Earnings Call Transcript
CARVANA CO. (CVNA)
Earnings Call Transcript - CVNA Q1 2022
Operator, Operator
Good day, and welcome to the Carvana First 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 note, this event is being recorded. I would now like to turn the conference over to Mike Levin, VP of Investor Relations. Please go ahead.
Mike Levin, VP of Investor Relations
Thank you, Betsy. Good afternoon, ladies and gentlemen. Thank you for joining us on Carvana's First 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 first quarter shareholder letter is also posted on the IR website. Also, we posted additional information on the ADESA US acquisition transactions, which can be found in the Events and Presentations page of the 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 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 it over to Ernie Garcia. Ernie?
Ernie Garcia, CEO
Thanks, Mike, and thanks everyone for joining our call. The first quarter was a challenging quarter for Carvana. There were a number of impacts on the business, some internal and some external that combined to negatively impact our financial results. We view these impacts as transitory setbacks, and I will hit them first. Secondly, I will discuss what we are working on internally to address each of these impacts. Next, I'll touch on the underlying demand for our offering. And finally, I'll close on our thoughts on the long term. First, let's discuss the impacts to our results. There were three primary drivers of our results in the first quarter. The first is our operational constraints that most severely impacted our inspection centers and logistics network. These began with Omicron, were exacerbated by winter storms and then the path to recovery has been slowed by our inspection center logistics network and inventory growth causing us to produce and move more inventory to newly opened IRCs that are further away from our average customers, leading to additional network complexity. These effects had negative impacts on both sales volumes and retail GPU. The second was industry-wide impacts. Affordability and general consumer sentiment combine to drive fewer industry-wide sales in prior periods. While we continue to rapidly grow market share throughout the quarter, the combination of these economic factors and our operational constraints caused our growth to come in lower than we were anticipating. Because of the operational requirements of our business, we generally plan and build for growth 6 to 12 months in advance, depending on the lead times necessary to ramp each operational team. On average, across our history, this has served us well as it has enabled us to maintain much higher levels of growth in businesses with our operational complexity historically have been able to achieve. But given the internal and external factors described above, this quarter, it caused us to carry more expenses than we had sales to offset them with. This led to total SG&A levels that were largely on plan in total dollars being much higher per unit than prior periods and, to a lesser degree, also flowed through COGS driving down total GPU. Thirdly, interest rates moved up rapidly in the quarter. As we originate the loans our customers use to buy parts from us and then sell them later, interest rate increases between initially showing our customers their financing terms and ultimately selling those loans leads to a reduction in the value of the loans we sell, which impacted reducing other GPU. These factors combined to lead to a clear step back in our financial results. While this isn't what we are shooting for, it is straightforward to understand and it suggests straightforward solutions. Returning to positive EBITDA and resuming our marks to our long-term financial model from there requires that we resolve our operational constraints that we get our expenses and sales back into balance through a combination of sales increases and cost efficiencies, and that we adjust our process in our finance group to reduce the impact of rapidly rising rates on GPU until we return to an environment with more stable rates. We have detailed plans that are already in motion in each of these areas. Our logistics team has clear plans in several key areas to catch up the level of our metrics were a year ago and then to move significantly beyond them. The addition of ADESA to our network will help to accelerate these plans further. Logistics progress will also unlock the ability to make more of our inventory visible to more of our customers, which is a straightforward way to drive sales up faster, as faster delivery time, larger selections increase customer conversion. Beyond that, the team is working on several near and medium-term plans to improve the selection of more affordable cars we have for our customers. These plans start as simply as buying a greater quantity of less expensive cars and extend the changes to our inspection center processes to produce more of those cars and the other product enhancements that make it easier for our customers to find and purchase less expensive cars. In addition, we are using our temporary excess capacity as an opportunity to gain additional cost efficiencies. While we are always aiming for cost improvement, the constant pressure of growth often dominates our priorities and slows our progress. Across the company, we have each of our operational teams focused on process and product improvements to increase efficiency in an effort to reduce cost and improve our scalability as part of Project Catapult. We are determined to make the most of this opportunity. Next, I want to touch on the underlying demand for our offering. Here, the signs continue to look great. We continue to rapidly gain market share in this difficult environment as we grew by 14%, while the market around us was shrinking. Further, we can look at subpopulations of our customers that are less impacted by affordability and interest rates to get a deeper view into demand. Our customers with FICO scores over 700 grew approximately 50% despite our logistics constraints and our ongoing suppression of inventory visibility. Lastly, I want to close with a couple of thoughts on the long term. At any point in time, the company's success is driven by the sum of the structural forces that define an industry by the macroeconomic backdrop and by company-specific factors. In the long run, the macroeconomic backdrop disappears from that equation as it just becomes its average. Structurally, nothing has changed. We're a fragmented 40 million unit per year market, with significant margins and customers who are open to and excited about something new. From a company-specific perspective, we continue to make constant progress. During this period, we have excess capacity, we have a transitory reduction in the amount of energy necessary to keep up with growth. While we will not allow that to reduce our energy output, we will simply point more of our energy towards system and process improvements to maintain the same aggregate level of relentless improvement. In nine years, we've gone from an idea to a company with over $12 billion in revenue, and we are still just 1% of our market. In nine years, we went from the company with negative gross profit to a company with over 4,500 gross profit per unit. In nine years, we went from the company that lost $0.30 of EBITDA for every dollar of revenue to a company with approximately EBITDA breakeven just last year. That constant progress has been the result of the opportunity our market has presented us, the power of the business model we have built, the quality of the team we have assembled and the endless effort, creativity, and passion the team is poured in. Some quarters are bumpier than others. Unfortunately, in the real world, they are rarely perfectly straight lines to anywhere. While it might be a little harder to see this quarter than most, we remain squarely on the path to building the largest and most profitable automotive retailer and to changing the way people buy and sell cars. The march continues.
Mark Jenkins, CFO
Thank you, Ernie, and thank you all for joining us today. Carvana continued to gain market share in Q1, but several external and internal factors impacted our financial results. Some of these impacted the used vehicle industry as a whole, such as Omicron, used vehicle prices, interest rates, and other macroeconomic factors, while others were more specific to Carvana such as reconditioning and logistics network disruptions. The impact of these factors on retail units sold volume was the primary driver of our results in Q1. We generally prepare for sales volume 6 to 12 months in advance, meaning we built capacity in most of our business functions for significantly more volume than we fulfilled in Q1. With our costs relatively fixed in the short term, the lower retail unit volume led to higher cost of goods sold per unit and higher SG&A per unit. These effects, combined with rapidly rising interest rates and widening credit spreads, led to lower EBITDA margin. In Q1, retail units sold totaled 105,185, an increase of 14%. Total revenue was $3.497 billion, an increase of 56%. Total gross profit per unit in Q1 was $2,833, a decrease of $823 year-over-year. This total gross profit included a $76 per unit impact from Ernie's 1 million Unit Milestone Gift to Carvana employees. Retail GPU was $808 in Q1, a decrease of $403. Retail GPU was impacted by a more than $600 per unit increase in reconditioning and inbound transport costs relative to the prior year and a more than $100 per unit decrease in shipping revenue, driven by refunds to customers following extended delivery times. Retail cost increases in Q1 were primarily due to inefficiencies in the inspection and reconditioning centers and logistics network, which in turn were driven by Omicron, severe weather events, and the extended timelines required to recover from these events, and due to lower retail units sold volume, which increased per unit cost. We believe the factors impacting Q1 were transitory, and we expect to see retail costs move toward more normalized levels over the coming quarters as our logistics network normalizes, and our expense levels are better balanced with sales volumes. Wholesale GPU was $219 in Q1, a decrease of $8, driven by higher volume, offset by lower profit per unit. Other GPU was $1,806 in Q1, a decrease of $412. Year-over-year changes in other GPU were primarily driven by higher benchmark interest rates at the time of loan sale relative to origination interest rates and widening of credit spreads following the onset of the conflict between Russia and Ukraine, partially offset by the impact of higher industry-wide used vehicle prices on average loan size. Looking sequentially, the rapid rise in benchmark interest rates and widening credit spreads had a significant impact from the spread between funding costs and origination interest rates in Q1 versus Q4. This increase in spread had a more than $600 impact on other GPU in Q1. We expect this spread to move toward more normalized levels over the coming quarters. The same factors that impacted retail units sold and total GPU also impacted EBITDA margin in Q1. EBITDA margin was minus 11.6%, a decrease from minus 1.3%. EBITDA margin included a 0.8% negative impact from Ernie's 1 million Unit Milestone Gift to Carvana employees. While we faced a uniquely difficult environment in the first quarter, we are already seeing positive trends across our key metrics, and we expect meaningful sequential improvement in Q2 versus Q1 in retail units sold, revenue, total GPU, SG&A per retail unit sold, and EBITDA margin. In our last shareholder letter, we provided an expectation that we would achieve over 4,000 GPU and approximately EBITDA breakeven in the last three quarters of 2022 taken in aggregate. We now expect to return to over 4,000 GPU and positive EBITDA to be pushed back a few quarters and then to resume our march toward our long-term financial model. We are on track to close our acquisition of ADESA U.S. in May and are excited about the role that ADESA U.S. will play in our path toward our long-term goals. The ADESA U.S. footprint includes 56 sites with approximately 6.5 million square feet of buildings on more than 4,000 acres. We expect to be able to build approximately two million units of annual reconditioning capacity in these locations, while still operating ADESA U.S.’s wholesale auction business. This is the equivalent of approximately 30 greenfield Carvana IRC locations in terms of the production volume that we expect to unlock over time. Adding the ADESA U.S. footprint will dramatically improve our logistics network over time. With the addition of these locations, we will eventually have reconditioned inventory within 50 miles of 58% of the US population and within 200 miles of 94%. This will have the benefit of reducing shipping distances, times, and costs, accelerating us to our long-term financial model. We expect the ADESA U.S. purchase price to be financed primarily with $2.275 billion in unsecured notes. In addition, we expect to raise an additional $1 billion in preferred equity and $1 billion in common equity for future real estate improvements on the ADESA U.S. sites and for general corporate purposes. These financing transactions will place us in our strongest total liquidity resources and production capacity position ever, giving us a strong foundation for profitable growth and significant flexibility to execute our plan. On March 31, we had approximately $1.7 billion in total liquidity resources, including cash, revolving availability, and financeable real estate and securities. In total, we expect the transactions to generate approximately $1.9 billion of net cash proceeds after payment of the ADESA U.S. purchase price and more than $900 million of financeable real estate, bringing our total liquidity resources to approximately $4.5 billion pro forma for the transactions. In addition, we estimate that the ADESA U.S. locations have approximately 200,000 units of facility capacity that is available for use with limited incremental site improvements. Mining our own IRCs with these ADESA U.S. locations, we expect total annual capacity at full utilization to be approximately 1.4 million units by the end of 2022. We are excited to join forces with the ADESA U.S. team on the path toward our long-term goals of buying and selling millions of cars per year and becoming the largest and most profitable auto retailer.
Operator, Operator
We will now start the question-and-answer session. The first question today comes from Zach Fadem with Wells Fargo. Please go ahead.
John Parke, Analyst
Hey, good afternoon, guys. This is John Parke on for Zach.
Mark Jenkins, CFO
Hey, John.
John Parke, Analyst
I guess with the two offerings you just announced, it doesn't sound like you guys are really changing the way you put on financing the acquisition. But can you guys kind of share how you're thinking about the debt terms, I guess, the incremental interest expense as well as any associated CapEx plan with this acquisition in 2022?
Mark Jenkins, CFO
Sure. So, yes, I think we have announced our plans for financing the ADESA purchase as well as future real estate improvements on the ADESA site and additional funds for general corporate purposes. We expect that to take the form of $2.275 billion in unsecured notes, $1 billion of preferred equity, and $1 billion of common equity. I think the specific terms on that, we'll discuss in the coming days. But I think that's the basic transaction structure. I think we feel really great about that transaction structure. I think it gives us a lot of flexibility to execute our plan. I think we feel really great about the trajectory that we're on. We feel really great about joining forces with ADESA U.S. and all the benefits that, that brings to our core business. And so, yes, I think we feel grateful about the acquisition and the financing structure. And then in terms of some of your questions on specifics on the securities, I think we'll talk more about that in the coming days. In terms of CapEx, one of the nice benefits of the ADESA acquisition is, we do expect it to meaningfully reduce our quarterly CapEx outflows from the levels that have been over the past several quarters. And the reason for that is we have been spending a significant amount through 2021 and early 2022 on building out our own Carvana greenfield IRCs. That's been a meaningful use of capital expenditures for us. Now with the ADESA locations online, we do expect to be outlaying meaningfully less CapEx on certainly Carvana greenfield IRCs and then in general. So I think that's the directional guidance that I would give there.
John Parke, Analyst
Great. And then just kind of switching gears a little bit on like, I guess, financing GPU. You guys talked about the $600 sequential impact from the compressing ABS spreads normalizing. I guess, I mean, is there any way to kind of help us think about like what a normal level of other GPU should be?
Mark Jenkins, CFO
Sure. So, I mean, I think we have talked a little bit about other GPU. I think we had a strong year on other GPU in 2021. We do think there were tailwinds to our other GPU in 2021 that came from elevated industry-wide used vehicle prices, because basically, the way that that works is the higher used vehicle prices lead to higher average loan sizes, which lead to higher other GPU, other things being equal. We sized that about $150 per unit. And then I think the other point that I would make on other GPU is we see significant opportunities in front of us to expand other GPU from a fundamental perspective off of what we've seen historically. I think that takes the form of fundamental improvements in the finance platform, other fundamental improvements in ancillary products, including existing and new ancillary products. So, I think overall, we feel like we built a business to generate very significant other revenues and very significant other GPU over time. I think Q1 was certainly an outlier, not representative at all of what we would expect to see on a normalized basis.
Operator, Operator
The next question comes from Chris Bottiglieri with BNP. Please go ahead.
Chris Bottiglieri, Analyst
Thank you for the question. My first inquiry is related to some comments from your peers today concerning concerns that ADESA may be losing several of its OEM relationships because of the acquisition. I would like to understand your perspective on the EBITDA you have acquired, particularly regarding the attrition estimates you've factored in. Additionally, looking at the bigger picture, is there an opportunity to restructure the deal to address these issues? Would you incur a breakage fee if you decided to walk away from this deal? It would be helpful to clarify these points prior to the Capital Markets Day.
Ernie Garcia, CEO
Sure. I want to express how excited we are about this transaction. We believe it has the potential to be transformative, giving us a nationwide presence, increased capacity to produce more cars, and enabling us to place those cars closer to customers. This will reduce delivery times and costs, enhance the customer experience, and allow us to operate at higher volumes and speed while furthering our long-term financial goals due to the advantages of these locations. We are also enthusiastic about the auction business and how it complements our Carvana operations. This overarching excitement shapes our focus more than any short-term results or developments. There has been a general decline in volume across the auction business over the past quarter, similar to trends in retail, and ADESA has experienced this as well. A small number of buyers and sellers have temporarily chosen not to engage with ADESA's part of the transaction, but this has been less impactful than we expected. We've also received positive news, and we don't think these changes have significantly affected results yet. Most importantly, we are very excited about the transaction—it’s a long-term foundational vision that fuels our enthusiasm, encompassing reconditioning, logistics, and the opportunities that arise from the auction business. While there may be some challenges ahead, they have not reached a concerning level for us.
Chris Bottiglieri, Analyst
Got you. That's helpful. Then just a related follow-up. It looks like there's an extra $1 billion of capital being raised now. Can you maybe just talk about that just because how frankly scared the macro backdrop is you're just being a little bit conservative with the balance sheet, or would you look to kind of repay some debt outstanding with some of the proceeds? Trying to understand what the extra $1 billion comes from. I apologize if you already addressed this.
Mark Jenkins, CFO
No, you're good. So, what I would say is I think the way that we've chosen to structure this purchase and the capital that we're raising is aimed at giving us maximum flexibility. It dramatically enhances our liquidity position. I think it does give us a lot of flexibility in the future to do interesting things. Undoubtedly, this quarter is not what we were planning for. We both hit in our prepared remarks. It's in the shareholder letter. We do plan for growth six to 12 months in advance. The world looks very different six, 12 months ago. And so we built for a different environment than we find ourselves in today that had costs. Those show up in the results that we're reporting. And now we're starting from a worst place when we would have liked to start. And so I think for the remainder of this year, we have to kind of dig out of that hole a little bit. So, that also generates rationale for a little bit of additional cushion. And then obviously, the macro backdrop is uncertain. And I think that extends to the broader macro economy and also to the way the auto industry is going to evolve from here. There are some pretty unique things happening in the auto industry these days that I at least haven't seen in my career. And so, we think that, given the opportunity that we've got, the size of that opportunity, the strength of which our customers have responded to our offering over the last nine years, the market share that we've seen continually growing across our markets, the continued market share growth that we've seen, the addition of ADESA and the ability for us to build into that opportunity. We just want to make sure that we position ourselves very well to ride out whatever storm may or may not come. And so, I think that this structure gives us the ability to do that. It gives us the ability to continue to run our play. And that's what we're going to do, because we think the opportunity is absolutely massive.
Operator, Operator
The next question comes from John Colantuoni with Jefferies. Please, go ahead.
John Colantuoni, Analyst
Thanks for taking my questions. So the shareholder letter mentioned aligning revenue and costs over the coming quarters, while also mentioning that profitability suffered somewhat in Q1 from having a high level of fixed costs. Maybe you could just help square those two comments, and also help detail some of the levers you have to become more efficient over the coming quarters.
Ernie Garcia, CEO
Sure. First, let's go over how I see the numbers working in a straightforward manner. We set our growth targets 6 to 12 months in advance due to our rapid growth. Our growth isn't consistent; it tends to fluctuate, especially around tax season at the end of February and early March. This requires us to plan ahead and expand our operational capacity. In Q4, we experienced 57% growth, and in Q3, it was 74%. We were anticipating higher sales in Q1 but underestimated the impact of affordability, interest rates, and consumer sentiment, which decreased overall volumes. Consequently, we added more capacity than what was ultimately needed, which is reflected in our elevated SG&A per unit, significantly higher than in the past. Even a simple calculation shows that if we had aimed for a level of growth without overbuilding for it, we would have seen a substantial difference of $250 million across 100,000 sales. Another factor affecting the results was the additional capacity we created, which also affected our COGS and various GPU line items as interest rates fluctuated. Moving forward, our primary focus must be on aligning our costs with sales. On a positive note, we've consistently gained market share even in this challenging environment. We grew by 14% this quarter, which, while not as fast as we hoped, is a solid performance given the overall market decline. There are signs of underlying demand growth, as evidenced by a 50% increase in customers with FICO scores over 700 this quarter and growth across all cohorts year-over-year despite the shrinking market. Our next step is to position the business to capitalize on this growth, paying attention to the macro environment. As we continue to gain market share, we need to consider the broader industry's sales trends. A persistent downturn will pose challenges, but we expect that stabilization will eventually turn into a tailwind for us. We also have certain operational levers that we control. We faced challenges from Omicron and subsequent logistics disruptions due to winter storms, coupled with a rapid expansion of inspection centers and inventory that outpaced our projections, adding strain to our network. Unfortunately, this has limited our ability to provide visibility of inventory to customers across our network. We're focused on restoring our logistics capabilities to last year's levels, which could lead to faster delivery times and increased sales. Improving inventory visibility should also boost sales. Overall, our goal is to get back on track to drive sales up. I'm proud of our team for recognizing opportunities in every situation, whether planned or unexpected. For nearly a decade, we've been consistently pushing ourselves to meet demand, successfully managing growth, GPU enhancement, and EBITDA leverage. However, with rapid growth come trade-offs and priorities that can be challenging. Growth typically takes precedence, which often sidelines cost reductions. Presently, we find ourselves in a unique position with excess capacity, allowing us to focus on increasing efficiency at a faster pace than before. This shift in focus from merely sustaining growth to enhancing operational efficiency presents a significant opportunity. Ultimately, we aim to achieve a balance between increased sales from our market share gains, operational improvements, market conditions, and optimizing expenses through this opportunity. We are optimistic about this plan and feel confident moving forward.
John Colantuoni, Analyst
Thanks for that. I wanted to ask about the proposed offering mentioned earlier. It seems that last quarter, the additional $1 billion in financing was primarily allocated to the ADESA assets. However, the proposed offering indicates that you'll also be investing that $1 billion into working capital and general corporate purposes alongside the investments in the ADESA assets. Can you specify how much of that $1 billion will be directed towards each of these categories? Also, what has changed since last quarter that requires an additional $2 billion in cash? Thank you.
Mark Jenkins, CFO
Sure. So on the construction improvements to the ADESA locations, there's nothing changed there. So we still expect to invest approximately $1 million over a period of multiple years in the ADESA locations in order to move them from what we estimate is about 200,000 infrastructure capacity today, if fully staffed from an annual retail reconditioning perspective up to 2 million annual units of production capacity at full utilization when fully staffed, which is our goal for the ADESA locations. So that is exactly the same as we've always thought about it. I think we do plan to fill out the locations. We expect that to cost about $1 billion over a period of multiple years. In terms of the additional capital, I mean, I think the way we're thinking about that is we have a very big opportunity as a company. I think we're extremely excited about the opportunity in front of us to take meaningful market share to drive strong unit economics, to take advantage of the ADESA acquisition, to get additional reconditioning capacity closer to more customers to improve customer experience and fast speed delivery times, take advantage of the logistics network benefits that come from having a more broadly distributed footprint. And so I think we decided to raise that additional capital just to allow us to completely focus on that goal building toward our long-term model and to stop having conversations about liquidity and what happens in a deep recession and a prolonged recession and all those sorts of things. So, I think we feel really good about the transaction structure that we've put together. I think we feel great about the ADESA acquisition and the overall trajectory that that places us on.
Operator, Operator
The next question comes from Michael Montani with Evercore ISI. Please go ahead.
Michael Montani, Analyst
Thanks for taking the question. I had two questions. The first one was around the demand side. So last quarter, you had given some color around how units grew for households with $100,000 plus of income versus those with $50K. So, I was wondering if you could discuss that and/or the impact of stimulus, which we think could have been 500 bps to 1,000 bps? And then I had a separate question.
Mark Jenkins, CFO
Sure. So what I would say is, at a high level, those kinds of metrics remain the same or kind of even more severe, where those with higher incomes have outgrown those with lower incomes by even more recently. So, I think this kind of theme of affordability has continued to get stronger over the last several months. So, whether you're looking at that in terms of income, in credit, we provided the statistic with customers below 700 FICO or an age. I think that basically shows up anywhere. So that is clearly something that is very active in terms of what's going on in the auto industry today. Those with higher incomes and better credit are still buying cars at much higher levels than those with lower incomes and lower credit in this environment. I think it's hard to disentangle the stimulus. There were several different ways of stimulus last year and the year before and it's hard for us to precisely disentangle that. Clearly, that is something we're comping over. Last year, it was tax season here as a little bit of stimulus story thereafter. And this year, tax season, in general, I would say was much softer in terms of impact than tax seasons historically have been. I think it's hard to disentangle the kind of comping stimulus effect from the affordability issues and the general consumer confidence and just kind of socioeconomic issues and everything going on in the world. But clearly, it all played something of a role.
John Colantuoni, Analyst
Okay. That's helpful. And then just on the headcount front, we had seen a pretty significant kind of quarter-on-quarter reduction in job openings. And I'm just wondering if you could talk to kind of if you assume volumes are relatively similar or improved kind of only modestly. How long do you think it would take to kind of rightsize the cost structure for that kind of environment? Is it kind of a one quarter thing, or is it more two to three quarters?
Ernie Garcia, CEO
Sure. So I don't think we're going to give precise timelines on that. What I'll say is, we're going to be working hard in every direction. We've been growing market share quickly. We clearly have operational opportunities that we expect will drive additional growth, all else constant. We're clearly focused from a product perspective on driving additional affordability, which I think will be helpful for customers. And then we're also very focused on gaining cost efficiencies as quickly as we can. I would say our plan right now is to sprint in all those different directions. And then we'll see where that all comes. I think historically, it's been easier for us to provide specific guidance and forecast when we're trying to predict what's going on with our demand and what's going on with our execution. I think today we have a significant overlay of dynamism in the economy broadly. And I think we want to be careful about being too specific in any of our projections as a result of that.
Operator, Operator
The next question today comes from Brian Nagel with Oppenheimer. Please go ahead.
Brian Nagel, Analyst
Good afternoon. Thank you for addressing my questions. I apologize for focusing on the short term, but you mentioned various effects in the quarter being transitory. Could you elaborate on the trend throughout the quarter and what you're seeing as we move into Q2, particularly regarding unit sales and GPU, as well as any early improvements with the factors starting to ease?
Ernie Garcia, CEO
Sure. Well, I think we definitely need to discuss Q1. In Q1, it generally appeared that the industry environment was worsening throughout the period. It's challenging to determine how much of that was due to affordability, consumer confidence, or interest rates. However, looking at auto sales across the industry and among peers, it seemed to decline during the quarter. Since it's early in Q2, I don't think we'll provide a specific outlook yet. That said, since our last earnings call, it’s clear that industry conditions have continued to worsen. We believe this situation is temporary, though the duration of it is uncertain. The auto industry typically involves around 40 million transactions, averaging over time because there are about 27 million cars on the road, and consumers usually trade vehicles every 6.75 years. In times like this, potential buyers often delay their decision to purchase a car for various reasons. Historically, such a slowdown leads to pent-up demand, which tends to resolve relatively quickly. Right now, we have additional factors at play, including inflation, reduced new car production, and car prices rising significantly faster than inflation. It's difficult to predict how these factors will affect the market in the short term. From our perspective, as we mentioned in our prepared remarks, the key focus is to work towards the significant opportunity ahead of us, which is the 40 million transactions, while continuing to make progress as a company. We aim to position ourselves to be resilient against any challenges the macro economy presents, and we believe that maintaining capital is essential to that strategy.
Brian Nagel, Analyst
That's helpful. So just to follow up on that, you're primarily discussing the unit sales. However, regarding the GPU side, particularly the reconditioning costs, have you started to see an improvement in that dynamic yet?
Ernie Garcia, CEO
Sorry. So yes, so on the retail cost side. So, I mean, I do think Omicron had very acute effects, for example, on the reconditioning centers and we are moving further away from that. So I think that's beneficial other things being equal. We definitely have been seeing improvements in the logistics network versus the most disruptive points. So I think that's beneficial other things being equal. So I would say we are seeing some positive data there.
Operator, Operator
The next question comes from Rajat Gupta from JPMorgan. Please go ahead.
Rajat Gupta, Analyst
Hi, good afternoon. Good evening. Thanks for taking the question. Just first one to know on the consumer environment in the near-term. In the shareholder letter, you mentioned that you're seeing a pretty substantial sequential improvement already in your metrics, including sales. Is that primarily a function of just elevating some of the capacity constraints or bottlenecks, or is there something in the demand environment that's helping that? Just wanted to clarify that, and I have a follow-up.
Ernie Garcia, CEO
Sure. These aspects are somewhat challenging to separate. However, from a logistics standpoint, we have seen some progress. If we compare our current situation to a year ago and look at our peak performance, we've recovered about half of the gains we aim to achieve to return to last year's level. We still have more ground to cover from there. We believe that certain specific advantages related to Carvana are contributing positively, and we also feel we are capturing more market share. As long as the overall decline in industry sales continues at a consistent rate, that should benefit us, provided we maintain our execution. It's still early in the quarter, so we don't want to discuss too much, but we are noticing operational improvements that are likely positively influencing our performance.
Rajat Gupta, Analyst
Got it. Thanks for clarifying that. And the other thing you mentioned in the auto GPU that you are able to successfully pass on the benchmark increases through APRs in the month of April. Have you seen any impact on demand because of that, or has that been very consistent versus what you would have expected? I mean some of your competitors had some different perspectives on that. So I was just curious like what you're seeing in like, how is that influencing demand, if at all? Like or is it all pretty much sticking pretty nicely? Thanks.
Ernie Garcia, CEO
Sure. I would say that, all else being equal, it's clear that rising interest rates have a negative effect on demand, and we are careful to monitor this continuously within the company. Additionally, as benchmark rates increase and risk spreads widen, the overall market tends to elevate interest rates as well. This means that consumer options generally increase. There’s a term often referred to, which we have used previously, indicating that interest rates are somewhat sticky; when they rise, it's not always easy to immediately pass all the increases onto customers in a way that is economically optimal. The adjustment tends to take some time since different groups have varying perspectives, but generally, this adjustment period is not very long. The same principle applies when rates decrease. Therefore, we would definitely anticipate higher demand if we were not increasing interest rates in this environment, but the reality is that the rest of the market is also raising interest rates. Thus, we are not experiencing the same effects as if we were raising rates independently while the market was not doing the same.
Operator, Operator
The next question comes from Adam Jonas with Morgan Stanley. Please go ahead.
Adam Jonas, Analyst
Hey, Ernie. What – can you tell us about Project Catapult, please? You're referring to a lot of the cost actions. And based on the e-mails I'm getting tonight, your quarterly cash burn and how – and what you can control to manage that even if it wasn't part of the plan is kind of a big impact on how long the capital that you're in process of raising can last you depending on outcome. So it sounds super important, but you mentioned logistics teams and some stuff, but I don't know if you could be a little more specific with those efficiency levers in terms of dollar terms or how we can dynamic that?
Ernie Garcia, CEO
Sure. Well, first of all, Project Catapult is the internal term that we use for the project that's running across all of our different operational groups right now. So that was a little bit of an internal call out to our teams. There's a lot going on across – across every single operational team. There are very clear goals and very clear metrics and a cadence of kind of catching up and accountability to make sure that we can gain as quickly as we possibly can. And we really are excited internally about using this as an opportunity to make gains that are hard to make in moments where you have as much pressure as we've had on average from growth. So I think there are many, many different subcomponents to that plan, and it does cross every operational team and several product teams as well. So I don't even really know where to begin, but I would say that the overall theme is called the catapult and put ourselves in a spot where we're really ready to efficiently grow when the market supports us and where we get gains in the near-term in all these areas where we know we can be better, and we finally have an opportunity to focus on it. So that's the general theme.
Adam Jonas, Analyst
So Ernie, I'm interpreting that as it's not purely a cost-cutting program. It's an efficiency program that can yield savings in a prolonged period of half the growth that you would have anticipated if at 14%, if that was prolonged and not what you're capacitized for that you could lower the burn rate in the next couple of quarters? Is that relevant?
Ernie Garcia, CEO
Yeah, I think efficiency is kind of lower cost and simpler to scale up. And so I think it's the pursuit of efficiencies across all of our different operational teams.
Operator, Operator
The next question comes from Seth Basham with Wedbush Securities. Please go ahead.
Seth Basham, Analyst
Thanks a lot. My first question is just a clarifying one on the last one. So you are in the process of cutting costs in certain areas of the business to reduce the cash burn.
Ernie Garcia, CEO
Sorry, that was your question. Yes. So, we are working on these projects that I discussed to find efficiencies across the business. That extends to every operating team, and all those constant, we do expect that to reduce variable costs.
Seth Basham, Analyst
Okay, thank you. And then my follow-up question is just understanding when you announce the ADESA deal, you were thinking of financing at that point in time from my understanding, solely with debt and now you're financing it probably with preferred equity and an additional equity cushion. So, what changed related to that financing component for the ADESA acquisition and the improvements from the debt components of the preferred equity component between then and now?
Ernie Garcia, CEO
Sure. So I think you maybe separate that into two. So, one is the addition of equity. And I think that, that was driven by giving us more flexibility as discussed earlier. We do think our opportunity is enormous. We think the market around us has moved a little bit. We think that suggests that we should put ourselves into a position where we can operate as flexibly as possible to take full advantage of the opportunity that we've got. And so I think that's an addition. And then I think in the capital structure, we evaluated a lot of different possible solutions and evaluated those through a lot of different lenses, cost efficiency, flexibility, pre-payability, and came down with this being the right capital structure. So I think there are a bunch of considerations there.
Operator, Operator
The next question comes from Michael Baker with D.A. Davidson. Please go ahead.
Michael Baker, Analyst
Thank you. I have a couple of quick questions, starting with one and then a follow-up. Regarding used car pricing in the industry, what is your perspective on its direction? Some indexes indicate a decrease on a sequential basis, and the year-over-year growth appears to be less than before. However, your average selling prices for used cars are rising at an increasing rate. A competitor that reported this morning showed similar trends, with year-over-year increases higher than last quarter and sequentially, prices are also rising. What do you think accounts for this discrepancy, and what is your outlook on used car prices?
Ernie Garcia, CEO
That's a challenging question. To begin with, the discrepancy may stem from timing as well as the differences between wholesale and retail markets. At the end of last year and into early this year, wholesale prices rose, but recently they've started to decline. When comparing quarter-over-quarter and year-over-year figures, the variations depend on the mix of car prices during that timeframe. These discrepancies could be influenced by the different periods or companies involved. Typically, retail prices have lagged behind wholesale prices and tend to change more gradually. The market operates such that cars are purchased at a certain moment and financed, with dealers often selling them at a markup based on those costs. Therefore, when wholesale prices decrease, it doesn't mean that retail prices will drop right away, as many cars on dealer lots were bought earlier at higher prices, and dealers may choose not to incur losses on them. This results in more stability in retail prices. I started by discussing historical prices and then addressed the factors that can create a gap between wholesale and retail markets. As for future trends, I can't predict with certainty. Currently, some used cars are approximately 40% more expensive than last year, while broad inflation is around 8%. Compared to other goods, cars are relatively more expensive now than they have been historically. Over the medium term, we might see car prices align more closely with the historical relationship to other goods, which would imply either higher inflation or lower car prices. A significant factor influencing car prices and the current dynamics in both the new and used car markets is the low production levels of new cars compared to historical data. Therefore, understanding how all this will balance out is complex, and we will closely monitor the situation to manage the business effectively. Our hope is for car prices to decline, as this would be preferable all else being equal. We believe that even if car prices were to decrease, the impact on retail gross profit might not be as negative as it appears, since lower wholesale prices could benefit our customers, contributing positively to normalizing the industry dynamics, and creating a favorable environment for the business. So, we wish for car prices to go down but prefer not to make precise predictions.
Michael Baker, Analyst
Yes, that makes sense. Just to follow up on that, you mentioned before that the ideal environment includes lower used car prices, which you reiterated, as well as lower interest rates. It seems we might have one of those, with car prices going down, but we are seeing higher interest rates. How would you rate that environment on a scale of one to ten, with ten being the most ideal?
Ernie Garcia, CEO
If we're rating the environment from one to ten, I'd say ten would mean everything is affordable, competition eases, and consumers are enthusiastic. That would be our ideal. Moving away from that, the key factor is ensuring cars are affordable for people, given the total vehicle prices and interest rates, as most consumers are financing their purchases. Therefore, affordability is a blend of car prices and interest rates. Additionally, stability is crucial. We see a significant opportunity ahead and aim to capitalize on it, but achieving that efficiently is much easier with clear insights about the future. More stability in the market would facilitate steady growth and help us better anticipate market changes. While we prioritize that stability over the specific levels of rates or prices, we would certainly prefer improved affordability for our customers.
Operator, Operator
The next question comes from Chris Pierce with Needham. Please go ahead.
Chris Pierce, Analyst
Just two. On the first one, we talked a lot about efficiency, but you guys spent $21 million more dollars to 8,000 less cars as far as advertising. I just want to think about advertising. Is that something that was preplanned and that kind of the demand environment is stuck up by you guys, or is that something that's kind of a bigger picture sacred cow? And the second question will be around credit spreads? Thanks.
Ernie Garcia, CEO
Sure. So what I would say on that is, I think, as I said, across the board, we build our plans out in advance. And then something that we've learned to do over time is be careful about yanking the wheel too much too quickly because generally, you regret it when you do. And I think when we talk about marketing, in particular, we still remain a relatively young brand that's building a lot of awareness. And we think that there's a lot of value in continuing to build awareness and understanding of what we do and trust in what we do. And we also think that all times, marketing is something that has a potentially long payoff. I think a lot of times, marketing dollars are thought of as kind of a direct investment where a dollar goes in and a sale comes out. But the truth is a lot of what you're doing with marketing is getting impressions on people and communicating what you do and how you do it, and those impressions add up and you build a brand with that and the payoff of marketing can be long. And so we will look to make moves that we think are intelligent across the board across time as we're managing the business, but we also try to be careful to not yank the wheel too much. So that's part of what you're seeing.
Chris Pierce, Analyst
Understood. If I look at Q1 API or some securitization compared to Q4, and considering that we're seeing higher FICO score customers contributing more to growth, will APR increase as interest rates rise, even affecting these top customers? I'm trying to understand how the spread can widen since you primarily have two levers for yield and not much control over one of them.
Ernie Garcia, CEO
Certainly. Customers with higher FICO scores typically differ from those with lower scores. The important interest rate spread is between their rates and the costs of funding. For other customers, it's the same comparison. What is crucial is maintaining a spread that can be consistently monetized. This quarter was somewhat unique; the effects of mix shifts weren't significant because the spreads were thoughtfully priced in. The real issue arose when we originated loans at a set interest rate with an expected funding cost. If the actual funding cost differs from this expectation due to changes in benchmarks, risk premiums, or anticipated losses between origination and sale, it creates a challenge. We observed some drastic movements, possibly the most significant benchmark changes since the financial crisis, which affected us. However, if you examine the rates charged to customers during the quarter alongside the expected funding costs, we were originating loans in a similar position to what we had before.
Operator, Operator
Our last question today will come from Naved Khan with SunTrust. Please, go ahead.
Robert Zeller, Analyst
Thanks. This is Robert Zeller representing Naved. I'm curious about your planning for the next 6 to 12 months. What short-term and operational measures do you have in place to respond to near-term market fluctuations or external macro conditions? Additionally, could you provide information on the current operating levels of the ADESA locations? While I appreciate the projections for full capacity, I'm interested in their current performance at less than full capacity. Thank you.
Ernie Garcia, CEO
In the near term, our aim is to address the operational constraints holding back sales so we can show customers more cars and boost sales. We are also focused on achieving maximum cost efficiency. Currently, ADESA has the capacity to handle around 200,000 cars per year at its facilities, which is already available. Over time, we plan to invest in increasing that capacity to the 2 million we mentioned earlier. However, actual utilization is much lower than our capacity, so there's potential for us to hire, train, and unlock more capacity, keeping in mind that there are steps to be taken before reaching the 2 million. Although the facilities are ready, we still need to hire and train to access that additional capacity. I also want to highlight our footprint and ADESA's locations, as outlined in our shareholder letter. When you examine our current footprint alongside the locations of our reconditioning centers and consider the logistics constraints we've faced lately, it becomes clear how effective our operations can be. We source cars nationwide, transport many to the central part of the country for reconditioning, and then return them to customers. By plotting ADESA's locations on the map, you can see how this reduces transport distances for inbound and outbound logistics. To fully leverage our business model and logistics network, we need to coordinate better between where cars are produced and where they are purchased. We believe this presents a significant opportunity for more efficient coordination, resulting in shorter distances and times between cars and customers. We are excited about this potential and will work to realize these benefits as swiftly as possible. Great. Well, thank you, everyone, and thanks for joining the call. To everyone on Team Carvana, let’s really take advantage of the opportunity. We've talked about it a lot internally, but this is an opportunity that we have. And if we take advantage of it, we're going to look back on it very fondly. And I think there's a huge chance that we can make this into a big positive. So let's do that. I appreciate everything you guys do, appreciate your taking the time to listen to the call, and we'll talk to you again next quarter. Thanks.
Operator, Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.