Q1 2023 Carvana Co Earnings Call
Hello, and welcome to the Carvana first quarter 2023 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.
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Draw from the question queue. Please press Star and you. Please note. This event is being recorded I would now like to turn the conference over to 19 Investor Relations. Please go ahead.
Thank you Jay good afternoon, ladies and gentlemen, and thank you for joining us on Carvana first quarter 2023 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.
The first quarter shareholder letter is also posted to the IR website. Additionally, we posted a set of supplemental financial tables for Q1, which can be found on the events and presentations page of our IR website.
Joining me on the call today are Andy 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.
Clearly from those disclosed here.
A detailed discussion of the material factors that cause actual results to differ from forward looking statements can be found in the risk factors section of Carvana and its 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, whether 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 the non-GAAP metrics and all references to EBITDA will be to adjusted EBITDA reconciliations between GAAP and non-GAAP metrics for all reported results can be found in our shareholder letter issued today, a copy of which can be found on our IR web.
Right.
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 the.
First quarter was a quarter of significant progress for Carvana.
The automotive industry as well as the macroeconomic and market environment changed pretty dramatically, resulting in a significantly shifting our near term priorities away from growth and toward profitability.
This shift has impacted everything we do it's impact what we're focused on is impacted how much. We are focused on and has impacted the way we were managing the business day to day and.
And all of these adjustments take time.
First we need a narrow set of operating goals inside the company that we knew would be necessary to hit our financial targets.
Second we tightened the connections between our technology and operating teams through shared goals shared meetings and even shared office spaces.
These changes first half to show up in the projects that teams are undertaking they moved to operating metrics and finally, they show up in financial results.
And that is exactly how our progress has been unfolding in the second quarter of 2022, we outlined our plan to discuss how we are organizing internally to tackle our goals.
In the third quarter, we shared a number of operating metrics that we're beginning to rapidly move in the right direction.
In the fourth quarter, we began to see some of the early signs of meaningful financial progress.
And now in the first quarter of 2023, the direction speed of the financial progress is undeniable, we reduced SG&A by over $100 million quarter over quarter and completed our year long effort to cut $1 billion of annualized cost out of the business.
In addition in the first quarter, we returned to our historical GPU and adjusted EBITA margin Frontline and reported company best results for first quarter in both metrics.
We still have a long way to go to achieve our broader goals, but we were on the right path and we are moving quickly.
As we've discussed before there are three steps in our plan to achieve positive cash flow and good Karma on are back on track to becoming the largest and most profitable automotive retailer.
Number one drive the business to positive adjusted EBITDA number to drive the business to significantly positive unit economics number three after achieving objective number wanted to return to growth.
As outlined in the letter we expect to complete the first step in this plan in the second quarter. The completion of this step with a milestone not a change of direction, we'll be using the same processes and focus we have benefited from over the last year to continue to see the pit planned through we remained firmly on the path of fulfilling our mission of changing the way people buy cars and to becoming the largest and most profitable automotive retailer.
March continues mark.
Thank you Ernie and thank you all for joining us today.
Our first quarter results demonstrated significant progress on our path to profitability.
We exceeded our goal of driving $100 million of non-GAAP SG&A reduction one quarter early and we surpassed our previously communicated goal of greater than 4000 G. P. M.
In the first quarter retail units sold totaled 79240, a decrease of 25% year over year and 9% sequentially.
Our decline in retail units sold which we expected was driven by four primary factors one reduced inventory size to reduced advertising three increased benchmark interest rates and credit spreads and for our continued focus on executing our profitability initiatives.
Total revenue was 2.6 billion, a decrease of 25% year over year and 8% sequentially.
Due to the dynamic nature of the current environment, we will focus our meeting remarks on sequential changes.
As we've previously discussed our long term financial goal is to generate significant GAAP net income and free cash flow.
In service of that goal in the near term our management team is focused on driving progress on a set of key non-GAAP financial metrics that are inputs into this long term goal, including non-GAAP gross profit non-GAAP SG&A expense and adjusted EBITDA.
In the first quarter non-GAAP total GPU was 47 96, a sequential increase of 2000 and $129 driven by increases across all components.
non-GAAP retail GPU was 15 91 versus $6 32 in Q4.
Retail GPU included a $593 benefit due to an adjustment to our retail inventory allowance.
In addition sequential changes in retail GPU were primarily driven by higher average days to sale, partially offset by wider spreads between wholesale and retail market prices, our shipping revenue and lower reconditioning and inbound transport costs.
Notably we achieved our Q1 retail GPU, despite selling vehicles that were on average more than 120 days old.
Nickel sold in Q1 that were less than 90 days old at.
That retail GPU over 2000.
And illustrating the benefit of normalizing inventory size and turning vehicles more quickly.
non-GAAP wholesale GPU was 12 36 versus 551 in Q4.
Those factors sequential changes in wholesale GPU will primarily driven by higher wholesale marketplace volume.
non-GAAP other GPU was 1969 versus $14 83 in Q4.
Sequential improvement in other GPU was primarily driven by a greater volume of loans sold in the quarter compared to Q4.
In Q1, we saw it slightly less than a normalized volume of loans as a result of uncertainty in the securitization market in March.
The GPU impact of this left the normalized sales volume was largely offset by higher interest income and other improvements leading to an approximately normalized other GPU in Q1.
In Q1, we made significant progress, reducing SG&A expenses for the third consecutive quarter, where.
What are you seeing non-GAAP SG&A expense by $119 million sequentially.
Following a $60 million sequential reduction in Q4.
These expense reductions were broad based including advertising compensation and benefits logistics and other SG&A.
non-GAAP SG&A expense per retail units sold decreased by more than $900 sequentially in Q1, demonstrating significant operating leverage.
Adjusted EBITDA loss was $24 million in Q1.
One 9% of revenue we.
We expect to achieve positive adjusted EBITDA in Q2.
After a strong quarter in Q1, we expect to drive greater than $5000, a non-GAAP total GPU in Q2 as long as the macroeconomic and industry environment remained similar to Q1.
Our strong GPU performance is powered by three fundamental drivers.
Driver number one.
A more robust retail GPU model.
We expect greater than $2000 or non-GAAP retail GPU in Q2, driven primarily by our efforts to normalize the inventory size accelerate turn times and generate additional revenue from additional services.
In FY 'twenty, one we generated approximately $1700 of non-GAAP retail GPU.
Since then we've made fundamental improvements that we believe will drive higher retail GPU on a sustainable basis.
First we have continued to improve our customer vehicle sourcing with a higher share of retail units sourced from customers. In Q1, 2023, then in FY 2021.
Second we are generating more revenue from the unique services, we offer our customers, including nationwide shipping and home delivery.
Third overtime, we expect per unit reconditioning, and inbound transport costs, excluding depreciation and amortization to be below FY 2021, due to our continued focus on operating efficiency.
Moving onto driver number two.
And in wholesale platform.
We expect greater than $1000 of non-GAAP wholesale GPU in Q2 split between Carvana is first party wholesale vehicle sales and a desk those third party wholesale marketplace.
In FY 'twenty, one we generated approximately $450 of non-GAAP wholesale GPU.
Since then we've made several fundamental improvements that we believe will drive higher wholesale GPU on a sustainable basis.
First in May 2022, we acquired ADESA, but.
<unk> largest U S wholesale used vehicle auction marketplace, that's as wholesale marketplace generated significant gross profit in Q1 and will be a long term addition to our total gross profit.
Second our acquisition of ADESA has improved the efficiency of our offering of buying cars from customers and selling them in the wholesale market. For example, since Q1 2022, we have reduced inbound transport costs on wholesale vehicles by approximately $200 per wholesale unit sold are approximately $90 per retail unit sold supported by.
That's the locations.
Moving on to driver number three strong finance and ancillary product execution.
We expect greater than 2000, non-GAAP other GPU in Q2, primarily driven by a normalization of loan sales volume.
Since the beginning of Q2, we have sold or securitized approximately $1.3 billion of loan principal and increase compared to Q1.
In FY 'twenty, one we generated approximately 24 50 of non-GAAP other GPU.
Well, we have not yet regained this level in the medium term, we see a significant opportunity to increase other GPU by improving our cost of funds spread relative to mature securitization market participants and by continuing to expand our ancillary product platform.
To summarize our first quarter results and second quarter outlook reflect a return to our multi track multi year track record of driving GPU improvements. We believe the gains we are demonstrating in 2023 year sustainable and reflect the significant fundamental improvements we have made in the last 12 months.
We also see further opportunities for more improvements in GPU in the future.
Okay.
Moving onto our second quarter outlook.
While the macroeconomic and industry environment continues to be uncertain looking toward Q2, 'twenty three more broadly we expect the following as long as the environment remains stable.
On retail units. We currently expect a sequential reduction in retail units sold in Q2 compared to Q1.
As we continue to normalize our inventory size optimized marketing spend make progress on our profitability initiatives.
And make progress on our profitability initiatives.
On SG&A, we expect similar non-GAAP SG&A expense in Q2 compared to Q1, we continued to see significant opportunities to further reduce non-GAAP SG&A expenses over time.
Finally, we expect to generate positive adjusted EBITDA in Q2, achieving the first step in our three step plan to generate positive free cash flow.
On March 31st we had approximately $3 $5 billion in total liquidity resources, including $1 5 billion in cash and revolving availability and 2 billion in Unpledged.
<unk> real estate and other assets, including more than 1 billion of real estate acquired with ADESA, our strong liquidity position significant production capacity runway and our clear and focused operating plan positions us well on our path to achieve our goal of driving positive free cash flow and becoming the largest and most profitable auto retailer in the future. Thank you for your attention and we'll now take.
<unk>.
Yeah.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Today's first question comes from Sharon Zackfia with William Blair. Please go ahead.
Hi, good afternoon.
I guess to maybe pretty quick questions. It sounded as if from the press release, you might have made really significant progress on the kind of percent of inventory. That's under 90 days. So I was hoping you could maybe talk to us about what percent of the inventory today is under 90 days versus what you had in the first.
Quarter, and then secondarily AD spend was really low I'm wondering if that's a low watermark for the year. If we should expect that to start to go higher. Thank you.
Yeah.
Well thanks for the question so I think.
On inventory, we definitely need a lot of progress we rapidly moved through a pretty significant portion of our aged inventory in Q1, and so we started with a much larger inventory then with size to sales and we need a lot of progress at the quarter, our inventories down year over year about 55% and was down 20% in just Q1 alone.
I think a useful metric for thinking about our inventory size and what that means for profitability is just think about how larger inventory is compared to the cars that we're selling on any given day and if you kind of do that simple math and take inventory size divided by daily sales in the quarter. We had about 65 days of implied turn time on that.
It contrasts with the actual turn time of 120 days that Mark talked about in his prepared remarks, that's obviously a really big difference.
And that leads to a pretty significant impact to retail GPU.
The letter we provided a number where for the cars that were less than 90 days, aged which for that subset of cars. The average turn time is approximately 65 days. So it's a it's a useful number to compare to our implied turn time, we had retail GPU of over $2000 and so I think we're you know we're heading into Q2 in a in a much better spot inventory perspective I think.
That's been a year long effort to kind.
Kind of get sales to catch up to our relative size of inventory and I think we're really pleased with the progress we still have probably a quarter and a half to go maybe two quarters ago to get that all the way into alignment, but the size of inventory relative to sales is now in alignment. So I think we're excited about that.
On AD spend that's another area, where there has been a tremendous amount of pressure on units in the business were down approximately 64% year over year in AD spend quarter over quarter were down approximately 35%. So that was a big move as well I think what we found is in this environment cars are expensive and consumers.
<unk> are a little bit less responsive to.
Do advertising and so we've been recasting, our all of our various advertising channels and I think the optimal that we're finding today are different from the optimal do we found in a more normalized environment and that's allowed us to pull back pretty dramatically on marketing.
Exciting.
Because I think we were able to show our customer acquisition costs of approximately $700 in the quarter, which is the lowest we've ever shown is accompanied by a pretty long way and I think if you look in deeper.
We had our oldest cohort we were in the low three hundreds. So I think there's just a lot of progress that we're seeing there and I think we're learning a lot about what the business model is capable of achieving I think we continue to learn as we as we shrink our inventory in and reduce our marketing spend and I think we'll continue to make adjustments over the next couple of quarters.
As as we learn more I think it is more likely than not that there will not be large reductions in marketing spend from here.
I think it's also unlikely that it will shoot back up super dramatically, but we will continue to test it and evaluate what we learn from those tests and then we'll go from there.
Thank you.
Thank you.
The next question is from Ron Josey with Citi. Please go ahead.
Thanks for taking the question I wanted to maybe do a quick follow up Mark can Ernie on just the inventory question from Shane from Sharon, but specifically Mark you mentioned, a higher incur an increase in vehicle sourcing from customers and you know I think last quarter, we talked about perhaps or maybe two quarters ago overpaying for that so talk to us a little bit more just about the sourcing of vehicles from customers we are.
Seeing more ads actually on social sites for Carvana on that and so I wanted to hear just the sourcing of vehicles as overall inventory call. It normalizes. Thank you.
Sure Yeah happy to answer that so yeah. The comparison that we talked about in prepared remarks, with Q1 2023 compared to.
<unk> 2021 so we certainly have continued to make progress on sourcing cars directly from customers over that time period, I think we feel great about that I think we've talked about it before but you know sourcing cars from customers is a great source of inventory because it's a great selection of cars very broad.
Array of different makes models years Mileages and then also those cars tend to be more profitable than cars that you acquired auction. So I think that's an area of the business, where we've had great success over the years I think we feel like we've got access to a lot of cars.
We have a lot of customers coming to the site are appraising vehicles with us and so I think that that's obviously been a success story in the business over the last couple of years and we'll you know we'll be looking to continue that success as we move forward.
The next question comes from Adam Jonas with Morgan Stanley . Please go ahead.
Ernie Hey, Mark I guess, so the company is getting more profitable.
The smaller cats at some point this will need to change I hear you on the guidance that I was going to ask is 80000 units a quarter. The right size for the company, you're telling us it's going to get continue to get a little smaller I would imagine with the lower levels of merchandising and then the lower AD spend to remain.
There. So I guess I'm wondering are we there yet what is the right size for the company and then I have a follow up.
Sure. So I mean to jump to the end I think the right size for the company is much much larger eventually and I think the path there through.
<unk> profitability has just included some of these moves that we've made to shrink inventory in shrink marketing and get back in balance I think you know when we found ourselves. After 2021 was expecting another similar year and just being pretty dramatically out of balance with where sales actually were and I think you know as we were growing from formally launched in 2013 O.
Through 2021 we benefited a lot from the positive feedback in the business as we got bigger we got better as we grew our inventory conversion rates went up as we spent more on marketing it was easier to open new markets and I think you know when we kind of found ourselves out of balance and we needed to rebalance. The business. We knew that we were going to face the other side of that feedback we knew that as we shrunk we.
We see conversion rates go down and we knew that was going to be a difficult transition.
But in light of the environment. We also thought it was the fastest path.
Two meaningful positive cash flow and so we took that path and I think we remain on it I think we believe that we are probably pretty close to what our sales will bottom out I think we'll learn more on that over the coming quarters. You know, we've obviously made dramatic moves I gave the numbers to share in a moment ago about how quickly we lowered <unk>.
<unk> inventory just in the last quarter and so I think some of those things can have some lag the facts that will show up over the next couple of quarters. So I don't want to act overconfident that we know exactly what will happen there, but I think the major headwinds that have faced the business over the year are largely subsiding, there's clearly been some.
Some industry and macroeconomic headwinds in the form of cost.
There has been macroeconomic headwinds in the form of interest rates and then there's been a lot of carbon and pose headwinds in the form of inventory reduction and marketing reduction and focusing on profitability and pulling away from sales that were less profitable and implementing different product changes that we think are the.
To make the business more efficient and so I think that undoubtedly been a difficult transition.
It's hard to know exactly what the impacts of all of those things are on volume, but doing the best job that we can and trying to control for all those we do believe that the business is performing better than we might have imagined.
Once we've made those moves we have estimates for the elasticity of sales to inventory.
Inventory size and the marketing dollars and into many of our different product changes and I think based on what we're seeing we're actually pretty happy with with where volumes are I think the third step of our plan. When we get there is going to be to turn back to growth and that's something that we clearly know how to do it is something we're clearly incredibly well positioned for I think we'll be better positioned for it then than ever before.
When we're a more efficient business. It means that growth comes easier when were.
You know when we've got the infrastructure that we've been able to acquire over the last year and a half.
We're gonna be in a better position to grow but I think that step three in our plant. So we're looking forward to Q2, where we plan to hit step one we will stay focused in that same direction. We've already got our plans for the next nine to 12 months to keep the pedal down and keep making a lot of progress in unit economics, we plan to do that at somewhat similar volumes to where we are today.
And then when we get there hit that goal, we're going to definitely turned our attention back to growth because we're still incredibly small compared to the huge opportunity. It is still a 40 million unit market. We still have an incredibly unique offering and it's still an offering that customers love.
Ernie just.
Just just a follow up I'm curious, where you where your team sees the lowest hanging fruit.
From here on SG&A and has your team, giving consideration to charging a delivery fee or somehow incentivising.
More the customer either paying or avoiding.
Avoiding that delivery cost to you.
<unk>.
Sure, Yes, so let me start with I think where we've made the most progress in cost over the last year. We've made a lot of progress and so I apologize for going these numbers route over and over again, but we're proud of them. You know, we've got $1 billion of cost out of the business and you know over 100 million quarter over quarter.
I think there are many areas of cost there is a kind of fixed cost or variable costs I think theres semi fixed cost and then there is no customer acquisition cost in the the variable costs. I think we are currently operating across virtually all of our operating groups at all time best efficiencies in the variable cost themselves I think we're generally.
Or near all time lows across all groups and I think that's happening despite input costs being higher I'm generally.
The efficiency for all of our groups. It is better than it's ever been and then in some groups of costs are still in similar places where they've been in the past because the input costs are higher whether that's gas or oil or there's been inflation just across the economy and so there are some areas, where theres somewhat similar but I think we've made a tremendous amount of progress and I think there's more progress to be made in those variable costs and kind of.
Semi fixed costs I think that's actually been the biggest bucket over the last year. That's what we were just built for a different level of volume that we saw and I think we've made a ton of progress there and that's been extremely helpful. I think theres still some room for us to make progress and get all the way in balance there, but I think most of that has been achieved in customer acquisition costs were all <unk>.
On Lowe's.
The the staff at the company level, it's about $700.
Our oldest cohort are you know its in the low three hundreds we have four cohorts that are that are better than company average.
Those are pretty great numbers. So those are numbers that are in alignment the below 300 numbers in alignment with best in class peers in the industry and it's in line with our long term.
That's a model so I think over time, there's room, there, but I think we've clearly proven that we can do much better than we ever have in the past and I think that that's exciting fixed cost today per unit are probably higher than they've ever been or at least near all time highs.
And Thats because volumes are lower and we've got a fixed cost business and we feel like we're getting returns on those investments I think that's you know once you've got costs, you you'd rather them be fixed than anything else and so I think that's good news, but certainly our fixed costs are high relative to our sales today.
And we do think we're getting return on that investment we continue to or we plan to reduce those costs over time, we plan to reduce the dollars of those fixed costs, we've been making progress on that but we can make more progress.
And then the remainder of them on a per unit basis.
You'll go away with with scale and some of them go away just with the passage of time you know today, we still have many facilities that were massively under utilizing.
In the case of some of our office space, That's office space that they will probably go away over time in the case of our inspection centers. For example, that's something that we expect to lever with with scale. So I think we've clearly got a path to significant additional gains and expenses across all types of expenses.
I think the biggest gains are behind us and they took the form of that kind of semi variable.
Form where we're just getting the business back in balance was really valuable.
And then you also asked a question about about delivery fees also something that we have done.
Over the last year is we've.
We've changed our offerings such that when customers elected to buy a car that is further away from them.
Especially in case when there was a car that's closer to them, we will charge a delivery fee and so that is flowing through our gross profit I think mark.
Spoke about that as being something that's different from the gross profit that we had in years past you'll for our customers. We still have thousands and thousands of options are available to them that are that are free but if there's some specific feature option, a or or unique component of a car that they're interested in it's further away. They can still buy those cars that are further away and we will charge.
A delivery fee.
And I think when we go back to our previous best GPU year, which was 2021, we were at $4500 for that year.
That was a year, where we didn't have that approximately 500 dollar line item that was a year, where we didn't have.
Desktop and so I think that's where mark was talking about.
GPU being in a place where we think the future looks very bright relative to the past and we're pretty excited about that as well.
Thanks Scott.
The next question comes from Michael Montana with Evercore ISI. Please go ahead.
Hey, Thanks for taking the question had one on the cost side and then a separate one on the customer base, but just on the cost side. If I could just wanted to dig into a few of the buckets in particular, the compensation and benefit other SG&A and then market occupancy and just kind of get a handle around you know if you.
Think of comp and Ben right now do you basically have the right team in place the right sized team and any further improvement from here are basically going to be a little process and efficiencies that you might gain or is there still some work to do there and just kind of the same question then for other SG&A as well as.
Market occupancy.
Yes sure.
So let me start with market occupancy that's the shortest answer market I've been do you think of more or less a fixed expense I think we.
Largely facilities out in our.
Out of our markets.
And including that machines, and you know that that's an expense, where we think we have significant opportunities to scale into the fixed cost base that we have but that is more or less fixed expense that we think we can lever meaningfully with volume over time moving onto comp and benefits, we certainly see opportunity to continue to drive down.
Compensation and benefits I think we've made tremendous progress there Ernie talked a lot about that progress.
The I think the future gains are spread across different areas definitely see an opportunity to continue to become more efficient operations.
<unk> continue to.
You know get leverage through our logistics network.
We see opportunities to continue to identify.
I'd say savings in it.
In our corporate expenses as well so I think I think we see opportunities across the board in compensation and benefits.
Obviously made a lot of gains there recently and other other SG&A you know other SG&A, we've talked about before it's really.
It's got three major categories of expenses in there there's transaction expenses there's a.
Corporate expenses and there is technology expenses, I think as far as Ernie sort of alluded to we see opportunities in all three of those areas, we see opportunity to break down per unit transaction expenses overtime with further efficiency initiatives. You know we've made some gains in limited warranty all bringing that down on a per unit basis recently.
And see opportunities.
And some of the other expenses like title and registration.
Corporate and technology definitely I think Ernie covered a lot of this ground, but see a lot of opportunity for leverage with increased volume, but also see an opportunity to bring down dollar expenses overtime.
We continue to focus on efficiency.
Touching on a lot of the same point that Ernie touched on.
We clearly see opportunity throughout the cost structure from where we sit today.
Thanks for the color that's helpful and just a follow up on the consumer side for a second I don't know if there's any color that you could share in terms of the 25% decline that you saw you know how would that shake out based on household income levels. And then also I know you all have been working to improve profitability and there are some metering involved.
So can you give us a sense for how you know maybe the coastal markets, we're able to perform relative to those in the central part of the country.
Sure I don't think we have anything, particularly interesting to say there I think the trends that we've seen over the last year or so have remained at and I think you know as it relates to Carvana specific trends I think we continue to see the middle of the country performing a little bit better than the coast for for the same reasons discussed and then I think as affordability has has continued to kind of move away.
For most consumers are I think we've seen the trends that you would expect.
Where I think across the entire auto industry, there's generally been a shift toward higher incomes and higher FICO.
And I think it's really just more of a distribution shifts that we.
We would expect and hope will revert.
When when either interest rates.
Start to back up or car price starts back up or both and I think we saw through most of 2022, we saw a car prices depreciate, but it was offset by increasing interest rates I think early this year, we saw volatility in interest rates. We saw car prices start going back up and I think more recently, we've seen the wholesale price is going down for the last several weeks our retail prices still been barely.
[noise] appreciating, but look like they will probably start to depreciate shortly and so you'll hopefully we're headed down a more sustainable path of sort of orderly depreciation that will bring more customers back into the market.
Thank you.
Thank you.
The next question comes from Seth Basham with Wedbush Securities. Please go ahead.
Thanks, a lot and good afternoon. My first question is just on the first quarter results that were meaningfully higher than the updated guidance provided on March 22nd driven by gross profit can you give a similar insight as to what drove the major improvement in the last days of the quarter.
Okay.
Sure Yeah. So.
With respect to our.
Our outlook for Q1, I think we are.
Very close to the top end of the range on units revenue.
SG&A expense.
While originations all of those metrics.
On GPU and in our outlook, we called out a couple of major points of uncertainty that wouldn't be known until after quarter end.
Those being.
The P&L from our loan hedging as well as our retail inventory allowance, which in part depends on what we see in the market.
Kind of around the time quarter, Andrew shortly thereafter, and so both of those uncertain items resolved favorably that was the big driver on GPU. We had a couple of other small beside you view across other areas of the business in the last couple of weeks of the quarter, but those are the big two.
Got it that's helpful and you've indicated that the retailer into allowance is likely not sustainable and also talk to other GPU likely being over 2000 in the second quarter, primarily driven by a normalization of loan sale volumes. What do you consider normalized volumes you've already sold one 3 billion this quarter accurate in that.
That's in line to above what I consider normal based on historical trends.
Yeah.
So I think the easiest way to think about normalized loan sale volume as you approximately so what you originate.
That's what we've done over the first many many years of our life as a company and so I think normalize as you see you saw what you originate obviously, there can be some timing shifts from quarter to quarter, depending on market and other dynamics.
As we mentioned we.
For example, so less than we originated in Q4 as one example of that so I think the I think that's the easiest way to think about normalized loan sale volume.
Some quarters will be below normalized some will be above but on average that's.
That's the right way to think about normalized I think so far this quarter obviously.
<unk> had success selling of securitizing loans setting feel good about that I think you know other gpus, we view as one of the areas of strength in the business along with some of the other areas that we pointed out on the rest of this call and so I think we're feeling pretty good about where we are.
Thank you.
The next question comes from Nick Jones with JMP Securities. Please go ahead.
Hey, Thanks for taking the questions maybe just a follow up on the cost reductions and maybe the impact on our logistics network as you start to turn a corner and.
Maybe you're starting to build inventory and ramping volume have kind of the cost reduction efforts you've made potentially impacted.
You know your ability to kind of scale volume and logistics or how should we think about maybe incremental investment out the other side.
As you do start to build inventory down the road and maybe what changes you've made in logistics today. Thanks.
Sure So I'm going to answer that with respect to most of the operating groups and I think logistics will fit in this in this framework as well I think there is efficiency and focus there'll be two different things and I think we've.
We've clearly increased efficiency.
Just because you asked about logistics network in the case of logistics network. You know, we've recently increased utilization of our logistics network, meaning the trucks are driving around with more cars on their back.
We decreased the miles when they're traveling.
Over time by something like 40% I think even quarter over quarter was down by 12%.
You're taking many different forms that are that are driving those miles down but it is it is just more efficient and therefore, there is kind of less work done per sale and therefore, when it is time to grow it'll be less work to achieve the same level of growth and I think that that is true across all of our different operating groups now.
And I also think that a huge part of that efficiency has been gained because we sort of removed the variables in the equation. We've aimed for lower volumes that we were confident we can hit and by doing that we were able to just really focus on costs and expenses and and and keep everyone focused on all the projects that were necessary to complete to drive down those costs and expenses.
As a result.
We are not focused on growth and growth is its own focused and it has a lot of associated projects and it requires time and effort and attention.
And you know we're not currently positioned to grow as quickly. So I think if we decided to press the button and turnaround tomorrow, we certainly know how but there would be a lag time associated with that.
To be able to really grow the way that we have in the past and that is not our plan. Our plan is to to hit the first step of our plan next quarter to then move through that to significantly positive unit economics, and then to move to growth and I think between here and there we hope to make more gains and efficiency across all of our operating groups and then to shift our focus to growth when it's time.
And that's something that we clearly feel like we know how to deal and we clearly feel like we've got consumer demand for our offering that we'll be able to go satisfied when it's time.
Great. Thanks, Ernie great. Thank.
Thank you.
The next question is from Rajat Gupta with JP Morgan. Please go ahead.
Oh, great. Thanks for taking the questions just wanted to follow up on the on the receivables question from South Arne you are.
So.
If I look at it.
The reported financials, I mean, I think in the first quarter.
In the fourth quarter yourself, roughly 800 million lower than once you originated.
In the first quarter looks like it was close to three to 400 milligram versus what's originated so something like that.
Two are in backlog receivables.
That that need to be sold before you can go back to like an origination doors similar origination where some say a run rate or normalized run rate.
How long do we shall we expect for that 1.2 billion backlog to get clear like is it going to be asking them to cure.
What would it take multiple quarters and I have a follow.
Thanks.
Sure. So I think you're you're approximately right in the size of the backlog in and I think that the.
The way that that works in the businesses we've got.
You know a couple of billion dollars of warehouses, where we can kind of how those those loans prior to selling them that does tie up capital. So that extra you know on the order of $1 2 billion.
Of of loans is tying up a pretty meaningful portion of liquidity when we really bad that will unlock quite a bit of cash yeah, we probably have about a 15% discount on average in our warehouses and so that means you know with using your number of $1 2 billion.
That would unlock about $180 million of cash by selling those receivables down I think we plan to sell those down in the in the coming quarters in an orderly way I think there is the.
The benefit of carrying them is we actually do earn additional finance GPU because those are very yield the assets in prior to sale. We are the ones benefiting from that yield.
As Marc called out in in Q1, we had some benefits there in in finance GPU, but we do plan to catch up and sell them. I think you know the financial markets at least recently have been in a better spot.
You know at the end of the first quarter, we had some elements of the regional banking prices that caused the securitization market to be a bit choppy and that caused us to push the securitization back that had been planned we recently completed that securitization.
It was our largest sub prime securitization debt.
That we've done to date.
That actually went extremely well we were many many times over subscribed across all classes.
And we're extremely pleased with the way that went I think Ah.
Big part of what has driven that is I think we do attract a customer we give them an experience that did end up leading to very high quality loan performance I think the securitization market has recognized that.
And so I think that that's something that has been.
Been able to take advantage of as we've gone through this period and so I think over the coming quarters, assuming that the financing markets remain open and the way they have been over the last several weeks, we will likely sell down those excess receivables and that would be.
One time tailwind to other GPU and when we do complete those sales.
Understood. That's helpful. And then maybe just a broader question on the liquidity profile.
You've mentioned in the past that you know your next Avenue due to shore up liquidity would be to leverage the U S real estate.
Curious like if that view has changed at all over the last couple of months.
And would you be open to considering alternative options.
The exchange offer which is all ongoing.
Did you reduce the current level of interest burden.
Whereas it was taking on more debt, maybe lease structuring the existing unsecured bonds or or perhaps even considering a debt for equity swap.
Yeah, that's it thanks.
Sure I can take that one so no changes to the way that we've historically thought about that I think typically when we think about financing sources generally speaking we.
Favre asset based or you know sort of dosing.
Asset base or secured financing of which I think the biggest asset that we have today is real estate now have nearly two nearly $2 billion of total unpledged real estate assets, a little more than half of that is that that's a real estate locations and no change to our overall thought process. There I think we generally generally prefer.
Asset base or secured financing.
Got.
Thank you.
The next question comes from Alex Potter with Piper Sandler. Please go ahead.
Great just a just one question for me and it's about.
The competitive landscape in auto loans I know that historically you had mentioned you were a little bit quicker to hike interest rates.
And then some of your peers, who had bigger balance sheets.
Wondering if there's been any rationalization in that regard or any other comments you'd be willing to make on on the competitive landscape in auto lending would be helpful. Thanks.
Sure.
Well I think it's been a dynamic environment. So I think you know the.
The primary dynamics that we probably have spoken most about as it relates to our loans over the last year or so was kind of a spread between the two year treasury and fed funds, which the two year treasuries are good proxy for you.
Our cost of funds when we when we sell our receivables because they have approximately a two year duration.
And they're generally sold into capital markets to us.
Those sorts of rates as a reference point.
And he'll approximately half of the of the market for auto loans is provided by banks that oftentimes are you.
You're using some combination of that and the fed funds as their frame of reference.
I think you know since the end of the first quarter went out of the regional banking crisis hit.
Hit or started I think there's also been some some dramatic moves in spreads that I think are our other impacts that are somewhat unique right now and I think they're a little bit harder to forecast over the over the medium term I think you know probably.
Probably theres been some some spread widening in in different areas I think undoubtedly carvana itself has seen spread widening over the last year I think that's a you know that that's too bad but it shows up in our results and so once you got the results you know what they are I think that's actually good news for the future. So I think there's room for our spreads to to come down over time as we approach the cost of funds of more mature issuers.
So I think that that's a dynamic that will play out and then I just think that you know from from here to the next couple of years now and when things are normal again, I think there were probably at some point be a normalization in 10 year Treasury was fed funds that that will.
And that should normalize there will probably be something of a normalization in spreads and then there should be a normalization in carvana spreads relative to other issuers and I think that all of those things leave room, I think to be optimistic, but the timing on all of them is also uncertain.
Great. Thanks very much.
Thank you.
The next question is from Winnie Dong with Deutsche Bank. Please go ahead.
Hi, Thanks for taking my question I, just have one and on the commentary that you expect similar SG&A expense in the quarter over quarter basis can maybe.
Clarify whether this is on a per unit basis or absolute dollar and then.
You know discuss although the various buckets to sort of go after them a longer term basis, but near term, what's sort of driving that pause and then why might that when might that longer time. So as you know reduction come come back. Thanks.
Sure Yeah, absolutely. So on the first part of the question. So we were talking about SG&A expense on a dollar basis and I think the to put that in context, a little bit I think last quarter, we outlined a goal to achieve.
Achieve approximately $420 million of non-GAAP SG&A expenses by Q2.
Did that a quarter early and not only to do it a quarter early would be also it'll be that goal by more than $50 million. So I think we're obviously feeling really great about the overall progress in.
We're moving SG&A expenses from the business and becoming more operationally efficient so.
I think that context is helpful. You know in Q2, our expectation is similar SG&A expense to Q1, but I think is that in part reflects just the very very significant gains that we were able to make.
Q1, looking forward beyond that we certainly we've made tremendous progress, but we certainly do not believe we're done I think we have significant opportunities across.
Across the business as I alluded to earlier to continue to become more efficient in our operations.
And that happens through all of the technology projects that we have going on throughout the operational efficiency groups too.
Automate manual tasks to make our routing and scheduling more efficient into two.
As we alluded to earlier incentivize customers to choose the.
Cars that are close to them or to.
So advising them to do b and pickups versus delivering to all kinds of things.
Help you know that we still have in progress to help drive operational efficiencies, we're working on them and they're not there yet we made good progress, but theyre not done yet so I think that's a little bit more color on the opportunities that we see ahead.
Okay.
Alright, thank you so much.
The next question comes from Chris Butler, but particularly with Exane BNP Paribas. Please go ahead.
Hey, guys. Thanks for taking the question.
I wanted to ask about I guess first about the.
The financing market, especially the non prime deal, which is pretty impressive at that price and this liquidity environment that.
But conceptually how do you think about owning that can residual.
Versus selling it off just given where discount rates and risk spreads are and all of that like.
Is it still a capital efficient to do get on sale for these non prime type deals or would you ultimately to sell the residual.
Okay.
I think.
In general we've looked to sell the residual I think you you point to something that that is correct, which is the yields that residual buyers today are getting are very high compared to the past and those yield profiles are very robustly can take very large multiples of expected losses.
And still do quite well.
So I think that dynamic is correct then that makes those desirable assets, but I think in this environment with our current goals.
We still intend to sell those residuals overtime.
Got you okay.
And then you know what when.
I guess, a conceptual question as well on inventory.
So it sounds like you just make more money on retail GPU when you sell the cars under 90 days.
And then they get they get the world shifted dramatically in a die like don't move that quickly but.
Have you rethought, how you price cars or their algorithms like is there a way to get more proactive with taking markdowns in and setting us up through wholesale just to like put a rule in place you don't sell cars above a certain number of days. So how do you how do you learn from experience and realizing how much better the model runs with quicker inventory days and kind of prevent this from happening in the future.
Sure.
But I can I can take that one so I think.
We have a multi year period, I would say honestly 2018 19.
I think late 2020, 'twenty, one where we operate pretty tight inventory.
Average lease sale call. It is as low as the high Fifty's up through the mid to high Sixteens, and we're and that's on average.
Pretty consistently operating that in that range.
I think that we probably experienced a little bit flippant with toga in early 'twenty, and then certainly moved materially off of that normalized.
Our range in 2022.
Because we just overbuilt inventory for the interest rate environment that ultimately came about and the sales that we ultimately ended up executing in 2022, we meaningfully overbuild inventory for that.
I think the what we're seeing with the these cars above 90 90 days I do think it's really a function of overbuilding inventory relative to sales.
And sort of maintaining that for most of 2022 now we clearly adjusted clearly marked down inventory.
The cars will be hold relative to the cars, we're selling are in a much more normalized range.
As everything sort of works through.
We think that will lead to a much more normalized average days of sale of much more normalized share of cars. So in less than 90 days and so I think really the name of the game is returning to our historical norms. After a pretty significant outlier year in 2020 that really kind of culminated in Q1.
Got you thanks, guys I appreciate it.
Thank you.
The next question is from Zachary Sadow with Wells Fargo. Please go ahead.
The next question is from Zachary Sadow with Wells Fargo. Please go ahead.
Thanks, So much guys for taking my question. This is Sam pinch hitting and Sam Reid pinch hitting for Zach.
Let me to bucket advertising savings and a bit more detail.
Can you break out how much you might be seeing anything from shifting to different asked in channels like more digital versus just absolute reductions in AD spend and then separately a more broader one on market share as you right size that business, who do you think is picking up some of the market share you might be giving up thanks.
Sure. So I think at a very high level I think what we've tried to do.
In in marketing is it just kind of manager uncertainty as best we can and so what that basically meant was was pulling more away from digital channels and brand channels and and what do you mean by managing our uncertainty is I think brand channels tend to have a long and difficult to measure payoff.
But we think that payoff is significant you know building a brand is incredibly difficult thing to do it didn't probably valuable thing to do.
Direct channels and various advertising channels, varian and their level of directness, but direct channels a.
Tend to have a shorter faster payoff that is much more measurable.
And so as we've gone through this environment, we've tested many of the different channels.
Those tests are you taking.
To take kind of a global forum.
Where we do large EV test of using a channel or not using channel. Many of those tests are it take kind of a market level form or we pick a subset of markets that look similar to another subset of markets and we run one marketing channel and in one set of markets in a different marketing channel and a different subset of markets. We try to get a sense for how those are going in and those sorts of tests are a little bit less susceptible to.
Errors and attribution and I think we've just tried to kind of continually learn because this environment has been different it's been an environment, where car prices are higher and it's been an environment, where our inventory is smaller of both those things mean lower conversion, it's been an environment, where theres been less competition for various marketing channels, which means clicks or less expensive.
And that varies by by the market generally by the kind of sub channel inside of any given channel. We think about S. E. M. For example, there are many sub keywords and and sub kind of campaigns that you can run. So we tried to be thoughtful about running many many different testing and learning I think that we feel like we've been pretty successful in cutting a lot of expense out.
And I think we're excited by that I think we're also starting to see that you know with with GPU climbing up pretty significantly in our variable costs.
Dropping pretty significantly in our contribution margins are starting to look better and so I think some of those trades could change a little bit in terms of what marketing channels. We're supposed to be utilizing so we'll keep we'll keep learning and I think overtime we will.
Most likely grow our marketing spend from here and and I think there's a reasonable chance that it could even go up at the per unit level.
Just given whats most efficient given our higher levels of GPU, our lower levels of variable costs.
And then as it relates to to kind of market share what I would say there is a I really think the most important point here is this market is enormous.
And so we're we're probably right now you know on the order of about 1% market share and you know, we're we're down from where we were let's say two years ago, but were down a similar amount due to the market overall, I think quarter to quarter and kind of year to year. There can be some variability in those numbers, but if you look back kind of to.
A more normalized environment, we're probably down a similar level to where the market was overall and so we're probably about 1%. If you look at it over the last six.
Six months nine months 12 months, we've certainly given up some we were probably a little higher than 1%, we're probably back down to 1% now, but then where that is going is to a mix of the other 99% and I think the most important dynamic. There is just that this is a very very large market and you know now is not a time when everyone is focused on growth.
Sure.
And we think it's appropriate not to be focused on growth but.
But I do think that if we allow ourselves the indulgence, it's up it's worth thinking about what that'll feel like again, because we do have a differentiated customer offering the customers love. Our NPS is high as we get more efficient we're seeing benefits to N. P. S. There.
There will be a time when it's time to grow inventory again, it's time to turn up marketing cause our Gpus high in our variable costs are low.
Pool that we're drawing from so I think it's hard for us to say, where the very small amount of market share that we've given up is gone.
But I think we're very well positioned to take it back when it's time.
Thank you.
This concludes our question and answer session.
I turn the call back over to CEO Ernie Garcia for any closing remarks.
Thank you.
Listen everyone on the Carvana team I cannot thank you enough I think I hope you're proud looking at this quarter I Hope you feel that I hope you know I know the last year has been a tough year.
But also you know, let's keep the pedal down let's keep going thanks, everyone for joining the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Okay.
Yeah.
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