Carvana Co.

Hello, and welcome to the Caravana Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up. Please note, this event is being recorded. I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead.

Thank you, MJ. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's second quarter 2022 earnings conference call. Please note that this call will be simultaneously webcast on the investor relations section of the company's corporate website at investors.carvana.com. The second quarter shareholder letter is also posted on the IR website. Also, we posted a set of supplemental financial tables for Q2 to assist investors in understanding the moving pieces this quarter with the consolidation of ADESA, and we've updated our operating plan deck to reflect the addition of ADESA. Both can be found on the events 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, and they cause actual results to differ materially from those discussed here. A detailed discussion of the material factors that cause actual results that differ from forward-looking statements can be found in the risk factor section of Carvana's most recent Form 10-K and Form 10-Q for the first quarter of 2022. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise. Unless otherwise noted on today's call, all comparisons are on a year-over-year basis. Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our investor relations website. And now with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Thanks, Mike, and thanks a lot for joining the call. The second quarter was probably the most dynamic quarter we've had at Carvana. We shifted our priorities for the first time in company history to favor efficiency and cash flow in recognition of the changes to the market and the economic landscape, as well as to enable us to quickly adjust to changes in our industry that had caused our expenses to be out of balance with sales volumes. We also complete our acquisition of Adessa in a transaction that we believe will be transformative over time. First, I want to hit our change in priorities to favor efficiency and cash flow. We began to make the biggest changes inside the company in May. These changes have been significant. They've resulted in prioritization shifts across every group in the business. They've resulted in the creation of new processes to increase focus and drive progress on these priorities. While it is early in the execution of our plan, this is going very well so far. At Carvana, we've always set high standards for ourselves, and I think it's one of the reasons we've been pretty successful so far. In the long run, the ability to keep pressure on ourselves is probably one of the greatest differentiators in how groups of people perform. But there's no substitute for the focus and motivation provided by market and economic disruption. Everyone feels it. And difficulty reveals people. What is revealing about the people of Carvana is something I already knew and something I can't thank them all enough for. The people of Carvana care, and they don't shy away from a challenge. They're fighters. The people of Carvana are focused in making faster progress than we have made at any point in our history. They're working hard, but they're finding the fun in it, and they're making change they're proud of. And as a result, we are rolling out new capabilities, products, and processes at an incredible rate. Our plan is to continue until we reach our goals. This drove a lot of progress in the quarter in a short period of time. We grew units sequentially by over 10% and reduced total SG&A by 5% at the same time, causing us to drive cash SG&A down per unit by $850 in the quarter to $5,400. We set a stretch goal to hit 4,000 cash SG&A per unit in the fourth quarter, excluding impacts from EDESA. This is going to be a hard mark to hit, but so far we're on the path. From there, we will continue to our midterm goal of 3,000 per unit. We will keep pushing. We also drove up GPU by $500 in the quarter to $3,400. We provided some bridges back to $4,500 and beyond in our shareholder letter. The biggest thing separating us from climbing back to that level is execution. We'll be pushing here as well. Now turning to the ADESA acquisition. We were excited about joining forces with ADESA when we completed the deal. Now that we've begun working with the team, we are more excited. First, I want to give credit to the Odessa team. They've embraced us in a way that we couldn't have reasonably expected. They are a fun group of warm people who are enthusiastic about doing right by their customers and about finding ways to do even better. On a personal level, it has been fun to meet so many people inside the company to learn from them and to see how interested they are in learning from us. Our alignment is leading to extremely fast progress in our integration. We already have over half the cars we buy from our customers that we plan to sell through the wholesale channel landing at 46 Odessa locations nationwide. We've already embedded market operations hubs at 18 Odessa sites. Odessa is already reconditioning over 500 cars a week in locations that complement our existing IRC footprint, primarily on the coast. In addition, we have also already deepened our relationship with Hertz in ways we couldn't have without ADESA. Over time, we expect ADESA to dramatically increase the scale and customer proximity of our inspection center network. We expect it to strengthen and simplify our logistics capabilities, and we expect to find cost savings and revenue opportunities that wouldn't be possible without our combined capabilities. We still have a long way to go to complete our integration, and this is another area where we will continue to push. Now I'd like to turn to what we're thinking about the near term. We are going to maintain our current priorities for the foreseeable future to drive efficiencies that we believe serve our short- and long-term goals best in this environment. While we continue to expect to rapidly gain market share, our shift in focus means growth in units and revenue will be slower than it otherwise would be in the short term. We also don't know exactly what to expect from industry-level sales in the near term in light of everything going on in the economy. In July, for example, there was another industry-wide reduction in demand levels, which has impacted us as well. We have meaningful latent demand and several levers to drive growth, which we will begin to pull over time, but the speed that we pull those levers will be driven by the progress we are making in our higher priorities. In more difficult times, people tend to get more nearsighted. There are good reasons for this. There is value in dialing into important cost fundamentals to get less attention in easier times. And as you can see from our priorities, we are focusing more on fundamentals in this environment as well. That said, it is still important to maintain awareness of the mountain we are climbing. Through a long-term lens, Q2 has the potential to be one of our greatest quarters. It serves as a catalyst to put more focus on driving efficiency. This was something we were going to do at some point anyway, and the environment has provided pressure that we will use to make progress faster than we likely would have otherwise. Our visibility to much higher volumes means high. On the demand side of the equation, we continue to take market share in this environment, and the market shares we have in our most mature cohorts provide a clear map to growing volume dramatically. In addition, previous periods of economic strain have accelerated consolidation in our industry. On the supply side, the acquisition of ADESA is a game changer. Simply put, execution is all that separates us from millions of sales per year. From a GPU perspective, our bridge back to 2021 levels is straightforward. And from there, opportunity remains. SG&A has been and remains our biggest opportunity. We have a clear plan. That plan is being aggressively executed against with concrete goals in every group of the company. And we have the historical performance we have seen in our more mature cohorts as proof points. We remain firmly on the path to achieving our mission of changing the way people buy cars and of becoming the largest and most profitable automotive retailer. The march continues. Mark. Thank you.