Carvana Co. (NYSE:CVNA) Q4 2024 Earnings Conference Call February 19, 2025 5:30 PM ET

Company Participants

Meg Kehan - IR
Ernie Garcia - CEO
Mark Jenkins - CFO

Conference Call Participants

Ron Josey - Citi
Sharon Zackfia - William Blair
Chris Bottiglieri - BNP Paribas
Daniela Haigian - Morgan Stanley
Michael Montani - Evercore ISI
Rajat Gupta - JPMorgan
Seth Basham - Wedbush Securities
Mike Baker - D.A. Davidson
Jeff Lick - Stephens
John Colantuoni - Jefferies
Marvin Fong - BTIG

Operator

Good day, and welcome to Carvana's Fourth Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Meg Kehan, Investor Relations. Please go ahead.

Meg Kehan

Thank you, Asha. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's fourth quarter and full year 2024 earnings conference call. Please note that this call will be simultaneously webcast on our Investor Relations section of the Company's corporate website at investors.

carvana. com. The fourth quarter shareholder letter is also posted to the IR website.

Additionally, we posted a set of supplemental financial tables for Q4, which can be found on the Events and Presentations page of our IR website. 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 on current expectations as of today, and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise. Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to 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. 2024 will always be a defining year in the Carvana story. In 2024, we became the most profitable public automotive retailer in U.S. history as measured by adjusted EBITDA margin, while simultaneously being the fastest growing.

There are many quarterly and annual numbers that support and punctuate this point, but the simple reduction is the most important. The most profitable ever and fastest-growing is very powerful. We also did this with 1% nationwide market share.

This is a very unique long-term growth opportunity and we are built for scale. Our inspection centers that were in operation before we began integrating our ADESA mega sites had capacity for over 1 million retail units, about three times our current volume. Fully integrating all ADESA mega-sites will give us capacity for approximately 3 million retail units or eight times our current volume.

And this isn't conceptual. In 2024, we integrated six of the 56 ADESA sites. We expect to open approximately another 10 mega sites this year, two of which we have already announced.

This reduces the execution risk of achieving significantly more scale and that extra scale will come with the positive feedback inherent in our model. Our business model took us $10 billion, tens of millions of hours of effort, and over 10 years to build. It is hard and the difficulty of building it is very clear through the simple exercise of looking at the outcomes and difficulties of the many companies around the world, including ourselves that have attempted to build something similar over the last 10 to 15 years.

In addition, our market enjoys unique competitive dynamics. We compete in a highly fragmented market. Our largest direct competitor has about a 2% market share. The largest 100 direct competitors combined have about 10% market share.

We are a team of builders that have stuck together through thick and thin and accumulated the lessons that have been learned at every step of our journey. We imagine the business, we designed the customer experience, we built the technology and operational apparatus that was necessary to deliver it. In just eight years, we had scaled that complex system quickly enough to be tied with the third fastest company to make the Fortune 500 in history.

We faced hardship together and most recently, we did all the hard detailed work that is necessary to prove that the machine that we imagined is the most efficient machine in our industry for buying and selling cars. The team that did all of this is still here and we are still hungry. And importantly, we deliver an experience our customers love.

It is faster, simpler, more confidence inspiring, offers greater selection and better value that is available elsewhere in the market and we aren't even close to done. There are fundamental gains left to be harvested, we will go get them. There are many opportunities to make our machine more efficient and add new foundational capabilities to serve our customers and partners better, we will build them. There is room to make our customer experiences simpler, more efficient, more delightful for our customers.

We'll make that happen too. We are at an exciting moment in our history. We are firmly on the path to buying and selling millions of cars to becoming the largest, most profitable automotive retailer and to fulfilling our mission of changing the way people buy and sell cars.

There's nowhere we'd rather be. The march continues. Mark.

Mark Jenkins

Thank you, Ernie, and thank you all for joining us today. 2024 was a monumental year for Carvana and solidified the long-term earnings power of our vertically integrated business model. We entered the year focused on driving fundamental gains and enhancing customer experiences while also beginning to layer in certain growth initiatives. Throughout the year, we maintained that mindset and achieved additional fundamental gains, which resulted in significant improvements in unit economics and meaningful enhancements to our customer offering.

This enabled us to once again leverage the three fundamental drivers of growth that we have benefited from in the past and expect to continue to benefit from in the future. One, continuously improving our customer offering; two, increasing awareness, understanding, and trust of our brand; and three, increasing inventory selection and other benefits of scale. Positive feedback created by these drivers resulted in a 33% year-over-year growth rate in FY 2024 retail units sold, significantly outpacing the industry, while simultaneously driving material operating leverage and industry-leading margins.

We set new company records in numerous financial metrics, including adjusted EBITDA of $1.38% billion, adjusted EBITDA margin of 10.1%, GAAP operating income of $990 million, GAAP operating margin of 7.2%, net income of $404 million and net income margin of 3.1%. Moving to our fourth quarter results, where unless otherwise noted, all comparisons will be on a year-over-year basis. The fourth quarter was again an exceptional quarter for Carvana that was driven by our team's ability to achieve further fundamental gains and operating efficiencies while also pursuing significant year-over-year growth.

The fourth consecutive quarter, we earned positive net income and we set new fourth-quarter records for retail units sold, adjusted EBITDA, adjusted EBITDA margin, GAAP operating income, GAAP operating margin, net income, and net income margin. The strong demand we experienced in the first three quarters of the year continued into the fourth quarter. Retail units sold totaled 114,379 in Q4, an increase of 50%, a significant acceleration from Q3, leading to the second-highest quarterly retail unit sales in our history despite Q4 being a seasonally lower demand period.

Revenue was $3.547% billion, an increase of 46%. Like the full year, our growth in the fourth quarter was driven by our three long-term growth drivers. We believe as we continue on our path of profitable growth, each driver will improve, creating more positive feedback in the model.

Our strong profitability results in Q4 were again driven by sustained and fundamental improvements across all GPU components and operations expenses as well as levering our overhead expenses. Non-GAAP retail GPU was $3,331, an increase of $361. Year-over-year changes were driven primarily by lower retail depreciation rates, reductions in reconditioning and inbound transport costs, and lower average days of sale, partially offset by lower spreads between wholesale and retail market prices.

Non-GAAP wholesale GPU was $8.57%, a decrease of 24%. Year-over-year changes were primarily driven by faster growth in retail units than wholesale vehicle and wholesale marketplace units, partially offset by lower vehicle depreciation rates. Non-GAAP other GPU was $2,728, an increase of $849.

The increase in other GPU was primarily driven by higher spreads between origination interest rates and benchmark rates, lower credit spreads on securitization transactions, changes in loan sale channel mix, and selling a greater volume of loans relative to originations in Q4 '24 compared to Q4 '23. Non-GAAP SG&A expense was $432 million, an increase of 15%. Q4 was another strong quarter for demonstrating the power of our model to lever SG&A expenses.

Our 50% growth in retail units sold led to a $1,165 reduction in non-GAAP SG&A expenses per retail unit sold. Carvana operations portion of SG&A expense totaled $1,696 per retail unit sold, a decrease of $328, driven by our operational efficiency initiatives. The overhead portion of SG&A expense totaled $159 million in Q4, an increase of $9 million, primarily driven by non-recurring items.

We continue to see opportunities for significant improvement in per unit SG&A expenses over time and as we scale, driven by both continued efficiency in operational expenses as well as leverage in the fixed components of our cost structure. Adjusted EBITDA was $359 million in Q4, an increase of $299 million. Adjusted EBITDA margin was 10.1% in Q4, a 7.6% percentage point increase.

Our adjusted EBITDA margin of 10.1% was industry-leading and is well within our long-term financial model EBITDA margin range of 8% to 13.5%. We continue to see meaningful opportunities for fundamental gains to continue driving towards the higher end of that range over time. Our adjusted EBITDA is very high quality compared to many rapidly growing companies due to our relatively low non-cash expenses.

GAAP operating income was $260 million in Q4, leading to GAAP operating margin of 7.3%, leading the public auto retail industry. As previously noted, we currently carry many expenses that support retail unit sales capacity of over 1 million units and expect our GAAP operating income to grow faster than adjusted EBITDA over time. As discussed in prior quarters, we believe that pairing our strong financial results with the measured actions we have taken position us well to continue delevering our balance sheet over time. As a company that we believe has the opportunity to be a many-year compounder, we believe in having a strong balance sheet with substantial liquidity and a strong credit rating.

In the fourth quarter, we took additional steps to further bolster our balance sheet, retiring $120 million of our 2028 senior secured notes and raising $924 million of equity through our ATM program. At the end of 2024, we had more than $1.7% billion of cash and $3.6% billion of committed liquidity resources, a $2 billion increase year-over-year. In addition, our ratio of net debt to adjusted EBITDA was 2.8% times and our ratio of adjusted EBITDA to interest expense was more than two times, demonstrating significant progress toward our deleveraging goals.

We remain committed to further deleveraging through growth in adjusted EBITDA and plan to drive toward investment-grade quality credit ratios over time. Our results in 2024 position us well for a strong 2025. Assuming the environment remains stable, looking forward, we expect significant growth in both retail units sold and adjusted EBITDA in full year 2025, including a sequential increase in both retail units sold and adjusted EBITDA in Q1 2025.

In conclusion, 2024 was an extremely exciting year for Team Carvana. We achieved two very significant milestones of becoming the fastest-growing and most profitable automotive retailer. The strength of our financial results and the strength of our customer offering position us well to continue to take market share as we progress in our long-term phase of driving profitable growth.

Thank you for your attention. We will now take questions.

Operator

[Operator Instructions] First question comes from Ron Josey with Citi. Please go ahead.

Ron Josey

Thanks for taking the question. Ernie, Mark, I had a question on inventory and the overall experience. And so on inventory, I think the letter talked about production throughput improvements.

And I want to understand as inventory grows, just how you philosophically manage balancing inventory as a lever to drive demand versus greater overall depreciation. And then having recently gone through the purchase and trade process at Carvana, with inventory growing, I just wanted to hear your thoughts on just how search and merchandising is improving overall, how you might use AI to maybe include natural language search and things along those lines as the user experience improves. Thank you.

Ernie Garcia

Sure. So first, I think we talked about a bit in the letter. I think we're big believers that selection is one of the simplest, clearest, and most obvious to our customer benefits that we provide. And so we're big believers that offering them that selection is very powerful.

We think that our business model is uniquely positioned to do that, not just because all the cars can be delivered to customers, so they can see everything nationwide, but also because it changes the cars that we can buy because we're optimizing a very large pool instead of many small pools. And the math of that is meaningful. It means that we can kind of cover more demand space per unit than many other automotive retailers would be able to.

So we think that's really valuable. I think there is many ways for us to think about what the right inventory size is. I think you framed up the trade-offs.

I think very clearly, as we have more inventory, we have greater conversion. And then when you have more inventory, if conversion goes up by less than the increase in your inventory, then you have greater expected depreciation and you can kind of convert that extra depreciation into a customer acquisition cost and compare it to other ways to acquire customers with the knowledge that not only is it a way to acquire customers, but it's also a way to acquire customers that makes them happier, making it kind of all else constant, a more efficient customer acquisition channels. So I think our general view is we want to keep leaning into inventory.

I think the team has done an absolutely incredible job. '24 was a year where our expectations for the units we would sell continually went up and that meant that the plan that the inspection center team and all the operating teams were kind of needing to level up to was constantly increasing. They did a great job doing that.

They did a great job doing that very efficiently and we're at a spot now where we're very happy with the inventory that we're producing, but we absolutely have big eyes and think that more cars is better and we're heading into very - in very short order tax season, where we expect sales to go up again. So I think we'll continue to invest in inventory and we think that's great for our business and great for our customers. You posed the AI question as number two.

I think there is so much to say there that we'll try to stay a little bit high level. I think - we will start with this. I think first and foremost, we're enormous believers in the power of this technology. I think our view is, it is unlikely that we will see another technology in our lifetimes that's this powerful.

It's - for those of you that are using it all the time, I'm sure you feel similarly, it's just absolutely unbelievable and the quality of technology that exists today is so far in front of what virtually any company is actually already implementing. And so there's a long roadmap in front of us to catch up to the horizon where that technology is and the speed at which it's improving is pretty unbelievable and I think there's clear visibility it's going to keep improving. And I think the number of applications are hard to imagine today, but there are undoubtedly many.

So we think that's extremely exciting. I think the foundation of Carvana was the belief that by reimagining a customer experience using modern technology, we could give customers an experience they loved. And I think a new technology revolution is an opportunity to continue to do that. And so I think we're very excited by that.

I think our business has a number of unique advantages that put us in a position to leverage these technologies in a more fulsome way than many of our competitors are likely to be able to. One that's very obvious is scale. We've now sold over 4 million cars or - excuse me, bought and sold over 4 million cars.

That's a lot of transactions that we're able to learn from and we have very deep data on every one of those transactions because of the fact that we're vertically integrated and capturing all those clicks throughout the entire process. Our business is built around making customer experiences simple and that means that the whole process is deterministic. There is not negotiation in between and that makes all the calculations easier and something that can be done ahead of time as long as your data is well-organized, which makes the power of any of these AI agents greater or AI applications greater.

We're vertically integrated, which means that the entirety of the transaction to a customer feels like one thing. When a customer buys a car, they feel like they're doing one thing. When we think about it from a business perspective, oftentimes, there is a number of horizontal businesses stacked on top of each other that are providing that single experience, but that creates friction to fully implementing the most optimal technological solutions that are available.

We're vertically integrated. We think it means that we can give customers a simpler experience and we think that's accentuated by these stronger technologies. And then I think importantly, we have a tech-centric team that pays attention to this and is really invested and believes.

And so you can see kind of our first and currently most developed application is Sebastian, which is our chatbot online. I think that represents the brain that we're building and it's us skin on top of that brain, but there is opportunity for us to put that throughout the entirety of the customer experience. And I think we plan to be very aggressive there.

So that's something we're certainly excited about.

Ron Josey

Thank you, Ernie.

Ernie Garcia

Thank you.

Operator

The next question comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia

Hi. Good afternoon. Congratulations on a good 2024.

Ernie Garcia

Sharon, is that the first time you've done that.

Sharon Zackfia

Yes, I know, I know.

Ernie Garcia

And it was a full-year. That means a lot, Sharon. Thank you.

Would you do us a favor and let the stock market know.

Sharon Zackfia

I won't ask you to define significant growth in 2025, so I'll let you pass on that. I do have a question on kind of GPU. Obviously, very impressive numbers in 2024 at $7,200.

From here kind of what are the pushes and pulls on GPU or should we really expect kind of leverage on that Carvana operations part of SG&A to really be the driver of margin from here.

Ernie Garcia

So I think our general view is that there are still meaningful fundamental gains to be had throughout the transaction. And I think to define that again, that's kind of generally speaking, we're talking about kind of variable functions there. So those are variable costs, which would be the operations expense or it would be the different GPU line items.

I think every one of those line items, we've got plans that we're pretty excited about that we think will drive additional fundamental gains. Now I think when you get those fundamental gains, you have to decide what to do. And I think if you look at where our financial model is today, it's obviously in a very good spot.

10.1% EBITDA margin for the year is extremely exciting. And then I think even if you just take that and apply a reasonable leverage expectations over the next several years to just overhead expense. I think the path to the high-end of our long-term financial model, which was 8% to 13.5% EBITDA margin, I think becomes very straightforward.

And so I think we feel like we can see that very clearly. We're obviously paying attention to as we get these gains, what's best for the long-term is it best to share those with our customers and benefit in conversion is it best for us to use those dollars and invest in additional foundational capabilities that make our experience even better for our customers and further differentiate us and further vertically integrate us. Or is it best to have it show up in the bottom line.

And I think that we're going to continue to march down the path of trying to unlock those gains and then we'll try to make intelligent decisions as we go about where those gains go, but we do expect the majority of those from here to be passed on to customers and we'll update you along the way as that changes. But certainly something that we're excited about. I think you called out our operations expense back down to $1,700 in the fourth quarter where we're building capacity for tax season.

I think we're extremely excited about that number. We called out in the shareholder letter, we're around $1,400 to provide all the kind of core functions of getting a car to a customer, managing the return policy, finance verifications, delivery. It's - the machine really is getting very efficient and then the 300 delta give or take is our expected warranty expense.

But I think we're excited where the machine is and we think we can make it more efficient from here and we just got to keep the work.

Sharon Zackfia

Thanks for that. And then I noted in your shareholder letter that delivery times were down more than 20% last year. Is there any way to kind of quantify what a faster delivery time means to you in conversion.

Ernie Garcia

Oh, I - forgive us. I think we'll stay away from quantifying that, but we do think it matters to conversion and we think it's material. And I think that that's another example of a team that's done a great job and I think excitingly, a team that has a lot of room left.

I think we've talked a bit about rolling out our same-day delivery capabilities that remain at very early stages. That's an incredibly complex capability to scale. We've rolled it out to a number of markets.

But so far, we haven't staffed for maximizing the number of customers that can get that benefit. We've more leaned into having that be more of an efficiency benefit where we can fill in any underutilized slots. I think there's certainly the opportunity for us to lean into that further.

There is a number of - kind of technology enhancements that we can lean into to make same-day delivery available to a larger portion of the credit spectrum. And then we're working hard to make sure that we can always add more cars to kind of be available there. And then really that's kind of all framed in same day, but the same is true of kind of next day, two-day, three-day deliveries and all of those kind of faster deliveries, we're just kind of shifting volume into those quicker deliveries and we've got, I think long-term plans to keep shifting into those faster deliveries.

That includes efficiency and logistics and then it also includes kind of all these integrations with these ADESA mega sites that get cars closer to customers and reduce miles. So I think that's also a long roadmap, but I think it's a roadmap that we believe will enable us to continue to materially reduce delivery time over time.

Sharon Zackfia

Okay. Thank you.

Ernie Garcia

Thank you.

Operator

The next question comes from Chris Bottiglieri with BNP Paribas. Please go ahead.

Chris Bottiglieri

Hi guys, thanks for taking the question. One overarching question and one kind of clarification, but on the overarching, just hoping you give us a sense for like what the go-forward strategy is on loan sales. It looks like the fixed loan sales stepped up to $700 million this quarter and the non-ABS kind of fell off this quarter.

Just want to get a sense for like how do you think about this moving forward. Do you prefer to do fixed loan sales. Do you prefer ABS, like what does that world look like.

And are there any liquidity challenges today like in the market itself that maybe temporarily pauses that. And then the follow-up was just on the $9 million, looks like there was a one-time item in other SG&A. It looks like you didn't adjust it out to add it back to EBITDA.

Just hoping you could elaborate on that. Thank you.

Mark Jenkins

Yes. Sure. I can take both of those.

So I think we've had a very strong year for the finance platform delivered very robust other GPU throughout the year, especially the latter three-quarters of the year. I think we feel great about that. From a loan monetization perspective, we expect to continue to use a diversified funding strategy.

I think that's been our strategy since very early on at Carvana was to use multiple channels for loan sales, a combination of whole loan sales and securitization market transactions and to maintain sort of those diversified funding sources. I think that's our expectation going forward. I think we feel really great about the way that the finance platform is performing today.

I think we're seeing very strong results and strong demand for our loans. And so I think - yes, I think business-as-usual is the name of the game there. Feel great about the way things are going and expect to keep executing the same strategy.

I think on your question about SG&A expense and the non-recurring items, the - I guess, a couple of things to call out there. One, we did do this thank you bonus in Q4 2024 was a truly special year for Carvana and we want to say thank you to employees across the company. And so we did a thank you bonus in Q4.

In total, it was just shy of $9 million across the company as a whole. Now that did not all go to overhead expense. Only a fraction of that went to overhead expense, but it did get spread out across cost-of-sales, operations expense as well as overhead expense.

But the overhead expense portion was one of the small non-recurring items. There are a few others as well that added up to that $9 million, but that just gives you a sense. And then in terms of backing it out of adjusted EBITDA, we have not historically backed out sort of small miscellaneous non-recurring items out of adjusted EBITDA.

Chris Bottiglieri

Makes sense. Thanks. Appreciate it.

Operator

The next question comes from Daniela Haigian with Morgan Stanley. Please go ahead.

Daniela Haigian

Thank you. Mark, you mentioned your goal in achieving a strong credit rating. How are conversations going with the credit rating agencies to help improve from current levels.

What do you feel is important to demonstrate in terms of leverage, consistency of free cash flow or something else.

Mark Jenkins

Sure. Yes. So I mean, I think our view is the most important thing that we can deliver from a credit perspective is very strong metrics and I think we did that overwhelmingly so in 2024 and then obviously expect significant growth in retail units sold and significant growth in adjusted EBITDA looking to 2025 as well. I think some of the metrics that we're focused on our net-debt to adjusted EBITDA is all the way down to 2.8% times and I think that's a strong ratio. We think there is lots of room to improve on that over time.

But I think that's a meaning - reflects a meaningful improvement from where we were one or two years ago. Similarly, our interest coverage now above two times, we think there is lots of room to improve on that as well. And that is our intent.

And so I think the most important thing we can do is deliver on metrics and I think the ratings will take care of themselves over time.

Daniela Haigian

Thank you. And then you've also mentioned reconditioning capacity for 1 million units, shareholder letter said, real estate capacity for 3 million units. What are the biggest gating factors near term limiting potential growth in units.

Is it rooftops, physical labor, logistics freight combination.

Ernie Garcia

I think it's the entire operational chain. But I think what we've called out in the past is being the kind of most operationally intensive part of that chain is reconditioning. And historically, that included acquiring real estate, doing the CapEx to get that real estate ready, hiring, training, and then executing. And I think given where we are today and given the real estate footprint that we have, we can scale to about three times our current scale with just hiring, training, and executing. And then I think we can get to about eight times our current capacity with the opening of these mega sites, CapEx, hiring and executing - hiring training and executing.

And so I think it's a simpler path than it was in the past. I think there are obviously other parts of the business that are very complex as well, logistics, last-mile delivery, customer care, verifications, title registration, but those are areas that I think we've made a tremendous amount of progress in. I think we've built the system to be scalable. I think we've demonstrated that we can scale it.

And so we feel like our job is to just keep executing and the rest will take care of itself.

Daniela Haigian

Thank you.

Ernie Garcia

Thank you.

Operator

The next question comes from Michael Montani with Evercore ISI. Please go ahead.

Michael Montani

Yes. Hi. Thanks for taking the question.

Just wanted to ask, first off, when you look at the number of markets that you all are in, I think it was pretty steady at 316. Just wanted to think about the potential cadence to expand across the country effectively for the remaining markets. Is that kind of a multi-year journey or could you do that in the next year or two.

And then I had a follow-up.

Ernie Garcia

Sure. So I would say, at this point, we're in the contiguous 48 states, we're delivering to the vast majority of the country. And I think that the most important things that we can do from here are continue to improve our delivery speed and continue to grow our inventory and kind of grow selection as it relates to kind of giving more people more options.

And then I think from there, it's just continuing to scale the business. I think most of our growth story from here will be about taking market share in all these markets. We've - historically, for those of you that have been around for a long time, we shared our cohorts that we had in all of our different markets.

I think in Q4, we got back just shy, I think a couple of thousand units shy of our peak unit volume in '22. And I think we're back to a place where those cohorts clearly light the path to significantly more scale and are back on the path to growing very quickly. They're generally speaking, showing all the same patterns that they showed back then and kind of at similar places where they were back then in terms of market share.

So I think it's at this point, it's more about just continually improving the offering, giving customers more selection, executing really well, and taking market share and we think that lights the path to a much, much larger business.

Michael Montani

Got it. And then just to follow up on the earlier question related to GPU. I was just wondering if you could describe a little bit the operating environment now.

Do you feel that there is any constraints in terms of the availability of inventory out there. What do you see competitively. Would you say fairly rational.

How are you guys thinking about that for the remainder of this year. And then basically, is there any benefit, I guess, to kind of pushing incremental units right now versus trying to kind of maximize profit in a constrained inventory backdrop.

Ernie Garcia

So, I mean, I think we try to take a long-term view on these sorts of questions and I think, generally speaking, the most important fundamental things about this market have been true for a long time. There is been about 270 million cars in the car park in the U.S. for a long time. There's been about 40 million transactions per year for a long time that can fluctuate 10% or 15%, but there is been about that many.

Generally speaking, the supply is all there, right. Customers are effectively just trading cars with one another or other owners of those cars or are getting those cars to a customer and we kind of exist inside of that machine. So we don't think that there's kind of a fundamental impact that we have on inventory. We think it's about getting a market share of kind of customer demand and then that leads to market share of supply very mechanically.

I think that we also believe that the market has pretty stable profits. I think if you look at the various public automotive retailers out there today, generally speaking, their EBITDA margins, for example, are still a touch above where they were in 2019, but they're getting very similar, they're in a similar spots where they were in 2019. And our best guess is that they'll probably hang out about that level.

I think there are deep structural reasons why that's about the profitability of these businesses and we think that that's great news because it just provides more of a proof point and ballast that these are the economics of the business. And then I think you didn't ask this question, but I think we oftentimes get a similar question about financing of how we be able to scale financing. And I think the same thing is true of financing.

We exist in a mature market, the various finance providers are out there providing loans to customers through different channels. If you have the customer demand market share, then there is demand to make loans and we are not creating new demand. We are simply kind of displacing those that were previously providing those loans to loan buyers.

So I think to us, this is - it's the advantage of being in a very large, very mature market. You have very clear visibility of what the unit economics are. The fundamentals of the business and then your job becomes just make sure that you're delivering an experience the customer loves, the customers love that you're taking market share, and that you execute well.

And I think that remains the name of the game for us and that's the path that we're on.

Operator

The next question comes from Rajat Gupta with JPMorgan. Please go ahead.

Rajat Gupta

Great. Thanks for taking the question. I just had one - first one on the fourth quarter our retail GPU.

It was in line with the guidance or commentary you provided. I was curious if you could elaborate a bit more on the sequential move. How much was it driven by just the pickup in the commercial retail marketplace.

And just how much influence that might have had on that number. Or was it just the core business that had the typical seasonal - for the non-marketplace business that had the typical seasonal drop-off. And I had a quick follow-up on the guide.

Thanks.

Mark Jenkins

Sure. Yes, I'll hit that one. You hit it the - I think our retail GPU in Q4 came in exactly in line with our expectations and our outlook. I think the sequential move from Q3 to Q4 in retail GPU is nearly exactly what we saw on average in the pre-COVID years.

Obviously, it can bounce around from year to year, but if you just kind of look at an average across multiple years, it's right in line with those historical averages. So I think that - and that indeed informed our outlook to a degree. So I think the - I think we saw what for us has been typical seasonality in Q4.

On a year-over-year basis, I think we had some good wins. In particular, we did see reconditioning and inbound transport costs come down on a year-over-year basis as a result of those operational efficiency initiatives that we've been so focused on.

Rajat Gupta

But nothing tied to the commercial marketplace ramp, that would have influenced the number from 3Q to 4Q or was it not material enough to call out.

Ernie Garcia

The way I think about it is we have seen sort of a normal seasonal pattern in retail GPU over a period of many years and we saw exactly that pattern this year as well.

Rajat Gupta

Got it. And then just maybe answer the guide just on like the equity offering. I mean, just the $900 million that you raised in the fourth quarter, it seems like you've hinted in the letter at a potential like refi opportunity.

Anything you could elaborate on that - the timing of that, is this the right time to do it. And obviously running your balance sheet with a lot of cash right now. Just curious what are the immediate uses as you think would be best for that cash.

Thanks.

Ernie Garcia

Sure. Yes. So let me hit that from a couple of different perspectives.

I think, one of the things we called out in the letter is that our credit ratios are improving rapidly for multiple reasons. One is we're very quickly growing adjusted EBITDA. But a second is we expect a meaningful step down in GAAP net interest expense in 2025 relative to 2024.

And so that just mechanically improves some of your credit ratios even without EBITDA growth, we expect significant EBITDA growth. So we - that was one thing we called out in the letter. I think the other thing we called out in the letter, we don't have any near-term expectations of a refinancing of our secured notes.

However, the secured notes are now trading at about a 7% yield, meaningfully below the coupon on the notes. And I think that just provides a way to think about longer-term opportunities to reduce interest expense even below what we currently expect from - in terms of like our expectation for 2025. And all that says is, hey, we've got a really straightforward path to, in our opinion, to materially better credit ratios across the Board versus where we are today.

And we think that's just, I think a nice feature of the business. Why is that important to us. I think where we sit today, industry-leading margins, industry-leading growth, 1% market share, 3x built capacity to grow into.

We just feel like we're in a position that is really unique and we're very, very excited about. And so we want to be completely focused on that growth opportunity. We think it's a historically unique growth opportunity.

We don't want to be spending a lot of time talking about the balance sheet, and that's why we're focused on just driving very strong credit metrics, so that we're just focused on the growth opportunity in our customer offering as opposed to the balance sheet.

Rajat Gupta

Got it. Got it. Makes sense.

Thanks for taking the questions and good luck.

Ernie Garcia

Thanks.

Operator

The next question comes from Seth Basham with Wedbush Securities. Please go ahead.

Seth Basham

Thanks. Good afternoon. And I know you don't want to talk much about the balance sheet, but just following up on the last question, with the step up in the use of the ATM program this quarter and the shelf registration that you made today, is there increased appetite to issue more equity.

Are you targeting a certain capital structure down the line that we should be thinking about.

Ernie Garcia

So our view on the ATM registrations is we just think it's good corporate housekeeping to have an active ATM program. We generally view that opportunistically. In terms of specific goals or targets, we don't have any specific near-term goals or targets.

I think if you take a longer-term view, we would like to drive the business to investment-grade credit ratios. That's our goal. One of the reasons for that goal is, like I was saying before, we just see an enormous opportunity in front of us and we want to have a very strong balance sheet that is paired with that significant long-term opportunity.

That will take time. But I think that is our goal.

Seth Basham

Got it. Thank you. And my follow-up question is on retail GPU.

Just thinking about the seasonality of that metric and we consider this fourth quarter to the first quarter, there's usually a material improvement through tax refund season. Is that the right way to think about it this year. Are there any other dynamics such as higher inventory that you're carrying to think about here.

Ernie Garcia

So I think the way we sort of think about the seasonality in retail GPU and our history on retail GPU, I think we typically think of Q4 and Q1 being the lowest quarters of the year and Q2 and Q3 being the higher quarters of the year. The - that's exactly correlated with industry depreciation trends where typically depreciation rates are highest late in the year and they're lowest in the middle of the year, which corresponds to that seasonal pattern that I just described. So that obviously can vary from quarter to quarter, but that's the broad sort of seasonal pattern that we have in mind on retail GPU.

Seth Basham

Okay. Thanks.

Operator

The next question comes from Mike Baker with D. A. Davidson.

Please go ahead.

Mike Baker

Okay. Great. Thanks.

Maybe a strange question, but I wanted to ask about tariffs, understanding you don't import anything. But to the extent that tariffs likely drive up new car pricing, can you remind us or how do you think about how that impacts used-car pricing. And then how does that impact your pricing and your margins, et cetera, just a lot going on with new car costs, et cetera.

And I'm just curious how you think that impacts your business, if at all.

Ernie Garcia

I think the most important answer to that question is, we certainly don't know what's going to happen with tariffs and wouldn't want to take a strong stand there. I think the smartest thing to do is probably wait and let's see that there is likely to be a lot of iterations in all this before we really figure out where this all ends up. But I think if the premise is new car prices go up, what does that do to used car prices.

I think generally speaking, indirectly, that would probably lead to dampened price increases as well. But I think it depends so much on the mechanics of so many things that are not specified there. So I think as a general matter, we're running the business with the kind of idea of operating like it's any other year.

And we think that's the smartest thing to do because there is a lot of uncertainty around exactly how those things will play out.

Mike Baker

Fair enough. All right. If I could ask one more, I won't call it a follow-up because it's unrelated.

But just thinking about - you've talked about a couple of different ways, but do you reinvest to drive more units. Do you let it go to the bottom line to generate higher EBITDA margins. I'm - you haven't changed your long-term margin outlook at all still in that, what is it 8% to 13.5%.

I think you said something about targeting the higher-end now, but I guess what do you need to see to take that number - that margin outlook higher.

Ernie Garcia

Sure. Well, I think first just for clarity, we definitely are targeting the high end. And I think, as discussed earlier, I think if you take the performance of even this full-year, we were improving throughout the year and just apply kind of reasonable leverage assumptions, you can get to the high end.

And so I think the path there is very clear. I think what's important to keep in mind is, I think the thing that we will be optimizing over time is basically the sum of the dollars that the business generates and the size of the business we can build, and the long-term value that we think comes from that. And that obviously includes a conversion elements as well and so that's something where I think the optimal amount of fundamental gains that should be shared with customers and should be showing up in our income statement is a function of your belief around some of those things.

And I think given our measures of the different inputs into that equation and our best guesses today where that will end up. We think aiming for the high end of our long-term financial model is a very reasonable thing to do. And we think that suggests that many of the fundamental gains that we'll make from here will be shared with our customers in various ways, which I think some will be obvious and some will be more creative and we'll seek to do that in the ways that are most efficient.

But I think that's generally how we're thinking about it today and in general, as long as we keep making the business better, we have a lot of great options and we'll see where that takes us.

Mike Baker

Makes perfect sense. Thank you.

Ernie Garcia

Thank you.

Operator

The next question comes from Jeff Lick with Stephens. Please go ahead.

Jeff Lick

Thanks for taking my question. Congrats on a great quarter guys.

Ernie Garcia

Thank you.

Jeff Lick

So, Ernie, I was wondering if you could maybe just opine a little bit on the acceleration in unit growth going from 34 in Q3 to 50 and then on a two-year basis from [6 to 31]. On our fireside chat, we had earlier here in Q3, we talked about inventory kind of being the gating factor of growing units. I was wondering if retail marketplace had any effect on the acceleration, where do you see the acceleration coming from.

Do you still think inventory is the gating factor because I did notice you guys didn't wholesale quite as much, where you're kind of reaching from that pool a little bit to get marginal units. So anything you could add there.

Ernie Garcia

Sure. But there is a lot there. So I think we spoke earlier about the success that we've had in building inventory because of all the hard work by the various members of the various teams and I think that clearly, all else constant is undoubtedly helping.

You made a reference at the end of the question to wholesale units. I think the kind of move that we saw in wholesale units was pretty similar to historical moves in absolute units that we've seen from Q3 to Q4. I think that's also related a bit to depreciation, generally speaking.

On units that we plan to wholesale, you were pricing those with the knowledge that we're going to take them to market very shortly after buying them and selling them at market. And so when there is higher depreciation, that impacts customer offers and so it's generally a time of year where there are fewer wholesale units. And I think the kind of moves that we saw there were very much in line with previous years.

I think - when you think about partner retail, I think the first order way that we are thinking about that is, it's a replacement source of inventory that we think is highly scalable, and we think has the opportunity for us to leverage our unique assets in a couple of forms. But I think one that is very concrete is just these mega sites and our inspection centers. To partner more efficiently with natural sellers of cars and to gain additional fundamental gains by basically making sure the cars are moved less often and faster and at lower cost.

I think most of those fundamental gains that we believe are achievable in those partnerships are not yet achieved. And so I think today, it's best to just think about that as a substitute of vehicle acquisition source, but not one that necessarily changes the customer offering all that much. I think what we believe has driven our growth has been, most importantly, the fact that customers love our offering. And then I think importantly, the fact that there is positive feedback in our model.

So as we grow inventory, there is higher conversion, which allows us to grow more inventory. You're seeing some of the other positive feedback show up and things like faster delivery times. And I think our goal is just to kind of keep leaning into that and keep growing.

And we think the limiting factor is our ability to execute effectively and make sure that we are delivering very high quality and ideally ever improving customer experiences. And I think that - that's what we'll continue to monitor and make sure that we're balancing carefully.

Jeff Lick

And then just one for Mark. Go ahead.

Ernie Garcia

Sorry, one more thing I'd just throw in there. Quick shout-out to the wholesale team. They did grow units 43% year-over-year, gross profit non-GAAP up 50% year-over-year.

So that was an all-time fourth-quarter record on units. So I think it was a great quarter for those guys. What was your next question.

Jeff Lick

Mark, on the - if you take other gross profit and strip out gain on sale, which pretty much leaves you with VSCs and some GAAP, that on a per unit basis was $901 in Q4, which was a sequential downtick from $939 and year-over-year $973. Just any color as to what's driving the decline there.

Mark Jenkins

I don't know if there is anything particular that I would call out. I do think that can fluctuate around quarter-to-quarter. I think overall, I think we see opportunities in those - the ancillary product component of other GPU. I think we have teams that are constantly focused on thinking about the customer experience related to those products, thinking about getting the right product offerings that are going to be the most desirable to customers in front of those customers.

I think they're always doing testing to try to make things as simple as possible. So I think that's a number that can bounce around from quarter to quarter for sure, but that's one of the areas in the business where we see continued opportunity for fundamental gains.

Jeff Lick

Great. Well, thanks for taking my question, and good luck this year.

Mark Jenkins

Thank you.

Operator

The next question comes from John Colantuoni with Jefferies. Please go ahead.

John Colantuoni

Great. Thanks so much for taking my question. So you ramped the marketplace - retail marketplace units sequentially in the fourth quarter.

Talk a little bit about any learnings from that expansion. And if you see an opportunity to make the offering a more meaningful portion of units sold over time. Thanks.

Ernie Garcia

Sure. Well, I would point again to - we think that the fundamental role that we play is to get a car from the previous owner or user to the next owner as efficiently as we possibly can. And we think that having the joint distribution channels of retail and wholesale and having the ability to convert a car from its previous state to retail ready at the same location where you can wholesale it, is a fundamental capability that enables partnerships and reduction of time and cost that we think is meaningful.

And so to us, that's the fundamental gain. Those cars are part of that 270 million car park that rotate around and turn into car sales. And so if we can build a system that is more efficient for those cars, we believe that we can disproportionately get those cars and deliver them to our customers and deliver them a great experience along the way.

And we believe it's part of just deepening kind of our foundational capabilities and our vertical integration. So I think that's the most important thing that we're working on. And I think that you're seeing us lay foundations for that.

Generally speaking, something of enduring value takes time to build. And so it requires the joint capabilities of reconditioning and wholesale at these different locations. Something that we're working on now quite a bit is working with our teammates at ADESA to build a very high-quality digital auction tool - that's going very well and also feeds into that system.

And then we've got a couple of partnerships where we're working on getting those cars and leveraging those tools and trying to make sure that it works out great for both us and for our partners. And we think that there is no reason why that can't scale meaningfully from here. I think the portion of the market that could be served in a similar way is very large.

But like anything, it will take work and so I think we've got plans and we got work to do and we're going to keep doing it. But it's - I think it's another one of the exciting vectors in our story that we're going to keep pursuing.

John Colantuoni

Appreciate it. Thank you.

Operator

The next question comes from Marvin Fong with BTIG. Please go ahead.

Marvin Fong

All right. Great. Thank you for taking my questions and doing this session.

Congratulations on the results. A question, yes, I think last quarter you had sort of indicated you expected the retail average selling price to come in at $21,000. I think you guys came in about $1,000 above that.

And I was just curious what in the quarter kind of might have developed that caused the ASP to come in above expectations was the pricing environment stronger than you expected or was the drag from retail marketplace units lower than you expected. Just some insight there would be great. And then on the OpEx spend per unit, the $1,696 this quarter, what - how would you advise us to kind of think about your ability to leverage this going forward.

Is there a dollar target we should have in mind or a percentage decline every year. What would be the best way you would advise us to kind of think about your ability to drive that number. Thanks.

Ernie Garcia

Sure. I would say on the first one, I think there is always a bit of room in those secondary numbers that we're trying to do our best to estimate those. But I wouldn't read too much into a $1,000 delta on that particular number.

On OpEx, I think, this again is a number that we're incredibly proud of. I think when you think through the work that is being done and the offer that is being made to our customers and the variable expenses that we are incurring in order to deliver that experience to customers, it's something that's really exciting. But we also definitely think that there is room for improvement in every part of that.

There are many elements of our operational chain that we've discussed on this call. Obviously, logistics is a big part of that. Customer care is a big part of that, verifications, title work, last-mile delivery, handling the return policy when that occurs.

Every element of that chain of completing a transaction with a customer is an area where we think there is room for improvement and where we have projects that we've mapped out where we believe there is room for improvement. And now we need to go execute against that. I think you can see that we've made a tremendous amount of progress over the last several years.

As those numbers get smaller, the dollar progresses, it gets tougher, but we improved another $150 year-over-year - excuse me, $330 year-over-year, which is very meaningful there. And I think we still think that there is definitely room to continue improving.

Marvin Fong

Got it. Thanks so much, Ernie. Appreciate it.

Ernie Garcia

Thank you.

Operator

Thank you. That's all the time we have for questions today. I would now like to turn the conference back over to Ernie Garcia for any closing remarks.

Please go ahead.

Ernie Garcia

Well, thanks, everyone, for joining the call. Carvana team, awesome job. I cannot say this enough.

I think the last year is a year that absolutely nobody saw coming. It's a year that may be just us inside this company saw coming, but I think to execute at the level that we did is something that we should be forever proud of. Please keep working just as hard as we have.

Please stay proud of the effort, not just the outcome. I think we have a ton of stuff that is left to do and our path is extremely bright. We are just getting started.

So let's keep it going. Thanks, everyone.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.