Earnings Call Transcript
CARVANA CO. (CVNA)
Earnings Call Transcript - CVNA Q4 2022
Meg Kean, Investor Relations
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, CEO
Thanks, Meg. And thanks, everyone, for joining the call. Ten years ago, in January 2013, we launched Carvana in Atlanta, Georgia. We were a passionate group of people who believed we could build something new in the world that we would be proud of. What we needed 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 believed we could do it. One, there was room for a 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 ten 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 foundation 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 is 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 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 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 on 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 the 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 one-time 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 clearer and 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 Jenkins, CFO
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. Throughout 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 timeline 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 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, which adjust for certain non-cash 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 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 on 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 networks. 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.
Operator, Operator
Our first question is from Sharon Zackfia with William Blair. Please go ahead.
Sharon Zackfia, Analyst
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 machines 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-commerce?
Ernie Garcia, CEO
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.
Sharon Zackfia, Analyst
Can I just ask a follow-up? So when you do customer research, I mean how important is delivery and what customers want? I mean, it would seem transparency, quality of the car, the car they're getting, all of that is very important, but is delivery really high on the list?
Ernie Garcia, CEO
It depends on the customer, which is why we've structured the system to provide options. All of those factors are important, and the easiest measure is how customers respond to their overall experience. While we're focusing on the vending machine, there are many other examples I've mentioned previously. For instance, delivery distance has decreased by 25% since early 2022. Regarding activity pairings, we have a large number of customers buying cars from us and some selling cars to us. Activity pairing involves optimizing our schedule so that when a customer leaves a hub or vending machine, they can complete two transactions efficiently. This ratio has improved from about 1 in 14 customers to roughly 1 out of 3 in the past year, indicating widespread gains. We're seeing these improvements manifest first in operational efficiencies, which will take time to translate into financial impacts. We typically implement these changes in select markets to assess their effects on customer experience, costs, and efficiency before expanding them nationally, allowing us to realize financial benefits afterward. You can expect to see more of these gains in the next two quarters, which is why we're optimistic about our cost reduction plan. We've been implementing numerous initiatives under this umbrella, and the customer experiences have improved over the past six months. Overall, we're excited about the progress, though there is still work to do, and the team is performing exceptionally well.
Sharon Zackfia, Analyst
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, CEO
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, Operator
The next question is from Chris Bottiglieri with Exane BNP Paribas. Please go ahead.
Chris Bottiglieri, Analyst
In Q1, are you still accounting for an increase in the inventory allowance adjustment that's putting pressure on retail GPU and wholesale? Can you clarify how much is left? What percentage of units are 90 days or older and still in inventory today? What’s considered normal? I assume this is a routine occurrence, but please provide some context on what remains.
Mark Jenkins, CFO
Certainly. There are a few ways to approach that question. First, I wouldn't characterize it as having anything left to address. To establish the allowance as of December 31, we assessed the vehicles on our balance sheet as of that date. We then anticipated the cars we would sell at a loss and the levels at which these sales would occur, and recorded the allowance accordingly. Some factors that positively influence the inventory allowance include the size of inventory. Reducing inventory and aligning it more closely with sales volume are definitely advantageous for the retail inventory allowance. As you mentioned, the retail inventory allowance is consistently reflected in our results. We adjust it monthly, and it appears in our quarterly results. However, it was particularly significant on December 31 due to the higher-than-normal inventory levels and elevated industry-wide retail depreciation rates we experienced in the fourth quarter. This explains the significant impact on Q4. To emphasize that point, we have made substantial progress in normalizing our inventory levels in Q4 and, so far in Q1, our inventory size is much more in line with normal levels relative to sales volumes compared to Q4. We believe that over time, this will lead to positive momentum for retail gross profit per unit, as we've highlighted in our materials.
Chris Bottiglieri, Analyst
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, CEO
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, Operator
The next question is from Rajat Gupta with JP Morgan. Please go ahead.
Rajat Gupta, Analyst
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, CEO
Our plan is divided into three main steps. First, we aim to achieve positive EBITDA, with specific milestones along the way. Second, we want to attain significant positive EBITDA per unit and ensure sound unit economics. Finally, we plan to focus on growth. We believe that we can execute this plan without needing to raise additional capital. The decision to raise capital in the future will depend largely on how quickly we can reduce SG&A expenses, increase GPU, and boost unit sales after acquisition. Small shifts in these metrics can significantly alter our requirements for capital. While we aim to avoid raising additional capital, we will remain vigilant and make decisions that are best for the business. We have access to various forms of capital, including high-quality real estate valued at approximately $2 billion, split between ADESA and original Carvana properties. Most of this consists of financeable inspection centers. Additionally, we hold other valuable assets and have the capacity to incur more secured or unsecured debt. We can also consider equity financing if necessary. For now, our priority is on executing our operational plan to meet the targets we've set.
Rajat Gupta, Analyst
Got it. That's clear. Maybe just on SG&A, you talked about the additional $100 million in reduction in the first half of the 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 forced reductions. So just curious like if you could help us understand where that $100 million is coming from. Thanks.
Mark Jenkins, CFO
Sure. We discussed this in the letter. We expect to achieve $100 million in quarterly expense reductions over the next two quarters, impacting the major line items such as payroll, advertising, logistics, and other expenses. We see opportunities to reduce additional SG&A expenses, even in categories that are typically viewed as fixed. We have multiple projects underway to enhance efficiency in our corporate and technology expenses. There are many areas within that part of SG&A where we are focused on improving efficiency and anticipate cost savings from that aspect of our plan in the upcoming two quarters.
Operator, Operator
And the next question is from Seth Basham with Wedbush Securities. Please go ahead.
Seth Basham, Analyst
Just a follow-up on the last question. Even if you achieve your breakeven EBITDA goal, you're still dealing with over $100 million in CapEx and $600 million in interest expense. That could lead to burning around $700 million in cash. Your liquidity can support that for a while, but eventually, you'll run out of time. How do you plan to handle that situation?
Ernie Garcia, CEO
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, Analyst
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 are still substantial loans on the balance sheet at this point in time relative to the $1.3 billion that you had at the end of the quarter?
Ernie Garcia, CEO
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, Operator
The next question is from Zachary Fadem with Wells Fargo.
Unidentified Analyst, Analyst
This is Sam Reed 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, CEO
Sure, let me provide a broader perspective. We are now a 10-year-old company. For the first nine years, we were in a fairly stable environment, particularly stable for about seven and a half years. Although COVID impacted us, our used vehicle sales volume at the industry level remained relatively similar. Over the past year, however, we've seen those volumes decline by around 10%. This decline has coincided with several decisions we've made to streamline our focus on profitability, which has put additional pressure on independent dealers compared to franchise dealers. As a result, this past year has been significantly slower for us, marking our first decline of 3%, while we experienced rapid growth in all previous years. The shrinking market aligns with our own contraction; we were growing when the market was stable. However, I believe this is correlation rather than direct causation. The 10% market shift is minor compared to the growth rates we had experienced before this year. While we always have an outlook on industry trends, we don't see them as the primary factor for our success. They have correlated with various factors, particularly the rise in interest and car prices over the last year, which have affected the industry broadly and us specifically. Moving forward, we anticipate a relatively flat market, and we don't believe that fluctuations in macro industry sales volumes will dramatically affect us. We expect to reflect these industry changes in our results. Could you remind me of the second part of your question?
Unidentified Analyst, Analyst
No, it's just another industry question here. It relates to advertising and volumes. You've done a good job of reducing advertising. What are you observing across the industry? Is there a similar reduction happening among your peers? As you cut back on advertising, how does your share of voice today compare to where it was before the cutbacks?
Ernie Garcia, CEO
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 years 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 into 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 were 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 in 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 bit in 2022. We've recently seen the market be reasonably strong regarding 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 constants, 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, Operator
The next question is from Winnie Dong with Deutsche Bank.
Unidentified Analyst, 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, CEO
We are making significant progress with integrating ADESA, which has 56 great sites nationwide. Currently, 75% of the cars we purchase for wholesale resale are being delivered to ADESA locations. This marks a considerable improvement compared to six or twelve months ago before the acquisition. This change enhances our efficiency, allowing these vehicles to be quickly inspected and sold, and reduces transportation costs since we are closer to ADESA. As a result, you will notice improvements in our wholesale margin. The ADESA footprint is impressive, and we are optimistic about the future benefits in wholesale, logistics, and reconditioning. However, we anticipate that many of these benefits will materialize more fully once we transition to the next phase of our strategy, which is driving growth. The team at ADESA has been performing admirably despite the challenges faced by auction businesses in recent years, particularly following the pandemic. They have a solid plan in place, and we are confident in the direction they are headed. Regarding the timeline to reach $4,000 GPU, I apologize for not being more specific, but I would like to highlight some key factors. Our current GPU is around $2,600. From there, accounting for the retail allowance—which we do not expect to be ongoing—will add about $600. The wholesale allowance contributes another $100. Additionally, the timing of our loan sales will add nearly $500. Mark mentioned that our car sales aged under 90 days in Q4 could provide an extra $600. We also see room for improvement in our non-vehicle COGS, with potential gains around $600 in Q1 or Q2 compared to our past performance. We believe there is still an additional $300 or $400 to gain in this area. However, these gains are coming more slowly as we reduce our inventory, which leads to fewer cars being inspected and means our inspection centers' overhead is allocated over a smaller number of cars. While this has created some efficiency challenges, they are temporary, and I see a significant opportunity ahead. There are numerous other opportunities as well, and the path forward is clear; we just need to execute effectively to achieve these goals.
Unidentified Analyst, Analyst
I would like to know if you could share your future strategy regarding the mix of inventory. Previously, you mentioned that moving forward, you would focus more on lower-priced inventory due to current macroeconomic conditions. Is that still part of your plan as you work on reducing inventory?
Mark Jenkins, CFO
Sure, I can address that. To provide some context, we typically assess our inventory mix by looking at what our customers are interested in on the site and comparing that to market trends regarding what other suppliers are offering. This analysis helps us determine the inventory we present online. We've discussed inventory extensively today, and it's clear that our inventory levels have been higher than our sales volume. We are actively working to resolve that. Regarding the mix, I don't see any specific trends worth mentioning at this moment. Moving forward from Q1, we will continue to monitor demand and supply signals to find the right balance. However, I don't foresee any notable shifts to highlight right now.
Operator, Operator
The next question is from Michael Montani with Evercore ISI. Please go ahead.
Michael Montani, Analyst
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, CEO
I believe we are currently in the third phase of our plan. This phase is significant because we have been one of the more aggressive growth companies for our entire existence, from our inception 10 years ago until about a year ago. This aggressive growth requires the alignment of thousands of people with shared priorities, actions, and decision-making processes. Transitioning to a complete focus on profitability over the past 12 months has been challenging and required considerable effort. There have been transitional costs related to aligning thousands of people with new goals that excite us all. Consequently, we may need to maintain our current priorities for a bit longer than what might be optimal, given market conditions, due to the high costs involved in changing priorities. I cannot pinpoint exactly when this will change. However, in the last 3 to 4 months, we have learned a lot. We outline projects believing they will be beneficial, then we implement them and observe their actual effects, which can impact customer experience, conversion rates, and underlying costs. This process helps us determine the best way forward regarding our operational levers and sales volume. Recently, we've found that many of our projects are yielding greater operational benefits than we anticipated, but they are also resulting in fewer sales. Therefore, we've shifted towards managing smaller inventory levels and expect to stabilize sales at a lower level than we would have projected six months ago. We still have much to learn, as there are many ongoing projects in our backlog. While we don’t know the exact timing for growth, we believe that we are close. When we do grow again, it will be as a more efficient company, one that has a clear understanding of how to achieve that growth, and with an infrastructure that is significantly improved from what we had previously. This is an exciting prospect, and while it may not be far off, we still need to finalize some elements of our plan. For now, we will continue to focus on the outlined strategy.
Michael Montani, Analyst
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, CFO
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, Operator
The next question is from Ron Josey with Citi.
Ron Josey, Analyst
I wanted to inquire more about how you manage the balance between supply reductions and demand alongside conversion rates. I'm curious about the current trends in conversion rates, as I assume they may be declining due to a lack of availability of desirable products. Historically, I've noted that inventory levels are decreasing, so I'm interested in understanding the conversion situation. Additionally, regarding marketing, Ernie, you've mentioned reduced marketing investments. Could you share any insights or lessons learned regarding brand awareness or traffic in light of the reduced advertising efforts? I believe you noted that some of the investments haven't yielded a positive return on investment. It would be helpful to understand whether you believe there is enough inherent brand awareness at Carvana to sustain sales without as aggressive marketing in the future. Thank you.
Ernie Garcia, CEO
Thank you for the question. To begin, inventory does affect conversion rates. As we decrease inventory, we expect conversions to decline, which in turn leads to reduced sales, assuming other factors remain constant. We can approach this by analyzing inventory elasticity to understand the sales advantages of holding more inventory versus the cost of carrying that inventory. This helps us determine the customer acquisition cost for additional transactions. At any level of depreciation, there is an optimal balance of inventory relative to sales, which is reflected in a target turnover goal. When depreciation is high, it’s preferable to maintain less inventory, while lower depreciation allows for larger inventory. Currently, we are experiencing a situation in the wholesale market that might even be appreciating, but we have mostly faced a rapidly depreciating environment over the past year. The expectation for the near future is likely a depreciating environment since car prices remain high compared to other goods. Additionally, our previously large inventory compared to sales suggests that we should aim for a smaller optimal inventory. Transitioning from a large inventory has been costly, affecting our margins and sales to some extent. We have taken all of this into consideration as we plan our strategies in this context and priority. The impacts align, as anticipated, and I hope this explanation sheds light on our thought process and its implications for the business. Regarding marketing, we have much to learn given the changes in our environment over the past two years. We must be cautious not to view past findings as absolute truths and should evaluate what applies to the current context. Our brand is likely stronger now than it was a couple of years ago, which seems to influence our ROI assessments for different marketing channels. While I acknowledge I could be mistaken, this is how the data appears currently. A key takeaway is the necessity of revisiting prior decisions made under different circumstances. Our current analysis indicates there may be some opportunities to adjust our marketing approach, favoring less spending, as decisions made before might not be as relevant today. Marketing is complex because branding is challenging to quantify but crucial for long-term success. Thus, we must proceed thoughtfully. It is easier to adjust with more confidence in direct marketing channels since they have a lesser immediate impact on the brand, though they do have some effect. We will be more cautious with brand-focused channels but will remain vigilant across all our marketing efforts, actively testing as we reduce total spending.
Operator, 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, CEO
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, Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.