Good day, and welcome to the CarMax First Quarter Fiscal Year 2023 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to David Lowenstein. Please go ahead, sir.

Thank you. Orlando. Good morning. Thank you for joining our fiscal 2023 first-quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon Daniels, our Senior Vice President CarMax Auto Finance Operations. Let me remind you our statements today that are not statements of historical fact, including statements regarding the company's future business plans, prospects and financial performance are forward-looking statements we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important facts that could affect these expectations, please see our Form 8-K filed with the SEC this morning and our Annual Report on Form 10-K for the fiscal year ended February 28, 2022 previously filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at 804-747-0422, extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill?

Thank you, David. Good morning, everyone, and thanks for joining us. For the first quarter of FY'23, our diversified business model delivered total sales of $9.3 billion, up 21% compared with last year's first quarter, driven by growth in average selling prices and wholesale volume gains, partially offset by a decline in retail used units sold. Across our retail, wholesale channels, we sold approximately 427,000 cars in total during the first quarter, down 5.5% versus last year's period. In our retail business, total unit sales in the first quarter declined 11% and used unit comps were down 12.7% versus the first quarter last year. Our performance was driven by the same macro factors that led to a market-wide decline in used auto sales during the quarter, including lapping material stimulus benefits paid in the prior year, widespread inflationary pressures including challenges to vehicle affordability and lower consumer confidence. We began the first quarter with a double-digit decline in comp sales during March, continuing the fourth quarter performance we discussed on our last earnings call. Comps then improved sequentially with May ending in a low single-digit decline. While we don't intend to talk about it each quarter, market share data provides additional context to our performance and indicates that our relative performance remained strong. Based on external data, we gained share each month from January through April, the latest periods for which title data is available. We believe the share gain reflects the strength of our business model and omnichannel platform, which gives us the ability to successfully manage through cycles like this one. In short, we remain focused on delivering the most customer-centric experience in the industry and we believe we are well positioned to deliver profitable market share gains in any environment. We reported first quarter retail gross profit per used unit of $2,339, up $134 per unit versus the prior year period. We continue to focus on striking the right balance between covering cost increases, maintaining margin and passing along efficiencies to consumers to support vehicle affordability. Wholesale units were up 2.7% versus the first quarter last year, despite a calendar shift, which negatively impacted auction volume compared with the prior year. Wholesale volume was also pressured by our decision to reallocate some older vehicles from wholesale to retail to meet consumer demand for lower-priced vehicles. We estimate that without these two factors, our wholesale unit growth would have been above 10%. Wholesale gross profit per unit was $1,029 in line with $1,025 a year ago. We are pleased that we continue to drive wholesale unit growth, even as we lapped last year's nationwide launch of our instant online appraisal offering on carmax.com and in the face of the industry-wide decline in used sales. We believe our wholesale business provides an incremental growth lever and is a valuable component of our diversified business model. We bought approximately 362,000 vehicles from consumers and dealers during the first quarter, up 6% versus last year's period. We continue to be the nation's largest buyer of vehicles from consumers purchasing approximately 345,000 cars in the quarter, up 3% versus last year's record results. This enabled our self-sufficiency to remain above 70% during the quarter. We also sourced approximately 17,000 vehicles through our Max offer, our digital appraisal product for dealers that we mentioned during our last call. This is up 183% versus last year's period. As a reminder, buying directly from consumers and dealers lowers our acquisition cost, enhances our inventory selection and provides profitable incremental wholesale volume. CarMax Auto Finance or CAF delivered income of $204 million, down from $242 million during the same period last year as the provision for loan losses normalized versus last year's favorable adjustment. Jon will provide more detail on customer financing, the loan loss provision and CAF's contribution in a few moments. At this point, I'd like to turn the call over to Enrique, who will provide more information on our first quarter financial performance. Enrique? Enrique Mayor-Mora: Thanks, Bill, and good morning, everyone. First quarter net earnings per diluted share was $1.56, down from $2.63 a year ago. While the decline in used sales was the key contributor, the comparison was also impacted by the following two items. First, as Jon will discuss, an $82 million year-over-year swing in the provision for loan losses, reflecting a more normalized environment. Second, earnings in last year's first quarter reflected a $22 million unrealized gain on an investment. Total gross profit was $875 million, down 5% from last year's first quarter. This decrease was driven primarily by the 11% drop in total used unit sales, which was partially offset by the increase in retail gross profit per unit and the continued growth in wholesale units. Wholesale vehicle margin was $192 million, up 3% despite the headwinds in the quarter that Bill noted. Other gross profit was $120 million, down 15% from last year's first quarter. This decrease was driven primarily by the effects of lower retail unit sales on service and EPP profits. Service results declined $31 million as lower sales and secondarily impacts from inflationary pressures drove a deleverage in results. EPP gross profit decreased by $18 million or 13%, slightly more than the retail unit sales rate decline. While penetration was stable at approximately 61%, this year's first quarter also reflected a $2.3 million unfavorable shift in the return reserve adjustments versus last year's period. Partially offsetting this decline in other gross profit was favorability in third-party finance income, which improved by $8 million, with income of $3.4 million compared to a cost of $4.6 million last year. This improvement was driven by lower Tier 3 volume compared with last year's first quarter. First quarter also benefited from $20 million of margin contribution from Edmunds. On the SG&A front, expenses for the first quarter increased to $657 million, up 19% from the prior year's quarter due to an increase in staffing costs and marketing, the continued investment in our strategic initiatives, growth costs related to the increase in appraisal buys and used stores and the consolidation of Edmunds. SG&A as a percent of gross profit deleveraged to 75% from 59.9% during the first quarter last year. The increase in SG&A dollars over last year was mainly due to three factors. First, a $61 million increase in compensation and benefits, excluding share-based compensation, driven by the annualization of the strong growth in staffing we experienced in the back half of last year, the inclusion of Edmunds payroll this quarter versus a year ago, wage pressures and the ramp in field staffing in anticipation of a stronger tax season. Partially offsetting this increase was a $16 million decrease in share-based compensation. Second, a $26 million increase in other overheads. The primary drivers of this increase include investments to advance our technology platforms and strategic initiatives, as well as growth-related costs. Third, a $16 million increase in advertising expense. This increase was primarily due to last year's lower level of spend in the first quarter given our tight inventory position and robust customer demand. In addition, this quarter spend had anticipated a stronger tax season. We've navigated many challenging consumer cycles throughout our history and remain committed to operating efficiently and effectively in every macro environment. We have already begun to better align staffing in our stores and CDCs to consumer demand as part of our ability to quickly adapt our business. From a capital structure perspective, we remain in a very strong position. We ended the quarter with an adjusted debt-to-capital ratio in the middle of our targeted range of 35% to 45%. We also generated sufficient cash to both pay down our revolver by more than $580 million and increase the pace of our share repurchase program relative to the back half of fiscal year '22. In the first quarter, we repurchased approximately 1.6 million shares for $158 million. First quarter also marked our entry into the New York City metro market. We opened a store in Edison, New Jersey and in the second quarter, we expect to open stores in Wayne, New Jersey at East Meadow, New York. We anticipate adding two more stores in this market next year. Now I'd like to turn the call over to Jon.

Thanks, Enrique, and good morning, everyone. Our CarMax Auto Finance business delivered solid results again this quarter despite the volatile broader lending environment. During the first quarter, CAF's net loans originated was over $2.4 billion. The weighted average contract rate charged to new customers was 9%, which was in line with year ago, but has significantly increased from 8.2% in the previous quarter. The majority of this quarter-over-quarter change came from increased rates charged to consumers rather than from the mix of credit. As the Fed clearly signaled interest rate hikes beginning of the calendar year, CAF was able to quickly test and methodically adjust consumer rates to carefully manage sales, finance margin and penetration. As a result of these proactive rate changes, CAF's penetration in the first quarter, net of 3-day payoffs was 39.3% compared with 43.7% last year. Of importance, CAF saw it’s penetration level improved during the quarter as we observed banks and credit unions raising their own consumer rates during this period. Our Tier 2 partners continue to compete for the attractive CarMax business resulting in a penetration rate of 25.2% compared with 22.8% last year. Tier 3 accounted for 7.1% of used unit sales compared with 10% year ago. And we believe this is an indication that these customers have been impacted the most by challenges to vehicle affordability. CAF income for the quarter was $204 million, a decrease of 15% or $37 million from the same period last year. I want to take a moment to clarify the year over year swing in our loan loss provision. You will recall that last year CAF recognized $24 million of income in Q1 related to the loan loss provision, as we continue to adjust our reserve based on favorable loss performance versus expectations set at the start of the COVID pandemic. CAF's loan loss provision this quarter was $58 million, reflecting a more normalized dollar amount, given the loss performance observed within the quarter. Significantly offsetting the provision headwind was our total interest margin, which grew $53 million year-over-year, including a $36 million increase and interest in fee income and a $17 million reduction in interest expense. The lower interest expense was supported by a $9 million benefit from our hedging strategy. The current quarter's provision of $58 million resulted in an ending reserve balance of $458 million or 2.85% of managed receivables. This is a slight increase from the 2.77% at the end of the fourth quarter and included a 5 basis point adjustment for the growth in Tier 2 and Tier 3 volume originated by CAF. We remain confident in both the resiliency of the CAF consumer and our ability to serve them well. While delinquency rates have increased, our Tier 1 credit losses remain comfortably within our historical operating range of 2% to 2.5%. At this point, I would like to also provide an update on our industry-leading online finance experience. As a reminder, our unique finance based shopping engine or FBS allows for multiple lenders to decision a single customer or co-applicants on our entire retail inventory, providing a full suite of personalized decisions available at the consumers' fingertips within carmax.com. During the month of March, we further enhanced this experience by testing a no impact your credit score pre-qualification feature along with a streamlined application process that provides real-time credit decisions on our full inventory. We are extremely excited about the results thus far. It is currently available to approximately 25% of our online customers and we anticipate scaling nationwide during the rest of the year. Now I will turn the call back over to Bill.

Great, thank you, Jon, and thank you, Enrique. For the past several years, our priorities and investments have focused on building a leading e-commerce platform that integrates buying and selling cars with our best-in-class store experience. I'm pleased to share that during the first quarter, we achieved a significant milestone, as we have now enabled online self-progression capabilities for all of our retail customers. Our journey to this point required a massive organizational transformation and I want to thank all of our associates for their tremendous support throughout as we work together to create our omnichannel experience for our customers. In regard to our first quarter online metrics, approximately 11% of retail unit sales were online, up from 8% in the prior year's quarter. Approximately 54% of retail unit sales were Omni sales this quarter, down slightly from 56% in the prior year's quarter. Online omni and in-person sales can vary from quarter to quarter depending on consumer preferences and how they choose to interact with us. While we expect our online and omni sales to grow over time, our goal is to provide the best experience whether that's in-store, online or a seamless combination of the two. Our wholesale auctions remain virtual, so 100% of wholesale sales, which represents 23% of total revenue are considered online transactions. Total revenue resulting from online transactions was approximately 31%. This is up from 24% in last year's first quarter. Our e-commerce engine combined with our unparalleled nationwide physical footprint is a competitive advantage. Our ability to deliver integration across digital and physical transactions gives us access to the largest total addressable market relative to others in our industry and is a key differentiator. We're now going to turn our efforts to further improving the experience for our customers and our associates by focusing on the seamlessness of our online and in-store offerings. Some of our key areas of focus include, first, as Jon just mentioned, we're deploying a more sophisticated version of our finance day shopping product. As interest rates rise, consumers' ability to confidently secure financing is more important than ever. The expansion of our best-in-class pre-qualification product once fully deployed will provide frictionless and seamless access to multi-lender credit terms on every car within our retail inventory on every cart within our retail inventory whether the consumer chooses to browse and purchase from the comfort of their home, walk the lot on their own with their mobile device or shop alongside one of our exceptional sales consultants. Second area of focus is continuing to leverage data science, automation and AI to improve efficiency and effectiveness across our buying organizations, business offices and customer experience centers. Finally, we will continue to use Max offer to acquire vehicles and build on our market leading position as a buyer of cars. With Max offer, we can utilize the Edmunds sales team to open new markets and sign up new dealers for the service. It's another example of our ongoing focus on innovating and finding new opportunities in the white space adjacent to our existing capabilities. We are currently live in over 30 markets and anticipate launching additional markets throughout FY'23. Staying on Edmunds for a moment, I want to acknowledge that as of June 1, we reached the one-year anniversary of this acquisition. We are glad to have all of the talented Edmunds associates on our team and have been very pleased with the value that's been created so far. We are equally excited about our path forward as we continue to build out together our vehicle and customer acquisition programs. Before closing, I want to acknowledge, there is uncertainty in the market and in regard to consumer behavior, we believe that our fundamentals are strong and that our diversified business model enables us to gain profitable market share in any environment. Multiple opportunities exist to grow the business as we roll forward and we're excited about the future. With that, we'll be happy to take your questions. Orlando?

Thank you. [Operator Instructions] All right, and we will take our first question from Brian Nagel with Oppenheimer. Please go ahead.

Good morning. Can you hear me?

Yes, good morning, Brian.

I'm sorry about that. I think transmission problem. Congrats on the continued progress. So the question I want to ask in this from a bigger picture perspective as we look at the sales trends here, Bill, in your prepared comments you mentioned again some of the same factors, obviously the difficult comparisons last year again stimulus and then elevated prices confidence and such. But as we're progressing now into '22, are you seeing more clearly kind of how the consumer really is -- how the consumer is behaving, the underlying health of the consumer, and what's really driving the business at this point, particularly as you mentioned the, I guess, a strengthening trend through fiscal Q1 is the health of the consumer getting better, is that more of a function of comparisons?

Yes, Brian, look, I think overall the consumer is absolutely a little softer, just because of all the things I've talked about it. I think it's hard to quantify if you think about lapping over stimulus, vehicle affordability, the general inflationary pressures, rising interest rates. If you think about those, it's hard to quantify the impact of each one. Now, I would tell you the further we've gotten from lapping the stimulus, obviously, the better we performed as I noted in my opening remarks, we got sequentially better on comps throughout the quarter, which is encouraging. But that being said, I think the consumer is softer, but there is still some demand out there and I think that's what we're trying to really maximize on and we're taking several steps to take advantage of that. It's one of the reasons why we're -- we continue to take efficiencies and pass what we can along to consumers to make the vehicle a bit more affordable. In my opening remarks, I talked about selling a little bit more of older vehicles, making the vehicles a little bit more affordable because we know some of the consumers are looking for that. In fact, Brian, you followed us long enough to know that we used to have what we called a ValueMax, which was really 6 years old vehicle, older than 6 or more than 60,000 miles, typically that -- what that type of inventory runs, let's call it, and I gave in year 22% to 25% of our sales. Well, for this quarter, it was more like 35% of our sales. So there is some demand for that. And I think the other thing I would point out is it's the reason why we also have the lending platform that we do that we have great third-party lenders and CAF just to make sure that we can get the most competitive interest rate for our customers.. So I think those are the things that we're doing to kind of work through this. And while the consumer is softer, there is still some demand out there.

No, that's very helpful. But if I could just slip one follow up into that. So, are you seeing, as you look at maybe across the different cohorts of your business, higher-priced vehicles, lower-priced vehicles, are you seeing now more significant demand dynamic across those cohorts?

On the vehicle prices?

Yes, just to get an idea of that -- okay.

What's interesting about it, Brian, is if you look back a year ago, 70% of our inventory was under $25,000. Fast forward to today, it's more like 43% to 45% and that's really a result of inflationary pressures, which again is one of the reasons why we're focused on getting more affordable inventory out there. So that's what our big push is right now. Now realizing some folks are interested in a higher model car and or an older car, but again, that's what our focus is right now.

Got it. I appreciate all the color. Thank you.

Yes.

Next question will come from John Healy with Northcoast Research. Please go ahead.

Thank you. Why don't we try to follow up on that first question maybe in a little bit different way. When I think about, Bill what you kind of talked about what's going on in the business, you re-merchandised, you've got investments into the sales and labor force, obviously, those mature at different rates. But if you look at kind of going from low double-digit declines in, say, March or April to low single-digit declines now in comps. What would you attribute the improvement to? Is it conversion? Is it the people in the stores? Is it that consumer might have paused and now they're realizing they have to make a transaction? Would just love to kind of hear how you and the team are attributing the sequential improvement and maybe to what initiatives are they more consumer-related?

Yes, it's a good question, John. I mean obviously, I'd love to tell you that it's because of our continued focus on improving the experience, getting the right inventory and they're improving prices and all that, while I do think that's a factor. I don't think you can ignore the fact that a year ago in March, the biggest stimulus checks hit the ground. And when you think about it, tax season this year versus last year would have looked very similar. The only difference though is last year $1,400 check went out to consumers during tax season and that did not happen this year. So, that absolutely had an impact. So I'm not going to sit here and say it's all us that's driving, I think there are some macro factors that are allowing it to improve the further you get away from that stimulus. Enrique Mayor-Mora: I think as well, like, our success in buying cars directly from consumers as reflected in our self-sufficiency rate really allows us to buy those older cars. And as Bill talked about, our percent of sales coming from older cars were not because the consumer demand is there. Those cars are not easy to buy in auction. So it's really a nod to our ability to buy cars directly from consumers.

Great. And then just one follow-up question. I think you mentioned the auction calendar working against the wholesale business this quarter. Will that revert? Will we pick that up in Q2? I was just curious how the timing impact might or that there might be a benefit quarter here as we look out for the remainder of the year.

Yes. No, great question. First of all, we're very pleased with the auction performance, wholesale performance, in general. We're pleased with the fact that we actually grew it. The dynamic was that we had one less Monday sale and swapped it for Tuesday and Monday is a bigger auction volume day than a Tuesday and that actually we got the benefit of that at some point last year. So that will not be a pickup. The other thing that I cited though was that we have made the decision to pull some what we normally run through the auctions and build those cars to retail and absent those two things. If you pull them out, the wholesale would have grown by more than 10% which, again, we're excited about.

Great. Thank you.

Yes.

Up next, we'll hear from Ms. Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning. So as you think about offering some more value-oriented cars, have you also considered kind of swaying from the, I guess, I would say fully reconditioned status that you've historically had and maybe leading from the scratches or whatever and marking it as is to further enhance the value proposition, I know that's been something you've been leery of in the past from a brand perspective. And then secondarily, obviously, there is a lot of concern that things are going to get worse before they get better, I mean how are you positioning from a controllable standpoint in the event that there is another leg down. I mean how should we think about SG&A, and what you can cut if you need to cut it?

Yes, I'll tackle both because I'm sure Enrique will have some comments on the kind of the concerns going forward. From your first question, as far as the older inventory. Sharon, if we're going to make it a CarMax car, it's going to be a CarMax car. And you know, you take these older cars, not all of them can make the cut. And we’ll end up trying to run through some through retail, they won't make it, but we're bringing them up to the CarMax standards. So I think that answers your first question. The other thing I would just point out there is those cars, and we've talked about this, but we haven't talked about it for a while, those cars are generally more profitable. So, they also provide us a tailwind when you think about margin management, pricing inventory that kind of thing. So we'll continue to do that, we'll continue to bring up to CarMax standards and not go with a lower standard. As far as the concerns about what may manifest in the future with the consumer, where the consumer is going, Sharon, we've been through this several times in the past and whether it's ’08, ‘09 recession, whether it's the depths of COVID, we've been able to navigate it profitably both times and we have lots of levers, we've shown that we've been able to pull those levers whether they're expense levers and you think about, you can slow down some of your growth, you can slow down some of your initiatives, you can pull back on advertising, your variable will adjust or if it's just you know if you want to secure cash, you can modify your stock buyback, you can start on some of your capital expenditures or delayed. So these are just some of the levers that you know that we pulled in the past and we're going to continue to monitor the conditions. But I'd tell you that it here today, yes, the consumer soft, but now is not the time. I don't think to be pulling back on our initiatives because the initiatives what are going to really help us grow in the future. But that being said, we're certainly aware of the outside factors and we'll continue to monitor. Enrique Mayor-Mora: Yes, I would just add to that by saying, we're going to be -- our objective really is to ensure that our expenses are in line with customer demand while at the same time making sure that we're investing in the key areas of that are going to enable us to grow profitability and market share over time. And as I mentioned in my prepared remarks, with a view of that, we've already begun to kind of align our cost structure to current demand through scheduling, through natural attrition. So we've already done those and look if a recession comes, we're confident in our ability to weather it as we're coming at it from a position of strength. We're profitable. We have a strong balance sheet and we generate cash. So we feel, again, as Bill mentioned, we've been through these cycles before and we feel confident we can manage through it effectively while growing our market share as well.

Okay, thank you.

Thank you, Sharon.

Our next question will come from Rajat Gupta with JPMorgan. Please go ahead.

Great, thanks for taking the questions. Nice execution on the retail gross profit per unit. Can you help us unpack that a little bit versus the prior quarter, what drove the sequential uptick there? Is it reconditioning saving? Is it just the sourcing mix? Is it pricing related? Curious if you could bucket those if possible and I have a follow-up.

Yes, thanks for the question, Rajat. Yes, the way I think about it and I talked about this in the opening remarks, we're really trying to walk upon balance here. We have some efficiencies, historically we've always passed our efficiencies along and the big efficiencies that we're working with right now are the fact that we've got self-sufficiency still at a high, but we also have this new dynamic where we're signed to more older cars. And as I talked about earlier, these older cars generally carry more margin. So that's also an opportunity to manage our margin and pass along efficiencies to the consumers. And this quarter, obviously, it's a little higher than last year and even our five-year average. And that's because with these efficiencies, we continue to pass along the price savings, but we also took a little bit more to the bottom line and we monitor sales elasticity, competitors' inventory levels that kind of things. And we'll continue to do that going forward, but we feel really good about our margin position right now and bearing the other big changes and keep an eye on the testing, we feel good about the margins going forward as well.

Got it, got it. Relatedly, on the topic you're shifting to SG&A, I mean is there any of the slight change in the sourcing mix or trying to maintain that GPU coming in some way at the expense of more cost on the SG&A side. Now, you're not roughly $2,700 per unit and this is the seasonally strongest quarter typically every year, so curious like what takes us down further as the year progresses? What are the areas of opportunity? If you could just give us some puts and takes on that front on how the SG&A per unit should progress going forward?

Yes, I'll pass to Enrique in just a second, but just to be clear, like these, the margin improvements are not coming at the expense of SG&A and the way we think about margin when we were building the cars we've absolutely seen inflationary pressures in the build of cars, which goes to the COGS. But we're also working very hard to offset those. So not only we are passing along some savings to the consumer through some of these efficiencies, but I also feel like because we're offsetting these costs that's also passing along to consumers, because some competitors won't have levers and if the costs go up, which everyone seeing whether it's gas, it's parts, it's labor, if they don't have levers to pull, their prices are going up. So I think about that is also an efficiency on price as well. Enrique Mayor-Mora: Yes. And I would say just to build on that. There is some pressure on SG&A from the amount of buys, right. So we've had tremendous success around the amount of buys there, we have to staff up to make sure we can accommodate that and ebbs and flows through to our self efficiency rate. So there is some pressure on SG&A, but what I'd tell you the story in Q1, an important story on the deleverage is really driven by a couple of things, right, year-over-year, when you look at the deleverage. Number one is like were are understaffed last year in the first quarter, you recall going back to the pandemic, coming out of the pandemic, we were understaffed. And we spent the back half of last year understaffed -- or staffing up. As the last year was understaffed, we also spent less on a per unit in marketing last year in the first quarter, because our inventory was fairly limited. So we spent a little bit less than we had very strong demand, so we're comping over those 2 things in the first quarter, which put a fair bit of pressure on that leverage rate. I think the second thing, as well as in anticipation of a stronger tax season performance, we have staffed up in our stores and in our CDCs and we had to spend more in marketing, now those sales didn't come, but as I've talked about, we're fairly nimble and we can manage those back down, which is what we've already begun to do when it comes to staffing in the CDCs and in our stores. And again we're doing that through just attrition and through better scheduling. But we can manage that down, but I think it's important to understand the Q1 deleverage what drove it.

Got it. Great, thanks for the color. I'll jump back in queue.

Thank you, Rajat.

Alright, up next, we'll hear from Daniel Imbro with Stephens Inc. Please go ahead.

Yes. Hey, good morning guys. Thanks for taking for our question. I wanted to ask on the competitive environment for CAF right now. I think last quarter we talked about how some of the other lenders were extending terms to 84 months. They weren't passing through higher cost of funds. It feels like you mentioned in your prepared remarks, if they were starting to pass through some of those higher cost of funds during the quarter. But just curious how the competitive backdrop is changing and obviously CAF penetration went down in the quarter. I mean, was that intentional on your part walking away from business? Or can you tell us what drove that? Thanks.

Sure. Yes, I appreciate the question, Daniel. Yes, thanks for the recognition in the prepared remarks, we did state. I think the story or the headline for penetration this quarter was really about cash pricing moves. We're not walking away from business at all. If you look at the average APR, we charge for our customers last quarter, it was 8.2% this quarter, it’s 9% largely coming from us passing along our increased costs under the consumer, it's always a delicate balance, you're trying to figure out managing, making sure you're highly competitive to your customer. Remember we're competing directly with predominantly credit unions and to some degree external banks. We install that -- what we observe, we just want a little sooner than they did are kind of trough of penetration in the quarter was more in that February-March timeframe and we watched our competition, we have sort of them raise rates throughout the quarter, we were just a little sooner and therefore our penetration came back the cadence within the quarter. So I think it will continue to be that way again trying to manage our penetration, our net interest margin capture and obviously making sure extremely competitive for our customers. So it's a delicate balance it will continue one, but we'll continue to watch what our competitors do and what the Fed does.

And Jon -- well our penetration went down those consumers that brought their own financing went up.

Great. That's generally the offset. So in our space usually a customer sees the car, they want it, making either choose the financing from CAF, or again that's what's great about our program is they can go externally not feel like they have to walk away from the car, and that's generally what they do. So they just chose to do that this quarter.

Got it. I'll hop back in the queue. Thanks so much guys.

Thanks, Daniel.

All right. Up next, we'll take a question from Seth Basham with Wedbush Securities. Please go ahead.

Yes, hi, this is Nathan Friedman on for Seth. Thanks for taking my questions. The first question I wanted to ask was regarding retail gross profit per unit, are you expecting this level of GPU going forward given the current used car pricing environment and a return to normalized or possibly accelerated depreciation through the duration of the year? And how should we be thinking about that?

Yes, Nathan. As I said earlier, we feel good about our margins. We've got some tailwinds there. I would tell you, we've navigated through times of depreciation before and I think we excel at it. And in those times of depreciation before, we've been able to maintain our margins. So I would expect that to be similar. I think the only times where our margins have come under pressure a little bit is when you see rapid, rapid depreciation of a very short period of time. But even then it's short-lived. So we feel very comfortable about our ability to continue to maintain margins. But again, we're going to also like I said earlier, we'll be testing a lot of different things and making sure that we have an outward eye on where the consumer is and sales elasticity competitors and all that.

Got it. Thanks for that. And my second question is focused on your strong net interest margin performance this quarter and the sequential increase here, despite your last ABS securitizations margins experiencing pretty large sequential margin declines. Can you provide more detail or quantify how much benefit you experienced from your hedging strategy this quarter? And how you're envisioning net interest margins going forward?

Sure. Yes, we -- Enrique and I’ll probably tag team on that, first just to talk about the net interest margin growth that we saw during the quarter. Again the key to remember is our business model in our accounting processes we earn over time rather than a gain on sale model, so the assets that are providing our net interest margin in this quarter coming from a year ago, two years ago, three years ago, where spreads are incredibly healthy. So obviously what we bring on this quarter, and most recent ABS transaction, it's really going to offset what we're rolling off of the portfolio. So it just so happens that timing is such that such strong margin assets still remain in our portfolio and will for some time. And eventually if we can keep our margin high, we'll continue to keep manage that well, then the fall off, will be -- may be minimized or at least slow on the downturn. With regard to hedging strategy, I'll let but Enrique talk to that. Enrique Mayor-Mora: Yes. And as Jon mentioned in his prepared remarks, we had and we experienced in the quarter a $9 million gain from a hedge benefit just to maybe explain that a little bit more. The vast majority of our receivables are funded through the securitization market and we have an accounting hedge on all of those. But we also have alternative funding vehicles as we've been talking about for a few years, right? With our banking partners a portion of those receivables have a cash flow hedge, but not an accounting hedge. And that's really due to our desire to maintain flexibility in the funding profile. So those receivables, they don't have an accounting hedge, get mark-to-market every quarter. So, we benefited this quarter given the recent sharp and material change in interest rates, but moving forward we’d only expect us to be material to any degree in periods again with our sharp and material changes in the interest rate.

Well. That’s good. Thank you for the time and best of luck.

Thank you.

All right. And up next, we will take a question from John Murphy with Bank of America. Please go ahead.

Good morning, everybody. I just wanted to go back to the shift towards older vehicles. And Bill, I mean as we look at the next few years, the zero to six year old car population is likely to shrink pretty dramatically or not really recover much if that is what we're seeing on new vehicle sales side, I mean, the vehicles just don't exist in reality. So as you look at going older to beyond six years, it just seems like there's a real opportunity in the seven to 10 year old vehicles. Our high-quality products is very different than they were 10 to 20-years ago, so you can wrap them pretty well to the consumers, so they're good products for you to rep in sell. So just curious, as we think about this idea there and like you said you went from 25% Valuemax or Valuemax like vehicles to 35% this quarter. Could that be significantly higher over time? And just the kind of thing that could be not just sort of a move to offset some of the shortage of supply on zero to six year side, but somehting you’d be more structural and if you think five to 10 years down the line could dramatically increase your addressable market for each store or in total?

Yes. Good morning, John. Yes, it's a great question. The beauty of our business is whatever the consumers are looking for, we'll put out there. Now obviously, it’s a little harder to find some of these vehicles and build them. We've been through a similar situation. If you go back to ’08 and ’09 the recession when the new car SAAR dropped dramatically. It was actually more pronounced back then, I think what that did to like a 10-year supply of newer type cars, because you know the SAAR was down to really low double-digits. I think at one point, if not even below that. So there was this bubble that had to work itself through. And I would expect to see a similar level, but not nearly to the magnitude that we saw back in ‘08 or ’09. I would tell you, the great thing that's different then -- back then, we are able to navigate them, but the great thing that we have now that we didn't is just our self-sufficiency and when I think about that type of inventory our best source of that is from consumers and so the fact that our self-sufficiency is so high. It just gives us a lot of that inventory, you know, I talked a little bit about those over six, but it really doesn't matter if you break it down zero to four, you know, that's generally like a year ago at 66% of our sales or so this quarter is about 50% five to seven year old vehicles again it's 20% to 25%, now it's 30% to 35%, 8%-plus, it’s like 15%, it across the board. And we have a better source of inventory now, so we're excited about the opportunity going forward.

Okay. And then maybe just to follow-up on that, on the -- I mean, it’s seems like on the acquisition side, it’s -- you’re doing a good job on self-sufficiency side. But if we think about that consumer buying that vehicle. It sounds like, they actually have a higher propensity than the younger vehicles to actually purchase online. I mean, when you are looking at your omnichannel efforts and actually conversion based on the age groups. I mean, is that true that basically this seve plus year old vehicle is actually -- that buyer is actually more apt to buy online then sort of the one to three year old bucket. I mean, I'm just curious what you're seeing there?

Yes, John. To be honest, off the top my head, I don't know if that's necessarily true, I mean what we're seeing from an online sales perspective is it's a wide swath of consumers looking for different merchandise. So I don't think that's necessarily true that it's the older stuff that selling online. There is some of it, I don't think it's disproportionate.

Okay. All right, thank you very much.

Thank you, John.

All right. Up next, we'll hear from Michael Montani with Evercore ISI. Please go ahead.

Great, thanks for taking the question. Good morning. Just wanted to ask first if I could, if you all could share some incremental color around the buying trends you're seeing. I don't know if you can segment it out by income cohort, kind of, 40k and below versus 100k plus households. But, but just talk about maybe what you saw there in the quarter? And then how that has evolved, if the sales have, kind of, stabilized it down low single-digit?

Mike, I don't have the cohort that you're looking for as far as household income the both our online, in-store appraisal lane has really resonated broadly with all consumers. I would say, interestingly, for the quarter we bought it may not be a total surprise we bought more what I would call larger SUV pickup trucks from consumers that may be because of gas prices, but on the flip side, we also sold more of that there were consumers, you know, I think if you pay the right and you have a price right that they’ll sell and we actually -- we saw that. But I don't have the data in front of me to tell you. Okay, household income, what does that look like on a sale. But I will tell you, it's the product that we have out there has really appealed across the spectrum. Enrique Mayor-Mora: Yes. I guess what I would add to that just some of the credit perspective trying to align maybe household income with the credit quality of the customer coming through the door. I think we mentioned before, I think there is demand out there. You see the lower credit quality customer who is still shopping still applying for credit, they just seem to be maybe priced out of the markets at times, because of the price of the vehicle and ultimately the monthly payments. So I think the demand is there, I think as inventory comes down they're going to be able to get there. So again provided there is some correlation between that consumer and the lower income consumer. I think the demand is there.

And if I could just follow-up on the profit front, earlier this year you all had mentioned the gross profit dollars, we need to grow, kind of, high single-digits to leverage, given some of the investments underway. So just wanted to think about that into the back half of the year. Does add expense kind of step up here given the multi-channel has been initially rolled out, head count it sounds like it could moderate a bit? So, just help us to understand kind of how to think about the pace of SG&A dollars for the back half? Enrique Mayor-Mora: Yes. And so what we have said last call, as we expect in fiscal year ’23 actually we're going to need an excess of that historical range of high single-digit, right. So we need more than that to leverage this coming year, because what I talked about earlier, largely that annualization of the success in staffing and again Q1 really is the quarter where we see most of that impact. We are committed to ensuring that our expenses are in line with customer demand. And again, I talked about that we've already -- the steps we've already undertaken. So for Q1 really from a year-over-year leverage perspective, it is our toughest quarter.

Thank you.

Thank you.

All right. Up next, we will take a question from Craig Kennison with Baird. Please go ahead.

Hey, good morning. Thanks for taking my question as well. I wanted to dig into your sourcing mode and really understand your Maxoffer tool a little bit better. Can you give us a feel for the economics of that tool? And why do dealers choose to use it given you're also competitors in that local market? And then, are those cars as profitable as cars you sourced directly from the consumer or from auctions? Thanks.

Yes, Craig. Yes, we're -- like I said earlier, we're excited about Maxoffer, it’s been a product that we've been working on, it took a little bit of a back seat to the IO, but we're leveraging similar algorithms. When I think about the profitability, obviously, the -- well first of all the Maxoffer buys are absolutely more profitable than buying offsite. As I rank on that, I think the most profitable or certainly the IOs that are consumers to bring us the cars for obvious reasons we're not saying logistics that kind of thing. But for the Maxoffer they're not as profitable as a consumer, but there's still more profitable than buying offsite, which again makes sense, because we're not having to pay buy fess. As far as why dealers, we choose to use it, but there is lots of deals out there have inventory that they're not interested in, or they have appraisals that they're looking at that they really don't know how to value it. And so this is a service that can be provided at no cost with a backing on it and it's proven to resonate. Like I said in the call, we're little over 30 -- in 30 markets, we have plenty of opportunity -- continue to expand it. Edmunds has 1,000s of dealers that they work with our auctions. We have 1,000s of dealers, so we think there's a lot of potential here.

Can you shed any light on the fee structure? Are you getting a fee or they getting a fee? Enrique Mayor-Mora: So we do -- they actually we make it a little bit what we make it worth our time, so they actually do make some money on these, and that's kind of how we work it.

Perfect, thank you.

Yes.

All right. Our next question will come from Evan Silverberg with Morgan Stanley. Please go ahead.

Good morning all. Evan Silverberg on for Adam Jonas. Recognizing there were some color in the prepared remarks on comps per month year-over-year. Curious if you could give any additional color on an absolute basis? How sales trended throughout the quarter? And what you're thinking in terms of exit rate into 2Q?

Yes. And like I said in my opening remarks, they got better progressively throughout the quarter from double-digits to low single-digit negative comp for the end of the quarter. So we've been pleased with that, that trend. And obviously we'll talk about June in second quarter at that time, but again we've -- we feel pleased as we exited the quarter.

And even within the quarter are you seeing any trends within the tiers of the consumer or you think it's pretty steady throughout the different classes?

No. I think it's pretty steady through the different ones, as Jon pointed out earlier, I think that, that lower FICO customer is probably being impacted the most by vehicle affordability. But again that, that's the way it started out at the beginning of the quarter and that's the way it ended the quarter. So I think it's fairly consistent throughout the quarter.

Great. Thank you very much.

Thank you.

All right. Our next question will come from David Whiston with Morningstar. Please go ahead.

Thanks, good morning. It's great to see free cash flow generation along with buybacks in the debt pay down. I was just curious on the roughly now I think about $1 billion then due two years from now. Is your goal to just get rid of that revolver through internal free cash flow generation before that time? Are you willing to do an five year, 10-year bond offering at some point? Enrique Mayor-Mora: Yes. Well we would. As you said, I mean, we are very pleased with our cash flow performance in the quarter. You know, despite a challenging sales quarter certainly where our business model is able to generate cash and we're really pleased that allowed us to pay down a fair chunk on our revolver, almost $600 million and accelerate our share repurchase program. So in terms of what we're going to do moving forward, I think the way to think about it is, will be nimble to the environment, we’re going to do what's right for our shareholders. And while taking a look at how we're performing and kind of what the options are for us. I think the way to think about it is we intend on managing within our capital structure at 30% to 45% adjusted debt-to-cap, and that's how we kind of manage the business we do that by taking on debt, we’re pulling down debt and also by our share repurchase program. So those are the levers that we use. So moving forward, you know, we’ll end up managing to that rate.

Okay. And on the free cash flow generation, it looks like you've got a lot of help from inventory reductions, which you hadn't gotten that help in working capital in the past several quarters. Just curious, was your inventory decline here intentional to get some free cash flow generation? Or is it perhaps a function of buying more older vehicles? Enrique Mayor-Mora: Yes, it was a little bit more seasonal, you have this time of year in the first quarter and leading into the first half of the year, we ramped down their inventory, as we work through tax season. It's a little bit of that. We also saw quarter-to-quarter just the average cost of our inventory went down a little bit too. So we did see that, and that helped us a little bit as well.

Okay, thank you.

All right. And moving on, we'll hear from Chris Bottiglieri with BNP Paribas. Please go ahead.

Hey, everyone. Thanks for taking the question. Just wanted to ask a follow-up question on kind, of CAF funding cost. So sort of I guess a few things like the interest rate hedge question, are you seeing that interest rates stay at these levels at the $9 million hedging benefit would unwind and trying to understand, like how long you said just last for? And then separately for the warehouse facility, kind of, in the K, like what's the benchmark rate for the warehouse facility is that like LIBOR or whatevere replace LIBOR or SIP number that’s called? And then, sorry, one last follow-on to this bigger picture, so I could tell you probably passed on that 50 bps of rate some of the customer. How much of that 300 basis point increase in benchmark rates do you ultimately think you’ll pass-through? And that's it from me.

I'll take the last one first, actually, yes, as you mentioned, we certainly have past along rates consumers. As I said previously, it's going to constantly be a test that assess right you recognize of what we're trying to manage penetration, margin, customer experience all of those things. So we're going to watch it very carefully. What I was very pleased with this quarter was and it wasn't just a single move and then forget it, and then absorbed it, it was identified pockets of populations that we think are less elastic more elastic test, adjust, you know, look at what our competition is doing, and that's generally how we operate. So again we are not looking to absolutely lead the market in past in that great along. We want to make sure we remain highly competitive. Again, fortunately, we have that three day payoff option. The customers may take advantage of to make sure we still sell the car. So I can't speculate exactly a much will pass along, but you understand how we're managing it. Enrique Mayor-Mora: Yes, and for the other two questions. In terms of the cost basis in our warehouses, it really is LIBOR and more and more SOFR as that, that tool kind of matures somewhat. In terms of the hedging question, very specifically the $9 million, but we do not have an accounting hedge. We have a cash flow hedge. Again, that really is going to change it will be benefit like it was this quarter, it could be a detriment only when interest rates are going to shape -- change sharply and materially, that's when they're going to change, because we have that hedge. The hedges over the life of the loan that we have, right? But again, it's only really going to change from quarter-to-quarter. When there’s a sharp and material change in those interest rates and that's why we see a benefit or [Technical Difficulty]. And again and that’s on as I mentioned earlier, the vast majority of our receivables are due to securitization market will not be impacted on the quarter-to-quarter basis with that, it's really to -- very small and much smaller pool of receivables that we have to our banking partners to alternative funding we'll see that. But again, if we don't -- that those interest rates still change sharply or materially you're really not going to be anything impactful quarter-to-quarter.

That’s okay. And then bigger picture question, the GPUs, I mean, this feels like a two to three standard deviation move in the GPU, like you usually are pretty methodical about kind of past the amount of the consumer taking market share. Just kind of your taking that GPU in kind of letting your ASP’s in output. So I guess it cut us down like, when I could tell you're comfortable running at this higher GPU level like what's philosophically changing that's causing you to kind of shift towards GPU and maybe less than market share or help maybe I'm wrong here in understanding correctly, how would you frame it?

No, I think you're right, it is lumpy in any given quarter you can make $50 to $80 difference, this is always little bit more than and it was a conscious decision. But again, the way we approach is we really look for efficiencies first and foremost. And if we find the efficiencies then you have the decision to make. If you take a little bit more to margin you have to look at a lot of factors in order to determine that. And how much do you put towards the price and just based on all the factors that we took some of these efficiency. So it's really not on the backs of the consumer, what they're paying before, we're actually passing some of the efficiencies, some of these additional ones from the older vehicles and the sub-sufficiency we continue to pass them and then we took a little bit more this quarter. So it was a conscious decision as far as going forward, we'll continue to monitor things and what competitors are doing and the elasticity and make decisions as we always do during the quarter. Enrique Mayor-Mora: And we've been able to do that while growing our market share within the quarter, right. So [Multiple Speakers] in our market share.

Yes.

Thank you.

All right. And we'll take a follow-up from Chris Pierce with Needham. Please go ahead.

Hey, good morning. You guys have talked about better aligning expenses. We’ve also talked about growing market share? And then just -- that last question, if GPU comfort you have at this higher level. Just curious how to think about advertising going forward. Can you kind of get a hobbled competitor out there? But I know the end market isn't really on fire either. So I'm kind of curious how you're thinking about advertising and advertising per vehicle going forward?

Yes. Thank you for the question, Chris. Look, I think our stance on advertising is still what we've been as we've said for this upcoming year. We expected to have a step up, I mean, keep in mind, if you go back pre-COVID, I think Enrique we're 70% up in -- Enrique Mayor-Mora: In total dollars and then on a per unit basis, most up 60%.

Yes. So when I think about advertising, we had a lot of good things to say. It's even though obviously consumer soft, there's a lot of advertising dollars being put in by everybody. And I think way that we will continue to go forward is with the guidance that we originally gave, which was really more in the ballpark of let's call it the $350 per unit, a little bit higher this quarter, but I think that's a good -- kind of a good thing to -- good way to think about it as we go forward. And then we've got lots of new capabilities, when you think about online self progression, we do anticipate at some point later in the year that we'll start to advertise that. And we do that, we'll shift some dollars around, we're always moving things between acquisition and awareness and whether it's appraisal awareness, whether it's consumer, retail, consumer awareness, we're always moving things around on any given quarter. So I would look for some new messaging later on this year.

Great. Thank you.

Thank you.

And we have no further questions at this time. I'll turn the conference back over to Bill for any closing remarks.

All right. Well, great. Well, thank you all for joining the call today and as always for your questions and your support. As always do, I want to thank our associates for everything they do and their commitment to making a positive impact on the customers and each others and our communities. And even particularly the environment, we just recently published our 2022 responsibility report, if you haven't had a chance look at it, I would highly encourage you to take a look at it. We're really proud of the values that we live every day and our ongoing commitment to all of our stakeholders to drive long-term sustainable value creation. So again, thank you for your time today and we'll talk again next quarter.

And ladies and gentlemen, this concludes today's call. We thank you again for your participation. And you may now disconnect.