Earnings Call Transcript - CVNA Q2 2023

Operator, Operator

Good day, and welcome to the Carvana Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Meg Kehan with Investor Relations. Please go ahead.

Meg Kehan, Investor Relations

Thank you, Rocco. Good morning, ladies and gentlemen, and thank you for joining us on Carvana's Second Quarter 2023 Earnings Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors.carvana.com. The second quarter shareholder letter is also posted to the IR website. Additionally, we posted a set of supplemental financial tables for Q2, 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 and Form 10-Q. 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. 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 financial 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 on such short notice. Let me start with the most important takeaways in this quarter. It was a great quarter for Carvana, and we're nowhere near the end. We are making rapid progress because of the power of our customer offering, the strength of our business model, and the quality of our people. The fundamentals are what is making it possible. We're going to sustain the intensity of the last 18 months by maintaining our operating focus for the foreseeable future and embedding it further into our culture. 18 months ago, we were positioned aggressively for growth. We were then hit with a combination of macroeconomic, industry, operational, and capital market impacts that when combined, put us under considerable pressure and demanded a reprioritization of our efforts. So that's what we did. We reoriented the business with a simple three-step plan. Number one, drive the business to positive adjusted EBITDA; number two, drive the business with significant positive unit economics. And number three, after completing steps one and two, return to growth. In the second quarter, we completed the first step. We are extremely proud of the speed of this progress. In the last year, we've taken $1.1 billion of annualized expenses out of the business, and this quarter, we set records in GPU and adjusted EBITDA margin with total adjusted EBITDA dollars over $150 million. These numbers benefited from significant nonrecurring items that collectively added about $900 to GPU and $70 million to adjusted EBITDA. But even when controlling for these nonrecurring items, the results were exceptional. Today, the company is functioning better than it ever has. We're more efficient and we are improving at a faster pace than we ever have in the past. This improvement spans the entire business, from customer-facing improvements, including the early testing of same-day delivery in a subset of markets that have inspection centers to product improvements that enable us to buy more cars from our customers more efficiently to process changes and developments that are making us more efficient across every operating group in the company, and we plan to keep up our pace. With the results and capital structure changes being discussed today, a natural question is how does this change the plan? The short answer is that it doesn't. We plan to continue operating in the same way with the same urgency to continue to drive efficiencies that we expect to result in sustainable significantly positive adjusted EBITDA. From there, we will once again turn our attention to growth as we did successfully for the first eight years of our history. Our opportunity is as great as it has ever been. Our customers love our offering and our business is efficient, highly differentiated, scalable, and extremely difficult to replicate. We remain firmly on the path to selling millions of cars per year and to becoming the largest and most profitable automotive retailer. The march continues.

Mark Jenkins, CFO

Thank you, Ernie, and thank you all for joining us today. Our second quarter results demonstrate significant progress on our path to profitability. We significantly exceeded our goal of driving positive adjusted EBITDA, and we set a company record for total GPU. These second quarter milestones complete step one of our three-step plan to drive positive free cash flow, and we are now in step two, driving repeated and significant unit economics. In the second quarter, retail units sold totaled 76,530, a decrease of 35% year-over-year and 3% sequentially. Similar to past quarters, our decline in retail units sold, which we expected, was driven by four primary factors: reduced inventory size, reduced advertising, increased benchmark interest rates and credit spreads, and a continued focus on executing our profitability initiatives. Total revenue was $2.968 billion, a decrease of 24% year-over-year and an increase of 14% sequentially. As we've previously discussed, our long-term financial goal is to generate significant GAAP net income and free cash flow. In service of this goal, in the near term, our management team remains focused on driving progress on a set of key non-GAAP financial metrics that are inputs into this long-term goal, including non-GAAP gross profit, non-GAAP SG&A expense, and adjusted EBITDA. Due to the dynamic nature of the current environment, we will focus our remaining remarks on sequential changes in these metrics. In the second quarter, non-GAAP total GPU was $7,030, a sequential increase of $2,234, driven by increases in retail and other GPU. The Total GPU in Q2 was positively impacted by approximately $900 nonrecurring benefits, which we described in more detail later in this remark. Non-GAAP retail GPU was $2,862 versus $1,591 in Q1. Retail GPU included an approximately $250 benefit due to an adjustment to our retail inventory allowance. In addition, sequential changes in retail GPU were primarily driven by lower average days of sale, lower retail market depreciation rates, wider spreads between wholesale and retail market prices, and lower reconditioning and inbound transport costs. This retail GPU in Q2 was driven by several fundamental improvements in our business as well as some seasonal end market tailwinds. On the fundamental gain side, retail GPU was driven by normalizing inventory size as well as several key areas of improvement compared to FY 2021, including a higher customer sourcing rate, higher revenue from additional services, and lower reconditioning and inbound transport costs. On the seasonal and market dynamics side, Q2 is on average, the strongest quarter of the year for retail GPU. In addition, this year saw a period of high spreads between wholesale and retail market prices followed by lower-than-expected retail depreciation, which benefited retail GPU in Q2, other things being equal. Non-GAAP wholesale GPU was $1,228 versus $1,236 in Q1. Sequential changes in wholesale GPU were primarily driven by higher wholesale market depreciation rates in Q2 compared to Q1, which negatively impacted wholesale vehicle gross profit per wholesale unit sold, largely offset by operational improvements that allowed us to handle more wholesale units sold volume. Non-GAAP other GPU was $2,940 versus $1,969 in Q1. Sequential improvement in other GPU was primarily driven by a greater volume of loans sold in Q2 compared to Q1. We estimate that a higher-than-normalized volume of loans held and sold in Q2 increased other GPU by approximately $650, other things being equal. Sequential changes in other GPU were also driven by higher origination interest rates relative to benchmark interest rates and higher average loan size. In Q2, we continued to make progress lowering SG&A expenses, reducing non-GAAP SG&A expense by $21 million sequentially, primarily driven by continued reductions in non-advertising expenses. Advertising expenses in Q2 were approximately flat compared to Q1. We expect Q1 to be our near-term low point on quarterly advertising expense as we continue to seek to optimize our spend to balance unit volume and profitability. We believe the cost reductions we've achieved over the past year are long-lasting and sustainable, and we believe we have further efficiencies to realize in all areas. Looking forward, we see three primary drivers to reduce SG&A per retail unit sold. First, in step two of our three-step plan, which is to drive significant unit economics, we continue to see opportunities to reduce operations expenses on a per retail unit sold basis by completing our pipeline of projects to automate manual work, optimize staffing and routing, and increase deep funnel conversion among other initiatives. Second, also in step two of our three-step plan, we continue to see opportunities to reduce and optimize our corporate technology and facilities expenses on an absolute dollar basis through a continued focus on zero-based budgeting and other efficiency gains. Third, in step three of our three-step plan, which is to return to growth, we see a significant opportunity to leverage our corporate technology and facilities expense base, leading to significant leverage on a per retail unit sold basis at higher volumes. Adjusted EBITDA was positive $155 million in Q2 or 5.2% of revenue. The impact to adjusted EBITDA of the previously described nonrecurring items was approximately $70 million, including a $50 million benefit from selling and holding additional loans and a $20 million benefit from our retail inventory allowance. Moving now to our third quarter outlook. While the macroeconomic and industry environment continues to be uncertain, looking toward Q3, we expect the following as long as the environment remains stable. On retail units, we currently expect similar retail units sold in Q3 compared to Q2. On GPU, we currently expect non-GAAP total GPU above $5,000. On SG&A, we expect similar non-GAAP SG&A expense in Q3 compared to Q2. We continue to see opportunities to further reduce non-GAAP SG&A expenses over time. Finally, we expect to generate positive adjusted EBITDA in Q3 for the second consecutive quarter, further demonstrating the first step in our three-step plan toward positive free cash flow. We see upside to these total GPU and adjusted EBITDA numbers, but given the early date of this earnings call within the quarter, we are electing to provide a conservative outlook. On June 30, we had approximately $3.5 billion in total liquidity resources including $1.5 billion in cash and revolving availability and $2 billion in unpledged real estate and other assets, including more than $1 billion of real estate acquired with ADESA. Today, we announced the transaction support agreement with over 90% of holders of our senior unsecured notes to exchange approximately $5.2 billion of those senior unsecured notes for new senior secured notes with maturities ranging from December 2028 through June 2031. The strong performance of our business in 2023 presented an opportunity for a win-win transaction for Carvana and its senior unsecured noteholders. The transaction reduces our total debt by over $1.2 billion, reduces our cash interest expense by over $430 million per year over the next two years, and extends more than 83% of our 2025 and 2027 senior unsecured note maturities, giving us significant flexibility to execute our plan toward driving positive free cash flow.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Today's first question comes from Ron Josey with Citi. Please go ahead.

Ronald Josey, Analyst

Thanks for taking my question. I want to discuss overall demand trends, and while I know we’ll touch on the debt restructuring, Ernie, could you address the inventory situation? I believe it was down in December, particularly regarding the days of inventory. I’m curious how that aligns with overall demand, especially as supply improves. Are you noticing any signs, particularly from companies in the energy sector with a more stable environment? Any insights on the broader macroeconomic situation would be appreciated. Thank you.

Ernie Garcia, CEO

Sure, let's begin with the inventory aspect of your question. Inventory has decreased by over 50% year-over-year, possibly closer to 55%. It has also declined from the previous quarter. We have been actively working to reduce our inventory to better match our sales volumes. This adjustment has positively impacted our retail gross profit. This quarter for retail gross profit has been impressive by any standard. One significant factor over the past six to nine months has been our focus on reducing inventory and aligning it with sales volumes, which has allowed for quicker turnover and reduced depreciation. Currently, the market is characterized by high prices, elevated interest rates, and challenges with customer affordability. While there are indications of depreciation, it resembles last year's depreciation, though it may be occurring slightly faster now, perhaps about a month ahead of last year's trends. We are monitoring how this situation progresses for the remainder of the year. In terms of what would be ideal for our business, considerable foreseeable depreciation could be beneficial. When depreciation is anticipated, the wholesale market can adjust, allowing for vehicle purchases at significant margins that can help absorb depreciation without significantly affecting the business. This scenario would also improve affordability for customers, which is what we hope for, and the current trends we are observing seem to align with that expectation. Regarding overall demand, I don't think we have much more to elaborate on at this time.

Ronald Josey, Analyst

Ernie, that's super helpful. And just a real quick one on inventory front users. I think you said you're back to above 2021 levels and process improvement has helped there. Speaking about inventory, any insights on that stock improvement.

Mark Jenkins, CFO

Yes. So, on inventory, we've reduced inventory size very significantly since the beginning of 2022. And I think what that has done is it has placed our inventory size now relative to sales volumes. That ratio is now back to much more normalized levels. I think we call it in the shareholder letter. If you just compare the inventory that we had on hand at the end of the second quarter to the second quarter retail units sold that ratio is in implied term time about 62 days, which is in sort of a normal range that we've operated in in the past.

Operator, Operator

Thank you. And our next question today comes from Michael Montani with Evercore ISI. Please go ahead.

Michael Montani, Analyst

Good morning. Thanks for taking my question. Yes. I just wanted to ask, first off, if I could, just for some updates in terms of what you're seeing on the depreciation side in the wholesale market. And basically, on the total GPU front, you had mentioned over $5,000 for the quarter, is that basically what you just produced is 7 less than roughly $900 of nonrecurring? Or could we see additional nonrecurring again this quarter.

Ernie Garcia, CEO

Sure. Regarding depreciation, it is indeed elevated, as previously mentioned. So far, the situation has been manageable, and it appears that the wholesale market can handle this depreciation and eventually transfer it to the retail market. We have not observed any significant impacts on retail spreads yet. The GPU number for this quarter is exceptional, with several contributing factors. We gained approximately $900 from nonrecurring items, including selling more receivables than we originated, which allowed us to earn extra interest on those receivables, along with a release of inventory allowance contributing around $250 to retail GPU. Even after accounting for this, the GPU still reached $6,000, a figure that was nearly unimaginable in our past and certainly not in our expectations from just a few months ago. There have been remarkable improvements throughout the business, with a focus on efficiency in various areas such as car acquisition, shipping logistics, and inventory management. Enhancements in the wholesale business and better utilization of ADESA have also contributed positively. ADESA had a strong quarter and is on a good trajectory, which is reflected in the GPU as well. We've observed an increase in market share in both the ADESA dealer and commercial sectors in recent months. Moreover, the general market seems poised for a turnaround as conditions normalize, and we anticipate increased off-lease volume in the near future, although we are not there yet. Overall, there have been numerous improvements across the business, with a belief that most of these enhancements are sustainable. Notably, while we highlighted the $900 in nonrecurring items, there were additional benefits, particularly since Q2 tends to be favorable for retail GPU due to seasonality. There was also some unexpected appreciation earlier this year that wasn't part of our plans, providing another benefit. However, we believe that the majority of the gains we've experienced are sustainable, and this is reflected in our outlook.

Mark Jenkins, CFO

I want to address an additional point regarding the expectation of nonrecurring items. Let's discuss our finance receivables balance. As of March 31, we had approximately $1.6 billion in finance receivables on our balance sheet, which we accumulated primarily in Q4 and Q1. By June 30, that amount decreased to $1.1 billion. While this $1.1 billion is still above the normalized level, we have more loans that we can sell in the upcoming quarters, which could generate additional nonrecurring revenue in GPU.

Operator, Operator

Thank you. And our next question today comes from Seth Basham with Wedbush Securities. Please go ahead.

Seth Basham, Analyst

Good morning. In your debt exchange, you're giving bondholders more security, including ADESA assets and higher interest rates tapping some value from the core business. Can you help us understand how you came to this agreement and how it's in the best interest of the company?

Ernie Garcia, CEO

We are very excited about the agreement we reached, which we believe benefits both parties. Achieving a mutually beneficial outcome is often challenging, but the strong performance of our business allowed us the opportunity to do so. In the past, when we issued our initial unsecured notes, we had the choice between unsecured and secured debt. We opted for unsecured debt to preserve our collateral, which ultimately could prove valuable in specific situations. Now, we find ourselves in a situation where that collateral is indeed valuable. We collaborated with our bondholders to devise a solution that enhances their bonds, while also enabling us to extend our maturities, reduce our overall debt burden, and gain significant financial flexibility, particularly in terms of interest costs over the coming years. Overall, this is a positive deal for us, and we greatly appreciate the cooperation from the bondholders. Despite the perception in the media, they were very focused on finding solutions, and we arrived at an agreement that serves everyone well.

Seth Basham, Analyst

That's helpful. And just as a follow-up in terms of your plan to sell equity, how quickly could we see that? And are you aiming to do as much as $1 billion in the very short term?

Ernie Garcia, CEO

Sure. So, our plan is to do $350 million of equity, and that's kind of built into our plan. Inside of that, the family would do approximately $125 million there'll be about $225 million going out into the market. We've also put out a larger ATM, which we believe is just kind of good corporate housekeeping in general, and we think that's true for most companies. It's certainly true for a company as volatile as ours in terms of stock price. And for a company that has as high-quality use of proceeds built into the business as we do. Another aspect of the agreement we came to with noteholders is we have highly desirable prepayment capabilities built into those notes. And so, I think that gives us a lot of optionality to the extent we raise more over time, the family commitment decreases. But that's kind of the options that we've got in front of us.

Operator, Operator

And our next question today comes from Ben Johnson with Piper Sandler. Please go ahead.

Benjamin Johnson, Analyst

Can you guys talk a little bit more about your ability to source vehicles from customers rather than wholesale? And what's kind of the main driver of that?

Ernie Garcia, CEO

Sure. And I think this is a fundamentally important element of our business. I think, first and foremost, we've built a transactional website that customers can go to that gets a tremendous amount of traffic and a tremendous amount of interest that enables us to get access to many, many customers. And then we built a process flow on the website that allows customers to get a value for their car in a minute that is extremely accurate and benefits from all of the data that we have on many different cars and all of our experience in valuing those cars. And then we've got a process, I think, that is about as desirable as the process can be for a customer selling a car where they get the value on their computer or on their phone, they click a button and schedule a pick-up, and then we come to them, we pick it up. We've built a number of enhancements in that process that have made us much more efficient and enable us to also differentiate vehicle value better and then pass some of those benefits on to our customers. And then we buy those cars, we bring them back and then we take them to our inspection centers. We plan to retail them and we prepare them for retail. And if we plan to wholesale them, we now have the ADESA asset where we can go take those cars and dispose of those cars. And so, I think that platform overall, I think, is an extremely valuable platform. I think it's fundamentally very hard to replicate. It benefits very much from basically reverse retail transactions. It benefits from the existence of the retail disposition channel, and it benefits from the existence of the ADESA disposition channel. So, what we think that we're incredibly well positioned to continue to grow that business. And I think that you're seeing the benefits of that business and the strength of that business in our retail GPU numbers and our wholesale numbers this quarter.

Operator, Operator

And our next question today comes from Mike Baker at D.A. Davidson. Please go ahead.

Michael Baker, Analyst

Hi. Thanks, everyone. I hope you can hear me. I wanted to ask about your revenue. How much of the decline do you attribute to the market conditions, and how much is due to your strategies focusing more on profitability? Essentially, I am trying to understand your current view on the markets, how it has evolved, and your outlook moving forward.

Ernie Garcia, CEO

Sure. Let me begin by saying that during the first eight years of our company's existence, we experienced growth of approximately 100% per year, even when the market was stagnant. This success was largely due to our high-quality customer offerings, a scalable business, and a dedicated team ensuring an excellent customer experience. This foundation allowed us to grow rapidly and consistently, despite lacking market support. However, over the last 1.5 years, our situation has changed significantly, leading us to shift our priorities. We concentrated on improving our unit economics, and the results of this focus are evident. We reported $155 million in EBITDA this quarter, which I believe few anticipated six months ago. Essentially, our business, which has strong fundamental qualities, redirected its efforts from growth to enhancing unit economics and profitability, resulting in fundamental benefits being reflected differently in our financials, but they materialize quickly. When we choose to return to a growth strategy, we have the expertise to achieve that. Our business model is conducive to growth, supported by high-quality customer experiences and scalability. Additionally, the past 1.5 years have highlighted the challenges of replicating our business, given its capital intensity and complexity. The market is indeed facing headwinds, but I don't believe these are the primary factors affecting us in recent times. Currently, used car sales are about 10% below the baseline, which suggests that once the market stabilizes, it could benefit us, although I don't foresee this being a major driver compared to our internal initiatives. Furthermore, the independent market has experienced a greater impact than the franchise market over the last 1.5 years, indicating that our direct market may have been affected even more than that 10%. Ultimately, as car prices stabilize and interest rates return to normal, I expect a rebound in the broader market. However, when the time comes to focus on growth, I am confident we will take charge and shape our future as we have successfully done in the past.

Michael Baker, Analyst

Okay. Very helpful. If I could follow up, you talked about the GPU and the one-time items, but how sustainable is the spread that you're seeing right now between retail prices and wholesale prices? I think the demand is high, but indexed pricing is lower than it's been in two years. Does that normalize at some point, or is that spread expected to continue in your GPU outlook?

Mark Jenkins, CFO

I’ll address that. We had a very strong quarter in retail GPU during Q2, due to several factors we've mentioned as well as others you've hinted at. While there were favorable market conditions, we also achieved significant fundamental improvements that are critical. We anticipate another strong quarter for retail GPU in Q3, although we won't benefit from the allowance we had in Q2. Some key improvements include our success in sourcing vehicles from customers, as Ernie mentioned earlier. We are generating revenue from additional customer services, and our fulfillment teams have made the logistics network more efficient, leading to lower inbound transport costs. Our inventory and reconditioning teams have focused on cost efficiency in inspection centers, significantly reducing reconditioning costs per retail unit sold to below 2021 levels. Even with inspection and reconditioning centers operating at about 25% capacity, costs remain lower than they were in 2021. These are real success stories that we believe will enhance retail GPU performance.

Operator, Operator

And our next question today comes from Chris Bottiglieri with BNP Paribas. Please go ahead.

Chris Bottiglieri, Analyst

Hi. Thank you for taking my question. I would like to clarify the capital structure. You have $1.2 billion of net debt maturing, and you're raising $350 million in equity, which leaves a gap of approximately $700 million to $800 million. I understand you're planning to use an ATM in the future, but it's unclear if that will be used to reduce the debt. Could you clarify the difference between the $1.2 billion and $350 million? Additionally, I know you still have some receivables to sell and cash on the balance sheet. I'm trying to understand how we can bridge that gap.

Mark Jenkins, CFO

Sure. Let me break that into two parts. First, regarding the capital structure. The framework you've outlined is accurate. The committed noteholders' participation in the transaction support agreement will lead to a reduction in the total face value of notes by just over $1.2 billion. Part of this involves cash considerations to retire certain notes, including $350 million of equity as part of the agreement. The Garcias will contribute $125 million, and we are seeking to raise an additional $225 million from other sources. This cash consideration will be part of the exchange, which will also involve converting existing senior unsecured notes into tranches of new senior secured notes. Notably, these senior secured notes offer the flexibility to defer interest payments for two years and will largely eliminate maturities in 2025 and 2027. After the exchange, we will have no significant note maturities until December 2028, which enhances our flexibility. We've seen success in executing our three-step plan; we've completed the first step, are progressing to the second, and the final step will be a return to growth. This gives us considerable flexibility over several years to implement our plan and drive significant positive unit economics and volume. Now, regarding liquidity, we concluded the quarter with around $1.5 billion in total liquidity resources, consisting of over $500 million in cash and nearly $1 billion available from existing revolvers. It's worth noting that our committed liquidity resources have improved quarter-over-quarter. We actually increased our liquidity in the second quarter, which positions us favorably with a lot of flexibility to carry out our plan over a long time horizon.

Ernie Garcia, CEO

And Chris, I want to clarify something because I couldn't determine your interpretation from the question. The majority of the $1.2 billion in debt reduction is essentially the exchange of collateral for a decrease in the face value of debt. It's not a cash paydown. Therefore, we don't need to align the full $1.2 billion reduction with cash, as most of that value is generated by providing collateral to the bond.

Chris Bottiglieri, Analyst

That's what I was asking. And just a quick follow-up. You have this $1 billion of ATM that you could theoretically take advantage of volatility. It seems like you could probably generate reported positive FCF because of the Pick feature, depending on your EBITDA levels moving forward for the next year. How do you think about future debt paydown? Is there wiggle room if you do raise this equity that they would allow you to retire more of debt? How do you think about that?

Mark Jenkins, CFO

Sure. Yes. So, I think there are multiple aspects of the new senior secured notes that do facilitate decreasing leverage. I think one is the 2028 notes have only a one-year no-call period. And so those can be called at only par plus half a coupon after one year. I think the 2030 notes also have a slightly shorter than typical no-call period, but just a two-year no-call period, and then that debt could be paid at par plus half a coupon. And so, I think those are a couple of features. I think the notes; the 2028 and 2030 notes also do allow prepayments to be made with proceeds from equity. That's another feature that enables the deleveraging. And so, I think there's many aspects of this debt exchange that I think worked well from the standpoint of capital structure and financial flexibility. I've talked about some of the interest components. We also talked about overall reduction in debt and the elimination of near-term maturities. But another, I think, is the ability to reasonably efficiently reduce leverage if we so desire.

Operator, Operator

And our next question today comes from Rajat Gupta with JPMorgan. Please go ahead.

Rajat Gupta, Analyst

Great. Good morning. Thanks for taking my question. Just a clarification on one of the prior questions. The $5,000 retail GPU for 3Q that does not assume additional backlog of receivables and backlog clearance. Is that correct? And if you do choose to do that, that's further upside to that? Just wanted to clarify that comment.

Mark Jenkins, CFO

Sure. Yes. So, with the greater than $5,000 total GPU outlook for Q3, we didn't specify a specific volume of loans sold associated with that greater than $5,000 GPU outlook. However, we did note in the shareholder letter that we do see upside to that $5,000 GPU number. And I think we also noted at the same time, we see upside to the positive adjusted EBITDA outlook as well. But we're early in the quarter. So, we just gave those nice round figures that we believe we'll be above both of them. And so hopefully, that provides a little bit of color. Obviously, we feel really good about the strength of the business from a GPU perspective. We are operating at meaningfully higher GPU levels than we have at any point in the past, there's a lot of fundamental reasons why that's the case.

Rajat Gupta, Analyst

Got it. That's helpful. Regarding SG&A, the other SG&A remained relatively unchanged sequentially. You mentioned additional opportunities related to corporate costs and infrastructure reductions. How should we consider the timing of those benefits? Do you expect these to impact per unit costs moving forward? I was surprised that it stayed flat in the second quarter despite the decrease in volume. I'm just curious about how we should view the potential in that area.

Ernie Garcia, CEO

Let me jump in first, and then Mark, please provide a better answer. Did you find the only not positive number in the entire report, Rajat, come on?

Mark Jenkins, CFO

Let me address your question about other SG&A. I believe other SG&A was essentially unchanged from quarter to quarter. However, we see significant opportunities to continue reducing it over time. There may be factors that can cause slight increases or decreases on a quarter-by-quarter basis. While it might fluctuate a bit, we definitely see chances to further reduce it compared to Q1 and Q2.

Rajat Gupta, Analyst

Got it. If I can ask like one more on the positive side, you've made tremendous progress on the recon logistics side of things. Curious, I think in the past, you've given us some numbers in terms of like how much opportunity there was left. I mean, are we on a good glide path there? How do you feel about the recon and logistics expenses in the retail GPU or is there like more utilization opportunity there going forward?

Mark Jenkins, CFO

Sure. Yes. So simple answer there is we continue to see opportunities throughout all areas of the business, and that would include retail reconditioning and inbound transport, we certainly see more opportunities there despite the very significant progress that we've made.

Operator, Operator

Thank you. And our next question today comes from Brad Erickson with RBC Capital Markets. Please go ahead.

Brad Erickson, Analyst

So ultimately, what's going to catalyze kind of a return to quarterly retail unit growth here? Is it just getting kind of through this restructuring process, saying kind of stabilizing the balance sheet, maybe returning to inventory growth at some point? Or is it just more a function of the market? Or I guess, between those two, which is more important to driving a rebound to your retail unit sales growth?

Ernie Garcia, CEO

Sure. So, I would say, most importantly, is we underwent a big reprioritization pivot inside of the business around 12, 18 months ago. And that takes time and effort to reorient everything. And we're making in our opinion, at least pretty incredible progress pretty quickly as a result of that. I think at this point, the math is pretty clear. If you put it in a spreadsheet, it's going to tell you that we're supposed to grow as quickly as possible, basically because the GPU is in a great spot and our variable costs are in a great spot. But I think we're also continuing to rapidly make progress. And I think we're benefiting from the simplicity in the business by holding units approximately flat and focusing on efficiencies. And so, we plan to maintain the plan that we had before. Step one was to get to positive adjusted EBITDA. We completed that today. Step two is basically to maintain the exact same operating cadence, but pushing that to significant and sustainable positive unit economics that puts us in a very good position to build an incredible business over time that is much, much larger than we are today. And then step three will be to return to growth. I think there's a number of factors that will drive that transition. I think that you named several, I think, inside the business. The progress is clearly very helpful. I think capital structure changes are clearly helpful. But I think most importantly, the operational progress we're making is very, very fast. And so, we want to maintain discipline and be thoughtful about how we transition back to what has been the more comfortable and normal foot for Carvana over the majority of our life, which is a growth footing. So, we are not yet making that pivot, but in due time, we certainly plan to.

Brad Erickson, Analyst

I understand. As a follow-up, you mentioned the efficiencies that have come from adjusting run rates. Historically, when your growth was rapid, operating expenses were often higher because you were trying to keep up with demand. Looking ahead to a rebound, what costs will need to be addressed as you start to increase sales? I believe this is where some may find it challenging to understand the overall picture, including the leverage and efficiencies you and Mark discussed this morning, and how to navigate the rebound while controlling costs as you boost production capacity.

Ernie Garcia, CEO

I believe the key factor in managing increased costs associated with growth is the preparation and proactive positioning for that growth. This is linked to the efficiency within the company. If it costs $1 to sell a car while preparing for $2 in sales, you may need to invest an additional dollar. Conversely, if your cost is $0.50 for the same car, your additional investment is $0.50. The efficiency improvements we've incorporated over the past year will enable us to grow more effectively. Currently, a larger proportion of our expenses are fixed compared to our historical trends, which makes the math favorable with respect to growth. When we grow, we expect this to be advantageous for expenses since the fixed costs will have a more significant impact than the variable costs. We look forward to that time, knowing that growth will come with specific investments. Many of our growth-related investments are capital expenditures necessary for preparing for that growth. This includes constructing larger and more inspection centers, as well as improving logistics pathways, much of which is already underway. We are particularly excited about the ADESA acquisition, not only for its core business advantages but also for its implications for our infrastructure moving forward, reducing the investments needed to achieve our goal of becoming a company that sells millions of cars and transforms the car-buying experience. That remains our vision and belief. While we anticipate some cost increases, we are confident they will be outweighed by the overall improvements in our business from leveraging fixed costs.

Operator, Operator

And our next question comes from Brian Nagel at Oppenheimer. Please go ahead.

Brian Nagel, Analyst

Hi, good morning. Thanks for taking my question. First off, congratulations. I mean the repositioning has been very swift and very effective, so congratulations.

Ernie Garcia, CEO

I believe that's about our third congratulations in our public life. So that means more to us than you know.

Brian Nagel, Analyst

So, my question is just a follow-up to that, congratulations.

Ernie Garcia, CEO

There. You said it again.

Brian Nagel, Analyst

As we take a step back and evaluate everything that has been accomplished with Carvana, both in terms of operational repositioning and our balance sheet efforts, we recognize that the environment remains quite dynamic and that we are still an emerging business. So, is this process complete? Are we now in a position where we can look at our model and our balance sheet and confidently say that we can grow from here? Or should we anticipate further changes, either operationally or regarding our debt?

Ernie Garcia, CEO

Yes, I believe we are positioned to continue making operational gains, and our strategy is to keep pushing for those improvements. About a year ago, we launched an internal program aimed at achieving specific targets by Q2, which was very successful. We have implemented a similar plan for the upcoming year that we are excited about, as we see significant opportunities for further gains. We will continue to focus on this and expect to enhance our operational efficiency over time. From a balance sheet perspective, we are clearly in a much stronger position now than before, which is an encouraging and rapid development. In addition to reduced leverage, we have increased flexibility with longer maturities, additional prepayment options, and lower cash interest expenses. The improvements we've made are comprehensive. Looking ahead, we are also well positioned to further reduce our debt over time, though we will be mindful of the speed at which this happens. The pace of our progress will depend on your perspective on the timeframe, but I believe we are not finished with adjustments to the balance sheet overall. The business is in a solid position, and over time, we expect to generate significant positive cash flow, which opens up many opportunities for us. Additionally, we have outlined various options today that provide us with further flexibility.

Operator, Operator

Thank you, sir. And ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.