Carvana Co

NYSE:CVNA

Earnings Call Transcript 2022-Q3

[Operator]

Good day and welcome to the Carvana Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

[Mike Levin, VP, IR]

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 this quarter with the consolidation of ADESA, which can be found on the Events & Presentations page of our IR website. Please note that with the full consolidation of ADESA now complete, we do not intend to provide the 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 Form 10-I 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-I financial measures. Reconciliations between I and non-I 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.

And now with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

[Ernie Garcia, CEO]

Thanks, Mike. And thanks, everyone for joining the call. The third quarter was a quarter of strong operational progress against the difficult industry and economic backdrop. We are 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 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? And five, what does it all mean for the long term?

First, what is driving our expense and operational gains? In a 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 are probably 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 to change 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 new sales down approximately 10% to 15%, year-over-year in the third quarter. And many of the forward-looking indicators that we use internally, including web searches and artist activity on carvanha.com indicate further slowing recently. Cars are an expensive discretionary often finance purchase that inflated much more than other goods in the economy over the last couple of 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's less medium term downsides and there may be further categories. This possibility is also supported by higher depreciation rates that should over time, make cars more affordable again, and afford interest rate curve it suggested the majority of the interest rate increases are behind us. Regardless, we're 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 into your current yields plus credit spreads of last year are equivalent in their impacts 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 line with other goods in terms of cost and affordability and therefore it's 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, it can be seen over time. We've seen this in action recently as depreciation rates have increased over the last few 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 how it'll 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 us to normalize it, as it historically has. But the reason volatility is making it 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 discuss 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. The 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 realize 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 understanding of the differential impacts to conversion for our customers versus the average customer and industry due to the choices we are making and setting interest rates, as well as the impacts driven by our focus on profitability, it is likely we're seeing somewhat meaningful gains and top funnel demand market share. We expect this to begin to show up and realize sales when the interest rate and general industry environment approaches more stability, and when we stop further decreasing conversion to our profitability initiatives.

Now heading to what does this mean in 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 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 define our opportunity we started to Carvana and were three year ago when the environment felt very different are still true today. Nothing focuses us like difficulty in the last several quarters have undoubtedly been difficult. The next couple may be as well. Well it's never fun. While we're in the middle of difficult time. If we use the clarity and focus to provide will be better on the side of it. There's our intention to march continues, Mark.

[Mark Jenkins, CFO]

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 use 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 and 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 recording 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 SPC.

Historically, Carvana has reported GPU including D&A, while ADESA has reported gross profit excluding D&A. For the purpose of clarity, we're now providing both. Total gross profit per unit excluding D&A and gift SPC was 3,870 in Q3, an increase of $221 sequentially. Retail GPU was 1,131 in Q3, flat compared to 1131 in Q2. Retail GPU excluding D&A and gift SPC 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 1921 in Q3, compared to 1854 in Q2. Sequential changes and other GPU were primarily driven by higher origination rates relative to benchmark interest rates, and 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 low nails 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 have led to an adjusted EBITDA improvement of $39 million in Q3 compared to Q2 despite lower retail units sold. Adjusted EBITDA margin was minus 5.9% in Q3, compared to minus 6.2% in Q2, and improvement of 0.3%. Adjusted EBITDA excludes impacts from Ernie's gifts 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 for retail units sold, excluding D&A SPC and ADESA expenses. This equated to a stretch goal of 4,350 to 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 the 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 30, we had approximately $4.4 billion in total liquidity resources, including $2.3 billion in cash in 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 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. Will now take questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Chris Bottiglieri with BNP Paribas. Please go ahead.

[Chris Bottiglieri, Exane BNP Paribas]

Hey, guys, thanks for taking the question. I guess the first one is it appears that the broader used vehicle market may be facing incremental pressure in Q4 above and beyond we've seen in Q3. That seems to be the sense the habit that you're seeing as well in Q4. I guess my question is like what's changing right now? There's certain pockets the market and I'm talking Carvana specifically, we're pretty clear there. But what do you see in the market itself is the low 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

[Ernie Garcia, CEO]

Sure, well I think there's certainly a lot of headwinds. I think, 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, for a customer that is looking at car prices today and utilizing financing, their payment is up about 160% of what it would have been pre-pandemic. And I think recently, we've seen car prices depreciate to the tune of give or take 10% so far this year, but we've also seen interest rates shoot up very rapidly. And I think that that overall has harmed affordability.

I think, it's always hard to set out the rest of what's going on in the economy. But clearly, it feels like sentiment broadly is, is decreasing, there's a bunch of different statistics that we can look at around yield consumer confidence or consumer willingness to buy a car at any point in time. And I think that we tend to see some negative drift in those areas. I think 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. These volumes were lower volumes, we're going to keep marching on expenses as fast as we can. I do think that we see you at the top funnel, we see that we're still taking market share, and potentially at a pretty fast rate. And so I think that leads us hopeful for where, demand can ultimately go and where sales can ultimately go over time.

But I think the next six to 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're just focused on our own market share gains. So I'm there's a lot of things happening, I think all the things you pointed to around demographic shifts, whether it's income or credit, whatever else, all those are active, and all those are moving the directions that you'd expect. But I don't know that there's anything particularly notable that wouldn't be expected that's occurring, just general softness, I think we do see that across the entire industry.

[Chris Bottiglieri, Exane BNP Paribas]

Got it, okay. And then just given the uncertainty, can you talk about the financing outlook. Like if, if the world stays uncertain, seems like the ABS markets are like periodically open and periodically, that's like close, but just more expensive to get deals done. Like if you had to abandon the ABS markets for a couple of quarters? Do you'd 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'd have still a very high level of receivables originating so maybe just talk about your confidence, again those receivables offloaded in this environment?

[Ernie Garcia, CEO]

Sure. So yeah, what I would say is, I think the relationship with Ally remains extremely strong. We recently extended our floor plan line there for the next 18 months. I think that 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 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 in good times is probably a little bit more expensive for us. But it ensures that in tougher times where the ABS market can kind of go through difficult periods, that we've got a home for our loans.

And so I think we feel good about the way that we've positioned that over time, we feel great about the relationship we've got. 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 go that are different than it's been in the past. We generally set that up in a way where 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. And our arrangement is set up in a way that is dynamic. So it's those adjustments have been happening in real time throughout this year as the markets been changing.

So 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. And we generally try to size our commitment between us in a way that that insulates us from that. So I think that's generally the plan there. And 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.

[Operator]

Our next question will come from Rajat Gupta with JPMorgan. Please go ahead.

[Rajat Gupta, JPMorgan]

Great. Thanks for taking the question. Based on your fourth quarter unit and GPU guide, it looks like the fourth quarter cash burn, your excluding inventory is likely to be similar to the third quarter. And 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? And if yes, how should we think about the cap rates or if you offer the sale leaseback or maybe LTVs in case of a mortgage. And I have a follow up thanks.

[Mark Jenkins, CFO]

Sure, yeah. So, on Q4, already touched along, 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. And so those are obviously offsetting, obviously offsetting factors. We also I would add, expect capital expenditures to continue to come down in Q4 relative to Q3.

So I think those are some of the dynamics on Q4, specifically. In terms of our real estate assets, obviously, we have a very large and attractive real estate portfolio. We just acquired a nationwide network of auction sites, from ADESA. And I think those are, large sites and very desirable markets, we think are really attractive pieces of real estate, that was a big motivation for us undertaking that acquisition. We've also been building some large IRCs in attractive markets around the country, as well. And so, I think we have a great real estate portfolio.

In terms of, how we're thinking about financing that, yeah, do you think we have multiple options for the way we can finance that traditionally, in history, we've used sale leaseback transactions, I think we've executed about $500 million of those so far in our history as a company. But I think there can also be other forms of financing for large real estate portfolios. So I think that's something we're thinking about, I don't think the -- I don't think we're going to thoughtful about the timeline on executing any real estate transactions. But we do feel like we've got a really nice base of assets there.

[Rajat Gupta, JPMorgan]

So you're not tapping to any right in front of you so far?

[Mark Jenkins, CFO]

I think we're going to be very thoughtful about, the best way and timing for financing those assets.

[Rajat Gupta, JPMorgan]

Maybe the other follow up, you mentioned that you're looking to be profitable at 4,000 plus in GPU and current volume levels. That would imply somewhere close to $100 million plus, that needs to come out from your quarterly SG&A. Can you highlight maybe a few areas where there's still some low hanging fruit, or any initiatives that are already underway to get there? And lastly, any sense of timing when you do expect to get there? This might be independent, the macro, my guess? Thanks.

[Mark Jenkins, CFO]

Sure. So I mean, I would start by just pointing to the progress that we made last quarter, where we reduce expenses by about $9 million quarter-over-quarter, which is obviously a big number, and is a is a meaningful number relative to the step down to we look to make in the future.

I think, undoubtedly, as you continue to march down expenses, it gets every incremental dollar gets a little harder than the last. But you're we're still at levels of expense that are much higher than we would like to be. And we're still in a place where there's obviously some low hanging fruit. I think, if we look at the gains that we made 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 $90 million in gains to something more like 70, but still a really meaningful number. And I think that was very broad base that came across the board.

And other payroll we reduce expenses by $20 million in advertising $14 million in logistics $14 million, which is 20% of logistics spend quarter-over-quarter, and then we made gains across the board everywhere else. And other we, we cut out $90 million of cost, which was 8% overall. And that was all powered by a lot of operational great gains across all of our operational groups. The logistics network had a bunch of meaningful improvements. Network utilization was up 8% quarter-over-quarter, we've seen average shipping miles per sale down 10% that continued to go down 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. And we expect to roll that out across the country over the coming quarters.

So I think we're really excited about gains that we're making an idea 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. And we expect gains from here to also come from across the business because there is still a lot of low hanging fruit.

[Operator]

Our next question will come from Nick Jones with JMP Securities. Please go ahead.

[Nick Jones, JMP Securities]

Great, thanks for taking the questions. I guess you're taking a big step back and looking at next year, is it is it kind of for used car retail is it really just kind of seeing prices come down and affordability come down or will this be difficult if OEMs kind of put more cars into the ecosystem? I guess kind of how are you thinking about what kind of key indicators to you indicate things are kind of normalizing as we kind of get through 4Q and start looking into next year?

[Ernie Garcia, CEO]

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 of years is correct and relevant. Although I will say that if we go back to the 2008-2009 recession, there were dramatically more cars pulled out of the ecosystem during that period. And 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. And I think the reduction in volume over the last couple of years, I said, has been a small fraction of the reduction volume over the couple of years surrounding that recession.

I think 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. Cars really moved up materially in cost. And the rest of kind of good in the economy for a long time were relatively stable. And now kind of cars are really coming down in cost at the same time that other goods in the economy are going up. And so I think debatably on kind of like a relative affordability, relative value basis, cars are potentially moving in a good direction.

I think that may also be true just 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. And for most customers who use financing to buy a car, that's obviously a meaningful input.

I think if we look back to 2008 and 2009 as well, and we try to say, where did the used car market bottom, it did probably bottom, give or take, six months before the stock market bottomed and maybe a little longer than that before like the economy bottomed in some total. I think that did correspond at the time with roughly when the fed started cutting interest rates, which who knows when that happens in this cycle. But I think that's how that played out last cycle. And as I said, I think there's a lot of dynamics that are pretty different right now and pretty unprecedented.

So I think without trying to look at everything like the glass is half full, I do think -- we want to make sure that we prepare for the worst, but I do think there's reasons to believe that there could be some good things that can happen in auto relative to other categories over the next 12 months. And 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.

So we pay attention every else will. I think we'll be setting up the business to be as flexible as it possibly can be. We'll be driving down expenses as quickly as possible. And like I said, planning for the worst and hoping for the best. But it's a hard 1 to call, I think, at this point.

[Nick Jones, JMP Securities]

Got it. And maybe just 1 quick follow-up on GPU. How at risk is GPU from some of these factors like depreciation rates? I mean how much -- how should we think about that kind of into 4Q 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?

[Ernie Garcia, CEO]

So let me start with the market factors, and then I'll kind of roll into the things that we're in control of. I think the first and simplest mental model for all this is that different players in the industry, whether we're talking about the finance industry or the automotive retail industry, are generally trying to kind of achieve a certain profit for the efforts that they're undertaking, right? And so 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, that ballast is stronger in the forces that impact retail GPU than finance GPU. And that's because in our view at least, retailers have much more similar cost structures. They have much more similar profit goals. They don't have variation in input costs. They tend to not have huge cash cushions, which puts in this well where they need to kind of earn period to period. And I think that's why if you look over time, 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.

And so I think from a market force perspective, that has historically been a pretty stable number. And I think that would be our expectation going forward. But I also think that we're in a period where some of those moves are just happening very, very fast. And 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. And so 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 have different underlying cost of funds and utilize different methods for passing on 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 of the benchmark that we use. I think to the extent that's true, once kind of treasury is correctly predicting what fed fund is going to do over the next two years, 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, both in terms of finance GPU and in terms of retail sales volumes that are driven by the quality offers that we give to our financing customers.

But I do think that just given that, that's a market that's dominated by fewer players with more variation input costs and who do have cash cushions who can absorb different strategies, I think there's more risk that, that could move around in more abnormal ways relative to history. But I think we're just going to 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 that we're buying from customers. And 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 what one of those costs take, go up. If it's our -- the input cost 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.

And so as we said, kind of I think our number one goal is going to 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 pull the levers that we've got control of to try to do the best we can to manage through it all. And I think that's the plan. And 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 of quarters.

[Operator]

Our next question will come from Adam Jonas with Morgan Stanley. Please go ahead.

[Adam Jonas, Morgan Stanley]

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?

[Ernie Garcia, CEO]

So I think you'll -- as you see here, our goals are going to be on driving down expenses and trying to get positive EBITDA as quickly as we can. We've got a bunch of committed liquidity. We've got a bunch of real estate. And I think that we feel like that puts us in a good position to ride out this storm. And we're making great moves inside the company.

So 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 going to keep running our play and moving forward.

[Adam Jonas, Morgan Stanley]

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? And you said you'd target a reduction, but I didn't know if you could identify a bit of a quantum from the -- into fourth quarter of how much that could be reduced. Appreciate it.

[Mark Jenkins, CFO]

Sure. We -- I think we initially laid out some CapEx targets by quarter in May. And I think our budget for Q43 was $100 million at the time, and I think we came just under that at $90 million. And our target at the time for Q44 was $50 million.

[Operator]

Next question will come from John Colantuoni with Jefferies. Please go ahead.

[John Colantuoni, Jefferies]

Yeah. Thanks for taking my questions. So 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?

[Ernie Garcia, CEO]

Sure. I think when we laid out our operating plan in May, we talked about several goals that we laid out for the end of this year, and we kind of talked about how -- in order to hit those goals, we would expect to get a little bit of help from units. So we're clearly in a spot where units have moved in the wrong direction over the last quarter. And I think that, 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 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 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. And then you also have kind of just the broader headwinds in the industry.

So I think 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 -- again, I think we got to be careful with hypotheticals, but I think to just try to provide something of a framework, I do think that in short periods of time and within reasonable range of units, today, expenses and units are moving somewhat independently, right? They're certainly not completely independent. They're obviously variable costs involved with selling a car. But when you're overbuilt, the underlying variable costs are obviously much, much lower.

And so I think had units been higher, I think it could have made a material difference to where our results were on a per unit basis. But I think, 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 and 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. And so that's what we'll continue to do.

[John Colantuoni, Jefferies]

Great. And I wanted to ask about your expectations for how used car prices coming down in the coming months impacts used cars 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? And at what point do we start to see that material uptick in used car velocity? Do prices need to reach pre-pandemic prices or 5% above pre-pandemic prices? I'm curious if you sort of thought about that at all. Thanks.

[Ernie Garcia, CEO]

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. And then there's kind of the unknown of just what our consumer is going to be feeling as we head through the next six to 12 months, depending on everything else that's going on in the economy, I think that's pretty hard to call.

I don't think that there's -- we don't believe that there's any kind of particular lines that prices have to drop below. We just think the kind of lower is better. And we think the consumer spent a lot over the last 18 months reading article after article about how expensive cars were. And that probably is not helpful in a way that's unbelievably difficult to measure. But we see pop out in some surveys of consumer perceptions of how good of a time it is to buy a car right now.

So I think what we want, I think, is to root for the fundamentals, which is we want to root for interest rates to stabilize. We want to root for car prices to go down and get more affordable for our customers. We want to root for economic stability. And I think all of those things are helpful. And I think all of those are also under uncertainty, and so we wouldn't want to precisely call when those forces start to move in our direction.

[Operator]

Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.

[Seth Basham, Wedbush Securities]

Good afternoon. You're taking actions to improve GPU, but those actions are having or impact on unit sales even beyond market forces. And in the fourth quarter, you're anticipating 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?

[Ernie Garcia, CEO]

I think we're going to try to miss aggressive is what I would say. And we've got the whole company pushing hard in this direction of managing expenses down. And I do think the progress that we've made is great. And I do -- once again, I want to 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. And I think that it's unfortunate is coming at the time we're facing so many headwinds and so it's a little bit harder to see the fruits of all that labor.

But I think that there's a lot of great work being done. And I think that in the fullness of time, that will all kind of ultimately show up. But I think for now, it's more of the same. I just think we keep our heads down and keep fighting through that. And then when we get to the other side of this, really, which I would define in kind of two steps. I think one big move is just stability. Once rates stop going up, and we get to a spot where there is 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. And then I think once you get to the extremely exciting place where the entire industry turns around, I think that's great because then I think we have 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 make more sales more attractive for us to go attack. And then you'd also have the tailwinds of the industry itself.

But I think we're just kind of 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.

[Seth Basham, Wedbush Securities]

Just to follow up, considering you have capacity for 1.4 million units and you're on a run rate of $400,000 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 IRCs and pull out of some markets?

[Ernie Garcia, CEO]

So I think, as I said, I'm going to say one level probably more abstract than you wish here, but I think we're definitely going to be taking actions to try and drive down expenses as quickly as we feel like we responsibly can. And we have been, and you can see kind of the benefits there in our results. Again, we dropped expenses by $90 million last quarter, quarter-over-quarter. That's pretty fast. And that's due to a lot of choices we made across the company and a lot of great execution, and our goal is to continue doing that.

[Operator]

Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.

[Brian Nagel, Oppenheimer]

Hi, good afternoon. So first question I have, we talked a lot about the degree to which you're working on the expense side of the business and then the challenges out there. So in the nearer term, as you're contingent with these demand headwinds, I know they're big in terms of both affordability and you're probably confidence, is there any other levers that Carvana could pull to try to offset that from the demand side or there are tools at your disposal that you would consider pulling?

[Ernie Garcia, CEO]

Sure. 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 if we -- 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. And so if we look at that, we grew by over 20% year-over-year in the quarter, which was over 30% faster than the rest of the company.

So that's pretty meaningful gains there. I think we also have spoken a bit abstractly about many of these choices we're making to try to pursue more profitable sales and to forego less profitable sales across the company. That takes many, many different forms. But I think the easiest form to kind of understand there and for us to articulate is to just look at different regions in the country. So if we look at the middle of the country, which is where we have many more of our inspection centers and many more cars that are closer to our customers, we grew 4% quarter-over-quarter. If we look at the two coasts, we shrunk pretty meaningfully quarter-over-quarter. And so the middle of the country -- or excuse me, year-over-year. And so the middle of the country outgrew the coast by over 10% there as well. And there's many underlying actions that are causing kind of more of our sales to be concentrated in the middle of the country as we pursue more profitable sales. But even in the middle of the country, they're impacted by our choice to pursue more profitable sales and to forego less profitable sales.

And so when you look at all that, you kind of can start to -- you got to be careful when you're layering multiple effects and compounding them, but you can see that when we look at cash customers, there's a lot of growth there. And 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. And you start to layer that on top of each other, and you can see that there really is underlying demand growth.

And so I think our view is if the industry can stabilize and if we can get to a spot where GPUs were -- 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 us a chance to start to go express that underlying demand growth again. But for the time being, I think we have to prudently manage the business for profitability and cash flow, and we've faced a number of headwinds that have caused us to pull back.

So I think the underlying demand, we believe, is still there like it was before, but I think 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.

[Brian Nagel, Oppenheimer]

Perfect. And just 1 follow-up, Ernie. So look, Carvana is unique, it's still primarily a virtual model. As you look at this -- the overall demand picture, what's happening in the sector from a demand -- do you think that Carvana and its still largely virtual model is incrementally hampered here versus maybe more traditional dealers or vice versa?

[Ernie Garcia, CEO]

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. And I think that has many impacts across every part of the company. And I think that, that change in strategy, all else constant, has probably made our work a little bit harder than four different retailers out there that weren't pursuing as aggressive of a growth strategy, and we're kind of already in more of a profit mindset.

So I think that -- probably that has been the bigger driver of kind of 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. We decreased our EBITDA loss in the quarter. I think given the headwinds that are seen everywhere else, a lot of other retailers are probably seeing their results get worse in the quarter, right? So I think directionally, we're making some pretty good steps or taking some pretty good steps. But I think probably that change, all else constant, has been hard, and I think that we're making it, and I think the team is doing a great job. And 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, we believe has kind of lower variable costs and higher fixed costs in the traditional business. But even at this level of volume is positioned to earn a lot of EBITDA when you're in a place where you're kind of stable and you're not swinging from one strategy to another.

[Operator]

Our next question will come from Chris Pierce with Needham & Company. Please go ahead.

[Christopher Pierce, Needham & Company]

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. So is it -- when this happens and when these spreads widen out, what do we need to see? Do you always need a 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 and we need to see not just lower prices -- well, lower prices kind of what -- how would you think about demand coming back and when that could happen? Or what happens when these spreads widen out this much?

[Ernie Garcia, CEO]

Yeah, sure. I think -- I mean you largely described the dynamic that I think has been the average dynamic over time, which is, generally speaking, wholesale prices lead. And so whether it's up or down, they tend to lead. And it's because, for the most part, kind of a heavily simplified mental model is that dealers are not buying cars at wholesale and then they plan to make a certain amount of profit on that car, and they sell that car between 30 and 90 days later, and they're going to aim for kind of earning the profit that they're shooting for on that car in 30 to 90 days.

And so when we saw prices appreciating over the last twp years, we saw the wholesale market leading up the retail market. And if you looked in real time, you saw the wholesale retail spread massively collapsed. But then that was offset in dealers profit margins by the appreciation that we've seen or equivalently by the lag time with which they would kind of change their pricing to the market. And then as it's gone down, we're seeing more of the same.

And I think if you look over the last two years, there have been many, many changes of direction of depreciation. And every time there's been at least a directionally offsetting change in wholesale retail spreads. So I think that what we're seeing in the wholesale market is most likely to be used a preview of what we're going to see in the retail market over the next couple of months. That's at least been the way that it's historically played out, and that it's played out over the last couple of years.

[Christopher Pierce, Needham & Company]

So is it too simplistic to think that it would be better to push inventory and reset at these lower prices? I know that turns, et cetera, is 30 to 90 days like you spoke about. But 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 2 situations. So hope to earn my standard GPU or just kind of move on from this aged inventory.

[Ernie Garcia, CEO]

So I think that, that framework is, I think, more of like a real-time earnings optimizing framework instead of like a total earnings over -- across time framework. And I think many dealers oftentimes think about optimizing kind of total cash. And if you were to take retail cars today and go and clear them in the wholesale market that is now leading the retail market down, you would take kind of 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 and if your goal was to earn the same profit as before, then you probably could lower prices quickly and sell more cars, but you would just be kind of getting more earnings to offset your previous losses.

And so I think usually, what most retailers out there do and what we do is we try to kind of optimize for what we think is the value across cars and customers across time. And 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. But generally speaking, as long as there's anything near healthy demand in your retail channel, you're usually better off selling those cars through retail when you kind of calculate some of the impacts across time.

[Operator]

Our next question will come from Naved Khan with Truist Securities. Please go ahead.

[Vincent Sengelmann, Truist Securities]

Hey, guys This is Vincent for Naved. So regarding working capital, you've again lowered inventory closer to the $2 billion to $2.5 billion target range you mentioned previously. So just curious how much lower you expect that to go. And how is your progress in moving on a third-party conditioning impact to the?

[Mark Jenkins, CFO]

Sure. Yeah. So I think we took a nice step-down in inventory in Q3, second consecutive quarter of moving it down towards more normalized levels. We do expect inventory to decline again in Q4 to get sort of inside that range that we laid out previously. And so we do think that's -- that also makes sense in light of the current depreciation environment and in light of our goals of getting inventory to a more normalized level relative to retail unit sales. So yeah, we do expect to do that in Q4 and feel good about the path that we're on there.

[Vincent Sengelmann, Truist Securities]

Okay. Great. And 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?

[Ernie Garcia, CEO]

Do you mind restating the question? I'm not sure we followed. I apologize.

[Vincent Sengelmann, Truist Securities]

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.

[Ernie Garcia, CEO]

Sure. Yeah. So you're referencing the stretch goal for Q4?

[Vincent Sengelmann, Truist Securities]

Yeah.

[Ernie Garcia, CEO]

Sure. Yeah. I think our goal is to continue to push down expenses as quickly as we possibly can. 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 the RIF. Last quarter, we were able to load them by about 12%. As we said, I think it obviously gets harder to lower expenses as your expense base drops, but we think there's still a lot of little hanging fruit and so we're going to try to continue to lower that.

And then I think right now, inside of reasonable ranges, expenses and units are much more loosely tied together than they normally would be. And so I think those things are probably moving more independent normal, and we'll just be seeking to push down expenses as quickly as we possibly can to try to get to breakeven EBITDA and then ultimately the positive cash flow ASAP.

[Operator]

Our next question will come from Nat Schindler with Bank of America. Please go ahead.

[Nat Schindler, Bank of America]

Yes. Hi, guys. There's -- going back to an earlier comment about equity financing. Well, let's not talk about equity financing specifically and go over that again, but more how do you fix the debt financing that you have -- what are your options right now? Because even getting the positive cash flow, even getting to your long-term targets -- sorry, not positive EBITDA, even getting to your long-term EBITDA target, 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?

[Ernie Garcia, CEO]

Sure. Let me start with this. I mean I think if we hit our long-term EBITDA targets even at today's units, we'd be in a great spot from a cash flow perspective. I think and would be able to comfortably cover our interest expense. So I think that I want to make sure that, that's at least clear. And I think that you look across time at other retailers that have been at similar scale to where we are today, who have been able to achieve sufficient kind of positive EBITDA to cover what our interest expense is today, so I think our goal is as stated, and I apologize for going through it over and over again, but I think in this environment, we've got to really focus on what's in our direct control.

And the thing that is most directly in our control is expenses. And so we're going to keep marching that down as quickly as we possibly can. And then we're going to pay a lot of attention to how we originate the most profitable sales that we can to try to accelerate our path to breakeven EBITDA and beyond. And so that's the plan right there. That's just what we're going to be working on.

[Nat Schindler, Bank of America]

So wait, even at 400,000 annual units, or, let's say, 100,000 in a quarter where you are right now, you had $150 million in interest income. At 13.5% EBITDA, you wouldn't cover that.

[Ernie Garcia, CEO]

I think you just make sure you're multiplying by the kind of retail price, and I think you'll probably get there.

[Nat Schindler, Bank of America]

Okay. You'll barely get there. Yes. Sorry. But---

[Ernie Garcia, CEO]

Yeah, I think we'd get there with a little bit of cushion. But yes, but either way.

[Nat Schindler, Bank of America]

Okay. So 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?

[Ernie Garcia, CEO]

I think -- as we stated earlier, I think the number one input to all this is expenses that drives into EBITDA. From there, we've got, to kind of use round numbers, about $4 billion of kind of total access to liquidity. Approximately half of that is immediately available. The other half is broken down to be about $1 billion of ADESA real estate and about $1 billion of other real estate. Between all that, that gives us a lot of access to liquidity. And so I think that's primarily how we're thinking about it at the moment, and we'll continue to march forward with our plan.

[Operator]

Our final question will come from Michael Montani with Evercore. Please go ahead.

[Michael Montani, Evercore ISI]

Hey, thanks for taking the question. Just wanted to ask, first off, if I could. You had mentioned trying to pull back in certain markets to emphasize more profitable sales. But 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. So I just wanted to understand where that sits, the Hertz partnership. And then I had a separate follow-up.

[Ernie Garcia, CEO]

Sure. So what I would say is I think when we think about -- I'm going to ask this 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, 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 where they don't.

And then I think there's a number of other dynamics kind of across car type, et cetera. There's also kind of variation in the underlying costs of completing a sale. If it's a car that's nearby to an inspection center, it can be much, much lower. If it's a car that's maybe further away but where we're charging a shipping fee, it can be higher, but it can be offset by the benefit of that shipping fee. And so I think there can be variation in underlying cost of sales.

And then there can also be a variation in the cost to acquire different types of sales, whether it's sales different types of customers or different types of cars. That can vary in some of those different channels can also attract customers with kind of variable levels of either gross profit or expected expense. And so 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. And I think that, that's taking many different forms.

And then you brought up Hertz. 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 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 -- to augment the overall capabilities that we have. So I think that continues to go really well.

And I think you said you had a follow-up.

[Michael Montani, Evercore ISI]

Yeah. Thanks. So the follow-up is just around CapEx. And I think in May, you all had outlined some different scenarios and what you felt was baseline kind of CapEx spend. But just wondering, volumes remain kind of challenged in terms of where we're at right now. Do you have further flexibility there? Can you just give us some sensitivity on kind of the CapEx outlay pace?

[Mark Jenkins, CFO]

Sure. Yeah. And everything I'm about to say is also in the shareholder letter for future reference. But in May, we laid out a 2023 full year CapEx budget in the range of $100 million to $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.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Ernie Garcia, CEO]

All right. Well, thanks, everyone, for joining the call. And 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've heard it over and over again, but I hope we're all prepared for the environment to continue to be tough. And I think we still have a lot of work left to do, but I do think we're all doing a great job, and we could not thank you guys more for it. So thanks for everything you guys do. And thanks again to everyone on the call. We'll talk to you soon.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.