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.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Michael Lasser with UBS. Please go ahead.

Good evening. Thanks a lot for kicking my question. Given the shortfall on the retail side in the first quarter, did you make any changes to your internal assumptions for the rest of the year? What's going to drive an improvement in the business? Is it just the weather getting more favorable?

Yeah, Michael. This is Jed. First of all, good afternoon and good to hear from you. So as we look at the balance of the year, So the weather, obviously the factor in that we view that as transitory. And there was a meaningful impact as we look at Q1. So as that adverse weather rolls off, and what we're seeing in April is that these April trends have gone on an overall comp basis. They are positive. So we have seen a little bit of a normalization. in the overall comp, which gives us some comfort as we look at the balance of the year and being able to come in and hit guidance.

Hey, Michael, this is John. The only thing I'd add is I can't see it getting any wetter than it did in Q1. So we had an unusually wet first quarter, the country did, particularly in California, but other states like Michigan, Salt Lake City, Boise, Idaho, if I could use the term perfect storm, but it was one of the wettest years on record, and it had an impact on our business. So over time, though, we believe weather normalizes, and we should get back to regular patterns.

And, Michael, just one other thing I would jump in and add is when you look at Q1, while it was impacted by the weather, what we had talked about on the last call is first half being at the low end of the range, second half being toward the high end of the range due to the difficult comparable that we have and Q1, we were at the low end of that range.

Michael, we also internally have a saying that we never use weather as an excuse for missing budget, although this quarter we're giving ourselves a little bit of a buy on that one because when it's raining out, people aren't washing their car.

Makes sense. My follow-up question is understanding you don't want to quantify the impact from the titanium program. What have you already tweaked in the in a program as a result of what you've learned so far? And once you get the program to the state of where you want it to be, how fast will you be able to deploy it across the entire chain?

Hey, Michael. So we are still tweaking certain elements of our marketing and launch strategy tactics. And the 30-odd stores that we have them in right now, we're seeing some early-stage favorable results. Again, we're not in a position to share any specifics around what the performance looks like other than to say it's exceeding our expectations, and we're very pleased. But at the very core, there's things around pricing, and there's a little bit of an art to ensuring that we're position this thing correctly in the quest of trying to make it as attractive to as many people as possible while maximizing revenue and trying to strike that right balance. And then the only other piece that I think we're still fine-tuning is our approach in articulating to existing members. And we have a model that is designed around speed where customers literally will zip through our stores with their windows up and they've become so accustomed to not even interacting in some cases with our team members because we've made it so convenient, getting them to stop and pause and introduce the service to them. We're working through different approaches to do that where we don't impede their experience but make them aware.

Okay, thank you very much. The next question will come from Kate McShane with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thanks for taking our question. We just had two questions, one regarding the retail markets where maybe you didn't see as high a rainfall, how they trended versus maybe the company average. And we're just wondering, since the weather was pretty adverse in the West, just was wondering if that's impacted or delayed your greenfield projects at all or pushed it out a little bit at all.

Yeah, Kate, I'll jump in. I'll take the first part of the question. So when we look at the markets where, and there were a small handful, particularly when you look in the southeast in Florida, when you look at the number of days with precipitation this year versus the number of days with precipitation last year, and keep in mind, it's not just the number of days with precipitation. It's just the threat of rain. It has an impact, particularly on the retail side of the business. So Orlando, for example, We saw the number of days with precipitation, it was favorable 44% this year compared to last year, and comp store sales were up double digit in that particular market. So in the handful of markets, in the majority of the markets where we saw favorable weather impact, we saw a high correlation with favorable comps as well.

Yeah, and I'll take the second part. So with respect to any delays in Greenfield, I don't think it's going to have an effect You know, we are still on track to hit, you know, the 35 that we're projecting to do this year, and we don't see the weather slowing us down.

Thank you.

The next question will come from Peter Keith with Piper Sandler. Please go ahead.

Hey, thanks. Good morning, everyone. A bit of a short-term question, but I think we go back a year ago was when you first started to see some of the retail weakness, perhaps in April of 2022. So it sounds like April is getting better. You have some weather noise in there. Does it feel like as you lap these easier retail compares that you're starting to see some improvement or stabilization on the retail side of the house?

Yeah. So as we look at April in particular on the retail side, And then, Peter, you're right that the lap does get just a little bit easier as we move into the second quarter. We are seeing those April retail trends moderate to be more in line with historic averages, largely as the weather improves and benefit there.

Okay, great. Good to hear. I wanted to clarify on the titanium 360 rollout, Jed, it was just right at the end of the script. I think you said you're going to finish it by the end of next year, or are you still sticking to the midpoint of next year, just thinking if it is the end of next year, maybe it's getting pushed out a little bit longer?

Yeah, so you're actually poking both Jed and I simultaneously with that question because my belief is that we can – get this thing all wrapped up and launched by the middle of next year. And Jed, being the conservative CFO that he is, wants to give us a little bit of wiggle room and has suggested that maybe we put in just a little bit of cushion. So we're pushing the internal team as hard as we can. We don't want to rush it. And again, to Jed's earlier comment that this is a material transformation of our entire rinsing and drying system, coupled with a new product launch, coupled with a new menu structure and pricing. So to that end, we're going to, as we've stated on multiple occasions, we're going to do it right and take our time. But there's nobody that's more anxious to get this in place. Our stores are chomping at the bit, but to get this in place and then see what we hope to be this lift to revenues over time than this management team.

Keep in mind, Peter, as we think about the rollout, as we've gone in this early days, we continue to learn as we go into this, and we're going to leverage the maintenance teams that are going to be there on the ground, not only implementing Titan, but also we've talked about the rinse improvement technology, blower configuration, just optimizing the overall car wash experience at each of these locations. You don't know what you don't know, and so while we're pushing the internal team as hard as we can, we want to make sure we're not getting ahead of our skis.

Okay, yeah, appreciate the conservatism, and it certainly sounds like an exciting change, so thank you very much.

The next question will come from Randy Koenig with Jefferies. Please go ahead.

Thanks, guys. I guess I have two questions. My first one, I guess I just want to understand – differences or changes that you've seen or expect to see in the deal environment as interest rates have gone up. I'm sure there's more sellers out there and so on and so forth. So I'm just curious and just give us that perspective on how you think the deal environment really kind of morphs over the next 12 to 24 months. That would be super helpful to start. Thanks, guys.

Hey, Randy. So sure, the interest rate environment, I think, is going to have a little bit of a headwind. You know, but I think there's other forces at play that are also driving what I'm seeing as kind of a cooling effect on multiples. Right now, you know, we're kind of the market, I would say, on average is in the low double-digit range for most assets. And I think, you know, more folks are interested in quality right now and, you know, kind of underscoring their approach to looking at real EBITDA versus, you know, EBITDA with a lot of adjustments. So the folks that were more interested in scaling up and establishing their position early in the market were leaning in. But I think rationality has set in now, and that's a good thing.

Got it. And then, Jed, I think you gave us some good perspective on the changes in comp. Uh, in the unaffected weather market, I believe Orlando of double digit. Can you give us some similar perspective? On, uh, you know, how a market like that performed from a member, a new member growth perspective, because you've, you've shown nice strength in that metric two quarter, you know, uh, second quarter in a row is up 14%. I think first quarter up 13% in this fourth quarter and up 13% in this quarter. So I just want to get some perspective on kind of balancing out, you know, in those non-effective markets, how that membership growth continues to be robust or more robust than the corporate average.

Yeah, Randy. So, I mean, the top of the funnel is that retail volume as we've talked about. And so that retail customer tends to be more sensitive. What we're seeing is they're more sensitive to the macro headwinds. They're more sensitive to when there's any type of weather across any market. And so when you look at, how that impacts Orlando specifically. First of all, when you look at overall UWC sales, it's held together very, very nicely, like we've talked about. We haven't seen an uptick in churn. We haven't seen members trading down. I think that's an important piece, and that's across all markets, both the markets that had weather and those that didn't. But when you look at a market like Orlando that had positive retail volume we saw UWC sales up there were up double digit as well, being fueled by that increased retail volume. So on the other end of the spectrum, in California for example, Modesto, Bakersfield, the San Joaquin Valley, California as a whole was about 170 basis point headwind to the overall comp alone. And UWC, volume there or UWC sales in those particular markets were impacted by the lack of retail volume that was coming through due to the weather. We expect that to come back as the weather improves there. Super helpful. Thanks, guys.

The next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.

Hey, guys. I'm going to ask two. Hopefully it's not too noisy. First, just to follow up, Jed, I think you said it twice. You said churn. Just to clarify, that means I guess the number of additions and subtractions overall hasn't changed, or is it that maybe additions picked up and subtractions hasn't? Like what was the mechanic of churn basically saying the same to see if the complexion is different? And the second question is any updated thoughts on how membership – may evolve in a tougher backdrop, recessionary backdrop. I know it's a tough question to answer, but curious if you've kind of done any more thinking on it. Thank you.

So the first question, the second question was how will subscription be impacted in a high inflationary environment? Maybe I'll start with the second one first. And I think one of the neat things we see about our membership is one that is extremely affordable. You know, in 1999 and 2099, that's within reach of almost every consumer out there. And with respect to their overall transportation budget is a really tiny fraction of their total cost of getting from point A to point B. And for all the things that you spend on getting from point A to point B, it's the one feel good in that expenditure bucket. So to that end, I think it's a very fair question, one that I think a lot of people are wondering out loud. And let's just say if there's a recession that's looming, will people start cutting back on discretionary subscriptions, a car wash subscription? The fact that our churn has remained flat throughout this last 12-month period I think speaks volumes to the stickiness and, again, the loyalty that we've engendered and how much people have valued it. So with all the knock on wood, Simeon, we're hoping that with all the different memberships that folks are subscribing to right now, we believe that the car wash is one that is in their top quartile of the ones they value the most and that it's gonna hold steady.

And then Simeon, just to break down that churn rate just a little bit further, so the way we think about churn, it represents the percentage of the members who were active at the beginning of the month and then those that fell off by the end of the month. And that churn rate during the quarter is in line with what we have historically seen. To John's point, we didn't see an uptick. I mean, as we talk about UWC as a whole, adding 122,000 UWC members with the macro headwinds and then the retail traffic impacted the way it was, I think overall we always want to see more growth there in UWC membership, but Overall, we're pleased with how UWC has held together, and particularly we're seeing a slight uptick in capture rates as the team becomes just that much more focused and educating the consumer on UWC and the benefits of the program, but then also the price differential between retail and UWC helps incent customers to trade into that UWC program.

Yes, Simeon, the only thing I'd add is that internally we say, Thank God for UWC, and thank God our UWC member base has remained so loyal and sticky, because I can only imagine had we not had this program in place and it wasn't close to 70% of our revenues, and let's just say worst case scenario, we did see an uptick in cancellations, it would be a whole lot different story, but we're not. So we're in a really, really good spot, and we're very grateful to have this program and for it to be central to our business model.

Thank you. Thanks. You're welcome. Thanks for the call.

The next question will come from David Bellinger with Roth. Please go ahead.

Hey, guys. Thanks for the question. Another follow-up on the churn levels. You mentioned no real change there, and that's been steady for some time. But if you peel that back and you look at – call it voluntary churn versus involuntary churn, maybe through some type of credit card expirations – Just anything like that you can expand upon as a read-through to your core customers? Is anything going on under the surface there?

No, there hasn't been any changes. As we've shared previously, roughly half of our churn comes from credit card declines. We have very little control over that. But we do know that once a customer, a member I should say, oftentimes when a member cancels, they will get their house in order, if you will, and come back into the program. And we have this beautiful trend where 30% of our former members re-sign up. And part of that is due to financial kind of hiccup in their lives and or they're taking a temporary hiatus, going on a long vacation. But the fact that they come back, there's a boomerang effect. And that's really neat. But we dissect the other reasons why people churn and the opportunities that we have. you know, being more proactive on the engagement front, which has been a real big initiative for us internally, is how can we, you know, get out in front of folks where their utilization of our program is starting to tail off. And, again, we're still working on fine-tuning that business model, if you will, because we're not quite there yet, but we have the pipes in place to do it, and now we're in the throes of figuring out how to get that Peloton user that is now down to one times per month back on their bike two times a month or three.

That's helpful. Appreciate it, John. And this is my follow-up on the reconfiguring the rinse and wash systems with titanium. So once those are fully complete, should we expect your stores to handle some kind of a different level of volume on a per-unit basis? Is there some kind of throughput implication once you finally get through tweaking the store footprint?

No, no throughput implications. It's an interesting question, though, because the way we're set up to maximize throughput, we're running very high line speeds right now, and we do process flow optimization and have created this beautiful flow through all of our stores where people can literally get in and out in five minutes. So we've de-bottlenecked operationally our stores, and that's created an unbelievably easy experience for our customers. So from a throughput standpoint, we feel really good about where we sit today. The real objective here is to move people into more profitable premium packages, but do it in a more natural way and have them trade up because the value is going to be intense.

Great. Thank you.

The next question will come from Justin Kleber with Baird. Please go ahead.

Hey, good afternoon, guys. Thanks for taking the questions. I wanted to follow up just first on one of the prior questions as it relates to the funding environment. But thinking about it from a Greenfield perspective, are you seeing any of your competitors pull back on Greenfield openings or any change just in the pace of new builds as the cost of capital has risen pretty dramatically here the past year or so?

So I'll kick it off, and then Jeff and I can talk about kind of the – financial environment. But it seems like almost everyone is pushing a density strategy right now and attempting to build up their network of stores. But as the cost of capital goes up, I think folks are having to revisit how much cash they actually have to fund future growth. And there's an upper limit just in terms of if it's funding free cash flow through operations, what your high watermark capacity can be. And so to that end, I think that there's a number of platforms out there that had very aspirational vision to aspirationally move into a whole lot of new markets. And I think there's a lot of folks that are just having to revisit how expansive they truly can be. And a lot of that's driven by, to your question, the current funding environment, which has gotten much tighter and much more expensive.

And, Justin, just a little bit more. To add to that, first of all, not all competitors are equal. I think access to capital looks different for different competitors in different markets. And keep in mind, it's about an 18-month build-out for these greenfield locations. And so what we're seeing is we're committing capital to these greenfields. We're in a fortunate position where we have, being one of the larger players in the space, having the free cash flow that's generated that gives us flexibility that... perhaps others may not have just from the sheer cash flow that's being generated from this business due to the scale that we have.

Got it. Yep, that makes sense. An unrelated follow-up just on titanium. We noticed you were offering one month of titanium for no additional cost if you're an existing member. Is that one of these marketing elements you referenced you're tweaking, or is that tactic being used? deployed across all stores where the service is launched just to incentivize your existing members to trade up.

Yeah, that was a test, and that's being tested against the control as we speak, and we're currently assessing whether or not that makes sense going forward. Got it. Okay.

Thanks, guys. Best of luck. The next question will come from Chris O'Keele with Stifel. Please go ahead.

Thanks. Good afternoon, guys. I had just a follow-up to that prior question. John, are you seeing any of the markets that Mr. competes within that could be saturated soon based on just competitor development?

Yeah, no, I still think the industry has a really long rough day from a growth standpoint, and we're not anywhere near an apex where things are going to start to mature and we're starting to duke it out for share. That said, there's always a couple exceptions in any pile. But for the most part, you know, we think just looking at the TAM of this space and what the white space potential can be, that we're kind of in the middle innings and that we have another, call it, 8,000 to 10,000 more car washes that the U.S. car park can support. And so that's what's driving, you know, this unit level expansion. If the question is centered around, you know, are we seeing any impact with this elevated level of building in our existing markets, in our backyard? You know, I think if anything, you know, as the intensity is picked up, where we are the market leader, we may see a temporary impact to one or two of our stores, but we recover quite nicely because at the end of the day, we think that the operator that delivers the most superior customer experience is going to win. And that's kind of what we've been built on, focusing on all the fundamentals, quality, speed, customer service. I can draw on and on about clean, dry, and shiny, but at the end of the day, if you're not delivering those basics, you can throw up a whole bunch of units. But I think in the end, there's going to be not a day of reckoning here, but ultimately, all platforms will be evaluated by the underlying health of their business will be on comp store sales, So let's see how everyone fares year three, year four in their maturation curve, and what do those AUVs look like? Because there's some folks that are more interested in just an aggregate unit number. We're more focused on quality and building really beautiful stores that are set up for a super high volume, and they're going to reflect our brand standards in good locations.

Okay. Have you guys estimated any kind of impact the competition may be having on retail sales in some of your markets?

Yeah, I mean, Chris, as we've looked at this from a competitive perspective, as John had said, not all markets, not all competitors and the impact are the same. What we see is, just as John had highlighted, the markets where we have more store saturation, more of a market share, the impact is short-lived. And then perhaps in a handful of markets where we don't have as big of a store presence, that that impact is a little bit measured. But that's really, as we've looked at that, there's really one market that we can point to, and it's one competitor that we can point to without giving names that we've seen a sustained impact from.

Hey, Chris, can I give you a personal anecdote? This one resonates with me anyway. I was taking a drive with my wife the other evening, and here in our own backyard in Tucson, there was a competitive car wash sign that was going up, And she looked at me and goes, are you aware of this? Like, I was asleep at the switch or something. I'm like, yes, honey, I'm aware of this, and it will remain anonymous out of respect for our competitors. And she goes, well, why would anybody ever want to go wash there when they only have one or two stores, and you guys have 20 stores in this market? So wherever I go in Tucson, I can get my car washed in any Mr., how are they going to be able to compete? And I said, honey, that's a great question. Maybe I'll bring that up when Chris asks a question during our – back at you, Chris. But, you know, so back to market density and the whole notion around fortressing, you know, really at the core that that is our central strategy, and we are committed to, you know, doubling down and taking what is a really strong footprint. We're the market leader in almost every market with a few exceptions – and increasing that presence, so taking our 20% share to 50% share. And, again, there's no hubris here. We're not going to own any market. No one player ever will. There is always going to be room for one or two, if not three, good players in every MSA, and we're going to fight for our share.

Thanks. That's helpful. And then just one last one. I'm just curious. Are you able to choose sites or maybe even change the design of some of the new Greenfield locations? So they have the potential to come out of the gate with much higher UWC memberships than the typical 5,000 members you see.

Yeah, that's a great question. And so from a, from a, uh, I guess technically how we're loading vehicles today, you know, we have three unintended payment stations, uh, and the design on the front end is set up where two of those lanes are dedicated to our membership. Uh, and one lane is to retail, but when you first launch a store, It's actually the opposite, where 80% of your business is retail, and so you're forcing almost everyone into that retail lane. And we're not doing that just to make it less enjoyable for them, because we open up all lanes to get them in. But from the very get-go, 66% of our lane assignments are for membership, again, with a focus on prioritizing their experience. Again, not to screw the retail guy, but to really make that UWC... person feel very special. Okay, thanks.

The next question will come from Liz Suzuki with Bank of America. Please go ahead.

Great, thank you. So just a question on the store operating expense. You gave some helpful color on the impact of higher rent. And then just with regard to utility rates and maintenance service costs, should we expect those costs to be ongoing or how are you budgeting for those costs going forward?

Yeah, Liz, it's a good question. So the utilities, maintenance services, as you break that down, it is a byproduct of the inflationary environment. While we have seen it moderate just a little bit from where we were a year ago, we do continue to expect some pressure. But coming down ever so – that pressure continuing to – lesson as we think about the second half of the year. But keep in mind, as you look at maintenance services and utilities as a percentage of that overall other operating store expense, it makes up a small amount. The rent is the bigger piece there.

Got it. And then just on the sale-leaseback strategy and now that you're paying more in rent, how should we think about what your comp leverage point is? What level of comp growth do you need to reach in order to leverage your operating expenses?

Just one clarification there. The increased rent, it's primarily driven by the fact that we have more sell-leasebacks, not because we've seen pressure on the cap rates. While we have seen some pressure, it's not as meaningful as the fact that we've got 40 more car wash leases this year compared to last year. So it's the number of leases, not the incremental cap rate. We have seen them widen, call it 75 basis points from when we were at our best or the market was at its best about just over a year ago. But that's not the meaningful driver of the rent increase.

Great, thank you.

Again, if you have a question, please press star, then 1. Our next question will come from Simeon Seidel with BMO Capital Markets. Please go ahead.

Hi, this is Garrett Klingshurn on for Simeon. Thanks so much for taking our question. Most of my questions have been asked and answered, but I do have a few follow-ups if you guys don't mind. I guess first things first, and John, you kind of touched on this a little earlier, but the new greenfields are obviously very heavy retail focused. I guess over the last year out of the greenfield units that have opened, has there kind of been a slower ramp to getting to the normalized unit economics? And how do you kind of think about that within the broader context of continuing the greenfield strategy of prioritizing those and keeping around that cadence of 30 to 40 openings or so a year?

No, so short answer to your question is we are very, very happy with how our new stores are opening, and I'll just say that they're opening with strength and that, you know, in aggregate, we're very pleased and they are exceeding our expectations. So that is further emboldening us to, you know, continue to just double down and see what we can do to accelerate the pace of new store openings, and for us, It's always a little bit of a juggling act because we want to push the envelope and grow at a quicker rate. But at the same time, back to my comment about quality, we don't want to grow too quickly where either we overheat or we build a house of cards. And really, ultimately, all of that manifests in the customer experience. And so if we throw up units and then... You know, they're not executing to the degree that we expect them to. You know, everything kind of gets watered down over time. So we're trying to, you know, continuously recalibrate that rate of growth and, you know, grow at a quicker clip. And I think that's for any growth company that is scaling very quickly, you know, it's arguably one of the most challenging things from a management standpoint is, how fast is too fast or not fast enough. So right now, you know, our goal is to add 35 stores this year. If we can eclipse that, that would be awesome, but 35 would be a great number for us. And then the path is to get to a store a month or, excuse me, a store a week.

Okay. That's great. And I guess one follow-up, if you guys don't mind, and I'm just thinking more kind of on the cost side, the – You know, the control we've seen the last few quarters on kind of the labor and chemical side has been really impressive, and you guys have kind of highlighted the scheduling efficiencies as well, the vertical integration benefits on the chemical side. I'm just curious, are there further opportunities there? Do you guys see the work you've done up to this point, and you're happy with that, and we're going to lap that here maybe in a few quarters? Or is there, you know, I'm sure you guys are always tweaking and looking for areas to improve. Is there anything there we should keep in mind?

Garrett, this is one of those things that is what we've built into the guide is basically what we've already locked in and realized. So having said that, we're always going to look for opportunities to become more efficient. How can we wash more cars with less labor but not compromise on the consumer experience? And that's always the tightrope that we're having to walk as we think about cost containment, management, and making sure that we continue to provide a superior customer experience.

Yeah, well said, Jed. Now, I think when we look at, you know, I'm surprised there's no margin contraction questions and margin expansion questions. But, you know, our margins have been driven by our top line. And when we look at labor, you know, a lot of folks will look at labor through a cost lens. We look at it through a productivity lens and an engagement lens. And so, again, we're happy to pay people more and offer them more comprehensive benefits, but then treat them well. And as we do that, we're washing more cars with less people and delivering an exceptional experience. So that's been a winning formula for us, and we're committed to that. And so, you know, we're proving out that you can also pay people well and deliver, you know, outsized return for, you know, our shareholders over time.

Appreciate that, guys. Thanks so much for taking our questions.

This concludes our question and answer session. I would like to turn the conference back over to Mr. John Lai for any closing remarks. Please go ahead, sir.

Okay. Well, thanks, everyone, for joining the call. You know, this was a tougher quarter for us to report on, but as we stated in our opening comments, you know, we expect the weather to normalize, and we are extremely optimistic about the future of Mr. Carwash and where we sit. I want to give a big shout-out to all of our team members who are working their tails off and, again, delivering an exceptional customer experience. We feel very fortunate as an organization to be in a leadership position with a long history of operational excellence. You know, we've got amazingly strong economics and, most importantly, a culture that values people. So the opportunity in front of us to continue to scale our company and grow to new heights is tangible and real and in our sight lines, and we are very optimistic about that future. Thank you, guys.

The conference is now concluded. Thank you for attending today's presentation.