Good afternoon, and welcome to the Carvana Fourth Quarter 2018 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 Mike Levin, Vice President of Investor Relations. Please go ahead.

Thank you, Andrea and good afternoon, ladies and gentlemen. Thank you for joining us on Carvana's fourth quarter 2018 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 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. We will be discussing some non-GAAP financial measures including gross profit ex-Gift, G&A ex-Gift, and EBITDA ex-Gift. All gross profit, SG&A, and EBITDA metrics mentioned by us on this call are on an ex-Gift basis unless otherwise noted. You can find reconciliations of those measures in most directly comparable GAAP measure in the shareholder letter we published today, posted on our website investors.carvana.com. And now, with that said, I'd like to turn over the call to Ernie Garcia. Ernie?

Thanks, Mike and thanks everyone for joining the call. The completion of another year is always fun because it provides an opportunity to take a quick break from all the things we're doing to continue our progression forward and to instead pause and reflect on what we've built so far. We're excited to be reporting results on another incredible year of building the Company. We closed the year with our 20th straight quarter of triple-digit growth. This is an accomplishment that clearly demonstrates the power of our customer offering and the quality of our execution, and it is a feat that we are extremely proud of. We grew units by nearly 50,000 for the year. This growth makes us the fastest growing automotive retailer in the country. We grew revenue by 128%, this makes us the fastest organically growing U.S. listed public company at anywhere near our scale in either retail, consumer, or technology. We grew our GPU from 1,539 to 2,133, an increase of nearly $600 for the year and an increase of over 1,100 since going public in April of 2017, cementing our path to our mid-term goal of $3,000 and beyond. We continue to march towards profitability, showing 700 basis points of leverage for 2018 and over 1,300 basis points since going public. All of this progress is the result of two powerful long-term forces. We're building a product our customers love and we have incredible people who love building and delivering it. If we do our jobs here, the same two forces will drive us to our goal of selling 2 million plus units per year. That number may sound daunting to some, but looking backwards provides some helpful context. Getting to 2 million requires that we grow roughly 20x from here. Few companies scale like…

Thank you, Ernie and thank you all for joining us today. Unless otherwise noted, all comparisons are on a year-over-year basis. We are pleased to report another quarter of triple-digit growth in both retail units and revenue. Retail units totaled 27,750 in Q4, an increase of 105%. Total revenue was $584.8 million in Q4, an increase of 121%. In 2018 we also completed our second year of triple-digit growth as a public company. Retail units sold totaled 94,108 in 2018, an increase of 113% and revenue totaled $1.96 billion, an increase of 128%. Underlying this company growth was another year of strong growth within our cohorts. Atlanta grew 30% in 2018, reaching a quarterly market penetration in Q4 of 1.94%, up from 1.54% the previous year. 2014 cohort growth accelerated in Q4, reaching a market penetration of 1.11%. The 2015 cohort faced a harder comparison this year than last year, with replacement demand in Houston in 2017, but it remained on a strong trajectory and the 2016 cohort saw a second year of nearly triple-digit growth. Finally, the 2018 cohort launched with the fastest start in our history, exceeding the 2017 cohort, which ramped faster than any previous ones. We believe the strong and consistent growth in our cohorts demonstrates the significant consumer demand for our product and the replicability and scalability of our model. Total gross profit per unit in Q4 was $2,131. For the year, total gross profit per unit was $2,133, an increase of $594. Our growth in GPU in 2018 was broad based, including gains in average days to sale, financing and ancillary products. EBITDA margin was negative 10.8% in Q4, an improvement of 4.7%, reflecting significant gains in the quarter. We made substantial progress on operating leverage this year while also increasing our investment and…

[Operator Instructions]. Our first question will come from Zach Fadem of Wells Fargo. Please go ahead.

Hey, good morning guys, sorry about that. When thinking about the drivers of the GPU improvement in 2019, could you walk us through some of the near-term buckets of improvement that you're expecting to contribute and how much do you expect the improvement to come from financing and other items?

Sure. So we've talked a lot about the different sources of GPU opportunity for us and I'll start with some of the big buckets that we have talked about at Analyst Day and then I'll touch on some other items. So, two of the big opportunities that we see are in buying more cars from customers and in expanding our finance monetization program. I think the buying more cars from customers is something where we obviously started to see more traction in 2018 as we devoted more resources to that business line. It's an area where we feel like we provide customers with a great experience and have some really, really nice aspects of our offering and we'll be looking to grow that business over time. Of course, buying cars from customers is a contributor to GPU for two reasons, first, cars that you buy from customers in wholesale, you earn wholesale gross profit that way and then cars that you source from customers are typically more profitable when you turn them into a retail transaction than cars that you source from auctions or other sources. So that's one place where we see opportunity. Obviously that's a new business and we expect to be doing lots of testing and we're still we feel at a very early stage, but that's opportunity number one. Opportunity number two that we see is expanding our finance program. I think we presented a little bit of data today on the quality of our program to-date and I think that's something that we're very excited about. We have a special model, our loans have performed very well over time and as a result are very valuable. And we'll look to continue to monetize those loans over time by expanding our number of partners and bringing down our cost of funds. In terms of other areas, I do think we see opportunities across the other parts of the transaction as well. We've talked over time about continuing to leverage our existing infrastructure that we use to transport and recondition cars. We've talked over time about continuing to expand attachment on existing ancillary products as well as potentially over time adding new ancillary products to the checkout flow. There are many places where we see opportunity, but I've walked you through the couple of the big ones.

Yes, if I could just jump in too Zach, I think most of the attention, most recently on the finance platform has been on how we're going to monetize that platform. I hope the data we presented today is helpful. We showed that our last experience has been great there relative to other public issuers that have data out there and that it has been consistently improving over time, but I think it's a story lost and it is really important that we want to make sure we make a point on as well, which is as long as we're originating high quality loans, we're selling cars at low price to customers, we're putting them in a better position to succeed in their loans, they are also defaulting less which aside from creating more valuable loans we can monetize better is a better customer experience with customers that are less likely to default, who are more likely to become repeat customers. And so we think that that's a really important area where our vertical integration is paying off in a way that it is probably not yet totally understood. But we think it pays serious dividends over time.

Got it, that's super helpful. And just taking this bigger picture, could you comment on just overall consumer adoption in the category, any color on how online penetration has been trending in the used car industry in 2018 and how do you expect this adoption to continue in 2019 and over the next three to five years?

So I think that's a hard question to answer precisely specifically because I think most consumers in the U.S. still don't even know exactly what is meant, when you say you buy car online. So I think if even if you ask them the question, I'm not sure they have enough exposure to what our model looks like to know if that is something that is appealing to them. We continue to see very steady progress across all of our cohorts. Atlanta continues to grow very quickly. I think something that gets us really excited is that we don't feel like we necessarily even need significant additional gains in the number of customers who would be willing to buy cars online in order to continue to see a lot of gains in actual transactions in the market of Atlanta, for example. And the reason that can happen is because as we grow inventory or as we add more inspection centers and shrink delivery time, we should get a higher conversion rate on the customers that we're already seeing today. And then, I think there's kind of this completely separate dimension of customers becoming aware of what we do and getting more comfortable with what we do. We haven't made public data on research that we do, trying to understand which customers are or what percentage of customers are really been aware of us. But the awareness levels nationwide and in Atlanta remain pretty low. And so we think there's a lot of opportunity there. And so, we think our job is to keep delivering great customer experiences one at a time and those customer experiences will tell the story and get more and more customers comfortable. And if we execute all the positive feedback and the model is going to show up, we should be in a really good spot.

So if I were to ask that question slightly differently, I mean CarMax just launched an omnichannel platform in Atlanta, just curious if you're seeing any impact there and could you see that as a positive for driving brand -- consumer awareness in the category?

Yes, I think we would start out, just kind of reiterating our general view on competition which is that this is an enormous market that's enormously fragmented. The largest player has 1.8% market share, the largest 100 players have about 7% market share. So I think those dynamics are fairly unique across different retail verticals. It's also a business that is somewhat operationally intensive, making rapid scaling difficult. So we think that all those things, I mean the competition is relatively less important than it might be in other verticals. I think your point's a good one though. I think when you start competition, it's a little bit unclear which direction that it pushes because effectively two brands are being pushed when one of our competitors out there advertising selling cars online. They're pushing their own brand out there, right, which if all is constant is negative for us. They're also pushing out the brand of buying cars in a new way. And we would like to think that we're kind of cemented in consumers' minds as the number one brand to go out and buy a car online. And so we think there's a chance that that will ultimately be positive. I think we haven't seen any material impacts in any of our markets where any of the different competitors out there doing any different things. In Atlanta in particular, we're very pleased with the growth we saw in the fourth quarter. It's extremely early in 2019 but we continue to see really good trends there. We've seen a slight acceleration of growth in the first couple of months in Atlanta. So far we just don't see anything that concerns us too much on that front and we continue to believe that we're the leader and as long we keep building, we're in a great spot.

Our next question comes from Sharon Zackfia of William Blair. Please go ahead.

Hi, good afternoon. A couple of questions, I guess it was really encouraging to hear about Phoenix and the ramp you saw there. I'm wondering if correspondingly you size similar decreasing in customer acquisition costs as you reach that 1%?

So we don't break out kind of our reporting at the individual market level. But I think in general, it's a very good first order assumptions that there is a inextricable link between customer acquisition cost and market share. So in general, that would be a good assumption. But we're going to continue to report at the cohort level.

Can you talk about anything you did specifically in Phoenix or anything unique there, other than you being headquartered there that you think drove the massive quick increase?

So I do think we had an advantage by virtue of being headquartered here, which I think made the early awareness easier to gain. So I think it probably benefited us. I also think the other advantage of Phoenix is it's very nearby an inspection center. And so there's on the order of 25% of our cars in the fourth quarter at least were parked just down the street from those customers in Phoenix and that meant their delivery times were fast and I think that probably hit in conversion as well.

Okay, great. And then on wholesale, I mean that was probably the only area where maybe it was a little bit weaker than we would have expected. Can you give some commentary around wholesale just given that that was part of the longer-term thought-process on GPU?

Sure, yes. I'm going to break that into units and then margins. Let me start with units. I think we are very pleased with the progress we made across the year. I think it grew by something in the order of 220% to 230% in total units that we bought from customers. Some of those flowed through wholesale, some of those flowed through to retail sales and kind of in either case, there's a profit opportunity there. But it just depends kind of which line item is going to flow through. I think like I said, the progress we made last year was exceptional and I think our expectation is that we'll make continued very significant progress in 2019. I think when you look at the fourth quarter and the first quarter, there's some dynamics that are worth kind of keeping in mind there. We have some different customer selection effect in the fourth quarter due to the promotion. We have some different customer selection effect in the first quarter due to the tax season. The fourth quarter and the first quarter tend to be the quarters where we're growing inventory the most. And in general, kind of the easiest inventory to go out and grow is coming from non-direct consumer channels. So we're going to -- we tend to grow more in those channels, which means it puts downward pressure on the percentage of cars that we're selling that were acquired from customers. But the underlying trend in cars that we're buying from customers and the margin we expect we will make over time are all very, very positive. And then on the margin front, in wholesale in particular, I think that probably moves around by 100 bucks or maybe 200 bucks something like that, not a super material number. We're still -- as we try to set expectations, we're growing this business very, very fast and we're learning very, very fast. We're changing the ways that we're going out and acquiring these customers, which you have selection effects and changes the way customers go through the funnel. We're constantly evolving the funnel and learning and changing conversion there. We're changing the way that we nurture these customers, we're working on pricing at the aggregate level and at individual car levels. So there are constantly lots and lots of tests going on. And I think that that business today is optimized for growth in learning, not for steady progress. And so I think if we look at it over longer time frames, I think we would be very pleased with the progress there. If we look at it quarter-to-quarter with all these different dynamics, I think it could be a little bit choppier and so I would build that in to your expectations.

And one last question, I didn't see this in the shareholder letter, what was the 2018 national market share for Carvana?

I think the way that we calculate that is 94,000 units divided by 40 million, so that would put you just shy about 0.25%.

Our next question comes from Ron Josey of JMP Securities. Please go ahead.

Great, thanks for taking the question. Maybe a quick follow on and then a broader one on just the IRC strategy, on the follow-up, Ernie, we were just talking about wholesale and buying cars from consumers or from users. Can you tell us what percentage of those cars are sold to retail, I think you said 16% in the past I think in 3Q? And then maybe a broader question, just the IRC strategy, you talked about adding a production line in Phoenix and in Indianapolis, launching newer IRCs though with only two production lines, some with four. So if you can just tell us about maybe how you're thinking about IRCs and the build-out as you reach to 2 million units over time and then here in the near term, just the location of these IRCs being potentially closer to your markets, the importance of being closer to the consumer with the IRCs and maybe the impact on shipping times as you launch call it four production lines and two production line IRCs? Thank you. And then of course, CAPEX. Thanks.

Oh man, you really got that last one there in one word. So retail, so cars that we're selling to customers or were purchased from customers, that went to 17% in the quarter versus 16%. That's the statistic that kind of faces the headwind of growing inventory, right. If we're growing inventory, it's generally coming from non-direct to consumer channels. That means that a smaller percentage of your inventories on the site any point in time was purchase directly from consumers and that creates a headwind for the likelihood that any given customer chooses a car that was bought from a customer. So I think we're pleased with that progress, especially in light of that headwind. From inspection center perspective, I think we're really focused on being sure that we stay in front of all the growth that we see over the next several years that we basically try to calculate by extrapolating out the cohorts. And then we're trying to make sure that we're building in flexibility. So I think we're excited to be building in this efficiency and it enables us to add additional lines in Phoenix and in Indy. We're excited to be adding additional locations in different parts of the country to kind of shorten delivery times overall. We expect this to be a constant push. We will be continually either acquiring new inspection centers or adding to existing inspection centers, in many cases probably both. I think something that we're really excited about, Phoenix is the first inspection center that we built from scratch and kind of laid out and that's specifically for Carvana processes. And in just about every metric that's already our most efficient inspection center. Many of the learnings that we kind of got there, we're taking into the next level inspection centers that we're setting up and that's driving some of the subtle changes in CAPEX which I think we now estimate to $10 million to $12 million per line. And we think that thinking about CAPEX on a per line basis is probably the right way to think about it. And then we'll size individual inspection centers based on the needs that we see in any given geography at any point in time.

Great, thank you.

Our next question comes from Chris Bottiglieri of Wolfe Research. Please go ahead.

Hey guys, thanks for taking my question. A couple of financing questions, so the financing gain on retail unit really pop this quarter even if you back out these refinancing transactions, so was there any noise on timing of receivables or maybe you can talk about what drove that significant improvement year-over-year or even relative to the last quarter?

So one factor that influenced Q4 gain on loan sale, looking at on a per retail unit sold basis is our Q4 refinancing transaction. And so the Q4 refinancing transaction had one major difference from the Q3 refinancing transaction and that is in Q4 we sold some loans directly from our balance sheet into the transaction along with loans that were refinanced. And so, because those loans were sold directly with much better financing than our typical forward flow financing, we earned a higher premium on those loans. And so part of the increase that you're seeing quarter-over-quarter and also year-over-year is due to that direct to sale to the purchasers with much better financing.

Got you, okay. And then sort of giving through the financing primer well on the calls is certainly not full yet, but I guess my first question is, it's obviously very impressive improvement in CNLs. So my first question is, has this improvement in the CNL been pretty consistent across your three scoring buckets or are you seeing like one bucket versus the other driving more significant outperformance? And then the follow-up to that would be, for the 10% of loans that are in the riskiest bucket, are you still receiving a positive fee on these gain on sale type transactions or are you looking at that payer in that 10%? Thank you.

So first, what I'd say is, I think you can kind of look at the outperformance of any given band of loans. Based on the data we provided you can look at kind of how the credit score or the lost curve look over time and then you can compare that to other issuers in the market. We've tried to provide that data in there. So I think that'll help you to try to size the relative outperformance by credit band. I think if you're asking about the improvements over time which credit band those came from, in general, they have come from several credit bands, but the kind of higher loss credit bands are always the places that have the biggest impact on your overall losses just because the way the math works out. So in general improvements there are always kind of most powerful to your entire curve. And then, we haven't really broke out the premiums that we get on any given credit band. But I think in general we have very high quality loans originating and you can kind of look at the loss differences by credit band and then you can do a little math to figure out how much more valuable those loans may be. And I think across credit bands we're originating very high quality loans and then we're also obviously functionally doing something different where we kind of like the combination of a retailer and a finance company in the sense that we're doing the credit scoring, pricing, structuring, all of that work that's associated with verifications work, all work associated with originating those loans. And that also puts us in a good spot to monetize. So, in general we're monetizing well across the spectrum, but we haven't broken out exactly how we're doing it in each bucket.

Okay, great. And then just one quick one very quickly on I want to talk of the transportation bucket is because you're growing so exponentially with market growth and I guess you opened another IRC is any of that like having a quantifiable impact on your inbound transportation cost and maybe temporarily depressing the retail GPU, just wasn't sure if there's anything kind of drove some of that Q4 step down, anything you can quantify there would be helpful? Thank you.

Sure. So, let me first hit the, I guess, sequential change in retail GPU because I think that'll help the thinking on that. So, there's a couple things that happened in the fourth quarter that impact retail GPU, the first is our Cyber Monday promotion, which is $1,000 off for customers who take advantage of the promotion that obviously impacts retail GPU. Secondly, Q4 is the period in the year where used car depreciation rates are highest. And so while you're holding inventory between acquisition and sale, those cars depreciate faster and that also has an impact on retail GPU. In terms of inbound logistics costs, there's nothing that I would call out there in particular. I think it's mainly the two big factors that I listed upfront.

Yeah, I'd add to that. I think the effect you're talking about is probably present to some degree, but probably it isn't a huge number inbound. I think that effect is meaningful outbound as we build out the network and kind of spread out across the country with fewer IRCs, supporting an entire nationwide network, that definitely does provide pressure because we're moving cars longer distances on average. And then as we fill in the IRC network, you're starting to ship cars lower distances on average. So I think the bigger effect there over time will be on outbound, which shows up in SG&A, but there probably will be something of an effect inbound as well, to your point.

Got you, thanks guys, appreciate it.

Our next question comes from Nat Schindler of Bank of America Merrill Lynch. Please go ahead.

Yeah, hi guys, a couple of things. One, if I look at just some basic math on the marketing per unit in Atlanta, it looks like you're running, call it, 2.5% right now with a target on your advertising spend being somewhere on the order of 1%, 1.5%. What gets you there from here to get way beyond where you are, even in Atlanta when you're hitting roughly 2% market share and what do you need to do from here to get there? Secondly, just a weird thing, I just was wondering if you could help me understand why do you seem to have particularly in Atlanta, I can't really tell in the other charts, why do you have a downturn in share in Q3 sequentially in the last several years, is there something that occurs seasonally that makes offline guys do better? And finally, just one final question, and no, these aren’t related, so you are going to have to remember them all. But there was a competitor made a commentary in the last couple of days that you guys are doing great but selling 100,000 units is one thing, when you start selling 400,000 units or something to that effect, similar to what you're suggesting your IRCs will be able to handle after you do this next time that you added in, it doesn't scale as well. Do you need to buy retail units, consumer units, do you need to buy from consumers in order to be able to get enough cars to meet -- to handle 400,000 units in the year?

Okay. There's a lot in there. So let's start with customer acquisition costs. So I think there's many, many ways that we think we can drive down customer acquisition cost. We talked a little bit earlier about kind of being in the early innings of awareness generation and I think that's true. We think that we're advertising today, we're not only acquiring customers in real-time, we're also building a brand. We think there's a lot of evidence of that we can see in the cohort factor, right, they are downward sloping for reasons that we're building brand over time. And so we think there's some natural momentum that will probably continue to show up there. I think the most compelling and kind of simplest way to understand how that -- we should be able to push that down over time, is just simply to think about conversion. So, if we take that market share of approximately 2% in Atlanta and we extrapolate that out nationwide, that suggests around 800,000 car sales, if we had order of 800,000 car sales and we had about a 30-day onsite turn time, we have about 70,000 cars on the site at any point in time, that's a very significant increase from where we are today and we think that alone with the exact same marketing dollars would lead to higher conversion and therefore push down our customer acquisition cost quite a bit. If you had 800,000 car sales per year you'd also have on the order of 16 inspection centers and so we'd see on average across the network faster delivery times, that would also push that down. So those to me are the simplest way to extrapolate out to kind of much lower customer acquisition costs, and so we feel really, really good…

Okay. If you look at the auction of the 14 million cars, roughly what percentage are in your kind of sweet spot of the three to five year old vehicle with the pretty prime used car?

I don't know the exact answer for you there, I believe and so I want to caveat this with I believe. I believe about 50% of car sales in the U.S. are less than five year old cars and so my guess is that cars going through auction would we somewhat proportionate to that distribution, but I'm not certain of that.

Our next question comes from Steve Dyer of Craig-Hallum. Please go ahead.

Thanks for taking my question. As it relates to your GPU guidance for this year, was there any assumption around another receivable sale in there or would that all be sort of incremental and additional in the guidance?

Yes, sure. So I can hit that. I think when we first announced the first refinancing transaction, we provided some commentary that we expected to do an additional fixed pool financing in Q4 and that we would endeavor to make it part of our ongoing finance monetization program. And so I think that still holds true today. Obviously, I think with the loan performance that we've seen and the quality of our platform, we think we'll have an ability to continue to use those types of transactions. We think those types of transactions make a lot of sense for everyone involved and we'll look to continue to do them going forward.

Given that $400 or so per unit GPU improvement this year, I guess what is your general thinking as to what role these transactions may play in that?

Sure, so consistent with past years, I think the way that we're looking at GPU and particularly our guidance on GPU is in terms of total GPU. We don't plan to break down specific line items. But we did do -- we've done two of these refinancing transaction so far, those give you a sense of the additional economics available when you transition from forward flow financing, which is less efficient to fixed pool financing which is more efficient. And like I said, we will look to do continued fixed pool financings over time to realize better effective cost of funds, which have a positive impact on finance gross profit.

Okay, so presumably there is something in it for this year. Just a question on inventory, I noticed your inventory was up 22% sequentially, Floor Plan debt was around 44% sequentially. Is that sort of as you hit a little bit you're using your Floor Plan line almost more like a revolver now, I mean you are taking equity in your vehicles or help me think about that?

Sure, so let me hit the inventory growth first and then talk the Floor Plan lines. So we typically grow inventory in Q4 in preparation for the first half of the next year. This year was no different. We started building inventory in advance of the positive demand seasonality in the first half of 2019. As it relates to the Floor Plan line, we expect looking forward to maintain more availability on the Floor Plan line than we have in the past. We think that's marked from a financial management strategy, the Floor Plan line is available to us to draw upon using our inventory as assets when we would like to, but from an interest expense management perspective, it makes sense to keep that line available as much as possible to minimize interest expense.

Okay. And then just one more from me, as it relates to CAC or more specifically advertising, how do you allocate those expenses by cohort when a lot of them are national, I guess I was always of the impression that it was really difficult to give any kind of profitability per cohort metric just because so many of the costs are national or corporate level? Thanks.

Sure. Yes, so on the order of half of our advertising is national and on the order of half is local. We've talked about that before. That's because TV is our main national channel. And then in terms of allocating, so all the local channels are obviously very straightforward. For national cable, the way we allocate is based on population within a cohort. And so we take our national TV spend allocated out of the cohorts based on their population.

In the interest of time, we ask that you please limit yourself to one question and one follow-up. Our next question will come from Armintas Sinkevicius of Morgan Stanley. Please go ahead.

Great, thank you for taking the question. When I look at the free cash flow burn this quarter and the anticipation for further free cash flow burn in the quarters ahead, how do you think about financing? I know you have $400 million plus of availability, but at some point presumably you would need to raise either equity or debt and what's your thought process there?

Sure. So, we don't plan to raise equity or debt other than our standard asset based financing which we've accessed many times over the past few years. I think a couple of key points there, one, our inventory is financeable with our Floor Plan line and we haven't fully drawn on that Floor Plan line at this time as I was mentioning, with respect to the earlier question, but obviously have availability there. The second key point I would make about sort of use of cash is a very large portion of our CAPEX is hard assets that we've historically financed. Those include real estate assets as well as hauler assets, which we finance with some sale leaseback financing or other types of leases or equipment financing in the case of haulers. And so we endeavor do that on a go-forward basis. At the end of Q4 we had approximately $130 million of unpledged real estate sitting on our balance sheet. We had a $75 million master sale leaseback agreement in place as well as some other smaller sale leaseback commitments. And so I think the combination of Floor Plan line when you're looking at working capital for inventory and then our historical access to capital for the hard assets on our balance sheet, I think we feel good about our liquidity position.

Okay, thank you for taking the question.

Thank you.

Our next question will come from Rick Nelson of Stephens. Please go ahead.

Thanks for taking my question as well. So, there is mentioned in the shareholder letter about a delay in tax refunds. To the extent in January 2018, you comment on the first quarter and how confident are you that these delays every time as opposed some of the data suggesting refunds are coming in lower on a per person basis, so how that might impact the business?

Sure. So I think there's a lot going on probably this tax season. I think there's probably more uncertainty about all the specifics today than there normally would be at this time of the year. So let me try to walk through that. I think based on the best research that we have seen it seems like probably aggregate refund dollars overall will be lower. And our understanding is that that's going to be primarily driven by essentially 1099 filers and some higher income people who have kind of the ability to change their withholdings more easily. And as a result of the tax law change, the recent tax law change, that they increase their withholdings and therefore they will get lower refunds. As part of the tax law changes as well though, there was an increase in something called the child tax credit. Historically, if you look at kind of tax dollars that are released and then the kind of relationship that those tax laws have to ultimate purchase of vehicles, the tax credits that kind of correlate best are the child tax credit and the earned income tax credit. Our belief today and based on research that we've seen from a number of banks is that those will be similar and potentially even higher. So we kind of think that the overall refunds will probably be lower with low certainty. We think that probably the refunds that are most highly correlated with the taxing response will be higher. We also feel that with relatively low certainty. And then it is undoubtedly been delayed to some degree, the government puts data out there so we can kind of like watch when the drops are happening and we can see what year-over-year total dollars look like. So it's undoubtedly been delayed a bit. There was actually somewhat sizable lease drop today. So we're still kind of learning exactly how much it's going to be delayed and I don't think we know, but our guess would be with seasonally high confidence it's delayed, with low confidence it's probably going to be similar to maybe even a little bit better overall. But I think there's more uncertainty than there usually is in tax refund season this year.

And do you think this affects the subprime kind of buyer more so than the prime buyer?

I think historically the tax refunds that have correlated most with kind of first quarter car purchases are the earned income tax credit and the child tax credit, which on average are associated with lower incomes. So I think it does probably impact the lower income population more than higher income population in terms of the immediate response to the tax refund.

Our next question comes from Nick Jones of Citi. Please go ahead.

Hi, thanks for taking my question. I want to focus back on IRCs, can you dive in a little deeper on kind of the shift work, two shifts a day, five days a week or seven days a week and is it possible to add a third shift so I guess what I'm asking is there kind of like a 33% upside to what your footprint is going to be even at 400,000 unit capacity?

Sure. The way we're planning today is based on two shifts per line and those shifts running five days per week. We do believe over time that there is an opportunity to expand beyond that and that could include weekend production, as you mentioned, so transitioning from five days per week to six or even seven. And then it also can include expanding shifts within any given day to two and half or three. Those aren't in our immediate plans, but we do think given the infrastructure that we're building, that option is on the table at some point in the future and which I think is great. But we don't have any immediate plans for that today. We're focused on two shifts per line, five days per week.

Okay. One quick follow-up, how did the Black Friday, Cyber Monday weekend go this year?

I would say it went fine. It went a little bit better than 2017 and it didn't go as well as 2015 and 2016. I think when we guided for Q4, that guidance was basically the largest probably driver of the range, there was uncertainty around exactly how the promotion would play out. And I think it went a little bit better than 2017 but not nearly as well as 2015 and 2016. And our kind of guidance range was basically for it to go somewhere between 2015 and 2016 or 2017. So I think it went fine. I don't think any of our major thoughts about running that promotion have changed. We think about that promotion as much more of a brand building effort than kind of a real-time sales driver and the reason we like it is because it associates us with online buying. And so we think that's valuable. And so I think we will continue to evaluate that at long length and through kind of the shorter length how many sales it drove this year, it was fine but it wasn't great.

Our next question comes from Colin Sebastian of Robert W. Baird. Please go ahead.

Hi, it's Ben on for Colin. Just two questions, first, given the advertising leverage you're seeing across your cohorts, does that imply that your older cohorts are profitable on a market contribution basis or have some the logistics investments kind of offset those? And then secondly, as it relates to the 2019 guide, how are you guys prioritizing unit growth versus GPU improvement, is there a bias toward one versus the other?

Sure. I would say, I mean in general, I think our priorities are to drive unit growth and deliver customer experiences and then GPU and then to reduce SG&A. So I think in general, that's how we think about it. I think it's probably a fair way to kind of think about the business and our expenses to complete a transaction are somewhat similar across markets. So when you look at our Atlanta CAC for example and compare that nationwide, it's probably fair to then say okay, if the rest of country gets down to where Atlanta is, how much that improves the economics and the answer there is very, very significant. And then the question about profitability is always the question about how you're allocating expenses because obviously at the company level, we are not profitable. But with many reasonable allocations our older markets are and have been profitable and that has us feeling very confident about where we're going.

Thanks.

Our next question comes from Seth Basham of Wedbush Securities. Please go ahead.

Thanks a lot and good evening. My question first is on the quarter, trying to understand a little bit better the bridge to your results relative to your expectations. It seems like Black Friday wasn't quite as good as you expected but those are relatively low incremental margin units, highly discounted. What else drove the miss in EBITDA relative to your expectations, can you please give a little more color around investments, etc?

Sure. Yes. So the primary driver of our EBITDA margin relative to expectations was the lower units and also the lower revenue that was associated with those lower units. In addition, we made some incremental investments similar to the ones we've talked about on previous calls, and that includes investing additionally in our technology team here at home office as well as our logistics network.

Got it, and when you think about that rate of investments going forward, do you expect a much slower growth rate in 2019 relative to 2018?

Sure, so all of all of our expectations about future investments are incorporated into our 2019 guidance. I think overall I think we're very excited about the leverage that we've shown. I think Ernie alluded to, we made 700 basis points of EBITDA margin improvement year-over-year. A significant portion of that was driven by expense leverage year-over-year in 2018, which actually accelerated relative to 2017. I think as we look forward to 2019, we expect obviously further GPU gains but also further operating leverage gains as we march towards profitability.

Our next question comes from Sameet Sinha of B. Riley, FBR. Please go ahead.

Yes, thank you very much. So Ernie, you've previously spoken about as you look at network expansion part of it is sometimes increasing density, part of it is expansion. It seems like this year it's going to be about increasing your density and that will be your capital efficiency is going to be higher. Now if you start to think about next year, are you kind of, would you say that next year you'll probably look to do more of the expansion part and we just need just to kind of have our expectations adjusted accordingly? That's one question. Secondly, the question is, if I'm just looking on a year-over-year basis on your retail business, units increased by about 14,000 year-over-year, gross profit by about 15,000. So incremental unit gross profit was about 1,000 let's say, maybe a little more but that's down year-over-year, that's down like 20%, is there anything specific in the composition or is it maybe to Cyber Monday, anything that you can point to?

Okay. So, let's start with the first question. So I think you're right, most of the markets that we're going to open or many of the markets that we are still going to open this year are going to be added basically on top of the existing logistics network which will be a little bit more capital efficient. Now I think that the CAPEX required to open markets in general is pretty low, so I don't know that that's a super material difference when we kind of zooming out and looking at the company. But I do think directionally we will have a lower CAPEX per market that we're opening this year. I think looking forward, our logistics network is getting pretty expansive now and it is covering most of the country. There's still some room for us to go up to the Pacific Northwest and a little bit more room for us to go up kind of farther North in the middle of the country. But we don't have a lot to add there. So I do think that after these 60 markets probably in 2020 we will be opening more markets that are kind of are a little bit heavier in CAPEX. But I don't know if that will be even a necessarily noticeable change, but I think directionally that probably is going to happen. I think the most important kind of density that we can build into the system over time is basically just having all of these markets continue to ramp up their market penetration and then that drives up sales. Driving up sales allows us to carry more inventory, that increases conversion and then driving up sales also allows us to build more inspection centers or requires us to build more inspections centers which decreases shipping times. And so I think those are the most important things over the next several years as we look for the positive feedback in the model and just to reiterate we feel really good about that. We feel we have a repeatable playbook across the board there in terms of the way that we are opening up markets, in terms of the way that we're building out the logistics network, in terms of the way that we're opening up IRCs. We are constantly improving in all those different dimensions, it's highly scalable and obviously very difficult to replicate as well. So we are feeling really good about all that. And then I apologize but I'm not sure I totally followed the second question and what you are trying to get at, do you mind restating that?

Yeah, sure. Actually you know what I will just take that offline, maybe I will just replace it with another question. Now you have had two quarters of kind of middling experience with Cyber Monday and is that something that you are going to evaluate whether to have it or not because most of your competitors usually do not have such promotions, so if you can talk about that, that would be helpful?

Sure, so let's start it a really high level. So at a high level I think we generally don't want to be a super promotional company, right. I think that the notion of price not a lot of retail is something that has been beaten up pretty bad over a very long period of time. And so we don't want to participate in that, we want to maintain the integrity of price. And so we think that it's important for us not to be super promotional. Cyber Monday has always been an exception to that because we think the benefits of being associated with other online retailers and telling our story that way outweigh the costs of running a single promotion. And so that's how we thought about it. We thought about it as a brand building effort. It's more something that we measure over a longer period of time and something we will measure in real time. I think we are absolutely consistently learning about how to do these promotions, right. Given that we do one a year and we're now a six year old company and the promotions are several day event we now have on the order of 20 days of experience of running these promotions. And so we're continuing to learn and kind of get more efficient at that very quickly. I think we're going to keep evaluating whether or not this makes sense through a long-term lens and we will always keep our options open there. We're trying to think about as we become a better known brand does that mean the promotions are less important or does it mean that we're in a better position to take advantage of promotions because many very large well known brands have their own promotions. And I think we don't quite know the answers of those questions yet. So in terms of what your expectations should be for next year, we're likely to run the promotion again. We wouldn't want to put that in stone but I think it's more likely than not. And again we will just keep evaluating through a longer-term lens and make the best decisions we can. We are not -- our mind is not going to be changed by a promotion that goes 10% better or worse in any given year, that's just not the scale at which we're making that decision.

The last question will come from Derek Glynn of Consumer Edge Research. Please go ahead.

Thanks for taking my question. As you grow the number of vehicles acquired from customers, would it make sense at some point to operate your own onsite wholesale auctions, how do you think about that opportunity long-term?

So I think we've got a lot of building to do and a lot of really clear opportunities in front of us and so we're trying to stay as focused as we can while also taking advantage of all of the huge opportunities in front of us. I think that particular opportunity is unlikely to be an exciting opportunity for us anytime in the immediate future, just given the operational complexity of it. I think we feel like we can grow very, very fast and it's not clear that we want to be taking on more operational complexity that will slow us down over time. I also think there's a lot of instant data out there about I believe Mannheim and those are the data that suggested on the order of 15% of wholesale buyers through their auctions now are buying online which I think has suggested that there may be opportunities that are kind of much more scalable and much less intensive over time. But again that's not on the immediate horizon and we've got great relationships with our auctioning partners and we plan to continue to work with them. So that's kind of where we are today.

Got it, makes sense. And then just lastly, looking back in 2018 you had mid single-digit growth in used retail pricing, do you think that growth rate is sustainable as we look out to 2019 or should we expect that to decelerate?

I think -- first of all, I think it's probably best to think about the model as being unit-driven instead of dollar-driven. We are buying our products at a wholesale market and we're selling them in a retail market. And so what really matters is the spread more so than price. And so I think it's probably best to think about kind of units and then GPU as opposed to like price going up and what an impact that may have that flows through our income statement. There are some impacts, but I don't think they are super material. I think we saw some subtle changes in vehicle mix throughout 2018, they drove some of that. Depending on if you're looking at kind of average retail price or ARPU, we also had progress in other parts of transaction that drove the ARPU up. And then I think over time we expect to be able to make more progress selling both lower cost cars and more expensive cars and the balance of how that will play out over time I don't think is crystal clear yet. So I think first order we're just going to keep trying to put cars in front of our customers that they love and we're going to try to do that at the biggest scale that we possibly can and we think that's what we should be focused on.

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending our presentation. You may now disconnect.