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Carvana Co. misses on earnings expectations. Reported EPS is $-1 EPS, expectations were $-0.95. Carvana Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Carvana Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Meg Kehan with Investor Relations. Please go ahead.

Meg Kehan: Thanks, Joe. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana’s fourth quarter and full-year 2023 earnings conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the Company’s corporate website at investors.carvana.com. The fourth quarter shareholder letter is also posted on the IR website. Additionally, we posted set of supplemental financial tables for Q4, which can be found on the Events and Presentations page of our IR website. Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to Carvana’s market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Carvana’s most recent Form 10-K. The forward-looking statements and risks in this conference call are based upon current expectations as of today, and Carvana assumes no obligation to update or revise them whether as a result of new developments or otherwise. Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to the non-GAAP metrics and all references to EBITDA will be to adjusted EBITDA. Reconciliations between GAAP and non-GAAP 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?

Ernie Garcia: Thanks, Meg, and thanks, everyone, for joining the call. 2023 was an exceptional year for Carvana. It was our best year from a financial perspective by a long way. Full-year, GPU was nearly $1,000 better than our previous best in 2021. Our full-year adjusted EBITDA per unit was over $900 higher than our previous best, and we have clear visibility to further improvements, as you can see in our outlook. The last two years have been initially characterized as negative for Carvana. In early 2022, we took a quick trip from a company that was perceived to be able to do a little wrong to one that was perceived to be able to do little right. That wasn’t a fun transition for anyone. In each of our letters since we went public in 2017, we have signed off with the march continues.

The reason is because we believe this statement is a simple reduction of a massively important and generally underappreciated principle. Getting up again and again and relentlessly pushing forward is part of every success story, but that tenacity is easy to claim and hard to achieve. It’s hard because the moments when you have to get back up again, feel very different in the moment than when they are imagined. They feel different for every stakeholder and most importantly, they feel different for every member of the team. I will never know exactly we did right to attract the team that we have, but that combination of things, which undoubtedly includes elements of luck, is almost certainly the most important thing we have ever done as a company.

It’s very hard for a group to go through a period like the last two years and not to disintegrate under the pressure. We didn’t disintegrate. We thought, we came together and we got better. The fact that we got better creates room for the last two years to be recharacterized in the future. Time will ultimately pass judgment on the impact of the last two years on the Carvana story. But my personal take is that it’s been our proudest period and that when the story is written, this period and our team’s response will be viewed very favorably. To the Carvana team, there is nothing we can say in words that will convey the gratitude we have for the fight you’ve always put up, but I hope you know it’s real. Thank you. While the success of 2023 deserves a moment of reflection, the truth is we still have a lot of marching to do.

Our goals are big. From here, the key questions are this. Where are we? Where are we going? And how are we going to get there? First, where are we? Today, Carvana sits in the strongest position we have ever been in for five reasons. I would ask that you come back to this and evaluate each element for yourself. Number one, our customers love the experiences we deliver. And as we execute these experiences are getting even better. Number two, the financial power of our business model is becoming clear every quarter and is highly differentiated across every line item of our income statement, there remain many significant opportunities for additional improvement. We plan to get them. Number three, our infrastructure is simply unmatched. We have built a vertically-integrated machine with 6,500 acres of land and over 500,000 parking spots that scalably and cost effectively gets cars from one customer to another more efficiently than any other machine that serves the same purpose.

Number four, competitively, we have never had more separation as we continue to execute, that gap is getting bigger. And number five, we compete in a $1 trillion market, and we currently have approximately 1% market share. The potential is obvious. So where are we going? From the early days of Carvana, we have never flinched in our goals. They have been and remain to become the largest and most profitable automotive retailer and to buy and sell millions of cars per year. And finally, how are we going to get there? We are going to continue to march. We are still an ambitious group with big dreams and hustle. We will keep sprinting in our goals to drive as much positive changes as we can as quickly as possible as we always have. We are also a group that is constantly learning.

Every stage in Carvana’s journey teaches us new lessons and adds to our toolkit. As long as that is true, and as long as we always get back up, our best day is always today. The march continues, Mark.

Mark Jenkins: Thank you, Ernie, and thank you all for joining us today. Our fourth quarter highlighted the significant and sustainable progress we have made on our path to profitability. We set company records for fourth quarter and full-year total GPU and adjusted EBITDA, completing a year in which we improved adjusted EBITDA by nearly $1.4 billion and positioning us well for further adjusted EBITDA growth in 2024. As part of our earnings materials this quarter, we provide a detailed look at our fourth quarter and full-year results. I’ll start by summarizing three key takeaways. First, our FY2023 results and Q1 2024 outlook resoundingly demonstrate the ability of our online sales model to generate significant adjusted EBITDA.

Based on our Q1 outlook, we expect to generate significantly above $100 million of adjusted EBITDA, equating to significantly above $1,200 per retail unit sold. Despite declining used vehicle prices, industry volumes that remain below pre-pandemic levels and sizable costs of carrying capacity for future growth. Second, we are now beginning to demonstrate record adjusted EBITDA profitability while also showing early signs of growth. Based on industry data sources, we gained market share on a sequential basis in Q4 and our outlook calls for retail unit growth not only on a sequential basis, but also on a year-over-year basis in Q1 and in full-year 2024. Third, we have a unique and powerful infrastructure for significantly and efficiently scaling retail unit volume with excess capacity in our existing footprint to support multiples of profitable growth.

We expect this growth to be paired with significant operating leverage as we leverage our underutilized overhead costs. Moving now to our fourth quarter results. As we previously discussed, our long-term financial goal is to generate significant GAAP net income and free cash flow. In service of this goal, our management team remains focused on driving progress on a set of key non-GAAP financial metrics that are inputs into this long-term goal, including non-GAAP gross profit, non-GAAP SG&A expense and adjusted EBITDA. Due to the dynamic nature of the current environment, we will focus our remaining remarks on sequential changes in these metrics. Retail units sold declined by 6% sequentially, in line with our outlook and better than the industry on a sequential basis.

Total revenue was $2.424 billion, a decrease of 13% sequentially. In the fourth quarter, non-GAAP total GPU was $5,730, a sequential decrease of $666 driven primarily by the absence of non-recurring benefits, which positively impacted Q3 and seasonality. Non-GAAP retail GPU $2,970 in Q4 versus $2,877 in Q3, a new company record. Our strength in retail GPU came despite higher-than-normal fourth quarter depreciation and continues to be driven by fundamental gains in non-vehicle cost of sales, customer sourcing, inventory turn times and revenues from additional services, highlighting the value of our vertically-integrated business model. We expect non-GAAP retail GPU in Q1 to be similar to Q4, with the potential for upside. Non-GAAP wholesale GPU was $881 in Q4 versus $951 in Q3.

Sequential changes in wholesale GPU were primarily driven by fourth quarter seasonality. We expect a sequential increase in wholesale GPU in Q1. Non-GAAP other GPU was $1,879 in Q4 versus $2,568 in Q3. Sequential changes in other GPU were primarily driven by selling a lower volume of loans in Q4 relative to retail units sold that in Q3, as well as lower premium on loan sales resulting from higher industry-wide loss expectations that we have since passed through to our pricing. We expect a sequential increase in other GPU in Q1. Non-GAAP SG&A expense was $376 million in Q4 versus $370 million in Q3. Sequential changes in non-GAAP SG&A expense were primarily driven by the absence of a small non-recurring benefit that impacted Q3 and small incremental expenses in Q4.

Finally, adjusted EBITDA was $60 million in Q4, a new fourth quarter company record. I’ll turn now to our first quarter outlook. While the macroeconomic and industry environment continues to be uncertain, looking toward the first quarter of 2024, we expect the following as long as the environment remains stable. One, we expect retail units sold slightly up on a year-over-year basis; and two, we expect adjusted EBITDA significantly above $100 million. Our confidence about driving significantly above $100 million of adjusted EBITDA is driven by our results so far this quarter. This outlook does not anticipate any material one-time benefits or costs in Q1. For FY2024, we expect to grow retail units sold and adjusted EBITDA compared to FY2023. We are excited about the path we are on, and we look forward to making continued progress toward our goal of becoming the largest and most profitable auto retailer.

Thank you for your attention. We’ll now take questions.

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Operator: We will now begin the question-and-answer session. [Operator Instructions] At this time, we will take our first question, which will come from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia: Hey, good afternoon. I guess a couple of questions. As you think about – I mean, I’m going to ask a question about the quarter and then something longer term. But on the quarter itself, when you’re coming up with that slightly above year-over-year units sold, what are you kind of assuming for tax refund season? Because you’ve got the bulk of the quarter ahead of you. And I’m curious as well kind of the credit tightening that you did and the rate increases when that happened and kind of how you’re factoring that into any kind of curtailment that we might see in trends from here?

Ernie Garcia: Sure. So I don’t think we’re making any unique assumptions about tax season. I think most of the information is out there, if you read it, is that tax season probably started a little slower, less money went out as a result of the timing of the holidays, but I think there’s an expectation that probably tax season will be pretty strong this year and average refunds will probably be a bit larger. Really kind of the first chunk of significant money, we believe, hit yesterday and last night. And I think our assumption is driving kind of our outlook for Q1 is just anything roughly normal. I don’t think we’re making super aggressive assumptions there. So I don’t think there’s anything super notable to discuss. And then as it relates to credit tightening, I think we rolled a lot of that out over the last six months. We’ve rolled more of that out even more recently. And so I think that’s largely – or that is completely taken into account in our outlook as well.

Sharon Zackfia: Okay. And then, Ernie, you’re kind of nicely within your long-term gross margin targets. I know you’re going to say there’s more you can do on gross profit per car. But is this a point where if we look at the next three to five years, we’re looking at more of the SG&A leverage as the driver of margin? Or do you think that 15% to 19% gross margin target is now potentially different than what you thought a few years ago?

Ernie Garcia: I think you know what I’m going to say, but I’m going to say it anyway. I think our view is there’s opportunity everywhere, I think a useful way to break it down is kind of variable expenses and fixed expenses. I think fixed expenses, roughly the way we’re managing that today is holding that in the range, and we expect that to lever as we turn to growth. And then I think in variable expenses, we still absolutely believe that there are gains to be had. I think the teams have been doing an incredible job. I think if you look at the trajectory of those numbers, it’s very strong. And I think we’re excited about a lot of initiatives that we still have left. I think in many of those areas, prioritizing those initiatives is still one of our bigger issues internally and just making sure that we’re doing one thing at a time and not trying to take on too much at any given time.

I think from a gross profit per unit perspective, there’s also opportunity there. And I think that’s true in basically every line item. I would kind of probably characterize those as fundamental opportunities, meaning regardless of where we choose to price things like rates or the vehicle. We believe we can be more efficient in all those areas. And I think that those – that can take the form of continued enhancement in credit scoring and credit pricing, credit structuring and innovations that we’ve been recently rolling out internally that allow us to more precisely kind of connect our credit pricing structuring and risk assessment to individual loans. It can take the form of getting smarter about how we’re buying cars, the data that we’re in taking to evaluate the value of those cars, a number of things that we’re doing at the point of receipt of the cars to make sure that we’re cutting out the biggest losers.

So I think there’s a number of initiatives there as well that are pretty exciting. And then I think we remain in this period of trying to make sure that we’re driving efficiencies. And I think despite that, we’re obviously looking forward to a very strong Q1 from both a financial perspective and from showing a little bit of growth for the first time in a while. So overall, I think we are just very excited about the way the team has responded in the last couple of years. I think it was pretty hard to imagine from the perspective of two years ago where we’re sitting today. I think it was hard to imagine the perspective of a year ago where we’re sitting today. And I think that we feel like we’ve got a lot of room to continue to make improvements, and we look forward to continuing to make those improvements.

So I think across the board, we’re looking for fundamental gains.

Sharon Zackfia: All right. Thanks, and congrats on a great 2023.

Ernie Garcia: Thank you.

Operator: And our next question will come from Adam Jonas with Morgan Stanley. Please go ahead.

Adam Jonas: Thanks, everybody. So you’re guiding to substantially above $100 million for the first quarter, obviously, and that compares to a small loss – odd million EBITDA on your definition loss prior year. So I’m just – I’m not asking you to guide specifically for the rest of the year, but your comment of growing full-year EBITDA. I mean, you’re already at $120 million or $130 million kind of ahead of that statement just with all what you see in the first quarter. So my question is, could you express the confidence that the remainder of the year you could at least grow EBITDA from Q2 to Q4? Of course, you don’t have to answer the question. I just wanted to see if you’re willing to go there.

Ernie Garcia: Yes. No. Well, I appreciate the question. I appreciate you handing us out at the end of it. But I think, we got to stick with our guidance. We want to make sure that we stay disciplined on that. We are extremely excited about where we are. I think the trends of the business are very, very strong. I think we obviously had a great 2023 from an EBITDA perspective, but the trends that kind of underline the sum of the year were also very positive and those trends remain, and that’s what we see heading into Q1. And I think now the balls in our hand, and we just got to go execute. And if we keep executing, I think there’s pretty exciting things in front of us, but we got to go, make those things happen, and we’ll continue to update you every quarter.

Adam Jonas: Okay. Well, Ernie, I appreciate that. I’ll interpret that as you’re not giving me any – you’re not calling out any reason why you wouldn’t be able to grow EBITDA in the remainder of the year, even though you’re not giving a formal guide. That’s just my interpretation of that. You would call something out if you felt there was something beyond the quarter that you felt was prudent to call out of the headwind, just my interpretation.

Ernie Garcia: Well, if we comment on your interpretation, then I mean this starts to get really – or really fast. I think you’ve got your interpretation. We’re going to keep marching, we’re excited.

Adam Jonas: Thanks, Ernie.

Ernie Garcia: Thank you.

Operator: And our next question will come from John Healy with Northcoast Research. Please go ahead.

John Healy: Thank you. Ernie, I was hoping you could talk just a little bit about affordability. I would love to get your thoughts on where affordability sits today for your customer and the monthly payment that they’re looking at. And theoretically, if we do get with the couple of cuts by the Fed, what would be the sweet spot for you guys? Is there a monthly payment you’d like to see where you’d say that would be the real sweet spot for us to be able to grow same-store sales and show a good margin? I just would love for you to kind of comment on the interest rate environment and what would be ideal for you guys.

Ernie Garcia: Sure. Well, maybe we’ll start with a couple sort of data points. So I think roughly speaking, if you – like inflation adjust car prices against all other goods just using CPI. Car prices themselves are probably still on the order of, give or take, 10% higher than other goods in the economy. So I think that suggests on a price level, there’s potentially room for that to continue to moderate over time. I think if you look at monthly payments, which compound that and the moves in interest rates. Again, like high-level swag, monthly payments are probably on the order of more like 20% higher relative to other goods than they were pre-pandemic. So I think that also kind of points a little bit in the direction of room for moderation.

But we’ll see. I think so far, that model of post shortage, there’s usually a glut and car prices should probably normalize relative to other goods. So far, that’s been pretty predictive for the last two years. The speed is always hard, but that’s at least kind of predicted the direction, I think that we’re seeing a lot more new car incentives and aggressiveness right now, which probably points a little bit to more support for that kind of direction in the future, but that’s a hard thing to get exactly right. I think, generally speaking, for us, probably lower is better. I’m not sure that there’s a level that we’re trying to get to. I think it makes cars more affordable for customers. It pulls more people back into the market. And generally speaking, as we’ve discussed in the past, I think we do exist – our business is sitting between the wholesale market and the retail market.

And so what really matters for us is that spread. And we have kind of over the last two years, we’ve had kind of the expected case scenario, I would say, but also probably the best case scenario where you’ve seen depreciation, which made cars more affordable, but you also saw the wholesale market anticipate that depreciation and so margins have been pretty stable. I think if you look at our retail margins we’ve been near in the 2,800-plus area for the last three quarters, and we expect it to be in a similar spot to maybe even having upside in Q1. And so I think that, that suggests that despite the fact that this depreciation has been occurring and making cars more affordable for our customers, our margins have held in there and been pretty steady.

And so overall, I think that’s playing out the way that we would like for it to and probably the way that we should have expected it to.

John Healy: Got it. That’s helpful. And then just one follow-up. There’s been some market chatter out there about you guys playing an active role in helping one of your former competitors liquidate. Can you talk about what that might mean for the business in Q1 or really how the economics of those units being moved might flow through the P&L for you guys?

Mark Jenkins: Sure. I can take that one. The simple answer is we don’t expect any material impacts from acquiring units in bulk from competitors. We did acquire a portfolio of about 2,800 units in January from industry player that was selling their units. And so those 2,800 units, I’d expect us to sell them over the next couple of quarters. We did acquire the units in full. So those will be retail units sold when they sell, there’ll be gross revenue and generate retail gross profit when they sell. But given the small size of the portfolio that we acquired, would not expect it to have a material impact on either retail units sold over the combination of the next couple of quarters, including Q1 or on retail GPU and either those quarters.

John Healy: Got it. Thank you, guys.

Ernie Garcia: Thank you.

Operator: And our next question will come from Nick Jones with Citizens. Please go ahead.

Nicholas Jones: Great. Thanks for taking the questions. Two, if I can. One, as we think about the blending of Phase 2 and 3 and maybe the algorithm for growth from here, is there a level of unit economics where you maybe start to hold and focus more topline growth? Or is the goal really to consistently drive kind of topline growth and unit economics as you kind of approach your long-term targets.

Ernie Garcia: I think the goal is to continually get better everywhere. I think we’ve benefited a bit in a way over the last two years from being able to kind of simplify our goals and focus just on improving efficiency throughout the business. And I think the primary form that benefit has taken is it just kind of simplified the number of moving pieces in the business and has allowed us to make a lot of progress really fast. That said, I do think that there remains a lot of room for improvement. And as we said earlier, I think one of the biggest issues we deal with internally is just trying to make sure that we’re not trying to bite off kind of too many projects because there’s still a lot of projects that are pretty exciting.

So I think we will continue absolutely to work on projects that we expect to drive efficiency across both variable costs and gross profit. We also do expect as we kind of head into that transition to start to focus a little bit more on projects that are supportive of growth, and that’s obviously exciting. I think given where the business model is, it’s very clear how powerful that is to the financial model of the business. And we think we’re incredibly well positioned for that. We think that the business is in the strongest place it’s ever been. We think our customer offering is stronger than it’s ever been. We think our infrastructure is ready to support this growth. We think the work that it takes to grow is meaningfully less than it’s been in the past.

I mean just even to throw some stats out there. Today, we’re moving cars inbound to our inspection centers, approximately 20% fewer miles than we were a year ago. Outbound we’re moving cars 30% fewer miles. That’s because we’ve got more of these facilities, and we’ve integrated intelligently into our scheduling systems to make better choices there. On in-market ops, we’re now pairing almost 50% of activities, which means when we deliver a car to a customer, on the way back, we are picking up another car to get more efficient. I think that’s up 75% year-over-year as we put time and effort into building those systems to make them smarter. And building the scheduling systems to make it more likely that we see overlap. That gets better as we get more density in the network and there’s still a lot of room to improve there across customer care.

Our advocates are roughly twice as efficient as they were in the past in terms of number of sales per advocate per period. The same is true in title and registration with better performance metrics in that group that are now extremely high quality. So I think we’re really well positioned to head into growth when it’s time. And I think what we’ve got to do now as a company is we’ve got to figure out just how effectively we can manage that transition, how good of a job we can do maintaining the accountability that we had over the last couple of years by keeping things simple as we do head into a more complex optimization equation of both growth and efficiency. But the opportunity is everywhere. The question is how well we execute. The question is not where we’re going.

We have every intention of selling millions of cars. We’ve never been better positioned for it, and that is absolutely what we intend to do. But now we’ve got to figure out how quickly we can do it and how efficient we can be along the way.

Nicholas Jones: And maybe just a follow-up on that. I think you listed off kind of the four buckets you highlighted in your vertically-integrated technology-driven platform from the shareholder letter of the customer sourcing, inbound transport, inspection, reconditioning with [indiscernible] and delivery or do one of those stand out as one of the biggest drivers? And are there any of those whether it’s kind of more wood to chop than others in terms of driving efficiency?

Mark Jenkins: I can take that one. So I actually think there’s opportunities in all of those areas. I don’t think we feel like we’re done with any of those. I think we’ve hit on these types of things at various points, but clear opportunities in inbound transport as we expand the number of sites where we’re doing reconditioning, which brings down inbound cost of inbound days on the inbound transport side. I think in the reconditioning centers, they’ve made tremendous gains, implementing new technology, new processes, standardizing processes across locations, rolling out our proprietary CARLI system across our nationwide infrastructure. That team is not done. That team still sees meaningful opportunity to further develop our technology, refine our processes and standardize and drive execution across our nationwide set of locations.

I think in outbound transport, just like the others. It’s the same story, pairing technology with process excellence. That’s the area where the teams have been focused up to this point, made tremendous gains, and I think they’re also looking at their business today, and saying, yes, we still see further opportunity to make gains. And then on the sourcing side, just like every other area. We’ve got teams that are working to every day pull in more data sources, every day, refine our algorithms – for putting the optimal valuation on every single car that we look at. And that’s, I think, millions of cars that we see and are collecting data on every single day. So I think the main takeaway there is we’ve made tremendous gains, but the teams that are working on each of those areas see opportunities for meaningful gains from here.

Nicholas Jones: Thanks, Ernie. Thanks, Mark.

Operator: And our next question will come from John Colantuoni with Jefferies. Please go ahead.

John Colantuoni: Great. Thanks for taking my questions. First one on retail GPU. Mark mentioned revenue from additional services as one of the drivers of strong GPU in the quarter. Can you just detail what those additional services are and how much they’re contributing to 4Q and 1Q GPU? And to the extent you could sort of comment on the sustainability of those additional services? And second, I’ve noticed sort of you’ve recently started incorporating EBITDA per unit into your public documents. I’m curious if that’s just a reflection of your greater operational focus on profitability or if that’s sort of nudging people externally to start assessing business on that KPI more? Thanks.

Mark Jenkins: Sure. Yes, I can take both of those. So let me start with retail GPU. So here I think the main idea is we have a unique business model that allows us to take cars that are reconditioned, acquired and stored around the country and make them available to customers in our 300 markets plus nationwide. And so for shorter distance shipments where customer finds a car that’s perfect for them that’s nearby to them. We have free shipping and in most of the markets we operate based on our data. We have the largest availability of free shipping inventory in those markets, the ones that we have looked at. However, for larger shipments, we’ve been – we do use the opportunity of making that selection available to also generate additional revenue, just from long distance, the shipping services provided to customers.

And so I think that’s where the additional revenue from additional services comes from. It’s really from our ability to move cars long distances efficiently around the country and make much wider selection available to customers as a result of that. Now in terms of how it flows through to retail GPU, that’s actually been fairly steady, I would say, over the last three or four quarters. It really hasn’t been moving around much sequentially, maybe up or down a little bit, but nothing that’s worth calling out. I think it’s more when you compare to sort of our pre-pandemic model, we weren’t generating as much revenue from having that nationwide logistics network as we are today. So that’s the answer to question one. On question two, so in my prepared remarks, I mentioned the idea of being significantly above adjusted EBITDA per unit in Q1.

And I think that my motivation for mentioning that was people for a long time they didn’t believe just to say it candidly, that a vertically integrated e-commerce online sales model could work. And now we’re sitting here in the first quarter of 2024. And I think we’re very confidently saying we expect to drive significantly more than $100 million of adjusted EBITDA or significantly more than $1,200 per unit of adjusted EBITDA in the first quarter. And we’re also doing that in an environment where rates are at multi-decade highs, which I think makes it even a bit more impressive. We’re doing it in an environment where the used vehicle industry as a whole is still notably down relative to pre-pandemic levels, which I think makes that adjusted EBITDA generation, even more impressive.

Moreover, we’re doing it while also carrying significant cost of excess capacity that we view as a huge benefit for us as we look forward because we’re generating a lot of adjusted EBITDA now at a volume that is far below what our capacity can support from an overhead cost and fixed infrastructure perspective. And so I just think when you start layering all of those things on top of each other, it gets us very excited about where the model can go. I think it resoundingly answers the questions about whether or not this is a long-term profitable business model, whether or not this is a long-term sustainable business model. I think that’s one of the things, as I mentioned, that I think we’re just – we’re feeling really good about and why I called out that one data point in my prepared remarks.

Ernie Garcia: Who doesn’t love when Professor Jenkins takes the mic. Everyone in Carvana is celebrating right now.

Operator: And our next question here will come from Seth Basham with Wedbush Securities. Please go ahead.

Seth Basham: Thanks. Just want to follow-up on an earlier question, just thinking about the framework for retail GPU moving forward. So obviously, as you start to grow, there will be some costs associated with that growth. Very limited growth you’re signaling for the first quarter in terms of retail units. But beyond that, as you really ramp, will the cost of growth outweigh all the efficiencies you continue to expect to get in 2024 within the retail GPU line?

Mark Jenkins: Yes. So let’s focus in on incremental costs associated with growth in retail cost of sales. So I do think there are some costs associated with higher growth rates and retail cost of sales. I think some of them take the form of just direct hiring and training expenses as you’re building up staffing, you’re spending money on hiring, training new employees. I think a little bit of it takes the form of newer employees typically take a little time to get up to speed and become as efficient as more tenured employees. And so I think that can have a small impact. I think another dynamic is you may outsource more services for a period of time as you’re ramping up. Now in our case, looking forward, I would not expect outsourcing more services to take the form of full car reconditioning by partners, which is something we did in 2021.

Don’t anticipate that. But on smaller services, on a select basis, I see [indiscernible] you could do that. So I give that detailed list just so you have a clear view of what we view as the some of the incremental costs associated with ramping and it’s really those three buckets. Now let’s talk a little bit about sizing. Putting all those together, we do not view those as being a particularly significant part of the overall retail GPU story. There are some offsets, for example, getting leverage on fixed facilities expenses in inspection and reconditioning centers, other fixed expenses in those centers. So that’s a partial offset to some of the things that I mentioned. And so I think the main takeaway is there are some frictions. However, we do not expect them to be of a particularly large size, just based on the progress that we’ve made in improving our technology, improving our processes, having a broad base of existing inspection and reconditioning centers from which to build.

And so that would be my full set of thoughts on that specific question.

Seth Basham: All right. That’s helpful. And as you work to acquire more inventory without wholesale purchases from the competitors, would you expect your pure metal margin to improve going forward?

Mark Jenkins: So I’m not sure I caught that question.

Seth Basham: Just thinking about the other component within retail GPU, just your spread between what you’re selling cars score and you’re buying them for probably getting a nice benefit from some of the inventory you’re acquiring [indiscernible] prices in the near term. Beyond the near term, would you expect continued expansion there?

Mark Jenkins: Got it. Yes. So I hit the point about the bulk part. We made a bulk purchase of vehicles from a competitor in January. We purchased about 2,800 units that we expect to sell the majority of over the next couple of quarters. We do not expect a material retail GPU impact from that. There could be some small impact. But just given the size of the portfolio, we do not expect a meaningful impact from that. On the question about metal margin more generally. I mean Ernie called this out early in the call, but with our outlook of being close to Q4 levels with upside or the potential for upside in Q1, that’s going to be four consecutive quarters at a pretty substantial retail GPU level. So obviously, with four full quarters at a very strong level, we’re feeling really good about the way that we’re executing from a retail GPU perspective.

We talked about a lot of the fundamentals that are driving that. We talked about – obviously, all the progress in the reconditioning centers. We’re doing a great job sourcing cars for customers. We really normalize inventory turn times. We’re generating revenue from additional services, taking advantage of our national logistics network. And so I think we obviously have established a very strong track record on retail GPU with our three final quarters of 2023 and our outlook for Q1.

Seth Basham: Absolutely. Thank you.

Mark Jenkins: Thank you.

Operator: And our next question will come from Rajat Gupta with JPMorgan. Please go ahead.

Rajat Gupta: Great. Thanks for taking the questions. I’ll take a couple as well. Just to follow-up on a couple of the previous questions around growth. It looks like you’ve obviously right-sized your cost structure to a large degree. You’ve comfortably exceeded your long-term model, at least on a gross profit per unit basis. And obviously, the margins look low because of where prices are. So why wouldn’t the company press the pedal on growth here a little more meaningfully? Even if GPUs did come back somewhat and you’re able to leverage fixed cost from your industry backdrop that’s a factoring the decision or any other consideration? Are you just willing to go a little slowly and keep testing how the business is responding? Just curious on the thought process there, and I have a quick follow-up on the finance business.

Ernie Garcia: Sure. Well, I think the first thing we want to do is we want to kind of complete the projects that we’ve got underway today. And I think we have a number of projects underway today that we expect to continue to drive efficiency. So I think we want to see that through. I think the reason we had to provide this frame earlier our goal is to sell millions of cars and to be the largest, most profitable automotive retailers because that’s the place where we’re heading. I think the question then is how fast are we going to get there. And I do think that there are reasons to believe that we should be able to grow at faster rates and be very efficient just given how much more efficient the business is today and the fact that infrastructure is sitting there to be filled in, but we have to go execute on that.

And so I think we will always be in a rush to make as much progress as we possibly can. But we will try to be intelligent about how we transition between the goal of efficiency and the goal of growth. We think that there are still gains to be had in both areas. And that’s why we’re labeling that a transition period. The place where we’re headed is clear, the speed that we’re going to get there is less clear. And so as we start to make that transition, we’ll keep giving you feedback to make it clear what we believe at any point in time.

Rajat Gupta: Got it. Okay. That’s fair. And just on the finance business, I mean you undersold a couple of hundred million in the fourth quarter. And you noted in the shareholder letter that you don’t expect any onetime benefits here in the first quarter either. So does that mean you’re likely to run at this elevated level of receivables on the balance sheet from here on? And then what was driving that decision? Thanks.

Mark Jenkins: I can hit that. Yes. So I think the – I would say the – what we called out in the outlook is us being significantly above $100 million of adjusted EBITDA that doesn’t anticipate any loan sales above originations. I think it’s possible that we could oversell originations. That’s just not – it’s not necessarily a baseline expectation. And it’s also – I think the most important point is we don’t need to feel really good about our significantly above $100 million adjusted EBITDA outlook. And then in terms of the – is Q4 the base level, the answer to that is no. I do think we’ll transition back toward more normalized levels by overselling originations at various points from time-to-time over the course of the year would be my expectation.

Rajat Gupta: Understood. That’s clear. Thank you.

Operator: And our next question will come from Mike Baker with D.A. Davidson. Please go ahead.

Michael Baker: Okay. Thanks. A couple real quick sort of asked, but I’ll ask it another way, maybe anything unique about the first quarter and not significantly above $100 million that shouldn’t translate into something similar in future quarters in 2024.

Mark Jenkins: We did address this in our outlook. So our outlook does not anticipate any onetime benefits or costs.

Michael Baker: Anything in terms of the market or – is the first quarter usually more profitable than other quarters? Or anything externally or anything that would suggest that, that kind of quarterly number isn’t sustainable?

Ernie Garcia: No. I think our expectations for Q1 are normal seasonality, but nothing – there’s tax season that we discussed earlier that is hitting today. Nothing abnormal beyond that in our assumptions.

Michael Baker: Thank you. That makes sense. Okay. We’ve seen a lot of advertisements and announcements on the same day. I understand part of that is sort of the backhaul being more efficient on your backhaul. But is that – what’s the uptake on that? How much of a competitive advantage is that becoming for you from a customer standpoint?

Ernie Garcia: Yes. Well, I mean, first, we’re extremely proud of that offering. That’s not an easy thing to do. I think it’s the kind of thing that I think sort of flexes our vertical integration muscles because to do that well, you have to have a transaction platform that’s very quick and easy, that’s deeply integrated into your logistics system, which is connected up through your verification system most of those customers are getting financing and they need to get their financing terms and get verified to unlock that. So I think that’s a complicated offering to put together that does require vertical integration and a lot of systems intelligently speaking to one another. I think that’s something we’ve been working on for a bit now.

But it’s something that we’ve generally been pointing more at efficiency gains than at driving growth. And I think what we mean by that is just as a function of normal course, there are always kind of gaps in any given calendar that pop up for many different reasons. And by building same-day capabilities, we’ve been able to then basically fill in gaps with additional volume by just making those times available to customers. And so we’ve been able to basically drive efficiency in our cost while simultaneously giving customers faster delivery. Now to the extent we want to start to flex that into more of a growth tool over time. One, you kind of can just do that with scale because density makes that easier to do. But two, you can lean in a little bit more into your kind of staffing model to enable more of those slots.

That, I would say, is sort of a separate choice. The underlying capability is something that we have built something that we’re rolling out something that we’re extremely excited about, something that does have uptake that is notable and that customers really like. And if you search around in our reviews or online, you can find a lot of commentary on it, where customers are very positively surprised by it. And then I think separately, we have a choice of kind of are we using that just to drive efficiency or are we going to kind of push the lever more in the direction of growth. And over time, as we balance this transition, I think that’s probably the direction it will go, but we’ll see what speed it goes that direction.

Michael Baker: Okay. Makes sense. If I could ask one more. Your units available for sale on your website has been pretty consistent, although we did see a pickup lately as we track that. My guess is that’s because of taking the inventory from your liquidating competitor – or am I wrong about that? Is that more of a discretionary decision to start to bump up your inventory in anticipation of stronger growth?

Mark Jenkins: I think that – I think most likely what you’re referencing is the bulk sale or bulk acquisition vehicles from a competitor – is most likely what you’re referencing there in the data. There hasn’t been a concerted effort.

Michael Baker: Right. Understood. Thank you.

Operator: And our next question will come from Ron Josey with Citi. Please go ahead.

Ronald Josey: Great. Thanks for taking the questions. Maybe as a quick follow-up, Ernie, this one, just on same-day shipping. I think we just talked about it a little bit, but now live in 11 markets. Rather than focusing on efficiency, I wanted to hear your comments on perhaps the impact to improve conversion rates that’s coming from same-day shipping. Is this something that you’re seeing to have an impact on just conversion to sale? Or is it say, call it, still too early to tell in the market to see the benefits there? That’s question one. And then maybe, Mark, realizing it’s also early, but CARLI, now that it’s, call it, implement, I wanted to hear about the efficiencies range just across the reconditioning process. And this is in the process of like how AI is changing the business? Thank you.

Ernie Garcia: Sure. So on same-day delivery, I think we’re will elect to not quantify the impact, but absolutely, there’s no question that speed drives conversion and that we see that in same delivery as well or same-day delivery as well. So I think that is exciting. That’s a powerful feature. And as discussed earlier, I think over time, it’s a feature that we can lean into more – if we choose to use that as a growth lever and then also as we expand our footprint leveraging more of our ADESA for reconditioning, it unlocks the ability to do same-day delivery in many more markets. So I think that’s a story that will probably unfold over many years, but we think it’s a pretty exciting story. It’s a story that is only possible for integration. It’s a story that’s only possible with an enormous footprint, and I think it’s very hard to replicate. So something we’re very excited about. And then Mark, do you want to hit CARLI?

Mark Jenkins: Sure. Yes. I can hit CARLI. So I think we’re very excited about the progress that we’ve made, obviously, in the reconditioning centers. A lot of that was operational gains and a lot of that was technology gains led by the nationwide rollout of CARLI. And so we have seen – I think we’ve talked about more than $900 step-down non-vehicle retail cost of sales. Since our peak over a year ago, and I think that’s been driven by many sources getting better at managing the process of reconditioning, getting better at parts procurement and efficiency and a number of other things. So I think that’s been a big success story in the IRCs. And then you also looked in a question about AI more broadly. And that’s certainly an area it’s widely talked about, but it is something that we’re very excited about.

I think we have several what we see as significant advantages in our position to take advantage of the rapid development of AI. One is our large scale. So we have – are collecting enormous numbers of data points every year with all the cars that we’re evaluating on a day-to-day basis, all of the customer interactions that we have every single day, whether it’s on the website or in our communications with customers, and a number of other things. And we’re able to do that at a very large scale. We’re also highly vertically integrated, which we think makes AI even more powerful because various parts of the vertically integrated chain can be connecting and learning from one another, driving even further gains on AI. And obviously, we’re also technology-centric, which I think along with having large scale and vertical integration is important to making the most use of AI as quickly as possible.

We’ve seen all kinds of gains already in customer care, in particular, getting better at processing documents, automatically speeding up the time it takes to handle calls that come in to our customer care centers. And I think those are a couple of quick examples, but this is certainly something that we’re very excited about. We think we’re structurally positioned to significantly benefit from it, given our large scale, our vertical integration and our technology focus. And so definitely something that we are excited about.

Ernie Garcia: And just because that’s a fun one I would love to jump in and add a couple of points as well. The other thing that we believe is unique about us is our system is totally deterministic, meaning that there is a negotiation. And that means that a customer coming to our site can get a complete answer instantly just driven by logic. And so it means the experience that they can get through these tools are much more complete. And I think there are a few tools that we’ve worked on in our history that I think have more clearly demonstrated the value of vertical integration because it is very, very hard to answer what can feel to a customer like a very simple question. Do you have any similar cars with the sunroof that will cost me $20 less per month?

That’s a hard question to answer. And it’s an extremely hard question to answer if you’re not vertically integrated and if your data isn’t organized in a way that enables you to do it and impossible to answer, if you’re not – if your policies don’t result in deterministic calcs that drive that and all of ours do. So I think it’s really exciting. This is an area where anyone who’s paying any attention at all is your mind is constantly blown every week when you kind of see the new things that are rolling out. So I don’t think we yet know exactly where this is going to go. I think we do know that we’re well positioned to take advantage of it. I think also there’s kind of another fundamental at play, which is the value of any given technology is always a function of how well positioned you are to use it versus those you compete with.

And I think there’s a pretty differentiated story here. We’ve got a great team. We’re paying very close attention. And so we’ll see where that takes us. I’m not sure it’s driving numerical results yet outside of some things you’re seeing in customer care, but we are certainly working on it, and we’re excited about where it could go over time.

Ronald Josey: Super helpful. Thanks, guys.

Ernie Garcia: Thank you.

Operator: And our last question will come from John Blackledge with TD Cowen. Please go ahead.

John Blackledge: Great. Thanks. Two questions. First, the ad spend was down over 30% year-over-year. Just curious how we should think about ad spend in the first quarter and then 2024? And then just a follow-up on same-day. Recognized it’s in 11 markets right now, and it’s early days, but what is the typical mix of kind of same-day inventory available in a given market? And how could that trend over time? Thank you.

Mark Jenkins: I could start by hitting the question on ad spend. So ad spend in the first quarter, we expect a slight tick down from where we were in Q4, more toward Q2, Q3 levels, maybe slightly lower, but roughly in the Q2 to Q3 range. So the overall story there is stable ad spend in Q1 relative to the past few quarters.

Ernie Garcia: And then generally speaking, as it relates to inventory availability of same-day, the right kind of first order way to think about that is usually the vehicles that are closest to customers in the markets where we offer it, are available same-day, and we are generally rolling it out in markets where we are nearby inspection centers. And so that is what is governing our choices of which markets rolling that out to, and that’s why over time, as we continue to open more capabilities at [indiscernible] locations, we’ll be able to expand that further.

John Blackledge: Thank you.

Ernie Garcia: Thank you.

Operator: And this concludes our question-and-answer session. I would now like to turn the conference back over to Ernie Garcia for any closing remarks.

Ernie Garcia: Great. Well, thanks everyone for joining the call. We are extremely excited about the work that has been done by the team here. And to the Carvana team, we do this every call. We always say thank you. I always feel like there’s no way it’s coming through the phone in the way that we mean it, but we really do hope that you guys feel that and understand and appreciate the impact of all the work that you’ve done. I don’t think it was reasonable to expect the progress that we’ve made from the perspective of a year ago. And I hope that we have another unreasonable year now and I think we’re positioned to do it if we keep charging. So keep marching. Thank you all. We’ll talk to you guys next quarter.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.