Mister Car Wash, Inc.

Good afternoon and welcome to Mr. Carwash's conference call to discuss financial results for the second quarter ending June 30, 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 that this call is being recorded and the 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. 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 mrcarwash.com. 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. Please be advised that the statements made today are current only as of this call and and they're 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-K reports, as such factors may be updated from time to time in other filings with the Securities and Exchange Commission. I will now turn the call over to Mr. John Lai. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining our 2023 Q2 earnings call. We had a solid second quarter where comp store sales accelerated into positive territory. Operating margins improved quarter over quarter. Our limited wash program remained incredibly resilient, and we officially began the rollout of our titanium program. For the quarter, Sales grew 5% to $237 million. Adjusted EBITDA came in at $74 million. Comp store sales were up fractionally. We opened nine new Greenfield stores and acquired one location. And in July, we closed on a five-store acquisition in Los Angeles, bringing our total store count to 454 stores in 21 states. Our Unlimited Watch Club program continues to perform well with strong member retention and new member capture rates. We added 181,000 UWC members in the first half of the year and are approaching the 2.1 million member mark, underscoring the strength and resilience of our business. Subscription accounted for nearly 70% of revenue in the second quarter, and this continues to provide a predictable and recurring revenue stream and cash flow. Q2 marked the official beginning of our titanium rollout. And as of today, we've launched in over 100 stores across eight regions, and the early stage results have been encouraging. For those that haven't had the opportunity to experience titanium, allow me to start with the efficacy of this product. Our proprietary titanium formula is three times more active than anything we've seen in the market, which not only improves protection against corrosion, but produces a mirror-like finish on the paint. The best way to describe the effect titanium has on your vehicle is to imagine that you're looking at the side panel of your car and the finish is so brilliant that it could be used as a mirror to see your face in the reflection. It's that shiny. In fact, true story. Last weekend, our yellow lab named Macy was in the garage barking at my wife's car. Macy rarely barks, so I immediately thought something was wrong. When I went to investigate, I found her going crazy over the reflection of herself in the side door panel. So for what it's worth, titanium passed one of the harder bars, the Macy test. But I digress. Back to the show element of titanium. To make it even more immersive, we developed a unique and visually pleasing application arch with interactive lights, color, and signage, which takes the tunnel experience to a whole new level, making it feel like you're in an IMAX movie. But unlike an IMAX movie, our customers aren't just watching the show, they're in the show, riding through the tunnel, feeling it firsthand, and being thoroughly entertained in the three minutes it takes to get your car washed. With this launch, we've also repositioned our menu and introduced a new premium topside anchor package to provide members with more choice and value, which we believe will have a lifting effect to our revenues and earnings. While it's still early, We're gonna go out on a limb and say that over time, we expect to have at least 10% of our members in the titanium plant. Before I move on, I'd like to give a big shout out to one of the unsung hero groups inside of our company, our amazing facility maintenance teams who've been working overtime getting titanium installed. Cheers to you guys. Switching to new unit growth. Our foot is firmly on the pedal of Greenfield expansion as we've opened 13 new stores year to date and remain comfortable with our full-year target of approximately 35. All our new builds are ramping beautifully and are not only profitable in year one, but comping faster than our existing stores. When I think about the locations that we'll be opening over the next six months and what our real estate teams have in the hopper for 2025, we're really starting to see the benefits of scale and a flywheel effect as we get stronger and better with each successive store we build. I'd like to give another big shout out to our construction and development teams, new build install, IT and operations teams, who are all in growth mode as we continue to increase our greenfield capacity and scale up to help fulfill our vision. From an M&A standpoint, as we've shared on previous calls, we've seen a moderation of multiples with valuations becoming a bit more reasonable, and we remain disciplined and opportunistic as we bolster our position in existing markets, while continuing to assess new and adjacent markets to move into. Our latest acquisition, Cruisers, a five-store express chain in Los Angeles, is a good example of the type of platform acquisition that we tend to like that serves as a beachhead to enter a desirable new market. California is one of our more productive states, and our entry into Los Angeles firmly positions us in a way that will allow us to expand through Greenfield and M&A in an area that we believe has a ton of upsides. Before I turn it over to Jed, I just want to talk about the heat that we're experiencing across the country. Today, we're speaking to you from Tucson, where even though it's a dry heat, we're on track to break the record for the longest consecutive streak of 100-plus degree days in the last decade. And it's not just Tucson. June and July have been one of the hottest months on record across the country, and August is showing no signs of letting up. As a people-centric company, we've always prioritized the safety of our team members, and I want to let everyone know that we're taking extra steps to make sure everyone's properly hydrated, that they're educated on the signs of heat-related illnesses, and that we're given breaks throughout the day to keep our people safe and fresh. I want to take this opportunity to thank the men and women of Minister who brave the heat, bring their smiles to work, and work tirelessly to help make us the special company that we are. 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. Overall, we had a good second quarter, and we remain optimistic about what the future holds for MISTER. Before I review the details of our second quarter results, let me give you an update on our new titanium offering. We are excited to report that we have implemented titanium in just over 100 stores as of today. This includes the titanium offering along with some rinse improvement technology and reconfiguring blowers to provide an even more superior wash experience for our customers. We are ahead of our implementation plan and now expect all stores to be offering titanium by March of next year. We are refining and testing various promotional offers to help drive trial and adoption. We expect that this will result in a slightly higher churn rate after the promotional pricing period expires, but the churn will be offset by higher membership levels post the promotional period. Based upon our initial analysis, we believe titanium could eventually represent at least 10% of UWC subscription mix longer term. The revenue and EBITDA impact will likely be minimal this year because of the timing of the rollouts. and the promotional offerings and strategy, but we believe it will be meaningfully accretive to next year and could have a multi-year impact. Now, turning to the results of the second quarter. Total revenue increased 5.2% and comparable store sales increased three-tenths of a percent. UWC sales represented nearly 70% of total wash sales and we added 59,000 net members in the second quarter. On a year-over-year basis, the number of UWC members increased 12.2% and we finished the quarter with approximately 2.1 million members. The performance of the subscription business remained very stable in the quarter. Core churn rates and the split between premium and base memberships remained within the historic ranges. On the development side, we opened nine new Greenfield locations and acquired one existing store in the second quarter. The performance of our greenfields remains strong, ramping toward our mature express exterior average unit volumes of approximately $2.1 million and four-wall EBITDA margins of 45% to 50% in under three years. On the expense side of the business, we remain focused on better managing expenses and optimizing the investments we are making. While we continue to experience some increases, we are partially offsetting some of these with productivity improvements. Excluding stock-based compensation as a percentage of revenue, total operating expenses increased 210 basis points to 75.3%. The main drivers are labor and chemicals decreased 90 basis points to 29%. Other store operating expense increased 300 basis points to 38.1%. And G&A expense increased 50 basis points to 10.1%. The labor and chemicals line primarily benefited from better labor scheduling and optimizing regional labor infrastructure and offset average hourly labor wage increases of 5%. Other store operating expenses increased primarily from the fact that we have 54 more car wash leases compared to the same time last year due to the additional cell leasebacks completed during the last year. As a result, cash rent expense increased 15.5% to $24.8 million for the quarter. Utility rates and maintenance service costs also continued to experience some inflationary pressure. G&A expenses, excluding stock-based compensation expense, increased 10.5% and was driven by both continued investments to support growth in areas such as marketing, construction and development, partially offset by lower corporate insurances and other previous investments. During the second quarter, interest expense increased to $18.3 million from $8.8 million last year due to higher interest rates and the expiration of our interest rate hedge last year. It was slightly favorable compared to expectations due to the higher cash balance resulting from the faster pace of closing on sell these backs and the timing of reinvesting the proceeds back into the business. Our GAAP reported effective tax rate for the second quarter was 21% compared with 21.7% for the second quarter of 2022. The decrease was primarily due to the benefit related to the employee stock awards exercised and the benefit related to a change in our estimated state tax expense this year compared to last year. Adjusted net income and adjusted net income per diluted share which add back stock-based compensation of certain non-core operating expenses, were $29 million and nine cents respectively in the quarter. Second quarter adjusted EBITDA was $73.9 million, up 4.1% sequentially from the first quarter. Adjusted EBITDA margin remained high at 31.2%. Moving on to some balance sheet and cash flow highlights. At the end of the second quarter, Cash equivalents were approximately $136.2 million, and outstanding long-term debt was $896.6 million. Importantly, our balance sheet remains strong, and we continue to self-fund our growth and expansion. Demand for the sell-leasebacks remains strong despite the rising interest rate environment. We completed a record 10 sell-leaseback transactions in the second quarter, involving a total of 18 car wash locations for aggregate consideration of $80 million. Lastly, let me make a few comments around guidance and how we are thinking about the year. Our first half performance was in line with the low end of our expectations. Our subscription business performed well. However, the retail side of the business remained relatively soft, causing us to take a slightly more cautious stance on our outlook for the back half of the year. At the same time, we are now starting to factor in some basic assumptions for titanium into our forecast, but these remain minimal given the discussed timing and promotional strategy. Net-net, we are updating our full year 2023 guidance by shifting our ranges down slightly and tightening the possible range of outcomes. A summary of the changes can be found in the earnings release. In closing, we had a solid second quarter and continue to make good progress against our strategic initiatives. I want to thank the entire Mr. Car Wash team for their hard work and commitment to our customers and business day in and day out. With that, we are happy to take your questions.