.

And I think that overall has has harmed affordability.

I think it's always hard to suss out the rest of what's going on in the economy, but clearly it feels like sentiment broadly as is decreasing there's a bunch of different statistics that we can look at around yield consumer confidence or consumer willingness to buy a car at any point in time and I think that we we tend to see.

Some negative drifting in those areas of I think we don't know exactly how that will unfold from here I think we're trying to position the business in a way, we're we're well positioned to earn significant parts of EBITDA. These volumes are lower volumes, we're gonna keep marching down expenses vast we can.

I do think that we see yeah at the top funnel, we see they were still taking market share and potentially at a pretty fast rate and so I think that leaves is hopeful for where demand and ultimately go and where sales and ultimately go over time, but I think the next six to 12 months are are certainly more uncertain than they have been in recent periods where.

It was pretty reliable that kind of car sales would come in flat quarter over quarter winters folks on our own market share gains. So there's a lot of things happening all the things that you pointed to around demographic shifts, whether it's income or credit or whatever else.

All of those are active and all those are moving the directions that you would expect but I don't know that there's anything particularly notable that wouldn't be expected. That's occurring just just general softness I think when you see that across the entire industry.

Gotcha, Okay, and then just given that uncertainty.

Can you talk about the financing.

Outlook.

If the world stays insert it seems like the avs markets or like periodically opened in periodically that that's like clothes, but more expensive to get deals done.

You had to abandon the ABS markets for a couple of quarters.

Do you have enough liquidity through ally or other partners lined up that you could actually sell those receivables like how should we think about that risk of being able to you know you would have still a very high level of receivables originating so maybe to talk about your confidence again, those those receivables off loaded in this environment.

Sure. So yeah, what I would do that I think the relationship with ally remains extremely strong.

We recently extended our floor plan line there for the next 18 months and I think that the way that our our relationship works is we are regularly in contact with one another we're making sure that we come up with a plan that works great for both of US I think he does we've discussed in the past the way that we've always thought about balancing our channels is making sure that we have access to a very high quality channel.

Ally, which in good times is probably a little bit more expensive for us, but it ensures that in tougher times, where the avs market can kind of go through difficult periods that we've got a home loans and so I think we feel good about the way that we position that over time, we feel great about the relationship. We've got you will be renewing that deal as we head into next year.

Have over the last several years I don't think we have any.

Patients for how that renewable go that are different than it's been in the past, we generally set that up in a way where the economics between US an ally are set up to ensure that they have rates of return that are comparable to what they get elsewhere in the market and our arrangement is set up in a way that is dynamic. So it's those adjustments have been happening in real time throughout this year is it.

The market's been changing.

No I don't think we would have any expectations for something particularly discrete they've been a great partner for us in the past we've gone through periods, where the avs market was was in a tough spot, including Covid and.

And we generally try to size our commitment between us in a way that insulates us from that so I think that's generally the plan there and I think as I said, we feel we feel good about it it's a great relationship they've been great awesome hopefully they feel the same way about how we'd been to them.

Our next question will come from Rajat Gupta with J P. Morgan. Please go ahead.

Oh great.

The question based on your fourth quarter units and GPU Guide.

It looks like the fourth quarter of cash burn.

Inventory is likely to be similar.

To the third quarter, and you might need to either drawn vulgar again or.

Or or gap into the real estate.

Should we expect you to tapping into the real estate in the near term already or maybe you have already done it in the fourth quarter.

Oh and if he has how should we think about you know the cap right or if you're authenticated please bag or maybe L. D V.

And I have a follow up.

Sure Yeah, so on queue for Ernie touched along.

A lot of the key dynamics, we do expect volume to be lower sequentially relative to Q3, we all suspect GPU to be lower sequentially.

Relative to Q3 as well due to some of the dynamics and Ernie discussed at the same time, we also expect expect SG&A expenses to.

To be down significantly as well as we continue to execute on all of our efficiency and cost savings initiatives and so those are obviously offsetting.

Obviously offsetting factors, we also I would add.

Expect capital expenditures to continue to come down and Q4 relative to to Q3. So I think those are some of the the dynamics on queue for specifically in terms of our real estate assets.

Obviously, we have a very large and attractive real estate portfolio.

We just acquired a nationwide network of auction sites from Odessa.

I think those are you know.

Large sites and very desirable markets.

We think of really attractive pieces of real estate that was a big motivation for us undertaking that acquisition I've also been building.

Some large irc's in in <unk>.

Tractive markets around the country as well and so I think we have a a great real estate portfolio in terms of how.

How we're thinking about financing that I do think we have multiple options for the way we can finance that traditionally in history. We've used dailies back transactions I think we've executed about $500 million with those so far in our history as a company.

But I think there there can also be other forms of financing for large real estate portfolio. So I think that's something we're thinking about I don't think the.

I don't think we're going to we're going to be thoughtful about the timeline on executing any any real estate transactions, but we do feel like we've got a really nice base of assets there.

Okay have you started.

So you're not that into any yet right.

Yeah.

So far.

I think we're going to be very thoughtful about the.

The the the best way and timing for financing those assets.

They may be able to follow up you know you mentioned that you're looking to be profitable at.

G B U R N.

Volume level.

That would imply somewhere close to 100 million block that needs to come out from your quarterly SG&A.

Can you highlight maybe a few areas where.

Food.

Or any initiatives that are already under way to get there and lastly, any kind of timing when you do it.

To get there.

That might be independent of the macro I guess thanks.

Sure. So I mean, I would start by just pointing to the progress that we've made last quarter, where we reduce expenses by about $90 million.

Order over quarter, which is obviously a big number and is a is a meaningful number relative to you know to the to the step down that we will look to make it in the future I think undoubtedly as you continue marched down expenses against every incremental dollar gets a little harder than the last but you were still at levels of expense that are much higher than we would like to be and we're still in a place where there's obviously.

Some low hanging fruit I think if we look at the gains that we made your last quarter, it's probably most fair to massage out the impact of the reduction in force that we had and may which probably reduces that kind of $90 million and gains to something more like 70, but still a really meaningful number and I think that was very broad based I came across.

The board and other payroll, we reduce expense by $20 million in advertising $40 million and logistics $40 million, a is 20% will just expand quarter over quarter.

And then we made gains across the board everyone else in other we we cut out $90 million of course, which was 8% overall and that was all powered by a lot of operational great gains across all of our operational groups.

The logistics network.

Had a bunch of meaningful improvements network utilization was up 8% quarter over quarter.

<unk> average shipping miles per sale down 10% that's continued to go down.

Further since the since the quarter ended we've rolled out a new management structure at our logistics hubs only a small subset so far but in those hubs, we're seeing an additional 10% of gains in kind of cost per mile.

And we expect to roll that out across the country over the coming quarters. So I think we're really excited about gains that were making it we put a table in the letter that tries to break that down. So you can kind of see where that's all coming from and it really is coming from across the business and we expect gains from here to also come from across the business because there is still a lot of low hanging fruit.

Our next question will come from Nick Jones with JMP Securities. Please go ahead.

Great. Thanks for taking the questions I guess, they're taking a a big setback in and looking at.

Next year.

Is it is it kind of for for used car retail is it really just kind of thing prices come down and affordability come down or whether it would be difficult if Oems can't kind of put more cars into the ecosystem I guess kind of how how are you thinking about what kind of key indicators.

To you indicated things are kind of normalizing as we as we kind of get through four accused started looking into next year.

I I think that's probably a very complicated question. So I think all all we can do is kind of reach back in history and try to give you. Some data points that we think might be relevant I think the point that you've made about Oems producing fewer cars over the last couple of years is is correct and relevant although I will say that.

If we go back to the 2008 nine recession, there were dramatically more cars pulled out of the ecosystem during that period and if we look at used car sales over the next several years.

They were pretty marginally impacted by that I think the debatably and the data you can kind of see an echo of that decrease.

In <unk> in production, but it's not particularly pronounced and I think the the reduction in volume over the last couple of years I said has been a small fraction production volume over the coupla years surrounding that recession.

I think yields and cars also inflated dramatically relative to other goods in a dynamic that I think is is pretty abnormal.

Thermal an unprecedented at least in in my knowledge that.

Cars really moved up materially in cost and the rest of kind of good in the economy for a long time were relatively stable and now kind of cars are really coming down in cost at the same time that other goods and the economy are going up and so I think debatably on kind of like a relative affordability relative value basis cars are potentially moving in a good direct.

<unk> I think that May also be true.

Depending on what your view is of rates, but if we use the Ford interest rate curve as as an indication where rates are going to go there should be more of increases behind us than there are in front of us.

And for most customers used financing to buy a car. That's that's obviously meaningful input I think if we look back to his nature nine as well and we try to say where did the used car market bottom. It did probably bottomed give or take six months before the stock market bottomed and maybe a little longer than that before like the economy bottomed in some total I think that.

Did correspond at the time with roughly when the feds started cutting interest rates.

Which who knows when that happens in this cycle, but but I think that's that's how that played out last cycle and as I said I think there's a lot of dynamics that are pretty different right now in pretty unprecedented. So I think without trying to look at everything like the glass is half full I do think we want to make sure that we prepare for the worst but I didn't.

There's reasons to believe that.

There could be some good things that can happen in auto relative to other categories over the next 12 months and I think those are driven by the fact that cars are extremely expensive, they're they're extremely sensitive to interest rates and there's been a lot of movement in those areas recently and it looks more likely that some of that movement will unwind and the future of the not so good.

You will be paying attention to everyone else well I think we'll be setting up the business to be as flexible as it possibly can be will be driving down expenses as quickly as possible and like I said Yo planning for the worst and hoping for the best but it's a hard one to call I think at this point.

Got it and maybe just one quick follow up on G. P. U I would risk of GPU from some of these factors like depreciation rates I mean, how much how should we think about that kind of in.

The fortunes in the next year.

[noise] I compressed kind of quite a bit or do you feel comfortable that it's kind of range bound and you can protect G P or to an extent.

So let me start with the market factors and then I'll I'll kind of roll into the things that were in control of I think.

The first and simplest mental motto for all this is that different players in the industry, whether we're talking about the finance industry or the automotive retail industry are generally trying to.

Achieve a certain profit for the effort that they're undertaking right and so I think over time, there's obviously kind of Dallas in the market that is.

He's trying to kind of find its normal range I think that is probably true that that balance is stronger than the forces it impacts retail GPU and finance CPU and that's because.

In our view at least.

Retailers have much more similar cost structure is they they have much more similar profit goals. They don't have variation in input costs.

They tend to not have huge of.

Cash cushions, which puts them as well where they need to kind of earn period a period and I think that's why if you look over time, you see a lot of correlation between depreciation rates in wholesale retail spread.

Spreads and you see a lot of stability in retail margins across many retailers across many cycles and so I think from a market force perspective that has historically been a pretty stable number and I think that would that would be our expectation going forward, but I also think that we're in a period, where some of those moves.

Art is happening very very fast and I think when they have been very fast I think it leaves room for either kind of air relative to what we've seen in the past.

And so I think we need to prepare for that I think on the finance GPU side I think there's room for those forces to be a little bit slower different finance companies.

Have different underlying cost of funds and.

Utilize different methods for passing on cost upon increases to their customers. We've seen evidence for many finance.

Finance companies out there that they have been passing on cost of funds more in line with fed funds, then with two year Treasury, which is more of the benchmark that we use.

Yeah, I think the extent that's true once.

Kind of Treasury is correctly predicting what fed funds is going to do over the next few years. It should stabilize and then the fed funds rate would likely continue to go up and kind of that gap would would collapse and that would probably be helpful for us both.

Both in terms of finance CPU and in terms of of retail sales volumes that are driven by the quality offers that we give to our financing customers, but I do think that given that that's a market. That's dominated by fewer players with more variation input costs and who do have cash pushes who can absorb.

You have different strategies I think there's more risks that that's that that could move around.

In more abnormal ways relative to history, but I think we're just gonna have to watch that and see it play out now what's in our control within our control is where we set price and where we said interest rates and where we said bids on cars were buying some customers.

And I think that in all those areas, there's there's probably a little bit of room for us to be able to adjust to an environment, where underlying cos regardless of what form those cost take go up if it's our input costs of our cars or or the cost of financing for our customers I do think we have some natural offsets there where we likely have some room.

And so as we said kind of I think our number one goal is going to be really focused on expenses in this environment really focus on being purpose full about driving more of our most profitable sales and fewer of our less profitable sales pay very close attention to what's going on in the world around us as it's moving is dynamically that has been.

Then pull the levers that we've got control of to try to do the best we can to manage through it all and I think that's the plan and like I said, we'll be paying close attention from here.

There's a lot of room for things to very relative to the past over the next couple of quarters.

Our next question will come from Adam Jonas with Morgan Stanley . Please go ahead.

Hey, Ernie.

Does the business need more equity capital and what your family consider giving up control if that was required to maintain the company as a going concern.

Do I think as just need your our goals are gonna be on drive down expenses and trying to get positive EBITDA as quickly as we can we've got a bunch of committed liquidity, we've got a bunch of real estate and I think we feel like that puts us in a good position to ride out this storm.

We're we're making great moves inside the company. So I think that we're extremely optimists about writing all that out and then I just think as it relates to hypotheticals will stay away from will stay away from those were just going to keep.

Run or play in moving forward all.

Alright, Ernie just as a follow up on Capex, the $90 million in the quarter backing out the first half was that gap between the 50 million target how much of that was a deaf and you said you'd targeted reduction, but I didn't know if you could identify a bit of a quantum from the in the fourth quarter of how much that can be reduced appreciate it.

Sure. We I think we initially laid out some capex targets by quarter in.

In May and I think our our budget for Q3 was $100 million at the time and I think we came just under that at 90 and our target at the time for.

Four Q4 receptive.

Our next question will come from John <unk> with the Jeffries. Please go ahead.

Hey, Thanks for taking my questions.

So I'm just curious if you could lay out which areas of the industry. You saw the biggest deterioration relative to your expectations last quarter and how much those areas of surprise impacted vehicle GPU and SG&A per unit.

Guess I guess, what I'm asking is if you look back at those areas of surprise can you help size how much progress you would have made on your operational goals absent the softening macro.

Sure I think he'll we laid out our operating plan in May we talked about.

Several goals that we laid out for for the end of this year and we had to talk about how you are in order to hit those goals, we would expect to get a little bit of help from units. So.

We're clearly in the spot where we're units has moved in the in the wrong direction over the last quarter and I think that that's probably the area, where there's been the biggest change relative to what our expectations would have been to then now I think a lot has moved right. We've seen interest rates move up materially in most customers Houston.

Dancing to buy a car we've seen depreciation rates move up quite a bit we've seen that probably slow down our progress on GPU as we focus on originating more profitable sales and fewer less profitable sales I think the kind of line, which sales you want to originate moves up and down with GPU and then you also have kind of just the broader headroom in the industry. So.

I think those have been the adjustments that we've been making real time as we've been adjusting to the changing world just like everyone else.

I think again I think we ought to be careful of hypotheticals, but I think to just tried to provide something of a framework I do think that.

In short periods of time and within reasonable ranges of units today expenses and units are moving somewhat independently right. There. They are certainly not completely independent they're obviously variable costs involved with with selling a car, but when you are overbuilt.

Underlying variable costs are obviously much much lower.

So I think you know had unit has been higher I think it could have made a material difference to our results were on a per unit basis.

But I think like I said, all all we can do is kind of keep doing the best job. We can forecast enrolled in front of us recognize that it's probably better to miss conservative than to Miss aggressive and then try to drive down expenses and make the best decisions. We can pulling the other levers as we managed to and so that's what we'll continue to do.

Right and.

I wanted to ask about your expectations for.

How you used car prices coming down in the coming months impacts used cars demand DC consumers waiting for used car prices to hit the floor before buying picks up more materially or do you see there being a more of a linear relationship between declining prices and rising demand.

And and at what point do you know do we start to see that material up uptick in used car velocity prices needs to reach pre pandemic prices or 5% above pre pandemic prices I'm curious if you sort of thought about that at all.

Sure I think they are all good questions that I think they're all hard to answer I would I would say is I think probably all those different forces are continuous forces and then there is kind of the unknown just what are consumers can be feeling as we head to the next six to 12 months, depending on anything else going on in the economy I think thats.

That's pretty hard to to call I don't think that there is we don't believe that there is any kind of particular lines that the prices have to drop below we just think the kind of lower is better and we think the consumers spent a lot of the last 18 months reading article after article about how expensive cars were and that probably is not.

[noise] helpful. In a way that's unbelievably difficult to measure, but but we see pop out in some surveys of consumer perceptions of the you know how good of a time that is to buy a car right now so.

So I think what we want I think is to route for the fundamentals which is we.

We want to route for interest rates to stabilize we want a route for.

Car prices to go down and get more affordable for our customers want to route for economic ability and I think all of those things are helpful.

And I think all of those are also under uncertainty and so we wouldn't want to precisely call.

When those forces start to move in our direction.

Our next question will come from Seth shop with Wedbush Securities. Please go ahead.

Thanks, a lot and good afternoon, you're taking option to improve G. P U but those actions are having a severe impact on your own sales even beyond market forces in the fourth quarter you anticipating it volumes anti to you to be down sequentially did you take more drastic actions in one direction.

The other here to improve on those metrics, even as you consider that the macro courses.

So I think we're going to try to miss aggressive.

It is what I would say and and we've got the whole company pushing hard in this direction of managing expenses down and I do think.

The progress that we've made is is is great and I you know I I do once again want to point to the fact that I think there's a lot of people inside carvana doing some of the best and fastest and most effective work they've ever done I think as a company. We are getting more done now than we ever have and I think that it's unfortunate is coming at a time, we're facing somebody headwinds and so it's a little bit harder to see the fruits of all that.

But I think that there's a lot of great work being done and I think that in the full Senate fullness of time that'll all had ultimately show up but I think for now it's more of the same I just think we keep our heads down and keep keep fighting through that and then you don't really get to the other side of of.

Really which I would define it kind of two steps I think one one big move is just stability once rates stopped going up and we we get to a spot where where there's just a little bit of stability in the economy, even if car sales stay added depressed level and we're able to just kind of continue to drill our demand market share from there.

I think that puts us in a really good spot and then I think once you get to the extremely exciting place where the entire industry turns around I think that's great cause then I think we have double tailwinds. There we have kind of our own market share gains are we would expect to get that would be accentuated by increases in GPU to make more sales more attractive for us to go attack and then you'd also have the tailwinds of the industry itself, but I think.

We're just kind of not planning for that for now we're just trying to drive down expenses, and we'll pay attention and make adjustments as we need to.

Just a follow up considering you have capacity for 1.4 million units and you're on a run rate of 400000 or less and you have a lot of markets that are getting low volumes and aren't near irc's wouldn't be prudent at this point in time for <unk> awesome, Iraqis and pull out of some markets.

So I think as I said I'm going to say, one one level probably more abstract than you wish you right I think we're definitely going to be taking actions to try to drive down expenses as quickly as we feel like we response as we can and we have been and you can see kind of the the benefits there in our results again, we dropped expenses.

By $90 million last quarter quarter over quarter, that's pretty fast.

And that's due to a lot of choice.

Joyce has been made across the company and a lot of great execution and our goal is to continue doing that.

Our next question will come from Brian Nakal with Oppenheimer. Please go ahead.

Hi, good afternoon.

So the first question I have.

Talk a lot about.

Talk a lot about this.

The degree to which you're you're working on the expense side of the business and then the challenges out there so.

In the near term as as you as you continue with the demand headwinds.

I know the big.

In terms of both affordability and job you know.

Probably confidence is there any other levers that carvana you could call to try to offset that from the demand side or you ordered tools at your disposal that you would consider pulling.

Sure why they'd suddenly we haven't talked about on this call as I do think the underlying demand picture looks better than the sales picture in our minds at least I think if we you one way to try to massage out kind of differential impacts of of kind of interest rate.

Policy between us and other players and to massage out some of the impacts of rising rate is to just look at the sales volume that we have for customers that use cash to buy cars from us and so if we look at that we grew by over 20%.

Year over year in the quarter.

Which was over 30% faster than the rest of the of the company. So that's.

That's pretty meaningful gains there I think you'll we also have spoken a bit abstractly about many of these choices, we're making to try to pursue more profitable sales and to forgo less profitable sales across the company.

That takes many many different forms, but I think the easiest form to kind of understand there and for us to articulate is to just look at different regions of the country. So if we look at the middle of the country, which is where we have many more of our inspection centers and many more cars that are closer to our customers. We grew 4% quarter over quarter. If we look at the two coasts.

We shrunk pretty meaningfully quarter over quarter, and so the middle of the country or excuse me a year over year until the middle of the country outgrew the coast by by over 10% there as well and you know there's many underlying actions that that are causing kind of more of our sales are concentrated in middle of the country as we pursue more profitable sales, but even in the middle of the <unk>.

<unk> they are impacted by our choice to pursue more profitable sales and to forego less profitable sales and so when you look at all that you can start to you gotta be careful you are layering multiple effects in compounding them, but you can see that when we look at cash customers you know, there's a lot of growth there.

When we look at the middle of the country, where we're making less dramatic moves to cut out less profitable sales there's growth there and you start to layer then on top of each other and you can see that there there really is no underlying demand growth and so I think you will argue is if the industry can stabilize and if we can get to a spot where gpus, where they can kind of settle out and.

Be a little more stable a little more reliable as we get stability in interest rates.

I think that gives us a chance to start to go expressed that underlying demand growth again, but for the time being I think we have to prudently manage the business for for profitability in cash flow and <unk>.

Face the number of headwinds that have caused us to pull back. So I think the underlying demand. We believe is still there like it was before but I think the pretty.

Pretty dramatic change in sort of strategic direction from a heavy focus on growth to a heavy focus on cost certainly is imposing a cost on volumes that you're seeing in a result.

Perfect.

<unk> follow up so.

Carbon is unique.

Primarily a virtual model.

Look at your overall demand picture of what's happening in this sector from your demand do you think that carbonated still largely virtual model is.

Is incrementally.

<unk> your purchases, maybe more traditional dealers or vice versa.

I think.

I think.

Undoubtedly the the swinging strategy from grow as fast as you can to get profitable fast you can is a big change and I think that that has many impacts across every part of the company.

And I think that that that change in strategy.

All of those constant has probably made our work a little bit harder that Dan for for different retailers out there that weren't pursuing as aggressive a growth strategy.

And we're kind of already and more of a profit mindset. So I think that probably that has been the bigger driver of kind of differential pressure that we felt now that said I think if you look at the direction of our results whether it's expenses are EBITDA or whatever else I think the direction is good we decreased our our EBITDA loss in the quarter I think given the the head.

Winds that are seen everywhere else, you'll have a lot of other retailers are probably seeing their results get worse in the quarter right. So I think directionally, we're making some pretty some pretty good steps are taken some pretty good steps, but I think probably that change almost constant has been hard and I think that we're making it and I think the team is doing a great job and.

And I would associate that more with the change in strategy than I would with the model I think the business model kind of it it built and aimed at a certain volume.

We believe has kind of lower variable costs and higher fixed costs in the traditional business, but even at this level of volume is positioned to earn a lot of EBITDA. When you are in a place where you're kind of stable and you're not swinging from one strategy to another.

Our next question will come from Chris Pierce with need Ham and company. Please go ahead.

Hey, another and market question I'm, just kind of curious was missing wholesale prices come down pretty aggressively, but we're not seeing that at the retail level. So is it when this happens and when the spreads wide now what do we need to see the the at least need to clear existing inventory.

Are they not willing to do that because they don't Wanna take losses, I'm, just trying to get a sense of when demand might actually come back and read to see not just lower prices, but lower prices have just kind of what how would you think about the man coming back and when that could happen, but what happens when these spreads widened out this much.

Yeah sure I think I mean, you largely as described the dynamics that I think has been the average dynamic over time, which is generally speaking wholesale prices lead and so whether it's up or down they they they tend to lead and.

And it's because you know for the most part to kind of Ah Ah heavily simplified mental model is that your dealers route buying cars at wholesale and then they they plan to make a certain amount of profit on that car and they sell that car between 30, and 90 days later and they're gonna aim for kind of earning the profit that they're shooting for on that car and 30 to 90 days and so when we saw prices depree.

<unk> over the last two years, we saw the wholesale market, leading up the retail market and if you looked in real time, you saw the wholesale retail spread massively collapse, but but then that was offset deals profit margins by the appreciation that we've seen.

Or equivalently by the lag time, with which they would kind of changed their pricing to the market and then as it's gone down we're seeing more of the same and I think if you if you're a little the last two years there had been <unk>.

Many many changes of direction of depreciation and.

Every time, there's been at least the Directionally offsetting change in wholesale retail spreads. So I think that what we're seeing in the wholesale market is most likely to be used a preview of what we're going to see in the retail market.

Over the next couple of months.

That's at least in the way that it is historically played out in that it's played out over the last couple of years.

Is it too simplistic to think that it would be better to plus your inventory and reset at lower prices that I know that.

<unk> 30 to 90 days like he spoke about but it seems like instead of just waiting and waiting and having lower unit sales and you just kind of curious how would you like to think about those two situations.

And I hope to earn my standard D. P U or just kind of move on from this aged inventory.

So I think that.

That framework is is I think more of like a a real time earnings optimizing framework instead of like a total earnings over across time framework and and I think many dealers off time to think about optimizing kind of total cash and if you were to take retail.

Cars today and go in and clear them in the wholesale market that is now leading the retail market down you would take kind of pretty large losses that would be certain you would be able to then replace that with lower cost inventory that you could put out on your on your line. If your goal was to earn the same profit as before you then you probably could lower prices quickly and and sell more cars.

But but you would just be kind of getting more earnings to ask that your previous losses, and so I think usually what what what most retailers out there doing what we do is we tried to tried to kind of optimize for what do we think is is the value across cars and customers across time.

And it it's usually pretty expensive to take cars out of retail and go sell them wholesale kind of regardless of what the market is there.

There can be occasions, where that that can make sense, but generally speaking if you as long as there's anything near healthy demand and your retail channel, you're you're usually better off selling those cars do retail when you calculate the some of the impacts across time.

Our next question will come from Nevada Con with true of Securities. Please go ahead.

Hey, guys. This has been phone current events so regarding working capital.

<unk> lowered inventory closer to the two to 2.5 billion dollar target range you mentioned previously to.

So just curious how much slower you expect that to go and.

How is your progress and moving on the third part of your conditioning impacted this week.

Yeah. So I think we were.

We took a nice nap down in inventory in Q3 second consecutive quarter of moving down toward more normalised levels, we do expect.

Inventory to decline again in queue for.

To get sort of inside that range that we that.

We laid out previously and so we do think that that also makes sense in light of the current depreciation environment and in light of.

Our goals of getting inventory to a <unk>.

Wised level relative to retail unit sales. So yeah, we do actually do that in Q4 and feel good about the path that were on there.

Okay, Great and then can you provide any color on kind of your ability to reach the base unit goal given a reduction resale values.

D do you mind repeating the question I'm not sure we followed I apologize yeah no worries.

Just wondering if you can provide color on like your base year and SG&A per unit Cole.

Given reduction in volume three to a orange.

Sure Yeah, so you're you're referencing the stretch goal for Q4.

Yeah.

Sure Yeah, I think our goal is to continue to push down expenses as quickly as we possibly can we tried to give a framework for how close do we think we can push those down we were able to lower them kind of without accounting for the risks last quarter were able to lower than by about 12%.

As we said I think you know obviously gets harder lower expenses.

As your expense based drops, but we think there's still a lot of low hanging fruit and so we're gonna try to continue to lower that and then I think right now inside a reasonable ranges expenses and units are are are much more loosely tied together than they normally would be.

And so I think those those things are probably moving more independent Lee the normal and we will just be seeking to push down expenses as quickly as we possibly can to to try to get to.

Breakeven EBITDA and then ultimately a positive cash flow a SAP.

Our next question will come from Nat Schindler with Bank of America. Please go ahead.

Yes, hi, guys.

Going back to an earlier comment about equity financing well, what's nice talking about equity financing specifically go over that again, but more how do you fix the debt financing that you have.

What are your options right now because even getting deposit in cash flow even getting too.

Your long term targets.

Not public cats.

Positive EBITDA, even getting to your longterm EBITDA targets.

Oh, a whole lot of cars just to cover your current.

Interest.

Expense.

What can you do to fix that.

Load.

Sure let me see.

I mean, I think if we had our long term EBITDA targets even at today's units.

We'd be in a in a great spot from a cash flow perspective, I, I think and we'd be able to comfortably cover are of interest expense. So I think that I want to make sure that that's at least clear and I think that you can look across time at other retailers that have been at similar scales to to where we are today, who have been able to achieve.

Sufficient kind of positive EBITDA to cover to.

To cover what artist expenses today, So I think.

Our goal is as stated and I, you know I apologize for going through it over and over again, but I think in this environment. We got a really focus on what's in our direct control and and the thing that is most directly in our controls expenses and so we're gonna keep mark that down as quickly as you, possibly can and then we're going to pay a lot of attention to how we originate the most profitable sales that we can to try to accelerate our path to.

Breakeven EBITDA and beyond.

That's the plan right. There that's just what we're going to be working on.

So wait even at 400000 annual units.

Or let's say 100000, and a quarter, where you are right now you have $150 million in interest income.

At 13.5% EBIT value.

You wouldn't public.

I think just make sure you're multiplying by the kind of retail price and I think you'll probably get there.

Okay, you're barely get there.

Yes, sorry.

Yeah, I think we I think we get there with a little bit of pushing but but yeah, but either way.

Okay.

So is there anything that you have on the near term on the horizon that you can pick the <unk>.

To finance that any other way, though other than just driving that either.

I think you know as as we see it earlier I think the number one and put to all this is expenses that drives into EBITDA from there we've got.

To kind of use round numbers about $4 billion of of kind of total access to to liquidity approximately half that is immediately available you'll the other half is broken down to be about $1 billion of a desert real estate and about $1 billion of other real estate between all that that gives us.

A lot of access to liquidity.

And so I think that's primarily how we're thinking about it at the moment and will continue to move forward with our plan.

Our final question will come from Michael Montana with Evercore. Please go ahead.

Hey, Thanks for taking the question just wanted to ask first off if I could you know you had mentioned trying to pull back in certain markets to emphasize more profitable sales, but I also wanted to ask about some of the initiatives that you all have going on and I'm thinking of for example, third party listings I had seen that you may be pulling back.

Pausing on that so I just wanted to understand where that fits the hertz partnership and then I had a separate follow up.

Sure. So what I would say is I think when we think about I'm going to ask this generally and maybe not precisely related to some of the things that you brought for your question hopefully it's useful when we think about trying to aim for more profitable sales you know what does that mean, there's there are certainly variability in.

Gross profit associated with different types of sales, obviously sales where customers finance with us or more profitable knows where they don't and those where they just buy a warranty on more profitable knows where they don't and then I think there's a number of other dynamics kind of across.

Type et cetera.

Also kind of variation in the underlying costs of completing a sale if it's a car that's nearby to an inspection center it can be much much lower.

If it's a car that's maybe further away, but we're we're charging a shipping fee you know it can be it can be higher but it can be offset by the the benefit of that shipping fee and so I think there can be variation in underlying cost of sales and then they can also be variation the cost to acquire different types of sales, whether it's sales different types of customers or different types of cars that can.

Barry and some of those different channels can also attract customers with kind of variable levels of of either gross profit or expected expense and so I think across all those different areas are trying to just be very thoughtful right now and make sure that we're pulling levers that we think will drive the most profitable sales and drive the fewest less.

Profitable sales.

And I think that's that's taken many different forms and then you you brought up Hertz yeah.

I would say a partnership continues to go very well, we're putting even more focus and attention on that.

Right now as we think it's a big opportunity and there's alignment between the two groups. We're excited about the results there for sure I think it's led to.

Some other opportunities between us, especially as we've added ADESA to you to kind of.

Augment the overall capabilities that we have so I think that continues to go really well and I think you said you had a follow up.

Yeah. Thanks, so the follow up to just around Capex and I think and May you all had outlined some different scenarios and what you felt was baseline kind of capex been but just wondering you know volumes remain kinda challenged in terms of where we're at right. Now you know do you have further flexibility. There can you just give us some sensitivity on I'm kind of the <unk>.

<unk> acts outweigh pace.

Sure Yeah.

Everything I'm about to say is also in the shareholder letter.

For future reference, but in May we laid out of 2023 full year Capex budget in a range of $100 million to $200 million, depending on the amount of elective capital expenditures, we decided to undertake I think from where we sit today, we expect to be in lower half of that range.

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

Well, thank you for joining the call and to everyone in sight Carvana. Thank you guys again for all the work that you're putting in I I do think that we are getting more done than we ever have I know it's against the tough backdrop I think.

You've heard it over and over again, but I hope, we're all prepared for the environment to continue to be tough and I think we still have a lot of work left to do but but I do think we're all doing a great job and we could not think he has more for it. So thanks for everything you guys do and thanks again to everyone on the call will talk to you soon.

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