Q4 2022 Carvana Co Earnings Call
Good afternoon, and welcome to the Carvana fourth quarter and full year 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
Now I'd like to turn the conference over to make Kian Investor Relations. Please go ahead.
Thank you Gary good afternoon, ladies and gentlemen, and thank you for joining us on Carvana fourth quarter and full year 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 dotcom.
Fourth quarter shareholder letter is also posted on the IR website. Additionally, we posted a set of supplemental financial tables for Q4, which can be found on the events and presentations page of our IR website.
Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer before we start I would like to remind you that the following discussion contains forward looking statements within the meaning of the federal securities laws, including but not limited to carvana as market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially.
From those discussed here.
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 is most recent Form 10-K.
The forward looking statements and risks in this conference call are based on current expectations as of today and Carvana assumes no obligation to update or revise them whatsoever, as a result of new developments or otherwise.
Our commentary today will include non-GAAP financial metrics, unless otherwise specified all references to GPU and SG&A will be to be non-GAAP metrics and all references to EBITDA will be to adjusted EBITDA.
Conciliations 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 IR website.
And now with that said I'd like to turn the call over to Ernie Garcia Ernie.
Thanks, Meg and thanks, everyone for joining the call.
10 years ago in January 2013, we launched Carvana in Atlanta, Georgia, We're passionate group of people, who believe we could build something new in the world that we would be proud of where we ended it with simple to change the way people buy and sell cars. There were a million little reasons bet against us most people who cared enough to even be aware of what we were trying to do would have but there were two big reasons why we believe we could do it.
One there was room for new operating the customers would love to we're scrappy group, who care and we're ready to fight for our dream.
We stand here 10 years later in a place with hard to imagine from where we started we built an offering customers do love we have brought that offering to over 300 markets across the country. We have bought and sold cars in a whole new way to millions of people and we've laid the foundations to buy and sell many millions more.
The big things overpower the little things.
This story skips a lot of time and as a result, it skipped a lot of detail and gifts to simply impression it feels linear but the truth is there were a lot of ups and downs along the way there were high highs and there were low lows. They were fundings number hard days I think the truth of building something new in the world that they are usually more hard days in our easy days, even though it doesn't sound that way and the stories. This is Steve.
True progress is rarely linear in 2022 reminded us of that again, so what happened in 2022.
The story straight board one we came into the year positioned for growth similar to what we had experienced in prior in the prior nine years too.
Two after the pandemic smell the automotive supply chain and historically rapidly rising interest rates combined to dramatically impact the affordability of used cars.
Three rising interest rates and market sentiment drove a significant shift in our priorities away from growth and toward profitability.
Sure.
This combined to lead to markedly lower volumes and we are positioned for and as a result, we've been carrying excess costs too.
2022 had a lot of hard days more scrappy group and hard days aren't always the worst thing in the world prescribing people scrapping people find a way and we're finding a way the hard days are making us better and we're doing our best work right now as part of this work we have three major milestones that we're marching toward.
The first step is to drive the business to breakeven adjusted EBITDA. This is our current goal and we will discuss the key drivers of this go more in these remarks. The second step is to drive the business through significant positive unit economics breakeven adjusted EBITDA as a milestone but it is not our goal our goal is positive free cash flow.
The third step is to return to growth since launching in 2013, we've made capital investments of more than $4 billion building the nation's largest used vehicle inspection and reconditioning infrastructure first party automotive logistics network and last mile automotive delivery network. We believe the investments we've already made lay the groundwork for not only significant growth in the future, but significantly more efficient growth that is.
Typically profitable today.
Today, we're focused on the first step and we are well on our way with high visibility of the progress we expect to make.
First we expect to continue our SG&A expense reduction plan by reducing quarterly SG&A expenses by approximately $100 million in aggregate over the next few quarters. This will complete over $1 billion annualized SG&A cost reduction since the first quarter of 2022, we expect these expense reductions to be broad based across all large SG&A expense components, but importantly.
We do not expect future reduction forestry part of this plan.
Second we expect our weekly retail unit sales volume to stabilize relative to the declines we saw in the second half of 2022 as the seasonal headwinds we faced at that time transition to seasonal tailwind stabilizing weekly retail unit sales volume will allow our SG&A expense savings to catch up to retail unit volumes, allowing us to demonstrate SG&A leverage that was illusive during periods of retail unit declines.
Third we expect a substantial reduction in our inventory size, which we accelerated in Q4 to lead to significant gains in retail GPU, while we don't expect to see meaningful gains on retail GPU in Q1, we expect to see the benefits of reducing inventory size become apparent in the following quarters.
The progress we are making shows a burst in operational metrics and then fluids and the financial metrics later as those operational efficiencies get rolled out and utilize across the business across all operating groups. The operational progress. We've already made and are continuing to make a significant and logistics. Our average delivery business is down 25% since early 2022 and market operations, we have built scheduling system.
The currently allow us to pair over one out of three retail deliveries with vehicle pickup up from one out of 14 retail sales just one year ago and customer care. Our advocates are spending 40% less time on the phone for sale and they werent early 2022, and our vending machine pickup rates have more than doubled since start of last year with 40% of our customers nationwide now picking up their car to vending machine, even though we only have.
Vending machines and a subset of our markets importantly, we have done all this while improving quality of our customer experiences over the last six months.
As is often the case in working through these transitions and when the operational progress is beginning to convert into financial progress. There are some one time items, an extrapolation of that need to be made to really see the quality of the progress. We are currently making.
These are outlined in the shareholder letter and Mark will provide some color on them as well, but the progress is really beginning to show up this will continue to get cleared to require less explanation overtime as we expect the combination of these three factors to lead to significantly improved adjusted EBITDA profitability over the next few quarters 2022 was a hard year and we still have a lot of hard work in front of us to get to where we want to be but we have a clear plan.
And we are executing this is still a 40 million unit a year market on average we still have just 1% market share. We are still a passionate scrappy group, who cares and who is ready to fight for our dream our customers do love our offering we have built the capabilities and laid the foundations to buy and sell cars with millions and millions of customers and there are still a million little reasons to bet against us we expect to be.
Things to overpower the little things just as they have in the past we are firmly on the path to building the nation's largest and most profitable automotive retailer and to achieving our mission of changing the way people buy cars. The March continues mark.
Thank you Ernie and thank you all for joining US today. Our results in 2022 were driven by numerous external factors as well as our internal decisions made to shift priorities toward profitability.
We came into 2022 significantly overbuilt for the volume, we ultimately realized through.
Through the year, we have been executing our plan to drive profitability by steadily reducing expenses normalizing inventory size and executing profitability initiatives that make us more efficient more resilient and more flexible.
For the full year 2022 retail units sold totaled 412296, a decrease of 3% year over year.
While this was the first year that our retail units sold declined year over year 2022 marked our ninth consecutive year of market share gains against the backdrop of double digit industry declines.
Revenue totaled $13 six <unk> 4 billion in 2022, an increase of 6% year over year, marking our ninth consecutive year of revenue growth.
We finished the year as the second largest seller of used vehicles in the country for the third consecutive year.
The scale that we have already achieved and the timeline on which we have achieved it demonstrates the long standing strength of our customer offering.
Due to the dynamic nature of the current environment, we will focus our remaining remarks on fourth quarter results with a particular focus on sequential changes and the unique items impacting the quarter as well as our near term outlook.
Our long term financial goal is to generate significant net income and free cash flow.
In service of this goal in the near term our management team is focused on driving progress on a set of non-GAAP financial metrics that are inputs into this long term goal.
In order to provide clear visibility into our progress beginning in Q4, we are reporting two new non-GAAP metrics non-GAAP gross profit and non-GAAP SG&A expense that adjust for certain noncash and nonrecurring revenues and expenses.
We are also updating our adjusted EBITDA definition to exclude revenue from route warrants as well as share based compensation and restructuring expenses.
We provide more detail on these metrics in the supplemental financial tables available on the events and presentations page of our IR website and in our Form 10-K.
In the fourth quarter retail units sold totaled 86977, a decrease of 23% year over year and 15% sequentially.
Our sequential decline in retail units sold was only slightly larger than the industry's sequential decline of 12%. Despite several actions we are taking to increase near term profitability, including one normalizing inventory size to reducing advertising free proactively adjusting to increase.
And benchmark interest rates and for continuing to focus on executing our profitability initiatives.
Total revenue was $2 8 billion in Q4, a decrease of 24% year over year and 16% sequentially approximately in line with retail units sold.
non-GAAP total GPU was $26 67 in Q4 versus $38 70 in Q3.
Total GPU in Q4 was driven by several unique items across the retail wholesale and other components.
non-GAAP retail GPU was $6 32 in Q4 versus $12 67 in Q3.
Retail GPU was impacted by a $52 million or $598 per unit adjustment to our retail inventory allowance, which was primarily driven by elevated industry wide retail depreciation rates and higher than normalized inventory size relative to sales volumes.
Other sequential changes in retail GPU were primarily driven by higher retail depreciation rates, partially offset by wider spreads between retail prices and acquisition prices and lower cost of sales.
In addition to the allowance adjustment retail GPU was also impacted by carrying a higher than normalized inventory size relative to sales, which resulted in longer turn times.
Longer turn times lead to higher vehicle, depreciation, which has a negative impact on retail GPU other things being equal.
One way to quantify the impact of extended turn times is to isolate retail GPU for vehicles sold within 90 days of the acquisition date.
These vehicles realized approximately $600 per unit higher retail GPU in Q4 compared to retail units in aggregate.
non-GAAP wholesale GPU was $552 in Q4 versus $682 in Q3.
Wholesale GPU included a combined $103 per unit impact due to a $5 billion adjustment to our wholesale inventory allowance and a $4 million loss on certain retail vehicles, we sold in the wholesale market in the quarter.
Sequential changes in wholesale GPU were primarily driven by these impacts and lower seasonal wholesale marketplace volume.
non-GAAP other GPU was $14 83 in Q4 versus $19 21 in Q3.
Other GPU was primarily impacted by a shift in the timing of a sale of a pool of loans to ally from December to January to align with the upsize and extension of our forward flow purchase agreement.
We estimate this shift in timing reduced other gross profit by $42 million or $483 per retail unit sold.
So on the actual sales price of the loans, we realized in January less incremental interest income we earned on the loans in December .
In Q4, we made significant progress reducing SG&A expenses for the second consecutive quarter, reducing non-GAAP SG&A expense by $60 million sequentially, following a greater than $60 million sequential reduction in Q3.
These expense reductions were broad based including advertising compensation and benefits logistics and other.
While we significantly reduced SG&A expense over the past few quarters, we have not yet meaningfully levered SG&A expense per retail units sold because retail units sold have declined at a pace similar to SG&A expense reductions.
As already discussed we expect our weekly retail unit sales volume to stabilize relative to the declines we saw in the second half of 2022.
Seasonal headwinds transitioned to seasonal tailwind.
We expect stabilizing retail unit sales to allow our SG&A expense savings to catch up to retail unit volumes, leading to SG&A leverage.
Adjusted EBITDA in Q4 was a loss of $291 million or 10, 1% of revenue.
Adjusted EBITDA was negatively impacted by a total of $103 million due to the unique retail wholesale and other GPU items described above.
Finally, as a result of the decline in trading prices of our securities by the end of the fourth quarter, we recorded a goodwill impairment expense of $847 million.
The goodwill impairment was not related to changes in our long term expectations for our business or the operations of any prior acquisitions.
As we've discussed previously our goal is to manage the business to achieve over 4000 total GPU and significant adjusted EBITDA profitability at current higher or lower volume levels.
Focusing in on Q1 2023, we currently expect the following.
On retail units. We currently expect a sequential reduction in retail units sold in Q1 compared to Q4 as we continued to normalize our inventory size optimize marketing spend and make progress on our profitability initiatives.
On GPU, we currently expect a sequential increase in total GPU in Q1 compared to Q4.
We expect retail GPU to increase in Q1 due to multiple offsetting effects first we are quickly reducing our inventory size by purchasing fewer retail vehicles.
<unk> fewer retail vehicles means fewer low age units are added to the website, which other things being equal increases the average age of our inventory and a retail units sold and reduces retail GPU.
At the same time, we expect our lower inventory size to lead to a retail inventory allowance adjustment benefit in Q1, leading total Q1 retail GPU to be higher than Q4.
We also expect a sequential increase in other GPU in Q1 following the shift in the timing of loan sales from December to January previously discussed.
On SG&A, we are currently targeting an aggregate of approximately $1 million reduction in quarterly non-GAAP SG&A expense by Q2 2023 compared to Q4 2022, as we continued to execute our plan across all areas of the business.
On December 31, we had approximately $3 $9 billion in total liquidity resources, including $1 9 billion in cash and revolving availability and $2 billion in Unpledged real estate and other assets, including more than $1 1 billion of real estate acquired with ADESA.
We also ended the quarter with approximately $1 3 million annual units of inspection and Reconditioning center capacity at full utilization, including Odessa locations over.
Over the last several years, we've made significant investments into building out one of the auto industry's largest and most expansive inspection and reconditioning network.
While we remain focused on more efficiently leveraging our existing footprint in the near term, we believe having access to this massive infrastructure positions us very well for growth with limited incremental investment in the future.
Our liquidity position production runway and our clear and focused operating plan position us well to achieve our goal of driving positive cash flow and becoming the largest and most profitable auto retailer in the future. Thank you for your attention we will now take questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Sharon Zackfia with William Blair. Please go ahead.
Hi, good afternoon.
<unk> you Sharon hockey and you were talking really fast and.
But I think he said Hey, I think you said, 40% of vehicles are picked up at that name machines. I think it was in the fourth quarter I didnt catch what that compared to maybe relative to a year ago, and I guess, where you incentivize them to get to that number. It also begs the question kind of how high could that go.
So what is the.
<unk> trade off in terms of GPU when you get <unk>.
Customer to come to that new machine for pickup and I noticed in the shareholder letter you also mentioned starting off or pick up at non vending machine location. So I guess this is a long question to just ask are we seeing some sort of evolution in the model, which would be kind of more what I would think of as an omnichannel model versus a pure E com.
Sure. So first apologies for the fast talking that is my habit and so in India in the prepared remarks, I didn't compare it to anything it is 40% nationwide at vending machines, even though we only have vending machines and a subset of markets and that has roughly doubled since early 2022.
We are testing other pickup options as well and we are incentivizing customers to do that.
What I would say there is I think across the entire business. We're testing all kinds of opportunities to decrease our operational costs and then see what the impact is to both customer speed of getting them a car and also customer experience.
And I think this is one of many areas, where we're seeing really strong results there.
Can I just ask a follow up when you do customer research I mean, how important is delivery and what the customers want I mean, it would seem transparency.
Quality of car or the car theyre getting all of that is very important but is delivering really high on the list.
I think it depends on the customer.
And I think that's why we've kind of structured the system to give them their option.
So I think all of those things are important and I think the easiest thing that we can measure is in aggregate how customers are responding to the sum total of their experience.
And we are talking now about the vending machine, but there's many other examples there that then I'll repeat that I kind of spoke about in my prepared remarks delivery distance is also down 25%.
Since early 2022 talked about activity pairings that can be a bit of a confusing one to make sure that we're understanding but we've got obviously many customers that are buying cars from us. We have many customers that are selling cars to us and so activity paring is building the logic into our scheduler that allows us to ensure that when a customer leaves.
Hub or vending machine they can complete two transactions in a single path.
It was obviously a lot more efficient that's gone from about 1% and 14 customers to approximately one out of three customers in the last year. So we're making gains all over the place and we are seeing that really show up in operational gains first which then I think you are starting to get a peek into the impact they'll have financially, but that does take more times, we tend to royalties.
<unk> markets, we get a sense for the impact of both customer experience and cost and efficiency and then we roll them out nationwide and then we kind of are able to realize the dollar gains thereafter, so I think youll price or see more of those gains over the next two quarters, which is why we're feeling really good about our cost reduction plan over the next few quarters, but we've been doing all.
All of that and many many more examples that would fit under the same umbrella.
But we take different forms and every group and we've seen customer experiences go up in the last six months. So I think overall, we're really excited about the way that's playing out we still have a lot of work to do but the teams are doing a great job.
Last question for me I know you said youre working towards EBITDA breakeven at current volumes, what's your line of sight on timing on that.
Yeah.
As fast as possible I think we're going to be moving as quickly as we possibly can we gave I think some hopefully helpful Guide rails in there around driving down SG&A dollars by $100 million.
Over the next few quarters, I think Marc spoke quite a bit about some of the GPU visibility that we have that is very high.
Something that is imposing a very significant cost.
Across GPU right now has the choice to drive down our inventory rapidly. We're very confident that's the right choice for the business sales volumes are low relative to inventory that we're carrying and therefore turn times are high.
And especially in our high depreciation environment, it's important to get those two things in a balanced but the transition from two large inventory to the right size of inventory means.
It means the turn times or even longer that showed up in lower GPU in the quarter and an allowance that we're taking is as more of those cars that we expect to sell in the future are likely to have negative margins. So that's a transitory cost.
If you look at the rate at which we're selling cars relative to the cars that we have in inventory is a much better number but the transition is expensive. So I think there's a lot of visibility there Mark also spoke a bit about the visibility we have in finance as we had a loan sale timing shift in Q4 that was costly. So I think there is hopefully a lot of building blocks there that will give you a sense.
And our goal is head down sprint and we'll get there as quickly as we can.
Okay. Thank you.
Thank you.
The next question is from Chris <unk> with Exane BNP Paribas. Please go ahead.
Hey, guys. Thanks, taking the question.
So the first one is in Q1 are you still taking provisions to increase the inventory allowance adjustment, that's causing pressure retail GPU in wholesale.
As a way to frame out how much is left like what percentage of your units are 90 days or older and they are still in inventory today.
What's normal looks like and I would imagine this happens routinely that does give us context for what's left.
Sure So I mean.
I think the.
I think theres a couple of different ways to think about that one I Wouldnt say there is any concept of what's left I think it.
To set the allowance on 12 31.
We looked at the cars that we had on balance sheet on 12, 31, and then we Forbes performed expectations about.
The cars that we're going to sell at a loss and at what level. Those cars were willing to sell at a loss and then we recorded that allowance on that basis.
I do think some of the things that benefit.
<unk>.
The inventory allowance is inventory size.
Shrinking inventory getting inventory more in line with.
More in line with sales volume.
Those are certainly beneficial from the standpoint of.
Retail inventory allowance as you sort of alluded to.
Our retail inventory allowance is something that's always on our results.
We adjust our allowance every month.
And.
Retail inventory allowance is reflected in our results every quarter just happened to be particularly large on $12 31 in light of the dynamics that we saw in Q4 with much higher than normalized inventory size.
And also very elevated industry wide retail depreciation rates, that's why it had a.
Outside of the effect on Q4 I think.
Take that point home I do think we've made really strong moves and normalizing our inventory size in Q4, and so far in Q1.
Our inventory sizes is much closer to a normal size relative to sales volumes and it certainly it was in Q4.
And we do think that overtime that will flow into a positive tailwind for retail GPU as we called out throughout our materials.
Got you Okay. Thanks, and then.
Just a bigger picture question, if I can squeeze one more in.
When you speak of these profitability at current levels are you extrapolating market share very mature markets to like some natural run rate of a mature business because I think your national market share compare it to Atlanta or or some of the early market a similar point in time was Atlanta profitable in that penetration.
What gives you the visibility to achieve profitability at such a low volume level and I think I think personally you'll get well above that over time, so not sure why this profitability level frankly matters in the near term, but just curious how you think about all that.
Sure, Yes, so I mean, I think we mean that and the simplest way.
It can be interpreted which is we believe that we can achieve EBITDA.
Positive at the current volumes that we're at across the entire company, we're not extrapolating.
Two kind of market shares that we have in some of our more mature markets.
We're making a ton of progress on SG&A and there's room for a ton more progress frankly, given all the operational gains that were seeing and theres a lot of visibility in GPU progress as well so I think.
This last year has been a massive change in priorities for the company. The world changed on this very very quickly and we shifted our priorities very very quickly and undoubtedly that's been a difficult transition, but I think there's no doubt that it's leading to a more efficient company I think that is not yet fully showing up in the numbers, but theres no doubt its showing up very clearly in the <unk>.
Operational numbers and we expect it to show up in the numbers.
In the not too distant future so.
We believe we can get to EBITDA positivity.
At current volumes and significant positive EBITDA at current volumes and then we obviously expect to to continue to grow from there and to get even more EBITDA positive on a on a unit basis from there as well. So I think we've got a lot of work in front of us, but we've got a lot of great visibility as well.
Okay. Thanks very much.
Thank you.
The next question is from Rajat Gupta with Jpmorgan. Please go ahead.
Great. Thanks for taking the question.
The elephant in the room is the 600 million or so of interest expense.
We're going to get to EBITDA breakeven.
At some point next year or later next year.
We will still need to add more debt at some stage to continue to just maybe ongoing.
Debt.
Is there anything you can do or are considering to use debt burden.
Perhaps some form of restructuring.
Leveraging our real estate.
And find some sort of a middle ground with the bondholders just curious.
What level of engagement you've had there.
We brought on thoughts on that thanks.
Thanks.
Sure.
I think our plan, we tried to break it into three steps step one is get to EBITDA positive we've got half mile markers along the way step two is get to meaningfully positive EBITDA per unit.
Positive unit Economics, and then step three is to start to grow.
And we believe that with that plan.
We have believed and continue to believe that we have the opportunity to.
Run that plan and to not need to raise additional capital.
Obviously, the question around whether or not we'll raise capital in the future is largely a function of the speed at which we drive down SG&A the speed at which we drive up GPU and the speed at which we're able to also drive up units once we once we bottom.
And subtle changes in the shape of those curves can change the answer quite a bit. So our plan is to not need to raise additional capital, but obviously, we'll be paying attention will do what we need to do that it's right for the business I think we have access to capital in many forms.
Obviously got.
A lot of real estate, that's very high quality, we have approximately $2 billion of real estate.
Proximately half an ADESA in half.
End of original Carvana real estate. The majority of that is inspection centers, which are high quality.
Ansible properties.
We've got a lot of other assets as well and we've got capacity to put in.
More secured debt, we've got capacity to put in more unsecured debt obviously in the future. We chose and we believed it was the right choice we could raise equity so that we have a lot of options.
If.
If we choose that that's the right path for the company, but today, we're focused on the operating plan, that's got our full attention and we're marching that.
To hit the numbers that we've outlined.
Got it that's clear maybe just on SG&A you talked about the additional 100 million reduction in the first half year.
And you also mentioned is coming across the different buckets, I think one area, where I believe you've not seen a meaningful reduction yet to the other SG&A.
Seemingly a bigger fixed component of your SG&A.
A good chunk of that $100 million.
Coming from that particular line item because I think you mentioned also that you don't expect more forced reductions or force reduction.
Just curious like if you could help us understand where that $100 million is coming from.
Yeah.
Sure, Yes, so we talked a little bit about that in the letter.
We do expect the SG&A reductions that the $100 million in aggregate.
Quarterly expense reductions that we're targeting over the next two quarters to come across the major line items, So and that I would include.
Payroll I would include.
Advertising logistics and the other expense bucket or do you think there is we certainly see opportunities to reduce.
Other SG&A expenses, including in categories that you may traditionally think of effects I think we have numerous projects ongoing to just be more efficient in our corporate and technology expenses.
Think theirs.
Many many areas across that component of SG&A, where we're very focused on efficiency and do expect to gain savings from that component as part of our plan over the next two quarters.
Got it thanks, Okay back in queue.
Thank you.
And the next question is from Seth Basham with Wedbush Securities. Please go ahead.
Thanks, a lot and good afternoon, just to follow up on the last question. Even if you do hit your breakeven EBITDA goal.
You're still carrying 100 million plus capex and 600 million of interest expense would be burning $700 million.
So in cash and.
Liquidity, that's a court that prior period of time, but eventually you run out of time.
How do you expect to address that standard.
Okay.
Sure.
As we discussed.
One on the planet is breakeven adjusted EBITDA in step two is to go beyond that and then step three is to grow so that's undoubtedly a milestone in the plan, but it is not the plan.
We think we've got a lot of visibility beyond that so.
As we discussed we're focused to hit that plan and we believe that if we hit it in the ways that we're aiming to hit it we've got a real shot at not requiring additional capital if we're wrong and we have lots of ways to go out and get additional capital.
Got it and secondly, as it relates to the loan sales to ally could you help us understand the margins on those under the new agreement relative to the old agreement and.
Whether there is still substantial loans on our balance sheet at this point in time relative to one 3 billion that you had at the end of the.
Yeah.
Quarter.
Okay.
Sure.
First we completed the deal with ally.
The seventh year in that relationship that's something that we're extremely proud of we think it's been a great program for both of US they've certainly been there for us in difficult times, including recently.
We're therefore us in Covid and we would like to think that we've been great partners to them as well essentially in better times and that they've had access to high quality loans that are generally outperforming similar credit quality loans across that entire time. So I think that's been a great partnership for us and I think.
As we headed to the end of the year.
We had a bunch of loans that were looking to sell we're also getting that renewal done.
And it made sense to kind of complete the renewal first and push that over the year. So we had approximately $1 billion of extra loans.
Shifted over a year and as part of that deal as you'd imagine.
Ally does have more spread than they've historically had but that spread is reflective of market conditions, which is kind of the structure that we generally have in our deal and then we take those spreads in.
We pass them on and that enabled us to earn similar finance Gpus.
What we've learned in the past so I think that's been a great deal for us it gives us certainty of execution.
And they've been a great partner for a long time, and we couldn't be happier with it and then in addition today. We also closed our first securitization of the year.
So we'll continue to operate a multi channel strategy.
And we plan to catch up.
On loan sales in the first half of this year.
Thank you.
The next question is from Zachary <unk> with Wells Fargo. Please go ahead.
Hey, guys. This is Sam Reid pinch hitting for exact date him first big picture kind of what's the assumption for industry volumes that you're embedding in your Q1 unit outlook does that sequential pull back you were looking for a year.
Youre seeing across the industry and then I've got one of the other industry follow up.
Sure.
Yes, So let me start a little bigger picture I think we.
Now a 10 year old company and I think for.
Basically for nine years of our of our life well, we're in a reasonably stable environment. We're certainly in a stable environment for seven five years of our life and then we went through Covid, but we still had somewhat similar.
Used vehicle sales volume at the at the industry level and then I think for the last year, we saw those volumes at the industry level dropped by on the order of 10% give or take and I certainly think that is correlated.
With a bunch of choice that we've made to shrink up to focus on profitability.
And I think basically with more pressure on independents, even relative to franchise dealers and so undoubtedly the last year has been.
Much slower year for us the first year.
Where we actually shrunk by 3% we've grown very very quickly in all previous years and so I think the correlation is there when the market was shrinking we were shrinking and when the market was stable. We were growing I do think that that is more correlation than it is direct causation the market moving up or down by 10% relative to all the growth rates that we've seen in every year of our life. Prior to this year would be very <unk>.
Very small.
Relative to how quickly we're growing.
I think of course, we always have.
Something of an embedded view around what's going to happen at the industry level, but we generally don't think that thats. The biggest driver of our success I think it happens through a correlated because many things occurred most notably interest rates shooting up in car prices shooting up over the last year.
It had a real impact on the industry in general, but us in particular.
So I would say probably the best way to evaluate that as we generally are looking at the market being flattish go forward, but we also I don't think our our ever speaking in terms that are precise enough to where likely movements in the macro industry level sales volumes are that likely to impact us super dramatically, we would expect them to flow through to our results in the same way that they impact the industry.
In sum total and then I'm sorry, what was the second part of your question.
Hello, It's just another just another industry question here it kind of follows on advertising.
And volumes you've seen you've seen you guys have done a good job of pulling back on advertising, but what are you seeing kind of across the industry and is there a similar pullback that's taking place across your peer set and as you pull back on advertising can you compare and contrast, your share of voice today versus where it might have been before you started to pull back.
Sure.
Let's start with the maybe peers in automotive because I think the automotive world.
Yes, there's been a lot of interesting things happening over the last year and a half that you are.
More distorted than any any period that I can remember in my career, when I say disorganized mean abnormal theres been a lot of things that have been abnormal. So we went through this period, where cars very rapidly appreciated and for the most part consumers were going to get enough spots where that didn't necessarily impact.
History level sales volumes that much in 2022 as we saw car.
Car starts to slowly come down but rates go up we saw affordability say in a pretty similar spot, but we saw the industry generally gets softer I think franchise dealers have done incredibly well through the last two years I think if you kind of graph there.
Pick your kind of bottom line metric, but to make it comparable to ours view grab their EBITDA margins over the last 20 years, you would see extreme outliers over the last couple of years I think that while new volumes have gone down.
New margins have gone up by more than the volumes have gone down and so there's been a lot of profitability there I think.
Given how high car price are they have been able to convert many would be new car buyers into used car buyers and they've had an advantage supply of used cars as they have been returned off lease.
And those off lease returns where price in a completely different vehicle price environment. So they are able to acquire those cars at residuals that are far below the market value.
Even though historically on average residuals roughly approximated the market value and so I think for franchise dealers, it's been a great environment and I think many of them have not been super aggressively pulling back if we see kind of in aggregate over the last year and a half I think for independents, there's probably two categories. There as well there is those that were buying strictly from auction and those that were buying elsewhere I think.
For those buying strictly from auction, it's been a very tough environment because the auction of the placement has also been.
Dramatic changes over the last couple of years and it's been hard to acquire cars to carry.
Normal relative to history margin there I think for those that have acquired cars from customers at meaningful scale. I think last couple of years have actually been somewhat average from a profitability perspective, and so I think most of those retailers are probably played.
Kind of a relatively average gain from an advertising perspective over the last couple of years. So I think those things are starting to change a little bit and we saw the market soften.
A little bit in 2022, we've recently seen the market be reasonably strong as it relates to changes in prices. Early this year I think a lot of dealers probably came into the year with low inventories and weren't feeling super confident after November and December .
There is normally kind of a seasonal inventory build in car price depreciation around this time of year when tax monies coming and we've definitely seen that this year and then I think theres. Another peer set as well, which is kind of growth companies and technology companies out there and I think that peer set.
Undoubtedly pulled back materially on marketing I think the move there probably been.
Much more dramatic and we are certainly pulling back pretty dramatically on marketing I think you can see that in our results in Q4.
And there is certainly more of that to come.
We're in a unique environment, where gpus are lower than they've been in the recent past and kind of all else constant that means fewer transactions makes sense to acquire we've also focused.
Almost exclusively on on profitability over the last year that means many transactions that we would have acquired because we believe that they made sense over a longer term.
Time horizon, we have not been acquiring more recently.
Then the customer responsiveness is different in this environment and so we've been retesting all of our different marketing channels.
In many ways most effectively through our many markets, we'll use our markets as laboratories to turn on and off different marketing channels.
To try to assess what we think the effectiveness is.
Of any given marketing channel and I think that we found that in this environment.
In most cases, there's room for us to probably pull back quite a bit on marketing because we're not getting the return that we've gotten in the past and so we're doing that we're doing that purposefully warming should we roll out those tasks and we do it in a way that doesn't derail the entire business and cause it to get out of balance.
But I think that there is there is real economic opportunity there for us to pull back on marketing and so we've been doing that and we'll likely do that when we do that we are much more likely to pull back in direct marketing channels and we arent brand channels I think one of the reasons that we're able to efficiently pullback on marketing spend today is because we've been able to build a high quality brand over a long period of time and so we want to be careful that we preserve that.
We continue to invest in that brand, but I do think there's opportunities in in there.
These direct channels and I think youre, starting to see that show up in some of our results. So that that was a long answer to a question you partially asked I hope it was helpful. But that's how we're thinking about all of that.
Much appreciate it thanks, so much.
Thank you.
Next question is from Winnie Dong with Deutsche Bank. Please go ahead.
Hi, Thanks, so much for taking my question I was wondering if you can give us an update on sort of the integration of ADESA and where you are with footprint integration relative to the logistical savings that can be achieved for the benefit of GPU.
You get your prepared remark mentioned getting back to that $4000 in GPU I was wondering if you can say that around what you think the.
The timeframe is to achieving that that's my first question and then I have a follow up thanks.
Great.
Sure. So I think we're making a ton of progress with the integration of ADESA ADESA has.
56 incredible sites around the country and we currently have 75% of the cars that we buy from customers that we plan to sell wholesale that are now landing at ADESA properties.
That's a really significant change from obviously, where we were six months ago or certainly 12 months ago, when we prior to the acquisition.
That's very helpful from an efficiency perspective. It means those cars are on the ground in a location, where they can get rapidly inspected and sold.
It means that the transportation to those locations is much less than would have historically been because we're closer to desktop.
And so youll start to see that flowing through in our in our wholesale margin.
Footprint is incredible and we really look forward to the gains that will continue to get in wholesale in logistics and ultimately in reconditioning overtime.
But I think a lot of those gains will come.
More when we get to step three of the equation, which is which is turning growth back up in the meantime, the ADESA team has been doing a great job it's been a tough.
A couple of years for auction businesses I think postpaid.
Post pandemic has been a very odd time for the auction business in general.
But they've been doing a great job they've got a great plan, we feel good about the path that they're on.
And so we're excited there.
And then as it relates to the timeframe to getting back to 4000 GPU.
I apologize for not being more precise in this response, but I think we tried to give some some building blocks that we think are pretty big and so ill just all repeat some of those if you kind of start with our GPU that was at about 2600 <unk>.
Then you look at kind of the retail allowance, which we obviously don't expect to be a recurring item that would get you up $600 and if you look at our wholesale allowance, which is the same concept that exists in our wholesale inventory thats. Another $100. If you look at the shift in our loan sale timing, yet just shy of $500 Mark gave a helpful stat.
That talked about our sales of cars that are less than 90 days, aged in Q4, which would have been an additional $600.
On top of on top of all that.
We still have.
Significant room in our in our non vehicle Cogs, we called out that there was probably $600 a possible gains there.
In Q1 or Q2 relative to what we had achieved in the past, we probably have three or $400 of additional gains there to be had we're getting those gains more slowly.
As a result of shrinking our inventory than we might have otherwise if we werent shrink our inventory shrink our inventory means that we're buying fewer cars and it means that the overhead of the inspection centers are spread.
Between fewer cars and there is there is some efficiency impacts when you are buying fewer cars, but that's also transitory. So I think that's a big opportunity for us and there are others. So I think the opportunities are there. It's very clear we just have executing to do and we will go get it.
Great. Thanks, so much.
And then I was wondering if you can also comment on sort of like the Gulf War in strategy in terms of mix of inventory I think you had previously indicated that you had.
Going to go on a go forward basis going to tell it towards the lower price inventory just given the current macro conditions can you give us a sense. If that's something is going to plan.
And that your plan to reduce inventory.
Yeah.
Sure, Yes, I can take that one so just to set the stage a little bit so the the way we typically approach inventory mix is by evaluating what our customers are shopping for on the site and balancing that against.
What we're seeing in the market in terms of what customers or other suppliers are selling in and the combination of those two things.
Dictate what mix of inventory, we end up putting on our site I would say we've talked a lot about inventory on this call and certainly our inventory has been too large.
Relative to sales volume will be working very ambitiously to correct that in terms of mix.
I wouldn't say, there's any particular patterns to call out.
I think the I think we will continue to evaluate as we look forward from where we are here in Q1, and just be reading the demand signals reading the supply signals and doing our best to balance the two of those but right now I don't think that points to any particular <unk>.
<unk>, that's worth calling out at this time.
Okay, great. Thank you so much.
The next question is from Michael Montana with Evercore ISI. Please go ahead.
Hey, Thanks for taking the question just wanted to ask if I could.
When do you think that you would be in a position to kind of switch back to offense with respect to taking market share again would it be potentially third quarter when the.
The SG&A reductions would've been substantively made and if it is do you need to basically start growing.
G&A, an accelerated pace to take market share or do you think theres enough muscle that you could just be more productive I guess at a lower run rate moving forward.
Sure So I think.
It's the third step in the plan right now.
And the reason is the third step in the plan is that I do think.
We were one of the more aggressive growth companies out there for <unk>.
The entirety of our life basically from when we started 10 years ago until until about a year ago.
And that requires an alignment of thousands of people with priorities and what's being done and how we're working on things and how we make decisions.
And I think that it's a lot of work and it's.
Very difficult to turn that quick.
Quickly and focus completely on profitability, which is what we've done over the last 12 months.
And there are definitely some I would say transition costs.
So just.
Get thousands of people aligned on a new set of goals.
That we're all equally excited about and then we have a lot of work to do and a lot of gains to be had and so I think we paid those kind of fixed cost to transition and I think as a result, we will probably hang out here with priorities that look more like our current priorities.
For a little longer than than might even be kind of optimal given what the market is putting in front of us just because it is expensive to have these big priority changes and so I don't know exactly when that will be I think even over the last three or four months. We've learned a lot as we've gone many of these things that we do we outlined projects that we think.
Makes sense.
And then we roll them out and then we learned what the reality is they have some impacts to customer experience if something back to the customer conversion. They have some impacts to our underlying costs and they suggest an optimal path forward as it relates to the balance of the way that we pull those levers and the volume that we sell and so I think what we've seen over the last three or four.
Four months is more of our projects are probably having bigger operational gains and we may have kind of hoped for but they're also pushing in the direction of fewer sales and so that's where we have aggressively shifted in the last several months towards smaller inventory and we plan to kind of catch and bottom at a smaller level of sales and we probably would have imagine.
Even six months ago, and I think we still have learning to do because there are still many many of these projects in our backlog that we're rolling out. So I don't think we know exactly what the answer to that question is but I don't think its obviously has to be a super long time, and I think it's time for growth.
We're going to head into growth are much more efficient company. We are going ahead and to grow the company that knows exactly how to do that and we're going ahead and to grow the company that has it.
Infrastructure advantage that is materially different than the infrastructure advantage we had.
When we when we are growing last time, so I think that'll be an exciting time, it's not obvious it's that far away, but I don't think we yet know exactly when it is and for now we're going to keep our heads down on the plan that we outlined.
Got it and if I could just quickly follow up on one other angle was EBITDA. So for this year I was getting to EBITDA loss in the $400 million to $600 million range for 2023, and that's basically like a slight decline in units.
<unk> 3000 in total GPU SG&A improvements like you've discussed and so kind of a $1 billion plus of cash burn. If you include the interest expense I didn't know if you'd care to comment on any of that or any key drivers that could give upside or downside to consider.
I would suggest reading our shareholder letter I think we talk a lot about.
Some of the near term drivers of profitability as well as a sort of broader way to think about our plan and I think.
I think that will most likely be helpful for.
Trying to shed some light on our near term expectations.
Thank you.
The next question is from Ron Josey with Citi. Please go ahead.
Alright, Thanks for taking the question here Mark I wanted to ask more about supply and just how you balance the supply reductions with demand and conversion rates and wondering how the sort of conversion rates are trending I'm, assuming they're coming down simply because people might not have what they're looking for and so just historically I understand inventories coming down just wondering on conversion there.
And then maybe a flip side of the marketing questions earlier, we've seen the reduced marketing investments just talk to us about any lessons learned in terms of maybe awareness or traffic as you pull back on advertising I think you said some of it didn't have a positive it as positive and ROI, maybe just talk about just inherent sort of awareness of carvana that you don't need the market as much going.
Forward and maintain sort of the sales sales as they are thank you guys.
Yes. Thank you.
Okay sure. So let's start with the first question I think.
Undoubtedly.
Inventory impacts conversion and so as inventory is reduced we expect conversion to also be reduced and so sales can be reduced all those constant.
I think the way that we can kind of try to think about that and reduce that to a math equation that is going to kind of flow into the second question is we can basically say, okay, given our estimates of inventory elasticity.
What is the sales benefit.
Of carrying a larger inventory and then what is the depreciation cost of carrying a larger inventory and we can compare those two and we can effectively get to customer acquisition cost for those incremental transactions.
And the way all that math works is.
<unk> you want at any given level of depreciation you have kind of an optimal balance of inventory relative to sales, which shows up in our turn time goal and then the way you kind of shift around that is when depreciation is higher you want to have a smaller inventory and when depreciation as Laura do you want to have a larger inventory.
And I think we.
Sure.
Well right now, we're actually kind of in a.
Maybe even appreciating environment, the wholesale market, but but we've been for a year and a rapidly depreciating environment and I think probably the smarter guests over the next year or two is that it will be a depreciating environment on average because car prices are.
Youll still elevated relative to other goods.
That as well as the fact that we have until.
Until recently had a large inventory relative to sales both point in the same direction, which is the optimal inventory is smaller and as discussed earlier that is costly.
In terms of the margin that we realize is we're as we're transitioning out of that large inventory and to some degree. It is also costly as it relates to sales.
But we can do all the math on that and try to make the smartest choices. We can I think we talked a lot on the way up about the positive feedback in the business as the business gets bigger it gets better and it is also true that when we are shrinking that creates kind of negative feedback loops that we have to be mindful of and make it a little bit harder, but that's all taken into account as we.
Build out our plans and calculate what we think is the best set of moves in this environment given our current priority. So.
I think the impacts are exactly as you'd expect Directionally and then I hope that was helpful color in terms of the way that we think about it in the way the impacts of the business on marketing I would say.
Yes, there is a lot of potential earnings there.
We're in a pretty different world than we were two years ago, and so I think we ought to be careful to not extrapolate them as absolute.
Bruce we have to we have to evaluate what we're learning is things that are true in this environment.
I think it is highly likely that our brand is materially stronger than it was a couple of years ago and I think as we go through and we reevaluate various marketing channels I think that does seem to be having an impact on what we think the ROI is of those various channels.
Again, I reserve the right to kind of end up being wrong on that but I think that's what the data look.
Looks like today I think a general learning is it's important.
When you are growing fast in the business rapidly changing to to make sure that you revisit decisions that you previously made that might've been made under under different contexts.
And I think that marketing it looks like there may be some opportunity there as well we're under a different context, there are choices that made more sense and they make under today's context.
And I think so far what we've learned has pushed us in the direction of lower marketing, but again marketing is a.
Marketing is a delicate thing because you are building a brand which is very hard to measure thing.
And it's very important that you continue to build that brand and so I think you want to take care.
And it's I think easier to move with more conviction in a more quantitative way when youre talking about direct channels because those have less of an immediate brand impact they still have a brand impact because they show up in terms of X transactions and then those people that buy cars to me tell their friends and family about it but they have less brand impact than the brand channels and so.
We will be more careful with the brand channels, but we will be careful in general and we're definitely doing a lot of testing as as we move down in total marketing spend.
Thank you I appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Ernie Garcia for any closing remarks.
Perfect well, thank everyone for joining the call to everyone on team Carvana. Thank you. So much for the work you guys are doing this is Ben.
A tough year undoubtedly we've made huge strides massive changes are huge pivot and priorities.
And I'm, just always reminded of how much you care and how much you fight the team of fighters. He has been fighting hard and it is showing up it's going to keep showing up we've still got some fighting left to do but we're going to do it. So thanks to all we'll talk to you guys next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
Okay.