Carvana - Q2 2023
July 19, 2023
Transcript
Operator (participant)
Good day, and welcome to the Carvana Second Quarter 2023 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 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then 1 on your touch-tone phone. To withdraw your question, please press Star then 2. Please note, today's event is being recorded. I would now like to turn the conference over to Megan Kuan with Investor Relations. Please go ahead.
Megan Kuan (Senior Director, Capital Markets and 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. Now, with that said, I'd like to turn the call over to Ernie Garcia. Ernie?
Ernie Garcia (CEO)
Thanks, Meg, thanks, everyone, for joining the call on such short notice. Let me start with the most important takeaways from 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. 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 to significant positive unit economics. 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. This quarter, we set records in GPU and adjusted EBITDA margin, with total adjusted EBITDA dollars over $150 million. These numbers benefited from significant non-recurring items that collectively added about $900 to GPU and $70 million to adjusted EBITDA. Even when controlling for these non-recurring 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. 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 will 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 8 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?
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.
Total GPU in Q2 was positively impacted by approximately $900 of non-recurring benefits, which we describe in more detail later in this remark. Non-GAAP retail GPU was $2,862 versus $1,519 in Q1. Retail GPU included an approximately $250 benefit due to an adjustment to our retail inventory allowance. Sequential changes in retail GPU were primarily driven by lower average days to 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 and 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 dynamic side, Q2 is on average, the strongest quarter of the year for retail GPU. 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. 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 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, 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 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 non-recurring 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. Given the early date of this earnings call within the quarter, we are electing to provide a conservative outlook. On June 30th, 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 a 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. Thank you for your attention. We will now take questions.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press Star then 1 on your touchtone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press Star then 2. Today's first question comes from Ronald Josey with Citi. Please go ahead.
Ronald Josey (Analyst)
Great. Thanks, Ernie and Mark, for taking the question. I want to talk just about demand trends overall, and I'm sure we'll get into the debt restructuring. Ernie, talk to us about inventory that, you know, overall, I believe that was down in December. The team has sold for most of ADESA's inventory. Wondering how that compares to overall demand out there. Is used supply improving, I guess, is the question. Are you seeing any signs of, I think, Mark, I think you use the word stable environment, just in used car dynamics. Any insights on the broader macro would be helpful. Thank you, guys.
Ernie Garcia (CEO)
Sure. Well, let's start with the inventory component of that question. I think, you know, inventory is down year-over-year, by, you know, over 50%, I believe something in the order of 55%. It was down again quarter-over-quarter. We've really been pushing that down in an effort to align our inventory size with sales volumes, and I think you can really see that flowing through the benefits of that into retail GPU. I think we had a pretty incredible, by any measure, retail GPU quarter.
I think there are a number of components of that, but one of the largest, certainly over the last six to nine months, has been reducing inventory and kind of aligning our sales volumes with where inventory was, so we could have faster turn times and therefore less depreciation. I think, you know, the environment remains an environment of elevated prices and elevated interest rates and more difficult affordability for customers. I think there are certainly signs today of depreciation. I think depreciation right now looks very similar to depreciation last year, although it's probably been pulled forward, maybe a month. It's happening a little faster than last year. So I think we'll see how that unfolds through the rest of this year.
I think our view on that is, you know, the probably best case scenario for our business would be pretty significant depreciation that is foreseen. I think foreseen depreciation enables the market to organize, kind of, in the wholesale market, to buy cars at sufficiently high margins to where you can absorb that depreciation, and it doesn't impact the business in a material way. That also leads to better affordability for customers, and I think that's what we'd hope for, and I think the signs that we're seeing right now, are at least weakly aligned with that. From a broader demand perspective, I'm not sure we'd have a ton more to add.
Ronald Josey (Analyst)
Ernie, that's super helpful. Just a real quick one on inventory from users. I think you said you're back to above 2021 levels. Any profits improvement just out there. Speaking about inventory, any insights on those profits improvements? I'll go back in the queue. Thanks, guys.
Mark Jenkins (CFO)
Yeah, on inventory, we've re-reduced inventory size very significantly since the beginning of 2022. You know, I think what that has done is it has placed our inventory size now relative to sales volumes. You know, that ratio is now back to much more normalized levels. I think we call it in the shareholder letter. If you just compare, you know, the inventory that we had on hand at the end of the second quarter to our second quarter retail units sold, you know, that ratio is an applied turn time of about 62 days, which is in, you know, sort of a normal range that we've operated in the past.
Ronald Josey (Analyst)
Thank you.
Operator (participant)
Thank you. Our next question today comes from Michael Montani with Evercore ISI. Please go ahead.
Michael Montani (Managing Director)
Yeah, hey, good morning. Thanks for taking the question. 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. Basically on the total GPU front, you had mentioned over $5,000 for the quarter. Is that basically, you know, what you just produced, is $7 less the roughly $900 of non-recurring, or could we see additional non-recurring again, this quarter?
Ernie Garcia (CEO)
Sure. Really quickly on the depreciation side, I think depreciation is clearly elevated, as discussed before. I think so far that's happened in an orderly way, it seems like, you know, the wholesale market is positioned to kind of absorb that depreciation and then be able to pass that through to the retail market. We haven't yet seen that impacting retail spreads in a way that would be meaningful. I think, you know, the GPU number for this quarter is just a truly incredible number, I think there are so many components that go into it. We did benefit first from about $900 of non-recurring items.
That included the fact that we sold more receivables and we originated, as a result of also holding those receivables, we earned additional interest on those receivables. We did have a release of inventory allowance, as well, that ended up being about $250 of retail GPU benefit. When removing that, it was still $6,000, which is a number that I think was, you know, unimaginable for the vast majority of our history and completely unimaginable from the perspective of even, you know, three months ago, six months ago. I think there's been so many incredible improvements across the business.
We really have reoriented the business, and we've got an operating cadence that has many different teams, extremely focused on efficiency in every aspect of the business, from the ways that we're acquiring cars, to the ways that we're shipping cars, to the distances that we're shipping cars, to the way that we're managing how those cars get put onto trucks, the way that we're reconditioning cars. In our finance program, we've made a number of additional enhancements. In the wholesale business, we've made a number of enhancements and improvements and are better utilizing ADESA. ADESA has also had a great quarter. They're on a great path, and that's flowing through to GPU as well.
I think, you know, we've clearly seen market share in both the ADESA dealer business and the ADESA commercial business improve over the last many months. The market, in general, is also just seeming at least like it's likely to start turning around as the market starts to normalize. You know, we see more normal activity from rental fleets, and we're starting to get a sense that there could be off lease volume starting to come back in the not-too-distant future, even though we're not quite there yet. I just think across the business, there were a lot of improvements, and we think the majority of those improvements are sustainable. We called out that $900 non-recurring items.
There were some other benefits as well that flowed through. You know, Q2 is generally a good quarter for retail GPU, in particular, based on seasonality. Then I do think that there was some unexpected depr- or appreciation early in the year that wasn't at least in our plan, and so that benefited us a bit as well. The vast majority of the gains that we're seeing, we believe are sustainable, and you can kind of see that expectation in our outlook.
Mark Jenkins (CFO)
Just to hit one additional point there. You asked about, you know, are there more non-recurring items that we should expect? You know, on that note, let me just talk for a moment about, you know, our finance receivables balance. On three thirty-one, we had about $1.6 billion of, you know, finance receivables on our balance sheet, that we had built up over basically Q4 and Q1. As of six thirty, that was down to $1.1 billion. That $1.1 billion is certainly still higher than normalized. You know, we do have, we continue to have additional loans, that we can sell over the coming quarters, that would sort of yield additional non-recurring revenue in GPU.
Ernie Garcia (CEO)
Thank you.
Operator (participant)
Thank you. Our next question today comes from Seth Basham with Wedbush Securities. Please go ahead.
Seth Basham (Managing Director and Director of Research)
Thanks a lot. Good morning. In your debt exchange, you're giving bondholders more security, including the ADESA assets and higher interest rates, sapping 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)
Sure. Well, first of all, I would say I think we're extremely excited about the agreement we came to, and we believe it's great for both of us. We believe that, you know, getting a win-win is never a trivially simple thing to do in life, but I think given the performance of the business, it created a lot of room for a win-win. I think, you know, what we worked there to try to achieve is, you know, years ago, when we, when we took out our initial unsecured notes, we always had an option to either do unsecured debt or secured debt, and we elected at the time to do unsecured debt and to preserve that collateral.
Had we done secured debt, our interest expense over the last several years would have been much lower. We decided to preserve that collateral because we believed it could be valuable in certain circumstances. I think this is a circumstance where that collateral is valuable. What we were able to do is work together with our bondholders to find a solution that works well for them as we use that collateral to make their bonds stronger. We were able to take some of that benefit and extend our maturities and reduce our overall debt burden, and also give us a lot of freedom financially, especially over the next several years from an interest perspective. I think overall, that's a great deal for us.
We're extremely excited about it. I think I would be remiss if I didn't also note that I think the group bondholders was very productive to work with. Someone that I respect once said the world's full of optimizers and not enough solution providers. I will say that, you know, of course, you know, everyone wanted to make sure that they got a fair deal there. Of course, you're dealing with incredibly intelligent people, but what you read in the media is not correct. They were very much solution-oriented, and I think we came to a solution that was great for everyone.
Seth Basham (Managing Director and Director of Research)
That's helpful. Just as a follow-up, in terms of your plan to sell equity, how quickly could we see that? Are you aiming to do as much as $1 billion in the very short term?
Ernie Garcia (CEO)
Sure. 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, it'd 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, you know, 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. I think that gives us a lot of optionality. To the extent we raise more over time, the family commitment decreases. That's kind of the option set that we've got in front of us.
Michael Baker (Managing Director and Senior Research Analyst)
Thank you.
Operator (participant)
Thank you. Our next question today comes from Alexander Potter with Piper Sandler. Please go ahead.
Alexander Potter (Analyst)
Hi there. 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. I think this is a fundamentally important element of our business. I think, you know, first and foremost, you know, 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. Then we've built a process flow on the website that allows customers to get a value for their car in minutes, 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.
We've got a process, I think, that is about as desirable as a process can be for a customer selling a car where, you know, they get the value on their computer or on their phone. They click a button and schedule a pickup, and then we come to them, we pick it up. We've built a number of enhancements to that process that have made us much more efficient and enabled us to also differentiate vehicle value better and then pass some of those benefits on to our customers. We, you know, buy those cars, we bring them back, and then we take them to our inspection centers, if we plan to retail them, and we prepare them for retail.
If we plan to wholesale them, we now have the ADESA asset, where we can go take those cars and dispose of those cars. 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. 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.
Alexander Potter (Analyst)
Awesome. Thank you.
Operator (participant)
Thank you. Our next question today comes from Mike Baker at D.A. Davidson. Please go ahead.
Michael Baker (Managing Director and Senior Research Analyst)
Hi. Thanks, guys. Hopefully, you can hear me. I just wanted to ask about, top line. How much of your decline do you think is based on the market, and how much is based on your internal initiatives to focus more on profitability? In other words, I guess what I'm getting at is, how do you think about your market share right now? How has that changed, and how do you think about it going forward?
Ernie Garcia (CEO)
Sure. Well, let me start with this. I think, you know, for the first 8 years of our company existence, we grew at, you know, approximately 100% per year, at a time when the market was flat. So I think that that was possible because our customer offering is very high quality, our business is very scalable, and I think we have a lot of incredible people that do a great job across the business, making sure that the customer experience is great. That enabled us to grow very, very quickly over a sustained period of time without tailwinds from the market itself. I think, you know, over the last year and a half, you know, our situation, you know, changed pretty dramatically, and we reprioritized pretty significantly.
We focused a lot on getting to significantly better unit economics, and you're seeing the benefits of that focus as well. You see that in the $155 million of EBITDA that we just printed this quarter, that I think from the perspective of six months ago, I don't know if there was anyone out there that had that in their model at that time. I think one way to think about that is just that, you know, this business that has very high-quality fundamentals, shifted its goal from growth to unit economics and profitability. As a result, kind of those fundamental benefits flowed through in a different line item, but they flowed through very quickly.
I think when it's time to turn back to growth, I think this is a group of people that knows how to do that. I think this is a business model that lends itself to that, both through the quality of the customer experiences and through the scalability of the business model, as well as... I think something else the last year and a half has taught us is this is a very, very hard business to replicate. It's capital intensive, it is complicated, it's hard to get everything lined up and to do it well. I think when it's time, we'll be very well positioned. Now, I do think that the market has provided additional headwinds aside from our shift in focus, I don't think that those are the biggest drivers over the last year and a half.
Today, used car sales in some total are probably 10% below their baseline, is probably a reasonable way to think about it. At some point, when the market normalizes, that should be a tailwind, which will be nice, but I don't know that it'll be that significant relative to the benefits that we plan to go get ourselves. I think that there's strong arguments that the independent market has been more impacted than the franchise market over the last year and a half. I think that there's an argument that kind of our direct market has actually been impacted more than that 10%.
I think at some point, as car prices normalize and interest rates normalize and affordability comes back, I think that there likely will be a rebound in the broader market. I think most importantly, when it's time to grow, you know, we'll take control of that, and we'll control our own destiny as we did in the past, and we'll push growth on our own, like we have before.
Michael Baker (Managing Director and Senior Research Analyst)
Okay. Thank you. Very helpful. If I could follow up, you talked about the GPU, you know, you talked about the one-time items, this is not a one-time item, but how sustainable is it, the spread that you're seeing right now between retail prices and wholesale prices? I think the Manheim Index and pricing is low as 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 take that one. You know, obviously, we had a very strong quarter for retail GPU, you know, in Q2, for some of the reasons that we pointed out, as well as reasons that you just alluded to. You know, I do think there were some market tailwinds there, but I think there's also some real fundamental gains that we've made that are important. You know, we do expect to have another strong quarter of retail GPU in Q3. Obviously, we won't have the allowance benefit, you know, in Q3 that we had in Q2, but we do expect a strong quarter for retail GPU. I think some of those fundamental gains just to enumerate them again, you know, I think we're having a lot of success sourcing cars from customers.
Ernie's touched on that earlier in this call. You know, we are, you know, generating revenue from some of the additional services that we provide to our customers. You know, we've really had a lot of success on the cost side of retail GPU. You know, our fulfillment teams, you know, have been working to make the logistics network more efficient. We're really improving our inbound transport costs. You know, we've been, you know, the inventory teams and the reconditioning teams have been really focused on cost efficiency in the inspection centers, and we've really pushed down over the last year, you know, the reconditioning costs per retail unit sold.
All the way such that those are down below full year 2021 levels, even we're in the inspection and reconditioning centers, we're probably only operating at say, on the order of 25% capacity, maybe a little bit more than that, but right around that order of magnitude. Yet costs in those centers is down below what it was in full year 21. I think those are some real fundamental success stories that we believe will drive strength in retail GPU.
Michael Baker (Managing Director and Senior Research Analyst)
Perfect. Makes perfect sense. Appreciate it.
Operator (participant)
Thank you. Our next question today comes from Chris Bottiglieri with BNP Paribas. Please go ahead.
Chris Bottiglieri (Analyst)
Hi, thanks for taking the question. First of all, I just wanna kinda clarify the cap structure. Can you give us a summation? You have $1.2 billion of debt- net debt you're retiring. You're raising $350 million of equity. That leaves, you know, roughly a $70 million gap. You're gonna do an ATM in the future, but I can't tell if that's being used to pay down the debt. Can you maybe just clarify kind of like the gap between the $1.2 billion and the $350 million, and obviously you have some receivables to sell still, and there's some cash on the balance sheet. Just trying to think how we bridge the two.
Mark Jenkins (CFO)
Sure, yeah. Let me break that into two pieces. One is just talking about the capital structure, and then second is talking about liquidity resources. First, as it relates to capital structure, I think, you know, the basic framework that you laid out is correct. You know, with the committed note holders, you know, exchanging in the transaction support agreement will reduce total face value of notes by just slightly over $1.2 billion. A component of that is there will be some cash consideration paid, you know, to retire certain of the notes. And that's where this $350 million of equity comes in. That's part of the transaction support agreement.
Again, you know, we basically have committed to raise $350 million of equity, of which the Garcias have committed to put in $125 million, and then we're committed to raising $225 million elsewhere. That will, you know, form cash consideration that is part of the exchange. The remainder of the exchange is basically just exchanging existing senior unsecured notes for 3 tranches of new senior secured notes.
You know, I think, you know, some of the benefits of those senior secured notes, we've talked about a bit on this call, I think one, you know, really valuable benefit from our perspective, is, you know, the option to pay PIK interest for 2 years, and also to, you know, we're essentially largely eliminating 2025 and 2027 maturities. You know, after completing this exchange, we don't have a meaningful note maturity until December 2028. You know, I think that, I think that's really great from a flexibility standpoint. We've obviously had a tremendous amount of success so far executing our 3-step plan.
You know, we completed step one of it, we're moving on to step two of it, then step three of it will be return to growth. We have an awful lot of flexibility, you know, over a many year time horizon, to be executing that plan and really driving the business to, you know, a very significant, positive unit economics and volume. Now turning to your question about liquidity. We ended the quarter, with approximately $1.5 billion in total liquidity resources. That was a mix of, you know, just over $500 million of cash and, just under $1 billion of availability on existing revolvers. I think, you know, one thing to note about that number is, you know, our total...
Our committed liquidity resources actually stepped up quarter-over-quarter. you know, we actually increased our liquidity in the second quarter. you know, I think we feel like we're in a very good liquidity position with a lot of flexibility to execute our plan over a many year time horizon.
Ernie Garcia (CEO)
Chris, just to make sure one thing is clear, 'cause I couldn't tell how you were interpreting it from the question. The majority of that $1.2 billion of debt reduction is basically just the exchange of collateral for a reduction in face of debt. It's not a cash paydown, so we don't need to kind of tie out the full $1.2 billion reduction with cash. That's. The majority of that is just kind of value that is created by providing collateral to the bond.
Thanks, that's what I was asking. 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 PIK feature, depending on your EBITDA levels moving forward for the next year. How do you think about, like, future debt paydown? Is there wiggle room if you do raise this equity, that they would allow you to retire more of the debt? How do you think about that?
Mark Jenkins (CFO)
Sure, yeah. You know, I think there are multiple aspects of the new senior secured notes that do facilitate decreasing leverage. I think one is, you know, the 2028 notes have only a 1-year no-call period. 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 2-year no-call period, and then that debt can be paid at par plus half a coupon. I think those are a couple features.
I think, you know, the, the notes, the 2028 and 2030 notes also do allow prepayments to be made with proceeds from equity. That's another feature that enables deleveraging. You know, I think there's many aspects of, you know, this debt exchange that I think, you know, work well from the standpoint of capital structure and financial flexibility. I've talked about some of the interest components. We also talked about the overall reduction in debt and the elimination of near-term maturities. Another, I think, is the ability to reasonably efficiently reduce leverage if we so desire.
Ernie Garcia (CEO)
Okay. Very helpful and thorough. Thank you so much.
Operator (participant)
Thank you. Our next question today comes from Rajat Gupta with JPMorgan. Please go ahead.
Rajat Gupta (Analyst)
Great. Good morning. Thanks for taking the 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? If you do choose to do that's further upside to that. Just wanted to clarify that comment. Thanks.
Mark Jenkins (CFO)
Sure. Yeah, so, you know, 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. You know, I think we also noted at the same time, we see upside to, you know, the positive adjusted EBITDA outlook as well. We're early in the quarter, so, you know, we just, you know, gave those, you know, nice round figures that, you know, we believe will be above both of them. Hopefully that provides a little bit of color.
Obviously, we feel really good about the strength, you know, of the business from a GPU perspective. You know, we are operating at meaningfully higher GPU levels than we have at any point in the past, and there's a lot of fundamental reasons why that's the case.
Rajat Gupta (Analyst)
Got it. No, that's helpful. Just on SG&A. The other SG&A was flattish sequentially. You talked about some more opportunities around, like, software costs and, like, other infrastructure related reductions. How should we think about the timing of those benefits? Is that something you expect to see on a 4-unit basis going forward? You know, like, I was surprised to see it remain flat in the second quarter despite some margin reduction. Curious, how should we think about the opportunity there?
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, go for it.
Rajat Gupta (Analyst)
I mean, I had a lower number there, so I just wanted to see if I missed anything.
Ernie Garcia (CEO)
Go ahead, Mark.
Mark Jenkins (CFO)
Let me hit your question on other SG&A. No, so I do think other SG&A was basically flat quarter-over-quarter. We do see meaningful opportunities to continue to reduce that over time. I do think on a quarter-by-quarter basis, you know, there can be things that, you know, push it up a little on a non-recurring basis, push it down a little on a non-recurring basis. They're, you know, it can bounce around a little bit, but we certainly see opportunities to further reduce that from where it was in Q1 and Q2.
Rajat Gupta (Analyst)
Got it. If I can ask, like, one more on the positive side. You made tremendous progress on the recon logistics side of things. Curious, you know, 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 on how you feel about the recon and logistics expenses in the retail GPU? Is there, like, more utilization opportunity there going forward? Thanks.
Mark Jenkins (CFO)
Sure. Yeah. Simple answer there is we continue to see opportunities throughout all areas of the business. That would include, you know, retail reconditioning and inbound transport. We certainly see more opportunities there, despite the very significant progress that we've made.
Rajat Gupta (Analyst)
Got it. Thank you.
Operator (participant)
Thank you. Our next question today comes from Brad Erickson with RBC Capital Markets. Please go ahead.
Brad Erickson (Analyst)
Ultimately, you know, what's gonna catalyze kind of a return to quarterly retail unit growth here? Is it just getting kind of through this restructuring process today and 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. I would say most importantly is, you know, we underwent a big reprioritization pivot inside of the business around, you know, 12 to 18 months ago. And that takes time and effort to reorient everything, and we're making it, in our opinion, at least, you know, 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 gonna tell you that we're supposed to grow, you know, as quickly as possible, basically, because the GPU is in a great spot and our variable costs are in a great spot. 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.
We plan to maintain the plan that we had before. Step one was get to positive adjusted EBITDA. We completed that today. Step two is basically maintaining the exact same operating cadence, but pushing that to, you know, 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. Then step three will be 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. We want to maintain discipline, and be thoughtful about how we transition back to, you know, what has been the more comfortable and normal footing for Carvana over the majority of our life, which is a growth footing. We are not yet making that pivot, but, in due time, we certainly plan to.
Brad Erickson (Analyst)
Got it. Then maybe just to follow up, you just mentioned kind of the efficiencies as you, as you've kind of throttled run rates almost. You know, historically, when you guys were growing so fast, right, OpEx was kind of always running a little bit hot just because you were kind of struggling to catch up with demand to most degree. What like, as you think about the rebound, what costs will have to be incurred when you start to increase that sales run rate? I think that's where people are maybe a little bit struggling with how to bridge the math, understand all the leverage and the efficiencies you and Mark have spoken to here this morning.
Just how to think about that rebound and how we control costs as we ramp back up, production capacity, all that stuff.
Ernie Garcia (CEO)
Sure. Well, I think, the most important element to, you know, an increase in costs as a result of growth is basically preparation for that growth and positioning yourself for it ahead of time. I think that's a function of the level of efficiency you have inside the company, right? If it costs you $1 to sell a car, you're positioning for 2, you might spend an extra $1. If it costs you $0.50 to sell a car, and you're positioning for 2, it costs you an extra $0.50. I think the efficiency gains that we've built into the business over the last year will make it so that we can grow more efficiently.
I would also say that, you know, we're in a spot now where a, you know, disproportionate relative to our history, portion of our expenses are fixed. And so I think, you know, the math is pretty beneficial as it relates to growth. When it's time to grow, I, you know, I think our view is, that'll probably be helpful from an expense perspective because the fixed component of it is probably a larger and more mechanical component than the variable component. So I think when that's time, I think we look forward to it. There will undeniably be investments, associated with some of that growth, but I think we're very well positioned for it.
What I'll also say is, I think many of the other investments in growth are capital investments to prepare for that growth. You know, you have to build bigger inspection centers, you have to build more inspection centers, you have to build more logistics pathways. A lot of that is built. I think, you know, the ADESA acquisition is something that we remain just tremendously excited about, not just because of the core business, but also what it means to our infrastructure going forward and what it means to the decrease in investments that are necessary in order for us to build the company that we want to build. Which remains a company that sells millions of cars and changes the way people buy cars.
That remains our vision, our goal, and our opportunity and our belief. I think, you know, we think we're very well positioned for it. There will undeniably be some cost increases, but we think it is likely that they will be, you know, dwarfed by the improvements in the business, otherwise, due to the leveraging of fixed costs.
Brad Erickson (Analyst)
Got it. Thanks.
Ernie Garcia (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Brian Nagel at Oppenheimer. Please go ahead.
Brian Nagel (Managing Director and Senior Analyst)
Hi, good morning. Thanks for taking my questions. First off, congratulations. I mean, the reposition has been very swift and very effective. Congratulations.
Ernie Garcia (CEO)
Thank you so much. That's I believe that's about our third congratulations in our public life. That means more to us than you know.
Brian Nagel (Managing Director and Senior Analyst)
My question is, just a follow-up to that congratulations. You know, as we.
Ernie Garcia (CEO)
Oh, you said it again. Go ahead.
Brian Nagel (Managing Director and Senior Analyst)
It's the fourth. As we step back, you know, we look at all that's been done here with at Carvana, you know, both from a, I guess, an operational reposition and as well as the efforts on the balance sheet. Now, again, recognizing the environment's very fluid, you're still a young business, but is it done? Or, are you in a position now that you look at the model and this balance sheet and say, "Okay, we can grow from here," or, should we expect further type of repositions? Again, either operationally or on the debt side.
Ernie Garcia (CEO)
I'm sorry, did you say not operationally on the... but on the debt side? How do you finish the question? Yes.
Brian Nagel (Managing Director and Senior Analyst)
I'm sorry. Both on operationally and the debt, right, as we're looking.
Ernie Garcia (CEO)
Both, yes. I think operationally, I think we are in position to continue to make gains, and our plan is to continue to make gains. And so I think, you know, we've, you know, we rolled out an internal program about a year ago that was aiming at this Q2, that was incredibly successful, where all the different groups in the business were aiming for different targets. We've rolled out a similar plan over the next year that we're very excited about, and we think there's significant gains that are yet to be had. We're going to continue to, you know, push there, and we expect to make gains over time to continue to get more efficient operationally.
From a balance sheet perspective, I think we're clearly in a much better spot today than we were yesterday, and I think that that's an exciting and quick development. I think that in addition to just kind of the leverage being less, the flexibility is significantly higher in terms of longer maturities, more prepayment, and lower cash interest expense. I think the improvements there are sort of multidimensional. I think going forward, you know, we're also, I think, well positioned to further delever over time, although, you know, we'll be thoughtful about the pace at which that occurs.
I think, you know, it depends on your time frame that you're looking at there, but I do not think that we are done with balance sheet changes in the grand scheme of things. I think, you know, the business is in a very good position. I think we're well positioned over time to generate, yeah, significant positive cash. I mean, that gives us a lot of options. I think that we've also outlined a number of other options today that also give us flexibility.
Brian Nagel (Managing Director and Senior Analyst)
No, that's very helpful. A second question, also bigger picture, and just to kind of pick in your brains is what you're seeing from an, I guess, a sector standpoint. There's a lot of debate out there about, you know, as we think about affordability for used cars on the part of your core consumers. You know, maybe we're starting to see some acceleration in depreciation, maybe. I guess, as you think about affordability, what do you think is the bigger factor? Do you think it's still these elevated used car pricing, or is it now a higher rate environment?
Ernie Garcia (CEO)
I think our view would be it's the intersection. You know, the vast majority of consumers in the U.S., you know, buy a car with financing, and for most people, I think the decision to buy a car is a function of kind of the cash down payment upfront, then their monthly payment over time. Obviously, you know, those two things are a function of both the car price and rates. I think, you know, historically, we've seen, you know, many different rate environments, and I think you tend to see kind of car prices move in a way that would be expected in light of those rate environments.
I think what's been very unique over the last, you know, year and a half or so, is we saw rates rising rapidly while we also saw, you know, car prices at a very high level. Kind of, you know, they were depreciating in the back half of 22, but then they, you know, appreciated early this year, and now they're depreciating pretty quickly today. I think affordability is about, you know, just the sum of those two things, interest rates and car prices dropping over time. An average customer's monthly payment is less. I think that there are signs, at least on the car price side, that is occurring.
As I said, you know, depreciation this year looks a lot like depreciation last year, although it started about a month earlier, give or take, in both the wholesale and retail markets, and so far, at least, it's a little more severe even than it was last year. Which I think as long as that is foreseen by markets, that's probably great for us, you know, for the reasons discussed earlier.
Brian Nagel (Managing Director and Senior Analyst)
I appreciate all the color. Thank you.
Ernie Garcia (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Nicholas Jones with JMP Securities. Please go ahead.
Nicholas Jones (Managing Director, Internet Equity Research)
Great. Thanks for taking the questions. I guess one, you know, now that you're in part two of your kind of three-part plan, is this step maybe incrementally more challenging than the first part of your plan, as we all try to triangulate when you may return to growth? Any color there would be great.
Ernie Garcia (CEO)
Sure. I think everything that matters is challenging, but I think it's more of the same of what we've set up. I think the most challenging thing that we probably went through as a company was the transition from growth to a focus on improving unit economics. I think that was a big reorientation that was made very quickly, and it required new processes and new focus, and kind of, you know, new management patterns and all kinds of different things. I think that we made that transition, and I think we're very happy about the outcomes that we're observing now as a result.
I think that the next year looks a lot like the last year, in terms of the way that, you know, we're aiming for different targets inside the business. I don't know that, the setup is particularly difficult. I think making progress is always difficult, but I think we've got very good plans and very capable people, and I think we feel very good about the trend lines that we're on, and the targets that we've set. I think, you know, nothing's ever easy, but I think we're on a, we're on as good a path as we can be to continue to achieve those goals.
Then, you know, turning to growth, I think that will be, you know, that will be another pivot when it's time. Again, that's a pivot that I think is a pretty comfortable one for us, given our past and given our infrastructure setup and the scalability of our business, as well as the efficiency gains that we've made over time, that make that even more straightforward. You know, none of that's going to be easy, but we think it's all achievable, and we plan to achieve it.
Nicholas Jones (Managing Director, Internet Equity Research)
Great. Maybe a follow-up on driving reconditioning costs down. In this process, are you maybe not reconditioning items you would have reconditioned two years ago? Is there, are you getting smarter in what you're buying? Is there any kind of feedback from, you know, your customers as you've driven those costs down? Thanks.
Mark Jenkins (CFO)
The simple answer there is the gains are process and technology driven, not quality driven. You know, I think, you know, the inventory team has, you know, absolutely been investing in an enhanced inventory management system that, you know, makes us much better than we were before at managing parts spend, for example. You know, I think we've been insourcing, you know, various services that we've historically outsourced. That's something we've talked about before, that generates opportunities for cost savings and efficiencies. I mean, I think we're, you know, definitely much more right-sized and efficient with the staffing and teams in the inspection and reconditioning center.
The gains in reconditioning have been very broad-based, but they're certainly, they're certainly process driven and technology driven, and not quality driven.
Brad Erickson (Analyst)
Great. Thanks, guys.
Operator (participant)
Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any closing remarks.
Mark Jenkins (CFO)
Well, thanks, everyone. We really appreciate you taking the time. I know this was short notice, and it's early in the morning, at least for many parts of the country, so thank you for jumping on. To the Carvana team, thank you guys so much. I really cannot... Thank you just doesn't do it. The amount of work that's gone in over the last year to get to this spot is absolutely incredible, and the fact that everyone stood shoulder to shoulder with each other and never blinked, and just kept pushing in light of a lot of doubt, is something that is amazing, and I cannot fully express the gratitude that comes along with that. Thank you all so much.
We are nowhere near done, as we always say, and we're gonna keep pushing. This is a moment to be proud, and then later today is a moment to keep pushing that pedal down. Thank you, guys.
Operator (participant)
Thank you, sir. 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.
