Michael Montani: Okay, got it. Thank you and good luck.
Ernie Garcia: Thank you.
Operator: Thank you. The next question comes from Adam Jonas with Morgan Stanley. Please go ahead.
Adam Jonas: We see Ernie, I told you everything would work out.
Ernie Garcia: You did for the very beginning. You never doubted us, we appreciate it.
Adam Jonas: Never, never for a minute. I mean your margins are like twice CarMax and you’re doing like one-third of their volume. So it’s a good start. It’s a good start. So I’m going to ask Michael Montani’s question a little different way. There’s still a lot of economic uncertainty. It seems like the Fed might have overplayed their hand and talk of stagflation and just an uncertain time. So I’m just wondering, do you feel that you have enough equity in the business right now? And remind us maybe how you think about longer term leverage targets for the business.
Mark Jenkins: Sure. I can take that one. So I think the simple answer to the first part of that question is, I think we have ample liquidity and the business is generating very strong EBITDA and cash flow today. So I think we feel great about that structure. As I talked about earlier, we do intend to delever over time. I think a component of that, that we talked about on the call earlier, is we do plan to pay cash interest expense on both eligible sets of notes in 2025. And that reduces overall debt outstanding relative to paying in kind and also reduces long-term cash interest expense. So I think there’s been so many questions about our capital structure over the past couple of years, including pretty serious ones that people were asking at earlier points in time.
But I think this quarter resoundingly repositions us as it relates to those questions. I mean, $235 million of adjusted EBITDA, an outlook for an increase in that adjusted EBITDA dollars looking towards Q2. And as we talked about meaningfully exceeding CapEx and interest. And then as we’ve talked about throughout the call, we see big opportunities ahead now that where we’re positioned from an excess capacity perspective, from a customer offering and customer demand for our product perspective, I think we see a lot of opportunity ahead. And so I think that we feel really great about where we are today.
Adam Jonas: All right. I appreciate that. And thank, Mark. And then as a follow-up, say, what doesn’t kill you, makes you stronger. And I think this quarter seems to be goes a long way of some evidence of that. But what also doesn’t kill you maybe make you wiser and now that you’re returning to growth, tell us, Ernie, what are you — now that you’re in a more humble after that near death experience, but growing and stable and things are looking good. What are you keeping an eye out for what does keep you up at night in terms of things that you don’t want to get complacent on, whether it’s things that you can’t control or the things that you can? Thanks, guys.
Ernie Garcia: Well, first of all, you made an assumption of that question, which is not obviously true, but we will assume it is. I think [indiscernible], without a one. So here is [indiscernible] I would say we’re extremely excited, right. If we go back to the very beginning, what do we want to do? We wanted to build a business that we thought was going to require a ton of work to deliver great customer experiences, give them a better, simpler experience and drive industry-leading economics. And I think it feels really good to be in a spot where we feel like there’s a very strong argument to be made that those boxes are checked, and now our job is to get from here to the promised land and build this thing to be as big as we possibly can.
And I do think, going back to the growth answer, we are incredibly well-positioned to do that. I think it’s — the last couple of years have been absolutely brutal, but they have really cleared the competitive field quite a bit and also as a result of us getting it wrong in terms of what was going to happen in ’22 and ’23, we’re very well-positioned from an infrastructure perspective, and so forward growth looks good. I think that transition period is about us figuring out the balance between that enormous opportunity and making sure that we continue to execute extremely well. And I think that will be something that we’ll be debating internally over the next several quarters. I think it’s something that we’ll figure out. And I think it will be different voices in the room trying to make sure that we get that right.
But I think that we’re picking between I think different versions of pretty good outcomes as long as we execute. And so I think we’re excited about that. In terms of fear, I think I do think — I would like to give our team credit for being a team that places a lot of internal pressure on ourselves. I think that hopefully, that’s apparent in the sum of the work that we’ve done together over the last 11 years. But I think that there’s no question that there is no substitute for a bunch of external pressure. It is — it can put pressure on you in a way that you just cannot pressure yourself. And I think something that we’re working on internally is just trying to make sure that we remember the value of that pressure we were under and that we try to keep as much of that on ourselves as we possibly can, even if the world decides that we’re maybe a little less dumb than the world might have thought we were a couple of years ago.
And I think that’s not an easy thing to do. That’s a very easy thing to say, but to come in every day and put your head down and grind over and over again, even when things feel pretty good, is much easier said than done. So I think internally, we’re working hard to try to cement that culture as best we can. I think we have the right people to do it. I think we’re on a good path, I think acknowledging that, that’s important is the first step. But I think that to me is the biggest fear because it made us better, and we want to stay in the position we’re in right now.
Adam Jonas: Thanks, Ernie.
Operator: Thank you. The next question is from Doug Arthur with Huber Research Partners. Please go ahead.
Doug Arthur: Yes, thanks. Ernie, you sort of answered this in a lot of different ways, but you guys guided to units being slightly up in the quarter. Your marketing expense was very well contained. So what drove, you talked about better conversion, but what sort of drove the upside in units, which were a big upside surprise. I’ve got a follow-up.
Ernie Garcia: So I think there’s a series of things. I do think that the units came in stronger than we anticipated. And I think that, with demand moving in our direction, and then I think it’s completed with the team executing very well despite not anticipating it. And so that — there’s no getting around inventory shrinking when demand comes in a little hotter than expected because there’s long lead time there to kind of the number of cars you’re buying and you’re reconditioning. And so we saw inventory shrink a bit, but we saw even that team made quick adjustments and started to kind of get in a better position relatively quickly. And then I think the rest of the operating teams also handle the volume very, very well. And so I think that enabled us, Despite not being super well-positioned for growth to handle growth pretty well anyway.
And so I think — we’re excited about that. We think that, that bodes well. But we think we have work to do to really get the business into a position for sustained growth at high levels, and that’s what the transition period is all about.
Doug Arthur: Excellent. And then, Mark, just to be super clear here in terms of your guidance, you’re seeing a sequential increase in our year-over-year growth rate in the retail units. So I mean seasonally, I don’t know, you generally have flat to slightly down units Q2 over Q1. I mean it’s jumped around a lot over time. But — so you’re saying the growth rate will be up from the first quarter.
Mark Jenkins: That’s correct. The year-over-year growth rate will be up in the second quarter compared to the first, and we’ll also do more adjusted EBITDA sequentially.
Doug Arthur: Okay. All right. Thank you.
Operator: Thank you. The next question is from Ron Josey with Citi. Please go ahead.
Ronald Josey: Thanks for taking the question. Ernie, I wanted to ask a little bit more about sources of leverage and advertising specifically? Because I thought the commentary in the letter around the four oldest cohorts achieving 1% of advertising expense as a percentage of revenue was pretty telling, especially as you’re just seeing pretty good growth come back here. So I just wanted to get your thoughts as you think about sort of go-forward and sort of the brand recognition and awareness of Carvana, just how do you think about advertising spend going forward strategically? That’s question one. I’ve got another one, which might be a little bit easier, I might have missed earlier. But I think I heard capacity for 1.3 million units per year across the IRCs and ADESA about 3 million units annually.
Mark, I go back to the Analyst Day, however many years ago about that 5% share goal. We have enough capacity now. Or did I hear that maybe more IRCs might be on their way or just more efficient ones? Thank you.
Ernie Garcia: Sure. So let’s start with marketing spend. I think from here, there are two forces on marketing spend that point in different directions. I think as we continue to make fundamental gains, we think there’s reasons why we can continue to drive that down as our newer cohorts of markets age and act more like older cohorts of markets, we think that, that can be driven down. And then we also do believe that inventory specifically were constrained today. And if we were not constrained, we’d likely see higher conversion of the customers we already see on the website, and that would likely drive marketing dollars down as well. So I think that there’s a number of forces that we’re going to be actively working on to push advertising spend down.
I also think it is clearly true that we believe we could acquire incremental customers today at incremental customer acquisition costs that would be much lower than the gross profit minus variable costs, and therefore, would be additive. And it is also likely that much of those incremental customers that would be positive EBITDA additive would come at higher CAC than our average CAC today. And so as we kind of march up that incremental customer acquisition cost curve, that would be a force that would push it up. I think going forward is a balancing of those two forces, and I don’t think that we want to call our shot just yet. I think that’s also something that we’ll be figuring out as we go through the transition period. On the footprint side, just to make sure that’s clear.
At our existing inspection centers, we have capacity for 1.3 million units, and then we add the ADESA sites, you get to approximately $3 million in some total. Those ADESA sites do still need CapEx on top of the land to unlock that potential. We size that CapEx at the time of the acquisition at approximately $1.2 billion, which is probably still a good way to think about it. But that would be on the order of what would be required to unlock that additional reconditioning capacity.
Ronald Josey: That makes perfect sense. Thanks, Ernie. I appreciate it.
Ernie Garcia: Thank you.
Operator: Thank you. The next question is from Nick Jones with Citizens JMP. Please go ahead.
Nicholas Jones: Great. Thanks for taking the question. And sorry if I missed this. But in the past, as you were kind of growing really rapidly. On occasionally, you might hit some choke points that you would need to work through, which you tend to always be able to do that. As growth accelerates here, and Ernie, I think you mentioned you’re kind of feel good about where the infrastructure is. I mean are those choke points potentially still out there as growth accelerates? Or how should we think about some things that may be out there [indiscernible] through that we have kind of seen in the past? Thanks.
Ernie Garcia: I think the short answer is yes. I think growing is always hard. We tried to give an outline for why we think we’re very well-positioned for growth in the future from here and in many ways, better position than we were in the past. So hopefully, that’s somewhat helpful. But of course, there will be difficulty as we head back into growth, and there will be growing pains that there always are. And then hopefully, we execute well, we push through those pains. We have a lot of fundamental gains to offset them. But I think that’s the work that we have in front of us. And I think — in terms of real-world opportunity in front of us, we feel extremely good about it. But of course, there’s going to be work to do. And of course, over the years, there will be one of these calls where we’ll be explaining what we’re dealing with at any point in time because running a business is hard.
