Q4 2024 Carvana Co Earnings Call
A film by Ernest Garcia Directed by Ernest Garcia Screenplay by Ernest Garcia Cinematography by Ernest Garcia Music by Ernest Garcia Sound by Ernest Garcia Edited by Ernest Garcia
Speaker Change: Good day and welcome to Carvana's 4th Quarter 2024 Earnings Conference Call.
All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question,
Speaker Change: You may press star then 1 on a touchtone phone. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Meg Kehan, Investor Relations. Please go ahead.
Meg Kehan: Thank you, Asha. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's fourth quarter and full year 2024 Earnings Conference Call.
Speaker Change: Please note that this call will be simultaneously webcast on our investor relations section of the company's corporate website at investors.carbona.com
Speaker Change: The fourth quarter shareholder letter is also posted to the IR website. Additionally, we posted a set of supplemental financial tables for Q4 which can be found on the events and presentations page of our IR website.
Speaker Change: Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer.
Speaker Change: Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meanings of federal security laws, including, but not limited to, CARBONA's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.
Speaker Change: A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Cartlana's most recent Form 10-K.
Speaker Change: The forward-looking statements and risks in this conference call are based on current expectations as of today and Carvana assumes no obligation to update or revise them whether as a result of new developments or otherwise.
Speaker Change: Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to the non-GAAP metrics and all references to EBITDA will be to adjusted EBITDA.
Speaker Change: Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our IR website. And with that said, I'd like to turn the call over to Ernie Garcia. Ernie?
Thanks Meg and thanks everyone for joining the call.
Ernie Garcia: 2024 will always be a defining year in the Carvana story. In 2024, we became the most profitable public automotive retailer in U.S. history as measured by adjusted EBITDA margin, while simultaneously being the fastest growing.
Ernie Garcia: There are many quarterly and annual numbers that support and punctuate this point, but the simple reduction is the most important. The most profitable ever and fastest growing is very powerful.
Ernie Garcia: We also did this with 1% nationwide market share. This is a very unique long-term growth opportunity. And we are built for scale. Our inspection centers that were in operation before we began integrating our ADESA megasites had capacity for over 1 million retail units, about three times our current volume.
Ernie Garcia: Fully integrating all ADESA megasites will give us capacity for approximately 3 million retail units or eight times our current volume
Ernie Garcia: And this isn't conceptual. In 2024, we integrated six of the 56 Odessa sites. We expect to open approximately another 10 megasites this year, two of which we have already announced. This reduces the execution risk of achieving significantly more scale, and that extra scale will come with the positive feedback inherent in our model.
Ernie Garcia: Our business model took us $10 billion, tens of millions of hours of effort, and over 10 years to build. It is hard, and the difficulty of building it is very clear through the simple exercise of looking at the outcomes and difficulties of the many companies around the world, including ourselves, that have attempted to build something similar over the last 10 to 15 years.
Ernie Garcia: In addition, our market enjoys unique competitive dynamics. We compete in a highly fragmented market. Our largest direct competitor has about a 2% market share. The largest 100 direct competitors combined have about 10% market share.
Ernie Garcia: We are a team of builders that have stuck together through thick and thin and accumulated the lessons that have been learned at every step of our journey.
We imagined the business. We designed the customer experience.
Ernie Garcia: In just eight years, we had scaled that complex system quickly enough to be tied for the third fastest company to make the Fortune 500 in history. We faced hardship together, and most recently, we did all the hard, detailed work that is necessary to prove that the machine that we imagined is the most efficient machine in our industry for buying and selling cars.
Ernie Garcia: The team that did all of this is still here, and we are still hungry.
Ernie Garcia: And importantly, we deliver an experience our customers love. It is faster, simpler, more confidence-inspiring, offers greater selection, and better value than is available elsewhere in the market.
Ernie Garcia: and we aren't even close to done. There are fundamental gains left to be harvested. We will go get them.
Ernie Garcia: There are many opportunities to make our machine more efficient and add new foundational capabilities to serve our customers and partners better. We will build them.
Ernie Garcia: There is room to make our customer experiences simpler, more efficient, more delightful for our customers. We'll make that happen too.
Ernie Garcia: We are at an exciting moment in our history. We are firmly on the path to buying and selling millions of cars, to becoming the largest and most profitable automotive retailer, and to fulfilling our mission of changing the way people buy and sell cars. There is nowhere we'd rather be. The march continues. Mark.
Mark Jenkins: Thank you, Ernie, and thank you all for joining us today.
Mark Jenkins: 2024 was a monumental year for Carvata and solidified the long-term earnings power of our vertically integrated business model. We entered the year focused on driving fundamental gains and enhancing customer experiences while also beginning to layer in certain growth initiatives.
Mark Jenkins: Throughout the year, we maintained that mindset and achieved additional fundamental gains which resulted in significant improvements in unit economics and meaningful enhancements to our customer offering.
Mark Jenkins: This enabled us to once again leverage the three fundamental drivers of growth that we have benefited from in the past and expect to continue to benefit from in the future.
Mark Jenkins: 1. Continuously improving our customer offering 2. Increasing awareness, understanding, and trust of our brand and 3. Increasing inventory selection and other benefits of scale
Mark Jenkins: Positive feedback created by these drivers resulted in a 33% year-over-year growth rate in FY 2024 retail units sold, significantly outpacing the industry, while simultaneously driving material operating leverage and industry-leading margins.
Mark Jenkins: We set new company records in numerous financial metrics, including adjusted EBITDA of $1.38 billion, adjusted EBITDA margin of 10.1 percent.
Mark Jenkins: Gap operating income of $990 million, gap operating margin of 7.2%, net income of $404 million, and net income margin of 3.1%.
Speaker Change: Moving to our fourth quarter results where unless otherwise noted all comparisons will be on a year-over-year basis.
Speaker Change: The fourth quarter was again an exceptional quarter for Carvana that was driven by our team's ability to achieve further fundamental gains and operating efficiencies while also pursuing significant year-over-year growth.
Speaker Change: Fourth consecutive quarter we are in positive net income and we set new fourth quarter records for retail units sold, adjusted EBITDA, adjusted EBITDA margin, gap operating income, gap operating margin, net income, and net income margin.
Speaker Change: The strong demand we experienced in the first three quarters of the year continued into the fourth quarter.
Speaker Change: Retail units sold totaled 114,379 in Q4, an increase of 50%, a significant acceleration from Q3, leading to the second highest quarterly retail unit sales in our history, despite Q4 being a seasonally lower demand period.
Revenue was $3.547 billion, an increase of 46%.
Like the full year, our growth in the fourth quarter
Speaker Change: We believe as we continue on our path of profitable growth, each driver will improve, creating more positive feedback in the model.
Speaker Change: Our strong profitability results in Q4 were again driven by sustained and fundamental improvements across all GPU components and operations expenses, as well as levering our overhead expenses.
Non-Gap Retail GPU was $33.31, an increase of $3.61.
Speaker Change: Year over year changes were driven primarily by lower retail depreciation rates, reductions in reconditioning and inbound transport costs, and lower average days of sale, partially offset by lower spreads between wholesale and retail market prices.
Speaker Change: Non-GAP wholesale GPU was $8.57, a decrease of $24. Year-over-year changes were primarily driven by faster growth in retail units than wholesale vehicle and wholesale marketplace units, partially offset by lower vehicle depreciation rates.
Non-GAP other GPU was 2728, an increase of 849.
Speaker Change: The increase in other GPUs was primarily driven by higher spreads between origination interest rates and benchmark rates, lower credit spreads on securitization transactions, changes in loan sale channel mix, and selling a greater volume of loans relative to originations in Q4-24 compared to Q4-23.
Non-GAAP SG&A expense was $432 million, an increase of 15%.
Speaker Change: Q4 was another strong quarter for demonstrating the power of our model to lever SG&A expenses. Our 50% growth in retail units sold led to a $1,165 reduction in non-GAAP SG&A expenses per retail unit sold.
Speaker Change: Carvana operations portion of SG&A expense totaled $1,696 per retail unit sold, a decrease of $328 driven by our operational efficiency initiatives.
Speaker Change: The overhead portion of SG&A expense totaled $159 million in Q4, an increase of $9 million, primarily driven by non-recurring items.
Speaker Change: We continue to see opportunities for significant improvement in per unit SGA expenses over time and as we scale, driven by both continued efficiency in operational expenses as well as leverage in the fixed components of our cost structure.
Speaker Change: Adjusted EBITDA was $359 million in Q4, an increase of $299 million.
Speaker Change: Adjusted EBITDA margin was 10.1% in Q4, a 7.6 percentage point increase.
Speaker Change: Our adjusted EBITDA margin of 10.1% was industry-leading and is well within our long-term financial model EBITDA margin range of 8 to 13.5%.
Speaker Change: We continue to see meaningful opportunities for fundamental gains to continue driving toward the higher end of that range over time.
Speaker Change: Our adjusted EBITDA is very high quality compared to many rapidly growing companies due to our relatively low non-cash expenses.
Speaker Change: GAP operating income was $260 million in Q4, leading to GAP operating margin of 7.3%, leading the public auto retail industry.
Speaker Change: As previously noted, we currently carry many expenses that support retail unit sales capacity of over 1 million units and expect our GAAP operating income to grow faster than adjusted EBITDA over time.
Speaker Change: As discussed in prior quarters, we believe that pairing our strong financial results with the measured actions we have taken position us well to continue de-levering our balance sheet over time.
Speaker Change: As a company that we believe has the opportunity to be a many-year compounder, we believe in having a strong balance sheet with substantial liquidity and a strong credit rating.
Speaker Change: In the fourth quarter, we took additional steps to further bolster our balance sheet, retiring $120 million of our 2028 senior secured notes and raising $924 million of equity through our ATM program.
Speaker Change: At the end of 2024, we had more than $1.7 billion of cash and $3.6 billion of committed liquidity resources, a $2 billion increase year over year.
Speaker Change: In addition, our ratio of net debt to adjusted EBITDA was 2.8 times and our ratio of adjusted EBITDA to interest expense was more than two times, demonstrating significant progress toward our deleveraging goals.
Speaker Change: We remain committed to further deleveraging through growth in adjusted EBITDA, and plan to drive toward investment grade quality credit ratios over time.
Speaker Change: Our results in 2024 position us well for a strong 2025.
Speaker Change: Assuming the environment remains stable, looking forward, we expect significant growth in both retail units sold and adjusted EBITDA in full year 2025, including a sequential increase in both retail units sold and adjusted EBITDA in Q1 2025.
Speaker Change: In conclusion, 2024 was an extremely exciting year for Team Carvana. We achieved two very significant milestones of becoming the fastest growing and most profitable automotive retailer.
Speaker Change: The strength of our financial results and the strength of our customer offering position us well to continue to take market share as we progress in our long-term phase of driving profitable growth.
Thank you for your attention. We will now take questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. We ask that you please limit yourself to one question and a follow up.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
At this time, we'll pause momentarily to assemble a roster.
Thank you.
Speaker Change: The first question comes from Ron Josie with Citi. Please go ahead.
Ron Josie: Thanks for taking the question. Ernie, Mark, I had a question on inventory and the overall experience. And so on inventory, I think the letter talked about production throughput improvements. And I want to understand, as inventory grows, it's how you philosophically manage balancing inventory as a lever to drive demand.
Ron Josie: versus, you know, greater overall depreciation and then having recently gone through the purchase and trade process, you know at Carvana
Ron Josie: With inventory growing, I just want to hear your thoughts on just how search and merchandising is improving overall, how you might use AI to maybe include natural language search and things along those lines as the user experience improves. Thank you.
Ron Josie: Sure. So first, I think, you know, we talked about it a bit in the letter. I think we're big believers that selection is one of the simplest, clearest, and most obvious to our customer benefits that we provide.
Ron Josie: And so we're big believers that offering them that selection is very powerful. We think that our business model is uniquely positioned to do that, not just because all the cars can be delivered to customers so they can see everything nationwide, but also because it changes the cars that we can buy because we're optimizing a very large pool instead of many small pools. And the math of that is meaningful. It means that we can kind of cover more demand space per unit than many other automotive retailers would be able to.
Ron Josie: and compare it to other ways to acquire customers with the knowledge that not only is it a way to acquire customers, but it's also a way to acquire customers that makes them happier, making it kind of almost constant, a more efficient.
Ron Josie: Customer Acquisition Channel. So I think our general view is we want to keep leaning into inventory. I think the team has done an absolutely incredible job. Twenty-four was a year where our expectations for the units we would sell continually went up.
Ron Josie: and that meant that the plan that the inspection center team and all the operating teams were kind of needing to level up to.
Ron Josie: was constantly increasing. They did a great job doing that. They did a great job doing that very efficiently. And we're at a spot now where we're very happy with the inventory that we're producing, but we absolutely have big eyes and think that more cars is better, and we're heading into, you know, very, in very short order tax season where we expect sales to go up again. So I think, you know, we'll continue to invest in inventory, and we think that's great for our business and great for our customers.
Ron Josie: You posed the AI question as number two. I think there's so much to say there that we'll try to stay a little bit high level. I think, we'll start with this. I think first and foremost, we're enormous believers in the power of the technology. I think, you know,
Ron Josie: Our view is it is unlikely that we will see another technology in our lifetimes that's this powerful. For those of you that are using it all the time, I'm sure you feel similarly. It's just absolutely unbelievable. The quality of technology that exists today...
is so far in front of what
Ron Josie: virtually any company is actually already implementing and so there's a long road map in front of us to catch up to the horizon where that technology is and the speed at which it's improving is is pretty unbelievable and I think there's clear visibility it's going to keep improving and I think the number of applications are hard to imagine today but there are there are undoubtedly many.
Ernie Garcia: So we think that's extremely exciting. I think the foundation of Carvana was the belief that by reimagining a customer experience using modern technology, we could give customers an experience they loved. And I think a new technology revolution is an opportunity to continue to do that. And so I think we're very excited by that.
Ernie Garcia: I think our business has a number of unique advantages that put us in a position to leverage these technologies.
Ernie Garcia: and that makes all the calculations easier and something that can be done ahead of time.
Ernie Garcia: As long as your data is well organized, which makes the power of any of these AI agents greater or AI applications greater. We're vertically integrated, which means that the entirety of the transaction to a customer feels like one thing. When a customer buys a car, they feel like they're doing one thing. When we think about it from a business perspective, oftentimes there's a number of horizontal businesses stacked on top of each other that are providing that single experience.
Ernie Garcia: but that creates friction to fully implementing the most optimal technological solutions that are available. We're vertically integrated. We think it means that we can give customers a simpler experience and we think that's accentuated by these stronger technologies.
Ernie Garcia: And then I think importantly we have a tech-centric team that pays attention to this and is really invested and believes. And so you can see kind of our first and currently most developed application is Sebastian which is our chat bot online. I think that represents the brain that we are building, and it's us skin on top of that brain. But there is opportunity for us to put that throughout the entirety of the customer experience, and I think we plan to be very aggressive there. So that's something we are certainly excited about.
Thank you, Ernie.
Thank you.
Speaker Change: The next question comes from Sharon Zaxia with William Blair. Please go ahead.
Speaker Change: Hi, good afternoon. Congratulations on a good 2024. Sharon, is that the first time you've done that? Yes, I know, I know. And it was a full year? That means a lot, Sharon. Thank you. Would you do us a favor and let the stock market know? I won't ask you to define.
Speaker Change: significant growth in 2025, so I'll let you pass on that. I do have a question on kind of a GPU, obviously.
Speaker Change: very impressive numbers in 2024 at 7,200. From here, kind of, what are the pushes and pulls on GPU, or should we really expect...
Speaker Change: kind of leverage on that Carvana operations part of SG&A to really be the driver of margin from here.
Speaker Change: So I think our general view is that there are still...
Speaker Change: Meaningful fundamental gains to be had throughout the transaction. And I think to define that, again, that's kind of.
Speaker Change: Generally speaking, we're talking about variable functions there, so those are variable costs, which would be the operations expense, or it would be the different GPU line items.
Speaker Change: every one of those line items we've got plans that we're pretty excited about that we think will drive additional fundamental gains. Now I think when you get those fundamental gains you have to decide what to do and I think you know if you look at where our financial model is today
Speaker Change: And so I think we feel like we can see that very clearly. We're obviously paying attention to, as we get these gains, what's best for the long term? Is it best to share those with our customers and benefit in conversions? Is it best for us to use those dollars and invest in additional foundational capabilities that make our experience even better for our customers and further differentiate us and further vertically integrate us? Or is it best to have it show up on the bottom line? And I think that we're going to continue to march.
Speaker Change: Down the path of trying to unlock those gains and then we'll try to make intelligent decisions As we go about where those games go But we do expect the majority of those from here to be passed on to two customers and you will update you along the way Is that changes but certainly something that we're excited about. I think you called out our operations expense
Speaker Change: You know, back down to $1,700 in the fourth quarter where we're, you know, building capacity for tax season. I think we're extremely excited about that number. We called out in the shoulder letter.
Speaker Change: We're around $1,400 to provide all the kind of core functions of getting a car to a customer, managing the return policy, finance, verifications, delivery. The machine really is getting very efficient, and then the $300 delta, give or take, is our expected warranty expense.
Speaker Change: But I think we're excited where the machine is and we think we can make it more efficient from here and we just got to keep to work.
Speaker Change: Thanks for that. And then I noted in your shareholder letter that delivery times were down more than 20% last year. Is there any way to kind of quantify what a faster delivery time means to you in conversion?
Speaker Change: Forgive us, I think we'll stay away from quantifying that but we do think it matters to conversion and and we think it's material and I think that that's another example of a team that's done a great job and I think excitingly a team that has a lot of room left. I think you know we've talked a bit about rolling out our same-day delivery capabilities that remain in its very early stages. That's an incredibly complex capability to scale. We've rolled it out to a number of markets but so far we haven't
Speaker Change: staffed for maximizing the number of customers that can get that benefit. We've more leaned into having that be more of an efficiency benefit where we can fill in any underutilized slots.
Speaker Change: I think there's certainly the opportunity for us to lean into that further. There's a number of kind of technology enhancements that we can lean into to make same-day delivery available to a larger portion of the credit spectrum. And then we're working hard to make sure that we can always add more cars to kind of be available there. And then really, that's kind of all framed in same-day, but the same is true of kind of next-day, two-day, three-day deliveries.
as well.
Thank you.
Okay, thank you.
Thank you.
Chris Bottulieri: The next question comes from Chris Bottulieri with BNP Paribas. Please go ahead.
Chris Bottulieri: Hey guys, thanks for taking the question. You know, one overarching question that went kind of clarification, but are the overarching...
Chris Bottulieri: I'm hoping you give us a sense for like what the go-forward strategy is on loan sales. It looks like the fixed loan sales stepped up to $700 this quarter.
Chris Bottulieri: and the non-ABS kind of fell off this quarter. Just kind of want to get a sense for like, how do you think that this is moving forward? Do you prefer to do fixed loan sales? You prefer ABS, like?
Chris Bottulieri: What does that world look like and are there any liquidity challenges today like in the market itself that maybe?
temporarily pauses that and then the follow-up was just
The $9 million looks like there was a one-time item.
Chris Bottulieri: and the other SG&A. It looks like you didn't adjust it out to add it back, but just hoping you could elaborate on that. Thank you.
Chris Bottulieri: We expect to continue to use a diversified funding strategy. I think that's been our strategy since very early on at Carvana, was to use multiple channels for loan sales, a combination of whole loan sales and securitization market transactions.
Chris Bottulieri: and to maintain sort of those diversified funding sources. I think that's our expectation going forward. I think we feel really great about the way that the finance platform is performing today.
Chris Bottulieri: I think we're seeing very, very strong results and strong demand for our loans. And so I think, yeah, I think business as usual is the name of the game there. I feel great about the way things are going and expect to keep executing the same strategy.
Chris Bottulieri: I think on your question about SG&A expense and the non-recurring items
Chris Bottulieri: The I guess a couple things to call out there one, you know, we did do this. Thank you bonus in Q4 2024 was a truly special year for Carvana and we want to say thank you to employees across the company And so we did thank you bonus in q4
In total,
Chris Bottulieri: A fraction of that went to overhead expense, but it did get spread out across cost of sales, operations expense, as well as overhead expense. But the overhead expense portion was, you know, one of the small nonrecurring items.
Chris Bottulieri: There are a few others as well that added up to that $9 million, but that just gives you a sense. And then in terms of backing it out of adjusted EBITDA, we have not historically backed out sort of small, miscellaneous, nonrecurring items out of adjusted EBITDA.
Okay, makes sense. Thanks. Appreciate it.
Speaker Change: The next question comes from Daniel Rahigyan with Morgan Stanley. Please go ahead.
Daniel Rahigyan: Thank you. Mark, you mentioned your goal in achieving a strong credit rating. How are conversations going with the credit rating agencies to help improve from current levels? What do you feel is important to demonstrate in terms of leverage, consistency of free cash flow, or something else?
Sure, yeah.
I mean, I think our view is the most important.
Daniel Rahigyan: You know, the thing that we can deliver from a credit perspective is very strong metrics, and I think we did that overwhelmingly so in 2024. And then obviously expect, you know, significant growth in retail units sold and significant growth in adjusted EBITDA looking to 2025 as well.
Daniel Rahigyan: You know, I think some of the metrics that we're focused on, you know, our net debt to Adjusted EBITDA is all the way down to 2.8 times, you know, I think that's...
Daniel Rahigyan: a strong ratio. We think there's lots of room to improve on that over time, but I think that reflects a meaningful improvement from where we were one or two years ago.
Daniel Rahigyan: Similarly, you know, our interest coverage now above two times. I think there's lots of room to improve on that as well and that, you know, that is our intent. And so, you know, I think the most important thing we can do is deliver on on metrics and I think the ratings will take care of themselves over time.
Speaker Change: Thank you and then you've also mentioned reconditioning capacity for 1 million units. Shareholder letters said real estate capacity for 3 million units. What are the biggest gating factors near-term limiting potential growth in units? Is it rooftops, physical, labor, religious rate combination?
Thank you.
Speaker Change: I think it's the entire operational chain but I think what we've called out in the past as being the the kind of most operationally intensive part of that chain is reconditioning and historically that included acquiring real estate you know doing the capex to get that real estate ready hiring training and then executing and I think you know given where we are today and given the real estate footprint that we have we can scale to about three times our current scale with just hiring training and executing and then I think we
Speaker Change: can get to about eight times our current capacity with the opening of these mega-sites, CapEx, hiring and executing, hiring, training, and executing. And so I think it's a simpler path than it was in the past. I think there are obviously other parts of the business that are very complex as well, logistics, last mile delivery, customer care, verifications, title registration. But those are areas that I think we've made a tremendous amount of progress in. I think we've built the system to be scalable.
Speaker Change: and so we feel like our job is to just keep executing and the rest will take care of itself.
Thank you.
Thank you.
Speaker Change: The next question comes from Michael Montani with Evercore ISI. Please go ahead.
Michael Montani: Yes, hi, thanks for taking the question. I just wanted to ask, first off, when you look at the number of markets that you all are in, I think it was pretty steady at 316.
Michael Montani: I just wanted to think about, you know, the potential cadence to expand across the country, you know, effectively for the remaining markets. Is that kind of a multi-year journey or could you do that in the next year or two? And then I had a follow-up.
Speaker Change: Sure, so I would say at this point we're in the continuous 48 states, we're delivering to the vast majority of the country and I think that the most important things that we can do from here are continue to improve our delivery speed and continue to grow our inventory and kind of grow selection as it relates to kind of you know giving more people more options and then I think from there it's just continuing to scale the business.
Speaker Change: I think, you know, most of our growth story from here will be about, you know, taking market share in all these markets.
Speaker Change: at similar places where they were back then in terms of market share. So I think at this point, it's more about just continually improving the offering, giving customers more selection, executing really well and taking market share. And we think that that lights the path to a much, much larger business.
Speaker Change: Got it. And then just to follow up on the earlier question related to GPU
Speaker Change: You know, I was just wondering if you could describe a little bit the operating environment now. Do you feel that there's...
Speaker Change: Any constraints in terms of the availability of inventory out there? What do you see competitively? Would you say fairly rational? How are you guys thinking about that for the remainder of this year?
Speaker Change: And then, basically, is there any benefit, I guess, to kind of pushing incremental units right now versus, you know, trying to kind of maximize profit in a constrained inventory backdrop?
Speaker Change: So I mean I think we try to take a long-term view on these sorts of questions and I think...
Speaker Change: generally speaking, you know, the supply is all there, right? Customers are effectively just trading cars with one another or other owners of those cars are getting those cars to a customer and we kind of exist inside of that machine. So we don't think that there's kind of a fundamental impact that we have on inventory. We think it's about getting market share of kind of customer demand and then that leads to market share of supply very mechanically.
Speaker Change: the market has pretty stable profits. I think if you look at the various public automotive retailers out there today.
generally speaking, their EBITDA margins, for example, are...
Speaker Change: still a touch above where they were in 2019, but they're getting very similar, that they're in a similar spots where they were in 2019. Our best guess is that they'll probably hang out about that level. I think there are deep structural reasons why that's about the profitability of these businesses. We think that that's great news because it just provides more of a proof point and ballast that these are the economics of the business.
Speaker Change: and then I think you didn't ask this question but I think we oftentimes get a similar question about financing
Speaker Change: How will we be able to scale financing? And I think the same thing is true of financing. We exist in a mature market. The various finance providers are out there providing loans to customers through different channels. If you have the customer demand market share, then there is demand to make loans. And we are not creating new demand. We are simply kind of displacing those that were previously providing those loans to the loan buyers.
So I think, you know, to us, this is...
Speaker Change: It's the advantage of being in a very large, very mature market. You have very clear visibility of what the unit economics are. You know the fundamentals of the business, and then your job becomes just make sure that you're delivering an experience the customer loves, customers love, that you're taking market share, and that you execute well. And I think that that remains the name of the game for us, and that's the path that we're on.
Speaker Change: The next question comes from Rajat Gupta with J.P. Morgan. Please go ahead.
Rajat Gupta: Great, thanks for taking the question. I just had one first one on the fourth quarter or retail GDU. It was in line with the guidance or commentary you provided.
Rajat Gupta: I was curious if you could elaborate a bit more on the sequential move, you know, how much was it driven by just the pickup in the commercial retail marketplace?
Rajat Gupta: and just how much influence that might have had on that number or was it just the core business that you know had the typical seasonal or the non-market based business that had typical seasonal drop-off and had a quick follow-up on the guide. Thanks.
Sure, yeah, I'll hit that one.
Rajat Gupta: You hit it. I think our retail GPU and Q4 came in exactly in line with our expectations and our outlook.
The sequential move from Q3 to Q4 in Retail GPU.
Rajat Gupta: is nearly exactly what we saw on average in the pre-COVID years. Obviously, it can bounce around from year to year, but you just kind of look at a...
Rajat Gupta: an average across multiple years. It's right in line with those historical averages. So I think that, and that, you know, indeed informed our outlook to a degree. So I think we saw, you know, what for us has been typical seasonality in Q4.
Rajat Gupta: On a year-over-year basis, you know, I think we had, you know, some good wins. In particular, we did see, you know, reconditioning and inbound transport costs come down on a year-over-year basis as a result of those operational efficiency initiatives that we've been so focused on.
Speaker Change: But nothing tied to the commercial marketplace ramp that has influenced the number from 3Q to 4Q? Or was it not material enough to call out?
Speaker Change: The way I think about it is we have seen sort of a normal seasonal pattern in retail GPU over a period of many years and we saw exactly that pattern this year as well.
Speaker Change: anything you could elaborate on that you know the timing of that you know is this the right time to do it and obviously running your balance sheet with a lot of cash right now just curious what we needed to use as you think would be best for that cash. Thanks.
Thank you.
Speaker Change: Sure, yeah. So, let me hit that from a couple different perspectives, I think.
Speaker Change: One of the things we called out in the letter is that our credit ratios are improving rapidly for multiple reasons. One is we're very quickly growing adjusted EBITDA.
Speaker Change: But a second is we expect a meaningful step down in GAAP net interest expense in 2025 relative to 2024.
Speaker Change: And so that just, you know, mechanically improved some of your credit ratios, even, you know, without EBITDA growth, we expect significant EBITDA growth. So that was one thing we called out in the letter. I think the other thing we called out in the letter, you know, we don't have any near-term expectations of refinancing of our secured notes. However,
Speaker Change: you know, the secured notes are now trading at about a seven yield, meaningfully below the, you know, the coupon on the notes. And I think that just provides...
Speaker Change: A way to think about longer-term opportunities to reduce interest expense even below what we currently expect from
Speaker Change: in terms of like our expectation for 2025. And all that says is, hey, we've got a really straightforward path to, in our opinion, to materially better credit ratios across the board versus where we are today. And we think that's just.
I think a nice feature of the business.
Speaker Change: Why is that important to us? You know, I think where we sit today, industry-leading margins, industry-leading growth, 1% market share, 3x built capacity, you know, to grow into.
Speaker Change: We just feel like we're in a position that is really unique and
Speaker Change: We're very, very excited about, and so, you know, we want to be completely focused on that growth opportunity. We think it's a historically unique growth opportunity. We don't want to be spending a lot of time talking about the balance sheet, and that's why we're focused on just driving very strong credit metrics so that we're just focused on the growth opportunity and our customer offering as opposed to the balance sheet.
Speaker Change: Got it. Got it. Makes sense. Thanks for taking the question. Good luck.
Thanks.
Speaker Change: The next question comes from Seth Basham with Redbush Securities. Please go ahead.
Speaker Change: Thanks. Good afternoon. And I know you don't want to talk much about the balance sheet, but just following up on the last question, with the step up in the use of the ATM program this quarter and the shelf registration that you made today, is there increased appetite to issue more equity? Are you targeting a certain capital structure down the line that we should be thinking about?
Speaker Change: So, you know, our view on the ATM, you know, registrations is we just think it's good corporate housekeeping to have an active ATM program. We generally view that opportunistically.
Speaker Change: In terms of specific goals or targets, we don't have any specific near-term goals or targets. I think if you take a longer-term view...
Speaker Change: We would like to drive the business to investment grade credit ratios. That's our goal. One of the reasons for that goal is
Speaker Change: Like I was saying before we just seen enormous opportunity in front of us And we want to have a very strong balance sheet that is paired with that significant long-term opportunity That will take time But I think you know that that is our goal
Speaker Change: Got it. Thank you. And my follow-up question is on retail GPU, just thinking about the seasonality of that metric. When we consider the fourth quarter to the first quarter, there's usually a material improvement through tax refund season. Is that the right way to think about it this year, or are there any other dynamics, such as higher inventory, that you're caring to think about here?
So I think the
Speaker Change: The way we sort of think about the seasonality in retail GPU and, you know, our history on retail GPU, I think we typically think of Q4 and Q1 being the lowest quarters of the year and Q2 and Q3.
Speaker Change: being the higher quarters of the year, you know, that's exactly correlated with you know industry depreciation trends where typically depreciation rates are highest.
Speaker Change: late in the year and their lowest in the middle of the year which you know corresponds to that seasonal pattern that I just described. So you know that obviously can vary from quarter to quarter but that's the broad sort of seasonal pattern that we have in mind on retail GPO.
Thank you.
Okay, thanks.
Speaker Change: The next question comes from Mike Baker with DA Davidson. Please go ahead.
Okay, great, thanks.
Thank you.
Speaker Change: Maybe a strange question, but I wanted to ask about tariffs understanding you don't import anything, but to the extent that tariffs You don't likely drive up
Speaker Change: New car, pricing. Can you remind us or how do you think about how that impacts used car pricing and then how does that impact, you know, your pricing and your margins, etc. There's just a lot going on with, you know, new car costs, etc. And I'm just curious how you think that impacts your business, if at all.
Speaker Change: I think the most important answer to that question is we certainly don't know what's going to happen with tariffs and wouldn't want to take a strong stand there.
Speaker Change: I think the smartest thing to do is probably wait and let's see. There's likely to be a lot of iterations and all this before we really figure out where this all ends up. But I think if the premise is new car prices go up, what does that do to used car prices? I think generally speaking, indirectly, that would probably lead to dampened price increases as well. But I think it depends so much on the mechanics of so many things that are not specified there.
Speaker Change: with you know the kind of idea of operating like it's any other year and we think that's the smartest thing to do because there there's a lot of uncertainty around exactly how those things will play out.
Speaker Change: Fair enough. All right, if I could ask one more, I won't call it a follow-up because it's unrelated, but just thinking about, you've talked about a couple different ways, but you know, do you reinvest to drive more units? Do you let it go to the bottom line to generate higher EBITDA margins?
Speaker Change: You haven't changed your long-term margin outlook at all, still in that 8 to 13.5. I think you said something about targeting the higher end now, but I guess what do you need to see to take that number, that margin outlook higher?
Speaker Change: Sure, well I think, you know, first just for clarity, we definitely are targeting the high-end and I think...
Speaker Change: As discussed earlier, I think if you take the performance of even this full year, we were improving throughout the year, and just apply kind of reasonable leverage assumptions, you can get to the high end. And so I think that the path there is very clear. I think what's important to keep in mind is I think the
Speaker Change: The thing that we will be optimizing over time is basically the sum of the dollars that the business generates and the size of the business we can build and the long-term value that we think comes from that. And that obviously includes a conversion element as well. And so that's something where I think the optimal amount of fundamental gains that should be shared with customers and should be showing up in our income statement is a function of your belief around some of those things.
Speaker Change: that many of the fundamental gains that we'll make from here will be shared with our customers in various ways, which I think some will be obvious and some will be more creative, and we'll seek to do that in the ways that are most efficient. But I think that's generally how we're thinking about it today. And in general, as long as we keep making the business better, we have a lot of great options, and we'll see where that takes us.
Makes perfect sense. Thank you. Thank you.
Speaker Change: The next question comes from Jeff Flick with Stevens. Please go ahead.
Speaker Change: Thanks for taking my question. Congrats on a great quarter guys.
Thank you.
Speaker Change: So Ernie, I was wondering if you could maybe just opine a little bit on the acceleration in unit growth, you know going from you know 34 and Q3 to 50 and on a two-year basis from 6 to 31 on our
Speaker Change: I was wondering if Retail Marketplace had any effect on the acceleration, where do you see the acceleration coming from, do you still think inventory is the getting factor, because I did notice you.
Speaker Change: You guys didn't wholesale quite as much You know where you're kind of reaching from that pool a little bit to get marginal units. So anything you could add there
Speaker Change: Sure. There's a lot there. So I think we spoke earlier about the success that we've had in building inventory because of all the hard work by the various members of the various teams. And I think that that clearly, all else constant, is undoubtedly helping. You made a reference at the end of the question to wholesale units. I think the kind of move that we saw in wholesale units was pretty similar to historical moves
in her office.
Speaker Change: I think when you think about partner retail, I think the first order way that we are thinking about that is it's a replacement source of inventory that we think is highly scalable and we think has the opportunity for us to leverage our unique assets.
Speaker Change: in a couple forms, but I think one that is very concrete is just these mega-sites.
Speaker Change: and our inspection centers to partner more efficiently with natural sellers of cars and to gain additional fundamental gains by basically making sure the cars are moved less often and faster and at lower cost.
Speaker Change: I think most of those fundamental gains that we believe are achievable in those partnerships are not yet achieved. And so I think today, it's best to just think about that as a substitute vehicle acquisition source, but not one that necessarily changes the customer offering all that much. I think what we believe has driven our growth has been, most importantly, the fact that customers love our offering, and then I think, importantly, the fact that there is positive feedback in our model.
Speaker Change: and I think you know our goal is just to kind of keep leaning into that and keep growing and we think the limiting factor is our ability to execute effectively and make sure that we are delivering very high quality and ideally ever improving customer experiences and I think that's you know that that's what we'll continue to monitor and make sure that we're we're balancing carefully.
Speaker Change: One more thing I'll just throw in there, a quick shout out to the wholesale team. They did grow units 43% year-over-year, gross profit non-gap up 50% year-over-year. That was an all-time fourth quarter record on units, so I think it was a great quarter for those guys.
Speaker Change: What was your next question? Mark, if you take other gross profit and strip out gain on sale, which pretty much leaves you with, you know, BSCs and some gap.
Speaker Change: you know that on a per unit basis was 901 and Q4 which was a sequential downtick from 939 and year-over-year 973. Just any color as to what's driving the decline there?
Thank you.
Speaker Change: I don't know if there's anything in particular that I would call out. I do think that can fluctuate around quarter to quarter.
Speaker Change: I think overall, I think we see opportunities in those, you know, the ancillary product component of other GPU.
Speaker Change: I think we, you know, we have teams that are constantly focused on
Speaker Change: thinking about the customer experience related to those products, thinking about getting the right product offerings that are gonna be the most desirable to customers in front of those customers. I think they're always doing testing.
Speaker Change: to try to make things as simple as possible. So I think that's a number that can bounce around from quarter to quarter for sure, but that's one of the areas in the business where we see continued opportunity for fundamental gains.
Speaker Change: Great, well thanks for taking my question and good luck this year.
Thank you.
Speaker Change: The next question comes from John Colantoni with Jeffries. Please go ahead.
John Colantoni: Great, thanks so much for taking my question. So you ramped the retail marketplace units sequentially in the fourth quarter. Talk a little bit about any learnings from that expansion.
John Colantoni: and if you see an opportunity to make the offering a more meaningful portion of units sold over time.
Sure, well, I would point again to.
John Colantoni: We think that the fundamental role that we play is to get a car from the previous owner or user to the next owner as efficiently as we possibly can.
John Colantoni: and we think that having the joint distribution channels of retail and wholesale.
John Colantoni: partnerships and reduction of time and cost that we think is meaningful.
John Colantoni: And so, to us, that's the fundamental gain. Those cars are part of that $270 million car park.
that rotate around and and turn into car sales.
And so, you know, if we can, you know,
John Colantoni: build a system that is more efficient for those cars. We believe that we can disproportionately get those cars and deliver them to our customers, and deliver them a great experience along the way. And we believe it's part of just.
John Colantoni: Something that we're working on now quite a bit is working with our teammates at ADESA to build a very high quality digital auction tool.
John Colantoni: that's going very well and also feeds into that system. And then we've got a couple of partnerships where we're working on getting those cars and leveraging those tools and trying to make sure that it works out great for both us and for our partners. And we think that there's no reason why that can't scale meaningfully from here. I think the portion of the market that could be served in a similar way is very large. But like anything, it'll take work. And so I think we've got plans and we've got work to do and we're going to keep doing it.
John Colantoni: We're all going to keep pursuing it. But I think it's another one of the exciting vectors in our story that we're going to keep pursuing.
Appreciate it.
Thank you.
Speaker Change: The next question comes from Marvin Fong with BTIG. Please go ahead.
Great. Thank you for taking my questions.
Speaker Change: and during this session. Congratulations on the results. A question, I think last quarter you had...
Speaker Change: with the Drag from Retail Marketplace units lower than you expected. Just some.
Speaker Change: Some insight there would be great. And then, on the OPEX spend per unit, the $16.96 this quarter,
Speaker Change: How would you advise us to kind of think about your ability to leverage this going forward? Is there a dollar target we should have in mind or a percentage?
Speaker Change: the client every year, what would be the best way you would advise us to kind of think about your ability to drive that number? Thanks.
Speaker Change: and the various variable expenses that we are incurring in order to deliver that experience to customers. It's something that's really exciting, but we also definitely think that there's room for improvement in every part of that.
Speaker Change: There are many elements of our operational chain that we've discussed on this call. Obviously logistics is a big part of that, customer care is a big part of that, verifications, title work, last mile delivery, handling the return policy when that occurs. Every element of that chain of completing a transaction with a customer.
Speaker Change: is an area where we think there is room for improvement and where we have projects that we've mapped out where we believe there's room for improvement and now we need to go, you know, execute against that. I think, you know, you can see that we've made a tremendous amount of progress over the last several years. As those numbers get smaller, the dollar progress, you know, it gets tougher, but we improved, you know, another $150 year-over-year. Excuse me.
Speaker Change: $330 year-over-year which is which is very meaningful there and I think we we still think that there there's definitely room to continue improving
Got it. Thanks so much, Ernie. Appreciate it. Thank you.
Speaker Change: That's all the time we have for questions today. I would now like to turn the conference back over to Ernie Garcia for any closing remarks. Please go ahead.
Speaker Change: Alright, well thanks everyone for joining the call. Carvana team, awesome job. I cannot say this enough, I think the last...
Speaker Change: Year is a year that absolutely nobody saw coming It's a year that may be just us inside this company saw coming But I think to execute the level that we did is something that we should be forever proud of Please keep working just hard as we have Then please please stay proud of the effort not just the outcome I think we have a ton of stuff that is left to do and our path is extremely bright We are just getting started. So let's keep it going. Thanks everyone
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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