Mister Car Wash, Inc.

Good afternoon and welcome to Mr. Carwash's conference call to discuss financial results for the third quarter ending September 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 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, 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 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 or 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. Lai.

Good afternoon and thank you for joining our third quarter earnings call. We're feeling good about the business and how things are trending. Our titanium introduction continues to exceed our expectations. UWC member engagement remains strong and we're seeing a re-acceleration in retail traffic. The team has also done a fantastic job of managing expenses and increasing productivity while we continue to invest in our stores and our people to support our long-term growth opportunity. Allow me to update everyone on Q3. Sales increased 7% to $249 million. Comp store sales increased 2.9%, which is now six successive quarters of positive comp store sales growth. Adjusted EBITDA increased 10% to $79 million, and we opened 10 new stores, including our 500th location, which was a huge milestone. I'd like to begin by giving everyone an update on our marketing efforts and what we're doing to drive retail traffic. We've broadened our reach by implementing a full funnel media strategy. We're experimenting in new channels like digital out of home while increasing investments in existing channels like paid social, digital display, and search. We will continue to test different offers throughout Q4 and we'll be fine tuning our messaging and frequencies based on how customers respond. Our goal is to drive retail traffic and leverage our ad spend while we ramp up the intensity of our marketing strategy throughout the remainder of this quarter and well into 2025. To be crystal clear, increasing ad spend and being more promotional doesn't necessarily mean we're getting more aggressive with discounts. On the contrary, those that discount the most usually do it for a reason. We're extremely disciplined in making sure we don't dilute our brand by competing on price, which for most customers, is not why they're using us in the first place. At MISTER, our goal isn't just to satisfy our customers. We want to delight them. We call every touchpoint in our service delivery model a wow zone, and we train our teams to greet every customer with a wave and a smile, which, by the way, is not easy to do for 10 straight hours a day. Our net promoter scores remain extremely strong, with the highest marks around the friendliness of our staff and how good we are at making them feel welcomed. To give you a sense of what we're hearing, I thought I'd share a couple of select comments. Here's one from one customer. I love the shine on my car and your employees are just the best, friendly and helpful. Here's another customer comment. The workers are so nice. Everyone is always courteous and respectful. And finally, from another customer, the availability of multiple locations means that I can get my car washed while on my way to just about any kind of business. In addition to receiving feedback on things we should continue to do, we also receive instructive feedback on things we can improve upon, such as our vacuum efficacy during peak demand. We found out that about a third of our portfolio's vacuums weren't keeping up during our 100-plus car hours, and we needed to improve our suction. Turning data into actionable items by listening and responding to our customers is a hallmark of ours. As we speak, our facilities maintenance teams are in the process of tightening seals, improving nozzle seats, and upgrading producers to fix the issues. At our national leadership conference two weeks ago, the primary theme was the voice of the customer and what we need to do to get every team member to act as a brand ambassador. We start by establishing a culture of elevated hospitality and focus heavily on etiquette and manners, which has become synonymous with our brand promise. As we continue our march upward with more than 500 stores, the Mr. Brand continues to get stronger. Building out our network of locations and densifying within each MSA provides even more convenient options for our members, further supporting the benefits of being a scaled operator. At the very heart and soul of our company is our people who are absolutely the best. Our employee engagement scores, which are a proxy for our culture, are at record levels. which tells me we're not just building the largest car wash platform in the industry, but we're doing it the right way by taking care of our people. Experience and knowledge matter in this industry, and we're fortunate to have built a team of ninja warriors who are highly skilled in their craft and dedicated to improving each day. Before I turn it over to Jed, I want to say thanks to the entire team for a great quarter. We're off to a good start in Q4 and have some wind at our back. Our business is performing well right now, and we couldn't have done it without the amazing effort by our entire organization. Thank you.

Thank you, John, and good afternoon, everybody. Overall, we are pleased with our third quarter results. We delivered strong results and are encouraged with the momentum we are seeing in the business. Before we get into the details, let me touch on a few highlights. Our subscription business remains resilient. member utilization has remained constant, which is a key indicator of member satisfaction. Additionally, during the quarter, we didn't see any material changes in our core churn levels from previous quarters. Our new titanium membership offering continues to ramp ahead of our expectations, and at the end of the quarter, membership mix was nearly 24%. The vast majority of our titanium memberships recharged at the full regular monthly rate, which helped drive a 9% increase in express revenue per member during the quarter. Importantly, retail sales trends improved when compared to the first two quarters of the year. In particular, we saw a meaningful uptick in the second half of the quarter that continued into October. Some of the recent hurricanes that made national headlines were disruptive to our business and caused some store closures during the quarter. However, with subscription accounting for nearly 74% of wash sales in the quarter, coupled with our geographic diversity, helped provide some insulation to weather and these events. We opened 10 new express exterior car washes in the quarter and are tracking towards approximately 40 openings for the full year. Third quarter adjusted EBITDA was strong and came in ahead of our expectations, driven by better comp sales, tight expense management, and the timing of some marketing investments. Now, let me run through the third quarter numbers. Net revenues increased 7% and comparable store sales increased 2.9%, driven largely by the strength of our titanium offering and new store openings. UWC cells represented 74% of total WASH cells, and we ended the quarter with more than 2.1 million UWC members. On a year-over-year basis, the number of UWC members increased by 39,000 members, or 2%. At the end of the quarter, the membership split between base, platinum, and titanium was approximately 39%, 37%, and 24%, respectively. In the third quarter, the average express revenue per member increased over 9% to $28.33 versus $25.88 in the third quarter last year. Net income and earnings per diluted share were $22 million and 7 cents respectively. When adjusted for non-cash stock-based compensation and certain non-core or one-time expenses, Adjusted net income and adjusted earnings per diluted share were $29 million and nine cents respectively in the quarter. Adjusted EBITDA increased 10% to $79 million and adjusted EBITDA margin increased 100 basis points to 31.6%. Total costs and expenses were $200 million in the quarter and included $7 million in stock-based compensation and related taxes, and a $2 million gain from the disposition of assets. Excluding these items, total expenses as a percentage of net revenue decreased 10 basis points to 78.2%. The decrease was driven by decreases in labor and chemicals and G&A expenses, partially offset by an increase in other store operating expense as a percentage of net revenue. excluding stock-based compensation, related taxes, and other one-time or non-cash expenses. Labor and chemicals decreased 165 basis points to 28.4%, driven primarily by optimizing the labor model at our interior clean locations and leveraging our scale in purchasing and shipping of chemicals. This was partially offset by increased labor rates. Other store operating expenses increased 130 basis points to 32.6%, primarily driven by higher rent expense related to our store growth and sell these backs and some utility rate inflation. G&A expense decreased 60 basis points to 7.4%, driven primarily by better expense management and some deferred spend on marketing, systems, and people. In the third quarter, interest expense increased 8% to $21 million, primarily due to increased borrowings, partially offset by lower average interest rates year over year. Moving on to some balance sheet and cash flow highlights. At the end of the quarter, cash and cash equivalents were $16 million, and outstanding long-term debt was $931 million. Our balance sheet remains healthy, and we continue to self-fund our growth and expansion via cell leasebacks. In the third quarter, we completed four cell leaseback transactions involving four car wash locations for an aggregate consideration of $19 million. Since the end of the third quarter, our cell leaseback activity has picked up exponentially, and we currently have over 20 properties under contract, or LOI. Now let me provide an update to our full year outlook. On our last call, we reiterated our previously provided guidance ranges, but indicated we thought revenue was likely to be at the low end of the range and adjusted EBITDA was likely to be at the high end of the range. Given the recent trends in the business, we are a bit more optimistic and are revising our guidance to reflect this positive momentum. Specifically, we are tightening our full-year revenue guidance range to the low to midpoint of the range, tightening our comparable store sales to the high end of the previous range, and raising our adjusted net income and adjusted EBITDA guidance range above the previous high end. Our updated full-year 2024 guidance ranges can be found in a table in the earnings release, but to recap, we now expect the following. Net revenue of $988 to $995 million. Comparable store sales growth of 2% to 2.5%, which equates to 2% to 4% in the fourth quarter. Adjusted net income of $114 to $117 million. adjusted EBITDA of $313 to $318 million, representing approximately 9% to 11% growth year over year, and representing a margin of 31.7% to 32%. Adjusted earnings per diluted share of 35 to 36 cents, interest expense of approximately $81 million, rent expense of approximately $110 million, capital expenditures of $330 to $350 million, sell leaseback proceeds of $120 to $135 million, and new greenfield locations of approximately 40. As John mentioned earlier, we plan to increase our media spend in the fourth quarter. The incremental marketing spend in the fourth quarter is one of the deferred investments that we have mentioned the past two quarters and will impact our operating income and adjusted EBITDA margins during the fourth quarter. Let me wrap up by also thanking our amazing and dedicated team members who work hard and do all they do to make MISTER a best in class operator and a company we can all be proud of. The team has done a tremendous job of managing expenses. thinking like owners, and managing different obstacles. I look forward to continuing the momentum from our two recent quarters and working with our team to build the Mr. brand for years to come. That concludes our prepared remarks, and we will now open the call for your questions.