Carvana Co.

Good afternoon, and welcome to the Carvana fourth quarter and full year 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 one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Meg Keehan, Investor Relations. Please go ahead.

Thank you, Gary. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's fourth quarter and full year 2022 earnings conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors.carvana.com. The fourth quarter shareholder letter is also posted on the IR website. Additionally, we posted a set of supplemental financial tables for Q4, which can be found on the events and presentations page of our IR website. Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meeting of the Federal Securities Law, including but not limited to Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the risk factors section of Carvana's most recent form 10-K. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them whatsoever as a result of new developments or otherwise. Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to the non-GAAP metrics and all references to EBITDA will be to adjusted EBITDA. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our IR website. And now with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Thanks, Meg. Thanks, everyone, for joining the call. Ten years ago, in January 2013, we launched Carvana in Atlanta, Georgia. We were a passionate group of people who believed we could build something new in the world that we would be proud of. What we aimed to do was simple, to change the way people buy and sell cars. There were a million little reasons to bet against us, and most people who cared enough to even be aware of what we were trying to do would have. But there were two big reasons why we believed we could do it. One, there was room for new offering that customers would love. Two, we were a scrappy group who cared and were ready to fight for our dream. We stand here 10 years later in a place that was hard to imagine from where we started. We built an offering customers do love. We have brought that offering to over 300 markets across the country. We have bought and sold cars in a whole new way to millions of people. And we've laid the foundations to buy and sell many millions more. The big things overpowered the little things. This story skips a lot of time, and as a result, it skips a lot of detail and gives too simple an impression. It feels linear. But the truth is there were a lot of ups and downs along the way. There were high highs and there were low lows. There were fun days and there were hard days. I think the truth of building something new in the world is that there are usually more hard days than there are easy days, even though it doesn't sound that way in the stories. This is still true. Progress is rarely linear, and 2022 reminded us of that again. So what happened in 2022? The story is straightforward. One, we came into the year position for growth similar to what we'd experienced in the prior nine years. Two, After the pandemic, snarled automotive supply chains and historically rapidly rising interest rates combined to dramatically impact the affordability of used cars. Three, rising interest rates and market sentiment drove a significant shift in our priorities away from growth and toward profitability. Four, this combined to lead to markedly lower volumes than we had positioned for, and as a result, we've been carrying excess costs. 2022 had a lot of hard days, but we're a scrappy group, and hard days aren't always the worst thing in the world for scrappy people. Scrappy people find a way, and we're finding a way. The hard days are making us better, and we're doing our best work right now. As part of this work, we have three major milestones that we are marching toward. The first step is to drive the business to break even adjusted EBITDA. This is our current goal, and we will discuss the key drivers of this goal more in these remarks. The second step is to drive the business to significant positive view in economics. Break even adjusted EBITDA is a milestone, but it is not our goal. Our goal is positive free cash flow. The third step is to return to growth. Since launching in 2013, we have made capital investments of more than $4 billion building the nation's largest used vehicle inspection and reconditioning infrastructure, first-party automotive logistics network, and last-mile automotive delivery network. We believe the investments we've already made lay the groundwork for not only significant growth in the future, but significantly more efficient growth that is significantly profitable. Today, we're focused on the first step, and we are well on our way with high visibility into the progress we expect to make. First, we expect to continue our SG&A expense reduction plan by reducing quarterly SG&A expenses by approximately $100 million in aggregate over the next two quarters. This will complete over a $1 billion annualized SG&A cost reduction since the first quarter of 2022. We expect these expense reductions to be broad-based across all large SG&A expense components, but importantly, we do not expect a future reduction force to be part of this plan. second we expect our weekly retail unit sales volume to stabilize relative to the declines we saw in the second half of 2022 as the seasonal headwinds we faced at that time transition to seasonal tailwinds stabilizing weekly retail unit sales volume will allow our sgna expense savings to catch up to retail unit volumes allowing us to demonstrate sga leverage that was elusive during periods of retail unit declines third we expect a substantial reduction in our inventory size which we accelerated in q4 to lead to significant gains in retail gpu While we don't expect to see meaningful gains on retail GPU in Q1, we expect to see the benefits of reducing inventory size become apparent in the following quarters. The progress we are making shows up first in operational metrics and then flows into financial metrics later as those operational efficiencies get rolled out and utilized across the business. Across all operating groups, the operational progress we have already made and are continuing to make is significant. In logistics, our average delivery distance is down 25% since early 2022. In market operations, we've built scheduling systems that currently allow us to pair over one out of three retail deliveries with the vehicle pickup, up from one out of 14 retail sales just one year ago. In customer care, our advocates are spending 40% less time on the phone per sale than they were in early 2022. And our vending machine pickup rates have more than doubled since the start of last year, with 40% of our customers nationwide now picking up their car at a vending machine, even though we only have vending machines in a subset of our markets. Importantly, we have done all this while improving the quality of our customer experiences over the last six months. As is often the case when working through these transitions and when the operational progress is beginning to convert into financial progress, there are some one-time items and extrapolations that need to be made to really see the quality of the progress we are currently making. These are outlined in the shareholder letter, and Mark will provide some color on them as well, but the progress is really beginning to show up. This will continue to get clearer and to require less explanation over time as we expect the combination of these three factors to lead to significantly improved adjusted EBITDA profitability over the next two quarters. 2022 was a hard year, and we still have a lot of hard work in front of us to get to where we want to be, but we have a clear plan and we are executing. This is still a 40 million unit a year market on average. We still have just 1% market share. We are still a passionate, scrappy group who cares and who's ready to fight for our dream. Our customers do love our offering. We have built the capabilities and laid the foundations to buy and sell cars with millions and millions of customers, and there are still a million little reasons to bet against us. We expect the big things to overpower the little things just as they have in the past. We are firmly on the path to building the nation's largest and most profitable automotive retailer and to achieving our mission of changing the way people buy cars. The march continues. Mark.