Mister Car Wash, Inc.

Good afternoon and welcome to Mr. Carwash's conference call to discuss financial results for the third quarter fiscal 2022. At this time, participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Please note that this call is being recorded and a reproduction of this call in whole or in part is not permitted without written authorization from the company. Speaking from management on today's call, are John Lai, Chairperson and Chief Executive Officer, and Jed Gold, Chief Financial Officer. After John and Jed have made their formal remarks, we will open the call to questions. As a reminder, comments made on today's call may include forward-looking statements which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and accept as may be required by law The company does not have any obligation to update or revise such statements if circumstances change. Please review the forward-looking statements disclaimer contained in the company's second quarter 10Q as such factors may be updated from time to time in its other filings with the SEC. During the call today, management will also refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release issued earlier today and posted to the investor relations section of Mr. Carwash's website at ir.mrcarwash.com. I will now turn the call over to Mr. John Y. Please go ahead, sir.

Good afternoon, everyone. I'd like to begin with a quick update on our teams in Florida and the effects of Hurricane Ian. I'm happy to report that everyone is safe and our stores held up nicely. Our leadership team was amazing and went into batting down the hatches mode. securing our stores and making sure everyone had access to food, shelter, and medical resources. Team Florida, I'm proud of how you came together and showed how tough you are, particularly when you faced a really big one. Moving on to our third quarter results, overall performance was in line with expectations, and despite a tougher macro backdrop, our business continues to perform nicely and has proven over many different economic cycles to be strong and resilient. Revenue increased 12% to $218 million. Adjusted EBITDA increased 6% to $66 million. And comp store sales increased 2.9%. We opened eight new greenfield locations and acquired three new car washes, which brought our total store count through the end of Q3 to 420 locations. Our UWC program added 19,000 net new members and I'm happy to report that member growth and retention rates remain consistent with historical trends. UWC has proven to be very resilient, challenging those that have expressed some concerns around a potential pullback in consumer discretionary spend. Motorists take great pride in their automobile, and a clean car is not only a reflection of themselves, but it helps them feel good. To say that it's changed the way people care for their vehicles would be an understatement, and with memberships starting at $19.99 per month, that offers consumers a great value. Today, with nearly 70% of our business being subscription, we are deeply grateful to have built such a massive member base that provides a beautifully predictable and recurring revenue stream. Moving on to the cost side of things, similar to the past few quarters, we continue to see inflationary cost pressures across many areas of our business, which we partially offset with continued improvements in productivity, a tighter focus on our expenses, and reprioritizing longer-term projects. As a seasoned management team, while we're building the business for the long term, we're also cognizant of the short-term realities of this current environment and are prudently doing what it takes right now as things get a little harder in a shifting market. We took a modest retail price increase back in August, which was met with very little resistance. And to remind everyone, as a philosophical belief, We've always been more interested in maximizing volume versus maximizing ticket average, which is reflected in our AUVs. But we're also not afraid to make a move when we feel it's the right time, and this recent move got us to par in each market and was long overdue given the pressures we've been feeling on the cost side. All of our stores are executing wonderfully and putting out a good car at speed, but unemployment is still low, and the labor market is still stubbornly tight, making competition for the best talent even more challenging. To continue to attract and retain the best, we've had to incrementally increase starting hourly rates, with average non-managerial wages up 6% year over year. These wage increases are being offset by improvements to our staffing model, which we call Express 360, where everyone is cross-trained, crews are tightly knit, and the team culture of all for one and one for all has resulted in improvements in cars per labor hour, reductions in labor as a percentage of revenue, and reductions in our labor dollar per car. Speaking of our teams, I'd like to highlight the continued growth of our management and training program through our OLP Mr. Learn certified trainer network. We've spent considerable energy training the trainer and now have, in addition to our close coverage regional manager team, an additional network of trainers to help accelerate our leadership pipeline. We have a long history of promoting from within and over 80% of our senior ops team started out as an hourly team member on the front line. If you were to ask others what makes Mr. Carwash who they are, they'd probably answer they're good operators, particularly at scale. This hasn't happened by accident. We have a culture of operational excellence, and it's something we're deeply proud of. Investing in human capital and our high potential future leaders is one of the smartest things a company can do. We've built a laser-focused system, developed a national infrastructure, and now turning out the next-gen leaders that can be plugged into new stores or markets and hit the ground running in a high-throughput environment. Before I turn it over to Jed, I'd like to take a moment to thank our teams that delivered these results. We are the largest car wash operator in the United States with a footprint that stretches from coast to coast, from California to Pennsylvania, and north and south from Minnesota to Texas. We may be geographically spread out, but we act and move as one. delivering a consistent customer experience no matter which mystery you visit. It's taken us 25 years to build the best team in the industry, and I couldn't be prouder of everyone who's contributed to our success. Jed, I'll now turn it over to you.

Thank you, John, and good afternoon, everyone. Overall, we had a good third quarter, and our results were in line with our expectations. Similar to trends in the previous quarter, demand remained relatively consistent and we continue to partially offset inflationary pressures with productivity improvements as well as the retail price increase that we took in mid-August. Our greenfield stores continue to perform very well and are exceeding our expectations. We are experiencing first-year average unit volumes in the area of $1.4 million and four-wall EBITDA margins in the range of 30 to 35 percent. These stores continue to ramp nicely beyond year one. For comparison, our average mature express average unit volumes are $2.1 million with four-wall EBITDA margins of 45% to 50%. The significant opportunity to expand our store footprint coupled with these solid returns and our world-class operations capability have emboldened us to continue investing behind our greenfield expansion capabilities. In addition to new build expansion, We see opportunity to invest in a number of strategic initiatives while also taking steps to manage our near-term expenses and cost structure. During late September and early October, we experienced a disruption to our business in Florida as a result of Hurricane Ian. We have 72 locations in Florida and all but three stores temporarily closed for an average of three and a half days. A benefit to the majority of revenue being subscription-based is the reoccurring revenue helps insulate us from the financial impact of weather-related events such as the hurricane. Having said that, the hurricane has resulted in some construction delays in Florida that we are working through. During the third quarter, comparable store sales increased 2.9% and net revenue increased 12% to $218 million. Comparable store sales growth was positive in all three months of the quarter, with growth in September outpacing the growth in July and August. The UWC subscription side of our business remained steady and represented 69% of total wash sales in the third quarter. In line with our expectations, we added 19,000 net UWC members during the quarter and 204,000 net UWC members during the first nine months of the year. On a year-over-year basis, the number of UWC members increased by 19%. Similar to last quarter, we did not see a meaningful change from our historical churn rates, and we did not see club members trading down from the premium package to the base package in any meaningful way. During the quarter, we also experienced some stabilization on the retail side of our business with third quarter retail sales in line with our expectations and second quarter levels. Similar to my commentary on comparable store sales, retail volumes were better in September than July and August. Turning to expenses, these were also in line with their expectations but continued to be impacted by inflationary pressure. Excluding stock-based compensation and as a percentage of revenue, labor and chemicals decreased 90 basis points to 30.3 percent. Other store operating expenses increased 190 basis points to 31.2 percent, and G&A expense increased 70 basis points to 8.1 percent. Labor and chemicals continue to benefit from some labor efficiencies. Other store operating expenses increase primarily from a combination of higher utility rates and increased maintenance service costs. And the increase in G&A is primarily from public company costs and growth-related investments. As we have previously discussed, the biggest expense increases impacting adjusted EBITDA are coming from growth initiatives as we continue to build out internal capability and vertically integrate in areas where it makes the most sense. However, we have started to take a more balanced approach to managing our near-term cost structure with long-term growth objectives and are tightening our belts where we can around labor, hiring, systems, and becoming even more efficient at aligning our investments behind our strategic priorities. During the third quarter, interest expense increased to $10.1 million from $5.7 million last year due to the higher interest rates on the unhedged portion of our debt and additional debt added as part of our Clean Streak acquisition. As a reminder, our favorable interest rate hedge expired in mid-October, and we are now paying LIBOR plus 300 basis points on our outstanding debt. Our GAAP-reported effective tax rate for the third quarter was 26.9% compared with 19% for the third quarter of 2021. The increase was primarily due to the exercise of employee stock options and the favorable tax treatment in the year-ago period. The benefit to our GAAP tax rate related to the exercise of stocks awards exercised was negligible in the third quarter compared with $2.6 million in the third quarter last year. Adjusted net income and adjusted net income per diluted share, which add back stock-based compensation and certain non-core operating expenses, were $30 million and nine cents, respectively, in the quarter. Third quarter adjusted EBITDA was $66.1 million, up 5.9% from the third quarter last year. Moving on to some balance sheet and cash flow highlights. At quarter end, Cash and cash equivalents were approximately $75 million, and outstanding long-term debt was $895 million. For the first nine months of the year, net cash provided by operating activities was $185 million, and gross capital expenditures were $132 million. Lastly, let me make a few comments around guidance. Given the inline trends of the third quarter and modest acceleration in trends across the months of September and October, we remain comfortable with our previously provided outlook for the year and are simply tightening the ranges. Our updated full year 2022 guidance now calls for comparable store sales growth of 4% to 5%, net revenues of $865 to $880 million, adjusted net income of $123 to $128 million, and adjusted EBITDA of $273 to $278 million. As a reminder, when we forecast interest expense, we use the LIBOR forward curve in the market, and this makes for a bit of a moving target. With the shifts in the forward curve over the past 90 days, our 2022 interest expense assumption is now $43 million, instead of the $42 million that we mentioned last quarter. Interest expense continues to be a meaningful headwind to the model as the Fed increases interest rates. We continue to look at strategies to reduce interest expense going forward, but do not expect any material benefits in the short term. With Hurricane Ian causing some construction delays in the state of Florida and some of the supply chain delays earlier in the year, there are a few greenfield openings that could get pushed into early 2023, and our guidance for new greenfield locations is now a minimum of 25 this year. With a number of stores slated to open right at the end of the year, we do not expect the modest delay in timing to have a material impact on revenue or expenses in the fourth quarter of the full year. As stated earlier, we will remain opportunistic when it comes to sell leasebacks. Our model now assumes total proceeds of between $90 to $95 million in 2022 versus the $140 to $150 million previously forecasted. While we could end up doing more should the terms be favorable, we currently do not plan to do more deals unless terms are consistent with our recent closings. Our capital expenditure outlook for the full year 2022 is now $200 to $240 million versus a previous range of $235 to $285 million. This is largely a function of conservatism built into the original guide along with some CapEx projects that we have chosen to combine with next year's work around the new service offering. Given the magnitude of the work related to the new service rollout, it is simply more efficient to defer certain projects and complete these next year instead of this year. In closing, I would like to add my thanks and appreciation to all our hardworking team members and associates who are executing the business every day and helping us fulfill our mission of being America's premier car wash. With that, I will turn it over to the operator to begin the Q&A session. Operator.