Carvana Co. (CVNA) Q4 2022 Earnings Call Transcript

Carvana Co. (NYSE:CVNA) Q4 2022 Results Conference Call February 23, 2023 5:30 PM ET

Company Participants

Ernie Garcia - CEO

Mark Jenkins - CFO

Conference Call Participants

Sharon Zackfia - William Blair

Chris Bottiglieri - Exane BNP Paribas

Rajat Gupta - JP Morgan

Seth Basham - Wedbush Securities

Michael Montani - Evercore ISI

Ron Josey - Citi

Operator

Good afternoon, and welcome to the Carvana Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Meg Kean, [ph] Investor Relations. Please go ahead.

Unidentified Company Representative

Thank you, Gary. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Fourth Quarter and Full Year 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 fourth quarter shareholder letter is also posted on the IR website. Additionally, we posted a set of supplemental financial tables for Q4, which can be found on the Events and Presentations page of our IR website. Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer.

Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Carvana's most recent Form 10-K. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them, whatsoever, as a result of new developments or otherwise.

Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to the non-GAAP metrics, and all references to EBITDA will be to adjusted EBITDA. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our IR website.

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

Ernie Garcia

Thanks, Meg. And thanks, everyone, for joining the call.

10 years ago, in January 2013, we launched Carvana in Atlanta, Georgia. We were a passionate group of people who believe we could build something new in the world that we would be proud of. What we need to do was simple: to change the way people buy and sell cars. There were a million little reasons to bet against us and most people who cared enough to even be aware of what we were trying to do would have. But there were two big reasons why we believe we could do it. One, there was room for new offering that customers would love. Two, we were a scrappy group who cared and were ready to fight for our dream.

We stand here 10 years later in a place it was hard to imagine from where we started. We built an offering customers do love. We have brought that offering to over 300 markets across the country. We have bought and sold cars in a whole new way to millions of people, and we've laid the foundations to buy and sell many millions more. The big things overpowered the little things.

This story skips a lot of time and as a result, it skips a lot of detail and gives too simple an impression. It feels linear. But the truth is there were a lot of ups and downs along the way. There were high highs and there were low lows. There were fun days and there were hard days. I think the truth of building something new in the world that there are usually more hard days than there are easy days, even though it doesn't sound that way in the stories. This is still true. Progress is rarely linear, and 2022 reminded us of that again.

So what happened in 2022? The story is straightforward. One, we came into the year positioned for growth, similar to what we had experienced in the prior nine years. Two, after the pandemic snarled the automotive supply chains and historically rapidly rising interest rates combined to dramatically impact the affordability of used cars. Three, rising interest rates and market sentiment drove a significant shift in our priorities away from growth and toward profitability. Four, this combined to lead to markedly lower volumes than we had positioned for, and as a result, we've been carrying excess costs.

2022 had a lot of hard days. But we're a scrappy group, and hard days aren't always the worst thing in the world for scrappy people. Scrappy people find a way, and we're finding a way. The hard days are making us better, and we're doing our best work right now. As part of this work, we have three major milestones that we are marching forward.

The first step is to drive the business to breakeven adjusted EBITDA. This is our current goal, and we will discuss the key drivers of this goal more in these remarks. The second step is to drive the business to significant positive unit economics. Breakeven adjusted EBITDA is a milestone, but it is not our goal. Our goal is positive free cash flow. The third step is to return to growth. Since launching in 2013, we have made capital investments of more than $4 billion, building the nation's largest used vehicle inspection and reconditioning infrastructure, first-party automotive logistics network and last mile automotive delivery network. We believe the investments we've already made laid the groundwork for not only significant growth in the future, but significantly more efficient growth that is significantly profitable. Today, we're focused on the first step, and we are well on our way with high visibility on the progress we expect to make.

First, we expect to continue our SG&A expense reduction plan by reducing quarterly SG&A expenses by approximately $100 million in aggregate over the next two quarters. This will complete over $1 billion annualized SG&A cost reduction since the first quarter of 2022. We expect these expense reductions to be broad-based across all large SG&A expense components. But importantly, we do not expect the future reduction for us to be part of this plan.

Second, we expect our weekly retail unit sales volume to stabilize relative to the declines we saw in the second half of 2022 as the seasonal headwinds we faced at that time transitioned to seasonal tailwinds. Stabilizing weekly retail unit sales volume will allow our SG&A expense savings to catch up to retail unit volumes, allowing us to demonstrate SG&A leverage that was elusive during periods of retail unit declines.

Third, we expect a substantial reduction in our inventory size, which we accelerated in Q4 to lead to significant gains in retail GPU. While we don't expect to see meaningful gains on retail GPU in Q1, we expect to see the benefits of reducing inventory size become apparent in the following quarters.

The progress we are making shows up first in operational metrics and then flows in the financial metrics later as those operational efficiencies get rolled out and utilized across the business. Across all operating groups, the operational progress we have already made and are continuing to make is significant.

In logistics, our average delivery business is down 25% since early 2022. In market operations, we have built scheduling systems that currently allow us to pair over 1 out of 3 retail deliveries with a vehicle pickup, up from 1 out of 14 retail sales just one year ago. In customer care, our advocates are spending 40% less time in the phone per sale than they were in early 2022. And our vending machine pickup rates have more than doubled since the start of last year, with 40% of our customers nationwide now picking up their car at a vending machine even though we only have vending machines in a subset of our markets. Importantly, we have done all this while improving quality of our customer experiences over the last six months.

As is often the case when working through these transitions and when the operational progress is beginning to convert into financial progress, there are some onetime items and extrapolations that need to be made to really see the quality of the progress we are currently making. These are outlined in the shareholder letter, and Mark will provide some color on them as well, but the progress is really beginning to show up. This will continue to get clear and to require less explanation over time as we expect the combination of these three factors to lead to significantly improved adjusted EBITDA profitability over the next two quarters.

2022 was a hard year, and we still have a lot of hard work in front of us to get to where we want to be. But we have a clear plan, and we are executing. This is still a 40 million unit a year market on average. We still have just 1% market share. We are still a passionate scrappy group who cares and who's ready to fight for our dream. Our customers do love our offering. We have built the capabilities and laid the foundations to buy and sell cars with millions and millions of customers, and there are still a million little reasons to bet against us. We expect the big things to overpower the little things just as they have in the past. We are firmly on the path to building the nation's largest and most profitable automotive retailer and to achieving our mission of changing the way people buy cars. The march continues. Mark?

Mark Jenkins

Thank you, Ernie, and thank you all for joining us today.

Our results in 2022 were driven by numerous external factors as well as our internal decisions made to shift priorities toward profitability. We came into 2022 significantly overbuilt for the volume we ultimately realized. Through the year, we have been executing our plan to drive profitability by steadily reducing expenses, normalizing inventory size and executing profitability initiatives that make us more efficient, more resilient and more flexible.

For the full year 2022, retail units sold totaled 412,296, a decrease of 3% year-over-year. While this was the first year that our retail units sold declined year-over-year, 2022 marked our ninth consecutive year of market share gains against the backdrop of double-digit industry declines. Revenue totaled $13.604 billion in 2022, an increase of 6% year-over-year, marking our ninth consecutive year of revenue growth.

We finished the year as the second largest seller of used vehicles in the country for the third consecutive year. The scale that we have already achieved and the time line on which we have achieved it demonstrates the long-standing strength of our customer offering. Due to the dynamic nature of the current environment, we will focus our remaining remarks on fourth quarter results with a particular focus on sequential changes and the unique items impacting the quarter as well as our near-term outlook.

Our long-term financial goal is to generate significant net income and free cash flow. In service of this goal, in the near term, our management team is focused on driving progress on a set of non-GAAP financial metrics that are inputs into this long-term goal. In order to provide clear visibility into our progress, beginning in Q4, we are reporting two new non-GAAP metrics, non-GAAP gross profit and non-GAAP SG&A expense, that adjust for certain noncash and nonrecurring revenues and expenses. We are also updating our adjusted EBITDA definition to exclude revenue from Root warrants as well as share-based compensation and restructuring expenses. We provide more detail on these metrics in the supplemental financial tables available on the Events and Presentations page of our IR website and in our Form 10-K.

In the fourth quarter, retail units sold totaled 86,977, a decrease of 23% year-over-year and 15% sequentially. Our sequential decline in retail units sold was only slightly larger than the industry's sequential decline of 12%, despite several actions we are taking to increase near-term profitability, including: one, normalizing inventory size; two, reducing advertising; three, proactively adjusting to increases in benchmark interest rates; and four, continuing to focus on executing our profitability initiatives.

Total revenue was $2.8 billion in Q4, a decrease of 24% year-over-year and 16% sequentially, approximately in line with retail units sold.

Non-GAAP total GPU was $2,667 in Q4 versus $3,870 in Q3. Total GPU in Q4 was driven by several unique items across the retail, wholesale and other components. Non-GAAP retail GPU was $632 in Q4 versus $1,267 in Q3. Retail GPU was impacted by a $52 million or $598 per unit adjustment to our retail inventory allowance, which was primarily driven by elevated industry-wide retail depreciation rates and higher than normalized inventory size relative to sales volumes. Other sequential changes in retail GPU were primarily driven by higher retail depreciation rates, partially offset by wider spreads between retail prices and acquisition prices and lower cost of sales.

In addition to the allowance adjustment, retail GPU was also impacted by carrying a higher than normalized inventory size relative to sales, which resulted in longer turn times. Longer turn times lead to higher vehicle depreciation, which has a negative impact on retail GPU, other things being equal. One way to quantify the impact of extended turn times is to isolate retail GPU for vehicles sold within 90 days of the acquisition date. These vehicles realized approximately $600 per unit higher retail GPU in Q4 compared to retail units in aggregate.

Non-GAAP wholesale GPU was $552 in Q4 versus $682 in Q3. Wholesale GPU included a combined $103 per unit impact due to a $5 million adjustment to our wholesale inventory allowance and a $4 million loss on certain retail vehicles we sold in the wholesale market in the quarter. Sequential changes in wholesale GPU were primarily driven by these impacts and lower seasonal wholesale marketplace volume.

Non-GAAP other GPU was $1,483 in Q4 and versus $1,921 in Q3. Other GPU was primarily impacted by a shift in the timing of a sale of a pool of loans to Ally from December to January to align with the upsize and extension of our forward flow purchase agreement. We estimate this shift in timing reduced other gross profit by $42 million or $483 per retail unit sold based on the actual sales price of the loans we realized in January, less incremental interest income we earned on the loans in December.

In Q4, we made significant progress reducing SG&A expenses for the second consecutive quarter, reducing non-GAAP SG&A expense by $60 million sequentially, following a greater than $60 million sequential reduction in Q3. These expense reductions were broad-based, including advertising, compensation and benefits, logistics and other.

While we significantly reduced SG&A expense over the past two quarters, we have not yet meaningfully levered SG&A expense per retail unit sold because retail units sold have declined at a pace similar to SG&A expense reductions. As Ernie discussed, we expect our weekly retail unit sales volume to stabilize relative to the declines we saw in the second half of 2022 as seasonal headwinds transition to seasonal tailwinds. We expect stabilizing retail unit sales to allow our SG&A expense savings to catch up to retail unit volumes leading to SG&A leverage.

Adjusted EBITDA in Q4 was a loss of $291 million or 10.1% of revenue. Adjusted EBITDA was negatively impacted by a total of $103 million due to the unique retail, wholesale and other GPU items described above.

Finally, as a result of the decline in trading prices of our securities by the end of the fourth quarter, we recorded a goodwill impairment expense of $847 million. The goodwill impairment was not related to changes in our long-term expectations for our business or the operations of any prior acquisitions.

As we've discussed previously, our goal is to manage the business to achieve over 4,000 total GPU and significant adjusted EBITDA profitability at current, higher or lower volume levels. Focusing in on Q1 2023, we currently expect the following. On retail units, we currently expect the sequential reduction in retail units sold in Q1 compared to Q4 as we continue to normalize our inventory size, optimize marketing spend and make progress on our profitability initiatives. On GPU, we currently expect a sequential increase in total GPU in Q1 compared to Q4. We expect retail GPU to increase in Q1 due to multiple offsetting effects.

First, we are quickly reducing our inventory size by purchasing fewer retail vehicles. Purchasing fewer retail vehicles means fewer low age units are added to the website, which other things being equal, increases the average age of our inventory and of retail units sold and reduces retail GPU. At the same time, we expect our lower inventory size to lead to a retail inventory allowance adjustment benefit in Q1, leading total Q1 retail GPU to be higher than Q4. We also expect a sequential increase in other GPU in Q1, following the shift in the timing of loan sales from December to January previously discussed.

On SG&A, we are currently targeting an aggregate of approximately $1 million reduction in quarterly non-GAAP SG&A expense by Q2 2023 compared to Q4 2022 as we continue to execute our plan across all areas of the business.

On December 31st, we had approximately $3.9 billion in total liquidity resources, including $1.9 billion in cash and revolving availability and $2 billion in unpledged real estate and other assets, including more than $1.1 billion of real estate acquired with ADESA. We also ended the quarter with approximately 1.3 million annual units of inspection and reconditioning center capacity at full utilization, including ADESA locations. Over the last several years, we've made significant investments into building out one of the auto industry's largest and most expansive inspection and reconditioning network.

While we remain focused on more efficiently leveraging our existing footprint in the near term, we believe having access to this massive infrastructure positions us very well for growth with limited incremental investment in the future. Our liquidity position, production runway and our clear and focused operating plan position us well to achieve our goal of driving positive cash flow and becoming the largest and most profitable auto retailer in the future.

Thank you for your attention. We will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia

Ernie, you were talking really fast. But I think you said 40% of vehicles were picked up at vending machines. I think it was in the fourth quarter. I didn't catch what that compared to maybe relative to a year ago? And I guess were you incentivizing to get to that number? It also begs the question, kind of how high could that go? What is the kind of trade-off in terms of GPU when you get a customer to come to vending machine for pickup? And I noticed in the shareholder letter, you also mentioned starting to offer a pickup at non-vending machine locations. So, I guess, this is a long question to just ask, are we seeing some sort of evolution in the model, which would be kind of more what I would think of as an omnichannel model versus a pure e-com?

Ernie Garcia

Sure. So first, apologies for the fast talking. That is my habit. And so, in the prepared remarks, I didn't compare it to anything. It is 40% nationwide at vending machines, even though we only have vending machines in a subset of markets, and that is roughly double since early 2022. We are testing other pickup options as well, and we are incentivizing customers to do that.

And what I would say there is, I think across the entire business, we're testing all kinds of opportunities to decrease our operational costs and then see what the impact is to both customer speed of getting them a car and also customer experience. And I think this is one of many areas where we're seeing really strong results there.

Sharon Zackfia

Can I just ask a follow-up? So when you do customer research, I mean how important is delivery and what the customers want? I mean, it would seem transparency, quality of car, the car they're getting, all of that is very important, but is delivery really high on the list?

Ernie Garcia

I think it depends on the customer, and I think that's why we've kind of structured the system to give them their option. So, I think all of those things are important. And I think the easiest thing that we can measure is, in aggregate, how customers are responding to the sum total of their experience. And we are talking now about the vending machine, but there's many other examples there that I'll repeat that I kind of spoke about in my prepared remarks. Delivery distance is also down 25% since early 2022. We talked about activity pairings. That can be a bit of a confusing one to make sure your understanding. But we've got -- obviously, many customers that are buying cars from us. We have many customers that are selling cars to us. And so activity pairing is building the logic into our schedule that allows us to ensure that when a customer leaves a hub or a vending machine, they can complete two transactions in a single path, which is obviously a lot more efficient. That's gone from about 1 in 14 customers to approximately 1 out of 3 customers in the last year.

So, we're making gains all over the place. And we are seeing that really show up in operational gains first, which then I think you're starting to get a peek into impact they'll have financially, but that does take more time. So we tend to roll these out in markets. We get a sense for the impact of both customer experience and cost and efficiency, and then we roll them out nationwide, and then we kind of are able to realize the dollar gains thereafter. So I think you'll probably start to see more of those gains over the next two quarters, which is why we're feeling really good about our cost reduction plan over the next two quarters. But we've been doing all of that and many, many more examples that would fit under the same umbrella. But we take different forms in every group, and we've seen customer experiences go up in the last six months. So I think overall, we're really excited about the way that's playing out. We still have a lot of work to do, but the team is doing a great job.

Sharon Zackfia

Okay. Last question for me. I know you said you're working towards EBITDA breakeven at current volumes. What's your line of sight on timing on that?

Ernie Garcia

As fast as possible. I think we're going to be moving as quickly as we possibly can. We gave, I think, some hopefully helpful guide rails in there around driving down SG&A dollars by $100 million over the next two quarters. I think Mark spoke quite a bit about some of the GPU visibility that we have that is very high. Something that is imposing a very significant cost across GPU right now is the choice to drive down our inventory rapidly. We're very confident that's the right choice for the business. Sales volumes are low relative to the inventory that we're carrying and, therefore, turn times are high. And especially in a high depreciation environment, it's important to get those two things in balance, but the transition from too large of inventory to the right size of inventory means that turn times are even longer. That showed up in lower GPU in the quarter and in an allowance that we're taking as more of those cars that we expect to sell in the future are likely to have negative margins.

So, that's a transitory cost. If you look at the rate at which we're selling cars relative to the cars that we have in inventory, it's a much better number, but the transition is expensive. So, I think there's a lot of visibility there. Mark also spoke a bit about the visibility we have in finance as we had a loan sale timing shift in Q4 that was costly. So, I think there's hopefully a lot of building blocks there that will give you a sense. And our goal is heads down sprint, and we'll get there as quickly as we can.

Operator

The next question is from Chris Bottiglieri with Exane BNP Paribas. Please go ahead.

Chris Bottiglieri

The first one is, in Q1, are you still taking provisions to increase the inventory allowance adjustment that's causing pressure retail GPU and wholesale? Is there a way to frame out how much is left? Like what percentage of units are 90 days or older? And they're still in inventory today? And what's normal? Looks like -- I imagine this happens routinely, but just give us context for what's left.

Mark Jenkins

Sure. So I mean, I think the -- I think there's a couple of different ways to think about that. One, I wouldn't say there is any concept of what's left. I think we -- to set the allowance on 12/31, we looked at the cars that we had on balance sheet on 12/31. And then we formed expectations about the cars that we're going to sell at a loss and at what level those cars we’re going to sell at a loss, and then we recorded that allowance on that basis.

I do think some of the things that benefit the inventory allowance is inventory size. I think shrinking inventory, getting inventory more in line with sales volume. Those are certainly beneficial from the standpoint of retail inventory allowance. As you sort of alluded to, a retail inventory allowance is something that's always in our results. We adjust our allowance every month, and retail inventory allowance is reflected in our results every quarter. It just happened to be particularly large on 12/31 in light of the dynamics that we saw in Q4 with much higher than normalized inventory size and also very elevated industry-wide retail depreciation rates. So, that's why it had an outsized effect on Q4.

I think just to take that point home, I do think we've made really strong moves in normalizing our inventory size in Q4 and so far in Q1, our inventory size is much closer to a normal size relative to sales volumes than certainly it was in Q4. And we do think that over time, that will flow into positive tailwinds for retail GPU as we called out throughout our materials.

Chris Bottiglieri

Got you. Okay. Thanks. And then just a bigger picture question. If I can squeeze one more in. When you're speaking to these profitability at current levels, are you extrapolating market share of your immature markets still like some natural run rate of the mature business? Because I think your national market share compared to Atlanta or some of them are early market at a similar point in time. Was Atlanta profitable on that penetration? Like I guess what gives you the visibility to achieve profitability at such a low volume level? And I think personally, you get well above that over time, so I'm not sure why this profitability level frankly matters in the near term, but just curious how you're thinking about all that.

Ernie Garcia

Sure. Yes. So I mean, I think we mean that in the simplest way it can be interpreted, which is we believe that we can achieve EBITDA positive at the current volumes that we're at across the entire company. We're not extrapolating to kind of market shares that we have in some more mature markets. We're making a ton of progress on SG&A, and there's room for a ton more progress, frankly, given all the operational gains that we're seeing, and there's a lot of visibility in GPU progress as well.

So, I think this last year has been a massive change in priorities for the Company. The world changed on us very, very quickly. And we shifted our priorities very, very quickly. And undoubtedly, that's been a difficult transition. But I think there's no doubt that it's leading to a more efficient company. I think that is not yet fully showing up in the numbers, but there's no doubt it's showing up very clearly in the operational numbers, and we expect it to show up in the numbers in the not-too-distant future.

So, we believe that we can get to EBITDA positivity at current volumes and to significantly positive EBITDA at current volumes, and then we obviously expect to continue to grow from there and to get even more EBITDA positive on a unit basis from there as well. So, I think we've got a lot of work in front of us, but we've got a lot of great visibility as well.

Operator

The next question is from Rajat Gupta with JP Morgan. Please go ahead.

Rajat Gupta

Ernie, I think the elephant in the room is the $600 million or so of interest expense, if you get to EBITDA breakeven at some point next year or later next year. You also need to add more debt at some stage to continue to just pay the ongoing additional debt. Is there anything you can do or considering to use that burden, perhaps some form of restructuring that can take place, leveraging the real estate and find some sort of a middle ground with the bondholders? Just curious what level of engagement you have there. Any broader thoughts on that? And I have a follow-up. Thanks.

Ernie Garcia

Sure. Well, so I mean, I think our plan, we try to break into three steps. Step one is get to EBITDA positive. We've got to have mile markers along the way. Step two is get a meaningfully positive EBITDA per unit, positive unit economics. And then step three is to start to grow. And we believe that with that plan, we have believed and continue to believe that we have the opportunity to run that plan and to not need to raise additional capital.

Obviously, the question about whether or not we'll raise capital in the future is largely a function of the speed at which we drive down SG&A, the speed at which we drive up GPU and the speed at which we're able to also drive up units, once we bought them. And subtle changes in the shape of those curves can change the answer quite a bit.

So, our plan is to not need to raise additional capital. But obviously, we'll be paying attention. We'll do what we need to do that's right for the business. I think we have access to capital in many forms. We've obviously got a lot of real estate that's very high quality. We have approximately $2 billion of real estate, approximately half in ADESA and half kind of original Carvana real estate. The majority of that is inspection centers, which are high-quality financeable properties. We've got a lot of other assets as well, and we've got capacity to put in more secured debt. We've got capacity to put in more unsecured debt. Obviously, in the future, we chose to -- and we believe it was the right choice, we could raise equity.

So, I think we have a lot of options if we choose that that's the right path for the Company. But today, we're focused on the operating plan that's got our full attention, and we're marching that to hit the numbers that we've outlined.

Rajat Gupta

Got it. That's clear. Maybe just on SG&A, you talked about the additional $100 million in reduction in the first half year. And you also mentioned coming across different buckets. I think one area where I believe you've not seen the meaningful reduction yet is the other SG&A, seemingly a bigger fixed component of your SG&A. Is a good chunk of that $100 million coming from that particular line item? Because I think you mentioned also that you don't expect more forced reductions or force reduction. So just curious like if you could help us understand where that $100 million is coming from. Thanks.

Mark Jenkins

Sure. Yes. So, we talked a little bit about that in the letter. The -- we do expect the SG&A reductions, the $100 million in aggregate in quarterly expense reductions that we're targeting over the next two quarters to come across the major line items. So in that, I would include payroll, I would include advertising, logistics and the other expense bucket.

I do think there's -- we certainly see opportunities to reduce other SG&A expenses, including in categories that you may traditionally think of as fixed. I think we have numerous projects ongoing to just be more efficient in our corporate and technology expenses. I think there's many areas across that component of SG&A, where we're very focused on efficiency and do expect to gain savings from that component as part of our plan over the next two quarters.

Operator

And the next question is from Seth Basham with Wedbush Securities. Please go ahead.

Seth Basham

Just a follow-up on the last question. Even if you do hit your breakeven EBITDA goal, you're still carrying $100 million plus in CapEx and $600 million in interest expense. So maybe burning $700 million or so in cash. And your liquidity got -- support that for a period of time. But eventually, you'll run out of time. How do you expect to address that conundrum?

Ernie Garcia

Sure. Well, I think as we discussed, step 1 of the plan is breakeven adjusted EBITDA, and step 2 is to go beyond that, and then step 3 is to grow. So, that's undoubtedly a milestone in the plan, but it's not the plan, and we think we've got a lot of visibility beyond that. So, as we discussed, we're focused to hit that plan. And we believe that if we hit in the ways that we're aiming to hit it, we've got a real shot at not requiring additional capital. If we're wrong, then we have lots of ways to go out and get additional capital.

Seth Basham

Got it. And secondly, as it relates to the loan sales to Ally, could you help us understand the margins on those under the new agreement relative to the old agreement and whether there is still substantial loans on the balance sheet at this point in time relative to $1.3 billion that you had at the end of the quarter?

Ernie Garcia

Sure. So I think first order, we completed the deal with Ally. It's the seventh year in that relationship. That's something that we're extremely proud of. We think it's been a great program for both of us. They've certainly been there for us in difficult times, including recently. They were there for us in COVID. And we would like to think that we've been great partners for them as well, especially in better times, and that they've had access to high-quality loans that are generally outperforming similar credit quality loans across that entire time. So, I think that's been a great partnership for us.

And I think as we headed to the end of the year, we had a bunch of loans that we're looking to sell. We are also getting that renewal done. And it made sense to kind of complete the renewal first and push that over the years. So, we had approximately $1 billion of extra loans that shifted over year-end. As part of that deal, as you'd imagine, Ally does have more spread than they've historically had. But that spread is reflective of market conditions, which is kind of the structure that we generally have in our deal. And then we take those spreads, and we pass them on, and that enabled us to earn similar finance GPU to what we've earned in the past.

So I think that's been a great deal for us. It gives us certainty of execution, and they've been a great partner for a long time, and we couldn't be happier with it. And then in addition, today, we also closed our first securitization of the year. So, we'll continue to operate a multichannel strategy, and we plan to catch up on loan sales in the first half of this year.

Operator

The next question is from Zachary Fadem with Wells Fargo.

Unidentified Analyst

This is Sam Reed [ph] pinch hitting for Zach Fadem. First, big picture. Kind of what's the assumption for industry volumes that you're embedding in your Q1 unit outlook? And does that sequential pullback you're looking from here, what you're seeing across the industry? Thanks. And then I've got one other industry follow-up.

Ernie Garcia

Sure. Yes. So, let me start a little bigger picture. I think we're now a 10-year-old company. And I think for -- basically, for nine years of our life, well, we were in a reasonably stable environment. We were certainly in a stable environment for 7.5 years of our life, and then we went through COVID, but we still had somewhat similar used vehicle sales volume at the industry level. And then, I think for the last year, we saw those volumes at the industry level drop by -- on the order of 10%, give or take, and I certainly think that has correlated with a bunch of choices that we've made to shrink up and to focus on profitability, and I think basically with more pressure on independence even relative to franchise dealers. And so undoubtedly, the last year has been a much slower year for us. It's the first year where we actually shrunk by 3%. We've grown very, very quickly in all previous years. And so, I think the correlation is there where when the market was shrinking, we were shrinking. When the market was stable, we were growing. I do think that that is more correlation than it is direct causation. The market moving up or down by 10% relative to all the growth rates that we've seen in every year of our life prior to this year would be very, very small relative to how quickly we were growing.

So I think, of course, we always have something of an embedded view around what's going to happen at the industry level. But we generally don't think that that's the biggest driver of our success. I think it happens to have correlated because many things occurred. Most notably, interest rates shooting up and car price shooting up over the last year that had a real impact on the industry in general, but us in particular.

So, I would say probably the best way to evaluate that is we generally are looking at the market being flattish go forward. But we also, I don't think, are ever speaking in terms that are precise enough to where likely movements in the macro industry level sales volumes are that likely to impact us super dramatically. We would expect them to flow through to our results in the same way that they impact the industry in sum total. And then I'm sorry, what was the second part of your question?

Unidentified Analyst

No, it's just another industry question here. It kind of follows on advertising and volumes. You've seen -- you guys have done a good job of pulling back on advertising. But what are you seeing kind of across the industry? And is there a similar pullback that's taking place across your peer set? And as you pull back on advertising, can you compare and contrast your share of voice today versus where it might have been before you started to pull back?

Ernie Garcia

Sure. Well, let's start with the maybe peers in automotive because I think the automotive world, yes, there's been a lot of interesting things happening over the last 1.5-year that are probably more distorted than any period that I can remember in my career. When I say distorted, I mean abnormal. There's been a lot of things that have been abnormal.

So, we went through this period where cars very rapidly appreciated. And for the most part, consumers were going to get enough spots where that didn't necessarily impact industry-level sales volumes that much in 2022 as we saw cars start to slowly come down, but rates go up. We saw affordability stay in a pretty similar spot, but we saw the industry generally get softer. I think franchise dealers have done incredibly well through the last two years. I think if you kind of grab there, pick your kind of bottom line metric, but to make it comparable to ours, if you grab their EBITDA margins over the last 20 years, you would see extreme outliers over the last couple of years. I think that while new volumes have gone down, new margins have gone up by more than the volumes have gone down, and so there's been a lot of profitability there.

I think given how high car prices are, they've been able to convert many would-be new car buyers in to used car buyers, and they've had an advantaged supply of used cars as they've been returned off lease. And those off-lease returns were priced in a completely different vehicle price environment. So they're able to acquire those cars at residuals that are far below the market value, even though historically, on average, residuals roughly approximated the market value.

And so I think for franchise dealers, it's been a great environment. And I think many of them have not been super aggressively pulling back if we speak kind of an aggregate over the last 1.5 years. I think for independents, there's probably two categories there as well. There's those that were buying strictly from auction and those that were buying elsewhere. I think for those buying certainly from auction, it's been a very tough environment because the auction is the place where there's also been dramatic changes over the last couple of years, and it's been hard to acquire cars to carry a normal relative to history margin there. I think for those that have acquired cars from customers at meaningful scale, I think the last couple of years have actually been somewhat average from a profitability perspective. And so I think most of those retailers have probably played kind of a relatively average gain from an advertising perspective over the last couple of years.

So I think those things are starting to change a little bit as we saw the market soften a little bit in 2022. We've recently seen the market be reasonably strong as it relates to changes in prices early this year. I think a lot of dealers probably came into the year with low inventories and weren't feeling super confident after November and December. And there's normally kind of a seasonal inventory build in car price appreciation around this time of the year when tax money is coming, and we've definitely seen that this year.

And then, I think there's another peer set as well, which is kind of growth companies and technology companies out there, and I think that peer set has undoubtedly pulled back materially on marketing. I think the moves there have probably been much more dramatic, and we are certainly pulling back pretty dramatically on marketing. I think you can see that in our results in Q4, and there's certainly more of that to come.

We're in a unique environment where GPUs are lower than they've been in the recent past. And kind of all those constant, that means fewer transactions make sense to acquire. We've also focused almost exclusively on profitability over the last year. That means many transactions that we would have acquired because we believe that they made sense over a longer-term time horizon, we have not been acquiring more recently. And then the customer responsiveness is different in this environment. And so, we've been retesting all of our different marketing channels. In many ways, most effectively through our many markets, we'll use our markets as laboratories to turn on and off different marketing channels to try to assess what we think the effectiveness is of any given marketing channel. And I think that we found that in this environment, in most cases, there's room for us to probably pull back quite a bit on marketing because we're not getting the return that we've got in the past.

And so, we're doing that, we're doing that purposefully. We're making sure we roll out those tests and we do it in a way that doesn't derail the entire business and cause it to get out of balance. But I think that there's a real economic opportunity there for us to pull back on marketing. And so, we've been doing that, and we'll likely do that.

When we do that, we are much more likely to back in direct marketing channels than we are in brand channels. I think one of the reasons that we're able to efficiently pull back on marketing spend today is because we've been able to build a high-quality brand over a long period of time, and so we want to be careful that we preserve that and continue to invest in that brand. But I do think there's opportunities in these direct channels, and I think you're starting to see that show up in some of our results.

So, that was a long answer to a question you partially asked. I hope it was helpful, but that's how we're thinking about all that.

Operator

The next question is from Winnie Dong with Deutsche Bank.

Unidentified Analyst

I was wondering if you can give us an update on sort of the integration of ADESA and where you are with footprint integration relative to the logistical savings that can be achieved for the benefit of GPU. And in your prepared remarks, you mentioned getting back to that $4,000 in GPU. I was wondering if you can frame it around what you think the time frame is to achieving that? That's my first question, and then I have a follow-up. Thanks

Ernie Garcia

Great. Sure. So I think we're making a ton of progress with the integration of ADESA. ADESA has 56 incredible sites around the country, and we currently have 75% of the cars that we buy from customers that we plan to sell wholesale that are now landing at ADESA properties. That's a really significant change from obviously where we were six months ago or certainly 12 months ago when we -- prior to the acquisition. That's very helpful from an efficiency perspective. It means those cars are on the ground in a location, where they can get rapidly inspected and sold. It means that the transportation to those locations is much less than it would have historically been because we're closer to ADESA. And so you'll start to see that flowing through in our wholesale margin.

That footprint is incredible, and we really look forward to the gains that we'll continue to get in wholesale, in logistics and, ultimately, in reconditioning over time. But I think a lot of those gains will come more when we get to step 3 of the equation, which is turning growth back up. In the meantime, the ADESA team has been doing a great job. It's been a tough couple of years for auction businesses. I think post pandemic has been a very odd time for the auction business in general. But they've been doing a great job. They've got a great plan. We feel good about the path that they're on, and so we're excited there.

And then, as it relates to the time frame to getting back to $4,000 GPU, I apologize for not being more precise in this response, but I think we tried to give some building blocks that we think are pretty big, and so I'll just -- I'll repeat some of those. If you kind of start with our GPU that was at about $2,600 and then you look at kind of the retail allowance, which we obviously don't expect to be a recurring item, that would get you up $600. If you look at our wholesale allowance, which is the same concept that exists in our wholesale inventory, that's another $100. If you look at the shift in our loan sale timing, that's just shy of $500. Mark gave a helpful stat that talked about our sales of cars that are less than 90 days aged in Q4, which would have been an additional $600 on top of all of that. We still have a significant room in our non-vehicle COGS. We called out that there was probably $600 of possible gains there in Q1 or Q2 relative to what we had achieved in the past. We probably have $300 or $400 of additional gains there to be had. We're getting those gains more slowly as a result of shrinking our inventory than we might have otherwise if we weren't shrinking our inventory. Shrinking our inventory means that we're buying fewer cars, and it means that the overhead of the inspection centers is spread between fewer cars. And there's some efficiency impacts when you're buying fewer cars, but that's also transitory. So, I think that's a big opportunity for us. And there are others. So I think the opportunity is all there. It's very clear. We just have executing to do, and we'll go get it.

Unidentified Analyst

And then, I was wondering if you can also comment on sort of like the go-forward strategy in terms of mix of inventory. I think you had previously indicated that you going -- on a go-forward basis going to tailor towards the lower price inventory just given the current macro conditions. Can you give us a sense of that’s something still on the plan amid your plan to reduce inventory?

Mark Jenkins

Sure. Yes, I can take that one. So just to set the stage a little bit, so the way we typically approach inventory mix is by evaluating what our customers are shopping for on the site and balancing that against what we're seeing in the market in terms of what customers or other suppliers are selling. And the combination of those two things dictate what mix of inventory we end up putting on the site. I would say we've talked a lot about inventory on this call. And certainly, our inventory has been too large relative to sales volume. We were working very ambitiously to correct that.

In terms of mix, I wouldn't say there's any particular patterns to call out. I think the -- I think we'll continue to evaluate as we look forward from where we are here in Q1 and just be reading the demand signals, reading the supply signals and doing our best to balance the two of those. But right now, I don't think that points to any particular shift that's worth calling out at this time.

Operator

The next question is from Michael Montani with Evercore ISI. Please go ahead.

Michael Montani

Just wanted to ask, if I could, when do you think that you would be in a position to kind of switch back to offense with respect to taking market share again? Would it be potentially third quarter when the SG&A reductions would have been substantively made? And if it is, do you need to basically start growing SG&A in accelerated pace to take market share, or do you think there's enough muscle that you could just be more productive, I guess, at a lower run rate moving forward?

Ernie Garcia

Sure. So I think it's the third step in the plan right now. And the reason it's the third step in the plan is that I do think -- we were one of the more aggressive growth companies out there for the entirety of our life, basically from when we started 10 years ago until about a year ago. And that requires an alignment of thousands of people with priorities and what's being done and how we're working on things and how we make decisions. And I think that it's a lot of work, and it's very difficult to turn that quickly and focus completely on profitability, which is what we've done over the last 12 months. And there are definitely some, I would say, transition costs to just get thousands of people aligned on a new set of goals that we're all equally excited about and that we have a lot of work to do and a lot of gains to be had. And so, I think we paid those kind of fixed costs to transition. And I think as a result, we'll probably hang out here with priorities that look more like our current priorities for a little longer than might even be kind of optimal given what the market is putting in front of us just because it is expensive to have these big priority changes. And so, I don't know exactly when that will be.

I think even over the last 3 or 4 months, we've learned a lot as we've gone. Many of these things that we do, we outline projects that we think make sense and then we roll them out, and then we learn what the reality is. They have some impacts to customer experience. They have some impacts to customer conversion. They have some impacts to our underlying costs. And they suggest an optimal path forward as it relates to the balance of the way that we pull those levers and the volume that we sell.

And so, I think what we've seen over the last 3 or 4 months is more of our projects are probably having bigger operational gains than we may have kind of hoped for, but they're also pushing in the direction of fewer sales. And so, that's where we've aggressively shifted in the last several months toward smaller inventory, and we plan to kind of catch and bottom at a smaller level of sales than we probably would have imagined even six months ago. And I think we still have learning to do because there's still many, many of these projects in our backlog that we're rolling out.

So, I don't think we know exactly what the answer to that question is. But I don't think it obviously has to be a super long time, and I think that it's time for growth. We're going to head into growth a much more efficient company. We're going to head into growth, a company that knows exactly how to do that. We're going to head into grow the company that has an infrastructure advantage that is materially different than the infrastructure advantage we had when we were growing last time.

So, I think that will be an exciting time. It's not obviously that far away, but I don't think we yet know exactly when it is. And for now, we're going to keep our heads down on the plan that we outlined.

Michael Montani

Got it. And if I could just quickly follow up on one other angle was EBITDA. So for this year, I was getting to EBITDA loss in the $400 million to $600 million range for 2023. And that's basically like a slight decline in units, low $3,000s in total GPU, SG&A improvements like you've discussed and so kind of $1 billion plus of cash burn if you include the interest expense. I didn't know if you'd care to kind of comment on any of that or any key drivers that could give upside or downside to consider.

Mark Jenkins

I would suggest reading our shareholder letter. I think we talked a lot about some of the near-term drivers of profitability as well as a sort of broader way to think about our plan, and I think that will most likely be helpful for trying to shed some light on our near-term expectations.

Operator

The next question is from Ron Josey with Citi.

Ron Josey

I wanted to ask more about supply and just how you balance the supply reductions with demand and conversion rates? And wondering how this sort of conversion rates are trending? I'm assuming they're coming down simply because people might not have what they're looking for. And so just historically, I understand inventory is coming down, just wondering on conversion there.

And then, maybe on the flip side of the marketing question. Ernie, you've seen the reduced marketing investments. Just talk to us about any lessons learned in terms of maybe awareness or traffic as you pull back on advertising. I think you said some of it didn't have a positive -- as positive in ROI. Maybe just talk about just inherent sort of awareness at Carvana that you don't need to market as much going forward and maintain sort of the sales that they are. Thank you, guys.

Ernie Garcia

Thank you. Okay. Sure. So let's start with the first question. I think undoubtedly, inventory impacts conversion. And so as inventory is reduced, we expect conversion to also be reduced and so sales to be reduced, all else constant. I think the way that we can kind of try to think about that and reduce that to a math equation that is going to kind of flow into the second question is we can basically say, okay, given our estimates of inventory elasticity, what is the sales benefit of carrying a larger inventory and then what is the depreciation cost of carrying a larger inventory? And we can compare those two, and we can effectively get to a customer acquisition cost for those incremental transactions.

And the way all that math works is you -- one, at any given level of depreciation you have kind of an optimal balance of inventory relative to sales, which shows up in a turn time goal. And then the way you kind of shift around that is when depreciation is higher, you want to have a smaller inventory. And when depreciation is lower, you want to have a larger inventory. And I think we're, A, in a -- well, right now, we're actually kind of in a maybe even appreciating environment in the wholesale market, but we've been for a year in a rapidly depreciating environment. And I think probably the smarter guess over the next year or two is that it will be a depreciating environment on average because car prices are still elevated relative to other goods.

So, that as well as the fact that we have until recently had a large inventory relative to sales, both point in the same direction, which is the optimal inventory is smaller. And as discussed earlier, that's costly in terms of the margin we realized as we're transitioning out of that large inventory. And to some degree, it's also costly as it relates to sales. But we can do all the math on that and try to make the smartest choice as we can.

I think we talked a lot on the way up about the positive feedback in the business. As the business gets bigger, it gets better. And it is also true that when we are shrinking, that creates kind of negative feedback loops that we have to be mindful of and make it a little bit harder. But that's all taken into account as we build out our plans and calculate what we think is the best set of moves in this environment, given our current priorities. So, I think the impacts are exactly as you'd expect directionally, and then I hope that was helpful color in terms of the way that we think about it and the way that it impacts the business.

On marketing, I would say there's a lot of potential learnings there. We're in a pretty different world than we were two years ago, and so I think we ought to be careful to not extrapolate them as absolute truth. We have to evaluate we're learning of things that are true in this environment. I think it is highly likely that our brand is materially stronger than it was a couple of years ago. And I think as we go through and we reevaluate various marketing channels, I think that does seem to be having an impact on what we think the ROI is of those various channels.

Again, I reserve the right to kind of end up being wrong on that, but I think that's what the data looks like today. I think a general learning is it's important when you're growing fast and the business is rapidly changing to make sure that you revisit decisions that you previously made that might have been made under different contexts. And I think that marketing looks like there may be some opportunities there as well. We're under different context. There were choices that made more sense than they make under today's context. And I think so far, what we've learned has pushed us in the direction of lower marketing.

But again, marketing is a delicate thing because you're building a brand, which is a very hard-to-measure thing, and it's very important that you continue to build that brand. And so I think you want to take care. And it's, I think, easier to move with more conviction in a more quantitative way when you're talking about direct channels because those have less of an immediate brand impact. They still have a brand impact because they show up in terms of ex transactions, and then those people who buy cars may tell their friends and family about it. But they have less brand impact than the brand channels, and so we will be more careful with the brand channels. But we'll be careful in general, and we're definitely doing a lot of testing as we move down in total marketing spend.

Operator

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

Ernie Garcia

Perfect. Well, thank you everyone for joining the call. To everyone on team Carvana, thank you so much for the work you guys are doing. This has been a tough year, undoubtedly. We've made huge strides, massive changes, a huge pivot in priorities, and I'm just always reminded of how much you care and how much you fight. This is a team of fighters. You have been fighting hard, and it is showing up. It's going to keep showing up. We've still got some fighting left to do, but we're going to do it. So, thanks to all. We'll talk to you guys next quarter.

Operator

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