Mister Car Wash, Inc.

Good afternoon and welcome to Mr. Carwash's earnings call to discuss the financial results for the second quarter ending June 30th, 2024. 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 a reproduction of this call, in whole or in part, is not permitted without written authorization from the company. Speaking for management on today's call are John Mai, Chairman 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 the 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 ethical 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 will now turn the call over to Mr. John Mai. Please go ahead, sir.

Good afternoon, and thank you for joining our second quarter earnings call. I'd like to start with a quick update on Houston and the impact of Hurricane Beryl. As many of you are aware, the storm damaged a lot of power lines, and it took the city several weeks to get things back up and running. We initially had to close 42 of our stores and then began to reopen as power was restored. I'm happy to report that today all stores are open and processing cars. Now allow me to update everyone on Q2, which is a strong quarter by many measures. Sales increased 8% to $255 million. Comp store sales increased 2.4%. Adjusted EBITDA increased 20% to $89 million. Adjusted EBITDA margin increased 360 bps to nearly 35%. Itania member adoption was 20% of our member base. And our UWC member base increased 3% year over year. The only headwind right now remains to be retail traffic, which has been soft. In Q2, we opened nine new stores ending the quarter with 491 locations. When we hit the 500-store milestone, which is right around the corner, we plan on raising our glass and having a shot of tequila and celebrating doing what no one thought was possible. When it comes to our titanium introduction, we couldn't be happier with how our members have responded. Today, we sit at 20% membership penetration, with over 400,000 members who are enjoying the mirror-like finish and 360 degrees of protection. Building upon our long tradition of developing new and innovative products, titanium has truly accentuated the car wash experience while extending our competitive advantage with our proprietary in-house solution. From the very early stages of our launch, we moved deliberately but remained nimble, staying closely attuned to how our members were responding. Our philosophy around generating trial has always been to respect our customers and allow them to make an educated and informed decision. We know our customers are savvy and they know quality and value when they see it. Over the last several quarters, I know many of you wanted more specifics around the timing of our rolling rollout and what our promotional schedule looked like. Like any new product launch, we stayed flexible and adapted to how customers responded and made a few tweaks along the way. Our focus was on generating trial in a smart way, not being overly aggressive with discounts, and making sure we drove a stable and enduring member base. Today, most of our titanium members are paying full price. As a result, we are seeing a nice lift in revenue per member. However, we still see an opportunity in select markets to continue to grow our titanium and platinum memberships. and we'll approach those units on a more site-specific basis. Bottom line, we're happy with 20%, but we know there's room for improvement in certain regions. With respect to retail traffic, it's our number one priority from a marketing perspective, and the team under Matt Morakowicz, our new VP of Marketing, is laser-focused on broadening our reach and driving customer acquisition. Beginning with leveraging our database of over 2.1 million members, and identifying look-alike characteristics that can be used for more targeted emails, paid social, and smart search. Still learning for us, but our goal is to turn the retail trend around without giving away the farm. As we scale our company for the long term, we will continue to make investments in people, technologies, and our stores, all while maintaining tight control over expenses. On the people front, Our ability to continue to develop future leaders will be the primary determining factor on how fast we can scale our company, which is why we continue to make material investments in our high-potential future leaders with our Mr. Learn program, trainer infrastructure, and comp and benefits program. One of the things that makes Mr. Car Wash special is that we're always encouraging our general managers to think big, be creative, take initiative, and become even more entrepreneurial. Our goal is to cultivate a deep pipeline of talent and set them up with the ability to make independent and autonomous decisions in an agile and somewhat decentralized way. Today, we have over 300 managers at different points in our leadership funnel working their way through our immersive and very intense Mr. University OLP program. It goes without saying that our success depends on their success, which is why we spend so much time investing in their future. It wouldn't be a MR earnings call without providing an update on our culture and the esprit de corps of the team. We just wrapped up our employee engagement survey, which allowed us to quantify how they're feeling about working at MR, and more importantly, areas where we can improve. Overall, 85% of our team members stated that they recommend MR as a great place to work. From an opportunity for improvement standpoint, better communications, and recognizing those who are contributing at a high level bubble to the top. We believe feedback is a gift and are committed to continuing to strengthen our culture, which is what makes Mr. unique. In late June, we announced that Myra Schementi would be stepping down as our COO and staying on for now as a special advisor. I'd like to take this opportunity to express my deep gratitude for the instrumental role she played in helping shape this company particularly during the early years when we were laying the groundwork for where we are today. Keeping with our tradition of promoting from within, I'm proud to announce the recent promotion of Tim Vaughn to SVP of Operations. Tim has been with MISTER for 13 years, 26 in the industry, and is one of our best developers of talent. Alongside Tim, I'm thrilled to announce the promotion of Luke Kitley to VP of Operations. Luke is a 12-year veteran of MISTER who will help Tim alongside our directors of operations and regional managers, lead our best-in-class operations team. I've said it many times in the past, but it's worth repeating. We are an operations-driven company, and today our operations team has never been stronger. As I watch the Olympics unfold in Paris, the grit and determination of the best athletes in the world remind me of our own team members and their championship drive to help make Mr. the best company in the industry. Before I turn it over to Jed, I'd like to give a big shout out to the entire team who put up a really strong quarter and are having to do it during one of the hottest summers on record. I'll now turn the call over to Jed to give a deeper dive into our financials.

Thank you, John, and good afternoon, everybody. We had a strong second quarter and we're pleased with the underlying trends in our business. Let me touch on a few highlights before we run through the numbers. Our revenue and adjusted EBITDA reached record levels for any quarter in the company's history. Our subscription business remained resilient and we didn't see any material changes in our core churn levels from previous quarters. Our new titanium membership offerings continues to ramp ahead of our expectations. The vast majority of our titanium wash club members are now paying the regular monthly rate and we are seeing a healthy increase in subscription revenue per member. We know that trial drives adoption when it comes to our unlimited wash club and titanium offerings, and we will continue to strategically offer trial pricing to club and titanium members when and where it makes sense. Similar to prior periods, we continue to see downward pressure on retail transactions. Our Greenfield pipeline remains solid, but we have experienced some delays that have pushed the timing of a few stores to later in the year or early next year. Our priority is to build our subscription membership base at our new locations during the first year and our 2023 and 2024 Greenfield locations are growing membership in line with our overall expectations. We continue to see paybacks of about three years. Finally, We have done a lot of work around expense management and our strong adjusted EBITDA margin in the second quarter is a testament to the ownership mentality of our team. However, some of the margin growth in the quarter was also from the timing of certain investments that were originally budgeted for earlier in the year. Now, let me run through the second quarter numbers. Net revenues increased 8% and comparable store sales increased 2.4% compared to last year. UWC sales represented 72% of total wash sales and we added 15,000 net new UWC members in the quarter. On a year-over-year basis, the number of UWC members increased by 61,000 members, or 3%. At the end of the quarter, the membership split between base, platinum, and titanium was approximately 42 percent, 38 percent, and 20 percent, respectively, while the average express revenue per member was $28.14 versus $25.87 in the second 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 $37 million and 11 cents respectively in the quarter. Adjusted EBITDA increased 20 percent to $89 million, and adjusted EBITDA margin increased 360 basis points to nearly 35 percent. Total costs and expenses were $200 million in the quarter and included $7 million of stock-based compensation and related taxes, and $3 million of losses related to the disposition of assets. Excluding these items, total operating expenses as a percentage of revenue decreased 260 basis points to 74.6%. The main cost drivers were labor and chemicals decreased 160 basis points to 27.4%. Other store operating expense, inclusive of depreciation and amortization, increased 90 basis points to 39%. G and A expense decreased 190 basis points to 8.2%. Combining on each of these a little further, the decrease in labor and chemicals was driven primarily by greater labor and scale efficiencies, partially offset by increased labor rates. The increase in other store operating expenses was primarily from an increase in rent expense related to our store growth and sell-leasebacks. We ended the second quarter with 31 more car wash leases compared to the same time last year, and cash rent expense increased 14% to $27 million. The decrease in G&A expense was primarily driven by our focus on managing expenses optimizing our G&A structure and the deferred timing of some planned investments around marketing, systems, and new hires. In the second quarter, interest expense increased to $20 million from $18 million last year, primarily due to higher interest rates and slightly higher net debt. Moving on to some balance sheet and cash flow highlights, at the end of the quarter, Cash and cash equivalents were $4 million, and outstanding long-term debt was $919 million. Our balance sheet remains healthy, and we continue to self-fund our growth and expansion. In the second quarter, we completed three sell-leaseback transactions involving three car wash locations for an aggregate consideration of $14 million. Let me conclude with a few comments on guidance. We are reiterating our previously provided guidance ranges for the fiscal year ending December 31st, 2024, which are included in a table at the back of today's earnings release. Within the context of those ranges, we wanted to provide some directional commentary on the major components. On the revenue side, we currently expect full year revenue to be at the low end of the guidance range of $988 million to just over $1 billion. There are a few key drivers here. First, we've shifted the timing of new store openings to later in the year. Second, we closed 42 stores in Houston in the month of July related to Hurricane Burrow. On the comparable store sales side, we currently expect comp growth to be around the midpoint of the guidance range of 0.5% to 2.5%. The puts and takes here are stronger than forecasted titanium performance and revenue per member, offset by lower than forecasted retail transactions, and the impact of Hurricane Barrel. On the adjusted EBITDA side, we expect adjusted EBITDA to be at the high end of the guidance range of $291.5 to $308 million. The puts and takes here are We've done a good job of managing expenses and optimizing our G&A structure. We also built our budgets around some additional investments which have not yet materialized and are now planned for second half of the year. I think it's also worth noting our field merit increases went into effect July of 2024 and will be reflected in the second half of 2024. These were included in our original guidance and will impact the comparability with Q2. Let me wrap up by recognizing our hardworking team members who are braving the heat and executing the business every day. Also, I appreciate the team for thinking like owners and helping manage expenses. We feel very good about our performance in the second quarter and the way we are navigating an evolving industry landscape. That concludes our prepared remarks and we will now open the call for your questions.