Good day, and welcome to the Carvana first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Mike Levin, VP of Investor Relations. Please go ahead.
Thank you, Betsy. Good afternoon, ladies and gentlemen. Thank you for joining us on Carvana's first quarter 2022 earnings conference call. Please note that this call will be simultaneously webcast on the investor relations section of the company's corporate website at investors.carvana.com. The first quarter shareholder letter is also posted on the IR website. Also, we posted additional information on the ADESA U.S. acquisition transactions, which can be found on the Events and Presentations page of the 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 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'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. Unless otherwise noted on today's call, all comparisons are on a year-over-year basis. Our commentary today will include non-GAAP financial measures.
Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our investor relations website. Now with that said, I'd like to turn it over to Ernie Garcia. Ernie.
Thanks, Mike, and thanks, everyone, for joining our call. The first quarter was a challenging quarter for Carvana. There were a number of impacts on the business, some internal and some external, that combined to negatively impact our financial results. We view these impacts as transitory setbacks, and I will hit them first. Secondly, I will discuss what we are working on internally to address each of these impacts. Next, I'll touch on the underlying demand for our offering. Finally, I'll close on our thoughts on the long term. First, let's discuss the impacts to our results. There were three primary drivers of our results in the first quarter. The first is our operational constraints that most severely impacted our inspection centers and logistics network.
These began with Omicron, were exacerbated by winter storms, and then the path to recovery has been slowed by our inspection center, logistics network, and inventory growth, causing us to produce and move more inventory to newly opened IRCs that are further away from our average customers, leading to additional network complexity. These effects had negative impacts on both sales volumes and Retail GPU. The second was industry-wide impacts. Affordability and general consumer sentiment combined to drive fewer industry-wide sales than prior periods. While we continued to rapidly grow market share throughout the quarter, the combination of these economic factors and our operational constraints caused our growth to come in lower than we were anticipating. Because of the operational requirements of our business, we generally plan and build for growth six to 12 months in advance, depending on the lead times necessary to ramp each operational team.
On average, across our history, this has served us well, as it has enabled us to maintain much higher levels of growth than businesses with our operational complexity historically have been able to achieve. Given the internal and external factors described above, this quarter, it caused us to carry more expenses than we had sales to offset them with. This led to total SG&A levels that were largely on plan in total dollars being much higher per unit than prior periods, and to a lesser degree, also flowed through COGS, driving down total GPU. Thirdly, interest rates moved up rapidly in the quarter.
As we originate the loans our customers use to buy cars from us and then sell them later, interest rate increases between initially showing our customers their financing terms and ultimately selling those loans leads to a reduction in the value of the loans we sell, which had the impact of reducing other GPU. These factors combined to lead to a clear step back in our financial results. While this isn't what we are shooting for, it is straightforward to understand and it suggests straightforward solutions.
Returning to positive EBITDA and resuming our march to our long-term financial model from there requires that we resolve our operational constraints, that we get our expenses and sales back into balance through a combination of sales increases and cost efficiencies, and that we adjust our processes in our finance group to reduce the impact of rapidly rising rates on GPU until we return to an environment with more stable rates. We have detailed plans that are already in motion in each of these areas. Our logistics team has clear plans in several key areas to catch up to the level our metrics were a year ago and then to move significantly beyond them. The addition of ADESA to our network will help to accelerate these plans further.
Logistics progress will also unlock the ability to make more of our inventory visible to more of our customers, which is a straightforward way to drive sales up faster as faster delivery times and larger selections increase customer conversion. Beyond that, the team is working on several near- and medium-term plans to improve the selection of more affordable cars we have for our customers. These plans start as simply as buying a greater quantity of less expensive cars and extend to changes to our inspection processes to produce more of those cars and to other product enhancements that make it easier for our customers to find and purchase less expensive cars. In addition, we are using our temporary excess capacity as an opportunity to gain additional cost efficiencies.
While we are always aiming for cost improvement, the constant pressure of growth often dominates our priorities and slows our progress. Across the company, we have each of our operational teams focused on process and product improvements to increase efficiency in an effort to reduce cost and improve our scalability as part of Project Catapult. We're determined to make the most of this opportunity. Next, I want to touch on the underlying demand for our offering. Here, the signs continue to look great. We continue to rapidly gain market share in this difficult environment as we grew by 14% while the market around us was shrinking. Further, we can look at subpopulations of our customers that are less impacted by affordability and interest rates to get a deeper view into demand.
Our customers with FICO scores over 700 grew approximately 50% despite our logistics constraints and our ongoing suppression of inventory visibility. Lastly, I want to close with a couple of thoughts on the long term. At any point in time, a company's success is driven by the sum of the structural forces that define an industry, by the macroeconomic backdrop, and by company-specific factors. In the long run, the macroeconomic backdrop disappears from that equation as it just becomes its average. Structurally, nothing has changed. We're in a fragmented 40 million unit per year market with significant margins and customers who are open to and excited about something new. From a company-specific perspective, we continue to make constant progress. During this period, we have excess capacity, we have a transitory reduction in the amount of energy necessary to keep up with growth.
We will not allow that to reduce our energy output in the least. We will simply point more of our energy toward system and process improvements to maintain the same aggregate level of relentless improvement. In nine years, we've gone from an idea to a company with over $12 billion in revenue, and we are still just 1% of our market. In nine years, we went from a company with negative gross profit to a company with over $4,500 gross profit per unit. In nine years, we went from a company that lost $0.30 of EBITDA for every $1 of revenue to a company with approximately EBITDA breakeven just last year.
That constant progress has been the result of the opportunity our market has presented us, the power of the business model we have built, the quality of the team we have assembled, and the endless effort, creativity and passion the team has poured in. Some quarters are bumpier than others. Unfortunately, in the real world, there are rarely perfectly straight lines to anywhere. While it might be a little harder to see this quarter than most, we remain squarely on the path to building the largest and most profitable automotive retailer and to changing the way people buy and sell cars. The march continues. Mark.
Thank you, Ernie, and thank you all for joining us today. Carvana continued to gain market share in Q1, but several external and internal factors impacted our financial results. Some of these impacted the used vehicle industry as a whole, such as Omicron, used vehicle prices, interest rates, and other macroeconomic factors. Others were more specific to Carvana, such as reconditioning and logistics network disruptions. The impact of these factors on retail units sold volume was the primary driver of our results in Q1. We generally prepare for sales volume six to 12 months in advance, meaning we build capacity in most of our business functions for significantly more volume than we fulfilled in Q1. With our costs relatively fixed in the short term, the lower retail unit volume led to higher cost of goods sold per unit and higher SG&A per unit.
These effects combined with rapidly rising interest rates and widening credit spreads to lead to lower EBITDA margin. In Q1, retail units sold totaled 105,185, an increase of 14%. Total revenue was $3.497 billion, an increase of 56%. Total gross profit per unit in Q1 was $2,833, a decrease of $823 year-over-year. This total gross profit included a $76 per unit impact from Ernie's 1 million unit milestone gift to Carvana employees. Retail GPU was $808 in Q1, a decrease of $403. Retail GPU was impacted by a more than $600 per unit increase in reconditioning and inbound transport costs relative to the prior year, and a more than $100 per unit decrease in shipping revenue driven by refunds to customers following extended delivery times.
Retail cost increases in Q1 were primarily due to inefficiencies in the inspection and reconditioning centers and logistics network, which in turn were driven by Omicron, severe weather events, and the extended timelines required to recover from these events, and due to lower retail units sold volume, which increased per unit costs. We believe the factors impacting Q1 were transitory, and we expect to see retail costs move toward more normalized levels over the coming quarters as our logistics network normalizes and our expense levels are better balanced with sales volumes. Wholesale GPU was $219 in Q1, a decrease of $8, driven by higher volume offset by lower profit per unit. Other GPU was $1,806 in Q1, a decrease of $412.
Year-over-year changes in other GPU were primarily driven by higher benchmark interest rates at the time of loan sale relative to origination interest rates and widening of credit spreads following the onset of the conflict between Russia and Ukraine, partially offset by the impact of higher industry-wide used vehicle prices on average loan size. Looking sequentially, the rapid rise in benchmark interest rates and widening credit spreads had a significant impact on the spread between funding costs and origination interest rates in Q1 versus Q4. This increase in spread had a more than $600 impact on other GPU in Q1. We expect this spread to move toward more normalized levels over the coming quarters. The same factors that impacted retail units sold and total GPU also impacted EBITDA margin in Q1.
EBITDA margin was -11.6%, a decrease from -1.3%. EBITDA margin included a 0.8% negative impact from Ernie's 1 million unit milestone gift to Carvana employees. While we face a uniquely difficult environment in the first quarter, we are already seeing positive trends across our key metrics, and we expect meaningful sequential improvement in Q2 versus Q1 in retail units sold, revenue, total GPU, SG&A per retail unit sold, and EBITDA margin. In our last shareholder letter, we provided an expectation that we would achieve over 4,000 GPU and approximately EBITDA breakeven in the last three quarters of 2022, taken in aggregate.
We now expect a return to over 4,000 GPU and positive EBITDA to be pushed back a few quarters and then to resume our march toward our long-term financial model. We are on track to close our acquisition of ADESA U.S. in May and are excited about the role that ADESA U.S. will play in our path toward our long-term goals. The ADESA U.S. footprint includes 56 sites with approximately 6.5 million sq ft of buildings on more than 4,000 acres. We expect to be able to build approximately 2 million units of annual reconditioning capacity in these locations while still operating ADESA U.S.'s wholesale auction business. This is the equivalent of approximately 30 greenfield Carvana IRC locations in terms of the production volume that we expect to unlock over time. Adding the ADESA U.S. footprint will dramatically improve our logistics network over time.
With the addition of these locations, we will eventually have reconditioned inventory within 50 miles of 58% of the U.S. population and within 200 miles of 94%. This will have the benefit of reducing shipping distances, times, and costs, accelerating us to our long-term financial model. We expect the ADESA U.S. purchase price to be financed primarily with $2.275 billion in unsecured notes. In addition, we expect to raise an additional $1 billion in preferred equity and $1 billion in common equity for future real estate improvements on the ADESA U.S. sites and for general corporate purposes. These financing transactions will place us in our strongest total liquidity resources and production capacity position ever, giving us a strong foundation for profitable growth and significant flexibility to execute our plan.
On March 31st, we had approximately $1.7 billion in total liquidity resources, including cash, revolving availability, and financeable real estate and securities. In total, we expect the transactions to generate approximately $1.9 billion of net cash proceeds after payment of the ADESA U.S. purchase price and more than $900 million of financeable real estate, bringing our total liquidity resources to approximately $4.5 billion pro forma for the transactions. In addition, we estimate that the ADESA U.S. locations have approximately 200,000 units of facility capacity that is available for use with limited incremental site improvements. Combining our own IRCs with these ADESA U.S. locations, we expect total annual capacity at full utilization to be approximately 1.4 million units by the end of 2022.
We are excited to join forces with the ADESA U.S. team on the path toward our long-term goals of buying and selling millions of cars per year and becoming the largest and most profitable auto retailer. Thank you for your attention. We'll now take questions.
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. We ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from Zachary Fadem with Wells Fargo. Please go ahead.
Hey, good afternoon, guys. This is John Park on for Zach.
John.
I guess with the two offerings you just announced, it doesn't sound like you guys are really changing the way you plan on financing the acquisition. Can you guys kind of share how you're thinking about the debt terms, I guess, the incremental interest expense, as well as any associated CapEx plan with this acquisition in 2022?
Sure. Yeah, I think, you know, we have announced our plans for financing the ADESA purchase as well as future real estate improvements on the ADESA site and additional funds for general corporate purposes. We expect that to take the form of $2.275 billion in unsecured notes, you know, $1 billion of preferred equity and $1 billion of common equity. I think the specific terms on that, you know, we'll discuss in the coming days. I think that's the basic transaction structure. I think we feel really great about that transaction structure. I think it gives us a lot of flexibility to execute our plan.
I think you know, we feel really great about the trajectory that we're on. We feel really great about joining forces with ADESA U.S. and all the benefits that that brings to our core business. Yeah, I think we feel grateful about the acquisition and the financing structure. You know, in terms of some of your questions on specifics on the securities, you know, I think we'll talk more about that in the coming days. In terms of CapEx, one of the nice benefits of the ADESA U.S. acquisition is we do expect it to meaningfully reduce our you know, quarterly CapEx outflows from the levels that we've been at over the past several quarters.
The reason for that is, you know, we have been spending a significant amount through 2021 and early 2022 on building out our own Carvana greenfield IRCs. That's been a meaningful use of capital expenditures for us. Now, with the ADESA locations online, you know, we do expect to be outlaying meaningfully less CapEx on, certainly, you know, Carvana greenfield IRCs and then in general. I think that's the directional guidance that I would give there.
Great. Then just kind of switching gears a little bit on, like, the, I guess, financing GPU. You guys talked about the $600 sequential impact from the compressing ABS spreads normalizing. I guess, I mean, is there any way to kind of help us think about, like, what a normal level of what their GPU should be?
Sure. I mean, I think we, you know, we have talked a little bit about, you know, other GPU. I think we had a strong year on other GPU in 2021. We do think, you know, there was tailwinds to our other GPU in 2021 that came from elevated industry-wide used vehicle prices. You know, because basically the way that that works is, the higher used vehicle prices lead to higher average loan sizes, which leads to higher other GPU, other things being equal. We sized that about $150 per unit.
You know, I think the other point that I would make on Other GPU is, you know, we see significant opportunities in front of us to expand Other GPU from a fundamental perspective, you know, off of you know what we've seen historically. I think that takes the form of, you know, fundamental improvements in the finance platform, other fundamental improvements, and ancillary products, including existing and new ancillary products. You know, I think overall, you know, we feel like we built a business that generates very significant other revenues and very significant Other GPU over time. I think Q1 was certainly an outlier, not representative at all of what we you know would expect to see on a normalized basis.
The next question comes from Chris Bottiglieri with BNP. Please go ahead.
Hey, thanks for taking the question. Yeah. I guess the first question is, one of your peers today highlighted that there's been some chatter that ADESA is losing a bunch of its OEM relationships because of the acquisition. What I just want to get a sense for, like, as you're thinking about the EBITDA you've acquired, what type of attrition estimates you've assumed. Then two, I guess just like bigger picture, you know, is there any opportunity to restructure the deal to incorporate some of this? Do you have to pay a breakage fee if you walk away from the deal? Just be helpful to think through that, you know, before you approach the capital markets, thanks.
Sure. Let me start with a reiteration of how excited we are about this transaction. We do think it has the potential to be a truly transformative transaction, giving us a nationwide footprint, the capacity to produce a lot more cars, the ability to put those cars closer to customers, to shrink delivery times, to reduce delivery costs, to enhance the customer experience and to do it at greater volume and to do it all faster, and also to accelerate our path to our long-term financial model because of the benefits of those locations. We're extremely excited about that. We're also excited about the auction business itself, and the way that kind of works, when paired with the Carvana business.
I want to start there and that dominates anything that happens kind of quarter- to- quarter or day- to- day or any other results. I do think that there has been across the auction business in general, across all different auction groups, there has been something of a reduction in volume over the last quarter, much like we've seen in retail, and I think ADESA has not been immune to that. I think there have been a small handful of both buyers and sellers who have elected, at least in the short term, to not do business with ADESA as part of this transaction. That's actually probably been maybe a little less than we would have anticipated so far. We've heard some really positive news as well.
We don't think that that's actually flowing through and impacting the results in a way that is noticeable as of yet. I think, you know, most importantly, we are extremely excited about the transaction. It's very much a long-term foundational view that is generating that excitement, and that extends across, you know, reconditioning, logistics, and the exciting things that we can do together with the auction. We're excited. I think there will probably be some of that noise. Maybe there's a little bit more of that in the future, but it has not been at a level that is concerning, at least to us.
Got you. That's helpful. Just a related follow-up. It looks like there's an extra $1 billion of capital being raised now. Can you maybe just talk about that? Is it just because, you know, how frankly scary the macro backdrop is, or you're just being a little conservative with the balance sheet, or would you look to kind of repay some debt outstanding with some of the proceeds? Trying to understand where the extra $1 billion comes from. Apologize if you already addressed this.
No, you're good. What I would say is I think the way that we've chosen to structure you know this purchase and the capital we're raising is aimed at giving us maximum flexibility. It dramatically enhances our liquidity position. I think it does give us a lot of flexibility in the future to do interesting things. Undoubtedly, this quarter is not what we're planning for. You know, we both hit in our prepared remarks. It's in the shareholder letter. You know, we do plan for growth six to 12 months in advance. The world looked very different six to 12 months ago. We built for a different environment than we find ourselves in today. That had costs, those show up in the results that we're reporting.
Now we're starting from a worse place than we would have liked to start. I think, you know, for the remainder of this year, we have to kind of dig out of that hole a little bit. That also, you know, generates rationale for a little bit of a additional cushion. Then obviously the macro backdrop is uncertain. I think that extends to the broader macro economy and also to the way the auto industry is going to evolve from here. There's some pretty unique things happening in the auto industry these days that I at least haven't seen in my career.
We think that, you know, given the opportunity that we've got, the size of that opportunity, the strength of which our customers have responded to our offering over the last nine years, the market share that we've seen continually growing across our markets, the continued market share growth that we've seen, the addition of ADESA, and the ability for us to build into that opportunity, we just wanna make sure that we position ourselves very well to ride out whatever storm may or may not come. I think that this structure gives us the ability to do that. It gives us the ability to continue to run our play, and that's what we're gonna do because we think the opportunity is absolutely massive.
The next question comes from John Colantuoni with Jefferies. Please go ahead.
Thanks for taking my questions. The shareholder letter mentioned aligning revenue and costs over the coming quarters, while also mentioning that profitability suffered somewhat in Q1 from having a high level of fixed costs. Maybe you could just help square those two comments, and also help detail some of the levers you have, to become more efficient over the coming quarters.
Sure. I mean, first of all, let's walk through how I think the numbers work in the simplest way we can. As we said, you know, we aim for growth six to 12 months in advance, and that's because, you know, we've grown at a very fast rate. We do have real ops. Our growth is not continuous and smooth. It tends to be discontinuous around tax season, which is the end of February, early March. That requires planning, and we have to build up our operational capacity ahead of time. If we go back in time, you know, to Q4, we grew at 57%. In Q3, we're growing at 74%.
We clearly were growing at higher rates and we were anticipating higher rates of sales in Q1 because we didn't appreciate, you know, what would happen industry-wide with affordability and interest rates and consumer sentiment, everything pushing overall volumes down. We built more capacity. One way to look at that is if you look at our SG&A per unit, you know, it's at levels that we haven't been at in a really long time. And, you know, we've been at much lower levels. We've been, you know, at on the order of $2,500 less many times in our history.
Even if we just kind of, you know, do the simple math there and say we would've aimed for this level of growth and not kind of built for a higher level of growth, you know, across 100,000 sales, that's $250 million. That's a really big difference. We built for more than showed up, and I think that's where we find ourselves today. The other impact that kind of drove the results was some of that kind of extra capacity we built also does flow through COGS, and it impacted various GPU line items. Then we saw interest rates move back. Some of those things kind of led us to where we are.
I think going forward, the most important thing that we can do is we just need to align, you know, our cost levels with sales. You know, the good news is we've been growing market share very consistently, even through this environment. The underlying business continues to grow, you know, relative to market. We grew at 14% in the quarter, which isn't as fast as we would've liked, but is very solid in light of a shrinking environment. You know, we continue to see more evidence of the underlying demand growth if we look a bit deeper. We pointed to this statistic of customers over 700 FICO grew at 50% in the quarter.
You know, across all of our cohorts, we saw growth year- over- year in the quarter despite the shrinking market. I think what we have to do now is we just have to, you know, continue to position the business to benefit from that growth. We have to try to do our best to understand what's gonna happen in the macro environment because as we're continuing to take market share, there's a question about what's going on with the aggregate levels of sales across the industry. As long as that's still shrinking, that'll be a headwind to growth. When that abates and even stabilizes somewhere, that should be less of a headwind, which will be beneficial. Then at some point, that that'll reverse and it'll turn into a tailwind.
We also have some operational levers that we have that are in our control. You know, we talked about it. We definitely took a hit from Omicron in the logistics network, and then that was extended by winter storms. You know, as we've opened three inspection centers in the last quarter and one the quarter before it, and we've got kind of inventory in different places that grew a little faster than we anticipated, that put a little bit of extra strain on the network. Unfortunately, that extra strain has put us in a position where we have not yet increased visibility of inventory across our network to customers everywhere. You know, those are operational undertakings that we're very focused on.
You know, we wanna try to get our logistics network back to where it was a year ago and then continue to proceed positively from there. That would lead to faster delivery times and greater sales all else constant. Then that puts us in a spot to be able to make inventory visible, which should also lead to greater sales all else constant. That's the kind of, you know, easiest and most important way to get back to balance is to drive up sales. Then I think something that we're trying to do internally and something that I'm incredibly proud of the team for is, you know, every moment, whether it's the moment you planned for or if it's a little bit different than the moment you anticipated, it is some sort of an opportunity.
As a company for the last nine years, you know, we've been characterized by sprinting as fast as we possibly can to keep up with the demand that we've seen. I think the company's done a great job, and the team's done a great job keeping up with that growth and growing, you know, GPU and levering EBITDA. But undoubtedly, when you're growing that fast, you know, there are just trade-offs that get made, and there are priorities that you have to kind of surrender to. Growth usually wins and that means that kind of, you know, cost reductions oftentimes do take a back seat. We haven't had a lot of opportunities where there's less immediate pressure on us to grow.
I think, you know, the advantage that we have today and the opportunity we have today is we do have excess capacity. You know, we've got the team pointing their energy at let's find ways to get more efficient faster than we otherwise would've because we've still got all this effort, and now we have this new opportunity where we're not pointing a lot of that effort in the direction of just keeping our head above water with growth. That's the other big opportunity that we've got.
You know, somewhere in the mix there between growing sales as a result of our market share growth, growing sales as a result of continuing to improve our operations, you know, with the overlay of whatever happens in the market, and then you know, getting more efficient on expenses because of this opportunity that we've got, we expect to get back in balance, and then we'll continue to build from there. That's our plan, and we feel really good about it.
Thanks for that. Just wanted to quickly ask about the proposed offering from this morning, for—from this afternoon, sorry. It sounds like last quarter, the $1 billion of additional financing was being mostly invested into the ADESA assets. But the proposed offering mentioned that you'll also be now investing that $1 billion into working capital and general corporate purposes in addition to that, the investments in the ADESA assets. Two questions. That's also in addition to you raising an additional $1 billion in equity. Two questions here. Can you just quantify how much of that $1 billion you'll be investing into each of the buckets that you outlined in the proposed offering? Then second, what changed since last quarter that's necessitating an additional $2 billion in cash? Thanks.
Sure. On the construction improvements to the ADESA locations, there's nothing changed there. We still expect to invest, you know, approximately $1 million over a period of multiple years in the ADESA locations in order to move them from, you know, what we estimate is about 200,000 infrastructure capacity today, if fully staffed from an annual retail reconditioning perspective, up to 2 million annual units of production capacity at full utilization when fully staffed, which is our, you know, our goal for the ADESA locations. That is exactly the same as we've always thought about it. You know, I think yeah, we do plan to yeah fill out the locations.
We expect that to cost about $1 billion over a period of multiple years. In terms of the additional capital, I mean, I think the way we're thinking about that is we have a very big opportunity as a company. I think we're extremely excited about the opportunity in front of us to take meaningful market share, to drive strong unit economics, to take advantage of the ADESA acquisition, to you know, get additional reconditioning capacity closer to more customers to improve you know, customer experience and faster delivery times, take advantage of the logistics network benefits that come from having a more broadly distributed footprint.
I think you know we decided to raise the additional capital just to allow us to you know completely focus on that goal of building toward our you know long-term model and to stop having you know conversations about liquidity and what happens in a deep recession and a prolonged recession and all those sorts of things. I think we feel really good about the transaction structure that we've put together. I think we feel great about the ADESA acquisition and the overall trajectory that that places us on.
The next question comes from Michael Montani with Evercore ISI. Please go ahead.
Hey, great. Thanks for taking the question. Had two questions. The first one was around the demand side. Last quarter, you had given some color around how units grew for households with 100,000+ of income versus those with 50,000. I was wondering if you could discuss that and/or the impact of stimulus, which we think could have been 500 basis points to 1,000 basis points. I had a separate question.
Sure. What I would say is, you know, at a high level, those kinds of metrics remain the same or, kind of, even more severe, where those with higher incomes have outgrown those with lower incomes by even more recently. I think this kind of theme of affordability has continued to get stronger over the last several months. Whether you're looking at that in income, in credit, we provided the statistic with customers over 700 FICO, or in age, I think that basically shows up anywhere. That is clearly something that is very active in terms of what's going on in the auto industry today.
Those with higher incomes and better credit are still buying cars at much higher levels than those with lower incomes and lower credit in this environment. I think it's hard to disentangle the stimulus. That there were several different ways of stimulus, you know, last year and the year before, and it's hard for us to precisely disentangle that. Clearly, that is something that we're comping over. You know, last year it was tax season. There was a little bit of stimulus shortly thereafter. This year, tax season in general, I would say was much softer in terms of impact than tax seasons historically have been.
I think it's hard to disentangle the kind of comping stimulus effect from the affordability issues and the general consumer confidence and just kind of, you know, socioeconomic issues and everything going on in the world. Clearly it all played something of a role.
Okay, that's helpful. Just on the headcount front, we had seen a pretty significant kind of quarter-on-quarter reduction in job openings. I'm just wondering if you could talk to kind of if you assume, you know, volumes are relatively similar or improve kind of only modestly, how long do you think it would take to kind of right-size the cost structure, you know, for that kind of environment? Is it kind of a one-quarter thing, or is it more two to three quarters?
I don't think we're gonna give precise timelines on that. What I'll say is, you know, we're gonna be working hard in every direction. We've been growing market share quickly. You know, we clearly have operational opportunities that we expect will drive additional growth, all else constant. We're clearly focused from a product perspective on driving additional affordability, which I think will be helpful for customers. Then we're also very focused on gaining cost efficiencies as quickly as we can. I would say our plan right now is sprint in all those different directions, and then you know, we'll see where that all comes.
Historically, it's been easier for us to provide specific guidance and forecasts when we're trying to predict you know what's going on with our demand and what's going on with our execution. I think today we have a significant overlay of dynamism in the economy broadly and I think we wanna be careful about being too specific in any of our projections as a result of that.
As a reminder, if you would like to ask a question, please press star then one to be joined to the question queue. We also ask that you please limit yourself to one question and one follow-up. The next question today comes from Brian Nagel with Oppenheimer. Please go ahead.
Good afternoon. Thanks for taking my questions. I apologize. I mean, I wanna focus a bit shorter term, but just where there was You made a lot of comments, a lot of detail with regard to the effects in the quarter being transitory. Could you talk more about, you know, the trend in through the quarter then here even into Q2, both with unit sales as well as GPU and the, you know, maybe some of the early improvements you're already starting to see as some of these factors begin to abate?
Sure. Well, I think we'll definitely happy to talk about Q1. I mean, Q1, I would say it was for the most part just kind of continually deteriorating. It looked like the industry environment was deteriorating throughout. You know, I think probably the simplest way to characterize that. Again, disentangling, you know, how much of that was affordability, how much of that was, you know, just general consumer confidence or interest rates is very, very hard. I think just, you know, looking at, you know, auto sales across the industry, looking at auto sales of peers, it looked like it was deteriorating throughout the quarter.
I think it's very early in Q2, so I don't think we're gonna provide, you know, too specific of a view there. I do think that, you know, from the time that we last, you know, spoke and had our last earnings call, things clearly continued to deteriorate from an industry perspective. Now, we do think that's transitory. You know, there's a question of duration, but this industry is a 40 million, you know, transaction industry. It's been that way for a very long time.
If you kind of zoom out over any reasonable period of time, you know, that's what it averages and kind of that those transactions come from the fact that there's 270 million cars on the road and consumers trade with each other, you know, once every 6.75 years, and that's kind of the math that works out. In a moment like this, it gets very easy for many people to kind of put off the decision to purchase a car for many possible underlying reasons. Historically, you know, you can see car sales slow for a period, and generally that generates pent-up demand and it alleviates relatively quickly. I think we do have extra dynamics going on right now.
You know, we have inflation, we have reduced new car production, we have car prices that are massively outpacing inflation in terms of price increases. I think it's hard to know exactly how those forces will all play out in the near term. I think, you know, from our perspective, you know, we made this comment in prepared remarks. You know, the most important thing we can do is continue to build toward the structural opportunity that sits in front of us, which is this 40 million opportunity, and continue to make gains as a company, and then just position ourselves to be resilient to whatever the macro economy brings us. We think capital is a big part of that, and we think we've positioned ourselves well for whatever that does bring.
Okay. That's helpful. Just to follow- up on that, I mean, so that you're talking primarily about, as you know, the unit sales. With regard to on the GPU side, and in particular the reconditioning costs, have you started to see, you know, that dynamic improve yet?
Sorry. Yeah. On the retail cost side, I mean, I do think that Omicron had very acute effects, for example, on the reconditioning centers, and we are moving further away from that. I think that's beneficial other things being equal. You know, we definitely have been seeing improvements in the logistics network, you know, versus the most disrupted points. I think that's beneficial other things being equal. I would say we're seeing some positive data there.
The next question comes from Rajat Gupta from JP Morgan. Please go ahead.
Hi. Good afternoon or good evening. Thanks for taking the questions. This is the first one, you know, on this, you know, the consumer environment in the near term. You know, in the shareholder letter, you mentioned that, you know, you're seeing a pretty substantial sequential improvement already in a lot of the metrics, including sales. Is that primarily a function of just, you know, alleviating some of the capacity constraints or bottlenecks? Or is there something in the demand environment that's helping that? You know, just wanted to clarify that, and I have a follow-up.
Sure. I think, again, sometimes those things are a bit difficult to disentangle, but from a logistics perspective, for example, we have made some gains. You know, if we kind of look at where we were a year ago and then compare ourselves to the peak, you know, depending on what metric you're looking at, we've maybe made kind of half the gains back to where we would like to be if we were, you know, in the same spot as we were a year ago, and then we've got room to go from there. I think there have been some benefits that are specific to Carvana that we believe are driving some benefits. Then, you know, we also do believe that, you know, we are growing market share.
As long as even kind of the rate of industry-wide sales shrinking reduces, all else constant, that should be positive for us as long as we continue to execute on our side. I think, you know, like I said, it's very early in the quarter. We don't want to talk too much about it. I think there have been some at least operational gains that we are making and they are likely having a positive impact.
Got it. Thanks for clarifying that. You know, the other thing you mentioned, you know, in the other GPU that, you know, you are able to successfully pass on, you know, the benchmark increases, you know, through APRs, you know, in the month of April. Have you seen any, you know, impact on demand because of that? Or, you know, has that been pretty consistent versus what you would have expected, you know? I mean, some of your competitors had some different perspectives on that. I was just curious, like, what you're seeing and like, you know, how is that influencing demand, if at all, like, or has it all pretty much taken pretty nicely? Thanks.
Sure. Well, I mean, I would say, you know, all else constant, there's no question that that increasing interest rates negatively impacts demand. That's something that we try to, you know, make sure that we're measuring, you know, carefully all the time inside the company. I think the other thing that's true is as benchmark rates go up and as risk spreads go up, the rest of the market also raises interest rates. From a kind of competitive option perspective, you know, consumer options just in general kind of go up.
I think, you know, there is kind of this term that's often used, that we've used in the past as well, that interest rates are somewhat sticky, where, you know, when they're going up, it's sometimes difficult to pass all of the increases on to customers instantly in a way that is economically optimal. It just tends to take a little bit longer 'cause different groups do kind of take different views, and it takes a little bit of time to adjust. But generally, that adjustment period is not super long. Then the same is true on the other side as well. I think, you know, undoubtedly, you know, we would expect to see more demand if we were not raising interest rates with the environment.
The rest of the market is also raising interest rates in the environment. I think that we are not seeing the same impacts that we would see if we were raising interest rates by ourselves without the market raising interest rates alongside us.
The next question comes from Adam Jonas with Morgan Stanley. Please go ahead.
Hey, Ernie. What can you tell us about Project Catapult, please? You're referring to a lot of the cost actions, and based on the emails I'm getting tonight, you know, your quarterly cash burn and what you can control to manage that, even if it wasn't part of the plan, you know, it has a big impact on how long the capital that you're in process of raising can last you, depending on outcomes. It sounds super important, but you mentioned logistics teams and some stuff, but I didn't know if you could be a little more specific with those efficiency levers in terms of dollar terms or how we can model that.
Sure. Well, first of all, Project Catapult is the internal term that we use for the project that's running across all of our different operational groups right now. That was a little bit of an internal call-out to our teams. There's a lot going on. Across every single operational team, there are very clear goals and very clear metrics, and a cadence of kind of catching up, and accountability to make sure that we can gain as quickly as we possibly can. We really are excited internally about using this as an opportunity to make gains that are hard to make in moments where you have as much pressure as we've had on average from growth. I think, you know, there are many different subcomponents to that plan.
It does cross every operational team and several product teams as well. I don't even really know where to begin, but I would say that the overall theme is Project Catapult and put ourselves in a spot where we're really ready to efficiently grow, when the market supports us, and where we get gains in the near term in all these areas where we know we can be better and we finally have an opportunity to focus on it. That's the general theme.
Ernie, I'm interpreting that as it's not purely a cost-cutting program. It's an efficiency program that can yield savings in a prolonged period of half the growth that you would have anticipated if that, you know, a 14% if that was prolonged and not what you're capitalized for, that you could lower the burn rate in the next couple quarters.
Sure. Yeah.
Is that relevant?
Yeah. I mean, I think efficiency is kind of lower cost and simpler to scale up. I think it's the pursuit of efficiencies across all of our different operational teams.
The next question comes from Seth Basham with Wedbush Securities. Please go ahead.
Thanks a lot. My first question is just a clarifying one on the last one. You are in the process of cutting costs in certain areas of the business to reduce the cash burn.
I thought that was your question. Yeah. We are working on these projects that I discussed to find, you know, efficiencies across the business. That extends to every operating team. All else constant, we do expect that to reduce variable costs.
Okay. Thank you. My follow-up question is just understanding when you announced the ADESA deal, you were thinking of financing at that point in time, from my understanding, solely with debt, and now you're financing it partly with preferred equity and adding some additional equity cushion. What changed related to that financing component for the ADESA acquisition and the improvements from the debt component to the preferred equity component between then and now?
Sure. I think we can maybe separate that into two. One is the addition of equity and I think that was driven by giving us more flexibility, as discussed earlier. We do think our opportunity is enormous. We think the market around us has moved a little bit. We think that suggests that we should put ourselves into a position where we can operate as flexibly as possible to take full advantage of the opportunity that we've got. I think that's an addition. In the capital structure, we evaluated a lot of different possible solutions and evaluated those through a lot of different lenses, cost efficiency, flexibility, prepayability, and came down with this being the right capital structure.
I think there are a bunch of considerations there.
The next question comes from Michael Baker with D.A. Davidson. Please go ahead.
Okay, thanks. A couple real quick ones here, one and then a follow-up. Just on used car pricing in the industry, what's your view on where it's going? Some of the indexes seem to be coming down on a sequential basis, and then the year-over-year growth has been a little bit less than it has been. Yet you're seeing the opposite. Your used car, your ASPs are up and up at an accelerating rate. One of your competitors that reported this morning, same thing, year-over-year increases were higher than last quarter, and sequentially, the prices are getting higher. Why the discrepancy, do you think, and where do you see used car prices going?
Well, that's a very hard question. Let's start with maybe the discrepancy. I think the discrepancy could be partially in timing, and then it could also be the gap between wholesale markets and retail markets. Let's start with wholesale prices. We definitely saw wholesale prices kind of, you know, move up in the end of last year and into early this year. You know, more recently, we've seen wholesale prices kind of start to fall back a bit. I think when you're comparing, you know, quarter-over-quarter, year-over-year, it just kind of depends on the blend of where car prices were across the sum of that period.
I think maybe some of those discrepancies could just be a function of, you know, what different periods you're looking at and what different companies you're looking at. I think, generally speaking, retail prices have been lagging, wholesale prices, and generally speaking, they move down, a little bit more smoothly or up a little bit more smoothly. You know, the way that a large portion of the market operates is, that cars are kind of purchased at a point in time, and then they're financed on a floor plan, and they're kind of sold cost plus for lack of a, of a kind of a more complicated description. There's a lot more that goes into it, but I think that's a good first order way to think about it.
Oftentimes if wholesale prices drop, it's not necessarily clear that retail prices will immediately follow because many of the cars that are sitting on dealer lots were bought in the previous period. There's, you know, debt against those cars at a price that was the prevailing price of that previous period. Oftentimes, dealers are not in a position to take loss on those cars or choose not to take loss on those cars, and so they'll just hold the prices longer and then sell them at a higher price. You tend to see a little bit more stability in retail prices.
I started with kind of the historical prices and then moved on to the dynamics and what can sometimes create a gap between wholesale and retail. As far as where it goes from here, I think the simple answer is, I certainly don't know. I think, you know, today, depending on what kind of bucket of used car prices you're looking at, many cars are 40% more expensive than a year ago, whereas, economy-wide, you know, inflation is closer to 8%. You know, relative to other goods, cars are more expensive today than they have historically been. You would or I guess I would at least expect that over a medium period of time, you know, cars will likely kind of have the same relationship to other goods that they've historically had.
That would mean either more inflation or car prices will come down at some point. I think probably the single biggest input to car prices today and the single biggest input, I think, to a lot of the unique dynamics that are happening across the new car market and the used car market is just new car production levels, which are obviously much lower than they've historically been. I think that, you know, it's hard to figure out how all that's gonna balance out. I think, you know, we'll be paying very close attention and trying to do the best job we can to predict it and trying to manage the business in a way that's resilient to whatever directions those things could move.
I don't think we're confident in precisely how it'll work out. I will say our hope is that car prices come down. I think all else constant, you know, we would certainly prefer car prices to come down. I think in transition, there's a chance that would provide you know, something of a headwind to Retail GPU. I also think because of the dynamics discussed with kind of the gap between the wholesale market and the retail market, it's not obvious that headwind would be as strong as it might look if you saw wholesale prices move down. Then also it would clearly be a benefit to our customers if car prices were lower.
That would probably play a big part in returning the industry to normal, which would, you know, cause kind of the industry dynamics to, you know, reverse from what's been a headwind recently to a tailwind, which we think would be great for the business. I think our hope is that car prices go down. I think we would like to stay away from trying to precisely call it.
Yeah. That makes sense. To just follow- up on that, you said in the past, Ernie, that the ideal environment is lower used car prices, as you just reiterated, but also lower interest rates. I think what we might get here is one of those lower car prices, but I think we're seeing higher interest rates. How would you sort of characterize that environment, you know, on a scale of one to 10, let's say, as being, you know, 10 being the most ideal environment?
I mean, I think if we're going with one to 10, I think 10 would have to be, you know, everything's low and competition gives up and consumers are excited. I think that would be 10. I think you know, moving off of that ideal, I think the most important thing is cars that people can afford because of the sum of vehicle prices and interest rates, which the vast majority of consumers are financing their purchases. You know, affordability for them is kind of the intersection of, or the combination of both car prices and interest rates. I just think stability. You know, we feel like we've got an enormous opportunity, and we wanna build into that opportunity.
Building into that opportunity as efficiently as possible is made easier if we have clear visibility into what the future holds. If we had more stability in the market, I think that would be easier for us to just kind of stably grow and to be able to rely on what the market's gonna do around us. I think we care more about that probably than the levels of either rates or prices. Certainly would love for affordability to get better for our customers as well.
The next question comes from Chris Pierce with Needham. Please go ahead.
Hey, just two. On the first one, we talked a lot about efficiency, but you guys spent $21 million more to sell 8,000 less cars as far as advertising. I just wanna think about advertising. Is that something that was pre-planned and that kind of the demand environment snuck up on you guys or that's something that's kind of a bigger picture sacred cow? The second question will be around credit spreads. Thanks.
Sure. What I would say on that is I think, as I said, across the board, we build our plans out in advance. Something that we've learned to do over time is be careful about yanking the wheel too much too quickly because generally you regret it when you do. I think when we talk about marketing in particular, you know, we still remain a relatively young brand that's building a lot of awareness. You know, we think that there's a lot of value in continuing to build awareness and understanding of what we do and trust in what we do. We also think that, you know, oftentimes marketing is something that has a potentially long payoff.
I think a lot of times marketing dollars are thought of as kind of a direct investment where, you know, a dollar goes in and a sale comes out. The truth is, a lot of what you're doing with marketing is getting impressions on people and communicating what you do and how you do it. Those impressions add up and you build a brand with that. The payoff of marketing can be long. We, you know, we will look to make moves that we think are intelligent across the board, you know, across time as we're managing the business. We also try to be careful to not yank the wheel too much. That's part of what you're seeing.
Understood. Then if I look at Q1 APRs on the securitization versus Q4. We're talking about higher FICO score customers being a larger part of the growth. I guess, can APR move higher because as interest rates move higher, even these customers, your best customers, will face higher rates? I'm just trying to figure out how the spread can widen because you've only got two levers and the yield lever is a lever you don't really have much control over.
Sure. I think the simplest way to probably think about that is just you know, customers with higher FICOs are different customers than customers with lower FICOs. The interest rate spread that matters there is the spread between their rates and their funding cost. You know, on other customers, it's you know, their rate and their funding cost. I think what matters is keeping the spread between those two things in a place that you can monetize in a consistent way. I think you know, what happened in the quarter that is unique, it.
The mix shift effects don't matter all that much because the spreads are kind of priced in in a way that is thoughtful and the mix shifts don't matter too much. What happened in the quarter is when we originate a loan, you know, we have an interest rate that we show to a customer, and there's an expectation of the underlying funding cost. If the actual funding cost ends up being different than that expectation because either benchmarks or risk premiums or expected losses move between the moment of origination and the moment of sale, then that ends up being a headwind. You know, what we saw obviously was pretty dramatic in rate moves. I believe it's the most dramatic the benchmarks have moved since the Great Financial Crisis.
You know, that had an impact. I think that if you look at the actual rates that were charged to customers at any point in time and the expected funding costs, you know, throughout the quarter, we were originating loans in a very similar spot to where we were previously.
Our last question today will come from Naved Khan with Truist. Please go ahead.
Thanks. This is Robert Zeller on for Naved. I'm just curious. You guys are planning six to 12 months ahead. What short-term measures you guys have? What operational measures you have in place to react to near-term market swings or exogenous market macro conditions? Secondly, have you said publicly, or can you give us some sort of understanding of where the ADESA location is, what they're operating at today? I appreciate the projections and forecasts on what they can do at full capacity, but maybe what levels they're operating at today, if they're not full capacity. Thanks.
Sure. I think in the near term, our goal is kind of as outlined earlier on the call. We want to do everything we can to improve the operational constraints that we think are constricting sales so we can show customers more cars and drive sales up. We're working hard to drive as much cost efficiency as we possibly can. We'll see how that all kind of plays out. On the ADESA side, you know, ADESA currently has facility capacity for, you know, approximately 200,000 cars per year, a little over 200,000 cars per year. You know, that kind of already exists in these sites.
You know, over time, we'll be making the investments to be able to ramp up that facility capacity to the 2 million that we outlined earlier in our deck. The actual utilization is far below the capacity they have. You know, there's an ability for us to hire and train and unlock more of that capacity. There are steps between where we are in doing that. The facilities exist and are ready to go, but there's still a need for hiring and training to unlock the 200,000+ .
I would just reiterate again. I think, you know, we put our shareholder letter kind of our footprint and the ADESA footprint, and I really think that that's a powerful page to take a look at because if you look at our footprint today, and you look at where our reconditioning centers are, and you think about this through the lens of the logistics constraints that we've seen over the last four or five months, you can really see how that works, right? We're buying cars nationwide, and we're shipping a lot of those cars to the middle of the country to get reconditioned, and we ship them all the way back out to customers.
When you kind of, you know, look at that ADESA footprint, and you overlay it on the map, you can see how all of those kind of inbound and outbound transport legs really reduce. To kind of maximally get advantage of our business model, our logistics network, it does require a coordination between where cars are produced and logistics network and where cars are purchased. We think that this gives us an incredible opportunity to coordinate that much better, much more tightly and with lower distances and times sitting between cars and customers. We're obviously really excited about that, and we'll look to gain the benefits from that as quickly as we can.
Great. Thanks.
Thank you.
This concludes our question- and- answer session. I would like to turn the conference back over to management for any closing remarks.
Great. Well, thank you, everyone, and thanks for joining the call. To everyone on Team Carvana, you know, let's really take advantage of the opportunity. We've talked about it a lot internally, but this is an opportunity that we have, and if we take advantage of it, we're gonna look back on it very fondly. I think there's a huge chance that we can make this into a big positive. Let's do that. Appreciate everything you guys do. Appreciate everyone taking the time to listen to the call, and we'll talk to you again next quarter. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.