Q2 2023 Carvana Co Earnings Call
After today's presentation there'll be an opportunity to ask questions.
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Please note today's event is being recorded.
I would now like to turn the conference over to Maggie <unk> with Investor Relations. Please go ahead.
Thank you Rocco good morning, ladies and gentlemen, and thank you for joining us on our second 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 Dot Carvana dotcom.
The second quarter shareholder letter is also posted to the IR website. Additionally, we posted a set of supplemental financial tables for Q2, which can be found on the events and presentations page of our IR website.
Joining me on the call today are already Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer before we start I would like to remind you that the following discussion contains forward looking statements within the meaning of the federal securities laws, including but not limited to carvana as market opportunities and future financial future financial results that involve risks and uncertainties that may cause actual.
To differ materially from those discussed here.
A detailed discussion of the material factors that cause actual results to differ from forward looking statements can be found in the risk factors section of Carvana. Its most recent Form 10-K and Form 10-Q.
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 financial 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 on such short notice.
Let me start with the most important takeaway from this quarter. It was a great quarter for Carvana and we're nowhere near that yet.
We are making rapid progress because of the power of our customer offering the strength of our business model and the quality of our people the fundamentals of what is making it possible.
We're going to sustain the intensity last 18 months by maintaining our operating focus for the foreseeable future and embedding it further into our culture.
18 months ago, we were positioned aggressively for growth we've been hit with the combination of macroeconomic industry operational and capital market impacts.
When combined put us under considerable pressure and demanded a re prioritization of our efforts. So that's what we did we reoriented the business with a simple three step plan number one drive the business to positive adjusted EBITDA number to drive the business with significant positive unit economics.
And number three after completing steps wanted to return to growth.
In the second quarter, we completed the first step we are extremely proud of the speed of this progress.
In the last year, we've taken $1 1 billion of annualized expenses out of the business and this quarter, we set records in GPU and adjusted EBITDA margin with total adjusted EBITDA dollars over $150 million.
These numbers benefited from significant nonrecurring items that collectively added about $900 to GPU and $70 million to adjusted EBITDA, but even when controlling for these nonrecurring items the results were exceptional.
Today, the company is functioning better than it ever has we're more efficient and we are improving at a faster pace than we ever have in the past this improvement spans the entire business from customer facing improvements, including the early testing of same day delivery in a subset of markets that have inspection centers to product improvements that enable us to buy more cars from our customers more efficiently to process changes and <unk>.
Of elements that are making us more efficient across every operating group in the company.
And we plan to keep up our pace.
With the results in capital structure changes being discussed today a natural question is how does this change the plan.
The short answer is that it doesn't we plan to continue operating in the same way with the same urgency to continue to drive efficiencies that we expect will result in sustainable significantly positive adjusted EBITDA from there we will once again turn our attention to growth as we did successfully for the first eight years of our history.
Our opportunity is as great as it has ever been our customers love our offering in our business as efficient highly differentiated scalable and extremely difficult to replicate.
We remain firmly on the path to selling millions of cars per year and to becoming the largest and most profitable automotive retailer the market continues mark.
Thank you Ernie and thank you all for joining us today.
Our second quarter results demonstrate significant progress on our path to profitability.
We significantly exceeded our goal of driving positive adjusted EBITDA and we set a company record for total GPU.
These second quarter milestones complete step one of our three step plan to drive positive free cash flow and we are now in step two.
Driving repeated in significant unit economics.
In the second quarter retail units sold totaled 76530, a decrease of 35% year over year and 3% sequentially.
A more capacity orders or decline in retail units sold which we expected was driven by four primary factors reduced inventory size reduce advertising increased benchmark interest rates and credit spreads and a continued focus on executing our profitability initiatives.
Total revenue was $2 96, 8 billion, a decrease of 24% year over year, and an increase of 14% sequentially.
As we've previously discussed our long term financial goal is to generate significant GAAP net income and free cash flow.
In service of this goal in the near term our management team remains 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.
Due to the dynamic nature of the current environment, we will focus our remaining remarks on sequential changes in these metrics.
In the second quarter non-GAAP total GPU was <unk> 7030, a sequential increase of 2000 and $234 driven by increases in retail and other GPU.
Total GPU in Q2 was positively impacted by approximately $900 of nonrecurring benefits, which we describe in more detail later in this remark.
non-GAAP retail GPU was $28 62 versus <unk> 19 in Q1.
Retail GPU included an approximately $250 benefit due to an adjustment to our retail inventory allowance.
In addition sequential changes in retail GPU were primarily driven by lower average days to sale lower retail market depreciation rates wider spreads between wholesale and retail market prices and lower reconditioning and inbound transport costs.
This retail GPU in Q2 was driven by several fundamental improvements in our business as well as some seasonal and market tailwind.
On the fundamental game side retail GPU was driven by normalizing inventory size as well as several key areas of improvement compared to FY 2021, including a higher customer sourcing rate higher revenue from additional services and lower reconditioning and inbound transport costs.
On the seasonal and market dynamics side Q2 is on average the strongest quarter of the year for retail GPU.
In addition, this year saw a period of high spreads between wholesale and retail market prices, followed by lower than expected retail depreciation, which benefited retail GPU in Q2, other things being equal.
non-GAAP wholesale GPU was 12 28 versus <unk> 36 in Q1.
Sequential changes in wholesale GPU were primarily driven by higher wholesale market depreciation rates in Q2, compared to Q1, which negatively impacted wholesale vehicle gross profit per wholesale unit sold largely offset by operational improvements that allowed us to handle more wholesale units sold volume.
non-GAAP other GPU was 29 40 versus $19 69 in Q1.
Sequential improvement in other GPU was primarily driven by a greater volume of loans sold in Q2 compared to Q1.
We estimate that a higher than normalized volume of loans held unsold in Q2 increased other GPU by approximately $650 other things being equal.
Sequential changes in other GPU were also driven by higher origination interest rates relative to benchmark interest rates and higher average loan size.
In Q2, we continued to make progress lowering SG&A expenses, reducing non-GAAP SG&A expense by $21 million sequentially, primarily driven by continued reductions in non advertising expenses.
Advertising expenses in Q2 were approximately flat compared to Q1.
We expect Q1 to be our near term low point on quarterly advertising expense as we continue to seek to optimize our spend to balanced unit volume and profitability.
We believe the cost reductions we've achieved over the past year are long lasting and sustainable and we believe we have further efficiencies to realize in all areas.
Looking forward, we see three primary drivers to reduce SG&A per retail unit sold.
And step two of our three step plan, which is drive significant unit economics, we continue to see opportunities to reduce operations expenses on a per retail units sold basis by completing our pipeline of projects to automate manual work optimize staffing and routing increased deep funnel conversion among other initiatives.
Second also in step two of our three step plan, we continue to see opportunities to reduce and optimize our corporate technology and facilities expenses on an absolute dollar basis through a continued focus on zero based budgeting and other efficiency gains.
Third in step three of our three step plan, which has returned to growth we see a significant opportunity to leverage our corporate technology and facilities expense base, leading to significant leverage on a per retail unit sold basis at higher volumes.
Adjusted EBITDA was positive $155 million in Q2 or five 2% of revenue.
The impact to adjusted EBITDA of the previously described nonrecurring items was approximately $70 million, including a $50 million benefit from selling and holding additional loans and a $20 million benefit from a retail inventory allowance.
Moving now to our third quarter outlook.
While the macroeconomic and industry environment continues to be uncertain looking towards Q3, we expect the following as long as the environment remains stable.
On retail units. We currently expect similar retail units sold in Q3 compared to Q2.
On GPU, we currently expect non-GAAP total GPU above 5000.
On SG&A, we expect similar non-GAAP SG&A expense in Q3 compared to Q2, we continue to see opportunities to further reduce non-GAAP SG&A expenses over time.
Finally, we expect to generate positive adjusted EBITDA in Q3 for the second consecutive quarter further demonstrating the first step in our three step plan toward positive free cash flow.
We see upside to these total GPU and adjusted EBITDA numbers, but given the early date of this earnings call within the quarter, we are electing to provide a conservative outlook.
On June 30, we had approximately $3 $5 billion in total liquidity resources, including $1 5 billion in cash and revolving availability and 2 billion in Unpledged real estate and other assets, including more than 1 billion of real estate acquired with ADESA.
Today, we announced the transaction support agreement with over 90% of holders.
Of our senior unsecured notes to exchange approximately $5 2 billion of those senior unsecured notes for new senior secured notes with maturities ranging from December 2028 through June 2031.
The strong performance of our business in 2023 presented an opportunity for a win win transaction for Carvana and its senior unsecured note holders.
The transaction reduces our total debt by over $1 2 billion reduces our cash interest expense by over $430 million per year over the next two years and extends more than 83% of our 2025 and 2027 senior unsecured note maturities, giving us significant flexibility to execute our.
Land toward driving positive free cash flow. Thank you for your attention we will now take questions.
Thank you.
A question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Sure he isn't a speakerphone.
Handset before pressing the keys.
Your question please.
Two.
Today's first question comes from Ron Josey with Citi. Please go ahead.
Great. Thanks, Mark for taking the question.
I wanted to talk just about demand trends overall and I'm sure, we'll get into the debt restructuring.
Talk just about inventory overall.
Overall I believe that was down in December and the team is sold in those days inventory are wondering how that compares to overall demand out there use supply improving I guess is the question are you seeing any signs of a market.
Stable environment, just used car dynamics any insights on the broader macro.
Thank you guys.
Sure well, let's let's start with.
The inventory component of that question I think inventory is down year over year by over 50% I believe something in the over 55%. It was down again quarter over quarter, we've really been pushing that down.
In an effort to align our inventory size with sales volumes and I think you can really see that flowing through the benefits of that into retail GPU. I think we had a pretty incredible by any measure retail GPU quarter and I think there are a number of components of that but one of the largest certainly over the last six to nine months has been reducing inventory and kind of a line.
Our sales volumes with where inventory was so we can have a faster turn times and therefore less depreciation.
I think the environment remains an environment of elevated prices and elevated interest rates and more difficult affordability for customers. I think there are certainly signs today of depreciation I think depreciation right now looks very similar to depreciation last year, although it's probably been pulled forward maybe a month.
Turning a little faster than last year.
So I think we'll see how that on both the rest of this year I think our view on that is the probably best case scenario for our business would be pretty significant depreciation that is foreseen.
Foreseeing depreciation enabled the market to organize kind of in the wholesale market to buy cars at sufficiently high margins to where you can absorb that depreciation and it doesn't impact the business in a material way, but within that also leads to better affordability for customers and I think that's what we'd hoped for and I think the signs that we're seeing right now or at least weekly.
And with that.
From a broader demand perspective, I'm not sure we'd have a ton more to add.
That's super helpful and just a real quick one on inventory from the users I think you said.
You're back to about 2021 level.
And further just out there thinking about inventory any insights on this profit improvement and I'll go back in the queue. Thanks guys.
Yeah, so on inventory.
We reduced inventory size very significantly since the beginning of 2022.
And I think what that has done is it has placed our inventory size now relative to sales volumes.
That ratio is now back to much more normalized levels I think we call. It in the shareholder letter if you just compare.
The inventory that we had on hand at the end of the second quarter to our second quarter retail units sold.
That ratio is an implied turn time of about 62 days, which is in sort of a normal range that we've operated in in the past.
Thank you.
Thank you and our next question today comes from Michael Huang Tommy with Evercore ISI. Please go ahead.
Yeah, Hey, good morning, Thanks for taking the question I just wanted to ask first off if I could just for some updates in terms of what you're seeing on the depreciation side in the wholesale market and basically on the total GPU front you had mentioned over 5000 for the quarter.
Is that basically what you just produced a seven less the roughly 900 of nonrecurring or could we see additional nonrecurring again this quarter.
Sure. So so really quickly on the depreciation side I think depreciation is clearly elevated as discussed before I think so far that's happened in an orderly way and it seems like the wholesale market is is.
<unk> is positioned to kind of absorb that depreciation and then be able to pass that through to the retail market. So we haven't yet seen that impacting retail spreads in a way that would be.
Meaningful and then I think.
The GPU number for this quarter is just a truly incredible number and I think there are so many components that go into it.
We did benefit first from from about $900 of nonrecurring items that included the fact that we sold more receivables and we originated as a result of also holding those receivables. We earned additional interest on those receivables and then we did have a release of inventory allowance as well that ended up being about $250 of.
Retail GPU benefit, but when removing that it was still $6000, which is a number that I think was.
Unimaginable for the vast majority of our history and completely unimaginable from the perspective of even three months ago six months ago and I.
There's been so many incredible improvements across the business, we really have reoriented the business and we've got an operating cadence that has many different teams extremely focused on efficiency in every aspect of the business from the ways that we're acquiring cars the ways that we're shipping cars. So the distances that were shipping cars. So the way that we're managing how those cars get get.
Put onto trucks, the way that we're reconditioning cars and our finance program. We've made a number of additional enhancements in our wholesale business. We've made a number of enhancements and improvements.
And are better utilizing our <unk>.
Dessa.
This has also had a great quarter. They are on a great path and that's flowing through to GPU as well I think we've clearly seen market share in both the <unk>.
That's the dealer business and the ADESA commercial business improve.
Over the last many months.
And the market in General is also just see me at least like it's likely to start turning around as as the market starts to normalize.
And we see more normal activity from from rental fleets and we're starting to get.
A sense that there could be off lease volume starting to come back in the not too distant future, even though we're not quite there yet so I just think across the business. There were a lot of improvements and we think the majority of those improvements are sustainable we called out that $900 and nonrecurring items. There were some other benefits as well that flowed through Q2 is generally a.
Good quarter for retail GPU in particular based on seasonality.
And then I do think that there.
There was some unexpected appreciation early in the year.
It wasn't at least in our plan and so that benefited us a bit as well, but the vast majority of the gains that we're seeing we believe are sustainable and you can kind of see that expectation in our outlook.
And then just to hit one additional point there you asked about.
They're more.
Nonrecurring items that we should expect.
On that note.
Let me just talk for a moment about.
Our finance receivables balance so on 331, we had about $1 6 billion of.
Finance receivables on our balance sheet.
That we had built up over basically Q4 and Q1.
As of 630 that was down to $1 1 billion.
That $1 $1 billion is certainly still higher than normalized and so we do have we continue to have additional loans.
We can sell over the coming quarters.
That would sort of yield additional nonrecurring.
Revenue in GPU.
Thank you.
Thank you and our next question today comes from.
Seth Basham with Wedbush Securities. Please go ahead.
Thanks, a lot and good morning in your debt exchange Youre getting bondholders more security, including a desert assets and higher interest rates our.
Staffing some value from the core business can you help us understand how you came to this agreement and how it's in the best interests of the company.
Sure well first of all I would say I think we're extremely excited about the agreement we came to it and we believe it's great for both of US and we believe it.
Getting a win win is never trivially simple thing to do in life, but I think given the performance of the business. It created a lot of room for win win.
And so I think what we worked there to try to achieve is.
Years ago, when we when we took out our initial unsecured notes, we always had an option to either do unsecured debt or secured debt and we like it at a time to do unsecured debt and to preserve that collateral had we'd unsecured debt our interest expense over the last several years would have been much lower.
But we decided to preserve that collateral because we believe it could be valuable in certain circumstances and I think this is a circumstance where that collateral is valuable and so what we were able to do is work together with our bondholders to find a solution that works well for them as we use that collateral to make their bonds stronger.
And then we were able to take some of that benefit and extend our maturities and reduce our overall debt burden and also give us a lot of freedom financially, especially over the next several years mentioned perspective.
So I think overall that was.
A great deal for US we're extremely excited about it.
And I think I'd be remiss if I didn't also note that I think the group bondholders was was was very productive to work with someone that I respect once said the world's full of optimizer and not enough solution providers and I will say that you know of course.
One wanted to make sure that they've got a fair deal there and of course youre dealing with incredibly intelligent people, but what you read in the media is not correct. They were very much solution oriented and I think we came to solution. It was great for everyone.
That's helpful and just as a follow up in terms of you planning to sell equity.
Could we see that.
Are you able to do as much as $1 billion in very short time.
Sure. So our plan is to do $350 million.
<unk> equity and Thats kind of built into our plan.
Inside of that.
The family would would do approximately 125 and should be about 225 going out into the market. We've also put out a larger ATM, which we believe is just kind of good corporate housekeeping in general.
And we think that's true for most companies. It is certainly true for our company as volatile as ours in terms of stock price.
And for a company that has a high quality user proceeds built into the business as we do it another aspect of the agreement we came to with note holders as we have highly desirable prepayment capabilities.
Capabilities built into those notes and so I think.
And that gives us a lot of optionality to the extent, we raised more over time that the family commitment decreases.
But thats kind of the options that we've got in front of us.
Thank you.
Yeah.
Thank you and our next question today comes from Ben Johnson with Piper Sandler. Please go ahead.
Hi, there can you guys talk a little bit more about your ability to source vehicles from customers rather than wholesale and what's kind of the main driver of that.
Yeah.
Sure.
I think this is a fundamentally important element of our business I think.
First and foremost we built a transactional website that customers can go to that gets a tremendous amount of traffic and a tremendous amount of interest.
That enables us to get access to many many customers and then we built a process flow on the website that allows customers to get value for their car in minutes.
That is extremely accurate and benefits from all of the data that we have on many different cars all of our experience in valuing those cars.
And then we've got a process I think that is about as desirable as the process can be for a customer selling a car where.
They get the value on their on their computer on their phone they click a button and scheduled to pick up and then we come to them we pick it up.
We built a number of enhancements that process that have made us much more efficient and enabled us to also differentiate vehicle value better and then pass some of those benefits onto our customers.
And then we buy those cars, we bring them back and then we take into our inspection centers that we plan to retail them and we prepare them for retail and if we plan to wholesale than we now have the ADESA asset where we can take those cars.
And dispose of those cars and so I think that platform. Overall I think is an extremely valuable platform I think it's fundamentally very hard to replicate it benefits very much from basically reverse retail transactions.
That's when the existence of the retail disposition channel and it benefits from the existence of the ADESA disposition channels. So.
What we think that we're incredibly well positioned to continue to grow that business and I think that you are seeing the benefits of that business and the strength of that business and our retail GPU numbers and our wholesale numbers this quarter.
Okay.
Awesome. Thank you.
Thank you and our next question today comes from Mike Baker.
Davidson. Please go ahead.
Hi, Thanks, guys.
So.
Yes.
Just wanted to ask you about.
Top line how much of your declines do you think is based on the market.
How much is based on your internal initiatives to focus more on profitability in other words I guess, what I'm getting at is how do you think about your market share right now how has that changed and how do you think about it going forward.
Sure well, let me start with this I think for the first eight years of our company existence, we grew at approximately 100% per year.
At a time when the market was flat and so I think that that was possible because our customer offering is very high quality of our business is very scalable and I think we have a lot of incredible people to do a great job across the business, making sure that the customer experiences is great and that enabled us to grow very very quickly over a sustained period of time without tailwind from the market itself.
I think.
Over the last year and a half.
Our situation changed pretty dramatically and we re prioritize pretty significantly.
And we focus a lot on getting to significantly better unit economics, and youre seeing the benefits of that focus as well.
You see that in the $155 million of EBITDA that we just printed this quarter that I think from the perspective of six months ago. I don't know if there was anyone out there that had that in their model at that time.
And I think one way to think about that is just that this business that has very high quality fundamentals shifted its goal from from growth to unit economics and profitability and as a result of kind of those fundamental benefits flowed through in a different line item, but they flowed through very very quickly and I think when it's time to turn back to growth I think this is a group of people that knows.
Knows how to do that I think this is a business model that lends itself to that both through the quality of the customer experiences and through the scalability of the business model is as well as.
I think something else the last year and a half has taught us that this is a very very hard business replicated capital intensive. It is complicated it's hard to get everything lined up and to do it well. So I think when it's time will be very well positioned now I do think that the market has provided additional headwinds aside from our shift in focus but I don't think that those are the biggest drivers over the last year and a half.
Today used car sales in sum total of probably 10% below their baseline is probably a reasonable way to think about it. So at some point when the market normalizes that should be a tailwind, which will be nice, but I don't know that it will be.
That significant relative to the benefits that we plan to go get ourselves.
And then I think that there is.
Strong arguments that the independent market has been more impacted than the franchise market.
Over the last year and a half and so I think that there is an argument that kind of our direct.
Market has actually been impacted more than that 10%. So I think at some point as car prices normalizing interest rates normalize and affordability comes back I think that there likely will be a rebound in the broader market but.
But I think most importantly, when it's time to grow.
We will take control of that and we'll control our own destiny as we did in the past.
We'll push growth on our own like we have before.
Okay. Thank you very helpful. If I could follow up you talked about the GPU and you talked about the one time items, but so this is not a one time item, but but how sustainable is it the spread that you're seeing right now between retail prices and wholesale prices I think the manheim index pricing as low as it's been in two years does that normalize at some point.
Or is that spread expected to continue in your GPU outlook.
I'll I'll take that one so obviously, we had a very strong quarter for retail GPU.
In Q2 for some of the reasons that we pointed out as well as reasons.
That you just alluded to.
I do think.
There were some market tailwind there, but I think there's also some real fundamental gains that we've made that are important.
We do expect to have another strong quarter of retail GPU.
In Q3, obviously, we won't have the allowance benefit.
In Q3 that we had in Q2, but we do expect a strong quarter for retail GPU I think some of those fundamental fundamental gains.
Just to do break them again, I think we're having a lot of success sourcing cars from customers earnings touch on that earlier in this call.
Are generating revenue from some of the additional services that we provide to our customers.
And we've really had a lot of success.
On the cost side of retail GPU, so our fulfillment teams.
I have been working to make the logistics network more efficient, we're really improving our inbound transport costs.
Ben.
The inventory teams in the reconditioning teams have been really focused on cost efficiency and the inspection centers and we've really pushed down over the last year.
The reconditioning cost per retail units sold.
All the way such that those are down below full year 2021 levels even.
The inspection and reconditioning centers.
We're probably only operating at say on the order of.
25% capacity maybe.
A little a little bit more than that but right around that order of magnitude and yet cost in those centers is down below what it was in full year 'twenty, one so I think.
I think those are some real fundamental success stories that we believe will drive strength in retail GPU.
Perfect makes perfect sense I appreciate it.
Thank you and our next question today comes from Chris <unk>.
Well that's fair.
Please go ahead.
Alright, thanks for taking the questions.
First of all just wanted to kind of clarify the cap structure.
Can you give us a summation.
You have $1 2 billion of debt net debt retiring.
Youre raising $350 million of equity.
That leaves roughly 700 million or GAAP, you're going to do the ATM in the future, but I can't tell if that's being used to pay down the debt, but can you maybe just clarify kind of like the gap between the one to $3 50.
Obviously, you have some receivables to sell still and there is some cash on the balance sheet, but just trying to kind of how are we going to tip.
Sure, Yes, so let me let me break that into two pieces. One is just talking about.
The capital structure, and then second is talking about liquidity resources.
So.
First as it relates to capital structure, So I think.
The basic framework that you laid out is correct. So.
With the committed note holders.
Exchanging in the transaction support agreement will reduce total face value of notes by.
Just slightly over $1 2 billion.
Our.
<unk> of that is there will be some cash.
Cash consideration paid.
To retire certain of the notes.
And that's where this $350 million of equity comes in Thats part of the transaction support agreement again.
Basically we have committed to raise $350 million of equity of which.
Which the garcias have committed to put in $125 million.
And then we're committed to raising $225 million elsewhere.
And so.
That will form cash consideration that as part of the exchange and then the remainder of the exchange is basically just exchanging existing senior unsecured notes for three tranches of new senior secured notes.
I think some of the benefits of those senior secured notes, we talked about a bit on this call but.
I think one.
Really valuable benefit from our perspective is the option to pay Pik interest for two years.
And also too we're essentially.
Largely eliminating 2025 and 2027 maturities. So after completing this exchange we don't have a meaningful note maturity until December 2028, and.
I think that.
I think thats really great from a flexibility standpoint, and we've obviously had a tremendous amount of success so far executing our three step plan.
We completed step one of it we're moving on to step two of it and Thats that three of it will be returned to growth and we have a lot an awful lot of flexibility.
Over a many year time horizon to be executing that plan and really driving the business too.
A very significant positive unit economics in volume now.
Now turning to your question about liquidity.
So we ended the quarter with approximately $1 $5 billion in total liquidity resources.
And that was a mix of.
Just over $500 million of cash and just under $1 billion of availability on existing revolvers.
I think.
One thing to note about that number is.
Total our committed liquidity resources actually stepped up quarter over quarter.
We actually.
Increased our liquidity in the second quarter.
And so I think I think we feel like we're in a very good liquidity position with a lot of flexibility to execute our plan over a many year time horizon.
Chris just to make sure one thing is clear because I couldnt tell how you're interpreting the question. The majority of that $1 $2 billion of debt reduction is basically just the exchange of collateral for a reduction in face of that.
Not a cash pay down so we don't need to kind of tie out the full $1 $2 billion reduction with cash.
That's the majority of that is just kind of value that is created by providing collateral to the bonds.
That's what I was asking it and just a quick follow up.
You have this $1 billion ATM that you could theoretically take advantage of volatility. It seems like you could probably generate reported positive Fcs because of the pik feature depending on your EBITDA levels moving forward.
The next year, how do you think about like future debt pay down is there wiggle room. If you do raise this equity that they would allow you to retire more debt do you think about that.
Sure Yeah. So.
Think there.
There are multiple aspects of the new seat.
Senior secured notes.
Do facilitate decreasing leverage.
One is the 2028 notes have only a one year no call period.
And so those can be called.
Only par plus have a coupon after one year.
I think the 20.
30 notes also have a slightly shorter than typical no call period, but just two year no call period, and then that can be paid at par plus have a coupon.
And so I think those are a couple of features I think.
The.
The notes the 2028 and 2030 notes also do allow prepayments to be made with proceeds from equity.
That's another feature that enables deleveraging deleveraging and so I think there's many aspects of.
This debt exchange.
I think worked well from the standpoint of capital structure and financial flexibility I've talked about some of the interest components. We also talked about the overall reduction of debt.
And the elimination of near term maturities, but another I think is the ability to reasonably efficient efficiently reduce leverage if we so desire.
Okay very helpful. Thank you so much.
Thank you and our next question today comes from Rajat Gupta with JP.
Please go ahead.
Great. Good morning, Thanks for taking the question just a clarification on one of the prior question.
5000 retail GPU for tweak here.
Got you.
Additional backlog.
What was the backlog.
That's correct and if you do choose to do that that's further upside to that just wanted to clarify that comment right.
Sure.
Yes so.
The greater than $5000 total GPU outlook for Q3, we didn't specify.
Specific volume of loans sold.
Associated with that greater than 5000 GPU outlook. However, we did note in the shareholder letter that we do see upside to that 5000 GPU number.
And.
I think we also noted at the same time, we see upside too.
The positive adjusted EBITDA outlook as well, but we're early in the quarter. So.
Gave those.
Nice round figures.
We believe we'll be about both of them.
So hopefully that provides a little bit of a little bit of color. Obviously, we feel really good about the strength.
Of the business from a GPU perspective.
We are operating at a meaningfully.
Meaningfully higher GPU levels than we have at any point in the past and Theres a lot of fundamental reasons why that's the case.
Got it that's helpful.
On SG&A.
The other SG&A was was flattish sequentially you talked about some some more opportunities are out of my pocket Boston like other.
Infrastructure related reduction.
How should we think about the timing of those of those benefits is that something.
You expect to see on a per unit basis going forward you know.
I was surprised to see it.
It remains flat in the second quarter.
Despite some volume reductions so curious how should we think about the opportunity there.
Let me jump in first and Mark Please provide a better answer did you sign the only not positive number in the entire report reside come on.
I mean, I was I had a lower number than so I just wanted to.
Please go ahead.
Let me hit your question on other SG&A.
So I do think other SG&A was was base.
Basically flat.
Quarter over quarter, we do see meaningful opportunities to continue to reduce that over time I do think on a quarter by quarter basis.
There can be things that.
Push it up a little on an arm recurring basis was down a little on the non recurring basis.
But.
And so there.
It can bounce around a little bit, but we certainly see opportunities to further reduce that from where it was in Q1 and Q2.
Scott if I can add.
One more on the positive side.
You've made tremendous progress on that.
Logistics side of things I'm curious you know I think in the past you've given us some numbers.
In terms of like how much opportunity. There was left I mean are we are we on a good glide path. There on how you feel about the recon and logistics expenses and the retail GPU.
Or is there like more utilization opportunity there going forward.
Sure Yeah. So.
Simple answer there is we continue to see opportunities throughout all areas of the business and that would include.
<unk>.
Retail reconditioning and inbound transport, we certainly see more opportunities there. Despite the very significant progress that we've made.
Got it thank you.
Thank you and our next question today comes from Brad Erickson with RBC capital markets. Please go ahead.
So ultimately whats going to catalyze kind of a return to quarterly retail unit growth here is it just getting kind of through this restructuring process, saying kind of stabilize the balance sheet, maybe returning to inventory growth at some point or is it just more a function of the market.
Or I guess between those two which is more important to driving a rebound to retail unit sales growth.
Sure. So I would say most importantly is we underwent a big re prioritization pivot inside of the business around 12.
12 to 18 months ago.
And that takes time and effort to reorient everything and we're making.
Our opinion at least Youll pretty incredible progress pretty quickly as a result of that I think at this point the math is pretty clear if you put it in a spreadsheet, it's going to tell you that we're supposed to grow.
As quickly as possible basically because the GPU is in a great spot in our variable costs are in great spot.
But I think we're also continuing to rapidly make progress and I think we're benefiting from the simplicity in our business by holding units approximately flat and focusing on efficiencies and so we plan to maintain the plan that we had before step one was get to positive adjusted EBITDA. We completed that today's step two is basically maintaining the exact same operating K.
And so we're pushing that too significant and sustainable positive unit economics that puts us in a very good position to build an incredible business over time that is much much larger than we are today and then step three will be returned to growth I think theres a number of factors that will drive that transition I think that you you named several I think inside the business. The progress is clearly very helpful.
I think capital structure changes are clearly helpful. But I think most importantly, the operational progress, we're making is very very fast and so we want to maintain discipline and be thoughtful about how we transition back to what is what has been the more comfortable than normal footing for carvana over the majority of our life, which is a growth footing.
So we are not yet making that pivot, but in due time, we certainly plan to.
Got it and then maybe just a follow up you just mentioned kind of the efficiencies as you as you.
Kind of throttled run rates almost you know historically when you guys are growing so fast right Opex was kind of always running a little bit Hot just because you were you were kind of struggling to catch up with demand.
Most degree what caught like as you think about the rebound what cost will be incurred when you start to increase that sales run rate I think I think that's where people are maybe a little bit.
<unk>.
Struggling with how to bridge the math understand all the leverage and the efficiency market spoken to here. This morning, but just how to think about that that rebound in how we control costs as we ramp backup.
Production capacity all of that stuff.
Sure well I think.
The most important element to an increase in cost as a result of growth is basically preparation for that growth and positioning yourself for it ahead of time and I think thats a function of the level of efficiency you have inside the company right. If it costs you a dollar to Telecard your positioning for two you might spend an extra dollar if it costs 50 census, Telecard Youre <unk>.
<unk> for two of cost you an extra 50.
And so I think the efficiency gains that we built into the business over the last year will make it so that we can grow more efficiently.
I would also say that we're in a spot now where.
Yes, disproportionate relative to our history portion of our expenses are fixed.
And so I think the math is pretty beneficial as it relates to growth and so when it's time to grow I think our view is.
That will that will probably be helpful from an expense perspective, because the fixed component of it is <unk>.
A larger and more mechanical components.
And then the variable component.
So I think when that time I think we look forward to it there will undeniably the investments.
Associated with some of that growth, but I think we're very well positioned for it and I would also say as I think many of the other investments in growth our capital investments to prepare for.
For that growth yet to build bigger inspection centers you have to build more inspection centers you have to build more logistics pathways.
Lot of that is built.
I think the Odessa acquisition is something that we remain tremendously excited about not just because of the core business, but also what it means to our infrastructure going forward and what it means to the decrease in investments that are necessary in order for us to build the company that we want to build.
<unk> remains a company that sells millions of cars and changes the way people buy cars that that remains our vision, our goal and our opportunity and our belief.
So I think we think we're very well positioned for it they will undeniably be some cost increases but.
But we think it is likely that they will be.
Dwarfed by the improvements in the business otherwise due to the leveraging of fixed cost.
Got it thanks.
Thank you thank.
Thank you and our next question comes from Brian Nagel at Oppenheimer. Please go ahead.
Hi, good morning, Thanks for taking my questions.
First of all congratulations on the repositioning has been very swiftly so congratulations.
Thank you so much I believe that's about our third congratulations in our public life. So that means more towards it you know.
So my question.
As a follow up to that congratulations.
As we said it again.
Go ahead and support as we.
Step back.
All that's been done here.
<unk> bought a bulk rate.
Just an operational repositioning as well as the efforts on the balance sheet.
Recognizing the environment is very fluid and you're still a young business, but is it are you in a position now that you look at the model and this balance sheets okay.
We can grow from here or should we expect further type of repositioning.
Operationally go on the jet side.
I'm, sorry, you say not operationally on it but on the debt side now that you finished the question, yes, I'm sorry, both on operationally.
Yes.
Yes, so I think operationally I think we are we are in position to continue to make gains and our plan is to continue to make gains and so I think we've.
We rolled out an internal program.
A year ago that was aiming at this Q2, there was incredibly successful.
All the different groups of the business, we're aiming for different targets, we've rolled out a similar plan over the next year that we're very excited about and we think there is significant gains that are that are yet to be had so we're going to continue to push there and we expect to make gains over time to continue to get more efficient operationally from balance sheet perspective, I think we're clearly.
<unk>.
In a much better spot today than we were yesterday and I think that that's that's an exciting and.
And quick development.
And I think that in addition to just kind of the levers being less the flexibility.
Is significantly higher in terms of longer maturities more prepayments and lower cash interest expense. So I think the improvements there are sort of multi dimensional I.
I think going forward.
We're also I think well positioned to to further delever over time, although we'll be thoughtful about.
The pace at which that occurs so I think it depends on your timeframe that youre looking at there but.
I do not think that we are done with balance sheet changes in the Grand scheme of things I think the business in a very good position I think we're well positioned over time to generate.
Yes significant positive cash I think that gives us a lot of options and I think that we've also outlined a number a number of other options today that also give us flexibility.
That's very helpful. And then a second question also bigger picture just kind of kick in your branches what youre seeing from.
I guess the sector standpoint, so there's a lot of debate out there about as we think about affordability affordability for used cars on the part of your core consumers, maybe we're starting to see some acceleration in depletion, maybe but I guess as you think about affordability. What do you think is the bigger factor do you think it's still elevated used car pricing or is it now a higher rate.
Brian .
I think I think our view would be it's the intersection the vast majority of consumers in the U S.
Biochar with financing and for most people I think.
The decision to buy a car is a function of kind of the cash down payment upfront and then their monthly payment over time and obviously.
Those two things are function of both the car price and rates.
Historically, we've seen many different rate environment that I think you tend to see kind of car prices move in a way that would be expected.
In light of those rate environments, I think what's been very unique over the last.
Year, and a half or so as we saw rates rising rapidly while we also saw.
Car prices that are at a very high level.
And kind of they were depreciating in the back half of 'twenty two but then they appreciated early this year and now they're depreciating pretty quickly today I think affordability is about just the sum of those two things interest rates in car prices dropping over time. So in average customers monthly payment is less and I think that there.
There are signs at least on the car price side.
That is occurring as I said depreciation this year looks a lot like depreciation last year, although it started about a month earlier give or take in both the wholesale and retail markets and so far at least.
More severe even than it was last year.
Which I think as long as that is foreseen by market, that's probably great for us.
For the reasons discussed earlier.
Alright, well I appreciate all the color. Thank you.
Thank you thank.
Thank you and our next question comes from Nick Jones with JMP Securities. Please go ahead.
Great. Thanks for taking the questions I guess one another in part two of your kind of three part plan is this maybe incrementally more challenging in the first part of your plan as we all try to triangulate when EMEA returned to growth any color there would be great.
Sure I think it's.
I think everything that matters is challenging but I think it's more of the same of what we've set up I think the most challenging thing that we probably went through as a company with the transition from growth to focus on.
Improving unit economics, I think that that was a big re orientation.
That was made very very quickly and.
And it required new processes and new focus.
And kind of new management patterns, and all kinds of different things.
But I think that we made that transition and I think we're very happy about the the outcomes that we're observing now as a result, I think that the next year looks a lot like the last year in terms of the way that we're aiming for four different targets inside the business.
And so I don't know that that the setup is particularly difficult I think making progress is always difficult, but I think we've got very good plans and very capable people in and I think we feel very good about the trend lines that we're on and.
And the targets that we set so.
<unk>.
Nothing's ever easy, but I think we're on a run as good a path as we can be to continue to achieve those goals.
And then turning to growth I think that will be that will be another pivot when it's time.
But again, that's a pivot that I think.
It is a pretty comfortable one for us given our past and given our infrastructure setup and the scalability of our business as well as the efficiency gains we've made over time that make that even more straightforward. So.
None of that is going to be going to be easy, but we think it is all achievable and we plan to achieve it.
Great and then maybe a follow up on driving reconditioning costs down.
In this process are you maybe not reconditioning items, you would've recondition two years ago.
Getting smarter on what Youre buying.
Is there any kind of feedback from your customers.
Driven those costs down.
Yes.
The simple answer there is.
The gains are process and technology, driven not quality driven.
I think.
The inventory team has.
Absolutely been investing in.
And enhance inventory management system that makes us much better than we were before at managing parts of spend for example.
I think we've been in sourcing.
Various services that we've historically outsourced that's something we've talked about before but that generates opportunities for cost savings and efficiencies I think we are.
Definitely much more right sized and efficient with the <unk>.
Staffing and teams in the inspection and reconditioning centers. So the gains in reconditioning had been very broad based.
But theyre certainly there certainly process driven and technology driven.
And not quality driven.
Great. Thanks, guys.
Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to the management team for any closing remarks.
Well thanks, everyone. We really appreciate you taking the time I know this was short notice and it's early in the morning at least from many parts of the country. So thank you for jumping on.
To Carvana team. Thank you guys. So much I really cannot you think you're just doesn't do it the amount of work that's gone in over the last year to get to this spot is absolutely incredible and the fact that everyone's stood shoulder to shoulder with each other and never blinked.
And just kept pushing in light of a lot of a lot of doubt is something that is amazing and I cannot fully express the gratitude that comes along with that so thank you all so much.
We are nowhere near done as we always say and we're going to keep pushing but this is the moment to be proud.
And then later today at the moment too to keep pushing that pedal down yes.
Thank you, Sir ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation.
What's your lines and have a wonderful day.