Mister Car Wash, Inc.

Good afternoon and welcome to Mr. Carwash's conference call to discuss financial results for the first quarter ended March 31st of 2023. At this time all 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 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 Mr. John Lai, chairperson and chief executive officer, and Mr. Jed Gold, Chief Financial Officer. After John and Jed have made their formal remarks, we will open the call to questions. During this conference call, references to non-GAAP financial measures will be made. A complete reconciliation of these measures to the most comparable GAAP measures have been included in the company's earnings press release issued earlier today and posted to the investor relations section of the company's website at ir.mrcarwash.com. As a reminder, comments made on today's call may include forward-looking statements which are subject to significant risk and uncertainties that could cause the company's actual results to differ materially from management's current expectations. Please be advised that the statements made today are current only as of this call and are based on the company's present understanding of the market and industry conditions. While the company may choose to update these statements in the future, they are under no obligation to do so unless required by applicable law. or regulations. Please review the forward-looking statements, disclaimer contained in the company's latest annual 10-K and 10-Q reports, as such factors may be updated from time to time in other filings with the Securities and Exchange Commission. I would now like to turn the call over to Mr. John Lai. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining our 2023 Q1 earnings call. The headline for the period is our unlimited wash club program eclipsed the 2 million member mark. This is a huge milestone for our company, and I'd like to give a special thanks to the hardworking Mr. Team that made this possible. We feel fortunate that nearly 70% of our revenues are subscription-based, providing a recurring and predictable revenue stream and consistency to our free cash flow. And while the first quarter retail sales were a little softer than what we would have liked, primarily due to weather, the subscription side of our business continued to perform well, with strong member retention and new member capture rates. From a labor standpoint, our stores are fully staffed and in good shape. Wages on a year-over-year basis are up modestly, but that's offset by our reset labor model that's resulted in improved productivity across almost every store. And on the G&A front, given the opportunity to scale our company, we're playing the long game by making smart investments primarily in people, while responsibly managing through near-term margin expectations. For the quarter, sales grew 3% to $225 million. Adjusted EBITDA came in at $71 million, a 5% year-over-year decline. Comparable store sales were down 1.6%, and we opened four new greenfield stores. Outside of the financial numbers, we remain laser-focused on our strategic pillars that will drive growth in the near and long term. As a reminder, our strategic pillars are number one, expanding our footprint by accelerating our greenfield development and pursuing strategic M&A. Number two, implementing our new premium position titanium 360 retail and UWC offering. Number three, improving our marketing and ad spend by focusing on acquiring new retail customers. Number four, growing and strengthening our UWC member base. Number five, improving the performance of our existing portfolio. And number six, investing in people and building our leadership bench. We're making progress in each of these key areas, but the one that I'd like to highlight is the launch of our new titanium 360 product. Early stage results have been encouraging. We currently offer titanium 360 in around 30 stores across three markets, and are fine-tuning our marketing and launch strategies. We're also taking this opportunity to make material improvements to our rinse and drying systems as part of this rollout. Given the significance of this introduction, we want to take our time and get it right. I'd like to remind everyone that one of the things that gives us a distinct competitive advantage is our vertically integrated chemical program. Titanium 360, like our proprietary hot shine carnauba shield and wheel polish before it, is a truly differentiated extra service that helps us stand out from many of the off-the-shelf products that are out there. What's truly remarkable about this game-changing new offering is the level of shine and protection it provides. And what's most important is that this gives us the opportunity to introduce a new premium unlimited wash plan, which we feel confident will drive average revenue per member over time. Now, we know that many of you are chomping at the bit to model this out. We're not going to provide any more details because we're still tweaking certain elements of our launch strategy, and it would be irresponsible for us to throw out numbers until we have more data to project the uplift over time. We ask that everyone have some patience with us with more to come. Finally, we continue to build a world-class team, and we're thrilled to publicly announce the appointment of Mary Porter as our new Chief People Officer. Mary brings over 30 years of experience from Nordstrom, and her background is a perfect fit to lead our people-related initiatives. I will now turn the call over to Jed to provide more commentary around our financial results for the quarter.

Thank you, John, and good afternoon, everyone. We knew the first quarter was likely to be our most challenging comparison of the year. Last year's first quarter benefited from a strong macro backdrop, favorable weather conditions, and lower store costs. labor costs, that the trends heading into this year's first quarter were obviously very different. And we knew that growing the top and bottom line was going to be difficult. Embedded in the full year guidance that we previously provided was the assumption that first half comparable store sales could be flat to plus or minus a point or two. While the headwinds from weather did impact the first quarter more than expected, our results were still within the range of expectations. In the first quarter, total net revenue increased 3% and comparable store sales decreased 1.6%. Setting the difficult lap aside, on a two-year stack basis, comparable store sales increased 9.2%. As John mentioned, we don't often talk in much detail about the weather because it's simply not a significant swing factor in most quarters. But this was a quarter where it was simply too big to ignore. Many of our markets received excessive amounts of rain, and rain hurts our business, particularly on the retail side. In total, we estimate the weather negatively impacted the first quarter comparable store sales by approximately 250 to 300 basis points. Our subscription business remained strong and steady in the quarter. UWC sales represented 69% of the total wash sales, and we added 122,000 net members in the first quarter. On a year-over-year basis, the number of UWC members increased 12.6%, and we finished the quarter with more than 2 million members. Over the course of the past three years, we've added 1 million members and doubled the size of this program. This is a significant milestone for our company. Once again, 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. On the development side, during the first quarter, we opened four new greenfield locations, and this was in line with our expectations. The performance of our greenfields remained strong, ramping toward our mature express exterior average unit volumes of approximately $2.1 million and four while EBITDA margins of 45 to 50 percent in under three years. On the expense side of the business, we continue to experience cost headwinds and inflationary pressures. Including stock-based compensation and as a percentage of revenue, labor and chemicals decreased 40 basis points to 28.7 percent. Other store operating expense increased 410 basis points to 39.6 percent. and G&A expense increased 10 basis points to 9.2%. The labor and chemicals line primarily benefited from better labor scheduling and optimizing regional labor infrastructure. Other store operating expenses increased primarily from higher rents, utility rates, and maintenance service costs. We have 40 more car wash leases compared to the same time last year due to additional cell leasebacks completed during the last year. As a result, cash rent expense increased 13% to $24 million for the quarter. G&A expenses were relatively flat and reflect both continued investments to support growth in areas such as construction and development and some leverage against public company costs and other previous investments. During the first quarter, interest expense increased to $18 million from $8 million last year. due to higher interest rates and the expiration of our interest rate hedge last quarter. Our GAAP reported effective tax rate for the first quarter was 24.1% compared to 18.9% for the first quarter of 2022. The increase was primarily due to a smaller benefit related to the employee stock options exercised this year compared to 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 $27 million and 8 cents, respectively, in the quarter. First quarter adjusted EBITDA was $71 million, down 5.2% from the first quarter last year, but up sequentially 7.2%. Adjusted EBITDA margins were down on a year-over-year basis, but increased 50 basis points sequentially from Q4 2020. 22 to 31.4%. Moving on to some balance sheet and cash flow highlights. At the end of the first quarter, cash and cash equivalents were approximately $69.9 million and outstanding long-term debt was $896 million. Importantly, our balance sheet remains strong and we continue to self-fund our growth and expansion. For the quarter, Net cash provided by operating activities was $67 million, and gross capital expenditures were $72 million. We completed two sell-leaseback transactions for aggregate proceeds of $9.2 million in the first quarter. Our guidance for the full year 2023 is unchanged. We are still expecting net revenues of $925 to $960 million. Comparable store sales growth of 0% to 3%, adjusted net income of $100 to $115 million, and adjusted EBITDA of $277 to $297 million. As a reminder, our guidance does not include any benefit from the new titanium 360 offering. While we do expect the new offering to be accretive to our margins and earnings over time, it's still too early to build anything into the model at this point. We remain comfortable with our new store target of approximately 35 greenfields in 2023, with roughly 40% of the openings in the first half and 60% in the second half. A couple of other quick call-outs around 2023 guidance. Our interest expense assumption remains $73 million, and we are still projecting sell-leaseback proceeds of between $110 to $130 million. Between the sell leasebacks executed last year and the expected sell leasebacks to be completed this year, along with rent escalators, we continue to expect 2023 cash rent expense to increase $12 million to approximately $100 million. In the second quarter thus far, we have closed on 13 sell leaseback locations and expect to close on more before the end of the quarter. As a result, We expect second quarter rent expense to be up approximately $1 million from the first quarter. This will impact our other store operating expense line. Capital expenditures are still expected to be $220 to $270 million, and given the longer lead times to open new stores, this includes expenditures for planned Greenfield openings in 2023 and 2024, as well as some deferred capital projects in 2022. In addition to rolling out our new titanium 360 offering, we are making significant improvements to our rinse, drying, and TDS water solution systems throughout the majority of our stores. The full implementation and reconfiguring process across the entire store base is expected to run through the end of next year. In closing. We feel good about the progress we are making against our strategic initiatives, but recognize there is still a lot of work to be done and the macro environment is likely to remain challenging for the foreseeable future. I want to thank the entire Mr. Carwash team for their discipline and dedication to our customers and the success of our business. With that, we're happy to take your questions.