CVNA - NYSE

Hello and welcome to the Carvana First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Meg Kehan, Investor Relations. Please go ahead.

Thank you, MJ. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's 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.com. 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 Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially 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's 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 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. The first quarter was a quarter of significant progress for Carvana. A year ago, the automotive industry as well as the macroeconomic and market environment changed pretty dramatically, resulting in us significantly shifting our near-term priorities away from growth and toward profitability. This shift has impacted everything we do. It has impacted what we are focused on, it has impacted how much we are focused on, and it impacted the way we are managing the business day to day. And all these adjustments take time. First, we made 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 have to show up in the projects the teams are undertaking. They move to operating metrics, and finally, they show up in financial results. And that is exactly how the progress has been unfolding. In the second quarter of 2022, we outlined our plan and 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 earliest 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 costs out of the business. In addition, in the first quarter, we returned to our historical GPU and adjusted EBITDA margin trend lines and reported company best results for the first quarter in both metrics. We still have a long way to go to achieve our broader goals, but we are on the right path, and we are moving quickly. As we've discussed before, there are 3 steps in our plan to achieve positive cash flow and get Carvana back on track to becoming the largest and most profitable automotive retailer. Number one, drive the business to positive adjusted EBITDA; number two, drive the business to significantly positive unit economics; number three, after achieving objective number one and two, 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 is 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 plan through. We remain firmly on the path to fulfilling our mission of changing the way people buy cars and to becoming the largest and most profitable automotive retailer. The 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 reductions one quarter early, and we surpassed our previously communicated goal of greater than 4,000 GPU. In the first quarter, retail units sold totaled 79,240, 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; two, reduced advertising; three, increased benchmark interest rates and credit spreads; and four, a 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 remaining 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 $4,796, a sequential increase of $2,129 driven by increases across all components. Non-GAAP retail GPU was $1,591 versus $632 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 of sale, partially offset by wider spreads between wholesale and retail market prices, higher 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. Vehicles sold in Q1 that were less than 90 days old had retail GPU over 2,000, illustrating the benefit of normalizing inventory size and turning vehicles more quickly. Non-GAAP wholesale GPU was $1,236 versus $551 in Q4. Wholesale GPU included a $50 benefit due to an adjustment to our wholesale inventory allowance. In addition, we estimate that wholesale GPU benefited by $150 due to abnormal wholesale market appreciation in the quarter. Beyond those factors, sequential changes in wholesale GPU were primarily driven by higher wholesale marketplace volume. Non-GAAP other GPU was $1,969 versus $1,483 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 sold slightly less than a normalized volume of loans as a result of uncertainty in the securitization market in March. The GPU impact of this less-than-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, reducing 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 unit sold decreased by more than $900 sequentially in Q1, demonstrating significant operating leverage. Adjusted EBITDA loss was $24 million in Q1 or 0.9% of revenue. We expect to achieve positive adjusted EBITDA in Q2. After a strong quarter in Q1, we expect to drive greater than $5,000 of non-GAAP total GPU in Q2 as long as the macroeconomic and industry environment remains similar to Q1. Our strong GPU performance is powered by 3 fundamental drivers: driver number one, a more robust retail GPU model. We expect greater than $2,000 of non-GAAP retail GPU in Q2 driven primarily by our efforts to normalize inventory size, accelerate turn times and generate additional revenue from additional services. In FY '21, we generated approximately $1,700 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 than in FY 2021. Second, we are generating more revenue from the unique services we offer our customers, including nationwide shipping and home delivery. Third, over time, 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 on to driver number two, expanded wholesale platform. We expect greater than $1,000 of non-GAAP wholesale GPU in Q2, split between Carvana's first-party wholesale vehicle sales and ADESA's third-party wholesale marketplace. In FY '21, 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, the second largest U.S. wholesale used vehicle auction marketplace. ADESA's 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 or approximately $90 per retail unit sold, supported by ADESA locations. Third, we continue to invest in our wholesale platform through product and process improvements with a continued goal of growing these businesses over time. Moving on to driver number three, strong finance and ancillary product execution. We expect greater than $2,000 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, an increase compared to Q1. In FY '21, we generated approximately $2,450 of non-GAAP other GPU. While 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 fund 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 the return to our multitrack -- multiyear track record of driving GPU improvements. We believe the gains we are demonstrating in 2023 are 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. Moving on to our second quarter outlook. While the macroeconomic and industry environment continues to be uncertain, looking toward Q2 '23 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, optimize 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 continue 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 3-step plan to generate positive free cash flow. On March 31, 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. 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. We'll now take questions.

[Operator Instructions] Today's first question comes from Sharon

I guess two 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 hoping you can 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?

Thanks for the question. So I think on inventory, we've definitely made 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 than was sized to sales, and we made a lot of progress of the quarter. Our inventory is 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 thinking about how large our inventory is compared to the cars that we're selling at 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. That 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. In 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 useful number compared to our implied turn time. We had retail GPU of over $2,000. And so I think we're heading into Q2 in a much better from an inventory perspective. I think that's been a year-long effort to kind of get sales to catch up to our relative size and inventory. And I think we're really pleased with the progress. We still have probably 1.5 quarters to go, maybe two quarters to go to get that all the way into alignment, but the size of the 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. We're down approximately 64% year-over-year in ad spend. Quarter-over-quarter, we 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 are a little bit less responsive to advertising. And so we've been retesting all of our various advertising channels. And I think the optimal that we are finding today are different from the optimal that we found in a more normalized environment, and that's led us to pull back pretty dramatically on marketing. That's exciting because I think we were able to show a customer acquisition cost of approximately $700 in the quarter, which is the lowest we've ever shown as a company by a pretty long way. And I think if you look in deeper, we had our oldest cohort, we were in the low 300s. 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 shrink our inventory and reduce our marketing spend, and I think we'll continue to make adjustments over the next couple of quarters as we learn more. I think it is more likely 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.

The next question is from Ron Josey with Citi.

I want to maybe do a quick follow-up, Mark and Ernie, on just the inventory question from Sharon. But specifically, Mark, you mentioned higher incurred -- an increase in vehicle sourcing from customers. And 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.

Sure. Yes, happy to answer that. So yes, the comparison that we talked about in prepared remarks was Q1 2023 compared to 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 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 acquire at 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, and we have a lot of customers coming to the site appraising vehicles with us. And so I think that's obviously been a success story in the business over the last couple of years, and we're looking to continue that success as we move forward.

The next question comes from Adam Jonas with Morgan Stanley.

So the company is getting more profitable the smaller it gets. At some point, this will need to change. I hear you on the guidance that -- I was going to ask is 80,000 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, too, are remaining 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 profitability has just included some of these moves that we've made to shrink inventory and shrink marketing and get back in balance. I think where 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 as we were growing from when we launched in 2013, all the way 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 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 see conversion rates go down. We knew that was going to be a difficult transition. But in light of the environment, we also thought it was the fastest path to 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 where sales will bottom out. I think we'll learn more on that over the coming quarters. We've obviously made dramatic moves. I gave the numbers to Sharon a moment ago about how quickly we've lowered advertising inventory just in the last quarter. And so I think some of those things can have some lag effects 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 industry and macroeconomic headwinds in the form of cost. There's been macroeconomic headwinds in the form of interest rates. And then there's been a lot of carve-on and post 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 make the business more efficient. And so I think that's undoubtedly been a difficult transition. It's hard to know exactly what the impact 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 size and the marketing dollars and to many of our different product changes. And I think based on what we're seeing, we're actually pretty happy 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's something we're clearly incredibly well positioned for. I think we'll be better positioned for it than ever before. When we're a more efficient business, it means that growth comes easier. When we're -- when we've got the infrastructure, we've been able to acquire over the last 1.5 years, we're going to be in a better position to grow, but I think that's step 3 in our plan. So we're looking forward to Q2. Where we plan to hit step 1, we'll stay focused in that same direction. We've already got our plans for the next 9 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 turn our attention back to growth because we're still incredibly small compared to this 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.

Just a follow-up. I'm curious where you -- where your team sees the lowest-hanging fruit from here on the SG&A. And has your team given consideration to charging a delivery fee or somehow incentivizing the customer either paying or avoiding a delivery cost to you?

Sure. Yes. So let me start with, I think where we've made the most progress in costs over the last year, we've made a lot of progress, and so I apologize for filling these numbers around over and over again, but we're proud of them. We've cut $1 billion of cost out of the business and over $100 million quarter-over-quarter. I think there are many areas of costs. There's kind of fixed costs. There's variable costs. There's semi-fixed costs, and then there's customer acquisition costs. In the variable costs, I think we are currently operating across virtually all of our operating groups at all-time best efficiencies. In the variable costs themselves, I think we're generally at or near all-time lows across all groups. And I think that's happening despite input costs being higher. Generally, the efficiency for all of our groups is better than it's ever been. And then in some groups, the costs are still in a similar place where they've been in the past because the input costs are higher, whether that's gas or there's been inflation just across the economy. So there are some areas where they're 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. In kind of the semi-fixed costs, I think that's actually been the biggest bucket over the last year. That's when we were just built for a different level of volume than we saw. And I think we've made a ton of progress there, and that's been extremely helpful. I think there's 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, we are all-time lows. I gave the stat. At the company level, it's about $700 oldest cohort. It's in the low 300s. We have four cohorts that are better than company average. Those are pretty great numbers. Those are numbers that are -- in alignment, the low 300 numbers in alignment with best-in-class peers in the industry, and it's in line with our long-term financial model. So I think over time, there's room there, but I think that 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 costs today per unit are probably higher than they've ever been or at least near all-time highs. And that's because volumes are lower, and we've got a fixed cost business, and we feel like we're going to returns on those investments. I think that's -- once you've got costs, you'd rather than be fixed than anything else. So I think that, that's good news, but certainly our fixed costs are high relative to our sales today. And we do think we're getting a return on that investment. We continue to -- 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 go away with scale. And some of them go away just with the passage of time. Today, we still have many facilities that we're massively underutilizing, in the case of some of our office space, that office space that will probably go away over time. In the case of our inspection centers, for example, that's something that we expect to live with scale. So I think we've clearly got a path to significant additional gains in 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 just getting the business back in balance was really valuable. And then you also asked a question about delivery fees. So something that we have done over the last year is we've changed our offerings such that when customers elect to buy a car that is further away from them, especially in case when there's 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've had in years past. For our customers, we still have thousands and thousands of options available to them that are free. But if there's some specific feature option or unique component of a car that they're interested in, that'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 $4,500 for that year, that was a year where we didn't have that approximately $500 line item. That was a year where we didn't have ADESA. 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.

Next question comes from Michael Montani with Evercore ISI.

I 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 if you think of comp and ben right now, do you basically have the right team in place, the right size team? And any further improvements from here are basically going to be about 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. I can say that's the shortest answer. Market occupancy, if you think of more or less of fixed expense, I think we -- it's largely facilities out in our markets and including betting machines. And 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. So we think we can lever meaningfully with volume over time. . Moving on to 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. I think the future gains are spread across different areas. We definitely see an opportunity to continue to become more efficient in operations. We see opportunities to continue to get leverage through our logistics network. We see opportunities to continue to identify, I'd say, savings in our corporate expenses as well. So I think we see opportunities across the board in compensation and benefits, but we've obviously made a lot of gains there recently. In other SG&A, other SG&A, we've talked about before, it's really -- it's kind of three major categories of expenses in there. There's transaction expenses. There's corporate expenses, and there's technology expenses. I think as Ernie sort of alluded to, we see opportunities in all three of those areas. We see an opportunity to bring down per unit transaction expenses over time with further efficiency initiatives. We've made some gains in limited warranty, bring that down on a per unit basis recently and see opportunities in some of the other expenses like title of registration. In 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 over time as we continue to focus on efficiency. So that -- in touching on a lot of the same points that Ernie touched on, but we clearly see opportunity throughout the cost structure from where we sit today.

That's helpful. And just to 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. 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 is some metering involved. So can you give us a sense for how maybe the coastal markets were 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. And I think as it relates to Carvana-specific trends, I think we continue to see middle of the country performing a little bit better than the coast for the same reasons discussed. And then I think as affordability has continued to kind of move away from most consumers, I mean, the trends that you'd expect where I think across the entire auto industry, there's generally been a shift toward higher incomes and higher FICOs. And I think that's really just more of a distribution shift that we would expect and hope will revert when either interest rates start to back up or car prices start to back up or both. And I think we saw -- through most of 2022, we saw 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 wholesale prices going down for the last several weeks. Retail price has still been barely appreciating, but it looked like they will probably start to depreciate shortly. And so hopefully, we're headed down to a more sustainable path of sort of orderly depreciation that will bring more customers back into the market.

Next question comes from Seth Basham with Wedbush Securities.

My first question is just on your first quarter results that were meaningfully higher than the updated guidance you provided on March 22nd driven by gross profit. Can you give us some more insight as to what drove the major improvement in the last days of the quarter?

Sure. Yes. So with respect to our outlook, for Q1, I think we're very close to the top end of the range on units, revenue, SG&A, expense, loan originations, all those metrics. We beat 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. It's kind of around the time of quarter end or shortly thereafter. And so both of those uncertain items resolved favorably. That was the big driver on GPU. We had a couple of other beats -- small beats across other areas of the business in the last couple of weeks of the quarter, but those are the big 2.

Got it. That's helpful. So you've indicated that the retail inventory allowance is likely not sustainable. You've also talked to other GPU likely being over 2,000 in the second quarter, primarily driven by normalization of loan sale volumes. What do you consider normalized volumes? You've already sold 1.3 billion this quarter. I presume that's in line to above what I'd say normal based on historical trend.

So I think the easiest way to think about normalized loan sale volume is you approximately sell 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 is you sell what you originate. Obviously, there can be some timing shifts from quarter-to-quarter depending on market and other dynamics. As 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 easy way to think about normalized loan sale volume. Some quarters will be below normalized, some will be above. But on average, that's the right way to think about normalized. I think so far this quarter obviously have success selling and securitizing loans. So I think feel good about that. I think 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. So I think we're feeling good about where we are.

The next question comes from Nick Jones with JMP Securities.

Maybe just a follow-up on the cost reductions and maybe the impact on the logistics network. As you start to turn the corner and maybe starting to build inventory and ramping volume, have kind of the cost reduction efforts you've made potentially impacted your ability to kind of scale volume in 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?

Sure. So I'm going to answer it with respect to most of the operating groups, and I think logistics will fit in this framework as well. I think there's efficiency and focus. There may be two different things. And I think we've clearly increased efficiency just because you asked about the logistics network. In the case of the logistics network, we've recently increased utilization of our logistics network, meaning the trucks are driving around with more cars on their back. We've decreased the miles. They're traveling over time by something like 40%. I think even quarter-over-quarter, it was down by 12%. That's taking many different forms that are driving those miles down. But -- so 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 will be less work to achieve the same level of growth. And I think that's true across all of our different operating groups. And I also think that a huge part of that efficiency has been gained because we sort of removed the variable from the equation. We've aimed for lower volumes that we are confident we could hit. And by doing that, we were able to just really focus on costs and expenses and keep everyone focused on all the projects that were necessary to complete to drive down those costs and expenses. And I think as a result, we are not focused on growth. And growth is its own focus, and it has a lot of associated projects, and it requires time and effort and attention. And we're not currently positioned to grow as quickly. So I think if we decided to press the button and turn around 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 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 do. We clearly feel like we've got consumer demand for our offering that we'll be able to go satisfy when it's time.

Next question is from Rajat Gupta with JPMorgan.

Just wanted to follow up on the receivables question from Seth earlier. So if I look at the reported financials, I mean, I think in the first quarter -- in the fourth quarter, you sell roughly $800 million lower than what you originated. In the first quarter, it looks like it was close to $300 million to $400 million versus what's originated. So there's like $1.2 billion of backlog receivables that need to be sold before you can go back to, like, an origination -- to a similar origination versus sales run rate or a normalized run rate. How long do we -- should we expect for that $1.2 billion backlog to get clear? Like is it going to be as soon as 2Q? Or will it take multiple quarters? And I have a follow-up.

Sure. So I think you're approximately right in the size of the backlog. And I think that the way that, that works in the business is we've got a couple of billion dollars of warehouses we can kind of house those loans prior to selling them. That does tie up capital. So that extra on the order of $1.2 billion of loans is tying up a pretty meaningful portion of liquidity when we relieve that or unlock quite a bit of cash. We probably have about $0.15 discount on average in our warehouses. And so that means 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 coming quarters in an orderly way. I think the benefit of carrying them is we actually do earn additional finance GPU because those are very yieldy assets. And prior to sale, we are the ones benefiting from that yield. As Mark called out in Q1, we had some benefits there in finance GPU, but we do plan to catch up and sell them. I think the financial markets at least recently have been in a better spot. At the end of the first quarter, we had some elements of the regional banking crisis 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 subprime securitization that we've done to date, and that actually went extremely well. We were many, many times oversubscribed across all classes, and we're extremely pleased with the way that went. I think a big part of what has driven that is, I think, we do attract the customer. We give them an experience that 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 -- we've been able to take advantage of as we've gone through this period. And so I think over the coming quarters, assuming that the financial markets were made open in the way they have been over the last several weeks, we will likely sell down those excess receivables, and that would be a onetime tailwind to other GPU when we do complete those sales.

Understood. That's helpful. And then maybe just a broader question on the liquidity profile. You mentioned in the past that your next avenue to shore up liquidity would be to leverage the ADESA real estate. Curious like if that view has changed at all over the last couple of months. And would you be open to considering alternate options outside of the exchange offer, which is ongoing, to reduce the current level of interest burden versus taking on more debt, maybe restructuring the existing unsecured bonds or perhaps even considering a debt for equity swap?

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 favor asset-based or sort of -- asset-based or secured financing, of which I think the biggest asset that we have today is real estate, have nearly $2 billion of total unpledged real estate assets. A little more than half of that is ADESA real estate locations and no change to our overall thought process there. I think we generally prefer asset-based on secured financing.

The next question comes from Alex Potter with Piper Sandler.

Great. Just one question from 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 than 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 the competitive landscape and auto lending would be helpful.

Sure. Well, I think it's been a dynamic environment. So I think the primary dynamic that we probably have spoken most about as it relates to our loans over the last year or so was kind of the spread between the 2-year Treasury and Fed funds, which the 2-year Treasury is a good proxy for our cost of funds when we sell our receivables because they have approximately a 2-year duration, and they're generally sold into capital markets that use those sorts of rates as a reference point. And approximately half of the market for auto loans is provided by banks that oftentimes are using some combination of that and the Fed funds as their frame of reference. I think since the end of the first quarter when kind of the regional banking crisis hit or started, I think there's also been some dramatic moves in spreads that I think are other impacts that are somewhat unique right now and I think are a little bit harder to forecast over the medium term. I think probably there's been some spread widening in different areas. I think undoubtedly, Carvana itself has seen spread widening over the last year. I think that's too bad, but it shows up in our results. And so once you've 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 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 from here to the next couple of years from now when things are normal again, I think there will probably, at some point, be a normalization in 2-year Treasury versus Fed funds, and that will -- 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.

The next question is from Winnie Dong with Deutsche Bank.

I just have one. On the commentary that you expect similar SG&A expense on a quarter-over-quarter basis, can you maybe clarify whether this is on a per unit basis or absolute dollar? And then I know you've discussed all of the various buckets to sort of go after on a longer-term basis. But near term, what's sort of driving that pause? And then when might that longer-term sort of reduction come back?

Sure. Yes. 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 approximately $420 million of non-GAAP SG&A expenses by Q2. We obviously did that a quarter early, and not only to be in a quarter early, we'd also beat that goal by more than $15 million. So I think we're obviously feeling really great about the overall progress in moving SG&A expenses from the business and becoming more operationally efficient. So in Q2, our expectations similar SG&A expense to Q1, but I think that, in part, reflects just the very, very significant gains that we were able to make in 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 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 to automate manual tasks, to make our routing and scheduling more efficient, to, as we alluded to earlier, incentivize customers to choose the cars that are close to them or to incentivizing them to do -- being pickups versus delivery, all kinds of things that help -- that we still have in progress to help drive operational efficiencies we're working on. And they're not -- we made great progress, but they're not done yet. So I think that's a little bit more color on the opportunities that we see ahead.

The next question comes from Chris Bottiglieri with Exane BNP Paribas.

I wanted to ask about -- I guess, first about the financing market. I saw you said a nonprime deal, which is pretty impressive to get that price in this liquidity environment. But like conceptually, how do you think about owning that residual versus selling it off just given where discount rates and risk spreads are and all that? Like is it still, like, capital efficient to do get on sale for these nonprime type deals? Or would you ultimately look to sell the residual?

I think in general, we've looked to sell the residual. I think you point to something 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 robust. They can take very large multiples of expected losses and still do quite well. And so I think that dynamic is correct, and that makes those desirable assets. But I think in this environment with our current goals, we still intend to sell those residuals over time.

Got you. Okay. And then one, I guess, 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 I get the world just shifted dramatically in a dime, like no one can move that quickly, but have you rethought how you priced cars to their algorithms? Like is there a way to get more proactive with taking markdowns and setting up through wholesale, just to, like, put a rule in place to sell cars above a certain number of days? Like how do you learn from this experience and realizing how much better the model runs with quicker inventory days and kind of prevent this from happening in the future?

Sure. I could take that one. So I think we have a multiyear period, I would say, honestly, 2018, '19, I think, late '20 and 2021, where we operate pretty tight inventory. Average sale, call it, as low as the high 50s, up through the mid- to high 60s, and we're -- and that's on average. We're pretty consistently operating in that range. I think that we probably experienced a little blip with COVID in early '20 and then certainly moved materially off of that normalized range in 2022 because we just overbuild inventory for the interest rate environment that ultimately came about and the sales that we ultimately ended up executing in 2022, we meaningfully overbuilt inventory for that. And so I think the -- what we're seeing with these cars above 90 days, I do think is really a function of us overbuilding into relative to sales and sort of maintaining that for most of 2022. Now we've clearly adjusted, clearly marched out inventory. The cars that we hold relative to the cars that we're selling are in a much more normalized range. As everything sort of works through, we think that'll lead to a much more normalized average sale, a much more normalized share of cars sold 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.

The next question is from

This is [Sam Reed] pitch-hitting for

Sure. So I think at a very high level, I think what we've tried to do in marketing is kind of manage or uncertainty as best we can. And so what that basically meant was pulling more away from digital channels than brand channels. And what I 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. Building a brand is an incredibly difficult thing to do. It's an incredibly valuable thing to do. Direct channels and various advertising channels vary in their level of directness, but direct channels 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 different channels. Some of those tests take kind of a global form where we do large A/B tests of using a channel or not using a channel. Many of those tests take kind of a market level forum where we pick a subset of markets that look similar to other subset of markets and we run one marketing channel in one set of markets and a different marketing channel and a different subset of markets, and we try to get a sense for how those are going. 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 to be different. It's been an environment where car prices are higher. It's been an environment where our inventory is smaller. Both those things mean lower conversion. It's been an environment where there's been less competition for various marketing channels, which means clicks are less expensive. And that varies by the marketing channel, even by the kind of sub-channel and side of any given channel. If we think about [SEM], for example, there are many sub keywords and sub kind of campaigns that you can run. So we try to be thoughtful about running many different tests 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 with GPU climbing up pretty significantly and our variable costs dropping pretty significantly, 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 learning. And I think over time, we will most likely grow marketing spend from here, and I think there's a reasonable chance that it could even go up at the per unit level just given what's most efficient given our higher level of GPU and our lower levels of variable costs. And then as it relates to kind of market share, what I would say there is I really think the most important point here is this market is enormous. And so we're probably right now on the order of about 1% market share. We're down from where we were, let's say, two years ago, but we're down a similar amount to the market overall. I think quarter-to-quarter and kind of year-to-year that there can be some variability in those numbers. But if you look back kind of to a more normalized environment, we're probably down at a similar level to where the market was overall. And so we're probably about 1%. If you look at it over the last 6 months, 9 months, 12 months, we've certainly give up some. We were probably a little higher than 1%, and 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 now is not a time when everyone is focused on growth here and we get appropriate not to be focused on growth. But I do think that if we allow ourselves the intelligence, it's worth thinking about what that will feel like again because we do have a differentiated customer offering that customers love. Our NPS is high. As we get more efficient, we're seeing benefits to NPS there. There will be a time when it's time to grow inventory again, it's time to turn up marketing because our GPU is high and our variable costs are low, and it will be very difficult to replicate the machine that we've built, and we're incredibly well positioned for that time. So I think when that time comes, we'll look to kind of take that volume from that -- the entirety of that market again, that very, very large market. And the great news of being in the market that big is very few players will be able to identify exactly where it's coming from because it is just such an enormous pool that we are 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.

This concludes the question-and-answer session. I would now like to 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 -- I know the last year has been a tough year. I know it is not a year that we anticipated walking into. I know that everyone's put in a ton of work. I know there were times when it felt like the payoff network was slow and it was hard. I hope you see this quarter as evidence that it is paying off, and it's paying off pretty quickly. I hope you also know that we still got a ton of work left to do, and all the focus that we've put in over the last year is paying off, but we've got a lot more effort to put in from here. So I think heads up, be proud, but also let's keep the pedal down. Let's keep going. Thanks, everyone, for joining the call.