Q1 2024 Carvana Co Earnings Call
Hello, and welcome to the Carvana first quarter 2024 earnings call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask.
Operator: Hello and welcome to the Carvana First Quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad, and to withdraw from the question queue, you may press star, then 2. As a reminder, this conference is being recorded. I would now like to hand the call to Meg Kehan, Investor Relations. Please go ahead.
A question you May Press Star then one on your telephone keypad and to withdraw from the question queue. You May Press Star then two.
As a reminder, this conference is being recorded.
Investor Relations: I would now like to hand, the call to make in Investor Relations. Please go ahead.
Meg Kehan: Thank you, MJ. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's first quarter 2024 earnings conference call. Please note that this call will be simultaneously webcast on the investor relations section of the company's corporate website at investors.carvana.com. The first quarter shareholder letter is also posted on the IR website. Additionally, we posted a set of supplemental financial tables for Q1, which can be found on the events and presentations page of our IR website.
Investor Relations: Thank you Jay good afternoon, ladies and gentlemen, and thank you for joining us on Carvana first quarter 2024 earnings Conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors Carvana and dotcom.
Investor Relations: First quarter shareholder letter is also posted to the IR website. Additionally, we've posted a set of supplemental financial tables for Q1, which can be found on the events and presentations page of our IR website joining.
Meg Kehan: Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of federal securities laws, including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of the material factors that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Carvana's most recent Form 10-K and Form 10-Q.
Jay: Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer before we start I would like to remind you that the following discussion contains forward looking statements within the meaning of federal securities laws, including but not limited to carvana as market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially.
Jay: From those discussed here.
Investor Relations: Detailed discussion of the material factors that cause actual results to differ from forward looking statements can be found in the risk factors section of carve out its most recent Form 10-K and Form 10-Q.
Investor Relations: Forward looking statements and risks in this conference call are based on current expectations as of today and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise.
Meg Kehan: Forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise. Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to non-GAAP metrics, and all references to EBITDA will be to adjusted EBITDA. Reconciliations between our GAAP and non-GAAP financial metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our IR website. And with that said, I'd like to turn the call over to Ernie Garcia. Okay, Ernie?
Investor Relations: Commentary today will include non-GAAP financial metrics, unless otherwise specified all references the GPU and SG&A will be to the non-GAAP metrics and all references to EBITDA adjusted EBITDA.
Investor Relations: Reconciliations between our GAAP and non-GAAP financial metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our IR website and with that said I'd like to turn the call over to Ernie Garcia Ernie.
Ernest C. Garcia: Thanks Meg and thanks everyone for joining the call. Q1 was an incredible quarter for Carvana, and one that is worthy of reflection. My plan is to first share some of the highlights from the quarter, and then to discuss the long-term implications of our recent performance. First, the highlights from the quarter.
Ernest C. Garcia: Thanks, Meg and thanks, everyone for joining the call.
Ernest C. Garcia: Q1 was an incredible quarter for Carvana and one that is worthy of reflection. My plan is to first share some of the highlights from the quarter and then to discuss the long term implications of our recent performance.
Ernest C. Garcia: First the highlights in the quarter.
Ernest C. Garcia: In the quarter, we achieved an adjusted EBITDA margin of 7.7%. And by this measure, in Q1, we not only set new all-time company records, but we also became the most profitable public automotive retailer in the U.S. for the first time. We return to growth, growing retail units 16% year over year, despite decreasing marketing dollars by 4% and having constrained inventory. We complete our first quarter with adjusted EBITDA exceeding CapEx and interest expense, achieving this milestone by a significant margin.
Ernest C. Garcia: In the quarter, we achieved adjusted EBITDA margin of seven 7%.
Ernest C. Garcia: By this measure in Q1, we not only set new all time company Records, but we also became the most profitable public automotive retailer in the U S for the first time.
Ernest C. Garcia: We returned to growth growing retail unit, 16% year over year, despite decreasing marketing dollars by 4% and having constrained inventory.
Ernest C. Garcia: We completed our first quarter with adjusted EBITDA exceeding Capex and interest expense achieving this milestone by a significant margin we achieved GPU that exceeds our previous record for Q2 2023. After normalizing for last Q2's excess loan sale volume achieving a GAAP gross profit margin of 19, 3% above the high end of our long term financing.
Ernest C. Garcia: We achieved GPU that exceeds our previous record from Q2 2023 after normalizing for last Q2's excess loan sale volume, achieving a GAAP gross profit margin of 19.3% above the high end of our long-term financial model. We significantly levered marketing spend, operations expenses, and overhead expenses, the last of which were held flat in absolute dollars despite 21% sequential growth.
Ernest C. Garcia: Model.
Ernest C. Garcia: We significantly levered marketing spend operations expenses and overhead expenses, the last of which were held flat in absolute dollars, despite 21% sequential growth.
Ernest C. Garcia: And combining our GPU and expense leverage we also validated our long term financial model that we put out six years ago, and clearly with a path to significant additional financial gains from here.
Ernest C. Garcia: In combining our GPU and expense leverage, we also validated our long-term financial model that we put out six years ago and clearly lit the path to significant additional financial gains from here. These gains will be driven by both leverage on our fixed overhead costs and additional fundamental gains in both operational expenses and GPU. We see opportunity for large improvements in our adjusted EBITDA margin from here. We achieved all of this in a difficult automotive environment at a time when most in the industry are moving backward on both unit economics and volume. The long-term implications of this quarter are significant.
Ernest C. Garcia: These gains will be driven by both leverage on our fixed overhead costs and additional fundamental gains in both operational expenses and GPU, we see opportunity for large improvements in our adjusted EBITA margin from here.
Ernest C. Garcia: We achieved all of this in a difficult automotive environment at a time when most of the industry are moving backward on both unit economics and volume.
Ernest C. Garcia: The long term implications of this quarter are significant we continue to deliver experiences that our customers love the strength of our customer offering has always been apparent our growth, which even with the last two year hiatus has earned us the honor of being the fastest growing automotive retailer in U S history, as we get bigger and more efficient the experiences we deliver get even better and simpler constantly improving cost.
Ernest C. Garcia: We continue to deliver experiences that our customers love. The strength of our customer offering has always been apparent in our growth, which, even with the last two-year hiatus, has earned us the honor of being the fastest-growing automotive retailer in U.S. history. As we get bigger and more efficient, the experiences we deliver get even better and simpler. Constantly improving customer experiences has always been centrally important to us, and it will remain centrally important to us in the future. It is one of our most important pieces of feedback.
Ernest C. Garcia: We're experiences has always been centrally important to us and it will remain centrally important to us in the future. It is one of our most important feedback loops, we are positioned to grow significantly from here.
Ernest C. Garcia: We are positioned to grow significantly from here. The part of our business that is most difficult to scale is reconditioning because it requires significant physical space, construction, and zoning approvals. Across our current inspection and reconditioning center infrastructure, we have capacity for 1.3 million units per year, over three times our current volume. Beyond that, we have a network of locations.
Ernest C. Garcia: The part of our business that is most difficult to scale reconditioning, because it requires significant physical space construction and zoning approvals across our current inspection and Reconditioning center infrastructure, we have capacity for 1.3 million units per year over three times, our current volume.
Ernest C. Garcia: Beyond that our desk locations.
Ernest C. Garcia: We have the ability to increase our production capacity to a total of approximately 3 million units annually. To unlock this opportunity, we are developing a playbook to bring our full suite of retail reconditioning and logistics technology and processes to Odessa. We recently completed our first conversion of an Odessa site in Buffalo, New York, to a Carvana reconditioning center, and now this site is leveraging Carly, our proprietary reconditioning software, and our proprietary processes to recondition retail units.
Ernest C. Garcia: We have the ability to increase our production capacity to a total of approximately 3 million units annually.
Ernest C. Garcia: Unlock this opportunity we're developing a playbook to bring our full suite of retail reconditioning in logistics technology and processes to a depth of locations. We recently completed our first conversion of an ADESA site in Buffalo, New York to a Carvana Reconditioning Center and now this site is leveraging carley, our proprietary reconditioning software and our proprietary processes to recondition retail units.
Ernest C. Garcia: We believe we have a model that gets better as it gets bigger and it definitely is a key part of that story.
Ernest C. Garcia: We believe we have a model that gets better as it gets bigger, and Odessa is a key part of that story. Reconditioning cars at more desolate locations over time reduces inbound transportation, which positively impacts cost of sales and retail GPU, and decreases outbound transportation, reducing SG&A per unit and decreasing delivery times for our customers, increasing conversion and decreasing marketing costs. This is also good feedback.
Ernest C. Garcia: Reconditioning cars at more desk locations overtime reduces inbound transportation, which positively impacts cost of sales in retail GPU and decreased outbound transportation, reducing SG&A per unit and decreasing delivery times for our customers increasing conversion and decreasing marketing costs. This is also a good feedback loop.
Ernest C. Garcia: Competitively, we sit in a better position than we have at any point in our history. Through our own experiences and those of the various companies who have sought to do something similar to us, the last few years have resoundingly proven just how difficult it is to build a business this complex, to drive it to scale, to achieve strong unit economics, and to deliver high-quality customer experiences. Building a business like Carvana is very hard, and hard is the ultimate competitive mode. Our addressable market remains an enormous opportunity. 40 million used cars are bought and sold on average each year.
Ernest C. Garcia: Competitively, we sit in a better position that we have at any point in our history.
Ernest C. Garcia: Through our own experiences and those are the various companies who have sought to do something similar to us. The last few years have resoundingly proven just how difficult. It is to build a business. This complex to drive it to scale to achieve strong unit economics and to deliver high quality customer experiences.
Ernest C. Garcia: Building a business like Carvana is very hard and hard is the ultimate competitive mode. Our addressable market remains an enormous opportunity 40 million used cars are bought and sold on average each year. There are tens of thousands of car dealers offering customers similar experiences to one another with similar business models Carvana offers a differentiated experience supported by a differentiated cost.
Ernest C. Garcia: There are tens of thousands of car dealers offering customers similar experiences to one another with similar business models. Carvana offers a differentiated experience, supported by a differentiated cost structure and driving a differentiated business model. That differentiated model just delivered approximately a billion dollars in annualized adjusted EBITDA, and we are still a long way from the full financial potential of our business model and its scale. With just 1% market share in this enormous fragmented market, we are extremely well positioned.
Speaker Change: Sure and driving a differentiated business model that differentiated model just delivered approximately $1 billion in annualized adjusted EBITDA and we are still a long way from the full financial potential of our business model and its scale with just 1% market share in this enormous fragmented market. We are extremely well positioned today is an exciting day for carvana besides of our off.
Ernest C. Garcia: Today is an exciting day for Carvana. The size of our opportunity and the strength of our positioning are clear. Now it's our job to make sure we make the most of it. Our team is ready. The march continues. Mark
Ernest C. Garcia: <unk> on the strength of our positioning are clear now it's our job to make sure we make the most of it our team is ready the marks continues mark.
Ernest C. Garcia: Thank you Ernie and thank you all for joining us today.
Mark Jenkins: Thank you, Ernie, and thank you all for joining us today. The first quarter was a milestone quarter for proving the long-term earnings power of our online retail model. We set company records on adjusted EBITDA and adjusted EBITDA margin. We achieved an industry-leading adjusted EBITDA margin for the first time. We drove significant gap operating income, and we generated adjusted EBITDA that significantly exceeded capital expenditures and interest expense. Our results in Q1 were exceptional, but we also see significant opportunities to improve margins with scale and continued efficiency gains over time. We provide additional details on these opportunities in our shareholder letter.
Ernest C. Garcia: The first quarter was a milestone quarter for proving the long term earnings power of our online retail model.
Mark Jenkins: We set company records on adjusted EBITDA, and adjusted EBITDA margin.
Mark Jenkins: Industry, leading adjusted EBITDA margin for the first time.
Ernest C. Garcia: We drove significant GAAP operating income and we generated adjusted EBITDA that significantly exceeded capital expenditures and interest expense.
Ernest C. Garcia: Our results in Q1 were exceptional but we also see significant opportunities to improve margins with scale and continued efficiency gains over time.
Ernest C. Garcia: We provide additional details on these opportunities in our shareholder letter.
Ernest C. Garcia: Turning to our first quarter results.
Mark Jenkins: Turning to our first quarter results, we entered Q1 squarely focused on unit economics and profitability initiatives. Despite this focus, we saw strong customer demand, in part due to several fundamental gains in conversion and customer experience that we made over the preceding quarters. Retail units sold increased by 16% year-over-year and 21% sequentially, reflecting significant market share gains on both a year-over-year and sequential basis. Revenue increased by 17% year-over-year and 26% sequentially.
Ernest C. Garcia: We entered Q1 squarely focused on unit economics and profitability initiatives.
Ernest C. Garcia: Fight. This focus we saw strong customer demand in part due to several fundamental gains in conversion and customer experience that we made over the preceding quarters.
Ernest C. Garcia: Retail units sold increased by 16% year over year, and 21% sequentially, reflecting significant market share gains on both a year over year and sequential basis.
Ernest C. Garcia: Revenue increased by 17% year over year and 26% sequentially.
Ernest C. Garcia: This unit and revenue growth was more than we targeted given our continued focus on profitability initiatives entering the year.
Mark Jenkins: This unit and revenue growth was more than we targeted, given our continued focus on profitability initiatives entering the year. That said, our teams have handled it well and responded to increased sales while also demonstrating leverage on operations expenses. We are excited by this and believe there is more to come.
Ernest C. Garcia: That said our teams have handled it well and responded to increase sales while also demonstrating leverage on operations expenses.
Ernest C. Garcia: We are excited by this and believe there's more to come.
Ernest C. Garcia: Our growth in Q1 has had multiple impacts on our inventory.
Mark Jenkins: Our growth in Q1 has had multiple impacts on our inventory. First, our results in Q1 demonstrated how efficient our nationally pooled inventory can be. In March, the average car we sold was only visible to customers on our website for 13 days before being purchased, nearing our all-time monthly low on this metric. Second, our inventory is currently smaller than we would like, resulting in less selection available to our customers.
Ernest C. Garcia: First our results in Q1 demonstrated how efficient are nationally pooled inventory can be.
Ernest C. Garcia: In March the average car, we sold was only visible to customers on our website for 13 days before being purchased nearing our all time monthly low on this metric.
Ernest C. Garcia: Second our inventory is currently smaller than we would like resulting in less selection available to our customers.
Mark Jenkins: All else constant, we believe this is negatively impacting our sales volumes today. To respond, our teams have begun increasing production across the country. In the near term, our focus will remain on growing production to increase selection to more optimal levels for our customers. Our strong profitability results in Q1 were driven by meaningful fundamental improvements in GPU and SG&A expenses. In the first quarter, non-gap total GPU was 6802, a sequential increase of 1072, and a new first quarter record.
Ernest C. Garcia: All else constant we believe this is negatively impacting our sales volumes today.
Ernest C. Garcia: To respond our teams have begun increasing production across the country.
Ernest C. Garcia: In the near term our focus will remain on growing production to increase selection to more optimal levels for our customers.
Ernest C. Garcia: Our strong profitability results in Q1 were driven by meaningful fundamental improvements in GPU and SG&A expenses.
Ernest C. Garcia: In the first quarter non-GAAP total GPU was 60 802, a sequential increase of 10 72, and a new first quarter record.
Mark Jenkins: Non-Gap Retail GPU was 3211 versus 2970 in Q4, a new company record. Our strength in retail GPU continues to be driven by fundamental gains and consistent performance in several areas, including non vehicle cost of sales, customer sourcing, inventory, turn times, and revenues from additional services. Non-Gap Wholesale GPU was $11.53 versus $8.81 in Q4. Sequential changes in wholesale GPU were primarily driven by more favorable depreciation rates and first quarter seasonality. Non-Gap Other GPU was 2438 versus 1879 in Q4.
Ernest C. Garcia: non-GAAP retail GPU was 32 11 versus 20 or 70 in Q4, a new company record.
Ernest C. Garcia: Our strength in retail GPU continues to be driven by fundamental gains and consistent performance in several areas, including non vehicle cost of sales customer sourcing inventory turn times and revenues from additional services.
Ernest C. Garcia: non-GAAP wholesale GPU was 11 53 versus 881 in Q4.
Ernest C. Garcia: Sequential changes in wholesale GPU were primarily driven by more favorable the depreciation rates and first quarter seasonality.
Ernest C. Garcia: non-GAAP other GPU was 24 38 versus $18 79 in Q4.
Mark Jenkins: Sequential changes and other GPU were primarily driven by more normalized loan sale volume relative to originations, lower securitization credit spreads, and credit scoring and pricing optimizations, including credit tightening in Q4. Non-GAAP SG&A expense was $390,000,000 versus $376,000,000 in Q4. Q1 was an exceptional quarter for demonstrating the power of our model to leverage SG&A expenses. Retail units sold increased by 21% sequentially, while non-GAAP SG&A expenses increased by less than 4%, leading to a nearly $700 reduction in SG&A expense per retail unit sold.
Ernest C. Garcia: Sequential changes in other GPU were primarily driven by more normalized loan sale volume relative to originations lower securitization as credit spreads and credit, scoring and pricing optimizations, including credit tightening in Q4.
Ernest C. Garcia: non-GAAP SG&A expense was $390 million versus $376 million in Q4.
Ernest C. Garcia: Q1 was an exceptional quarter for demonstrating the power of our model to leverage SG&A expenses reach.
Ernest C. Garcia: Retail units sold increased by 21% sequentially, while non-GAAP SG&A expenses increased by less than 4% leading to a nearly 700 dollar reduction in SG&A expense per retail units sold.
Mark Jenkins: We continue to see opportunities for significant SG&A expense leverage over time and as we scale. Adjusted EBITDA was $235 million in Q1, a new company record. This result included small one-time headwinds that were larger than any one-time tailwinds.
Ernest C. Garcia: We continue to see opportunities for significant SG&A expense leverage over time and as we scale.
Ernest C. Garcia: Adjusted EBITDA was $235 million in Q1, a new company record.
Ernest C. Garcia: This result included small onetime headwinds that were larger than any one time tailwind.
Mark Jenkins: It is important to note that the change in fair value of our root warrants does not impact adjusted EBITDA. Furthermore, demonstrating the quality of our adjusted EBITDA, we also generated $134 million of GAAP operating income in Q1, a new company record. As mentioned previously, in Q1, we generated adjusted EBITDA that significantly exceeded capital expenditures and interest expense. This milestone means that, in Q1, we officially achieved the goal we set out in May 2022 to drive significant positive cash flow after interest expense. Moreover, we achieved this goal at 360,000 units of annualized volume, in line with our expectations.
Ernest C. Garcia: It is important to note that the change in fair value of our route warrants does not impact adjusted EBITDA.
Ernest C. Garcia: Demonstrating the quality of our adjusted EBITDA. We also generated 134 million of GAAP operating income in Q1, a new company record.
Ernest C. Garcia: As mentioned previously in Q1, we generated adjusted EBITDA that significantly exceeded capital expenditures and interest expense.
Ernest C. Garcia: This milestone means that in Q1, we officially achieved the goals we set out in May 2022 to drive significant positive cash flow after interest expense.
Ernest C. Garcia: Moreover, we achieved this goal at 360000 units of annualized volume in line with our expectations.
Mark Jenkins: Given our strong liquidity position and operating results, we currently plan to pay cash interest on our 2028 and 2030 senior secured notes on both semiannual payment dates in 2025, reducing long-term cash interest expense and supporting our plan to delever over time. Turning now to our second quarter outlook. We expect the following as long as the environment remains stable: a sequential increase in our year-over-year growth rate of retail units sold and a sequential increase in adjusted EBITDA. This outlook does not anticipate any material, one-time benefits, or costs.
Ernest C. Garcia: Given our strong liquidity position and operating results. We currently plan to pay cash interest on our 2028 and 2030 senior secured notes on both semi annual payment dates in 2025.
Ernest C. Garcia: Reducing long term cash interest expense and supporting our plan to delever over time.
Ernest C. Garcia: Turning now to our second quarter outlook, we expect the following as long as the environment remains stable.
Ernest C. Garcia: A sequential increase in our year over year growth rate of retail units sold and a sequential increase in adjusted EBITDA.
Ernest C. Garcia: This outlook does not anticipate any material onetime benefits or costs.
Mark Jenkins: With our strong results in Q1 and outlook for Q2, we expect to comfortably deliver on our outlook of year-over-year growth in retail units sold and adjusted EBITDA for full year 2024. Our team's strong execution has positioned us well to pursue our financial goals. As we focused on growth, we joined Amazon, Google, and Meta as one of the four fastest companies to join the Fortune 500. When we focused on profitability, we increased quarterly adjusted EBITDA by more than $500 million in under two years and catapulted to industry-leading margins.
Ernest C. Garcia: With our strong results in Q1 and outlook for Q2, we expect to comfortably deliver on our outlook of year over year growth in retail units sold and adjusted EBITDA for full year 'twenty 'twenty four.
Speaker Change: To conclude.
Speaker Change: Our team's strong execution has positioned us well to pursue our financial goals.
Speaker Change: When we focused our growth, we joined Amazon, Google and better as one of the four fastest companies joined the Fortune 500.
Speaker Change: When we focused on profitability, we increased quarterly adjusted EBITDA by more than $500 million in under two years and catapulted to industry leading margins.
Mark Jenkins: We are now focused on our long-term phase of driving profitable growth and pursuing our goal of becoming the largest and most profitable auto retailer and selling and buying millions of cars. We are excited about what's ahead. Thank you for your attention. We'll now take questions.
Speaker Change: We are now focused on our long term phase of driving profitable growth and pursuing our goal of becoming the largest and most profitable auto retailer and selling and buying millions of cars. We're excited about what's ahead. Thank you for your attention and we'll now take questions.
Operator: We will now begin the question and answer session. Before we begin, we ask that you limit yourself to one question and one follow-up on today's call. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, you may press star then 2. Today's first question comes from Rajat Gupta with J.P. Morgan. Please go ahead.
Speaker Change: We will now begin the question and answer session before we begin we ask that you limit yourself to one question and one follow up on today's call if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: Anytime Youre question has been answered and you would like to withdraw. Your question you May Press Star then two.
Rajat Gupta: Great, thanks for taking the question and then congrats on a great quarter and improving a lot of us. Thank you, Rajat. So kudos on that.
Speaker Change: Today's first question comes from a Rajat Gupta with JP Morgan. Please go ahead.
Rajat Gupta: Oh, great. Thanks for taking my question and congrats.
Rajat Gupta: On a great quarter, and improving approving a lot of it's wrong.
Rajat Gupta: So I had one question, you know, just, you know, looking at the first quarter results and, you know, comparing them to the fourth quarter units, almost like 15% sequential growth or 20% sequential growth. I'm curious, um, uh, was that all primarily driven by, you know, just better selection, you know, faster deliveries? Was there, uh, anything that you saw changing in the news call market itself that supported that greater than seasonal pickup? I mean, just curious if you could, uh, characterize that growth in the first quarter a little more relative to what we're seeing in industry trends.
Rajat Gupta: So kudos on that.
Rajat Gupta: Alright, So I had one question you know just you know looking at the first quarter resolved.
Rajat Gupta: You know comparing it to the fourth quarter.
Rajat Gupta: Units, almost like 15% sequential growth or 20% sequential growth there curious oh, what's that all primarily driven by you know better selection faster deliveries.
Rajat Gupta: Was there Oh.
Rajat Gupta: There are anything that he saw changing in the used car market itself.
Rajat Gupta: That's supported a greater than seasonal pick up I'm just curious if you can.
Rajat Gupta: Characterize that that growth in the first quarter, a little more relative to what you're seeing in the industry trends.
Rajat Gupta: Thanks.
Speaker Change: Sure. So let me start with is I mean, I think we're still moving down in marketing dollars. Your inventories clearly constrained we put us out in our shareholder letter that for cars to make it up on our website there being picked up by a customer in 13 days on average.
Ernest C. Garcia: Sure. So let me start with this. I mean, I think, you know, we're still moving down in marketing dollars, and our inventory is clearly constrained. We put a stat in our shareholder letter that for cars to make it onto our website, they're being picked up by a customer in 13 days on average right now.
Speaker Change: Right now so we're definitely constrained and so I I don't believe the best explanation of growth is is one of these levers as being pulled I think essentially a better explanation of growth is that its a return back to the kinds of things that drove our growth for many years. Prior we grew extremely fast in 2013 to 'twenty 'twenty. One I think there were probably many.
Ernest C. Garcia: So we're definitely constrained, and so I don't believe the best explanation of growth is one of these levers that's being pulled. I think potentially a better explanation of growth is that it's a return to the kinds of things that drove our growth for many years prior. You know, we grew extremely fast from 2013 to 2021. I think that there were probably many things going on there. But I think the two most important, because they're the most sustainable, were one: we deliver to customers the experience they love. It's highly differentiated and hard to replicate.
Speaker Change: Things going on there, but I think the two most important because they are most sustainable were one we deliver to customers and experienced they loved is highly differentiated and hard to replicate and one for which I think you know consumer preferences are are constantly migrating toward.
Ernest C. Garcia: And, you know, one for which I think, you know, consumer preferences are constantly migrating toward. And then I think, too, there's positive feedback in our business inherently. And I think over the last, you know, two years through 22 and 23, you know, that positive feedback was going the wrong way on us as we were shrinking inventory and we were shrinking marketing dollars, and we were pulling in, and we were really focusing on profitability. And I think, you know, over the last several quarters, that's at least kind of the winds have gotten still. And so I think that's probably our best explanation.
Speaker Change: And then adding to that there was positive feedback in our business inherently and I think over the last two years through 'twenty, two and 'twenty three you'll have positive feedback was going the wrong way on us as we were shrinking inventory and we're shrinking marketing dollars and we are pulling in and we're really focusing on profitability and I think over the last several quarters that is at least kind of the the wins have have gotten stale and so I.
Speaker Change: That's probably our best explanation. In addition to that there had been countless improvements across the business you're seeing many of those in the financial numbers you can see our operating expenses going down you can see our GPU going up.
Ernest C. Garcia: In addition to that, there have been countless improvements across the business. You're seeing many of those in the financial numbers. You can see, you know, our operating expenses going down; you can see our GPUs going up. That's the result of a lot of work from a lot of teams, where they focus on customer experiences and efficiency gains and just make little improvements over and over again for the last several years. And I think that drives better customer experiences, it drives higher conversion, and it drives better economics. And we think all of that is playing into what we're seeing today.
Speaker Change: That's the result of a lot of work from a lot of teams.
Speaker Change: Where they focus on customer experiences and efficiency gains and just made little improvements over and over again for the last several years and I think that drives better customer experiences it drives higher conversion and it drives better economics.
Speaker Change: And we think all of that is playing into what we're seeing today.
Speaker Change: Got it got it that's clear and then I think your prepared remarks, you mentioned that.
Rajat Gupta: Got it. Got it.
Rajat Gupta: That's clear. And then, in prepared remarks, you mentioned that you plan to grow EBITDA margins from here. So is it fair to assume the 7.7% is the whole point? You know, even on a quarterly basis? Or was that more of like an annualized comment? I mean, just curious.
Speaker Change: You plan to grow EBITDA margins from here. So is it fair to assume the seven 7%.
Speaker Change: Oh boy.
Speaker Change: Clearly basis or was that more of like an annualized comment I mean, just curious.
Speaker Change: How should we think about you know.
Speaker Change: Obviously, given us some guidance on second quarter, but curious.
Ernest C. Garcia: How should we think about, you know, you've obviously given us some guidance for the second quarter, but curious, does that also mean margins are also naturally up sequentially, and it's just not EBITDA? That's right.
Speaker Change: Does that also mean margins are also naturally up sequentially and it's just not EBITDA that's up.
Speaker Change: Sure well, so I think we're going to stick with the guidance. We provided the guidance we provided for Q2 as in EBITDA dollars and we expect it to go up.
Ernest C. Garcia: Sure. Well, I think, you know, we're going to stick with the guides we provided. The guidance we provided for Q2 is in EBITDA dollars, and we expect it to go up. But then, I think we can also provide some color.
Speaker Change: But then I think we can also provide some color we provided a table in the shareholder letter that we hope is useful that quantifies three relatively straightforward extrapolation, we believe relatively straight forward extrapolation from our Q1 results to to give kind of some visibility into where we think things can go into those three changes where one year, we start with 7.7.
Rajat Gupta: We provided a table in the shareholder letter that we hope is useful that quantifies, you know, three relatively straightforward extrapolations from our Q1 results to give kind of some visibility into where we think things can go. And so those three changes were, one, we start with a 7.7% adjusted EBITDA margin. We did actually undersell loans in the quarter versus what we originated.
Speaker Change: <unk> percent, our adjusted EBITA margin, we did actually under sell loans in the quarter versus what we originated in if we assume that we would have sold those loans that are at a similar premium which would be our expectation two loans. We sold in the quarter that would have gotten us up to 8% and then number two we kind of provided a data point, where you are average marketing dollars divided bye bye.
Ernest C. Garcia: And if we assume that we would have sold those loans at a similar premium, which would be our expectation for loans we sold in the quarter, that would have gotten us up to 8%. And then, number two, we kind of provided a data point where our average marketing dollars divided by revenue was 1.8% in the quarter. That already compares pretty well to our long-term model that we put out six years ago, where we expected it to be between 1 and 1.5%.
Speaker Change: Our revenue was one 8% in the quarter.
Speaker Change: That's not already compares pretty great to our long term model that we put out six years ago, where we expected to be between one and one 5%, but if we look at our four oldest cohorts, where we tend to have higher market shares in and lower marketing spend it was it was down to 1% and we think that clearly likes the way to getting down to the low end of our <unk>.
Ernest C. Garcia: But if we look at our four oldest cohorts, where we tend to have higher market shares and lower marketing spend, it was down to 1%. And we think that clearly lights the way to getting down to the low end of our financial model over time. And so that's 0.8%. And then you also saw in the quarter that we held our overhead expenses flat in dollar terms at approximately $150 million.
Speaker Change: <unk> model over time, and so that that's 8% and then you also saw in the quarter that we held our our overhead expenses flat in dollar terms at approximately $150 million.
Ernest C. Garcia: And that led to significant leverage on a per unit basis, given the 21% sequential growth. And so if we assume that we grow into the infrastructure that we have across the business, you know, we have inspection centers that we're ready to grow into. We have excess multi-car haulers as a result of our path over the last couple of years. You know, we've got the market operations hubs to support significantly more growth.
Speaker Change: And that led to significant leverage on a per unit basis, given the 21% sequential growth and so if we assume that we grow into the infrastructure that we have across the business. You know we have inspection centers that were ready to grow into we have excess multicar haulers.
Speaker Change: As a result of our path in the last couple of years Oh, We've got the the market operations hubs to support a significantly more growth, we think theres over three points of possible leverage there and then does that also leaves out the fundamental gains that were continuing to work very hard on across the business in driving down operations expenses and driving up GPU, where all the team.
Ernest C. Garcia: We think there are, you know, over three points of possible leverage there. And then, you know, that also leaves out the fundamental gains that we're continuing to work very hard on across the business in driving down operations expenses and driving up GPU, where all the teams that have done all this incredible work over the last two years to make all these gains have exciting projects that they're still working on today. So I think we look at all that, and we're extremely optimistic and extremely excited, frankly, about the medium term. I think we have a lot of work to do to make sure that we unlock all that value. But we're working hard to make it.
Rajat Gupta: Great, thanks again and good luck. Thank you. Thank you. The next question is from Chris Bottiglieri with...
Speaker Change: That have done all this incredible work over the last two years to make all these gains have exciting projects that they're still working on today. So I think we look at all of that and we're extremely optimistic and extremely excited frankly about the the medium term I think we got a lot of work to do to make sure that we unlock all that value, but we're working hard to do it.
Speaker Change: Great. Thanks, again and good luck.
Speaker Change: Thank you.
Speaker Change: The next question is from Chris Gothic Larry with BNP Paribas. Please go ahead.
Speaker Change: Chris Your line is open.
Christopher James Bottiglieri: Thank you. Chris, your line is open.
Chris: Oh, sorry, I was on mute I'll I'll start up again, sorry about that.
Chris: So obviously really impressive unit economics, I think amongst the highest in retail that we've ever seen.
Chris: Curious, how you think about sustaining this versus reinvestment.
Chris: Is there a level like when he had this 3000 plus retail G. P. Why is that the right level versus say taken at lower and have you looked at Leicester City and what it could be that you sacrifice some of the GPU to drive higher units, but curious if you think of that balance.
Chris: Sure well first these are 29th call that we've done as a company after being public and I think now after a shot we've got five great quarters. Your first comment was ambiguous when we qualify that as a great quarter now.
Christopher James Bottiglieri: Sure. Well, first, this is our 29th call that we've done as a company since being public, and I think now, after Rajat, we've got five great quarters. Your first comment was ambiguous. So would we qualify that as a great quarter or not? You can add me.
Chris: Are you going to go out and you can add to that list. Okay. Thank you appreciate it thanks okay.
Ernest C. Garcia: Thank you. I appreciate it. Okay. Um, I think, um, listen, what I would say is I think we're, we're, we're very excited. We're in a great spot. I do think that today we are a bit constrained, um, most notably in inventory. Uh, but also, you know, as we've spoken about for the last several quarters, we have not been positioning for growth just yet, right? We've, we've been focused on driving the economic gains that we're seeing today. And, you know, that's been part of a plan that kind of has an annual cycle that is up in June.
Speaker Change: I think.
Speaker Change: What I would say I think we're we're very excited we're in a great spot I do think that today, we are a bit constrained most notably in inventory.
Speaker Change: But also you know as we've spoken about for the last several quarters, we have not been positioning for growth just yet right. We've been focused on driving the economic gains that we're seeing today.
Speaker Change: And that's been part of the plan that they kind of have an annual cycle that that is up in June.
Ernest C. Garcia: So most of our operating teams really have not been focused on growth at all. They've been focused on kind of, you know, staying in a similar spot and then basically responding to the demand that has just been showing up, kind of absent us pulling it forward from customers. And so I think, where we are today is we have to start to position the business for growth over time.
Speaker Change: So most of our most of our operating teams.
Speaker Change: Really have not been focused on growth at all they've been focused on kind of staying in a similar spot and then basically responding to the demand that they just kind of been has just been showing up kind of absent us pulling it forward from customers and so I think where we are today is we have to start to position the business for growth over time, we've been working on trying to.
Ernest C. Garcia: We've been working on trying to catch up on inventory. I think, you know, an interesting, somewhat hidden stat in the business is because we were shrinking inventory so much a year ago, even though our inventory is roughly flat, our sales are up year over year, 16 percent, and the cars that we have reconditioned year over year are up closer to 50 percent. And that's because last year we were really pulling down on that capability because we were trying to shrink our inventory and get back in line. So that part of the business has begun to flex that muscle. And, you know, you're seeing the results in the retail GPU that you see today.
Speaker Change: Catch up on inventory I think you know an interesting somewhat hidden stat and the business is because we were shrinking inventory so much a year ago.
Speaker Change: Even though our inventory is roughly flat and our sales are up year over year, 16%. The cars that we have recondition year over year are up closer to 50% and that's because last year, we were really pulling down on that capability. Because we were trying to trigger inventory and get back in line. So that part of the business has has.
Speaker Change: Begun to flex that muscle and Youre seeing the results and in retail GPU that you see today, that's happening while they're working hard to grow and support that 50% growth year over year. The rest of the business has a little bit of work to do and we're also behind on inventory I think you know until we catch up I think it's pretty clear what our move is supposed to be we're supposed to work hard to catch up and were supposed to.
Ernest C. Garcia: That's happening while they're working hard to grow and support that 50 percent growth year over year. The rest of the business has a little bit of work to do, And we're also behind on inventory. I think, you know, until we catch up, I think it's pretty clear what our move is supposed to be. We're supposed to work hard to catch up, and we're supposed to kind of make normal adjustments to the market as we go.
Speaker Change: Kind of make normal adjustments with the market as we go.
Ernest C. Garcia: I think, you know, once we catch up, there may be other moves that we can make, but we'll have to make that call at that time. We clearly think we're constrained, and we clearly think that if we had more cars to sell and were built for more capacity, we would sell more cars, and it would lead to additional e-bidot.
Speaker Change: Once we catch up that there may be there may be other moves that we can make the lots to make that call at that time, we clearly think were constrained and we clearly think that if we had more cars to sell and were built more capacity, we would be selling more cars than it would be leading to additional EBITDA.
Speaker Change: Gotcha. Okay. Thanks again are in a great great job that's number seven.
Speaker Change: Thank you, we'll take the Delta.
Speaker Change: [laughter].
Operator: Thank you. The next question comes from Sharon Zackfia with William Blair. Please go ahead.
Speaker Change: Thank you. The next question comes from Sharon Zackfia with William Blair. Please go ahead.
Sharon Zackfia: Hi, good afternoon. I'm not going to keep showering you with compliments, so that's going to just end here. Jared?
Sharon Zackfia: Hi, good afternoon, I'm, not going to keep shower and newest complement so that's going to just add here on <unk>.
Sharon Zackfia: Oh, thank you. So, I guess I have two questions. On the GPU, it's obviously very, very good, and I know you've done a lot of work on reconditioning. You mentioned Carly in your prepared comments. Can you give us kind of any insight on where recon per car is all in today relative to maybe, you know, several years ago, and how much more you think you can harvest in terms of efficiencies there? And then I have a follow-up.
Speaker Change: Okay.
Sharon Zackfia: So I guess two questions.
Sharon Zackfia: On the GPO. It's obviously very now go ahead and I know you've done a lot of work on our reconditioning you mentioned Kylie in your prepared comments can you give us kind of any insight on where recon per car as I'll end today relative to maybe you know several years ago and how much more you think.
Kylie: You can harvest in terms of efficiencies there and then I have a follow up.
Kylie: Yeah.
Kylie: Yeah, I can hit that so I think <unk> is one of the places where we've made very significant gains I think we've talked a bit before about some of the gains relative to 2021 and there. We are you know down hundreds of dollars relative to where we were in.
Mark Jenkins: Yeah, I can hit that. So I think recon is one of the places where we've made very significant gains. I think we've talked a bit before about some of the gains relative to 2021. And there we are, you know, down hundreds of dollars relative to where we were, you know, in full year 2021.
Kylie: And full year 2021, so that's been some meaningful gains there that is I would note that a significant reduction in per unit cost while overall.
Kylie: Cost inflation and wage inflation around the industry and economy has generally led to higher costs and so that that's really just a technology driven efficiency gains.
Mark Jenkins: So there have been some meaningful gains there that is, I would note, that is a significant reduction in per unit costs, while overall, you know, cost inflation and wage inflation around the industry and economy have generally led to higher costs. And so that's really just technology-driven efficiency gains, process-driven efficiency gains, and, you know, the result of a lot of the efforts that we've made over the last couple of years.
Kylie: Process and driving efficiency gains and and the result of a lot of the efforts that we've made over the last couple of years. So I think I think we feel really great about that and that's absolutely part of the the strength in retail GPU.
Kylie: You know Ernie also hit on I think a stat that we're feeling really really good about which is we are ramping up production.
Kylie: Production now to respond to demand.
Kylie: And you know, we're not seeing those cost pick up and so I think that that's something that also speaks to the quality of the technology the quality of the management and the teams out in those inspection and reconditioning centers and so I.
Kylie: I think that's some commentary on where we are and where we've been in terms of where we can go we absolutely see opportunities to further drive down per unit.
Kylie: Reconditioning costs I think that takes a couple of forms one is simply continuing to pursue further efficiencies through technology and process improvements and I think we see opportunities. There I think we also see some opportunities as we start to scale into this infrastructure to get some fixed cost leverage on the on the cost of <unk>.
Kylie: <unk> side as well.
Kylie: It's not nearly as large as the fixed cost leverage.
Kylie: We hope to achieve in the SG&A part of the business, but we do see some opportunities there as well as it relates to recon.
Speaker Change: I guess the follow up is in the shareholder letter there was a lot of commentary around ADESA and you know your original allocation, there, which obviously was.
Kylie: May be deferred.
Kylie: Given the cash reality that you'd say oh.
Kylie: For the last 18 to 24 months.
Kylie: How do we think about kind of that vision coming to fruition in terms of timing I mean, when will we start to see a doctor sites.
Kylie: I started talking about Q.
Kylie: Something more meaningful where you can harvest efficiencies some of them.
Speaker Change: Sure well, let me, let me take that one and I want to start with this I think something that's very important to the success of the business today and to us achieve.
Mark Jenkins: So I think we feel really great about that, and that's absolutely a part of the, you know, strength in retail GPUs. Ernie also hit on, I think, a stat that we're feeling really, really good about, which is that we are ramping production now to respond to demand, and we're not seeing those costs tick up.
Speaker Change: Achieving our kind of best in industry EBITA margins. This quarter is that we do have a large network kind of underneath all of the things that we do that that that is the network of reconditioning centers. It's a network of long haul logistics its network of last mile logistics to deliver cars customers and pick them up and so that is already playing a very important role there.
Mark Jenkins: And so I think that's something that also speaks to the quality of the technology, the quality of the management, and the teams out in those inspection and reconditioning centers. And so I think that's some commentary on where we are and where we've been. In terms of where we can go, we absolutely see opportunities to further drive down per unit reconditioning costs. And I think that takes a couple of forms.
Speaker Change: We've got 30 of the 56, a desk locations, where we have last mile logistics, including you're buying cars from customers going and picking them up sometimes customers dropping them off.
Mark Jenkins: One is simply to continue to pursue further efficiencies through technology and process improvements, and I think we see opportunities there. I think we also see some opportunities, you know, as we start to scale into this infrastructure, to get some fixed cost leverage on the cost of sales side as well. But that's not nearly as large as the fixed cost leverage that we hope to achieve in the SG&A part of the business. But we do see some opportunities there as well as it relates to recon.
Speaker Change: Delivering cars to customers and then we've got nine of these locations, where we have a multicar haulers that that are able to kind of run their logistics route through those locations, making us more efficient across the country as a business.
Sharon Zackfia: I guess the follow-up is, in the shareholder letter, there was a lot of commentary around ADESA and, you know, your original vision there, which obviously was maybe deferred a bit, just given the cash reality that you faced for the last 18 to 24 months. So how do we think about that vision coming to fruition in terms of time? I mean, when will we start to see ADELSA sites start to convert to something more meaningful where you can harvest efficiencies from them?
Speaker Change: And then we've also now begun to develop this playbook of adding Carvana reconditioning at the Buffalo site, which we're very excited about because that's something that we think you know unlocks approximately 2 million units of recondition capacity across those the desktop sites as we rolled that out nationwide and so I think that's.
Speaker Change: Very foundational right. They need these it is very difficult to get many sites that are large enough to run our business at scale and to get them zoned and appropriate located across the country that maybe doesn't sound from a distance like it's hard but it's something that's very hard takes a lot of time.
Speaker Change: And so I think it's already showing up in the Carvana results.
Speaker Change: And then I think the ADESA team is also doing a great job in that core business of a desk. The wholesale business is also going very well and then I think we're also mutually benefiting from from kind of the the the vertical integration of us being able to buy more cars from customers and then sell them at their locations, which has positive feedback for the auction business and and removes auction.
Speaker Change: Fees for us So I think theres a lot of great stuff, that's happening there and I do think it is a big part of our story.
Speaker Change: As we move forward in time, because it is very hard to build a business like this that delivers this kind of financial results without a very large network underneath of the powers.
Speaker Change: Okay. Thank you.
Speaker Change: <unk>.
Ernest C. Garcia: Sure. Well, let me take that one.
Speaker Change: Thank you. The next question comes from Chris Pierce with Needham. Please go ahead.
Christopher Alan Pierce: Just following up on that what is there anything specific about the ADESA Buffalo site that allows you to pick that one first like how repeatable is that playbook with the other 56 sites that are out there like how many of these many IRC could you pop up to kind of.
Speaker Change: To strengthen the network. Thank you spoke to.
Speaker Change: Sure well I think theres a number of reasons, we picked that side I know if we wanted to dive into all of those in detail, but I think the absolute belief is that it is repeatable across the majority of of ADESA sites and we felt like that was a good place to start for a number of reasons relating to to both ADESA and and two commodities.
Ernest C. Garcia: And I want to start with this. I think something that's very important to the success of the business today and to us achieving kind of best-in-industry EBITDA margins this quarter is that we do have a large network kind of underneath all the things that we do. That's the network of reconditioning centers. It's the network of long haul logistics. It's the network of last mile logistics to deliver cars to customers and pick them up. And so ADESA is already playing a very important role there.
Ernest C. Garcia: We've got 30 of the 56 ADESA locations where we have last mile logistics, including buying cars from customers, going and picking them up, sometimes customers dropping them off, and delivering cars to customers. And then we've got nine of these locations where we have multi-car haulers that are able to kind of run their logistics route through those locations, making us more efficient across the country as a business. And then we've also now begun to develop this playbook of adding Carvana reconditioning at the Buffalo site, which we're very excited about because that's something that we think, you know, unlocks approximately two million units of reconditioning capacity across those Odessa sites as we roll that out nationwide.
Speaker Change: Okay, and then just as a follow up what is growth look like from here I know, you're talking about increasing production, which means you're buying more cars from customers to get more cars on the site.
Speaker Change: But like do you need more technicians, you need more like is there anything you need more of or like what kind of it.
Speaker Change: Or you just literally just using excess capacity that you already have or adding second shifts like what its growth rate looked like from here.
Speaker Change: Well I think.
Speaker Change: Growth. So I think maybe it's helpful too to make that a concrete as possible, let's let's kind of overlay it with the growth that we have from 2013 to 2021.
Speaker Change: During that period, we are growing very very quickly you know even kind of like the last normal year, we grew at 100% in units year over year until 19.
Speaker Change: Obviously as you get to larger and larger scale that gets very hard, but we were able to grow very quickly and what we were doing that entire time is as we were building each of our operational capabilities and scaling the mountain so.
Ernest C. Garcia: And so I think, you know, that's very foundational, right? It is very difficult to get many sites that are large enough to run our business at scale and to get them zoned and appropriately located across the country. That maybe doesn't sound from a distance like it's hard, but it's something that's very hard, and takes a lot of time.
Ernest C. Garcia: And so I think it's already showing up in the Carvana results. And then I think the Odessa team is also doing a great job, and that core business of Odessa, the wholesale business, is also going very well. And then I think we're also mutually benefiting from kind of the vertical integration of us being able to buy more cars from customers and then sell them at their locations, which has positive feedback for the auction business and removes auction fees for us.
Speaker Change: At that time that meant that we were going out and we were finding reconditioning centers. We are purchasing the land we're getting <unk> zone, we're doing construction on the land we were getting all the improvements done and then were going out and we were hiring teams. We're training teams that are doing the reconditioning, we're doing the same logistics and customer care to answer customer questions and Verifications and registration all.
Speaker Change: Are these different operating groups, we had to do all this work and we were able to grow it pretty fast rates doing all that I think where we sit today to first speak kind of medium and long term and then we'll speak in the near term.
Ernest C. Garcia: So I think there's a lot of great stuff that's happening there, and I do think it's a big part of our story as we move forward in time, because it is very hard to build a business like this that delivers this kind of financial results without a very large network underneath it that powers it.
Speaker Change: I think you know.
Speaker Change: There's reasons to be pretty optimistic about what's possible I think you know from a from an effort per sale perspective. The business is just materially more efficient than it was when we were driving that growth are back through 2021, you know a couple of stats are useful.
Speaker Change: And this also speaks to the fundamental gains we've made as a business and market operations. We now have 50% roughly of our activities are paired which means when when a customer advocate you loads of a car to drive to a customer before they come back they stop somewhere else. They pick up a car that we bought from customer drive it back that's a relatively complicated capability to build out that requires a bunch of.
Speaker Change: If you have different teams, but it is a valuable capability and even a year ago that was less than 30%. So that just gives you a sense of you know each of these people in market ops are more efficient than they've been in the past. If we look at total miles driven our logistics networks for a number of reasons.
Speaker Change: We're down about 30% versus a year ago. So that's less logistics work to drive a transaction of our sales per advocates are up 61% year over year.
Speaker Change: That's a big number that that means that we're more efficient there as a business entitled registration were more than twice as efficient as we were per person a year ago. So I think from just a work required to grow perspective, we're in the best place we've ever been from an infrastructure perspective, we're clearly in the best place we've ever been in the pathway to build infrastructure as we went today we have infrastructure.
Speaker Change: You're sitting on the shelf. So that's great I think the financial impacts of growth are better than they've ever been we're sitting here with with more overhead expense per unit than we had back in the growth years by a significant margin.
Speaker Change: And with larger Gpus, and and you know very low variable costs and so that means contribution margins are high and and leveraging the fixed cost is also high.
Speaker Change: So I think from a finance perspective, it's good and then I think you know risk is sort of a combination of all of those things I think you know we we all together saw very clearly the risk of of growth at fast rates at large scale. When 2020, you showed up in car prices went up and as rates went up and we were not well positioned and yeah that was that that was <unk>.
Speaker Change: That put us in a tough spot that I think when all of a sudden done is going to end up being a great part of our story and it's gonna be a positive part of our story.
Speaker Change: And so I think.
Speaker Change: We're extremely proud of the team for making the most of it but we saw what risk looks like there are you know given where we are in the kind of financial position of the business and our unit economics, it's likely the risk is less so I think growth from here like I said, there's reasons to be optimistic. We also kind of coined this term of a transition period I think we'd.
Speaker Change: <unk> had a lot of success over the last two years, focusing on driving efficiency and when we go through each part of the business with with every operating group and talk about what can we do in the next year. There are still meaningful gains to be had in every group and theyre still exciting projects to work on and so we want to make sure that we continue to take advantage of that and make progress there because.
Speaker Change: We think in the long run that's going to serve our purpose by making us even more efficient.
Speaker Change: But we also see the very obvious pay off in growth and so we want to start to lean into that and so we're gonna have to start balancing those considerations in the transition period I think it's about is finding that right balance. So we've always been an ambitious group of people. We remain ambitious group people, we were going to push that but we also recognize that.
Speaker Change: Moving through this transition period purposefully and observing different levels of growth as we move will enable us to make the highest quality as we can about exactly what the right speed. It. So I think we got to figure that out over the next several quarters, but we're excited about what it can look like.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Operator: Thank you. The next question comes from Chris Pierce with Needham. Please go ahead.
Speaker Change: Thank you. The next question is from Seth Basham with Wedbush Securities. Please go ahead.
Christopher Alan Pierce: Just following up on that, is there anything specific about the Odessa Buffalo site that allowed you to pick that one first? Like, how repeatable is that playbook with the other 56 sites that are out there? Like, how many of these mini IRCs could you pop up to kind of strengthen the network like you spoke about?
Seth Mckain Basham: Thanks, a lot good afternoon, and congrats on the outstanding results.
Seth Mckain Basham: And my question, sorry, I heard you to say, but we appreciate it anyway.
Seth Mckain Basham: Oh, absolutely, it's well deserved.
Seth Mckain Basham: The conversion is just a popping here is there one or two things that you can point to that's really driving this increased conversion. However.
Ernest C. Garcia: Sure. Well, I think there's a number of reasons we picked that site. I don't know if we want to dive into all those in detail, but I think the absolute belief is that it is repeatable across the majority of EDESA sites. And we felt like that was a good place to start for a number of reasons relating to both EDESA and Carvana's needs.
Seth Mckain Basham: The last quarter or so.
Seth Mckain Basham: Okay.
Christopher Alan Pierce: Okay, and then just as a follow-up question, what does growth look like from here? I know you're talking about increasing production, which means you're buying more cars from customers to get more cars on the site. But like, do you need more technicians? Do you need more? Like, is there anything you need more of? Or like, what kind of it is, or are you just literally just using excess capacity that you already have or adding second shift? Like, what does growth really look like from here?
Speaker Change: I think the simplest explanation for that and I think that this is kind of a first the feedback loop. So we tried to point to in the prepared remarks is just that you know as we get better.
Seth Mckain Basham: Customer experiences get simpler and faster.
Seth Mckain Basham: One way to say it from a cost perspective is we have we have 60% more sales per advocate then we had a year ago. What that also means that the customer has fewer touch points right when they when they call and well they are less likely to call and if they call and they get a better experience where they.
Ernest C. Garcia: Growth, so I think maybe it's helpful to make that as concrete as possible. Let's kind of overlay it with the growth that we have from 2013 to 2021.
Ernest C. Garcia: You know, during that period, we were growing very, very quickly. You know, even in kind of like the last normal year, we grew at 100% in units year-over-year in 2019. Obviously, as you get to larger and larger scales, that gets very hard, but we were able to grow very quickly.
Seth Mckain Basham: Get more information faster and things in the background are moving more quickly. So that we don't need as many back in force and so I think that that is just the business getting simpler and so I think a lot of these expense improvements that we've had of last few years have also driven simplicity and customer experience. We've seen N. P. S go up pretty linearly over the last 18.
Seth Mckain Basham: Months, which is pretty exciting and so we're going to continue to to push on that but I think I think it's that and then again going back to the the answer we gave in the first question I do think that we were dealing with some negative feedback for a two year period, as we were shrinking inventory and shrinking marketing and I think even just that stabilizing has been helpful.
Speaker Change: That's helpful perspective, and then my follow up just on gross margins you talked to them being at $19, 1% below the long term a range and yeah. Obviously, there's some seasonality, but do you think that you can sustain or even.
Speaker Change: And you know drive gross margins higher than that long term goal overtime.
Speaker Change: Yeah.
Speaker Change: Sure I'll take that one so you know in the shareholder letter.
Speaker Change: We lay out a number of places where we see opportunities for fundamental gains in.
Speaker Change: And gross profit per unit or gross margin I think the those gains take a number of different forms. One is we definitely don't think we're done on costs. So like.
Speaker Change: I talked in response to.
Speaker Change: Sharon's question earlier, you know see meaningful opportunities for reductions in reconditioning costs from here, both due to technology and process driven efficiency gains as well as.
Ernest C. Garcia: And what we were doing that entire time was building each of our operational capabilities and scaling them out. And so, at that time, that meant that we were going out, and we were finding reconditioning centers. We were, you know, purchasing the land. We were getting it zoned.
Ernest C. Garcia: We were doing construction on the land. You know, we were getting all the improvements done. And then we were going out, and we were hiring teams. We were training teams.
Ernest C. Garcia: And we were doing the reconditioning. We were doing the same logistics and customer care to answer customer questions and verifications and registration. All these different operating groups, we had to do all this work. And we were able to grow at pretty fast rates doing all that. I think where we sit today, you know, to first speak kind of of the medium and long-term, and then we'll speak about the near term.
Speaker Change: Due to.
Speaker Change: Some scale components I think in addition to that we see opportunities to make further gains on inbound transport costs overtime Ernie touched on this with some of his commentary about adding more reconditioning centers, including at ADESA.
Speaker Change: That gives you more production locations, which reduces your inbound shipping miles and therefore, your inbound shipping costs.
Speaker Change: Those are on the cost side and some of the other areas we absolutely.
Speaker Change: See opportunities to.
Speaker Change: We continue to drive our wholesale vehicle business. We have teams that are working on fundamental gains there, we see opportunities in finance and ancillary products as well that are outlined in the shareholder letter I won't talk through every single one of them here, but those have been areas, where we've had success over the years.
Speaker Change: With teams really focused on just grinding out fundamental gains.
Speaker Change: In those areas and those those same team see more and more opportunities to be as we look forward from where we are today. So you know.
Ernest C. Garcia: I think, you know, there are reasons to be pretty optimistic about what's possible. I think, you know, from an effort-per-sale perspective, the business is just materially more efficient than it was when we were driving that growth, you know, back through 2021. You know, a couple of stats are useful, and this also speaks to the fundamental gains we made as a business. You know, in market operations, we now have roughly 50 percent, roughly, of our activities are paired, which means when a customer advocate loads up a car to drive to a customer, before they come back, they stop somewhere else, pick up a car that we've bought from a customer and drive it back.
Ernest C. Garcia: That's a relatively complicated capability to build out that requires a bunch of, you know, different teams, but it's a valuable capability, and, you know, even a year ago, that was less than 30 percent. So that just gives you a sense of, you know, each of these people in market operations is more efficient than they have been in the past. If we look at total miles driven, our logistics network, for a number of reasons, you know, we're down about 30 percent versus a year ago. That's less logistics work to drive a transaction. Our sales per advocate are up 61 percent year over year. That's a big number.
Ernest C. Garcia: That means that we're more efficient there as a business. With entitlement registration, you know, we're more than twice as efficient as we were per person a year ago. So, I think from just a work required to grow perspective, we're in the best place we've ever been. From an infrastructure perspective, we're clearly in the best place we've ever been. You know, in the past, we had to build infrastructure as we went. Today, we have infrastructure sitting on the shelf, so that's great.
Speaker Change: Even though were.
Ernest C. Garcia: I think the financial impacts of growth are better than they've ever been. We're sitting here with more overhead expense per unit than we had back in the growth years by a significant margin. And with larger GPUs and, you know, very low variable costs.
Ernest C. Garcia: And so that means contribution margins are high, and leverage into fixed costs is also high. So I think from a financial perspective, it's good. And then I think, you know, risk is sort of a combination of all of those things. I think, you know, we all together saw very clearly the risk of growth at fast rates at a large scale when 2022 showed up and car prices went up and interest rates went up, and we were not well-positioned. And, you know, that was tough.
Speaker Change: Experiencing exceptional exceptional results and we still see opportunities for fundamental gains across all of those different areas that the teams are going to be working to pursue.
Speaker Change: Got it so with that response does that mean, you'll address your long term margin expectations at a later point in time.
Speaker Change: So we you know it's been.
Ernest C. Garcia: That put us in a tough spot that, I think, you know, when all is said and done, is going to end up being a great part of our story, and it's going to be a positive part of our story. And so I think we're extremely proud of the team for making the most of it, but we saw what risk looks like there, you know, given where we are in the kind of financial position of the business and our unit economics, it's likely the risk is less. So I think growth from here, like I said, there are reasons to be optimistic. We also kind of coined the term transition period.
Ernest C. Garcia: I think, you know, we've had a lot of success over the last two years focusing on driving efficiency. And, you know, when we go through each part of the business with every operating group and talk about what we can do in the next year, there are still meaningful gains to be had in every group, and there are still exciting projects to work on. And so we want to make sure that we continue to take advantage of that and make progress there because, in the long run, that's going to serve our purpose by making this even more efficient.
Operator: Thank you. The next question is from Seth Basham with Wedbush Securities. Please go ahead.
Ernest C. Garcia: But we also see the very obvious payoff in growth, and so we wanna start to lean into that. And so we're gonna have to start balancing those considerations, and the transition period, I think, is about us finding that right balance. So we've always been an ambitious group of people. And we remain an ambitious group of people. We're gonna push that, but we also recognize that moving through this transition period purposefully and observing different levels of growth as we move will enable us to make the highest quality decisions we can about exactly what the right speed is. So I think we gotta figure that out over the next several quarters, but we're excited about what it can look like.
Speaker Change: Almost six years.
Speaker Change: Since we had the analyst day, obviously, you know, we're making great progress toward the long term, although we laid out at that time with our 7.7% adjusted EBITDA margin in Q1.
Speaker Change: No we haven't given any plans for an analyst day in the future, but you know it.
Speaker Change: That's something that we could pursue it at some point in time in the future.
Seth Mckain Basham: Thanks a lot, good afternoon, and congrats on the outstanding results. No, absolutely it's well-deserved.
Speaker Change: Thank you guys very much.
Speaker Change: Thank you. Thank you. The next question comes from Michael Montana with Evercore ISI. Please go ahead.
Seth Mckain Basham: The conversion is just popping here. Is there one or two things that you can point to that's really driving this increased conversion over the last quarter or so?
Ernest C. Garcia: I think the simplest explanation for that, and I think that this is kind of the first of the feedback loops that we tried to point out in the prepared remarks, is just that as we get better, our customer experiences get simpler and faster. One way to say it from a cost perspective is that we have 60% more sales per advocate than we had a year ago. What that also means is the customer has fewer touch points, right?
Ernest C. Garcia: When they call in, well, they're less likely to call in. If they call in, they get a better experience where they get more information faster, and things in the background are moving more quickly so that we don't need as much back and forth.
Michael David Montani: Oh, Hey, guys. Good afternoon. Thanks for taking the question just wanted to ask if I could around two things one was just around the capital stack. If we should be surprised if there's an equity raise here coming down the pipe or if you think at this stage, it's more about improving EBITDA and delevering the balance sheet gradually and that way and then I had a separate quest.
Speaker Change: <unk> on the on vehicle pricing.
Speaker Change: Okay.
Speaker Change: Sure.
Ernest C. Garcia: So I think that is just the business getting simpler. I think a lot of these expense improvements that we've had over the last two years have also driven simplicity in the customer experience. We've seen NPS go up pretty linearly for the last 18 months, which is pretty exciting, and so we're going to continue to push on that. But I think it's that. And then again, going back to the answer we gave in the first question, I do think that we were dealing with some negative feedback for a two-year period as we were shrinking inventory and shrinking marketing. And I think even just that stabilizing has been helpful.
Speaker Change: So I'd say for the last couple of years and.
Speaker Change: In response to questions about capital structure, we've been focused on operating results and.
Seth Mckain Basham: And then my follow-up question is just on gross margins. You talked about them being at 19.1% above the long-term range, and obviously there's some seasonality, but do you think that you can sustain or even, you know, drive gross margins higher than that long-term goal over time?
Mark Jenkins: Sure, I'll take that one. So, you know, in the shareholder letter, we lay out a number of places where we see opportunities for fundamental gains in gross profit per unit or gross margin. I think those gains take a number of different forms. One is that we definitely don't think we're done with costs. So I talked in response to Sharon's question earlier about meaningful opportunities for reductions in reconditioning costs from here, both due to technology and process driven efficiency gains, as well as due to, you know, some scale components.
Speaker Change: You were talking about how you know first driving the positive adjusted EBITDA and then driving significant adjusted EBITDA from there was our key focus.
Mark Jenkins: I think in addition to that, we see opportunities to make further gains on inbound transport costs over time. Ernie touched on this with some of his commentary about adding more reconditioning centers, including Adidesa, you know, that that gives you more production locations, which reduces your inbound shipping miles and, therefore, your inbound shipping costs.
Mark Jenkins: So those are those on the cost side. In some of the other areas, we absolutely see opportunities to continue to drive our wholesale vehicle business. We have teams that are working on fundamental gains there. We see opportunities in finance and ancillary products as well that are outlined in the shareholder letter. I won't talk through every single one of them here, but those have been areas where we've had success over the years with teams really focused on just grinding out fundamental gains in those areas.
Speaker Change: That focus has obviously paid.
Mark Jenkins: And those same teams see more and more opportunities as we look forward from where we are today. So, you know, even though we're experiencing exceptional, exceptional results, we still see opportunities for fundamental gains across all of those different areas that the teams are going to be working to pursue.
Speaker Change: Significant dividends here with record adjusted EBITDA in Q1, and a very big adjusted EBITDA number in Q1 that meaningfully exceeds our capital expenditures and interest expense.
Speaker Change: So absolutely our goal for the business will be to continue to drive our adjusted EBITDA and as you drive more and more adjusted EBITDA.
Speaker Change: Sure.
Speaker Change: All of your capital structure metrics look better and better over time as you continue to drive those operating results. So that's certainly going to be our number one focus in terms of more financial aspects of the capital structure, we did call out.
Speaker Change: In my prepared remarks that we do plan to pay cash interest on our 2028 and 2030 senior secured notes those are the two.
Speaker Change: Sets of notes that are eligible for cash interest in 2025, So we plan to pay cash interest on both of those notes.
Speaker Change: In 2025.
Speaker Change: Reduces overall.
Speaker Change: Debt outstanding and also reduces our long term our cash interest expense and so we did call that out earlier in this call.
Speaker Change: Okay got you and then just on the pricing front I just wanted to see how you guys think about the potential opportunity with respect to unit growth in the sense that you know when I look at the website and demand pricing surveys at times I'm noticing you guys above K b be fair pricing.
Seth Mckain Basham: Got it. So with that response, does that mean you'll address your long-term margin expectations at a later point in time?
Mark Jenkins: So we, you know, it's been almost six years since we had Analyst Day. Obviously, we're making great progress toward the long-term model we laid out at that time, with our 7.7% adjusted EBITDA margin in Q1. We haven't given any plans for an Analyst Day in the future, but I think that that's something that we could pursue at some point in time in the future.
Speaker Change: And I'm, just wondering with Gpus above your target if you would consider potentially flexing a little bit on GPU, either with more aggressive.
Speaker Change: <unk> to bid up cars, when you're buying or potentially to push more units you know to get to 2 million plus units more quickly.
Speaker Change: Sure what I would well, let's start with as I think we we keep track of millions of cars that are listed across many different websites. All the time to make sure that we have a good sense of the pricing of our vehicles and how it compares and I think over the last several years our offering versus.
Seth Mckain Basham: Thank you guys very much.
Operator: Thank you. Thank you. The next question comes from Michael Montani with Evercore ISI. Please go ahead.
Speaker Change: Both some of our of our larger competitors and then also just the across against the market generally have had been very stable over time. So we have generally held that pretty consistent I.
Speaker Change: I think that's the right first order assumption from here as well and especially given the constraints of overtime I think you know as we continue to make gains there.
Speaker Change: There's no question that there's opportunities there but.
Speaker Change: But that's not that's not something that we're planning on right now.
Speaker Change: Okay got it thank you and good luck.
Speaker Change: Thank you.
Michael David Montani: Hey guys, good afternoon. Thanks for taking the time to answer the question. I just wanted to ask you a couple of questions on two things. One was just around the capital stack, if we should be surprised if there's an equity raise coming down the pipe, or if you think at this stage it's more about, you know, improving EBITDA and delevering the balance sheet gradually in that way. And then I had a separate question on the vehicle price.
Speaker Change: Thank you. The next question comes from Adam Jonas with Morgan Stanley. Please go ahead.
Adam Michael Jonas: You see Ernie I told you everything will work out.
Adam Michael Jonas: You did from the very beginning you never doubted us and we appreciate it never never matter I mean, your margins are like twice.
Adam Michael Jonas: Carmax and Youre doing like one third of their volume so.
Adam Michael Jonas: It's a good start it's a good start.
Speaker Change: So I'm going to ask Michael Michael Montana question, a little different way.
Michael David Montani: I mean, we there's still a lot of economic uncertainty it seems like the fed might have overplay their hand, and talk on stagflation and yeah just.
Michael David Montani: In uncertain times I'm, just wondering do you feel that you have enough equity in the business.
Speaker Change: Right now and.
Speaker Change: Remind us maybe how you think about longer term leverage targets for the business.
Speaker Change: Sure I can take that one so I think the simple answer to the first the first part of that question is.
Mark Jenkins: Yeah, so, you know, I'd say for the last couple of years, in response to questions about capital structure, we've been focused on operating results and talking about how, you know, first driving to positive adjusted EBITDA and then driving significant adjusted EBITDA from there was our key focus. That focus has obviously paid very significant dividends here, with record adjusted EBITDA in Q1 and a very big adjusted EBITDA number in Q1 that meaningfully exceeds our capital expenditures and interest expense.
Speaker Change: We have ample liquidity and the business generating very strong.
Speaker Change: EBITDA and cash flows today, so I think we feel great about that structure as I talked about earlier.
Speaker Change: We do intend to Delever over time I think.
Speaker Change: A component of that that we.
Speaker Change: <unk> talked about on the call earlier is we do plan to pay cash interest expense on both eligible sets of notes in 2025 and.
Speaker Change: That reduces overall debt outstanding relative to paying in kind and and also reduces long term cash.
Speaker Change: Cash interest expense. So you know I think the theres been so many questions about our capital structure over the past couple of years, including you know pretty serious ones that people were asking at earlier points in time, but I think this quarter.
Speaker Change: Sounding Lee <unk>.
Speaker Change: Repositions us as it relates to those questions I mean.
Mark Jenkins: And so absolutely, a goal for the business will be to continue to drive adjusted EBITDA. And as you drive more and more adjusted EBITDA, all of your capital structure metrics look better and better over time as you continue to drive those operating results. So that's certainly going to be our number one focus.
Speaker Change: $235 million of adjusted EBITDA and outlook for increase in that adjusted EBITDA dollars.
Speaker Change: Looking towards Q2.
Speaker Change: As we talked about.
Speaker Change: Meaningfully exceeding capex and interest.
Michael David Montani: In terms of more financial aspects of the capital structure, we did call out in my prepared remarks that we do plan to pay cash interest on our 2028 and 2030 Senior Secured Notes. Those are the two sets of notes that are eligible for cash interest in 2025. So we plan to pay cash interest on both of those notes in 2025. You know, that reduces overall debt outstanding and also reduces long-term cash interest expense. And so, you know, we did call that out earlier in this call.
Speaker Change: And then you know as we've talked about throughout the call. We see big opportunities ahead, now that for where we're positioned from an excess capacity perspective from a customer offering and customer demand for our product perspective, I think we see a lot of opportunity ahead, and so you know I think that we feel really great about.
Mark Jenkins: Okay, got you. And then just on the pricing front, you know, I just wanted to see how you guys think about the potential opportunity with respect to unit growth in the sense that, you know, when I look at the website and do my own pricing surveys, at times, I'm noticing you guys above KBB fair pricing. And, you know, I'm just wondering if you would consider potentially flexing a little bit on GPUs, either with more aggressive offers to bid up cars when you're buying or potentially to push more units, you know, to get to 2 million plus units more quickly.
Michael David Montani: Sure. Let's start with this one.
Ernest C. Garcia: I think we keep track of millions of cars that are listed across many different websites all the time to make sure that we have a good sense of the pricing of our vehicles and how it compares. And I think over the last several years, our offering versus both some of our larger competitors and then also just against the market generally has been very stable over time. So we've generally held that pretty consistent.
Ernest C. Garcia: I think that's the right first order assumption from here as well, especially given the constraints over time. I think, you know, as we continue to make gains, there's no question that there's opportunities there, but that's not something that we're planning on right now.
Speaker Change: Where we are today.
Michael David Montani: Okay, I got it. Thank you and good luck.
Speaker Change: Alright, I appreciate that and thanks, Marc and then as a follow up you know they say what doesn't kill you makes you stronger and I think this quarter it seems to be.
Speaker Change:
Speaker Change: It goes a long way of some evidence of that but would also doesn't kill you may make your wiser.
Speaker Change: And now that you're returning to growth tell us.
Speaker Change: Ernie what are you now that you're in a more humble.
Speaker Change: That's after that near death experience, but growing and stable and things are looking good what are you keeping an eye out for what does keep you up at night in terms of.
Speaker Change: Things that you don't want to get complacent on whether it's things that you can control.
Speaker Change: Or are there things that you can't thanks, guys.
Speaker Change: Well first of all you made an assumption of that question, which is not obviously true, but we'll we'll assume.
Speaker Change: Assume fitness hub I think.
Speaker Change: Okay.
Speaker Change: Was that the one.
Speaker Change: So here's what I would say listen we're extremely excited right now if we go back to the very beginning what do we want to do we wanted to build a business that we thought was going to require a ton of work to deliver great customer experiences give them a better simpler experience and drive industry, leading economics and I think you know.
Speaker Change: It feels really good to be in a spot where we feel like there is there are some very strong arguments you made those boxes are checked and our job is to to get from here to the promised land and build this thing to be as big as we possibly can and I do think going back to the growth answer we are incredibly well positioned to do that I think it's.
Speaker Change: In the last couple of years have been absolutely brutal, but they have really cleared the competitive field quite a bit and also as a result of us getting it wrong and it was always going to happen in 'twenty two 'twenty three.
Speaker Change: We're very well positioned from an infrastructure perspective, and so you know for growth looks looks good I think that transition period is about is figuring out the balance between that enormous opportunity and making sure that that you know we.
Speaker Change: We continue to execute extremely well and I think that'll be something that we will be debating internally.
Speaker Change: Over the next several quarters I think it's something that that we will figure out and I think it'll be different voices in the room trying to make sure that.
Speaker Change: We get that right, but I think that we're picking between I I think I think different versions of of pretty good outcomes as long as we execute and so I think we're excited about that in terms of fear I think.
Speaker Change: I do think.
Speaker Change: I would like to give our team credit for being a team that that places a lot of internal pressure ourselves I think that hopefully that's apparent in the some of the work that we've done.
Speaker Change: Together over the last 11 years, but I think that Theres. No question that there is no substitute for a bunch of external pressure. It is it can put pressure on you in a way that you just cannot pressure yourself.
Speaker Change: And I think something that we're working on internally is just trying to make sure that we.
Speaker Change: We remember the value of that pressure, we were under and then we try to keep as much of that ourselves as we possibly can even if even if the world decides that were maybe a little less dumb there than the world might have thought we were a couple of years ago.
Speaker Change: And I think that's not an easy thing to do it's a very easy thing to say, but to come in every day and you put your head down and grind over and over again, even when things feel pretty good is it is much easier said than done. So I think internally, we're working hard try to cement that culture is as best we can I.
Speaker Change: I think we have the right people to do it I think we're on a good path I think acknowledging that that's important is the first step, but I think that that to me is the biggest fear because it made us better and we want to stay we want to stay in the position we're in right now.
Speaker Change: Thanks, Jeremy.
Speaker Change: Thank you. The next question is from Doug Arthur with Huber Research Partners. Please go ahead.
Operator: Thank you. The next question comes from Adam Jonas with Morgan Stanley. Please go ahead.
Douglas Middleton Arthur: Yeah. Thanks.
Douglas Middleton Arthur: Or any sort of answered this a lot of different ways, but you guys guided to units being slightly up in the quarter.
Douglas Middleton Arthur: Marketing expense was very well contained and sort of what what drove you talked about better conversion, but what sort of drove the upside in units, which were a big upside surprise.
Speaker Change: Follow up.
Speaker Change: So I think there is a series of things that I do think that the the unit came in stronger than we anticipated and I think that that starts with.
Speaker Change: Demand moving in our direction and then I think it's completed with the team executing very well despite not anticipating it and so you know that that there is no getting around inventory shrinking when when demand comes in.
Douglas Middleton Arthur: A little hotter than expected because you know that there's a long lead time, there to kind of the number of cars you are buying in your reconditioning and so we saw inventory shrink a bit but we saw even that team made quick adjustments and started to kind of getting a better positioned relatively quickly and then I think the rest of the operating teams.
Douglas Middleton Arthur: Also handled the volume very very well.
Douglas Middleton Arthur: And so I think that that that enabled us despite not being well super well positioned for growth to the handle growth pretty well.
Douglas Middleton Arthur: Anyway, and so I think you were excited about that we think that that bodes well.
Douglas Middleton Arthur: But we think we have work to do to really get the business into a position for <unk>.
Douglas Middleton Arthur: Sustained growth at at high levels, and that's what the the transition periods all about.
Speaker Change: Excellent and then Mark just to be Super clear here in terms of your guidance.
Mark Jenkins: You were saying a sequential increase in a year.
Mark Jenkins: Year over year growth rate in your retail units so.
Mark Jenkins: Seasonally I don't know you generally had flat to slightly down units Q2 over Q1, I mean, it's jumped around a lot over time, but.
Douglas Middleton Arthur: You're saying the growth rate will be up from the first quarter.
Speaker Change: That's correct the year over year growth rate will be up.
Speaker Change: In the second quarter compared to the first and we'll also do more adjusted EBITDA sequentially.
Speaker Change: Okay alright, thank you.
Speaker Change: Thank you. The next question is from Ron Josey with Citi. Please go ahead.
Adam Michael Jonas: You see, Ernie, I...
Ronald Victor Josey: Great. Thanks for taking the question Ernie I wanted to ask a little bit more about sources of leverage in advertising, specifically because I thought the commentary in the letter around the four oldest cohorts achieving 1% of the advertising expense as a percentage of revenue was pretty telling especially as youre just seeing pretty good growth come back here. So I was wondering if you wanted to get your thought.
Ronald Victor Josey: And as you think about sort of go forward and throw the brand recognition and awareness of Carvana. Just how do you think about advertising spend going forward strategically. That's question one I've got another one which might be a little bit easier I might have missed it earlier, but I think I heard capacity for $1 3 million units per year across the IR season.
Speaker Change: So about 3 million units annually Mark I go back to the analyst day. However, many years ago about that 5% share goal.
Speaker Change: We have enough capacity now or did I hear that maybe more I or excuse me might be on their way or just more efficient ones. Thank you.
Speaker Change: Sure So let's start with with marketing spend I think I.
Adam Michael Jonas: You did from the very beginning. You never doubted us, and we appreciate it. Never, never for a minute. Um, I mean your margins are like twice as high as CarMax, and you're doing like one-third their volume.
Adam Michael Jonas: So, it's a good start; it's a good start. So I'm going to ask Michael Montani's question a little differently. I mean, there's still a lot of economic uncertainty. It seems like the Fed might have overplayed their hand with talk of stagflation and, you know, just an uncertain time. So I'm just wondering, do you feel that you have enough equity in the business right now and maybe remind us maybe how you think about longer term leverage targets for the business.
Mark Jenkins: Sure, I can take that one. So, I think the simple answer to the first part of that question is that I think we have ample liquidity and the business is generating very strong EBITDA and cash flow today. So, I think we feel great about that structure. As I talked about earlier, we do intend to de-lever over time. I think a component of that that we talked about on the call earlier is that we do plan to pay cash interest expense on both eligible sets of notes in 2025. And that reduces overall debt outstanding relative to paying in kind and also reduces long-term cash interest expense.
Speaker Change: I think from here there are two forces on marketing spend at that point in different directions, I think as we continue to make fundamental gains. We think there's reasons why we can continue to drive that down as as our newer cohorts of markets.
Mark Jenkins: So, I think there have been so many questions about our capital structure over the past couple of years, including pretty serious ones that people were asking at earlier points in time. But I think this quarter resoundingly repositions us as it relates to those questions. I mean, $235 million of adjusted EBITDA, an outlook for an increase in that adjusted EBITDA dollars looking toward Q2. And, as we talked about, meaningfully exceeding CapEx in interest. And then, as we've talked about throughout this call, we see big opportunities ahead.
Speaker Change: Agent and act more like older cohorts of markets, we think that that can be driven down and then we also do believe that in inventory specifically, we're constrained today in and if we were not constrained we'd likely see higher conversion of the customers. We already see on the website and that would likely drive.
Speaker Change: Marketing dollars down as well.
Speaker Change: I think that you know that there's a number of forces that we're gonna be actively working on to push advertising spend down I also think it is clearly true.
Speaker Change: We believe we could acquire incremental customers today at incremental customer acquisition costs that would be much lower than the gross profit minus variable cost.
Speaker Change: And therefore would be additive and it is also likely that much of those incremental customers that would be a positive EBITDA additive would come at higher cap than our average CAC today.
Speaker Change: So as we kind of March up that incremental customer acquisition cost curve that would be a force that would push it up I think going forward is a balancing of those two forces and I don't think that we want to.
Speaker Change: Caller shot just yet I think that's also something that will be figuring out as we go through the transition period on the on the footprint side.
Mark Jenkins: Now, from where we're positioned, from an excess capacity perspective, from a customer offering and customer demand for our product perspective, I think we see a lot of opportunity ahead. And so, I think that we feel really great about where we are today. All right.
Adam Michael Jonas: Alright, I appreciate that. Thanks, Mark.
Speaker Change: Just just to make sure that's clear at our existing inspection centers, we have capacity for one 3 million units and then we add the ADESA sites you get to approximately $3 million in sum total of those ADESA site do still need capex on top of the land two to unlock that potential.
Speaker Change: That capex at the time of the acquisition add approximately $1 2 billion, which is probably still a good.
Speaker Change: Way to think about it but that would be on the order of what would be required to unlock that additional that additional reconditioning capacity.
Speaker Change: That makes perfect sense. Thanks, I really appreciate it thank.
Speaker Change: Thank you.
Speaker Change: The next question is from Nick Jones with citizens JMP. Please go ahead.
Nicholas Freeman Jones: Great. Thanks for taking the question.
Nicholas Freeman Jones: And sorry, if I missed this but you know in the past.
Nicholas Freeman Jones: As you were kind of a growing really rapidly on occasion, you might hit an choke points that you would need to work through it.
Nicholas Freeman Jones: And it's always going to do that.
Nicholas Freeman Jones: Growth accelerated care an area I think you'd mentioned, you're you're kind of.
Nicholas Freeman Jones: I feel good about where the infrastructure is there.
Nicholas Freeman Jones: I mean are those chokepoints potentially sell out there as growth accelerates or how should we think about.
Nicholas Freeman Jones: And things that may be out there that still need to get work through that we have kind of seen in the past. Thanks.
Speaker Change: I mean, I think the short answer is yes, I think.
Speaker Change: It's always hard.
Speaker Change: We tried to give up and outlined for why we think we're very well positioned for growth.
Speaker Change: In the future from here and in many ways better position than we were in the past.
Speaker Change: So our.
Speaker Change: Hopefully that's somewhat helpful. But of course, you know that there will be difficulty as we as we head back into growth and there'll be growing pains as there always are and then hopefully we execute well and we pushed through those pains. When we have a lot of fundamental gains to offset them, but but I think that's the work that we have in front of us and I think in terms of real world opportunity in front of US we feel extremely good about it.
Speaker Change: But of course, there can be work to do and of course over the years.
Speaker Change: There'll be versus these calls will be explaining what we're dealing with at any point in time, because you know running a business is harder.
Speaker Change: Got it thanks, Eric.
Speaker Change: Thank you.
Speaker Change: Thank you. This concludes our question and answer session I would now like to turn the call back over to Ernie Garcia for closing remarks.
Ernest C. Garcia: Great well. Thank you everyone for joining the call we really appreciate it and to the Carvana team. We say this at the end of every one of these calls but thank you guys. So much you've done an absolutely incredible job. This was virtually impossible to foresee and I think really this quarter is probably the hardest one to foresee from from the perspective of a couple of years ago I think we have been.
Adam Michael Jonas: And then, as a follow-up, you know, they say what doesn't kill you makes you stronger, and I think this order seems to be, um..., goes a long way as some evidence of that. But what also doesn't kill you, maybe makes you wiser. And now that you're returning to growth, tell us. Ernie, you know, what are you now that you're in a more humble, uh, after that near-death experience? The company is growing and stable, and things are looking good.
Adam Michael Jonas: What are you keeping an eye out for? What keeps you up at night in terms of things that you don't want to get complacent on, whether it's things that you can control or things that you can't. Thanks guys.
Ernest C. Garcia: Well, first of all, you made an assumption in that question, which is not obviously true, but we'll assume that it is. I think... It was a humiliation. Was that the one?
Ernest C. Garcia: So, here's what I would say, I would say, listen, we're extremely excited, right? If we go back to the very beginning, what do we want to do? We wanted to build a business that we thought, you know, was going to require a ton of work to deliver great customer experiences, give them, you know, a better, simpler experience and drive industry-leading economics, and I think, you know, it feels really good to be in a spot where we feel like, you know, there's a very strong argument to be made that those boxes are checked, and now our job is to get from here to the promised land and, you know, build this thing to be as big as we possibly can, and I do think, going back to the growth answer, we are incredibly well-positioned to do that.
Ernest C. Garcia: I think it's... You know, the last couple of years have been absolutely brutal, but they have really cleared. We're very well positioned from an infrastructure perspective, and so forward growth looks good. I think that the transition period is about us figuring out the balance between that enormous opportunity and making sure that we continue to execute extremely well, and I think that that'll be something that we'll be debating internally, you know, over the next several quarters.
Ernest C. Garcia: I think it's something that we'll figure out, and I think there'll be different voices in the room trying to make sure that we get that right. But I think that we're picking between, I think, different versions of pretty good outcomes as long as we execute, and so I think we're excited about that.
Ernest C. Garcia: In terms of fear, I think, I do think, you know, I would like to give our team credit for being a team that places a lot of internal pressure on itself. I think that, hopefully, that's apparent in the sum of the work that we've done together over the last 11 years, but I think that there's no question that there is no substitute for a lot of external pressure. It is; it can put pressure on you in a way that you just cannot put on yourself.
Ernest C. Garcia: Through tough times, together and I think there will undoubtedly be a lot of good data in front of us and a couple of bad days I think if we keep grinding the way that we have grinded over the last couple of years. It can be a lot more good days and bad days and when we see those bad days, we know how to face them and I just cannot thank you guys enough you've done an incredible job. Please be proud and then please.
Ernest C. Garcia: And I think something that we're working on internally is just trying to make sure that we remember the value of that pressure we were under and that we try to keep as much of that in ourselves as we possibly can, even if the world decides that we're maybe a little less dumb than the world might have thought we were a couple of years ago. And I think that's not an easy thing to do.
Operator: Thank you. The next question is from Doug Arthur with Huber Research Partners. Please go ahead.
Ernest C. Garcia: That's a very easy thing to say, but to come in every day and put your head down and grind over and over again, even when things feel pretty good, is much easier said than done. So I think internally we're working hard to try to cement that culture as best we can. I think we have the right people to do it, and I think we're on a good path. I think acknowledging that that's important is the first step. But I think that, to me, is the biggest fear because it made us better, and we want to stay in the position we're in right now.
Douglas Middleton Arthur: Yeah, thanks. Ernie, you sort of answered this a lot of different ways, but you guys guided to units being slightly up in the quarter. Your marketing expense was very well contained. So what drove, you talked about better conversion, but what sort of drove the upside in units, which was a big upside surprise, and I've got a follow-up.
Ernest C. Garcia: So I think there are a series of things. I mean, I do think that the units came in stronger than we anticipated. And I think that that starts with, you know, demand moving in our direction, and then I think it's completed with the team executing very well, despite, you know, not anticipating it. And so, you know, there's no getting around inventory shrinking when, you know, demand comes in a little hotter than expected because, you know, there's a long lead time there for the number of cars you're buying and you're reconditioning.
Douglas Middleton Arthur: And so we saw inventory shrink a bit, but we saw even that team make quick adjustments and start to kind of get in a better position relatively quickly. And then I think the rest of the operating teams also handled the volume very, very well. And so I think that that enabled us, you know, despite not being super well positioned for growth, to handle growth pretty well anyway. And so I think we're excited about that. We think that that bodes well, but we think we have work to do to really get the business into a position for sustained growth at high levels. And that's what the transition period is all about.
Operator: Thank you. The next question is from Ron Josey with Citi. Please go ahead.
Douglas Middleton Arthur: And then, Mark, just to be super clear here, in terms of your guidance, you're saying a sequential increase in our year-over-year growth rate in retail units. So, I mean, seasonally, I don't know, you generally have flat to slightly down units, Q2 over Q1, I mean, it's jumped around a lot over time. But, you're saying the growth rate will be up from the first quarter.
Ronald Victor Josey: Great, thanks for taking the question. You know, Ernie, I wanted to ask a little bit more about sources of leverage and advertising specifically because I thought the commentary in the letter around the four oldest cohorts achieving 1% of advertising spend to the percentage of revenue was pretty telling, especially as, you know, you're just seeing pretty good growth come back here. So I just wanted to get your thoughts as you think about sort of going forward and sort of the brand recognition and awareness of Carvana. Just how do you think about advertising spend going forward strategically? That's question one. I've got another one, which might be a little bit easier.
Mark Jenkins: That's correct. The year-over-year growth rate will be higher in the second quarter compared to the first, and we'll also do more adjusted EBITDA sequentially.
Ronald Victor Josey: I might have missed it earlier, but I think I heard capacity for 1.3 million units per year across the IRCs in Odessa, about 3 million units annually. Mark, I go back to the analyst day, however many years ago, about that 5% share goal. Do we have enough capacity now, or did I hear that maybe more IRCs might be on their way or just more efficient ones? Thank you.
Douglas Middleton Arthur: Okay. All right. Thank you.
Ernest C. Garcia: Sure. So let's start with marketing spend. I think from here, there are two forces on marketing spend that point in different directions. I think as we continue to make fundamental gains, we think there are reasons why we can continue to drive that down. As our newer cohorts of markets age and act more like older cohorts of markets, we think that that can be driven down.
Operator: Thank you. The next question is from Nick Jones with Citizens JMP. Please go ahead.
Ernest C. Garcia: And then we also do believe that in inventory specifically, we're constrained today. And if we were not constrained, we'd likely see higher conversion of the customers we already see on the website. And that would likely drive marketing dollars down as well. So I think that there are a number of forces that we're going to be actively working on to push advertising spend down.
Nicholas Freeman Jones: Great, thanks for taking the question. And sorry if I missed this, but, you know, in the past, when you were kind of growing really rapidly, on occasion, you might hit some choke points that you would need to work through, which, you know, you tend to always be able to do that. As growth accelerates here, and Ernie, I think you mentioned you kind of feel good about where the infrastructure is. Do those, I mean, are those choke points potentially still out there as growth accelerates? Or how should we think about some things that may be out there that still need to get worked through that we have kind of seen in the past?
Ernest C. Garcia: I also think it is clearly true that we could acquire incremental customers today at incremental customer acquisition costs that would be much lower than gross profit minus variable costs and therefore would be additive. And it is also likely that much of those incremental customers that would be positive EBITDA additive would come at higher CACs than our average CAC today. And so as we kind of march up that incremental customer acquisition cost curve, that would be a force that would push it up. I think going forward is a balancing of those two forces, and I don't think that we want to call our shot just yet.
Nicholas Freeman Jones: Thanks.
Ernest C. Garcia: I think that's also something that we'll be figuring out as we go through the transition period. On the footprint side, just to make sure that's clear, at our existing inspection centers, we have capacity for 1.3 million units. And then when you add the ADESA sites, you get to approximately 3 million in the sum total. But those ADESA sites do still need CapEx on top of the land to unlock that potential. We sized that CapEx at the time of the acquisition at approximately $1.2 billion, which is probably still a good way to think about it. But that would be on the order of what would be required to unlock that additional reconditioning capacity.
Ernest C. Garcia: I mean, I think the short answer is yes. I think growing up is always hard. We try to give an outline for why we think we're very well positioned for growth in the future from here and, in many ways, better positioned than we were in the past. So hopefully, that's somewhat helpful, but of course, there will be difficulty as we head back into growth. There will be growing pains; there always are. And then, hopefully, we execute well and we push through those pains, and we have a lot of fundamental gains to offset them.
Ronald Victor Josey: That makes perfect sense. Thanks, Ernie. I appreciate it.
Ernest C. Garcia: I think that's the work that we have in front of us, and I think in terms of the real world opportunity in front of us, we feel extremely good about it, but of course, there's going to be work to do, and of course, over the years, there will be versions of these calls where we'll be explaining what we're dealing with at any point in time because running a business is hard.
Operator: Thank you. This concludes our question and answer session. I would now like to turn the call back over to Ernie Garcia for closing remarks.
Ernest C. Garcia: Great. Well, thank you everyone for joining the call. We really appreciate it. And to the Carvana team, you know, we say this at the end of every one of these calls, but thank you guys so much. You've done an absolutely incredible job. This was virtually impossible to foresee.
Ernest C. Garcia: And I think really this quarter is probably the hardest one to foresee from the perspective of a couple years ago. I think, you know, we've been through tough times together, and I think there will undoubtedly be a lot of good days in front of us and a couple bad days. I think if we keep going the way that we have gone over the last couple years, there's going to be a lot more good days than bad days.
Ernest C. Garcia: And when we have those bad days, we know how to face them. And I just cannot thank you guys enough. You've done an incredible job. Please be proud. And then please put your heads down and keep fighting like it's 2022, because that's what got us here. Thanks, everyone.
Speaker Change: Your head down and keep fighting like it's 2022, because that's what got US here. Thanks, everyone.
Speaker Change: The conference has now concluded.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line and have a great evening.
Speaker Change: You for attending today's presentation. You may now disconnect your line and have a great evening.
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