Carvana Co. (NYSE:CVNA) Q4 2023 Earnings Call Transcript

Carvana Co. (NYSE:CVNA) Q4 2023 Earnings Call Transcript February 22, 2024

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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Q&A Session

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.