Good day, and welcome to the Carvana Third 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 star, then 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. In the interest of time, please limit yourself to one question and one follow-up. Please note this event is being recorded. I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead.
Thank you, Matt. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's third 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 third quarter shareholder letter is also posted on the IR website. Additionally, we posted a set of supplemental financial tables for Q3 to assist investors in understanding the moving pieces with our first full quarter with the consolidation of ADESA, which can be found on the Events and Presentations page of our IR website. Please note that with the full consolidation of ADESA now complete, we do not intend to provide these supplementary tables going forward. 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 and our quarterly report on Form 10-Q for the first quarter of 2022. 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 the call over to Ernie Garcia. Ernie?
Thanks, Mike, and thanks, everyone, for joining the call. The third quarter was a quarter of strong operational progress against a difficult industry and economic backdrop. We're on track with our goals from an expense and operational efficiency standpoint, but industry demand, interest rate, and depreciation headwinds are slowing our progress on overall profitability. We made gains here, but they were slower than we would have liked, and these headwinds are likely to persist over the near term, making precise forecasting of that progress more difficult. To organize these remarks, I plan to provide our thoughts on five important questions. One, what is driving our expense and operational gains? Two, what are the key headwinds we face and how do changes in those dynamics impact us? Three, how do we believe we are doing relative to the industry? Four, what does all this mean for the near term?
Five, what does it all mean for the long term? First, what is driving our expense and operational gains? In the letter, we provide a number of data points, including that we reduce expenses by about $90 million in the quarter, $360 million on an annualized basis, as well as many underlying operational metrics that are making those expense reductions possible. We're extremely proud of this progress. It is the result of an intense focus on efficiency throughout the company in the way that we manage the business, the way that we organize and set our priorities, and the way that we execute day-to-day. As we have faced the changes in the economy, our industry, and in markets over the last several quarters, the people of Carvana have come together and are doing great work.
We have a lot of work left to do, but we know it, and we know how we're going to go about doing it. Thanks to everyone inside the company for all the hard work you're putting in. We still have a long way to go, and there will probably be additional unexpected difficulties between here and the end of all this. We've got to keep our heads down and keep marching. Next, what are the key headwinds we face and how do changes in those dynamics impact us? There are three key headwinds that we are facing right now: industry-level demand, interest rate increases, and vehicle price depreciation. Let's take these one at a time. First, industry-level demand. There are many data sources available to assess industry-level demand, but regardless of the source, demand is slow.
Industry data sources estimate used sales down approximately 10%-15% year-over-year in the third quarter, and many of the forward-looking indicators that we use internally, including web searches and activity on carvana.com, indicate further slowing recently. Cars are an expensive discretionary, often financed purchase that inflated much more than other goods in the economy over the last couple years and is clearly having an impact on people's purchasing decisions. The good news is that historically, used cars have been a relatively resilient category, and the depressed level of sales that we see today are similar to periods of fairly severe economic difficulty in the past, potentially suggesting that there is less medium-term downside than there may be for other categories.
This possibility is also supported by higher depreciation rates that should, over time, make cars more affordable again and a forward interest rate curve that suggests that the majority of the interest rate increases are behind us. Regardless, we are building our plans around assumptions that the next year is a difficult one in our industry and in the economy as a whole. Next, interest rate increases. Interest rates have risen rapidly with the two-year Treasury, a good benchmark for automotive loans, rising 3.9% over the last year and 2.6% since 2019. In addition, credit spreads have risen about 1% in the last year.
To put this in perspective, for a customer utilizing financing, the moves in two-year Treasury yields plus credit spreads over the last year are equivalent in their impact to the customer's monthly payment of about a $3,000 price increase. As a result, for customers using financing, cars ended the quarter at their most unaffordable point ever, despite the fact that retail prices have dropped roughly 10% this year. As benchmark interest rates, risk spreads, and market expectations for future credit performance evolve over time, we do expect those changes to impact our other GPU and sales volumes before the market fully adjusts, which is built into our expectation that other GPU will move down in the fourth quarter relative to the third. Lastly, vehicle depreciation.
Over the medium term, we believe vehicle depreciation is good as it is necessary to bring cars back into alignment with other goods in terms of cost and affordability and therefore is healthy for volume. In the near term, it is less clear. Two key dynamics that have a big impact on retail GPU is the average spread between acquisition prices and retail prices and the rate of daily depreciation. Historically, on average, the wholesale retail spread roughly captures the depreciation dealers expect to see prior to selling a car, which creates stability in industry retail margins that can be seen over time. We have seen this in action recently as depreciation rates have increased over the last two quarters, and in both quarters, we saw acquisition spreads widen in a way that was approximately offsetting.
Looking forward, we expect this to continue to be the case on average, but we don't know exactly what will play out quarter to quarter. We have recently seen wholesale retail spreads widen further and have also seen daily depreciation rates move up meaningfully. Given these moves, our expectation for the fourth quarter is that retail GPU will decrease relative to the third quarter. Over time, we expect this to normalize as it historically has, but the recent volatility is making a tougher call than it usually is. Moving on to how do we believe we are doing relative to the industry? This is a much more difficult question to answer simply with our results than it normally is, given the dynamics discussed above, as well as the volume impacts of our focus on profitability.
We discussed much of this in the shareholder letter in a way that we hope provide some clarity and understanding, but to summarize our beliefs, they are this. For realized sales volumes year-over-year, we are clearly taking market share relative to the industry. Quarter-over-quarter, we are most likely not taking realized sales market share relative to the industry as a whole, but it depends on which data sources we compare to. If we use our best understandings of the differential impacts to conversion for our customers versus the average customer in our industry due to the choices we are making in setting interest rates, as well as the impacts driven by our focus on profitability, it is likely we are seeing somewhat meaningful gains in top funnel demand market share.
We expect this to begin to show up in realized sales when the interest rate and general industry environment approaches more stability and when we stop further decreasing conversion through our profitability initiatives. Now, heading to what does this mean for the near term. In the near term, our goal is clear, to march toward profitability as quickly as we can, regardless of industry-level sales volumes. To achieve this, we plan to continue to rapidly reduce expenses, to continue to put our focus on efficiency gains throughout every area of the company, and to continue to evaluate and test what levers we should pull to maximize the number of our more profitable sales and to minimize the number of less profitable sales. Lastly, I want to hit the question of what does this mean for the long term.
This is an easy question to skip in a difficult environment, but in the end, it is the most important question. Our belief is this: if we manage through the current environment as we intend to, the long term will be even brighter. All the things that defined our opportunity when we started Carvana and were true a year ago when the environment felt very different are still true today. Nothing focuses us like difficulty, and the last several quarters have undoubtedly been difficult. The next couple may be as well. While it's never fun while we're in the middle of a difficult time, if we use the clarity and focus it provides, we'll be better on the side of it. This is our intention. The march continues. Mark.
Thank you, Ernie, and thank you all for joining us today. We made significant progress in Q3 executing our plan of reducing SG&A expenses and progressing toward profitability despite significant volume headwinds driven by a variety of external and internal factors. In Q3, retail units sold totaled 102,570, a decrease of 8%. We gained market share versus the comparable period in 2021, despite the impact of high used vehicle prices, rising interest rates, and several initiatives focused on improving near-term profitability. Total revenue was $3.386 billion in Q3, a decrease of 3%. Total revenue included $193 million from ADESA, which was included in our results for the full quarter in Q3.
Total gross profit per unit was $3,500 in Q3, a decrease of $1,172 year-over-year and an increase of $132 sequentially. Due to the dynamic nature of the current environment, we will focus our more detailed commentary on sequential changes. Following the acquisition of ADESA, we are reporting total GPU, retail GPU, and wholesale GPU, both including and excluding depreciation and amortization expense, or D&A, and share-based compensation expense associated with Ernie's 1 million unit milestone gift, or gift SBC. Historically, Carvana has reported GPU, including D&A, while ADESA has reported gross profit excluding D&A. For the purpose of clarity, we are now providing both. Total gross profit per unit, excluding D&A and gift SBC, was $3,870 in Q3, an increase of $221 sequentially.
Retail GPU was $1,131 in Q3, flat compared to $1,131 in Q2. Retail GPU, excluding D&A and gift SBC, was $1,267 in Q3 compared to $1,276 in Q2. Sequential changes in retail GPU were primarily driven by higher spreads between retail prices and acquisition prices and lower retail cost of sales, offset by higher retail depreciation rates in Q3 compared to Q2. Wholesale GPU was $448 in Q3 compared to $383 in Q2, a sequential increase of $65. Wholesale GPU, excluding D&A, was $682 in Q3 compared to $519 in Q2. Sequential changes in wholesale GPU were primarily driven by consolidating a full quarter of ADESA in Q3. Other GPU was $1,921 in Q3 compared to $1,854 in Q2.
Sequential changes in other GPU were primarily driven by higher origination rates relative to benchmark interest rates. Improved securitization credit spreads relative to Q2, partially offset by lower ancillary product attachment rates. Looking toward Q4, we expect to maintain flexibility to optimize our loan sales channel mix as the quarter progresses. We made significant progress reducing SG&A expenses in Q3. Carvana-only SG&A expense, excluding impacts from ADESA, declined by $89 million compared to Q2. These SG&A expense reductions were broad-based, including in payroll, advertising, logistics, and other SG&A expense. We expect to make continued progress on reducing SG&A expense in the coming quarters as we continue to execute our plan across all areas of the business. Our progress in the quarter led to an adjusted EBITDA improvement of $39 million in Q3 compared to Q2, despite lower retail units sold.
Adjusted EBITDA margin was -5.9% in Q3 compared to -6.2% in Q2, an improvement of 0.3%. Adjusted EBITDA excludes impacts from Ernie's gift of personal stock to Carvana employees, as well as other income and expense, which primarily includes changes in the fair value of securities, but it includes non-gift share-based compensation. In May 2022, we outlined a stretch goal for Q4 2022 of $4,000 SG&A expense per retail unit sold, excluding D&A, SBC, and ADESA expenses. This equated to a stretch goal of $4,350-$4,450, including ADESA expenses. We are making strong progress reducing SG&A expenses on an absolute dollar basis, but due to the current volume environment, we do not expect to reach this stretch goal on a per-unit basis in Q4.
Our goal is to manage the business to achieve greater than $4,000 total GPU and significant adjusted EBITDA profitability at current volume levels, while also building in flexibility to achieve profitability at higher or lower volume levels through our efficiency and cost savings initiatives. On September thirtieth, we had approximately $4.4 billion in total liquidity resources, including $2.3 billion in cash and revolving availability and $2.1 billion in unpledged real estate and other assets, including approximately $1 billion of real estate acquired from ADESA. We also ended the quarter with approximately 1.2 million units of inspection and reconditioning sub-center capacity at full utilization, giving us substantial infrastructure for future profitable growth.
This strong liquidity position, our significant production capacity runway, and our clear and focused operating plan positions us well on our path to achieve our goal of driving positive cash flow and becoming the largest and most profitable auto retailer. Thank you for your attention. We'll now take questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone 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. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question will come from Chris Bottiglieri with BNP Paribas. Please go ahead.
Hey, guys. Thanks for taking the question. Yes, the first one is, it appears that the broader used vehicle market may be facing incremental pressure in Q4 above and beyond what you've seen in Q3. That seems to be the sense I have that you're seeing as well in Q4. I guess my question is, like, what's changing right now? Are there certain pockets of the market? I'm talking Carvana specifically, we're pretty clear there, but what are you seeing in the market itself? Is it the lower income consumers dropping out? Is every customer segment behaving similarly? Like, what are you seeing in the market environment itself in Q4 relative to Q3?
Sure. Well, I think there's certainly a lot of headwinds. I think, you know, we've seen a tremendous amount of appreciation in car price over the last several years. We put a stat in the shareholder letter that, you know, for a customer that is looking at car prices today and utilizing financing, their payment is up about, you know, 160% of what it would have been pre-pandemic. I think recently we've seen car prices depreciate, you know, to the tune of give or take 10% so far this year, but we've also seen interest rates shoot up very rapidly. I think that overall has harmed affordability.
I think, you know, it's always hard to suss out the rest of what's going on in the economy, but clearly it feels like sentiment broadly is decreasing. There's a bunch of different statistics that we can look at around, you know, consumer confidence or consumer willingness to buy a car at any point in time. I think that we, you know, we tend to see some negative drift in those areas. I think, you know, we don't know exactly how that will unfold from here. I think we're trying to position the business in a way where we're well-positioned to earn significant positive EBITDA at these volumes or lower volumes. We're gonna keep marching down expenses as fast as we can.
I do think that we see at the top funnel, we see that we're still taking market share and potentially at a pretty fast rate. I think, you know, that leaves us hopeful for where, you know, demand can ultimately go and where sales can ultimately go over time. I think the next, you know, 6 months-12 months are certainly more uncertain than they have been in recent periods, where it was pretty reliable that kind of car sales would come in flat quarter-over-quarter. We were just focused on our own market share gains. I think there's a lot of things happening.
I think all the things you pointed to, around demographic shifts, whether it's income or credit or whatever else. All those are active and all those are moving in the directions that you'd expect. I don't know that there's anything particularly notable that wouldn't be expected that's occurring. Just general softness, and I think we do see that across the entire industry.
Got you. Okay. Just given that uncertainty, can you talk about the financing outlook? Like if the world stays uncertain, it seems like the ABS markets are like periodically open and periodically not necessarily closed, but just more expensive to get deals done. Like, if you had to abandon the ABS markets for a couple quarters, do you have enough liquidity through Ally or other partners lined up that you could actually, like, sell those receivables? Like, how should we think about that risk of being able to, you know, you have still a very high level of receivables you're originating. Maybe just talk about your confidence in getting those receivables offloaded in this environment.
Sure. Yeah, what I would say is I think you know the relationship with Ally remains extremely strong. You know, we recently extended our floor plan line there for the next 18 months. I think that you know the way that our relationship works is we're regularly in contact with one another. We're making sure that we come up with a plan that works great for both of us. I think you know as we've discussed in the past the way that we've always thought about balancing our channels is making sure that we have access to a very high-quality channel like Ally, which you know in good times is probably a little bit more expensive for us.
It ensures that in tougher times where the ABS market, you know, can kind of go through difficult periods, that we've got a home for our loans. I think we feel good about the way that we've positioned that over time. We feel great about the relationship we've got. You know, we'll be renewing that deal as we head into next year, as we have over the last several years. I don't think we have any expectations for how that renewal will go that are different than it's been in the past. You know, we generally set that up in a way where, you know, the economics between us and Ally are set up to ensure that they have rates of return that are comparable to what they get elsewhere in the market.
Our arrangement is set up in a way that is dynamic. It's, you know, those adjustments have been happening in real time throughout this year as the market's been changing. I don't think we'd have any expectations for something particularly discreet. They've been a great partner for us in the past, and we've gone through periods where the ABS market was in a tough spot, including COVID. We generally try to size our commitment between us in a way that insulates us from that. I think that's generally the plan there. I think, as I said, we feel good about it. It's a great relationship. They've been great to us, and hopefully they feel the same way about how we've been to them.
Our next question will come from Rajat Gupta with J.P. Morgan. Please go ahead.
Great. Thanks for taking the question. Based on your fourth quarter units and GPU guide, you know, it looks like the fourth quarter cash burn, you know, excluding inventory, is likely to be similar to the third quarter. You might need to either draw on the revolver again or tap into the real estate. Should we expect you to start tapping into the real estate in the near term already or maybe you've already done it in the fourth quarter? If yes, how should we think about, you know, the cap rates or if you offer a sale-leaseback or maybe LTVs, you know, in case of a mortgage? I have a follow-up. Thanks.
Sure. Yeah. On Q4, you know, Ernie touched on a lot of the key dynamics. We do expect volume to be lower sequentially relative to Q3. We also expect GPU to be lower sequentially relative to Q3 as well due to some of the dynamics that Ernie discussed. At the same time, we also expect SG&A expenses to be down significantly as well as we continue to execute on all of our efficiency and cost savings initiatives. Those are obviously offsetting factors. We also, I would add, expect capital expenditures to continue to come down in Q4 relative to Q3. I think those are some of the dynamics on Q4 specifically.
In terms of our real estate assets, you know, obviously we have a very large and attractive real estate portfolio. You know, we you know just acquired a nationwide network of auction sites from ADESA. I think those are you know large sites in very desirable markets, you know, we think are really attractive pieces of real estate. That was a big motivation for us undertaking that acquisition. We've also been building you know some you know large IRCs in you know attractive markets around the country as well. I think we have a great real estate portfolio. In terms of you know how we're thinking about financing that, I do think we have multiple options for you know the way we can finance that.
Traditionally in history, we've used sale leaseback transactions. I think, you know, we've executed about $500 million of those so far in our history as a company. I think there, you know, there can also be other forms of financing for large real estate portfolios. I think that's something, you know, we're thinking about. We're gonna be thoughtful about the timeline on, you know, executing any real estate transactions, but we do feel like we've got a really nice base of assets there.
Got it. You're not tapping into any yet, right? In fact, as of yet so far?
I think we're gonna be very thoughtful about, you know, the best way and timing for financing those assets.
Got it. Maybe as a follow-up, you know, you mentioned that you're looking to be profitable at, you know, 4,000+ GPU and current volume levels. You know, that would imply somewhere close to, you know, $100 million+ that needs to come out from your quarterly SG&A level. Can you highlight maybe a few areas where there is still some low-hanging fruit or any initiatives that are already underway to get there? Lastly, any sense of timing when you do expect to get there? This might be independent of the macro, I guess. Thanks.
Sure. I mean, I would start by just pointing to the progress that we made last quarter where we, you know, reduced expenses by about $90 million, you know, quarter-over-quarter, which is obviously a big number and is a meaningful number relative to, you know, to the step downs that we, you know, look to make in the future. I think undoubtedly as you continue to march down expenses, it gets, you know, every incremental dollar gets a little harder than the last. You know, we're still at levels of expense that are much higher than we would like to be, and we're still at a place where, you know, there's obviously some low-hanging fruit.
I think if we look at the gains that we made, you know, last quarter, it's probably most fair to massage out the impacts of the reduction in force that we had in May, which probably reduces that kind of, you know, $90 million in gains to something more like $70, but still a really meaningful number. And I think that was very broad-based. That came, you know, across the board. In other payroll, you know, we reduced expense by $20 million. In advertising, $14 million. In logistics, you know, $14 million, which is 20% of logistics spend quarter-over-quarter. And then we made gains, you know, across the board everywhere else. In other, we cut out $19 million of costs, which was 8% overall.
That was all powered by a lot of operational gains across all of our operational groups. You know, the logistics network had a bunch of meaningful improvements. You know, network utilization was up 8% quarter-over-quarter. You know, we've seen average shipping miles per sale down 10%. That's continued to go down, you know, further since the quarter ended. We've rolled out a new management structure at our logistics hubs, only a small subset so far, but in those hubs, we're seeing an additional 10% of gains in kind of cost per mile. We expect to roll that out across the country over the coming quarters.
I think we're really excited about gains that we're making. You know, we put a table in the letter that tries to break that down so you can kind of see where that's all coming from, and it really is coming from across the business. We expect gains from here to also come from across the business because there is still a lot of low-hanging fruit.
Our next question will come from Nick Jones with JMP Securities. Please go ahead.
Great. Thanks for taking the questions. I guess just taking a big step back and looking at next year, you know, is it kinda for used car retail, is it really just kinda seeing prices come down and affordability come down? Or will this be difficult if OEMs can't kinda put more cars into the ecosystem? I guess kinda how are you thinking about what kind of key indicators to you indicate things are kind of normalizing as we kinda get through Q4 and start looking into next year?
I think that's probably a very complicated question, so I think all we can do is kind of reach back in history and try to give you some data points that we think might be relevant. I think the point that you've made about OEMs producing fewer cars over the last couple years is correct and relevant. Although I will say that if we go back to the, you know, 2008, 2009 recession, there were dramatically more cars pulled out of the ecosystem during that period. If we look at used car sales over the next several years, they were pretty marginally impacted by that. I think debatably in the data, you can kind of see an echo of that decrease in OEM production, but it's not particularly pronounced.
I think the reduction volume over the last couple of years, as I said, has been a small fraction of the reduction volume over the couple years surrounding that recession. I think, you know, cars also inflated dramatically relative to other goods in a dynamic that I think is pretty abnormal and unprecedented, at least in my knowledge set. You know, cars, you know, really moved up materially in cost and, you know, the rest of kind of goods in the economy for a long time were relatively stable and now kind of cars are, you know, really coming down in cost at the same time that other goods in the economy are going up.
I think debatably on kind of like a relative affordability, relative value basis, you know, cars are potentially moving in a good direction. I think that may also be true, just it depending on what your view is of rates, but if we use the forward interest rate curve as an indication of where rates are going to go, there should be more of the increases behind us than there are in front of us. For most customers who use financing to buy a car, you know, that's obviously a meaningful input. I think if we look back 2008 and 2009 as well, and we try to say, you know, where did the used car market bottom?
It did probably bottom, give or take six months before the stock market bottomed and maybe, you know, a little longer than that before the economy bottomed in sum total. I think that did correspond at the time with roughly when the Fed started cutting interest rates, which, you know, who knows when that happens in this cycle. I think that's how that played out last cycle. As I said, I think there's a lot of dynamics that are pretty different right now and pretty unprecedented. I think, you know, without trying to look at everything like, you know, the glass is half full, I do think we wanna make sure that we prepare for the worst.
I do think there's reasons to believe that, you know, there could be some good things that can happen in auto relative to other categories over the next 12 months. I think those are driven by the fact that cars are extremely expensive, they're extremely sensitive to interest rates, and there's been a lot of movement in those areas recently, and it looks more likely that some of that movement will unwind in the future than not. We'll be paying attention like everyone else will. I think we'll be, you know, setting up the business to be as flexible as it possibly can be. We'll be driving down expenses as quickly as possible. Like I said, you know, planning for the worst and hoping for the best.
It's a hard one to call, I think at this point.
Got it. Maybe just one quick follow-up on GPU. How at risk is GPU from some of these factors like depreciation rates? I mean, how should we think about that kind of into Q4 and into next year? Can that compress kind of quite a bit? Or do you feel comfortable that it's kind of range bound and you can protect GPU to an extent?
Let me start with the market factors, and then I'll kind of roll into, you know, the things that we're in control of. I think, you know, the first and simplest mental model for all this is that, you know, different players in the industry, whether we're talking about the finance industry or the automotive retail industry, are generally trying to, you know, kind of achieve a certain profit for the effort that they're undertaking, right? I think over time, there's obviously kind of ballast in the market, that is trying to kind of find its normal range.
I think that it is probably true that ballast is stronger in the forces that impact retail GPU than finance GPU, and that's because in our view, at least, you know, retailers have much more similar cost structures. They have much more similar, you know, profit goals. They don't have variation in input costs. They tend to not have huge, you know, cash cushions, which puts them in a spot where they need to kind of earn period to period. I think that's why if you look over time, you know, you see a lot of correlation between depreciation rates and wholesale retail spreads, and you see a lot of stability in retail margins across many retailers, across many cycles.
I think from a market force perspective, that has historically been a pretty stable, you know, number. I think that would be our expectation going forward. I also think that, you know, we're in a period where some of those moves are just happening very fast. I think when they happen very fast, I think it leaves room for either kind of error relative to what we've seen in the past. I think we need to prepare for that. I think on the finance GPU side, I think there's room for those forces to be a little bit slower. Different finance companies, you know, have different underlying cost of funds and utilize different methods for passing on, you know, cost of fund increases to their customers.
We've seen evidence for many finance companies out there that they've been passing on cost of funds more in line with Fed funds than with two-year Treasury, which is more the benchmark that we use. You know, I think to the extent that's true, you know, once kind of, you know, Treasury is correctly predicting what Fed funds are gonna do over the next two years, you know, it should stabilize, and then the Fed funds rate would likely continue to go up, and kind of that gap would collapse and that would probably be helpful for us, you know, both in terms of finance GPU and in terms of retail sales volumes that are driven by the quality of offers that we give to our financing customers.
I do think that just given that that's a market that's dominated by fewer players with more variable input costs and who do have cash cushions who can absorb, you know, different strategies, I think there's more risk that that's, that could move around, you know, in more abnormal ways relative to history. I think we're just gonna have to watch that and see it play out. Now, what's in our control? What's in our control is where we set price and where we set interest rates and where we set bids on cars we're buying from customers.
I think that in all those areas, there's probably a little bit of room for us to be able to adjust to an environment where underlying costs, regardless of, you know, what form those costs take, go up. If it's our, you know, the input costs of our cars or the cost of financing for our customers, I do think we have some natural offsets there where we likely have some room.
You know, as we said, kind of, I think our number one goal is gonna be really focused on expenses in this environment, really focused on being purposeful about driving more of our most profitable sales and fewer of our less profitable sales, pay very close attention to what's going on in the world around us as it's moving as dynamically as it has been, and then, you know, pull the levers that we've got control of to try to do the best we can to manage through it all. I think that's the plan. Like I said, we'll be paying close attention from here. There's a lot of room for things to vary relative to the past over the next couple quarters.
Our next question will come from Adam Jonas with Morgan Stanley. Please go ahead.
Hey, Ernie. Does the business need more equity capital, and would your family consider giving up control if that was required to maintain the company as a going concern?
I think, you know, as you've seen here, our goals are gonna be on driving down expenses and trying to get to positive EBITDA as quickly as we can. You know, we've got a bunch of committed liquidity. We've got a bunch of real estate. I think that, you know, we feel like that puts us in a good position to ride out this storm. You know, we're making great moves inside the company. I think that we're extremely optimistic about riding all that out, and then I just think as it relates to hypotheticals, we'll stay away from those. We're just gonna keep running our play and moving forward.
All right, Ernie, just as a follow-up. On CapEx, the $90 million in the quarter backing out the first half, was that gap between the $50 million target, how much of that was ADESA? You said you'd target a reduction, but I didn't know if you could identify a bit of a quantum from the $90 million in the fourth quarter of how much that could be reduced? Appreciate it.
Sure. I think we initially laid out some CapEx targets by quarter in May, and I think our budget for Q3 was $100 million at the time, and I think we came just under that at $90 million. Our target at the time for Q4 was $50 million.
Our next question will come from John Colantuoni with Jefferies. Please go ahead.
Hey, thanks for taking my questions. Just curious if you could lay out which areas of the industry you saw the biggest deterioration relative to your expectations last quarter, and how much those areas of surprise impacted vehicle GPU and SG&A per unit. I guess what I'm asking is if you look back at those areas of surprise, can you help size how much progress you would have made on your operational goals absent the softening macro?
Sure. I think, you know, when we laid out our operating plan in May, you know, we talked about several goals that we laid out for the end of this year, and we kinda talked about how, you know, in order to hit those goals, we would expect to get a little bit of help from units. We're clearly in a spot where units have moved in the wrong direction over the last quarter. I think that's probably the area where there's been the biggest change relative to what our expectations would have been then. Now, I think a lot has moved, right? We've seen interest rates move up materially and, you know, most customers use financing to buy a car.
We've seen depreciation rates move up quite a bit. We've seen that probably slow down our progress on GPU as we focus on originating, you know, more profitable sales and fewer less profitable sales. I think the kind of line of which sales you want to originate moves up and down with GPU. You also have kind of just the broader headwinds in the industry. I think, you know, those have been the adjustments that we've been making in real time as we've been adjusting to the changing world just like everyone else.
I think, you know, again, I think we gotta be careful with hypotheticals, but I think to just, you know, try to provide something of a framework, I do think that in short periods of time and within reasonable ranges of units, today expenses and units are moving somewhat independently, right? They're certainly not completely independent. There are obviously variable costs involved with selling a car. But when you're overbuilt, you know, the underlying variable costs are obviously much lower. And so I think, you know, had units been higher, I think it could have made a material difference to where our results were on a per unit basis.
I think, you know, like I said, all we can do is kind of keep doing the best job we can forecasting the world in front of us, recognize that it's probably better to miss conservative than to miss aggressive, and then try to drive down expenses and make the best decisions we can, pulling the other levers, as we manage through it. So that's what we'll continue to do.
Great. I wanted to ask about your expectations for, you know, how used car prices coming down in the coming months impacts used car demand. Do you see consumers waiting for used car prices to hit a floor before buying picks up more materially, or do you see there being more of a linear relationship between declining prices and rising demand? At what point do we start to see that material uptick in used car velocity? Do prices need to reach pre-pandemic prices or five percent above pre-pandemic prices? I'm curious if you sort of thought about that at all. Thanks.
Sure. I think they're all good questions, and I think they're all hard to answer. What I would say is I think probably all those different forces are continuous forces. Then there's kind of the unknown of, you know, just what are consumers gonna be feeling as we head through the next 6 months-12 months, you know, depending on everything else that's going on in the economy. I think that's pretty hard to call. We don't believe that there's any kind of particular lines that prices have to drop below. We just think the kind of, you know, lower is better, and we think the consumers spent a lot of the last 18 months, you know, reading article after article about how expensive cars were.
That probably, you know, is not helpful in a way that's unbelievably difficult to measure. We see pop out in some surveys of consumer perceptions of the, you know, how good of a time it is to buy a car right now. I think, you know, what we want, I think, is to root for the fundamentals, which is, you know, we wanna root for interest rates to, you know, stabilize. We wanna root for, you know, car prices to go down and get more affordable for our customers. We wanna root for economic stability, and I think all of those things are helpful. I think, you know, all of those are also under uncertainty, and so we wouldn't wanna precisely call, you know, when those forces start to move in our direction.
Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.
Thanks a lot, and good afternoon. You're taking action to improve GPU, but those actions are having a severe impact on unit sales, even beyond market forces. In the fourth quarter, you're anticipating unit volumes and GPU to be down sequentially. Do you take more drastic actions in one direction or the other here, to improve on those metrics, even as you consider the macro forces?
I mean, I think we're gonna try to be more aggressive, is what I would say. You know, we've got the whole company pushing hard in this direction of managing expenses down. I, you know, do think the progress that we've made is great. I, you know, do once again wanna point to the fact that I think there's a lot of people inside Carvana doing some of the best and fastest, most effective work they've ever done. I think as a company, we're getting more done now than we ever have. I think that, you know, it's unfortunate it's coming at a time where we're facing so many headwinds, and so it's a little bit harder to see the fruits of all that labor.
I think that there's a lot of great work being done, and I think that, you know, in the fullness of time, that'll all kind of ultimately show up. I think for now it's more of the same. I just think we keep our heads down and keep fighting through that. You know, when we get to the other side of this, you know, really which I would define in kind of two steps. I think one big move is just stability.
You know, once rates stop going up, and you know, we get to a spot where there's just a little bit of stability in the economy, even if car sales stay at a depressed level, and we're able to just kind of continue to grow our demand market share from there, I think that puts us in a really good spot. Then I think once you get to the extremely exciting place where the entire industry turns around, I think that's great, 'cause then I think we have, you know, double tailwinds there. We have kind of our own market share gains that we would expect to get, that would be accentuated by increase in GPU, which would make more sales more attractive for us to go attack. Then you'd also have the tailwinds of the industry itself.
I think we're just kinda not planning for that for now. We're just trying to drive down expenses and we'll pay attention and make adjustments as we need to.
Just to follow up, considering you have capacity for 1.4 million units and you're on a run rate of 0.4 million or less, and you have a lot of markets that are doing low volumes and aren't near IRCs, wouldn't it be prudent at this point in time to mothball some IRCs and pull out of some markets?
I think, you know, as I said, I'm gonna say one level probably more abstract than you wish here, but I think we're definitely gonna be taking actions to try to drive down expenses as quickly as we feel like we responsibly can. We have been, and you can see kind of the benefits there in our results. You know, again, we dropped expenses by $90 million last quarter-over-quarter. That's pretty fast. That's due to a lot of choices being made across the company and a lot of great execution and our goal is to continue doing that.
Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.
Hi, good afternoon.
Thanks.
First question I have, you know, you talk a lot about, you know, we talk a lot about this, you know, the degree to which you're, you know, working on the expense side of the business and then the challenges out there. In the nearer term, you know, as you're contending with these demand headwinds, you know, and I know they're big, you know, in terms of both affordability and, you know, and probably confidence. Is there any other levers that Carvana, you know, could pull to try to offset that from the demand side or are there tools at your disposal that you would consider pulling?
Sure. Well, I mean, you know, something we haven't talked about, on this call is I do think the underlying demand picture looks better than the sales picture, in our minds at least. I think, you know, if we, you know, one way to try to massage out kind of differential impacts, of kind of interest rate policies between us and other players and to massage out some of the impacts of rising rates is to just look at the sales volume that we have for customers that use cash to buy cars from us. If we look at that, you know, we grew by over 20% year-over-year in the quarter, you know, which was, you know, over 30% faster than the rest of the company.
That's, you know, that's pretty meaningful gains there. I think, you know, we also have spoken a bit abstractly about, you know, many of these, choices we're making to try to pursue more profitable sales, and to forgo less profitable sales across the company. That takes many different forms. But I think the easiest form to kind of, you know, understand there and for us to articulate is to just look at different regions in the country. If we look at the middle of the country, which is where we have, you know, many more of our inspection centers and many more cars that are closer to our customers, you know, we grew 4% quarter-over-quarter. If we look at the two coasts, you know, we shrunk pretty meaningfully quarter-over-quarter.
The middle of the country, you know, outgrew the coast by over 10% there as well. You know, there's many underlying actions that are causing kind of more of our sales to get concentrated in the middle of the country as we pursue more profitable sales. Even in the middle of the country, they're impacted by our choice to pursue more profitable sales and to forgo less profitable sales. You know, when you look at all that, you kind of can start to. You gotta be careful when you're layering multiple effects and compounding them, but you can see that when we look at cash customers, you know, there's a lot of growth there.
When we look at the middle of the country where we're making less dramatic moves to cut out less profitable sales, there's growth there. You start to layer that on top of each other and you can see that there really is, you know, underlying demand growth. I think, you know, our view is if the industry can stabilize and if we can get to a spot where, you know, GPUs where they can kind of settle out and be a little more stable and a little more reliable as we get stability in interest rates, I think that gives a chance to start to express that underlying demand growth again.
For the time being, I think, you know, we have to prudently manage the business for profitability and cash flow and, you know, we've faced a number of headwinds that have caused us to pull back. I think, you know, the underlying demand we believe is still there like it was before, but I think, you know, the pretty dramatic change in sort of strategic direction from a heavy focus on growth to a heavy focus on cost certainly is imposing a cost on volumes that you're seeing in our results.
Perfect. Then just, you know, one follow-up, Ernie. You know, Carvana is unique, you know, in that it's, you know, still primarily a virtual model. You know, as you look at this, the overall demand picture, you know, what's happening in the sector from a demand, do you think that, you know, Carvana and its still largely virtual model is, you know, incrementally, you know, hampered here, you know, versus maybe more traditional dealers or vice versa?
I think undoubtedly the swing in strategy from grow as fast as you can to get profitable as fast as you can is a big change. I think that has many impacts across every part of the company. I think that change in strategy, all else constant, has probably made our work a little bit harder than for you know, for different retailers out there that weren't pursuing as aggressive of a growth strategy, and were kind of already in more of a profit mindset. I think that probably that has been the bigger driver of kind of you know, differential pressure that we felt.
Now, that said, I think if you look at the direction of our results, whether it's expenses or EBITDA or whatever else, I think the direction is good. You know, we decreased our EBITDA loss in the quarter. You know, I think given the headwinds that are seen everywhere else, you know, a lot of other retailers, you know, are probably seeing their results get worse in the quarter, right? I think directionally, you know, we're making some pretty good steps or taking some pretty good steps. I think probably that change, all else constant, has been hard, and I think that we're making it, and I think the team's doing a great job. I would associate that more with the change in strategy than I would with the model.
I think the business model kind of is built and aimed at a certain volume. You know, we believe has kind of lower variable costs and higher fixed costs than the traditional business. Even at this level of volume, it is positioned to earn a lot of EBITDA, you know, when you're in a place where you're kind of stable and you're not swinging from one strategy to another.
Our next question will come from Chris Pierce with Needham & Company. Please go ahead.
Hey, another end market question. I'm just kind of curious. We've been seeing wholesale prices come down pretty aggressively, but we're not seeing that at the retail level. Like when this happens and when these spreads widen out, what do we need to see? Do dealers need to clear existing inventory? Like, are they not willing to do that because they don't want to take losses? Like, I'm just trying to get a sense of when demand might actually come back. We need to see not just lower prices, but lower prices. Just kind of how would you think about demand coming back and when that could happen, or what happens when these spreads widen out this much?
Yeah, sure. Well, I think I mean, you largely just described the dynamic that I think is has been the average dynamic over time, which is, generally speaking, wholesale prices lead. Whether it's up or down, they tend to lead. It's because, you know, for the most part, kind of a heavily simplified mental model is that, you know, dealers are out buying cars at wholesale, and then they plan to make a certain amount of profit on that car, and they sell that car, you know, between 30 days - 90 days later. They're gonna aim for kind of earning the profit that they're shooting for on that car in 30 days to 90 days.
You know, when we saw prices appreciating over the last, you know, two years, we saw the wholesale market leading up the retail market. If you looked in real time, you saw the wholesale retail spread massively collapse. But then that was offset in dealers' profit margins by the appreciation that was seen, or equivalently by the lag time with which they would kind of, you know, change their pricing to the market. Then as it's gone down, we're seeing more of the same. I think if you look over the last two years, you know, there have been, you know, many changes of direction of depreciation. You know, every time there's been at least a directionally offsetting change in wholesale retail spreads.
I think that what we're seeing in the wholesale market is most likely to be just a preview of what we're gonna see in the retail market over the next couple months. That's at least been the way that it's historically played out and that it's played out over the last couple years.
Is it too simplistic to think that it would be better to flush inventory and reset at these lower prices? I know that, you know, turns, et cetera, in 30 days-90 days like you spoke about. It seems like instead of just waiting and waiting and having lower unit sales, I'm just kind of curious how dealers would think about those two situations. Should they then hope to earn my standard GPU or just kind of move on from this aged inventory?
I think that framework is I think more of like a real-time earnings optimizing framework instead of like a total earnings across time framework. I think you know many dealers oftentimes think about optimizing you know kind of total cash. If you were to take you know retail cars today and go and clear them in the wholesale market that you know is now leading the retail market down you would take kind of you know pretty large losses that would be certain. You would be able to then replace that with lower cost inventory that you could put out on your lot. If your goal was to earn the same profit as before then you probably could lower prices quickly and sell more cars.
You would just be kind of getting more earnings to offset your previous losses. I think usually what most, you know, retailers out there do and what we do is we try to kind of optimize for what do we think is the value across, you know, cars and customers across time. It's usually pretty expensive to take cars out of retail and go sell them wholesale, kind of regardless of what the market is. There can be occasions where that can make sense. Generally speaking, if you know, as long as there's, you know, anything near healthy demand in your retail channel, you're usually better off selling those cars through retail when you kind of calculate the sum of the impacts across time.
Our next question will come from Naved Khan with Truist Securities. Please go ahead.
Hey, guys, this is Benjamin Thelen for Naved Khan. Regarding working capital, you've again lowered inventory closer to the $2 billion-$2.5 billion target range you mentioned previously. Just curious how much lower you expect that to go and how is your progress in moving out third-party reconditioning impact to this move?
Sure, yeah. I think we, you know, we took a nice step down in inventory in Q3, second consecutive quarter of moving it down toward more normalized levels. We do expect inventory to decline again in Q4 to get sort of inside that range that we laid out previously. You know, we do think that also makes sense in light of the current depreciation environment and in light of, you know, our goals of getting inventory to a more normalized level relative to retail unit sales. We, yeah, we do expect to do that in Q4 and feel good about the path that we're on there.
Okay, great. Then, can you provide any color on kind of your ability to reach the base year-end SG&A unit goal, given a reduction in retail volumes?
Do you mind restating the question? I'm not sure we followed. I apologize.
Yeah, no worries. Just wondering if you can provide color on, like, your base year-end SG&A per unit goal, given reduction in volumes, retail volumes.
Sure, yeah. You're referencing the stretch goal for Q4?
Yeah.
Sure. Yeah, I mean, I think, you know, our goal is to continue to push down expenses as quickly as we possibly can. You know, we try to give a framework for how quickly we think we can push those down. We were able to lower them kind of without accounting for, you know, the risk. Last quarter, we were able to lower them by about 12%. You know, as we said, I think, you know, it obviously gets harder to lower expenses, as your expense base drops, but we think there's still a lot of low-hanging fruit, and so we're gonna try to continue to lower that. Then I think right now, inside of reasonable ranges, expenses and units are much more loosely tied together than they normally would be.
I think, you know, those things are probably moving more independently than normal, and we'll just be seeking to push down expenses as quickly as we possibly can to try to get to you know break even EBITDA and then ultimately to positive cash flow ASAP.
Our next question will come from Nat Schindler with Bank of America. Please go ahead.
Yes. Hi, guys. Going back to an earlier comment about equity financing. Well, let's not talk about equity financing specifically and go over that again. More, how do you fix the debt financing that you have? What are your options right now? Because even getting to positive cash flow, even getting to your long-term targets. Sorry, not positive cash flow, positive EBITDA. Even getting to your long-term EBITDA targets, you would have to sell a whole lot of cars just to cover your current interest expense. What can you do to fix that debt load?
Sure. Well, let me start with this. I mean, I think, you know, if we hit our long-term EBITDA targets, you know, even at today's units, you know, we'd be in a great spot from a cash flow perspective. I think and would be able to, you know, comfortably cover our interest expense. I think that, you know, wanna make sure that that's at least clear. I think that you can look across time at other retailers that have been at, you know, similar scales to where we are today, who have been able to achieve, you know, a sufficient kind of positive EBITDA to cover what our interest expense is today.
I think, you know, our goal is as stated, and I, you know, I apologize for going through it over and over again, but I just think in this environment, we've gotta really focus on what's in our direct control, and the thing that is most directly in our control is expenses. We're gonna keep marching that down as quickly as we possibly can. We're gonna pay a lot of attention to how we, you know, originate the most profitable sales that we can to try to accelerate our path to break even EBITDA and beyond. You know, that's the plan right there. That's just what we're gonna be working on.
Wait, even at 0.4 million annual units, or let's say 0.1 million in a quarter where you are right now, you had $150 million in interest income. At 13.5% EBITDA, you wouldn't cover that.
I think you just have to make sure you're multiplying by the kind of retail price, and I think you'll probably get there.
Okay. You'll barely get there. Yes. Sorry.
Yeah. I think we get there with a little bit of cushion, but yeah. Either way.
Well, is there anything that you have on the near term on the horizon that you can think of to do to finance that debt any other way, though, other than just driving that EBITDA?
I think, you know, as we stated earlier, I think the number one input to all this is expenses. That drives into EBITDA. From there, you know, we've got, you know, to kind of use round numbers, about $4 billion of kind of total access to liquidity. You know, approximately half of that is immediately available. You know, the other half is broken down to be about, you know, $1 billion of ADESA real estate and about $1 billion of other real estate. You know, between all that gives us a lot of access to liquidity. I think, you know, that's primarily how we're thinking about it at the moment, and, you know, we'll continue to march forward with our plan.
Our final question will come from Michael Montani with Evercore ISI. Please go ahead.
Hey. Thanks for taking the question. Just wanted to ask first off if I could, you know, you had mentioned trying to pull back in certain markets to emphasize more profitable sales. I also wanted to ask about some of the initiatives that you all have going on. I'm thinking of, for example, third-party listings. I had seen that you may be pulling back or pausing on that. I just wanted to understand where that sits, you know, the Hertz partnership. Then I had a separate follow-up.
Sure. So, I mean, what I would say is I think, you know, when we think about. I'm gonna answer this, you know, generally and maybe not precisely related to some of the things that you brought for your question, but hopefully it's useful. When we think about trying to aim for more profitable sales, you know, what does that mean? There's certainly variability in the kind of gross profit associated with different types of sales. Obviously, sales where customers finance with us are more profitable than those where they don't, and those where they choose to buy a warranty are more profitable than those, you know, where they don't. And then I think there's a number of other dynamics kind of across, you know, car type, et cetera.
There's also kind of variation in the underlying costs of completing a sale. You know, if it's a car that's nearby to an inspection center, it can be much lower. If it's a car that's maybe further away, but where we're charging a shipping fee, you know, it can be higher, but it can be offset by the benefit of that shipping fee. I think there can be variation in underlying cost of sales. There can also be variation in the cost to acquire different types of sales, whether it's sales to different types of customers or different types of cars.
That can vary, and some of those different channels can also attract customers with you know, kind of variable levels of either gross profit or expected expense. I think across all those different areas, we're trying to just be very thoughtful right now and make sure that we're pulling levers that we think will drive the most profitable sales and drive the fewest less profitable sales. I think that that's you know, that's taking many different forms. You brought up Hertz. Yeah, I would say that partnership continues to go very well. We're putting even more focus and attention on that right now as we think it's a big opportunity and there's alignment between the two groups. We're excited about the results there for sure.
I think that it's led to some other opportunities between us, especially as we've added ADESA to kind of augment the overall capabilities that we have. I think that continues to go really well. I think you said you had a follow-up.
Yeah, thanks. The follow-up is just around CapEx. I think, in May, you all had outlined some different scenarios and what you felt was baseline kind of CapEx spend. Just wondering, you know, volumes remain kind of challenged in terms of where we're at right now. You know, do you have further flexibility there? You know, can you just give us some sensitivity on kind of the CapEx outlay pace?
Sure, yeah. Everything I'm about to say is also in the shareholder letter, for future reference. You know, in May, we laid out a 2023 full-year CapEx budget, in a range of $100 million-$200 million, depending on the amount of elective capital expenditures we decide to undertake. I think from where we sit today, we expect to be in the lower half of that range.
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
All right. Well, thank you for joining the call. To everyone inside Carvana, thank you guys again for all the work that you're putting in. I do think that we are getting more done than we ever have. I know it's against a tough backdrop. I think, you know, you've heard it over and over again, but I hope we're all prepared for, you know, the environment to continue to be tough, and I think we still have a lot of work left to do. I do think we're all doing a great job, and we could not thank you guys more for it. Thanks for everything you guys do, and thanks again to everyone on the call. We'll talk to you soon.
The conference is now concluded. Thank you for attending today's presentation.