Good day, and welcome to the CarMax Second 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.

Thank you, [Samira] [Ph]. Good morning, and thank you everyone for joining our fiscal 2023 second 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 the 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 factors 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, 2021, 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?

Great, thank you, David. Good morning, everyone, and thanks for joining us. Before I get started, I want to share that my thoughts are with our associates, their families, and communities that are being impacted by Hurricane Ian. We have a significant number of stores in the storm's path. And as always, the safety of our associates is our top priority. We've taken steps to support our associates and our communities, and we will continue to monitor the situation and take actions to provide assistance as needed. Now to our results, this quarter reflects wide-spread pressure the used car industry is facing. Macro factors, including vehicle affordability that stems from persistent and broad inflation, climbing interest rates, and low consumer confidence, all led to a market-wide decline in used auto sales. In addition, wholesale values were affected by steep depreciation in the quarter. Despite the impact of these factors on our results, we continued to grow market share. We also continue to make progress on the key initiatives that will further strengthen our competitive differentiation over time. We have weathered a number of difficult cycles in our history. And, each time, we have successfully managed through them, and have leveraged key learnings to further strengthen our operating model. We remain on track to achieve our long-term strategy and goals. For the second quarter of FY'23, our diversified business model delivered total sales of $8.1 billion , up 2% compared with last year's second quarter, driven by growth in average selling prices, partially offset by lower retail and wholesale volume. In our retail business, total unit sales in the second quarter declined 6.4%, and used unit comps were down 8.3% versus the second quarter last year. Our performance was impacted by the macro factors that I mentioned previously. We believe the industry sales were also impacted by shift in consumer spending prioritization from large purchases to smaller discretionary items. In response to the current environment and consumer demand, we have continued to offer a higher mix of lower-priced vehicles. We began the second quarter with a low single-digit decline in comp sales, during the June, that reflected the continuation of softer, although improving sales, which we discussed on our last earnings call. Comps then fell sharply at the beginning of July, with August ending in mid-teen decline. Last quarter, we reported market share data. We will do that again this quarter as the data provides additional context and highlights our performance relative to the industry. Based on external data, we continue to gain share through July, to latest period for which title data is available. We reported second quarter retail gross profit per used unit of $22.82, up $97 per unit versus the prior-year period, a reflection of our ability to manage used margin in any environment. We continue to focus on striking the right balance between covering cost increases, managing margin, and passing along efficiencies to consumers to support vehicle affordability. Wholesale unit sales were down 15.1% versus the second quarter last year, partially as a result of our deliberate decision to reallocate some older vehicles from wholesale to retail to meet consumer demand for lower-priced vehicles. We estimate that without this shift, our wholesale units would have been down less than 10%. Performance was also impacted by depreciation of about $2,500 and as -- and as we intentionally [slowed-bys] [Ph] in reaction to rapidly-changing market conditions. Wholesale gross profit per unit was $881, down from $1,005 a year ago, and reflected softening market conditions as well as their decision to retail a higher mix of older used vehicles. Our ability to source these vehicles from consumers is a competitive advantage. But relative to younger vehicles, more of them fall out during the reconditioning process as they are not able to meet our standards for consumer sales. When that happens, we wholesale those vehicles, often at lower-than-normal margins. In the third quarter, we have been focused on aligning our offers to current conditions and adjusted inventory to more efficiently incorporate older vehicles. [Fine] [Ph] vehicles at appropriate prices for market conditions is one of our core competencies. We bought approximately 343,000 vehicles from consumers and dealers during the second quarter. While down 8% versus last year's period, this was up approximately 50% from the second quarter of FY'21, and reflects customers' responsiveness to both our nation-wide online instant offer tool and our offers. We purchased approximately 323,000 cars from consumers in the quarter, down 11% versus last year's record results. We also sourced approximately 20,000 vehicles through MaxOffer, our digital appraisal product for dealers. This was up 130% versus last year's period, and up 18% compared to this year's first quarter. Our sales efficiency remained above 70% during the quarter. We remain focused on providing the most customer-centric experience in the industry, with a leading e-commerce platform that integrates buying and selling cars with our best-in-class store experience. In regard to our second quarter online metrics, approximately 11% of retail unit sales were online, up from 9% in the prior year's quarter. Approximately 53% of retail unit sales were omni sales this quarter, down, slightly, from 55% in the prior year's quarter. Our wholesale auctions remain virtual, so, 100% of wholesale sales, which represents 21% total revenue, are considered online transactions. Total revenue resulting from online transactions was approximately 30%. This is up from 28% in last year's second quarter. CarMax Auto Financer Cap delivered income of $183 million, down from $200 million during the same period last year. As a reminder, last year's quarter benefited from a reduced provision coming out of the pandemic. We will continue to provide strong credit offers to our customers as we move rates with the market. Jon will provide more detail in customer financing, the loan loss provision, and cap contributions in a few minutes. At this point, I'd like to turn the call over to Enrique, who will provide more information on our second quarter financial performance as well as the steps we are taking to further align our expenses to the current sales environment. Enrique? Enrique Mayor-Mora: Thanks, Bill, and good morning, everyone. Second quarter net earnings per diluted share was $0.79, down from $1.72 a year ago. Total gross profit was $737 million, down 9.6% from last year's second quarter. This decrease was driven primarily by wholesale vehicle margin of $141 million, which was down 26%. The year-over-year decrease was driven by both lower volume and margin per unit. As Bill noted, we faced sharp depreciation throughout the quarter, and have been adjusting accordingly to better position ourselves to manage through the current environment. Total used vehicle margin was down slightly, at $495 million, a decrease of 2%. Total used unit volume, of negative 6.4%, was largely offset by higher margin per unit. Other gross profit was $102 million, down 15% from last year's second quarter. This decrease was driven primarily by the effect of lower retail unit sales on service. Service results declined $13 million as lower sales and, secondarily, impacts from inflationary pressures drove a deleverage in results. EPP fell by 3% or $3 million, reflecting the combined effects of stronger margins, stable penetration at approximately 60%, and a decline in retail unit sales. Third-party finance fees were flat over last year's second quarter as lower volume in fee-generating Tier 2 were offset by lower Tier 3 volume, for which we pay a fee. On the SG&A front, expenses for the second quarter increased to $666 million. Up 16% from the prior year's quarter reflecting a slowdown from the year-over-year increase during the first quarter. Approximately three points of the increase this quarter reflects a change in an accounting estimate in the prior year quarter. SG&A as a percent of gross profit deleveraged to 90.4% from 70.4% during the second quarter last year. A key contributor of deleverage was a 9.6% decrease in total gross margin dollars compared to last year's quarter. The increase in SG&A dollars over the last year was mainly due to two factors. First, a $50 million increase in other overhead. The primary drivers of this increase include investments to advance our technology platforms, strategic and growth initiatives, a $14 million onetime impact from a prior year change in an accounting estimate related to non-CAF uncollectible receivables, and a variety of other smaller cost headwinds. Second, a $34 million increase in compensation and benefits excluding share-based compensation. Primarily driven by the annualization of the strong growth in staffing we experienced in the back half of last year as well as wage pressures. Partially offsetting this increase was a $4 million decrease in share-based compensation. During our first quarter earnings call, we discussed how we have actively taken steps to better align our staffing expenses in our stores and customer experience centers or CECs to the sales levels we were experiencing at the time. However, as Bill noted, sales declined sharply in the second quarter versus our expectations, starting in July. Accordingly, during the second quarter we pulled additional levers to further align our expenses to our sales levels. We expect these savings will materialize more fully in the coming quarters. This included further reducing staffing through attrition in our stores and CECs, pausing on a portion of the hiring and contractor utilization in our corporate offices as well as better aligning marketing spend to sales. In regard to marketing, our intent is to continue to maintain a strong level investment on a per unit basis that is at least consistent with the full-year FY '22 levels. For the second quarter, total marketing dollars were flat year-over-year but reflected a robust investment on a per unit basis. As part of our omni channel journey, we have reduced the variable cost component of our operating structure. Given the macro-environment, our near-term priority will be on allocating resources towards those initiatives that will further drive efficiency and effectiveness across our fixed cost. At the same time, we will continue to selectively invest in customer facing initiatives that will enhance our omni channel experience and support our long-term growth. From a capital structure perspective, we ended the quarter with an adjusted debt-to-capital ratio in the middle of our targeted range of 38% to 45%. During the second quarter, we repurchased approximately 1.7 million shares from $163 million. Now, I would like to turn the call over to Jon.

Thanks, Enrique, and good morning, everyone. Once again, the CarMax auto finance business delivered solid results while transitioning from a lending environment that has seen historically low levels of credit loss and extremely favorable funding cost. During the second quarter, CAF's net loans originated was over $2.3 billion. CAF's penetration in the second quarter net of three day payoffs was 41.2% compared with 43% last year and 39.3% in Q1. The weighted average contract rate charged to new customers was 9.4%, which was higher than the 8.5% in last year's second quarter and the 9% seen in Q1. This rate increase combined with the quarter-over-quarter increase in penetration affects CAF's ability to strategically pass along a portion of the added funding cost to consumers while still providing highly competitive offers. Our lending partners continue to complement each other in also providing attractive credit offers. Our Tier 2 penetration rate was consistent with last year, 21.6%. And Tier 3 accounted for 6% of used unit sales compared with 7.2% year ago. Although the lower credit consumer continuous to show demand by actively shopping and applying for credit, they continue to be challenged with affordability and being able to complete the purchase. CAF income for the quarter was $183 million, a decrease of 8.6% or $17 million from the same period last year. Last year, our loan loss provision of $35 million was a significant tailwind as the overall performance of the consumer remained remarkably strong. This quarter's $76 million provision resulted in ending reserve balance of $478 million or 2.92% of managed receivables, up from 2.85% last quarter. The seven basis point adjustment is once again predominantly attributed to the proportionately higher quarterly volume of Tier 2 and Tier 3 loan originations compared to the pre-existing $16 billion portfolio. Of note, as the macroeconomic conditions posed a challenge to the credit consumer, we remain confident in our ability to leverage our vast experience and robust credit platform to ensure our Tier 1 credit losses remain comfortably within our targeted operating range of 2% to 2.5%. As was seen last quarter, our provision headwind was significantly offset by our total interest margin, which grew $31 million year-over-year, our margin of 7.29% was up 11 basis points from last year's second quarter, and it was supported by a $9.4 million benefit from our hedging strategy. Regarding our industry-leading online finance experience, during the quarter, we significantly expanded our pre-qualification product launched in March. As a reminder, this unique multi-lender product results in no impact your credit score, and generates customized real time credit decisions on our full inventory. As of the end of the second quarter, this product was available to over 50% of our consumers, and is expected to go nationwide during the third quarter. Now I'll turn the call back over to Bill.

Thank you, Jon. Thank you, Enrique. Given the realities of the macro environment, we will further sharpen our focus on driving additional operational efficiencies as we continue to navigate the near-term pressures facing the used car industry. At the same time, we will remain focused on continuing our work to achieve our long-term goals, including further improving our omni channel experience for both our customers and associates, as well as growing our diversified business model. Some of our key initiatives include first, we're leveraging data science, automation and AI to improve efficiency and effectiveness within our customer experience centers. During the second quarter, we expanded our Associate Facing Guided Action software, from chat to phone calls, and develop additional work streams for our consumer facing digital assistant. Over time, we anticipate these tools will enable us to reduce associate time spent per customer as we enhance our ability to provide live interactions at the highest value moments. Second, as Jon mentioned, we continue to scale our industry leading finance base shopping experience. This best-in-class pre-qualification product leverages a streamlined, simple application and generates multi-lender credit terms on cards within our retail inventory in just minutes. With this tool, customers have all the information they need to quickly understand APRs and monthly payments across different contract terms, and effortlessly compare vehicles to ultimately secure the right financing options for them. Third, we're expanding Max offer to acquire vehicles and build on our market leading position as a buyer of cars. As a reminder, buying directly from consumers and dealers lowers our acquisition costs, enhances our inventory selections, and provides profitable incremental wholesale volume. We're currently live in over 40 markets and anticipate launching additional markets later this year. Finally, we're upgrading our auction experience to be even more user friendly. We're testing a modernized vehicle detail page to be mobile friendly and efficiently display the most relevant information dealers need to preview our wholesale inventory, similar to how customers shop our retail inventory. We're also testing AI capabilities to enhance our online vehicle condition reporting. In addition, we have rolled out self-service checkout capabilities nationwide. These tools will enable us to drive incremental operational efficiencies as we continue to scale our wholesale volume, all while providing an even better experience to our wholesale dealers. As I close, I want to reiterate that while the market conditions and consumer behaviors remain challenging, we believe that these pressures are transitory and that our foundation remains strong. We're well-positioned to navigate this environment as we have during challenging times in the past and remain excited about the future of our diversified business. With that, we'll be happy to take your questions. Samira?

Thank you. [Operator Instructions] And we'll take our first question from Craig Kennison with Baird. Please go ahead.

Okay, good morning. Thanks for taking my question. I'm sure there will be several macro questions, but I'd like to ask about your sourcing tool. I'm a little surprised to see an 11% drop in vehicles sourced from consumers. Given the secular momentum you've had with your online instant appraisal tool, can you shed a little more light on the traction you're seeing with that online instant appraisal tool, and whether the slower pace is a function of the slower traffic online or is it a decision to buy more selectively?

Yes, good morning, Craig, thank you for the question. And, look, I think it goes back to a couple things. First of all, we're really excited about both our online offer tool and the MaxOffer that I talked about earlier. While we did see a decline, the environment, I think the biggest factors of that decline, one, which I already highlighted, was the fact that we're moving -- kind of change the retail selectivity to take in some of those wholesale cars, and putting them over in retail, which if you take that out it would then mean our decline was less than 10%. Depreciation, you know, you've followed us long enough, any time we get into depreciating market, we're lowering our offers. That has an impact on what you ultimately end up buying from consumers. And I would say the third thing, which is smaller than the other two, but we actually -- we slowed some of our buys in certain pockets in certain geographic areas, in certain price points either because we didn't the cars or just because the dynamics of the quickly-changing environment. So, I think those are the three factors that really led to the decline.

Thank you.

Sure.

We'll take our next question from Brian Nagel with Oppenheimer. Please go ahead.

Hi, good morning. Thanks for taking my question. So, wanted to focus on just the trend in the quarter with the used car unit sales, so, Bill, you talked in your prepared comments about the market slowdown that began in July. So, my question there is, is there anything in -- you know, are macro pressures are very well documented out there, but there is anything you noticed in particular that could explain that slowdown? Did you see some variable [leaks] [Ph] geographically, or your cost of the product spectrum? And then there's a quick follow-up within that question, any comments on how the business is tracking here into Q3, and September, in particular?

Yes, Brian, it's a great question. If you remember the last call, I talked a little bit about June and how we were feeling good about June because it was doing better than the first quarter. And as I said, we saw a big drop-off in July. And then that softness continued into August, where we ended up in a mid-teen decline for comps. And there's not one single thing that I can point to that we can say, "Oh, because this happened in July is why we saw the drop-off." I mean, there's lots of, I think, pressures out there. I talked about the broad inflationary pressures. Obviously, consumers are having to make decisions; groceries are higher than ever. I think we've seen more interest rates' increases, consumer confidence, certainly during the quarter, all-time low as far as recent history, I mean even lower then the height of the pandemic. So, I just think consumers are prioritizing their spend a little differently. But there's not one single thing that I can point to, like, "Oh, this happened, and that's why we saw the decline." I think it's just the continuation -- kind of the deterioration of the overall consumer. Moving into September, we're seeing the same softness that we saw in August. And I would tell you, even more recently, just given the hurricane, as you can imagine, that's contributing to additional softness as well. Now, the thing with hurricanes or any weather events, you generally will flow -- get that back later on. But as far as September goes, it will absolutely put pressure. We have about -- let's see, 22 stores are currently closed, and have been closed for varying amounts of time. Enrique Mayor-Mora: And we've also seen on the wholesale side and just from a depreciation standpoint, just a continuation of that depreciating environment that we saw in the first quarter as well. So, that has continued into September.

Right. Could you ask a follow-up, I'll make it quick, I apologize? But just -- so you're talking about the depreciation in the wholesale. I mean should that lead then to more attractive prices in the used car business and potentially undermine what has been a significant challenge for consumers?

Yeah, I think you're thinking about it right way, Brain. And, in fact, I believe this is probably the first quarter where the gap between used and new got a little bit wider in, gosh, probably six or seven quarters, you know. So, it'll take some time. But I think depreciation and prices correcting on used will absolutely benefit the used the used market over time. But I think we got to keep in perspective this quarter was challenging. I mean, we haven't seen $2,500 in depreciation; that rivals -- in absolute dollars, that rivals back what we saw at the height of the Great Recession, that rivals what we saw at the peak of omni. So, it's a very unusual thing and it brings challenges. But I think that we've proven, over time, that we've been able to navigate those and that we'll do it better than pretty much anyone.

I appreciate it. Thank you.

Sure.

And our next question comes from Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning.

Good morning.

So, I've followed the company long enough to see that navigate a lot of different cycles. And congratulations on continuing to gain market share, although I'm sure it's small solace with the comp trends that you're seeing. I guess, historically, you haven't been a company that really has done layoffs materially, if at all. Obviously, you've swallowed, it sounds like, staffing acquisitions and open to hires. But I'm curious, just given the retraction in profitability here -- or you kind of erased, I think, seven years of profit in this quarter. I mean, how do we think about those initiatives, Enrique, that you talked about in terms of slowing SG&A spend, because -- and there's certainly scenarios that I can get to where SG&A spend exceeds gross profit in the back-half of the year, and as we go into kind of the seasonally slower time. So, help us think about kind of how much money you can take out right now, whether that's in SG&A as a percent of gross profit or SG&A dollar growth, just any kind of barometers whether it'd be mark-to-market, where sales are, we have an idea of where that SG&A spend is kind of coming in? Enrique Mayor-Mora: Yes, thanks for the question, Sharon. And our objective is on winning in the long-term. And that really requires that we remain focused on making the right investments to continue to differentiate ourselves from our competitors. So, we have an active and accretive portfolio of omni-related initiatives that we've been investing in that we've been able to do that, in large part because of our strong balance sheet and our performance, but that being said, certainly -- so, with the current macro environment, we have started to pull the levers, I mentioned in my prepared remarks, to better align our cost structure to the current environment. And we're also going to be tilting our resources more towards initiatives that drive efficiencies that I talked about, and Bill talked about in our prepared remarks as well. So, be slowing some of the velocity down on our growth-related investments, but certainly not pulling back. So, I think we're doing the right things at the current moment in terms of better managing our costs. We have a strong and active eye on the consumer, and we stand very experienced in managing through these cycles. But we also want to make sure that when the industry picks back up, that we're in a really strong position to capture the upside. So, I think in terms of the balance of the year and how to look at SG&A, we do expect the levers that we pulled during the second quarter will start to manifest themselves more fully over the next few quarters. I think the other component, certainly not in kind of an leverage, is purely just the gross profit, right, and where that stands to be in the fourth quarter and moving into next year, that's another factor. But we can control, certainly, very strongly is the SG&A. So, we feel good that we pulled the levers -- the appropriate levers for the time being.

Yes. And then, Sharon, the only other thing I would add to that, that we're absolutely entering this from a position of strength. And to Enrique's point, there's lots of lever. I mean just from the expense side, there's a lot of growth expense that we're continuing right now to prepare ourselves for the future, there's these initiatives, there's advertising, there's variable spend; all those we can still pull on, not to mention there's a whole host of other levers just for -- to preserve cash if that's ever needed. So, I think where we are at this point is -- is, look, we've pulled the levers, we know it's a challenging time, we're coming at this from a position of strength. There's initiatives that we know that will help us, both, in the near-term and the long-term; let's get them done. And so, when this market turns, and it will turn; when it turns, we'll be able to take off because we've already done these things. But we will keep, absolutely, an eye to the outside environment.

Okay. Can I ask just as a follow-up, just given the mid-teens decline in comp trends we see in, I guess, [indiscernible] I mean, can you kind of mark-to-market for us what that is in terms of SG&A as a percent of gross profit? I mean, have you let it go over 100, or is that kind of mark where you would say, okay, now we have to pull back more? Enrique Mayor-Mora: Yes. No, I think like we have said, we pull back on levers that we can control right now. We think we are better aligned with the current environment. You are going to see those savings manifest themselves kind of moving forward. We did pulled stronger levers kind of half way through the second quarter. So, you don't fully see it in this quarter's P&L, but moving forward, we should start to see more of the savings.

Yes. And I think, Sharon, way to think about it is, look, we had in absolute dollars an improvement in SG&A from the first to second as Enrique talked about. We would expect these dollars to manifest more. You will see a reduction there. The other wildcard in the equation that was just gross profit dollars, and that's going to be driven by the macro factors as Enrique talked about.

Okay, thank you for that.

Sure.

We will take our next question from Michael Montani with Evercore. Please go ahead.

Hello, thanks for taking my questions. So, the first question I have was just around the wholesale side. If we should assume kind of similar trends in terms of volume and GPU pressure to start the third quarter and wholesale given the challenging macro?

Yes, Michael, good morning. So, previous calls I have talked about because I have gotten asked questions about retail margin and wholesale margin. And what I have said in previous quarters is all us being -- we feel pretty good about keeping strong retail margins. Wholesale would be coming under pressure. And if we are going to enter into a depreciating environment, that's going to cause the pressure like I talked about before. The other reason I mentioned that it could come under pressure is just because that retail selectivity, and because we are moving some cars older cars over to retail. And then, the corresponding what we call kicks. You say okay, this is retailer's car, you go build it. Or, you start to build and realize, okay, we can't get this to standards. We then move that back to wholesale. And we generally perform worse on those than the normal wholesale. So, we knew there was going to be some pressure. I think if you look at recent performance, let's call -- certainly last year, I think every quarter last year on GPU standpoint for wholesale was over $1000. And then you look at the year before, I think we had another quarter that was over $1000. If you look at that and then compare it to the 5 years prior to that, there were probably equal or more quarters in the last year than we had in the last 5 years over $1000. And that's because of the massive appreciation that we saw last year. So, I think the way to think about it going forward is probably more in line with what you would normally see the average wholesale that we make in any given quarter over 3, 4, 5 year period. I think that's the way to think about especially in this depreciating environment and especially as we continue to push more or try to push some more of these older vehicles over just from an affordability standpoint.

And we will take our next question from Adam Jonas with Morgan Stanley. Please go ahead.

Hey, Bill. I am sure your team is following the proposed rule making from the FTC that motor vehicle dealer's trade regulation rule that now collecting comments. And it's aimed to increase transparency on pricing and advertising and some downstream stuff like aftermarket add-on. So, if this rule making is approved, I know there is going to be a lot of puts and takes, have you guys done any preliminary work on what impact this might have on CarMax in terms of compliance cost or SG&A expense, or any potential revenue impacts? Thanks.

Yes, Adam, it's a great question. Obviously, we commented during the comment period as many folks did just because the requirements in some cases are a little onerous, we started to look at obviously whatever ultimately gets decided, we will make sure that we do follow, but we haven't put -- we aren't prepared at this point to really talk about additional expenses or anything, because again to your point, it's so much up in the air, and there is so much discussion and debate about it. There is a lot that's really unknown.

One thing I will add though, I mean to your point, the verbiages, Adam, is that transparency and clarity around pricing add-on products et cetera. I think our business model sets us up perfectly for that. We already are very transparent, honest online. We can show our EPP products online, the pricing there. So, I think we are in a great position to do that. And obviously, we will do whatever is required.

And I think the motor bear complication for us, and I think really need to be looked as is some of the requirements on signing paperwork, physical signatures, managers that kind of thing. Everybody is operating in a world of online. So, again, it will be interesting to see how it pans out.

We will take a question from John Murphy with Bank of America. Please go ahead.

Good morning, guys. I just wanted to ask a question on pricing. Year-over-year comparisons are always relevant, but sequentially as things are changing here, they might be more relevant than typically when you look at the retail price, yours was down about 2% sequentially, quarter-over-quarter and wholesale was down 7%. I mean, and you talked about doing sort of more older vehicles in that, in the retail side. So, I mean that 2% is absorbing even lower priced vehicles. So, the gap actually may be even larger between those two. And Bill, what are you seeing in the market, where retail pricing we're hearing this from a lot of other folks is, is holding up a fair amount better than wholesale pricing? I mean, do you think that the market is sort of anticipating dealers or anticipating some kind of weakness or looking to maintain growth, it seems like there's, things are softening but a lot more on the wholesale than they are on the retail side.

Yes, John, I think some of it has to do with timing. I mean, if you think about it, although there was depreciation in the quarter, and although as you pointed out, we have an older vehicle mix, both of those bring down your overall retail prices, but it wasn't enough to offset when comparing to like a year-ago. So, if you think about it, we ended last year with an appreciation about $7,500. We've only experienced about $2,500 in depreciation. So, that dynamic will become less and less as we get later into the year. But you're still there just wasn't enough to offset that overall appreciation which is why you still see us above last year. I think the other thing that you got to think about is a lot of the cars that were sold in the second quarter were bought actually; a majority of them were bought prior to the quarter even starting, so they're at a higher price. So, I think there's some, there's definitely some timing there. On the wholesale side, obviously if you're moving some of the nicer more expensive stuff into retail that's going to impact your wholesale a little bit more. And so, I think that's the dynamic that you have going on there.

We will take our next question from Chris Bottiglieri with BNP Paribas. Please go ahead.

Hi guys, thanks for taking the question. I'm still a little lost on kind of how these hedges affect profitability, we quantified this quarter. And then to just like, given like bigger picture question, trying to take the impact in the next couple of years like given the decline in used volumes, the tightening in this securitization market spreads, and kind of defaults picking up a bit, can you just kind of maybe refresh us on how the fluctuations these variables impact loan originations and net margins so we can better model the cadence of cash going forward?

And maybe I'll jump in first on the hedge. Very similar dynamic to what we saw in the first quarter, right. So, the vast majority of our receivables are funded through the ABS market, as we know, we have accounting edge on those. However, we do have alternative financing vehicles with our banking partners; our longstanding banking partners and 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 our funding profile. So, those receivables are going to get mark-to-market every quarter like they did last quarter. And really where you see a change or benefit, or potential hit is when they're sharp and material rises or decreases in interest rates. And that's exactly what happened again this quarter. So, we would only expect this again to be material for capturing periods of material changes. And it's very similar to the first quarter. We saw sharp changes and movements in the interest rates. And that's what happened. And it was $9 million the same amount from the first quarter. Enrique Mayor-Mora: Great and I'll touch on your other question, Chris. And correct me if I don't cover everything you asked. But with regard to just overall interest margin, obviously, rising cost of funds that we've said, I think we signaled last quarter, you could begin to see a change in our net interest margin, maybe it's hit a peak and it could come down. And again, that's where our accounting is the way that we do our accounting benefits us. Obviously, as the margin increases over time, that higher margin receivable continues to hang around for longer. But obviously, our margins have tightened, had the hedge not been in there, we probably would have seen a downturn this quarter. And we're obviously going to be in a tighter environment. So, we maybe continue to see that come down. We're obviously on our side continuing to manage margins very carefully through our pricing. So, we'll do what we can, but still remaining competitive for our customer. So, again, I think there will be pressure on our net interest margin going forward. But again, we'll manage that as well as we can.

Got you. Thank you very much.

We'll take our next question from Rajat Gupta with JPMorgan. Please go ahead.

Great. Thanks for taking the question. Maybe there's a couple quick ones, first, on retail GPU, Bill, if I heard you correctly, you mentioned that you believe you could still maintain the current retail GPU level in the current pricing environment in the next few quarters. Did I hear that correctly, just want to clarify that and I have a follow-up. Thanks. Enrique Mayor-Mora: Yes, sure. Rajat. So, when I was speaking -- talking about earlier, although I do feel good about being able to maintain strong retail margins, but I always will caveat that with, depending on a lot of different things, sales elasticity, what competitors are doing, inventory levels, our own inventory levels, so there's a lot that goes into it. But we really are still realizing some nice benefits from although we've lack self-sufficiency, we still feel like there's a little bit there. But then this, the fact that we are selling these older vehicles, gives us a little bit more margin, and this quarter, we were able to pass along some of it to the consumers in the form of offsetting some of the inflationary pressures, as well as take a little bit more. So, again, we feel good about our retail margins and where they are today. And we'll just continue to watch some of them or other external factors as we go forward.

Got it, got it. And maybe just to follow-up on Enrique's comments around advertising, looks like you want us to maintain a healthy advertising spend per unit. But just curious like in terms of like the focus of the company right now, is it more to make sure you are able to continue to gain market share or is it more around managing overall profitability with maybe higher interest rates or maybe lack of pricing discounts. Just curious as to like, what's really the strategy in the near-term? Is the one for the other, or you think you could get both at the same time to the volume and profitability?

Yes, so I'll answer and then I'll let -- I'll just give you some other thoughts and Enrique as you know but as far as advertising goes, as Enrique said, look we still are, we're really excited about this industry, and where the industry is going. Granted, we've got some challenging things, right now, but we still want to continue to invest in advertising, we're going to do it, we kind of think about it on a per unit level. So, ultimately advertising as a whole will come down if the sales are down, but we feel like continuing to invest in the business, not obviously you may change where you spend it, to this quarter, the majority of it was awareness and from an acquisition standpoint as more customers versus buying vehicles. But it's also one that we can continue to monitor, everything we do from an advertising standpoint, we measure ROI. And so, we have certain targets that we're going to have to if we see things that aren't panning out, we'll certainly pull back or pivot to something else that is. So, Enrique, you have any thoughts on that? Enrique Mayor-Mora: Yes, what I would say is, compared to a few years ago, the marketing team overall has done a tremendous job of really giving us a line of sight, into profitability and the dollars, we're investing in how that then translates to an ROI. So, we feel really good about the investments we've been making over the past couple of years. If you compare ourselves to two years ago, I think we've increased the dollars per unit by over 50%, right. And that's because we feel really good about our ability to get visibility. So, I think we can continue to drive awareness and at the same time, drive that profitability. So, Rajat, I think we can get the best of both worlds.

Yes, I think the other thing that's important to remember too Rajat is we have a lot of great things going on, I'll give you an example. The pre-qualification that both Jon and I talked about, we haven't even -- we haven't even marketed that yet. And so, that's an area for opportunity. So, again, as we think about advertising, it really allows us to kind of okay, what do we want to highlight, we have to highlight online offers, we want to highlight the omni experience, we want to highlight being able to buy online, we're going to highlight pre-qualification, there's lots of things. So, we're constantly moving it around. So, again, that's kind of how we're thinking about it.

Got it, got it. Maybe just on the cash piece, are you still able to do you feel comfortable being able to continue to pass on interest rate increases to the consumer? Or is that also going to be more thoughtful based on just more competitive lenders out there?

Yes, Rajat, I appreciate the question. Yes, as I said in my prepared remarks, I was extremely pleased with the penetration we had, it did show that we were able to pass along some of the increases on to our customers, yet still manage the elasticity, capture the volume that we could again, three things we're trying to manage here is stay highly competitive for our consumers from our offers standpoint, manage that margin, and then make sure that we can capture the right amount of sales and it's a delicate balance, but I think we've done a great job and I think we'll continue to do that.

And we'll take our next question from Seth Basham with Wedbush Securities. Please go ahead.

Thanks a lot. My first question is on cash and just thinking about your loan loss reserves, and where you're at right now, what does that imply for what you're reserving, what your allowance rate is for your core Tier-1 securitized managed receivables?

Yes, so right now we are comfortably Seth within the 2% to 2.5% range. The increase that you saw, as I mentioned is predominantly coming from that Tier-2 and Tier-3 volume. That's a larger percentage in the new originations than it is in the portfolio. So, we feel real good about staying in that targeted range. And that's reflected in the reserve.

Got it. So, you haven't really taken up here allowance rate for those receivables despite the fact that we've seen collateral values come in sharply and the macro environment deteriorate? How should we think about the dynamics and the potential for higher loan losses for those core receivables?

Yes, we modelled that pretty extensively. And we felt like again, assuming there isn't just an absolute plummeting of the values, you've got people that are buying vehicles on our books that bought it five years ago, three years ago. So, there's obviously, it's been a slow ramp-up. And hopefully, it's a slow ramp down, but modeling that, it really was relatively immaterial in a $477 million reserve. So, we feel we are well reserved, we can absolutely absorb that in what we have today. So, we've considered it, but we think we've got the right reserve as it sits today.

Got it. Thank you.

We will take our next question from Joe Enderlin with Stephens. Please go ahead.

Hey guys, thanks for taking our question. So, a question for the older vehicle mix as the vehicle buy normalizes, could you see these older vehicles remain part of the mix to support higher GPUs than historical levels? Or how are you thinking about that moving forward?

Yes, no, it's a great question. The great thing about that is we now that we have so much more of that inventory available, we can put out whatever the customer wants. So, as we go forward, and maybe get to a more normalized area, or period, if consumers are looking for this, we can we now have a source to make sure that we put it out there. So, I think this also will benefit us. If you think about the fact that new cars right now there aren't as many being sold, they'll have to be something that fills that gap. This is a great -- I think this will be a great tool to do that. So, again, we'll put out there, whatever the consumers want.

Got it. Thank you, guys.

Thank you.

[Operator Instructions] And we'll pick our next question from David Whiston with Morningstar. Please go ahead.

Thanks. Good morning, buyback spending was roughly flat from Q1. Stocks, obviously a lot cheaper now, but of course, there's macroeconomic pressures, which can make one want to conserve cash, it's that delicate balance. But do you anticipate being able to be at least flat in second half versus first half? Are you going to pull back on buybacks or be even more aggressive?

Hey, David. Yes, thanks for the question. And as you pointed out in the second quarter, we're on the same pace as we were in the first quarter. So, continue to buy back our shares, but I tell you that our capital allocation philosophy remains the first and foremost, our cash goes into growing the core business. So, that's our retail businesses, our wholesale businesses, our cash business in making sure those are in a position to continue to grow. From there, we also look for growth opportunities, investments that we make, and then we return capital back to shareholders. So, our philosophy has remained the same.

Okay, and just on your SG&A control, I just want to make sure I understand the comment you made earlier on staffing. Are you doing any replacement hiring if someone does leave voluntarily?

Yes, so, we absolutely -- we don't have a pause on hiring at this point. We're very strategic. We have a prioritization of hiring. So, as folks leave and the positions, critical positions we absolutely, we'll replace them, but at the same time, if you have a vacancy, you want to make sure okay, is this something that's supporting our near-term initiatives, that kind of thing, but while we've prioritized, we have not paused overall hiring. Enrique Mayor-Mora: Yes, and just to be clear that managing headcount has also done through attrition as well, right, it's how we've been managing that. So, you will see those benefits again more sharply as we progress into the future quarters.

Okay, thank you. Enrique Mayor-Mora: Thank you.

And it appears there are no further questions at this time. I'd like to turn the conference back to Bill Nash for any additional or closing remarks.

Thank you. As always, I want to thank our associates for everything they do, how they take care of each other and the customers and the communities. Again, my thoughts are definitely with those being impacted by the Hurricane. Please, please stay safe. Thank you all for joining the call. And we'll talk again next quarter.

This concludes today's call. Thank you for your participation. You may now disconnect.