Earnings Call Transcript
CARVANA CO. (CVNA)
Earnings Call Transcript - CVNA Q2 2022
Operator, Operator
Hello and welcome to the Carvana Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please limit yourself to one question and one follow-up. Please note, this event is being recorded. I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead.
Mike Levin, Vice President of Investor Relations
Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's second 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 second quarter shareholder letter is also posted on the IR website. Also, we posted a set of supplemental financial tables for Q2 to assist investors in understanding the moving pieces this quarter with the consolidation of ADESA and we've updated our operating plan deck to reflect the addition of ADESA. Both can be found on the Events & 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 and Form 10-Q for the first quarter of 2022. The forward-looking statements and risks in this conference call are based on current expectations as of today and Carvana assumes no obligation to update or revise them whether as a result of new developments or otherwise. Unless otherwise noted on today’s call, all comparisons are on a year-over-year basis. Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our Investor Relations website. And now with that said, I'd like to turn the call over to Ernie Garcia. Ernie?
Ernie Garcia, Chief Executive Officer
Thanks Mike and thanks all for joining the call. The second quarter was probably the most dynamic quarter we've had at Carvana. We shifted our priorities for the first time in company history to favor efficiency and cash flow in recognition of the changes to the market and the economic landscape as well as to enable us to quickly adjust to changes in our industry that had caused our expenses to be out of balance with sales volumes. We also completed our acquisition of ADESA in a transaction that we believe will be transformative over time. First, I want to hit our change in priorities to favor efficiency in cash flow. We began to make the biggest changes inside the company in May. These changes have been significant. They've resulted in prioritization shifts across every group in the business. They've resulted in the creation of new processes to increase focus and drive progress on these priorities. While it is early in the execution of our plan, this is going very well so far. At Carvana we've always set high standards for ourselves. And I think it's one of the reasons we've been quite successful so far. In the long run, the ability to keep pressure on ourselves is probably one of the greatest differentiators in how groups of people perform, but there's no substitute for the focus and motivation provided by market and economic disruption. Everyone feels it and difficulty reveals people. What is revealing about the people of Carvana is something I already knew and something I can't thank them all enough for. The people of Carvana care and they don't shy away from a challenge. They are fighters. The people of Carvana are focused on making faster progress than we have made at any point in our history. They're working hard but they're finding the fun in it and they're making changes they're proud of. As a result, we are rolling out new capabilities, products, and processes at an incredible rate. Our plan is to continue until we reach our goals. This drove a lot of progress in the quarter in a short period of time. We grew units sequentially by over 10% and reduced total SG&A by 5% at the same time, causing us to drive cash SG&A down per unit by $850 in the quarter to $5,400. We've set a stretch goal to hit $4,000 cash SG&A per unit in the fourth quarter excluding impacts from ADESA. This is going to be a hard mark to hit but so far we're on the path. From there we will continue to our mid-term goal of $3,000 per unit. We will keep pushing. We also drove up GPU by $500 in the quarter to $3,400. We provided some bridges back to $4,500 and beyond in our shareholder letter. The biggest thing separating us from climbing back to that level is execution. We'll be pushing here as well. Now turning to the ADESA acquisition. We are excited about joining forces with ADESA when we completed the deal. Now that we've begun working with the team, we are more excited. First, I want to give credit to the ADESA team. They've embraced us in a way that we couldn't have reasonably expected. They're a fun group of warm people who are enthusiastic about doing right by their customers and about finding ways to do even better. On a personal level, it has been fun to meet so many people inside the company, to learn from them, and to see how interested they are in learning from us. Our alignment is leading to extremely fast progress on our integration. We already have over half the cars we buy from our customers that we plan to sell through the wholesale channel landing at 46 ADESA locations nationwide. We've already embedded market operations hubs at 18 ADESA sites. ADESA is already reconditioning over 500 cars a week in locations that complement our existing IRC footprint primarily on the coast. In addition, we have also already deepened our relationship with Hertz in ways we couldn't have without ADESA. Overtime, we expect ADESA to dramatically increase the scale and customer proximity of our inspection center network. We expect it to strengthen and simplify our logistics capabilities, and we expect to find cost savings and revenue opportunities that wouldn't be possible without our combined capabilities. We still have a long way to go to complete our integration. And this is another area where we will continue to push. Now I'd like to turn to what we're thinking about in the near-term. We are going to maintain our current priorities for the foreseeable future to drive efficiencies that we believe serve our short- and long-term goals best in this environment. While we continue to expect to rapidly gain market share, our shift in focus means growth in units and revenue will be slower than it otherwise would be in the short-term. We also don't know exactly what to expect from industry-level sales in the near-term in light of everything going on in the economy. In July, for example, there was another industry-wide reduction in demand levels which has impacted us as well. We have meaningful latent demand and several levers to drive growth which we will begin to pull over time, but the speed that we pull those levers will be driven by the progress we are making in our higher priorities. In more difficult times, people tend to get more nearsighted. There are good reasons for this. There's value in dialing into important cost fundamentals to get less attention at easier times. And as you can see from our priorities, we are focusing more on those fundamentals in this environment as well. That said, it's still important to maintain awareness of the mountain we are climbing. Through a long-term lens, Q2 has the potential to be one of our greatest quarters. It serves as a catalyst to put more focus on driving efficiency. This was something we were going to do at some point anyway, and the environment has provided pressure that we will use to make progress faster than we likely would have otherwise. Our visibility to much higher volumes is high. On the demand side of the equation, we continue to take market share in this environment and the market shares we have in our most mature cohorts provide a clear map to growing volume dramatically. In addition, previous periods of economic strain have accelerated consolidation in our industry. On the supply side, the acquisition of ADESA is a game changer. Simply put, execution is all that separates us from millions of sales per year. From a GPU perspective, our bridge back to 2021 levels is straightforward and from there opportunity remains. SG&A has been and remains our biggest opportunity. We have a clear plan. That plan is being aggressively executed against with concrete goals in every group of the company. And we have the historical performance we have seen in our more mature cohorts as proof points. We remain firmly on the path to achieving our mission of changing the way people buy cars and we are becoming the largest and most profitable automotive retailer. Mark continues.
Mark Jenkins, Chief Financial Officer
Thank you, Ernie and thank you all for joining us today. We made significant progress in Q2 on many fronts. We closed our acquisition of ADESA. We set clear operating priorities, focused on reducing SG&A expense and driving toward positive free cash flow. And we made significant sequential progress on our key metrics, despite facing continued macro-related pressures and working through internal constraints. In Q2, retail units sold totaled 117,564, an increase of 9%. We gained significant market share in Q2, despite the impact of high-used vehicle prices, rising interest rates, and other economy-wide factors on our industry. Total revenue in Q2 was $3.884 billion, an increase of 16%. Total revenue included $108 million from our acquisition of ADESA's wholesale marketplace, which closed on May 9. Total gross profit per unit in Q2 was $3,368 a decrease of $1,752 a year and an increase of $535 sequentially. Due to the dynamic nature of the current environment, we will focus our more detailed commentary on sequential changes. Retail GPU was $1,131 in Q2 compared to $808 in Q1, a sequential increase of $323. Retail gross profit included a $51 per unit impact from Ernie's one million unit milestone gift to Carvana employees and a $34 per unit impact from our May reduction in force. Excluding these impacts, retail GPU in Q2 was $1,216 compared to $884 in Q1. Sequential changes in retail GPU were primarily driven by higher spreads between retail sales prices and acquisition prices. Retail reconditioning and inbound transport costs were similar in Q2 and Q1, as we primarily sold vehicles in Q2 that were reconditioned prior to our cost efficiency initiatives. Wholesale GPU was $383 in Q2, compared to $219 in Q1, a sequential increase of $164. Sequential changes in wholesale GPU were primarily driven by a $43 impact from the ADESA wholesale marketplace, net of $128 of depreciation and amortization expense, as well as increased spreads between wholesale sales prices and acquisition prices. Other GPU was $1,854 in Q2 compared to $1,806 in Q1. Sequential changes in other GPU were primarily driven by higher customer rates relative to benchmark interest rates partially offset by wider credit spreads and a change in loan sales channel mix. Looking toward Q3, we expect to sell loans in the whole loan sales format but will maintain flexibility to optimize our channel mix as the quarter progresses. We made significant progress reducing SG&A per retail unit sold in Q2 with SG&A per unit excluding depreciation and amortization, share-based compensation, and ADESA declining by $942 compared to Q1. We expect to make continued progress on reducing SG&A expense in the coming quarters as we continue to focus on operating efficiency across all areas of the business. Adjusted EBITDA margin in Q2 was minus 6.2% compared to minus 10.2% in Q1, an improvement of four percentage points. Adjusted EBITDA excludes impacts from Ernie's gift of personal stock to Carvana employees as well as other income and expense, which primarily includes changes in the fair value of securities, but it includes non-gift share-based compensation and expenses related to our May reduction in force. Adjusted EBITDA also included a minus $2 million impact from the acquisition of ADESA inclusive of $3 million of one-time expenses and the reallocation of $2 million of gross profit generated from the Carvana business that was internalized following the acquisition. Following quarter end, we began implementing changes that we expect to positively impact EBITDA contribution from ADESA by approximately $7 million per quarter by later this year. As a result of the way the teams have come together, along with all we have continued to learn about the ADESA business, the rapid progress we are making in integration, and the long-term opportunity that exists between our two companies, we are as excited as ever about our acquisition of ADESA. On June 30, we had approximately $4.7 billion in total liquidity resources including $2.7 billion in cash and revolving availability and $2.1 billion of real estate and other assets, including approximately $1 billion of real estate acquired with ADESA. We also ended the quarter with approximately 1.2 million annual units of inspection and reconditioning center capacity at full utilization, giving us substantial infrastructure for future growth. This strong liquidity position, along with our significant production capacity runway and our clear and focused operating plan, positions us well on our path to achieve our goals of driving positive cash flow and becoming the largest and most profitable auto retailer. Thank you for your attention. We'll now take questions.
Operator, Operator
We will now begin the question-and-answer session. Our first question comes from Zach Fadem of Wells Fargo. Please go ahead.
Zach Fadem, Analyst
Hey, good afternoon. Ernie, at the current level of 8,000 to 9,000 cars per week, should we view this as a fair characterization of demand for your business today or more so a level that you're intentionally managing to as you shift the focus to profitability? And assuming it's the latter, can you talk about the level that units need to step up to in order to achieve the stretch SG&A per unit goal in Q4?
Ernie Garcia, Chief Executive Officer
Sure. So let's start with where units are. I think in the second quarter, we grew units by 9% at a time when the market was probably shrinking by around 15%, give or take. So when you look at that, I think we did continue to take market share. It's certainly at a slower rate than we historically have, but still at a pretty fast rate when you kind of really stop and take in. So I think that's something to be happy with in light of the circumstances. We have obviously changed our focus quite a bit and that has real impacts. When you think about year-over-year growth rates a year ago, everyone across every group inside Carvana had their number one priority just driving growth. Today, the number one priority is driving efficiency. And that has all kinds of impacts. We talked about the logistics network, for example, in the shareholder letter that gives some examples, but there are examples like that everywhere else. And so I think there's certainly some impacts that are happening when you think about it from a year-over-year basis. I think when you look at it sequentially, I think there's some impact there as well that take the same form in terms of the shift to focus. We decreased our marketing budget by about 15% quarter-over-quarter. That was certainly from elevated levels in Q1 that we are not interested in sustaining. But nonetheless, it's a 15% reduction in marketing spend quarter-over-quarter. That's going to have an impact all else constant. We've also been purposeful about managing our inventory down. So from peaks and more recent, we probably have around 20% fewer cars that are visible for our customers today than we had recently. Again, all else constant that would put a bit of a headwind on growth. So I think we're making the choice today that we think enable us to drive efficiency as quickly as we possibly can, and we think that's the right thing to do with the business. We're making a lot of progress as a result. And that's the way that we're prioritizing things. I think when we think about what the opportunity is long-term, I think honestly it's the exact same way we would have thought about it six months ago or 12 months ago. I don't think there's really anything different. We have years and years of history across hundreds of markets of continually gaining market penetration. And, I think extrapolating off that's not super hard. And then even in this environment with a focus change, we continue to take market share. So I think from a long-term perspective, we don't really look at it differently. And I think we're certainly reducing the speed at which we're growing today given the shift in focus, but our hope and belief is that by getting more efficient it makes it easier to grow faster in the future because you have kind of less work to do per sale. And so we'll hope to get that back over time at some point. I think when we look to our goals, there's kind of two ways that we can make progress toward $4,000 cash SG&A ex ADESA. I think one is just general progress in the business and driving more efficiency and one is certainly getting more units so we can kind of have more units to have our fixed costs flow over. I think both are very powerful. The first is probably sufficient to get to that goal. It's probably insufficient to get to that goal in the fourth quarter. So without growth, you'd probably expect that to push out further in time. We don't want to I think specifically give thoughts on exactly what we expect the growth to be as we head through the next couple of quarters. But I think our expectation of stretching to get that $4,000 goal, it does have gains in both areas, but the primary focus is efficiency throughout the business.
Zach Fadem, Analyst
Got it. That all makes sense. And in terms of your SG&A run rate in dollars, it looks like the primary step-down sequentially was pretty much all advertising. And as you look to Q3 and Q4, can you walk through how the reduction in force impacts the comp and benefits line and maybe pinpoint specifically how the SG&A dollar decline should trend from here and then what the synergies from ADESA for the logistics or market occupancy lines how those flow in as well?
Mark Jenkins, Chief Financial Officer
Sure. To start, we observed significant savings in SG&A dollars in Q2 compared to Q1. This reduction was evident across various categories, with total payroll decreasing by approximately $20 million and advertising costs declining by about $25 million, among other reductions. These decreases were a result of our efforts to drive efficiencies, including the impact of the reduction in force on payroll. However, we have seen improvements across multiple areas of the business. One area where SG&A spending increased was logistics in Q2 compared to Q1, mainly due to the use of third-party transport services to address backlogs in constrained areas of our logistics network. This was an expense incurred in Q2 that we do not anticipate carrying into Q3 to the same extent. Looking ahead, we continue to identify opportunities across all areas to enhance SG&A efficiency, with a focus on aligning staffing levels with business volume as a major initiative. Overall, we are pleased with our progress on SG&A per unit in Q2, which decreased by approximately $1,000 quarter-over-quarter, and we are eager to maintain this momentum moving forward.
Operator, Operator
The next question comes from Sharon Zackfia of William Blair. Please go ahead.
Sharon Zackfia, Analyst
Hi, good afternoon. A question on reconditioning and inbound transport. I know it was kind of similar in the second quarter to the first quarter. And there's obviously a timing lag here. But given the work you've done where is that running now in terms of improvement? I'm assuming on cars reconditioned today and transported today is no longer a $600 delta. And then secondarily I just wanted to, as you shifted focus as a company to cost, how have you changed like the incentive structure within the organization?
Ernie Garcia, Chief Executive Officer
Sure. I'll try to take those and then feel free to jump in if you'd like Mark. So, I think first with kind of COGS expenses, we really started to make a lot of these changes in the middle of May. And so that's obviously going to take some time to then flow all the way through to sales, which is when we'll see that in retail GPU. We're making a lot of progress in those underlying expenses just like we are in SG&A. And so those will show up over time. We expect to continue to make progress there. And then the SG&A immediately as you get the progress whereas the COGS benefit you make the progress and then you have kind of the time lag until you sell the car and then it flows through. So, there's kind of is a delay there. And again, those kind of cost reductions really just started over the last month and a half. In terms of focus inside the organization and kind of, incentive structure, I would say in many ways it's similar. It's just the projects that we're kind of pulling off the wall are different and they're cost-focused instead of being growth-focused. I think we have implemented a number of different processes that we're finding really efficient inside the company. Not to dive into too much detail but across every group in the company we've got very clear projects. We're doing, I think a better job than we have in the past narrowing our focus on those that are most likely to make the biggest impact the fastest. We've got every group meeting together on Monday and reporting the progress against expectations every single week. On Tuesday, we're getting all of our operational groups together and we go through how each group is performing relative to other groups internally. So, we make sure that we can take full advantage of internal benchmarking. And then, obviously, a lot of work is happening in the rest of the week as well. And so I think really it's more about the projects that we're pulling off the board. We've always had a lot of areas that we wanted to work on. It was just a question of what we prioritized. And so I think our priorities have changed. But I think we've also implemented some processes that have driven additional focus, attention, accountability, and speed. And I really do think the results of that so far has been pretty great. Yes, I think just it's hard to put this in a model but we have a project that we rolled out for example in the last couple of days. And just kind of sitting in the room with the team is that was rolled out and there were people across many different offices on a Zoom call with 50 people going back and forth talking about the statistics in real-time of how this new product was working. It was really cool to see. And you could see on everyone's faces there was just a lot of pride in what they had built that they had built it fast and rolled it out quickly. And like I said that's a hard thing to put in a model but it's probably the most valuable thing over time because that just compounds over and over again. And I do think that as we've gone through this change of focus, the people inside Carvana have done an unbelievable job embracing that, getting excited about it, and then pushing very hard. I think that the enthusiasm and speed of which we're getting things done is something that I'm extremely excited about and grateful to the team for.
Operator, Operator
The next question comes from Michael Montani of Evercore ISI. Please go ahead.
Michael Montani, Analyst
Hey, thanks for taking the question. So, first I was just hoping if you could give some incremental color around the consumer in terms of maybe what you're seeing in demand trends for high income versus lower income. And then also if there's any impact in terms of credit availability and/or ASPs of the vehicles that you're selling, if there's kind of a noteworthy divergence in trend there for high versus low price tag units.
Ernie Garcia, Chief Executive Officer
Sure. I don't know if we have anything too interesting to share here versus what we've shared in the past or what you might expect. But I think in general, the trends are as you'd expect that I think we're seeing higher incomes in general kind of fare a little bit better in this environment, higher FICOs in general fare a little bit better in this environment. All else constant, that's leading to higher purchase prices. It's leading to differences in mix and attach rates for finance and products like that. So, I mean, I think the impacts that we're seeing are probably those that you'd expect. I think from a credit perspective, across automotive I think in general, most finance companies continue to see pretty strong performance. I think there's been a slow drift back to more normalized 2019 levels off of kind of what was absolutely exceptional performance in 2020 and 2021. So, I don't think there's anything too notable happening there just yet. And so yes, I think the only other notable thing is this is a large-ticket purchase. It's a purchase that is financed, it's discretionary. I think historically, it has oftentimes been a purchase that leads the economy. And then, it also kind of uniquely in this environment, it's driven by kind of the complexity of OEMs' global supply chains. This is probably one of the products that has inflated the most in terms of price relative to all other products in the economy. And so, it's probably an area that is felt relatively more stressed so far broadly. That's not great when you're looking at it in hindsight. But I think when you look at it from a forward lens, it's debatably good news because it's hard to say exactly what's going to come from the economy here. But if we start from a place to believe that the kind of industry has already taken a deeper stress than the rest of the economy, I think it means kind of any additional stresses from here and expectations should probably be less than any recovery from here and expectations should probably be more. So, I think we'll see how that all unfolds over time. We're certainly in a unique time where it's obviously impacting customers in lots of ways. But as I said, I don't think that it's anything unexpected for our customer versus other customers out there.
Michael Montani, Analyst
And then just in terms of pricing, just curious if you all have a view that we may see flat or even decreasing retail pricing from here. And if we do see retail prices decrease into the back half of the year, does that make it harder to reach the GPU goals that you've set out, or have you already kind of planned for that?
Ernie Garcia, Chief Executive Officer
It’s difficult to say definitively, but I can share that we have observed a return of depreciation in the market this year. Given that car prices have increased more than other goods and services, it’s likely that they will depreciate faster in the future to better align with those other goods and services. This expectation seems reasonable. However, the impact on retail gross profit per unit is not entirely clear, as it largely depends on dealer expectations. Historically, increased depreciation results in a wider gap between wholesale and retail prices because dealers account for expected depreciation in their wholesale bids. If this happens, we might see falling prices without a significant decrease in retail gross profit per unit. If depreciation is unexpected, then retail gross profit could decrease during that time. Generally, we have observed the former situation, with relatively stable retail gross profit as car prices have dropped. So far this year, early signs of depreciation suggest that this relationship holds. Our quarterly results indicate that the difference between what we pay for cars and what we receive for them has increased, which shows evidence of widening spreads again. We cannot predict exactly how this will unfold, but historically, it has tended to play out this way, and current evidence suggests a similar trend.
Operator, Operator
The next question is from Chris Bottiglieri of Exane BNP Paribas. Please go ahead.
Chris Bottiglieri, Analyst
Hey, guys. I think you got to beat me to my first question a little bit there. But, can you give us a sense like obviously the $600 didn't flow through from the logistics and reconditioning. But you did see like frankly, pretty good improvement sequentially in retail GPU. And you seem to highlight market improvements there. Is that all just kind of what you cited a second ago on kind of moving to wholesale pricing, or are there other factors that led you to kind of expand that retail GPU $400 sequentially?
Mark Jenkins, Chief Financial Officer
I'm happy to address that. We were quite pleased with our retail GPU performance this quarter, showing a significant improvement compared to the previous quarter. This increase, particularly after factoring in our staff reduction costs, reflects a strong $1,216, marking a notable rise from Q1. We are optimistic about this figure, especially considering it accounts for higher reconditioning and inbound transport expenses. In terms of the sequential drivers, one key factor was recovering approximately $100 per unit in shipping revenue lost in Q1 due to refunds related to major logistics delays, which we regained in the second quarter. Additionally, Q4 2021 was a peak time for car purchasing, and as we transitioned away from that period, it positively influenced our retail GPU. In Q1, we sold more vehicles bought in Q4 2021 compared to Q2, where Q4's pricing was notably high. These were the main factors influencing our results, and we feel confident about our current standing given the cost opportunities we still have for GPU.
Chris Bottiglieri, Analyst
That's really helpful. I have an unrelated question. When I review the ADESA financials, it appears that the $7 million improvement suggests a run rate around $13 million in quarterly profitability for ADESA, which may be slightly below the $100 million target. I understand that volumes have declined sequentially. So, my question, after that lead-up, is whether this is a sustainable profitability rate until volumes improve, or are there other reasons to be more optimistic about ADESA's profitability ramping up in the near term?
Ernie Garcia, Chief Executive Officer
I believe we provided some guidance suggesting that around $100 million is a reasonable estimate for where ADESA could be. Currently, we find ourselves at a low point for the auction business, but it’s not clear if this is the absolute lowest point. In 2019, ADESA handled roughly 1.8 million units annually, a significant figure compared to today’s numbers, which are about 1 million units lower. There's certainly potential for the business to recover from this point. A historical reference might be 2008, when the number of units dropped significantly, but it wasn’t as drastic as in recent years. That recovery took about five years as original equipment manufacturers (OEMs) restored production after setbacks. This time around, while the fundamentals are not as dire, the auction conditions have been more challenging. Thus, the recovery could happen more quickly, but the timeline remains uncertain. A useful benchmark for evaluating profitability in this business could be around $250 of incremental EBITDA per unit. Looking ahead, we're uncertain if we’ve hit the bottom for auctions, yet there are many reasons to be cautiously optimistic. Some signs indicate that OEMs are ramping up production, and car prices are starting to decline, which may lead dealers to sell more off-lease vehicles. Additionally, OEMs seem to be selling more cars to rental companies, typically large sellers, and there’s also potential for finance companies to increase sales. While we can’t predict the specifics, it’s clear that there’s capacity for volume to recover, and ADESA has established a robust business with a solid customer base, putting them in a good position for when recovery occurs. Therefore, there is potential for significant improvement beyond our medium-term average expectation of $100 million. Overall, we believe that estimate reasonably reflects the business's earnings potential. We are also very enthusiastic about our collaborative efforts; our integration is progressing well. Just 2.5 months after closing the transaction, we have vehicles operating in 46 locations, and we are actively delivering and collecting cars in 18 locations, with those numbers growing rapidly. We’ve begun to increase production in coastal areas, which provides significant cost savings by streamlining our logistics network. Additionally, we've noticed benefits from partnerships that we couldn't have previously achieved. As we delve deeper into the ADESA acquisition, we become more excited not only about the long-term prospects related to reconditioning and logistics but also about the immediate efficiencies we can realize. I commend our team on this integration process. Following an acquisition, there’s always uncertainty about how things will go once you engage with the new team. However, the ADESA team has welcomed us with open arms, making the integration smoother than expected due to their collaborative spirit and willingness to share insights. We are very optimistic about the future; it is a significant opportunity for us long-term, and we also see substantial short-term gains ahead, but it will take effort, and we are committed to it.
Operator, Operator
The next question comes from Adam Jonas of Morgan Stanley. Please go ahead.
Adam Jonas, Analyst
Hey, everyone. I have a question regarding working capital, particularly inventory, which has seen a significant decline of about $466 million. I believe this figure includes ADESA, but please correct me if I'm mistaken. Do you consider this level to be normal for the end of the year? Is it more of a correction from the previous couple of quarters, which dealt with challenges related to COVID and IRC bottlenecks, or is there still some adjustment needed? Will you need to push more out in order to reach your desired volume? That's my first question.
Mark Jenkins, Chief Financial Officer
We significantly reduced our inventory from the previous quarter. This reduction does not take into account any effects from ADESA, which has minimal inventory. This reduction pertains solely to Carvana. As we mentioned in our Q1 call, we had previously overbuilt in several areas of the business as we entered Q1 of this year, including infrastructure, staffing, and inventory. Consequently, our inventory levels were higher than normal. We have been systematically reducing inventory throughout Q2 and into Q3. We expect to continue lowering our inventory balance in the third quarter to align it with our target level, which we consider to be between $2 billion and $2.5 billion. We were above that target at the end of Q2, and we anticipate further reductions to bring our inventory in line with both our targets and the business's overall needs. Additionally, there are many opportunities to optimize our inventory as we move away from third-party reconditioning, which generally has longer processing times compared to first-party reconditioning. Transitioning away from third-party reconditioning will positively impact our reconditioning cycle times. Many of our cost initiatives are also focused on speeding up processes, such as reducing the time it takes from acquiring a car to its reconditioning and shortening the duration from inspection to full reconditioning. We believe there are various avenues to improve the efficiency of our inventory as it stabilizes.
Adam Jonas, Analyst
That's very clear. Just a follow-up then housekeeping. How many cars did you have in inventory at the end of Q2 in terms of units and how that compared to Q1? Thanks.
Mark Jenkins, Chief Financial Officer
Sure. We don't report that specific number, but we did observe a decline in inventory units, which we believe aligns closely with the overall balance decline.
Operator, Operator
The next question comes from Nick Jones with JMP Securities. Please go ahead.
Nick Jones, Analyst
Hi. Thanks for taking the question. I guess two if I could. On the time buffers in certain states related to title and registration, is that a structural hurdle that's going to persist? Can you drive more efficiency there and kind of get rid of that over time? And how do you expect that to impact, I guess, conversion in the States? And then the second question, there was a bullet about not passing through the cost of fund increases. How should we think about, I guess, when you might start passing this through? Thanks.
Ernie Garcia, Chief Executive Officer
Sure. Those are two significant questions that require detailed answers, so we'll keep it concise. Regarding the time buffers, they aim to ensure we provide the best and quickest registration experience possible for our customers. Unfortunately, we've received considerable attention about registration issues over the last three to six months. This narrative is likely exaggerated and not fully representative of the current situation. I'd like to share some progress we've made: currently, we have about one-third the rate of delayed plates compared to a year ago, which is the best we've seen in our company's history. While it's challenging to obtain clear data on how other dealers perform in registration—an imperfect industry-wide process—we believe we are outperforming most dealers in the majority of states. We take pride in this, especially since our seven-day return policy and nationwide inventory often require us to handle more complex registration tasks. Overall, our team's execution today is the best it has ever been, though we continue to strive for improvement. We are implementing new processes to ensure that customers understand what paperwork is needed at delivery. We're also collaborating with several states on registration modernization initiatives and have influenced policy changes through our involvement. We expect these time buffers to be reduced over time, although it's difficult to predict exactly when this will happen. Faster delivery times positively affect sales conversion, and we acknowledge that longer delivery times may negatively impact this metric. On interest rates, we have seen some pass-through of recent rate changes over the last few months. Typically, finance companies, including us, are slower to adjust to rising interest rates, which is what the term "sticky" interest rates refers to. Not all increases in benchmarks and risk spreads have been fully passed to consumers yet. The exact timing for passing these changes through is influenced by the actions of other finance companies, and while we monitor the situation closely, we don't have perfect data. However, we've detected institutions starting to raise interest rates since March and April, a couple of months after we did, with increases of around 25 to 50 basis points in recent months. We can't predict how other finance companies will respond, but we're committed to monitoring trends and making informed decisions regarding interest rates. We will continue to provide insights to our investors about the impact of these adjustments while remaining hopeful for future improvements.
Operator, Operator
The next question comes from Seth Basham of Wedbush Securities. Please go ahead.
Seth Basham, Analyst
Thanks a lot and good evening, and thanks for all the great information. I have a follow-up question after the last question that was asked. First, as it relates to the titling registration challenges, are there any states where you are not able to currently sell vehicles because of those challenges? And then secondly, are there any issues currently with selling vehicles that don't have clean titles?
Ernie Garcia, Chief Executive Officer
There are currently no states where we are unable to sell vehicles, and there are no issues with clean titles. However, these challenges can occasionally arise. Recently, we encountered an issue in Illinois, and we were pleased to have a judge allow us time to address miscommunications with the state. We are eager to collaborate with them because we share their goals of providing customers with the best registration process possible. We aim to work together, similar to our partnerships with regulators in various other states. A positive outcome from the challenges in Illinois was that when we were temporarily shut down, we reached out to our customers for support and received a petition signed by 6,000 customers within 48 hours. Many more supportive comments also followed. This demonstrated a strong message from our customers, both in Illinois and nationwide, showing their appreciation for the Carvana experience. These are individuals who understand our process and rallied to help us, which is encouraging. While there may be occasional risks with states, we generally maintain strong relationships across the board and see the states as partners. Our objective is to continue strengthening these relationships so that both sides can view each other positively.
Seth Basham, Analyst
Great. And as a follow-up on the financing business, can you talk about the channel mix shift for some your finance receivables in the second quarter? How much would you sell to Ally? What's the remaining availability with that agreement? And then your decision to potentially sell whole loans in the third quarter what's driving that?
Ernie Garcia, Chief Executive Officer
Sure. I believe our approach to selling receivables involves balancing the need to maximize proceeds with minimizing volatility. This has always been our objective, which is why we established a platform that allows us to operate in both directions. Given the increased noise in the financial markets recently, we have decided to prioritize reduced volatility over maximized proceeds. We opted to collaborate with Ally to buy back more of our loans, similar to what we did during COVID for the same reasons. We feel this partnership has been beneficial for us, and we hope Ally shares that sentiment. Our strategy includes maintaining access to various channels while closely monitoring our expectations and the associated volatility. A few weeks ago, the ABS markets were experiencing difficulties, but they have improved recently. We will keep an eye on these markets to make informed decisions moving forward. As of now, our main expectation is to favor pooled loan sales, but we want to maintain the flexibility to make the best choices as the year progresses.
Mark Jenkins, Chief Financial Officer
And then on the question about capacity, so our agreement with Ally was most recently upsized in March and has $3.2 billion of capacity remaining.
Operator, Operator
The next question comes from Rajat Gupta with JPMorgan. Please go ahead.
Rajat Gupta, Analyst
Thank you for the insights shared on the call. I wanted to follow up on an earlier question regarding SG&A. What will occur when you reach the $4,000 target? A common inquiry we receive is about growth once you hit that target, especially considering the recent reduction in ad spending and other growth initiatives that have been toned down. How should we understand the growth strategy as you aim for a lower SG&A level? I have another question after this. Thank you.
Ernie Garcia, Chief Executive Officer
Sure. The quick answer to what happens when we reach $4,000 is that we will continue to push forward. Let's start by discussing how we move from our current position to $4,000, a milestone we've achieved several times in our history. We believe that reaching $4,000 is certainly possible; the real question is how quickly we can do so in a responsible manner. We have numerous locations and various functions that we need to manage, which amounts to hundreds of groups throughout the organization. It's crucial that we reduce our expenses at a pace that is quick enough to meet our goals, but also careful not to disrupt these multiple groups across the different locations and functions, as that can be costly. The target of $4,000 by the end of the year depends mainly on the responsible pace at which we can reach it. Looking ahead, from $4,000 down to our midterm target of $3,000 and then our long-term objectives, our primary focus is on enhancing efficiencies. We have various methods to identify where those efficiencies can be found, with a straightforward approach being to examine our cohorts. We provided past data about our SG&A expenses in more established cohorts, which gives an understanding of what we can accomplish. We've made progress even before targeting more efficient processes and product offerings. As we prioritize these improvements, we believe we're increasingly positioned to excel. Each group within the company now has specific goals that lead to our midterm aim of $3,000 per unit. We've traditionally utilized bottoms-up models to guide our long-term financial outlook, which is now translating into concrete products and projects across various teams aimed at achieving this goal. Regarding growth, the most significant impact stems from our shift in focus, specifically which projects we decide to prioritize and where we allocate our efforts throughout the business. As we reduce SG&A levels, the positive implications for growth, in our view, are apparent. One way to consider this is that the effort needed to boost sales by a certain amount is closely linked to the per-unit expenses, which reflect the internal work required to sell each unit. By driving those expenses down, it necessitates less effort per unit, allowing us to increase unit sales more efficiently. We're excited about what these efficiency targets could mean for our growth in the medium term. Currently, our main goal is to enhance efficiency, and we believe we are making significant strides, although we recognize that further progress is needed. The team is very focused on this and we're optimistic about our trajectory.
Rajat Gupta, Analyst
Got it. And maybe just a follow-up on the SG&A. Within the comp and benefits line, is there a way that you can help dissect for us what the corporate employee costs are versus some of the more personnel-related expenses in terms of employees who are involved in the actual buy-sell financing part of the transaction? Any metrics you can share around efficiency there, transaction time for sale or employee hours per sale or something of that sort? And so where are we today? And where do you expect to get to as you get to your $4,000 or the $3,500 target next year? Thank you.
Mark Jenkins, Chief Financial Officer
Sure. I can address that in a few ways. For example, regarding compensation and benefits for retail units sold, what we have accomplished in the past serves as a useful benchmark. We have also outlined midterm goals on our Investor Relations website, which provide insight into future potential beyond our previous achievements. I hope these resources are helpful for your question. From an efficiency standpoint, we are definitely seeing improvements across the business. Our teams are consistently working on enhancing efficiency, leading to reductions in hours per delivery and customer care phone time per sale, among other things. Utilization in our logistics network is also increasing, along with many other positive trends in the efficiency metrics we've been monitoring for several weeks or longer. Overall, we are optimistic about the direction these internal metrics are taking, and the teams are focused on driving these improvements.
Operator, Operator
The next question comes from Colin Sebastian of Baird. Please go ahead.
Colin Sebastian, Analyst
Thanks for having me. I wanted to ask about the process of managing improvements, but I realize that might take too long to discuss. Instead, I have a couple of follow-up questions. First, regarding not accessing the ABS market, is that reflected in the GPU, and what is the impact on other GPUs without access to that market? Secondly, are you expanding your inventory to include more value-priced cars? If so, are you observing increased demand from the mass market segment, or does that traffic naturally come to your website and app? How does that work? Thank you.
Mark Jenkins, Chief Financial Officer
Sure. So, I think on the first question, so the way we've always thought about this is we have a two-channel strategy for monetizing our loans. We use the securitization market. And then we sell loans through whole loan sales or for flow agreements. And I think the way we think about that two-channel strategy is that it balances economics and stability. And what I mean by that is typically in the securitization market you see better monetization but the securitization market involves more variability. And so the forward flow and whole loan sales typically have lower monetization but add a degree of stability. So that's basically the way we thought about it. In terms of our forward-looking expectations, I think we plan around expectations for ABS or for whole loan sales. As we laid out in Q3, our current expectation is we'll be selling loans in a whole loan sale format but will continue to evaluate as the quarter progresses.
Ernie Garcia, Chief Executive Officer
And then I think there’s certainly demand for lower-priced cars. I think that’s definitely something that’s true. There’s basically just a dearth of lower-priced cars out there industry-wide today. It is also true that those that are seeking higher-priced cars are probably less impacted by the economy at least so far in kind of the form that this thing has taken so far. So in terms of like demand across cars I would say it shifted to cheaper cars less than you might expect in light of kind of the desirability of those inexpensive cars but then also kind of the relative strength of the higher income consumer, which offsets that to a degree. But I think we’re continuing to push in that direction. We’ve got a number of initiatives to make sure that we’re able to provide our customers with a diverse set of cars that fit their needs across all different dimensions that matter, including price and working on different product enhancements to make it easier for customers to afford cars in this difficult environment when prices are high. So I think that’s an area that will continue to get focused from us and it’s an area where we’ve made progress so far and plan to make more progress going forward.
Operator, Operator
The last question will come from Brian Nagel of Oppenheimer. Please go ahead.
Brian Nagel, Analyst
Hi, good afternoon. So I know we’re trying to rein down here. So I’ll ask one – I guess one question with two parts. But with regard to ADESA, there’s a lot of – there’s been chatter out there about now that Carvana owns ADESA maybe some historic customers or partners with ADESA would no longer want to do business with ADESA because they’re now competitors to Carvana. So the question I have are you seeing that dynamic? If so is that factored into kind of the parameters you’ve given us for the ADESA business? And then secondly, just as we think about ADESA and its enhancement to the overall Carvana model, at what point or at what point would there kind of be that breakout moment where we really start to see the true benefits that ADESA is bringing to Carvana?
Ernie Garcia, Chief Executive Officer
Sure. I'll try to go on site as you said we are tight on time. Let me start with I think for sure we saw some customers of ADESA initially react negatively to the news. And we do feel like we lost some volume as a result of that immediately as the transaction was announced. I do think since then the news is actually pretty good. Obviously, we don't know how this will play out over time but we've seen a number of those customers already come back. We've seen some big commercial accounts start to shift more business back to ADESA. And so I think that so far at least it feels like the team at ADESA has done a good job, weathering the turbulence of that transaction which obviously causes everyone to kind of stop and reevaluate for a moment, but it feels like we're in a pretty good spot. And then I do think looking forward, it's hard to know how that's going to unfold. Again, ADESA is approximately one million units back of where it was in 2019. So there's a lot of room for volume increases from here kind of regardless of the number of customers that come back. But we'll be fighting and shooting to provide great experiences to all the historical customers of ADESA and trying to explain why we think that ADESA is still a great option for them. And as I said, I think so far the news there is pretty good. I think in terms of when to see what you expect to see the benefits of ADESA, I think hopefully it's relatively quick. We're already seeing operationally some benefits today that are pretty material. And hopefully, it's kind of continual over time and continually increasing. And hopefully, it will continue increasing for a long time. I think that there are many areas to reduce costs, there are many areas to drive revenue, there are many areas to collaborate on solutions for our shared customers that kind of benefit from our shared capabilities. And then there's obviously a lot of room to recondition more cars closer to our customers and to enhance our logistics network to get cars to customers faster. And I think unlocking all of that is a many, many year plan that we're excited about running at as quickly as we can, and we're excited to do it with the team at ADESA.
Operator, 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, Chief Executive Officer
Perfect. All right. Well, thanks everyone for joining the call. To everyone inside Carvana and ADESA, thank you so much for everything that you guys have done. The last several months have been dynamic, I believe, it was the word that we used in the prepared remarks. You all have felt that and seen that. And I think that people always have to decide how they respond to any kind of adversity. And I think the way that people inside Carvana have responded has been unbelievable. I think we could not ask for more. We couldn't be prouder to be working side-by-side with you guys. The progress that we're making is exceptional. I hope you're proud of what you're doing. If we keep our heads down we're going to continue to make a lot of progress really quickly. And that has been awesome to see and is exciting for the future. And then for the ADESA team, we've done this a couple of times now but I really do just feel extremely grateful that you have embraced us in the way that you have. And I think that hopefully we're both seeing the gains from that. I think it's showing up in the results already and we're excited about where we can go from here. So, we look forward to continuing to work with you. Thanks everyone. We'll talk to you next time.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.