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.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from Justin Cleaver with Baird. Please go ahead.

Hey, good afternoon, John and Jeff. Thanks for taking the questions. First one for me, just on the comments around the downward pressure on retail transactions that's continued. I guess when I run the math, it looks like the retail declines moderated fairly significantly on a year-over-year basis relative to 1Q. So just curious if my math is right. And if so, can you speak to what at least appears like an improving trend line? Was it weather? Are you starting to see any success with some of the tactics around retail customer acquisition? Just any color there would be helpful.

Yeah, Justin, it's Jed. Good afternoon. And listen, you're right. When you look at the retail sales, they did moderate compared to Q1. Retail sales were down low double digits in the second quarter, which was slightly better than what we actually expected. The difference here is the composition of the sales decline. It was a little bit different than what we had expected. Retail transactions were lower than we expected. Retail average ticket was higher than what we expected. So similar to the lift in revenue per member, we're seeing a nice lift in average ticket for retail due to titanium. We've updated this. We've taken this into account in the color and context that we provided as to what to expect in the second half of the year.

Okay. Thanks for that, Jed. And then a question on member growth. Members per store are running down across the first half of this year. I imagine part of that's just a function of new builds diluting that average figure. So I was curious if you could just comment on how UWC member counts are trending in your more mature locations. Are they stable? Are they increasing? Are they declining? Just any color on that would be helpful. Thanks so much, guys. Yeah.

Hey, Justin. This is John. Thanks for the question. So, yeah, we, as we've shared previously, we have, over the last year, prioritized focusing on taking our existing members and upgrading them to our premium programs, platinum and titanium specifically. The offset there is, you know, as we pivoted to focusing on upgrading existing members, you know, that acted as kind of downward pressure on new member growth. The reality is, though, that, you know, the top of the funnel for us is retail traffic. So with pressure on the retail side, you know, that's leading to less at-bats for our team. And so right now the net member growth has been modest, and we expect that trend to continue probably through the back half. Got it.

All right. Thanks, guys. Appreciate it.

The next question comes from Michael Lasser with UBS. Please go ahead.

Hi. This is Henry Caron from Michael Lasser. Thanks so much for taking our question. I wanted to ask, you know, can you speak a little bit about the penetration cadence for Titanium 360 during the quarter? I think we ended one queue at 20%. We were expected to moderate a little bit. And how has that sort of gone into July?

Yes, so as we think about titanium penetration, first of all, I think it goes without saying we're very happy with the progression of titanium sitting at 20% titanium mix, which is consistent with where we sat at the end of Q1. The difference here is at the end of Q1, that 20% member mix, there were still a large number of those members on promotion. And when we look at the 20% titanium mix at the end of Q2, They were vastly off promotion, and as a result, that's what's helping drive this nice lift in revenue per member of $2.27 that we saw during the quarter. We still see an opportunity in select stores and markets, as John talked about in his prepared remarks, to continue to drive titanium and platinum memberships. We're going to approach these units and markets on a more site-specific basis. But bottom line, we're happy with 20%, and we know that there's some room for improvement in certain regions with a little bit more time.

Thank you. And just as a follow-up, you know, understanding a little bit better for 4Q into 3Q, how that rolling off the promotions, I think the penetration for T360 increased from 6% to 15%. in 4Q from 3Q. So is that going to basically benefit the comp a little bit more in 4Q versus 3Q? Thanks.

Yeah, listen, Henry, the way that we've modeled it out is for Q3 and Q4, that revenue per member is relatively consistent with what we saw in Q2. Obviously, we're going to engage the teams to help drive that further and beat it.

Great. Thanks so much.

The next question comes from Chris O'Call with Stifel. Please go ahead.

Thanks. Good afternoon, guys. Jed, I know you recently said the average retail ticket was around $14. Did that figure include the impact you're seeing on titanium, or has it climbed more from there?

Yeah, Chris, so retail, when you look at average retail ticket, or average retail ticket, it's Green Q2. It was sitting at $14.88. It was up about 5.2% from where we were a year ago. Okay.

And then based on our math, it looks like you had fewer UWC members join in the first quarter than last year, and that's typically your highest seasonal quarter for additions. Then this quarter, it seems like you followed a fairly normal progression downward off that lower first quarter level. First, when do you become concerned that you simply don't have enough new retail customers coming in the door to keep UWC membership growth positive? And then second, can you help us understand where your conversion rates are today compared to where they maybe ran historically?

Okay. Okay. Hey Chris, great question. So let me start by saying we believe that the TAM for subscription is under-penetrated in general and that there is upside growth potential for subscription car washes in general. As we've previously stated, for us the pressure that we're feeling on the retail is leading to some softness in net member growth. So the chicken and the egg for us is prioritizing retail traffic growth, customer acquisition of new retail customers coming into our funnel. And then when we get them into the stores, the team has done an amazing job of converting them into membership and our membership conversion rates are at an all-time high. So we're executing really, really well once we get them in the store. The goal is to get them in the store. So your question of when do we get concerned? Well, we're always concerned, right? Um, our nature is to fret about everything. Um, and I think it's important to put into context that when you look at our, our current average membership on a per store basis, you know, we're in the top decile, uh, uh, given this, our portfolio and given just the scale of our business. So with close to 5,000 members per store, um, there's a lot of operators out there that would love to have that kind of average. Um, and we're doing it in a way where we're not, um, pushing aggressive pricing. So, you know, we have, um, shared openly that the value of that membership and revenue per member is really, really important to us. So we could spike membership, but we want to do it in a profitable way and do it in a way where we're not doing it in a way that dilutes our RPM. So the plus $2 per car that Jed shared, we see upside in that. But our focus has been on the premiumization of our membership plans. And really it begs the question, should we get more aggressive with our base offering at $19.99? We're seeing some operators moving downstream and choosing to offer more aggressive pricing. We think that that actually devalues your product and ultimately has a negative impact on your brand and what your brand stands for. And we would like to see ourselves as the premier operator in the space, and that doesn't need to resort to overly aggressive discount tactics.

And then Chris, the second part of your question around conversion rates, conversion rates have held consistent with where we've been in recent quarters, hovering at about that nine to 11% level, as has core churn remained consistent. So you're correct, about 70% of our, 60 to 70% of our membership signups are typically in the first half, and as part of our forecast update, and the color that we provided on the outlook for the balance of the year reflects those trends.

Chris, have we shared our Tommy Boy reference with you?

I don't think so.

Do you know when he's selling the brake pads and he's met with resistance and he says, I don't know if you've seen Tommy Boy, but for those that have seen that movie, it's really funny. But what we have is a very easy to get into the program and as a result, easy to cancel setup because we didn't want to be that company that forces you to jump through hoops to cancel your subscription. That said, We've identified, the marketing team has identified over 800,000 lapsed members that we can reach out to, and we're starting to design some tailored messages and offers that can win them back into the program. So there's a huge opportunity to take existing former members and bring them back into the fold. And so that's right in front of us. And sorry if my Tommy boy reference didn't land, but it works for me, so.

When do you think you'll be able to activate some of those marketing tactics? Would that be a third quarter or fourth quarter event?

Yeah, they're being activated as we speak.

Okay, great. Thanks.

The next question comes from Christian Carlino with JPMorgan. Please go ahead.

Hi, good evening. Thanks for taking our question. Can you speak to the cadence of comps over the quarter and how things are trending toward the date? And just given revenue per member or customer likely improved over the quarter as the promotions rolled off, was there any meaningful difference in the cadence of visits or transactions, whether due to weather or some of the macro events going on?

Yeah, so when you look at comps over the quarter, comp trends, they're fairly – when you look at it on the month, they were fairly consistent throughout the quarter. although April did slightly outperform the other months in the quarter. The other thing to keep in mind as we move into July and August, these were strong years, so we're facing a more challenging comparison during those months. We did see a moderation in comps during July, but there was some noise from Hurricane Beryl that was impacting the comps. And then as far as anything specific that jumps out on transactions, it's relatively consistent. RPM was relatively consistent during the quarter. Therefore, trans were as well.

Got it. That's really helpful. And just going back to your prior commentary about not needing to see retail trends improve to hit above the midpoint of the guide, how should we think about that now that we're halfway through the year? And I guess could you quantify the expense benefits that you expect to ship into the back house for some of the marketing and store openings?

Yeah, so the retail trends we built into Q3 and Q4 consistent with what we saw in Q2. So we expect those same trends on a year-over-year basis to be relatively consistent in the second half of the year. And then as far as the marketing, excuse me, the expense load, there's a few different things that add up here and are impacting the timing of the spend. The first and most pronounced is really marketing. The new head of marketing has come in and he's taking a very consumer insights approach and doing a lot of customer profiling. so we can be just that much more efficient when we do deploy these marketing dollars. That works underway and then the plan will be to have some more targeted consumer media in the second half of the year. There's also a little bit of timing with some IT systems and then also just the timing around some new hires. From a margin perspective, we do expect margins to moderate during the second half of the year to approximately the adjusted EBITDA margin in the low 30%. Got it.

That's really helpful. Thanks a lot.

The next question comes from David Bellinger with Mizuho. Please go ahead.

Hey, guys. Thanks for the question. The first one on the titanium promos and the roll-off, Just exiting Q1, I think there was something like 15% of stores still on promotions into early May. Based on some of the recent checks and some of the recent offerings we've seen out there, it looks like July and August might be reverting to some of these free trade-ups for titanium. Can you just help us with the thinking there? I know you mentioned a more site-specific approach, but any more detail on what locations those could be, and is this in any way like a step back from your initial cadence of rolling these promos off?

Yeah. Hey, David. No, so to be super clear, we had been pushing trial offers during the introduction over the last year. As we now stop and pause and reset and reevaluate where we sit at 20% on average, that means we have a number of stores and regions that are below 20%, a number of stores and regions that are above 20%. So our opportunity to continue to push and to continue to drive premium member adoption is right in front of us. The way we're going about it, though, is to do it where it doesn't take any revenue off the table. And so if we offer a trial upgrade for the existing price of your current membership, it is not diluted in any way, shape, or form. So those are done, again, on a store-specific and sometimes region-specific basis. But I just want to underscore that it's not going to do anything to shrink our revenues, which is really important to us.

Understood. Okay. And then just a follow-up on the additional membership breakdown you gave. Appreciate that. Maybe a longer-term question is how should we think about the overall mix and where that could land? Is this more of a barbell approach where that middle package might be the lowest penetration over the next three to five years? How do we think about the split across the three pieces of membership?

Yeah, there was a really smart analyst out there that made a very bold statement about operators at 50% of their top tier package. And I was sitting there going, where did he get that data point? I'm having fun with you, David, when I say that. That was in your last report. Because that felt very aggressive. By the way, can I ask you, where did you get that data point? Because I've never heard that before in my life.

I'll just tell you, just speaking with some of these operators, it might be in some regions like Florida where some of these newest members coming in tend to trade up to that highest premium package. There's a few conversations like that that some of those numbers shook out 50% or even higher. Yeah. Yeah.

Listen, I spent a lot of time at these trade shows and at the different conferences, and oftentimes the mosh pit of the bar where sometimes people can be loose with their words but also somewhat boastful about what they're doing. Jed Gold, when he states a number, he's held to the highest standard, and he can't frivolously or whimsically throw out something that is not accurate that he can't stand behind. So the numbers that we report are true and spot on. Bottom line, short answer to your question is right now 60% of our 2.1 million members are in our platinum and or titanium plan. So roughly 40% platinum, 20% titanium. We feel really, really good about that. Then the other 40% are in the base. Is there an opportunity to continue shifting that member base to the right? For sure. Hard for us to predict, right? So not knowing that we're one year into this thing. how high the tree line can go. But we do know that we have data points inside of our existing portfolio that have materially exceeded our current targets. And that's given us hope and promise that the possibility of further growth is in front of us. But I'm a little reticent. I don't want to be that guy at the bar after two drinks that throws out a number. And so we're going to stay reserved and not oversharing.

David, just a little bit more context. I think that's important. The goal here is not to drive penetration as high as we... What you'll see oftentimes when you talk to some of these competitors is $5, $3 memberships, so really, really low RPM, but it helps drive that member mix. So it's really a bit of a balancing act. We want to maintain that high RPM that we enjoy. We believe it's best in class in the industry, and then driving the penetration levels higher. And over time... We expect the 20% to increase, but we're not prepared to say over what time frame and how high it's going to get.

Thanks, guys. I won't give you my specific sources, but we'll keep the conversation going.

Okay, you got it, David.

As a reminder, if you have a question, please press star, then 1 to be joined into the queue. The next question comes from John Heinbockel with Guggenheim. Please go ahead.

Hey, John, question. Is there any correlation between retail traffic and your density and or market share? Is there any correlation with that? And then when you think about marketing, right, what's your thought in terms of where you want to spend that money? Do you want to spend it building brand awareness, traditional media, digital? It may vary by market. And what should, because you guys spend under $1 billion in marketing. What's the right number? Is it double that? Is it more than double that? What's your thought on that?

Yeah, John, thanks for the three-part question. Let me start with the first part of your question, which was, is there a correlation between The density of our portfolio on an MSA or DMA standpoint that I'm really looking at through a market share lens and then retail traffic, the short answer is no, we haven't seen a correlation. We do know, though, that in markets where we do have an elevated share, we have elevated AUVs, which supports our thesis that the value prop increases when you have more optionality, and it's just a much stronger program when you're on the ground pitching somebody about the value of your membership and that you can get your car cleaned in any 20 of the stores throughout the Tucson metro area versus an operator that may have two or three stores. And so that has held true. But with respect to correlation to retail, that's a little bit fuzzier for us. To your question on marketing and what our strategy there, so we do see an opportunity to do a better job of building our brand and brand awareness But we really want to take that and lead it to generating trial. And so specifically things that we're doing through paid social, some targeted emails, some digital ad spend. Right now we're testing various offers through various channels. But our goal is to, to your last question, is to increase our ad spend as our return on ad spend improves. And I think there is definitely a correlation between the bigger our network of stores gets, the more efficient our ad spend can be, and the more effective we become as we learn more and become better at our targeted advertising, we will get more efficiencies out of our ad spend, which will then support us taking the 1% today and perhaps taking it to 2% tomorrow. When tomorrow is, we're not going to, overspend too quickly until we have the data to support the efficiency and the effectiveness of our promotional spend.

Great. And then maybe just for Jed, sort of getting back to, right, you think about low 30s or close to 30 in the back half of the year, what normalizes, you know, you think about labor and chemicals was a huge good, right, and, you know, almost seems unsustainable. Does that normalize back to, you know, kind of a flattish level year over year? Is that the normalization or is it really, you know, because you didn't quantify the spend in G&A, is it really that, you know, rising, you know, much more significantly? Which one of the two would it be?

Well, listen, I think, let me answer it a slightly different way, John. I think the, first of all, we've worked hard to build this owner-operator mentality within the culture and And the team has done a phenomenal job finding ways to be more efficient, individuals owning their budgets, looking for what's the return on the incremental dollars that are being spent. And we've got a culture where we can challenge each other, frankly, and make sure that those returns are there. Very, very pleased with what we've seen on a chemical cost per car as we've leveraged the scale of the business and our purchasing and our buying. And helping drive some efficiencies on that chemical cost per car. We've also seen some labor efficiencies on our interior clean, which isn't at the core part of the business, but it represents 13% of our stores and about 30% of our employees. And so how can we find, how can we be more efficient as we staff those interior clean locations? Freight costs is another one where we've seen some leveraging the scale. And then some miscellaneous G&A items. So pleased with what we've seen and how those specific items that I just mentioned are going to stick in the second half of the year. What's more timing related is, as I talked about earlier, the marketing IT system, some of the new hires within G&A. We expect a little bit more of a step up in the second half from where we were compared to the first half.

Okay, thank you.

The next question comes from Simeon Gutman with Gorgas Family. Please go ahead.

Good afternoon, everyone. My first question, it's on the top line. The, I guess, good progress on the comp. If you take the puts and the takes from the quarter, you know, titanium being paid for, maybe weather, I don't know if hot, you know, helps or hurts and then hurricane. John, would you say that is your confidence changing at all with regard to the revenue generation of the chain? And then if I can just sneak as part of it, did you say that most or all of those people getting titanium or users are paying for it now and it's been rolled across to the entire chain or there's still a little bit of penetration and paying customers that could still roll on? So the 20%,

well, actually, the 40% of our platinum members are currently being billed at $32.99. 20% of our titanium members are being billed at $39.99. The promotional offers that we were speaking to were for members that are not in that program and trying to trade them up into that next-tier program. So we are enjoying the full lift. And with respect to, I guess you're asking me my mood and sentiment, Well, listen, we've shared with you guys. We've asked you guys to be patient, as we've been patient, wanting to focus on getting people into the program while our finger was firmly on the promotional button, and then we lifted it. And now we have delivered in a way with a north of $2. This is blended, Simeon. $2 average revenue per member across 2.1 million members, and we have momentum in that number, right? And so Jed is reticent and somewhat reluctant to want to stick his neck out and say, hey, there's more that we can generate. But with momentum, there's going to be some upside. And to what degree, hard for us to determine.

And Cindy, just a little bit more color. I think what you're seeing, you're asking about the disconnect between the comp and the total revenue generation. I think one point worth noting in had commented on it in the prepared remarks is with the timing of the new builds shifting to later in the year, it does create a little bit of a headwind to the revenue, total revenue from what we had expected earlier in the year.

Okay. And then just as a follow-up onto something John mentioned earlier, contemplating something about the base rate at some point in the future, you know, good or bad, we don't, you know, not good or bad, but whether or not it goes up, I think it probably doesn't go down. Is that a next 12 to 24-month decision, and you see how the rest of titanium goes, or that's a three-year strategic decision that you're contemplating?

Yeah. Well, I know you cover Costco, and their cadence is minimum once every five years. And so we're not worse than Costco. So for us, it's been 20 years at 1999. I think you're speaking specifically to that program. And for us, having a, we'll call it our value offering, is good for those more value-conscious customers. Is there an opportunity for us to take some price? Perhaps. Are we being overly conservative? Maybe. But, you know, the bottom line is when we feel it's appropriate, we will choose to take price. But really it's a judgment call, and right now we don't think we need to. It certainly will be highly accretive the day that we do it, but right now we're not going to.

Perfect, thanks guys, good luck. Thank you. Thanks, Simeon.

The next question comes from Philip Blee with William Blair. Please go ahead.

Hi guys, thanks for taking my question. You've spoken a bit about expectations for retail traffic to continue to remain soft in the second half of the year, but what do you expect you need to see for an inflection back to growth? Is it something improving in the macro or maybe a change in the level of the competitive intrusion in the market? Any color there?

Yeah, so I think we're all hopeful that this is cyclic and that the state of the U.S. consumer, particularly the lower-end cohort, is going to improve over time. But trying to time when that happens, there's a whole lot of people that are a lot smarter than us trying to predict when that happens. So until then, we know that we've got a product with universal appeal. Everyone loves a car wash. And when we see things come back to whatever the new normal is, we know that our lower-end quartile is the one that bounces back the quickest. They come in in droves. In fact, in some cases, they place more value on their vehicle than the top quartile, which is a little bit interesting. So that's our kind of non-answer on macro. I think the other positive trend is that You know, as we've stated in some of the previous calls, the 2023 was kind of the high watermark for new units coming into the category. And we're seeing a pretty marked reduction in new units this year. And from all sources, we're expecting that to continue in its decel into 2025. And so there'll be less competitive intrusion as a result, which is going to put less pressure on our stores. And quite frankly, if you're going to choose to put up a car wash Do you really want to put it up next to a Mr.? And so I'm not being cocky when I say that. It's just there's other operators that you could choose to go toe-to-toe with. I would not want to go up against us.

Great. That makes sense. And then I believe you previously mentioned certain markets where titanium mix is trending well above the average, maybe exceeding 30% in some cases. Do those markets typically have an or a higher overall premium membership mix as well? And then do you look at these markets as something that could be reasonable for a national average at some point? Thank you.

Chad, you want to answer that one?

Yeah, so Philip, it's a, the short answer is we do see a higher premium mix in those markets that have a higher titanium mix I mean, there's always a number of factors that go into this when you start looking market to market, the surrounding income demographics, the score base. I think seeing some of these markets that are at that 30% plus level, it does. It instills that sense of confidence that there's opportunity, particularly at some of those markets that are at the lower end, that are still below 20%, and that there's a path to bring them up and Over time, we expect, and we saw this over the last five years prior to when we had titanium, there's just a natural premiumization that takes place. It's not at the same rate that we've seen over the last year on the heels of the titanium product launch, but there has always been this natural shift into more premium products.

Yeah, Jed, can I also add, too, when you have a brand-new store with a relatively blank slate, it's so much easier as you're articulating the full suite of programs to get folks in versus having this installed base where you're then trying to trade them into a new program. And so there's a lot of operators out there that particularly with relatively young portfolios that are enjoying that benefit. We're having to take this very, very large installed base and shift some of their behaviors and purchasing choices. But we do know that in our greenfield locations, we're seeing really, really amazing premium numbers. And again, that's kind of our North Star for what the opportunity is.

Once again, if you would like to ask a question, please press star then one to be joined into the question queue. The next question comes from Peter Keith with Piper Sandler. Please go ahead.

Hey, thanks. Hi, good afternoon, guys. On the comp outlook for the rest of the year, could we think about a quantification of what Hurricane Beryl has done to Q3, maybe just to help level set our expectations? And then following on that, has there been any change to your Q4 outlook?

Yeah, Peter. Hurricane Barrel, when we look at it on the month, it was about 40 to 80 basis points of impact to July. I believe that could be a 20 to 30 basis impact to comp stores on the quarter. So a little bit of impact. It was 42 stores in Houston. They were closed on average. The average came out to about 2.9 days for the time that those were closed. We believe that we've adequately reflected that trend as we think about second half comps and our color around the forecast rolling up to the middle of the guidance, the midpoint of the guidance range that we have provided. Okay, great.

And I thought the commentary around the reactivation opportunity is interesting, and I guess Is this something that you guys were not doing in the past? It sounds like it's starting now. And so I guess how are you reaching out to some of these expired customers? What's the technique? Is it mailers, emails? Give us some color on that, please.

Yeah. So it was naturally occurring before where we knew that there was inside that 800,000 number, there's what we define as a seasonal member that will come in and out. And I choose the Minnesota market as an example where in the summertime, it's not uncommon for folks to go up to their lake cabin and cancel their membership during the summer period. But then when school's back in session, they come back and reactivate. And so we see that happen in that, not just in Minnesota, in a lot of markets where there'll be a temporary pause, they'll go on vacation, what have you. But we haven't done anything in a in a more, I think, strategic and targeted way up until now. And this is where the beauty of Matt comes in. Matt said, hey, there's this embedded base that's just sitting right in front of us. Let's go reach them. And the way to reach them is, we think the most effective way right now is email. And so we've got some campaigns that are going out as we speak. And we hope to have some more data to share on subsequent calls. Okay, sounds good. Thanks so much.

Thank you.

The next question comes from Robbie Ohms with Bank of America. Please go ahead.

Oh, hey, thanks for taking my question. Really just a follow-up on some of the ones that have gone before. For the greenfield stores that you've done, and maybe you don't have enough data yet, but where the penetration is really strong with titanium for a greenfield store, do you have any data on how those stores mature what the maturation curve looks like versus historical new locations?

Robby, just to clarify, are you talking about maturation of titanium or just maturation of the total members?

Maturation of members and sales of that store. So does it change the maturation or waterfalls of the store? you know, versus stores when you weren't doing the high penetration of titanium when you opened a new store.

Yeah, it's still early. We don't have enough data points to say definitively whether it impacts how those members ramp compared to prior to having titanium in our new builds.

Gotcha. And then just one other follow-up. I just want to clarify the – Are you seeing it's been very promotional and you think it's staying promotional or is it getting – you think the weaker competitors are getting less promotional? You know, just overall, what's the thought competitively?

Yeah, it's kind of a mixed bag. I think those that are executing really well, that have really good customer experience and a strong value prop are not having to lean too heavily on aggressive promotions. But those that may not have those things that I just mentioned will need to resort to price as their primary driver, which is why, again, we've been somewhat conservative in our approach to not being overly promotional. Because we know at the end of the day that when we look at the factor analysis of why people choose Mr. Car Wash, price is not the primary driver anymore. It's quality, it's speed, it's the efficiencies of our stores, and then the customer service that they get when they come visit us is second to none. And that's really become our calling card. So that said, there's a segment of the motoring public that will be motivated by a potential attractive offer. And because our margin profile is healthy, we have some room to lean in on certain offers. But again, we want to be very targeted and measure it, not just spray and pray.

Got it. Thanks so much.

The next question comes from Tristan Thomas Martin with BMO Capital Markets. Please go ahead.

Hey, good afternoon. Just one question for me. What are you seeing in terms of M&A multiples in the space?

Yeah, it's been very quiet on the M&A front. I think the appetite for doing deals right now in this kind of environment, given just the cost of capital and then, quite frankly, the debt loads specific to many of the PE-backed platforms, they're just over-levered right now and can't get access to capital. I think the REIT markets are also kind of wising it up, saying, hey, we need to be really smart with some of the businesses that we're underwriting because... At the end of the day, even if the coverage ratios are there, if it starts getting thin and you're quote unquote working for the landlord, that's not a single purpose facility. There's some risks associated with that. So due to those reasons, I think right now most operators are looking inward and saying, How do we execute across all the core fundamentals? And to do that, you need to reinvest. And this is kind of a capital allocation question. How do you take some finite resources? You can't sweat the assets. You've got to reinvest back into the business. But as importantly, you've got to invest in human capital. And so when we're seeing businesses that are running super lean crews and they're opening and closing with one guy, that's blasphemy for us. We would never do that because it's highly unsafe. But more importantly, we don't want to be that company where you pull on a lot and there's no money there to service you. So we err on the side of running a little heavier, if you will. But we're okay with that because for us it's all about the customer experience. So at the end of the day, I'm drifting here a little bit. I want to get back to your question on multiples. For the deals that are trading, I think the hard thing for anybody that's on the buy side right now is to pull the trigger on a deal north of where Mr. is trading because you really gotta think, again, particularly if you're a sponsored-back platform, what is my exit on this thing and where does this thing end right now? Mr. is one marker, is trading at X and I'm buying at Y. If that Y is materially over where we're trading, if I'm on that investment committee, I'm stressed out.

Yeah, Mikey.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Well thanks everyone for joining today's call. We have a lot of momentum going into the back half and I couldn't be more proud of our team and all the hard work everyone's put in to get us here. Our emphasis on our people and their happiness and engagement really starts with developing a culture where we work hard, care about doing a good job, and have fun along the way. We're very optimistic about our future and particularly the impact that our marketing and technology investments will have in the years ahead. Look forward to catching up with everyone on the next call, and hope everyone stays cool out there. Talk soon.

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