Q2 2022 Mister Car Wash, Inc Earnings Call

August 11, 2022

Good afternoon, and welcome to Mister car Wash its conference call to discuss financial results for the second quarter fiscal 2022 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.

Operator: Good afternoon, and welcome to Mister Car Wash's conference call to discuss financial results for Q2 of fiscal 2022. 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. I would now like to turn the conference over to Ms. Megan Everett, Senior Director of Communications. Please go ahead, ma'am.

In part is not permitted without written authorization from the company I would now like to turn the conference over to MS. Megan ever at senior Director of Communications. Please go ahead ma'am.

Thank you good afternoon, everyone and thank you for joining us today for Mister car wash as Q2 2022 earnings call.

Megan Everett: Thank you. Good afternoon, everyone, and thank you for joining us today for Mister Car Wash's Q2 2022 earnings call. Speaking today are Chairperson and Chief Executive Officer, John Lai, and Chief Financial Officer, Jed Gold. After John and Jed have made their formal remarks, we will open the call to questions. Before we begin, I do need to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today, and except, as may be required by law, the company does not have any obligation to update or revise such statements if circumstances change. During this call today, management will also refer to certain non-GAAP financial measures.

Speaking today are chairperson and chief Executive officers online and Chief Financial Officer said cost afterwards.

After John and Chad Hurt me. Therefore, my remarks, we will open the call to questions.

Before we begin I do need to remind everyone that comments made today may include forward looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially materially from managements current expectations.

These statements speak as of today and as except as maybe required by law. The company does not have any obligation to update or revise such statements as circumstances change.

During this call today management will also refer to certain non-GAAP financial measure.

Megan Everett: A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release issued earlier today and posted to the investor relations section of Mister Car Wash's website at ir.mistercarwash.com. With that, I will turn the call over to John. John?

A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release issued earlier today and posted to the Investor Relations section of Mister car wash as website at IR Dot Mister car wash dot com.

With that I will turn the call over to John John .

John Lai: Thanks, Megan, and good afternoon, everyone, and welcome to our Q2 Earnings Call. Coming into the quarter, I think there was some concerns around inflation and whether or not people might start pulling back on getting their car washed, particularly with gas prices soaring above $5 a gallon, and of course, the huge comp we were going up against. What we experienced was that demand remained solid. However, there was a little bit of softness on the retail side of our business, but that was offset by the strength of our Unlimited Wash Club program, which is 65% of our revenues, where our members remained amazingly loyal. Since our beginning over 25 years ago, we've been through various economic cycles, and what we've seen throughout is that in good times and in tough times, the American consumer deeply values keeping their car clean.

Thanks, Matt and good afternoon, everyone and welcome to our Q2 earnings call.

Coming into the quarter I think there was some concerns around inflation and whether or not people might start pulling back and get into carwash, particularly with gas prices soaring above $5 a gallon.

Of course, the huge comp we were going up against but.

But we experienced was that demand remained solid however, there was a little bit of softness on the retail side of our business.

But that was offset by the strength of our unlimited Watch club program, which is 65% of our revenues where our members remained amazingly loyal.

Since our beginning over 25 years ago, we've been through various economic cycles and what we've seen throughout is that in good times and in tough times, the American consumer deeply values, keeping their car clean and a $10 wash or 20 Bucks for club membership, it's affordable convenient and brings people joy.

John Lai: And at $10 a wash or $20 for a club membership, it's affordable, convenient, and brings people joy. And to that end, we feel very fortunate to be in a space that is so resilient. For Q2, I'm happy to report that revenues increased by 14% to $225 million. Comp store sales increased 2.4%, and we opened 4 new greenfield locations and acquired 6 new stores. We added 59,000 net new members to our Unlimited Wash Club program, and year-over-year, we're up 20%. The real headline for UWC is that we didn't see any impact to churn, which speaks to the loyalty we've engendered. However, on the retail side of our business, we did see some softness that was in line with expectations.

To that end, we feel very fortunate to be in this space is so resilient.

For Q2, I'm happy to report that revenues increased by 14% to $225 million.

Comp store sales increased two 4% and we opened four new Greenfield locations and acquired six new stores.

We added 59000 net new members to Orlando to Wash club program and year over year were up 20%.

The real headline for EWC is that we didn't see any impact to churn.

Which speaks to the loyalty we've engendered.

However on the retail side of our business, we did see some softness that was inline with expectations.

John Lai: And like almost everyone right now, we're experiencing some inflationary pressures in labor, chemistry, and utilities. I'll let Jed go into more details in a second on the cost side of the business. So big picture, with sales remaining relatively steady and with some cost pressure, we are experiencing some near-term headwinds to margins. But, and this is important, we're not slowing down on making long-term investments in people, programs, and in our stores, because our focus has never been about maximizing margins in the near term. We're more interested in scaling our company with a long-term view, given the incredible growth opportunity in front of us. Bottom line, Adjusted EBITDA came in at $74.5 million, just slightly below our internal expectations.

And like almost everyone right now we're experiencing some inflationary pressures on labor chemistry, and utilities I'll, let Jed go into more details in a second on the cost side of the business.

So big picture with sales remaining relatively steady and with some cost pressure, we are experiencing some near term headwinds to margins, but and this is important we're not slowing down on making long term investments in people programs and in our stores.

Our focus has never been about maximizing margins in the near term we're more interested in scaling our company with a long term view given the incredible growth opportunity in front of us.

Bottom line adjusted EBITDA came in at $74 $5 million, just slightly below our internal expectations.

John Lai: To remind everyone on the line today, our five strategic focus initiatives are, number 1, to expand our footprint, 2, to build out our teams, 3, to digitally innovate and enhance our member experience, 4, to develop the next generation of wash products, and 5, make a sustainable impact in the communities we serve. So let me provide you a brief update on some of these initiatives. While we've been highly acquisitive over the years, our business has shifted to become less of a consolidation play and more of an organic growth story. The 8 stores we've opened so far this year are off to a great start, and our greenfield program has materially exceeded our expectations. We're planning on adding another 20-plus stores in the back half of this year and are even more excited about 2023.

To remind everyone on the line today are five strategic focused initiatives are number one to expand our footprint to to build out our teams three to digitally innovate and enhance our member experience.

For to develop next generation of wash products and five make a sustainable impact in the communities we serve.

So let me provide you a brief update on some of these initiatives.

We've been highly acquisitive over the years, our business has shifted to become less of a consolidation play and more of an organic growth story.

The eight stores, we've opened so far this year are off to a great start and our Greenfield program has materially exceeded our expectations were.

We're planning on adding another 20 plus stores in the back half of this year and are even more excited about 2023.

John Lai: We currently have over 100 greenfield projects in our pipeline that we expect to open in the next few years. We think the addressable market is still underserved in many markets, and the opportunity to densify in each market that we move into is huge. On the product and services side, we're planning on expanding our service offerings in early 2023, with the goal of rolling out the biggest extra service offering in the history of our company. When we pioneered Hot Shine almost two decades ago, it completely changed the customer experience, and with this new offering, we'll continue our long history of innovation. With respect to retail pricing, we plan on leveraging our pricing power by taking some modest retail price increases in Q3.

We currently have over 100 Greenfield projects in our pipeline that we expect over the next few years.

We think the addressable market is still under served in many markets and the opportunity to densify in each market into is huge.

On the product and services side, we're planning on expanding our service offerings in early 2023 with the goal of rolling out the biggest extra service offering in the history of our company.

When we pioneered hot shine almost two decades ago it completely change the customer experience and with this new offering we will continue our long history of innovation.

With respect to retail pricing, we plan on leveraging our pricing power by taking some modest retail price increases in Q3.

John Lai: I'd like to remind everybody that our approach to pricing has been rather conservative, and we've always believed that rather than just taking price and justifying it by citing rising costs, we believe it's better to earn the right to a price increase by delivering exceptional value. On the sustainability front, in early 2021, we began piloting a water reduction and efficiency program in 15 stores in Salt Lake City. In our pilot, we were able to reduce fresh water usage by 30% by reengineering certain parts of our wash process. The plan is to leverage these results and expand the water reduction program into new regions going forward. Last but not least, I was in our Florida market recently, checking in on our teams on the ground.

And I would like to remind everybody that our approach to pricing has been rather conservative and we've always believed that rather than just taking price and justifying it by setting rising cost. We believe it's better to earn the right to a price increase by delivering exceptional value.

On the sustainability front in early 2021 began piloting a water reduction and efficiency program and 15 stores in Salt Lake City.

In our pilot, we were able to reduce freshwater usage by 30% by reengineering certain parts of our watch process.

The plan is to leverage these results and expand the water reduction program into new regions going forward.

Last but not least I was in our Florida market recently checking in on our teams on the ground and as you know we've doubled our footprint in Florida in the last six months and the teams we're knee deep in the post acquisition integration process.

John Lai: And as you know, we've doubled our footprint in Florida in the last six months, and the teams were knee-deep in the post-acquisition integration process. Without going into too many gory details, let's just say that integration is not for the faint of heart, and to do it right requires time, money, and a whole lot of effort. I was thrilled to see the progress the team has made, and I'm hoping I get asked questions during our Q&A on how we've transformed the culture and lifted the lives of our new team members. On another note, Florida, like many parts of the country, is experiencing some intense heat right now. Consistent with our people-first ethos, our general managers are focusing on safety and wellness, making sure everyone's properly hydrated, handing out electrolyte packets, and giving people necessary cooling breaks.

Without going into too many gory details, let's just say that integration is not for the faint apart and to do it right requires time money and a whole lot of effort.

I was thrilled to see the progress the team has made and I am hoping I could ask questions. During our Q&A on how we've transformed the culture and lifted the lives of our new team members.

On another note, Florida like many parts of the country is experiencing some intense heat right now.

Consistent with our people first ethos, our general managers are focusing on safety and wellness, making sure everyone's properly hydrated handing out electrolyte packets and giving people necessary cooling breaks.

John Lai: We hope that everyone on the line appreciates how difficult it is to work out in the elements and the steps we're taking to make sure everyone's safe. Jed, I'm now going to turn it over to you.

We hope that everyone on the line I appreciate how difficult it is to work out in the elements and the steps, we're taking to make sure everyone's safe.

Jed I'm now going to turn it over to you.

Thank you John and good afternoon, everyone.

Jed Gold: Thank you, John, and good afternoon, everyone. We had a solid second quarter, and overall, we are pleased with the results. I would refer you to our earnings release for a more fulsome review of our quarterly numbers. Rather than going through every line in typical fashion, I thought I would focus my comments on a few highlights and trends to help you better understand the business and what has changed since our last earnings call. First, on the demand side of the equation. Overall, demand for our services remained relatively consistent throughout the second quarter. While we don't talk about the individual months, all three months comped positive, and June was our strongest comparable store sales month during the quarter. The UWC subscription side of the business remained very steady.

Jed Gold: Thank you, John, and good afternoon, everyone. We had a solid Q2, and overall, we are pleased with the results. I would refer you to our earnings release for a more fulsome review of our quarterly numbers. Rather than going through every line in typical fashion, I thought I would focus my comments on a few highlights and trends to help you better understand the business and what has changed since our last earnings call. First, on the demand side of the equation. Overall, demand for our services remained relatively consistent throughout the Q2. While we don't talk about the individual months, all three months comped positive, and June was our strongest comparable store sales month during the quarter. The UWC subscription side of the business remained very steady.

We had a solid second quarter and overall, we are pleased with the results.

I would refer you to our earnings release for a more fulsome review of our quarterly numbers.

Rather than going through every line in typical fashion I thought I would focus my comments on a few highlights and trends.

Help you better understand the business and what has changed since our last earnings call.

First on the demand side of the equation.

Overall demand for our services remained relatively consistent throughout the second quarter.

While we don't talk about the individual months all three months Comped positive in June was our strongest comparable store sales months during the quarter.

The EWC subscription side of the business remained very steady in line with our expectations. We added 59000, UW see members in the quarter and 185000.

Jed Gold: In line with our expectations, we added 59,000 UWC members in Q2 and 185,000 in the first half of the year. As John indicated, we did not see a meaningful change in our churn rates, and we did not see club members trading down from the platinum package to the base package in Q2. On the retail side of our business, we did see a moderation in volume trends that was in line with our expectations during Q2. As we have discussed in the past, it's not uncommon to see some fluctuations in our retail volumes based on external factors such as weather, pricing, seasonality, and macro events. We also see an impact to this number as retail customers trade out of retail into the UWC program.

In the first half of the year.

As John indicated we did not see a meaningful change in our churn rates and we did not see club members trading down from the platinum package to the base package in the second quarter.

On the retail side of our business, we did see a moderation in volume trends that was in line with our expectations during the second quarter.

As we have discussed in the past, it's not uncommon to see some fluctuations in our retail volumes based on external factors such as weather.

Pricing seasonality and macro events.

We also see an impact to this number as retail customers trade out of retail into the EWC program.

Jed Gold: Our retail business was very strong in Q2 last year and benefited from a number of factors that made for a very difficult comparison in this year's Q2. Early into Q3, we have not seen a material change to our churn rate or makeup of our UWC subscription business, but we have seen some continued deceleration in our retail volumes that are likely a result of the broader macro environment. This, coupled with many macroeconomic outlooks suggesting continued degradation during the second half of 2022, caused us to take a more cautious view on UWC membership growth, comparable store sales growth, and total revenue in the second half of the year.

Our retail business was very strong in the second quarter last year and benefited from a number of factors that made for a very difficult comparison in this year's second quarter.

Early into the third quarter, we have not seen a material change to our churn rate or makeup of our EWC subscription business.

But we have seen some continued deceleration in our retail volumes that are likely a result of the broader macro environment.

This coupled with many macroeconomic Alex outlooks, suggesting continued degradation during the second half of 2022.

Caused us to take a more cautious view on EWC membership growth comparable store sales growth and total revenue in the second half of the year.

On the expense side of the equation, we continued to see modest inflationary pressure across many areas of our business and this along with growth investments and public company costs put some pressure on our margins in the second quarter.

Jed Gold: On the expense side of the equation, we continued to see modest inflationary pressure across many areas of our business, and this, along with growth, investments, and public company costs, put some pressure on our margins in Q2. As a percentage of sales, adjusted cost of labor and chemicals increased 127 basis points. Adjusted other store operating expenses increased 101 basis points, and adjusted G&A expenses increased 172 basis points. Collectively, our expenses did come in a little higher than we expected in Q2, and we have assumed a continuation of this trend in the second half of the year. The biggest increases are coming from growth initiatives as we continue to build our internal capabilities and vertically integrate in areas where it makes sense, makes the most sense.

As a percentage of sales adjusted cost of labor and chemicals entry increased 127 basis points.

Adjusted other store operating expenses increased 101 basis points and adjusted G&A expenses increased 172 basis points.

Collectively our expenses did come in a little higher than we expected in the second quarter and we have assumed a continuation of this trend in the second half of the year.

The biggest increases are coming from growth initiatives as we continue to build our internal capabilities and vertically integrate and areas where it makes sense. It makes the most sense.

Jed Gold: Key areas of focus right now include marketing, IT, digital, real estate, building and construction, and training and development. Given some of these trends on both the demand and expense side and the macro uncertainties, we think it's prudent to be a bit more cautious on our outlook for the back half of the year, and our revised outlook for the full year calls, full year 2022 calls for comparable store sales growth of 3% to 5%, net revenues of $860 to $880 million, and Adjusted EBITDA of $268 to $278 million. A few other things to note. First, with the rise in interest rates and the ending of our interest rate hedge in October, we estimate our interest expense will be in the area of $42 million for the full year.

Key areas of focus right now include marketing I T digital real estate building and construction in training and development give.

Given some of these trends on both the demand and expense side and the macro uncertainties. We think it's prudent to be a bit more cautious on our outlook for the back half of the year and our revised outlook for the full year calls at the full year 2022 calls for.

Comparable store sales growth of 3% to 5% net revenues of $860 million to $880 million and adjusted EBITDA of $268 million to $278 million.

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A few other things to note.

First with the rise in interest rates and the ending of our interest rate hedge in October we estimate our interest expense will be in the area of $42 million for the full year. This combined with an increase in our projected weighted average shares outstanding to $329 million gets us to a revised adjusted net income per diluted.

Jed Gold: This, combined with an increase in our projected weighted average shares outstanding to 329 million, gets us to a revised adjusted net income per diluted share figure of $0.36 to 0.39 for the year. Second, we completed a sale leaseback on 15 July for total aggregate proceeds of $55.2 million. The timing of the transaction means we will begin to incur additional rent expense in Q3. This, combined with additional sale leasebacks, likely later this year, will increase our other store operating expense line in the second half and is factored into our revised outlook....

Sure figure of 36 to 39 cents for the year.

Second we completed a sale leaseback on July 15th for total aggregate proceeds of $55 $2 million. The timing of the transaction means we will begin to incur additional rent expense in the third quarter.

This combined with additional sale leasebacks likely later this year will increase our other store operating expense line in the second half.

And is factored into our revised outlook.

Third we have lowered our capital expenditures outlook for the full year 2022 to a range of $235 million to $285 million from our previous range of $285 million to $315 million largely as a result of timing of projects being completed and favorability in our maintenance capex.

Jed Gold: Third, we have lowered our capital expenditures outlook for the full year 2022 to a range of $235 to 285 million from a previous range of $285 to 315 million, largely as a result of timing of projects being completed and favorability in our maintenance CapEx. Fourth, we remain comfortable with opening of approximately 30 new locations this year, and as John said, have more than 300 properties in various stages of development within our greenfield development pipeline. While we are not looking to provide quarterly guidance, let me provide some high-level commentary that should assist you with your modeling. We are looking to open approximately 23 stores in the second half, with the majority of these being somewhat late in the fourth quarter.

Fourth we remain comfortable with opening the opening of approximately 30 new locations. This year.

And as John said have more than 300 properties in various stages of development within our Greenfield development pipeline.

While we are not looking to provide quarterly guidance, let me provide some high level commentary that should assist you with your modeling.

We are looking to open approximately 23 stores in the second half with the majority of these being somewhat late in the fourth quarter with the opening of any new Greenfield store, we incur preopening costs in a number of operating expenses right out of the gate and it takes the store a few months to ramp up from a volume and revenue standpoint.

Jed Gold: With the opening of any new greenfield store, we incur pre-opening costs and a number of operating expenses right out of the gate, and it takes the store a few months to ramp up from a volume and revenue standpoint. The late fourth quarter timing of new builds will put some added temporary pressure on fourth quarter margins in the form of higher expenses and lower productivity rates. The other factor to keep in mind is the incremental rent from the sale-leasebacks that we did in July and will likely do later this year. As a result of these, we think fourth quarter EBITDA margin could be a couple of points below third quarter.

The late fourth quarter timing of new builds will put some added temporary pressure on fourth quarter margins in the form of higher expenses and lower productivity rates.

The other factor to keep in mind is the incremental rent from the sale leasebacks that we did in July and we'll likely do later this year.

As a result of these.

Fourth quarter EBITDA margin could be a couple of points below third quarter.

Jed Gold: As we have said, the performance of our new greenfield locations has been very strong, and the opening of so many stores late this year puts us in a good position for next year as these stores begin to fully ramp and we begin to better leverage some of this year's growth investments. In closing, I would also like to add my thanks and appreciation to all our hardworking team members who are executing the business every day and helping us fulfill our mission of being America's premier car wash. With that, I'll turn it over to the operator to begin the Q&A session. Operator?

As we have said the performance of our new Greenfield locations has been very strong and the opening of so many stores late this year puts us in a good position for next year as these stores begin to fully ramp and we begin to better leverage some of this year's growth investments.

In closing.

I would also like to add my thanks, and appreciation to all of our hardworking timber team members, who are executing the business every day and helping us fulfill our mission of being America's Premier Carwash.

With that I'll turn it over to the operator to begin the Q&A session.

Operator.

Operator: Thank you. 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press stars and two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Randy Konik with Jefferies. Please go ahead.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.

Yeah.

And the first question will come from Randy <unk> with Jefferies. Please go ahead.

Hey, guys. How are you I guess Scott for you.

Randy Konik: Hey, guys. How are you? I guess, Jed, for you, on any kind of added color on the retail side of the business on just how severe the kind of deceleration has been and any types of volatility or any color kind of you're seeing that is kind of subject to certain markets, that for certain income levels or anything like that, that we can kind of glean from the data? And then I guess my second question would be talking about the modest price increases or highlighting those price increases, color on how, how much you're thinking on those price increases. Just trying to get a sense of how that can potentially offset some of the weakness in the retail side. Thanks, guys.

I have added color on on the retail side of the business on just how severe the kind of thing.

The acceleration has been and and any types of volatility or any color kind of youre seeing that is kind of subject to certain markets for certain income levels or anything like that that we can kind of glean.

From on the data and then I guess my.

My second question would be I'm talking about the the modest.

Price increases are highlighting those price increases.

And how how much you're thinking on those price increases just trying to get a sense of how that can potentially offset some.

Some of the weakness in the retail side. Thanks, guys.

Yeah, Randy so like we talked about on the Q1, we've seen this this trend.

Jed Gold: Yeah, Randy. So like we talked about on the Q1, we've seen this trend of some continued moderation on the retail side of the business. We do have some very strong comparisons versus last year. Our theory is that the macro environment is putting a little bit of pressure on these retail volumes in the second quarter. And like we've talked about before, it's not uncommon to experience some short-term fluctuations in retail volume based on weather, macro conditions, seasonality, price increases, UWC conversions, etc. It's hard to look at this and say exactly how much is truly macro driven, but it is likely a factor along with some seasonality. A percentage of our retail customers are likely washing their vehicles slightly less often.

I have some continued moderation on the retail side of the business. We do have some very strong comparisons.

As last year.

The.

Our theory is that the macro environment is putting a little bit of pressure on these retail volumes in the second quarter and like we've talked about before it's not uncommon to experience. Some short term fluctuations in retail volume based on weather macro conditions.

Seasonality price increases EWC conversions et cetera.

It's hard to look at this and say exactly how much is truly macro driven but it is likely a factor along with some seasonality.

Our percentage of our retail customers are likely washing their vehicles slightly less often.

Jed Gold: Our our UWC business, though, does continue to be very resilient. We've not seen a material change in in UWC churn or mix shift between base and platinum. Second quarter retail, it was in line with our expectations, and as you had pointed out, we we have seen that further deterioration in retail volumes. Given that retail is the funnel that feeds new UWC membership growth, a decrease in retail volume typically leads to a slight slowdown in UWC member growth. Our our updated updated guidance accounts for all of these phenomenons. And then the second part of your your question there is, when you look at the the the total sales of the business across all income demographics, we're we're seeing growth across all income demographics. It's not as though one demographic is is being impacted more than another.

Our our EWC business, though does continue to be very resilient, we've not seen a material change in EWC churn or mix shift between base and platinum.

Second quarter retail it was in line with our expectations.

And as you had pointed out we have seen that further deterioration in retail volumes given that retail is the funnel that feeds new EWC membership growth a decrease in retail volume typically leads to.

A slight slowdown in EWC member growth are our updated updated guidance accounts for all of these phenomenon and then the second part of your question. There is when you look at the total cells of the business across all income demographics.

We're seeing growth across all income demographics, it's not as though one demographic is is being impacted more than another when we look at performance across all vintages, even our most mature locations continue to comp.

Jed Gold: When we look at performance across all vintages, even our most mature locations continue to comp positively, which to us indicates that it's not any one in particular segment or demographic, that everybody loves a car wash.

Positively.

Which to us indicates that it's not any one in particular.

Segment or demographics that everybody loves a carwash.

John Lai: Yeah, Jed, if I could just add some color to Randy's question, because I think it's a good one. You know, Randy, we've been intentionally conservative from a pricing strategy standpoint. Some could argue to a fault, but oftentimes we're the last people in the market to take price, and we're okay with that. But if you look at the most recent increase that we've taken to, again, the smaller segment, the retail segment of our business, which is 35% of revenues, it is a very incremental, modest increase. We are still at now, with the price increase, the market median, which is roughly $10 for an express car wash. And you know, that price point is still very affordable and accessible to you know, all segments of the motoring public.

Yes, Jed if I could just add some color to randy's question, because I think it's a good one.

Randy we've been intentionally conservative from a pricing strategy standpoint, some could argue too.

Oftentimes we are the last people in market to take price and we're okay with that but.

But if you look at the most recent increase that we've taken to again this smaller segment the retail segment of our business, which is 35% of revenues.

It is very incremental modest increase we are still at now with the with the price increase the market median which is roughly $10 for an express carwash and and.

At that price point is still very affordable and accessible to all segments.

The motoring public.

Jed Gold: ... And Randy, just to quantify that a little bit, it's about 75% or 70% of our core stores will receive a price change. And express price will increase about $1, interior clean, about $2. This puts us in line, or in some cases, we're still behind the competition. And when raising retail pricing in the past, we have seen modest decline in retail volumes, but it's offset by a modest increase in UWC membership. So historically, we've actually seen total volumes increase as you take that retail customer that comes in approximately 3 times per year and you trade them into UWC, that will wash approximately 3.5 times per month.

And Randy just to quantify that a little bit it's about 75 or 70% of our core stores will receive a price change.

And express price will increase about a dollar entire clean about $2. This puts us in line.

Or in some cases, we're still behind the competition.

And when rates rising raising retail pricing in the past we have seen modest decline in retail volumes.

But it's offset by a modest increase in EWC memberships. So historically, we've actually seen total volumes increase as you take that retail customer that comes in approximately three times per year, and you trade them into EWC that will wash approximately three and a half times per month.

Jed Gold: However, this current macro environment does make it a little bit harder to predict, but we expect this price increase to have a low single digit impact to our comp store sales.

However, this current macro environment does make it a little bit harder to predict but we expect this price increase to have a low single digit impact to our comp store sales.

Simeon Siegel: And then lastly, real quick, just on the guide, the changes, how are you thinking about what factors are you kind of, you know, implying with the trend on retail as well as expenses, and UWC penetration? Can you just give us a little color on how you think about that guidance or that on top line and EBITDA? Thanks.

Randy Konik: And then lastly, real quick, just on the guide, the changes, how are you thinking about what factors are you kind of, you know, implying with the trend on retail as well as expenses, and UWC penetration? Can you just give us a little color on how you think about that guidance or that on top line and EBITDA? Thanks.

And then lastly, real quick just on the guide.

How are you thinking about what factors are you kind of.

Implying with the trend on REIT as well as expenses.

<unk> penetration can you just give us a little color on how you think about that guidance or that.

On topline and EBITDA.

Jed Gold: Yeah. So the high end of the guide, Randy, the 5%, reflects. So when you look at July, it is in line with where we were in Q2 overall, but it was a slight moderation from where we were in June. And essentially, that's what we factored in to get to the 5%, is basically continued with slight deterioration in the second half of the year.

Yeah, so that the high end of the guide Randy that the 5%.

It reflects so when you look it at July .

It is in line with where we were in Q2 overall, but it was a slight moderation from where we were in in <unk>.

June and essentially that's what we've factored in to get to the 5% is basically continued.

With slight deterioration in the second half of the year.

Got it thanks, guys really helpful.

Simeon Siegel: Got it. Thanks, guys. Really helpful.

Randy Konik: Got it. Thanks, guys. Really helpful.

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

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

Simeon Gutman: Hey, everyone. Hey, Jed, one quick follow-up. I take it that you're not going to quantify the sequential deceleration in the retail business, or you're acknowledging that there is a sequential deceleration, or is it on par with what happened in Q1?

Hey, everyone.

Just one quick follow up.

I get that you're not going to quantify.

The sequential deceleration in the retail business or you're acknowledging that there is a sequential deceleration or is it on par with where we what happened in the first quarter.

Yeah. So it's I mean, we're not going to quantify and talk specifics around volumes in the retail volumes and disclose that but what what I will say that to just to give you. Some guardrails as you model. This is that what's what's reflected in the guide in the second half of the year is a slight deterioration from where we are today.

Jed Gold: Yeah. So Simeon, we're not gonna quantify and talk specifics around volumes and on the retail volumes and disclose that. But what I will say that, just to give you some guardrails as you model this, is that what's reflected in the guide in the second half of the year is a slight deterioration from where we are today, and then that gets us to the high end that we guided to, the 5%.

And then that gets us to the high end that we guided to the 5%. Yes recipient I think this is a tough environment for the business to try and gauge which direction. The ball is going to bounce.

John Lai: Yes, Simeon, I think this is a tough environment for any business to try and gauge which direction the ball is gonna bounce. I mean, you tell me, are we in a recession? We're definitely in a high inflation environment, but you know, what we're seeing is that our business has been relatively recession resistant. And, you know, again, there hasn't been a material impact to demand.

And in the large I mean, you tell me are we in a recession and we are definitely in a high inflation environment, but.

What we're seeing is that our business has been relatively recession resistant and again, there hasn't been a material impact to demand.

Simeon Gutman: Fair enough. John, I may have missed this. You said we're adding a service next year, and then I heard you mention Hot Shine, but that one sounded like past tense, so I may have missed it on the call. Can you talk about the addition, and then how does it flow through either pricing or membership? Because it sounded exciting, but I don't know if you've said much about it.

Fair enough and John I May have missed this you said, we're adding a service next year and then I heard you mentioned hot shine, but that one sounded like past 10. So I may have missed it on the call, but can you talk about the addition, and then how does it flow through either pricing or membership because it sounded exciting, but I don't know if you've said much about it.

John Lai: I intentionally did not say much about it, given the fact that this is broadcast to the universe. So we're gonna keep that under our hat. There's a black box right now with dry ice that's billowing out of the sides, and I'm having fun when I say that, Simeon. But we expect this new product to be revolutionary and continue with our track record of pioneering new extra services that have true efficacy, true value, and really make the cars pop. So more to come in our next call.

I I intentionally did not say much about it given the fact that this is broadcast of the universe.

So we're going to keep that under our hat as a black box right now with dry ice that's building out the sides.

I haven't found when I say that semi but we expect this new product to be revolutionary and continue with our track record of pioneering new.

Extra services that have true efficacy true value.

And and really make the cars pop so more to come.

And our next call.

Simeon Gutman: Okay. I guess this is just a pure follow-up to it, and I don't wanna say much, but it's, it's another tactic to which you're dealing with pricing power, this current environment, meaning making sure that, you know, you're making sure the business is gonna continue to grow profitably.

I guess I'm, just a pure follow up to it and I don't want to say much but.

It's another tactic to which youre dealing with pricing power in this current environment, meaning making sure that you know you.

Sure.

Make sure the business is going to continue to grow profitably.

John Lai: Listen, at the end of the day, our goal is to continue to add more value, provide more choices to our customers. And, you know, if you look at some other businesses where they have a black card, for example, and they're in a more elegant way, trading people up to more profitable packages, you can read between the lines, and that is gonna be our vision as well. So, it's not necessarily a price increase, but it's a way for us to offer a more value-added service that will have all the bells and whistles in the package.

At the end of the day, our goal is to continue to.

Add more value.

<unk> more choices to our customers.

And.

If you look at some other businesses, where they have a black card for example, and there.

In a more elegant way trading people up to more profitable packages.

Can read between the lines in that that is going to be our vision as well. So it's not necessarily price increase but it's a way for us to offer.

A more value added service that we will have.

All of the bells and whistles in the package.

Simeon Gutman: Fair enough. Thank you. Good luck.

Fair enough. Thank you good luck.

The next question will come from Simeon Siegel with BMO capital markets. Please go ahead.

Operator: The next question will come from Simeon Siegel with BMO Capital Markets. Please go ahead.

Thanks, Hi, everyone. Good afternoon about summer has gone well.

Simeon Siegel: Thanks. Hey, everyone. Good afternoon. Hope, hope summer's going well. Just to stay on retail, if possible, you guys mentioned macro. Anything you can share in terms of perspectives on competition? And just thinking through that element, like, thinking through what you've learned about price elasticity at retail, I know you've been conservative on the pricing. So as we think about taking price, but recognizing the comments around the softness in retail, it would probably be helpful to think through how you're gonna test that, how you'll react, how you'll flex. And then just, you did note the happiness with UWC, so I wanna stick on that a little bit. So maybe just give us a little bit of the way you think about the interplay between retail and UWC as a top of funnel.

So just to stay on retail possible you guys mentioned macro anything you can share in terms of perspective on competition and just thinking through that element like thinking through what you've learned about price elasticity at retail I know you've been conservative on the pricing. So as we think about taking price, but recognizing the comments around the softness in retail probably.

All that to think through how are you going to test that how you'll react how you'll flex.

And then just you.

You did note the happiness with EWC. So so I want to I want to stick on that a little bit. So maybe just give us a little bit of the way you think about the interplay between retail and your WCS top of funnel.

Simeon Siegel: How do you think about the normal lag for conversion? And then, was there any notable conversion learnings this quarter? Did anything different? I mean, you got, you got the UWC members; did they come from anywhere specific, the region's demographics? I know there's a lot in there, but I think it'd be helpful.

How do you think about the normal lag for conversion and then recognizing.

Was there any notable conversion learnings this quarter did anything different I mean, you've got you've got to EWC members did they come from anywhere specific reaches demographics I know, there's a lot in there, but I think it would be helpful.

John Lai: Simeon, consistent with your pattern, you asked 20 questions inside of Let me break down all. But just let me, let me respond, you know, at the highest level. So over the years, you know, every time we've held our breath, taken an incremental pricing move and, and have been concerned about the impact of volume, we haven't seen the impact of volume. And, you know, we're, we're hoping that this continues to play out. Again, we're, we're less obsessed about the competition, and we're more focused looking inward at, at the value that we're delivering. And, you know, we, we have built a brand that is known for speed, quality, and amazing customer service. It's less about price. I actually want to change the conversation away from price, because I don't think our business is that price sensitive, to be honest with you.

Simeon consistent with your pattern of U S 20 questions inside of them.

Let me break down all the time.

But just let me let me respond at the highest level over the years every time, we've held our breath taken.

Incremental pricing move and had been concerned about the impact of volume, we havent seen the impact of volume.

And so we're hoping that this continues to play out.

Again, we're less obsessed about the competition and we're more focused looking inward at the value that we're delivering and we have built a brand that is known for speed quality and amazing customer service, it's less about price I actually want to change the conversation away from price because I don't think our business is that price sense.

To be honest with you.

John Lai: But they're all fair questions, and I don't know if we have the answers to any of them. You know, we launch, and then we, you know, see how people respond. We can test until the cows come home, but, you know, sometimes you can overtest, and tests can be very easily manipulated, or affected by other variables. So to that end, we know that we have room. There's no hubris here, where we're taking price just to take price. Again, we're the last people at the dance to make a move, sometimes to a fault, but take the move, given the cost pressures that we're experiencing; we're kind of left with no choice. And we're pretty optimistic that it's gonna be accretive.

But they are all fair questions.

I don't know if we have the answers to any of them.

We launch and then we see how people respond.

We can test until the cows come home, but sometimes you can over time.

Tests can be very easily manipulated or affected by other variables. So to that end, we know that we have room.

Theres no hubris here, we're taking price just to take price.

Again with the last people to dance to make a move sometimes to a fault or.

Take the move given the cost pressures that we're experiencing I would kind of left with no choice.

And we were pretty.

Optimistic that's going to be accretive.

Okay cool, Thanks, and then Joe that might just be helpful to talk a little bit of how you're thinking about cash flow debt coverage, just levers you could pull if need be.

Simeon Siegel: Cool, thanks. And then, Jed, it might just be helpful to talk a little bit about how you're thinking about cash flow, debt coverage, just levers you could, you could pull if need be.

Yeah. So currently sitting at about three times three times Levered and as we look at that $42 million of forecasted interest expense.

Jed Gold: Yeah, so currently sitting at about 3 times levered, and as we look at the $42 million of forecasted interest expense, we're very comfortable with satisfying any interest expense payments that we have coming up. If push comes to shove, Simeon, right, there's some CapEx, some growth investments that potentially we'd pull back on. But listen, it seems unlikely at this point. As you recall, we used the proceeds from the IPO to pay down debt and lower our overall debt levels, which puts us in a good position from an overall leverage perspective. Also, as we've talked about before, through October of this year, we're currently sitting at about 60% hedged, which helps provide some protection, at least for half of the second half, against the interest expense.

We're very comfortable with with satisfying any interest expense payments that we have coming up.

If push comes to shove Simeon right there.

Capex.

Some growth investments that potential we would pull back on but listen it seems unlikely at this point as you recall, we used the proceeds from the IPO to pay down debt and lower our overall debt levels, which puts us in a good position from an overall leverage perspective.

Also as we've talked about before through October .

Of this year, we're currently sitting at about 60% hedged, which helps provide some protection at least for half of the second half.

Against against the interest expense.

Simeon Siegel: Great. Thanks a lot, guys. Best of luck for the rest of the year.

Great. Thanks, a lot guys best of luck for the rest of the year.

Jed Gold: Thanks, Simeon.

Thanks, Jamie.

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

Operator: The next question will come from Michael Lasser with UBS. Please go ahead.

Michael Lasser: Good evening, thanks a lot for taking my question. So if you roll back the clock, John, 90 days ago, you did talk about a bit more softness in the retail business back then, and now it seems like you're indicating that it's gotten a little worse. So the key question here is, how long do you expect this to last? And to what degree could it be exacerbated by some of the price increases that you're taking? Clearly, you've contemplated that as you thought about this move, but we would love to get some thoughts on how long this retail weakness is gonna last.

Good evening. Thanks, a lot for taking my question. So if you roll back the clock John 90 days ago, you did talk about.

More softness in the retail business back then and now it seems like you're indicating that it's gotten a little worse. So the key question here is how long do you expect this to last and to what degree could it be exacerbated by some of the price increases that you're now you're taking clearly.

You've contemplated that as you thought about this move but we would love to get some thoughts on how long this retail weakness when it's going to last.

John Lai: Yeah. I wish I had a crystal ball, to answer that question, with more precision, but I don't. I will look, though, at gas prices, and again, this last quarter when gas soared in California, it was north of $6, national average, north of $5. But we've seen, sequentially, week over week, gas prices go down, which is good. And if that trend continues, you know, I think it's gonna have a positive impact on, miles driven and folks getting their cars dirtier and wanting to come in and some additional, change in their pocket to be able to afford. Again, as Jed mentioned, you know, we have that segment.

Yeah, I wish I had a crystal ball to answer that question with more precision, but I will look though at gas prices and again this last quarter when guests soared in California was north of $6.

National average north of five but we've seen.

Sequentially week over week gas prices go down which is good and if that trend continues I think it's going to have a positive impact on.

Miles driven and folks getting their cars dirtier and wanting to come in and some additional change in their pocket to be able to afford again as Jed mentioned, we have that segment. It's a very small segment of our customer base that is a non member that is relatively infrequent and we think that that segment is the one that is.

John Lai: It's a very small segment of our, our customer base that is a non-member, that is relatively infrequent, and we think that that, that segment is the one that has probably been impacted, but we hope to get them back.

Probably been impacted but.

But we hope to get them back.

My follow up question is in 2020, you add.

Michael Lasser: My follow-up question is, in 2020, you had an 18.5% operating margin. Last year, you had a 26% margin. This year, it's gonna be lower. Under what circumstances would your profitability continue to move down next year? And at the same time, your interest is going up, and your leverage is also has been consistently high. So is there a risk that you'll have some constraints in your financial flexibility, either to do bolt-on in M&A or open the number of new organic locations to maintain your growth rate?

18, 5% operating margin last year, you had a 26% margin this year, it's going to be lower.

Under what circumstances would your profitability continue to move down next year and at the same time. Your interest is going up and your leverage is also has been consistently high. So is there a risk that you'll have some constraints in your financial flexibility either.

T do bolt bolt on M&A.

Or open the number of new organic locations to maintain your growth rate.

Yes.

John Lai: Yeah, let me start, and Jed, you can chime in. And I'm gonna sound like a broken record here, Michael, but I just want to reiterate that we've never been in margin expansion mode as a primary strategy. We've been focused on growing our top line, growing the number of units, making for the long haul, and we're gonna continue to stay on that track. These near-term cost pressures, we're hoping are temporal. We are taking some pricing to offset some of the cost pressures. We have, quite frankly, some more aces in the hole, some more stuff that we could potentially levers that we could pull, should we so choose. But we're not interested in dialing back on the investment side, because that would affect our long-term growth outlook.

Let me start and Jed you can you can chime in.

And I'm going to sound like a broken record here, Michael but I just want to reiterate that we've never been in margin expansion mode. As a primary strategy. We've been focused on growing our top line growing the number of units, making investments for the long haul and we're going to continue to stay on that track.

These near term cost pressures, we're hoping are temporal.

We are taking some pricing to offset some of the cost pressures, we have quite frankly, some more aces in the whole some more stuff that we could potentially levers that we can pull should we so choose.

But we're not interested in dialing back on the investment side.

Because that would affect our long term growth.

Outlook and we're more interested in what we look like five years from now than what we look like in Q3 that said.

John Lai: We're more interested in what we look like five years from now than what we look like in Q3. That said, if things got worse, we would manage through this like we have in the past, and there's some tightening things that we could do that wouldn't impact the customer experience if we needed to. And so this is a management team that's very seasoned, very experienced, and runs a very tight ship and runs a very efficient and highly productive number of units out there. And for us, you know, the top line sometimes cures all ills, but if we needed to, we can tighten up.

If things got worse, we would manage through this like we have in the past and there is some tightening things that we could do that would it impact the customer experience if we needed to.

And so this is a management team that's very seasoned very experienced and runs a very tight ship and runs.

A very efficient and highly productive number of units out there.

And for Us.

The top line, sometimes cures all hills, but if we needed to we can tell.

<unk>.

Jed Gold: Yeah, Michael, from an Adjusted EBITDA margin perspective, as we've said before, we're targeting that mid- to low-30% range. Last year, during the first half, they were exceptionally high, just given the high sales and the low variable cost nature of the business. When you look at the right sizing of the business and investments that we're making from a public company perspective, those will start to slow down. The other piece is because of the back-end nature of the new builds this year, we'll be able to leverage those new builds and those investments that we're making to get those open.

Michael from an adjusted EBITDA margin perspective, as we've said before that this mid to low 30% range last year.

During the first half they were exceptionally high.

Just given the high <unk>.

Sales in the low variable cost nature of the business.

When you look at.

The right sizing of the business and the investments that we're making from a public company perspective, those those will start to slow down the other pieces because of that the back end nature of the new builds.

This year, we will be able to leverage those those new builds in those investments that we're making to get those open also as we continue to integrate clean streak as we've talked about before typically in acquisitions will actually go half a step back, but then start to leverage some of the investments that we're making in year, two and year three of those <unk>.

Jed Gold: Also, as we continue to integrate Clean Streak, as we've talked about before, typically in acquisitions, we'll actually go half a step back, but then start to leverage some of the investments that we're making in year two and year three of those investments.

<unk> yeah.

John Lai: Yeah. Michael, did you say 26%?

Michael did you say 20, 26%.

Yes, and I think you were talking to operating profit margins Michael.

Jed Gold: Yeah, and, and I think you were talking operating profit margins, Michael, when we were looking at-

Michael Lasser: Yeah.

Jed Gold: - Adjusted EBITDA margins, 30 to 35%.

Michael Lasser: Yeah.

Jed Gold: - Adjusted EBITDA margins, 30 to 35%.

Adjusted EBITDA margin is 30% to 35%.

Understood. Thank you very much and good luck.

Michael Lasser: Understood. Thank you very much, and good luck.

John Lai: Michael, can we talk about our full-year EBITDA margins?

Michael can we talk about our four wall EBITDA margins, yes.

Michael Lasser: Yeah, and you're closer, John, please.

And you call to you John .

[laughter].

John Lai: Listen, I mean, I'm actually starting to reflect back on the... I mean, early in our life, I had on our whiteboard, 20% net operating margins. Let's get there. And we worked our, like, our feverishly to do that. And you know, as we continue to. I mean, this is the margin profile of our business is awesome. And you know, every time we give you guys more, you want even more. And I get that's the game that we're in, but I just wanna focus on the long-term growth.

I'm actually starting to reflect back on early in our life.

Had on our whiteboard, 20% net operating margins, let's get there and we worked hard.

Feverishly to do that.

And as we continue to this is the margin profile of our business is awesome.

Every time, we give you guys more you want even more.

I guess, that's the game that we're in but I just wanted to focus on the long term growth.

Understood. Thank you very much.

Michael Lasser: Understood. Thank you very much.

Operator: The next question will come from Elizabeth Suzuki with Bank of America. Please go ahead.

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

Great. Thank you. So just one on the sustainability effort can you just talk about any potential cost savings that you mean, the pilot program related to water reduction and whether that could be a source of margin improvement for all that to additional markets.

Elizabeth Suzuki: Great, thank you. So just one on the sustainability efforts. Can you just talk about any potential cost savings that you may have seen in the pilot program related to water reduction and whether that could be a source of margin improvement if rolled out to additional markets?

Yet to be honest with you. The objective was not driven by economics. It was more driven about whats the right thing to do for the environment and for this one world that we live in so we.

John Lai: Yeah. To be honest with you, the objective was not driven by economics. It was more driven about, you know, what's the right thing to do for the environment and for this one world that we live in. So, you know, we have taken water conservation very seriously from the get-go at Mister Car Wash, and prior to even this pilot, you know, we are very proud of the fact that we recycle and repurpose, you know, over 30% of the fresh water that we use on a per car basis already. And so this is just another example of, you know, our ongoing commitment to further reduce our dependence on freshwater. You know, the reality is, water is actually relatively cheap. It's roughly $0.01 a gallon.

Have taken water conservation very seriously from the get go with Mister car wash.

Prior to even this pilot.

We're very very proud of the fact that we recycle and re purpose over 30% of the freshwater that we use on a per car basis already.

And so this is just another example of our ongoing commitment to further reduce our dependence on freshwater.

Audi is water.

Relatively cheap, it's roughly a penny a gallon.

So there is a dollar savings.

John Lai: So, there is a dollar savings, but I'm a little reluctant to share those specifics with you on this call because it's a pilot, and we probably need more data points before we can say unequivocally what that number looks like.

I'm, a little reluctant to share those specifics with you on this call because it's a pilot and we probably need more data points before we can say unequivocally what that number looks like.

Elizabeth Suzuki: Understood. Okay. And just, you know, as you continue seeking out acquisition opportunities and, you know, you're up against PE firms and others that are trying to consolidate the industry, how do you pitch the value proposition to the owners and employees of those acquisition targets? And if you can share any stats on retention or on EBITDA lift per location after the first year or two post-acquisition, that would be great.

Okay, and just as you continue.

Seeking out acquisition opportunities in Europe against.

Firms and others that are trying to consolidate the industry. How do you pitch the value proposition to their owners and employees. If those acquisition targets and if you can share any stats on retention one EBITDA lift per location. After the first year post acquisition that would be great.

Yeah, Let me let me take the question the last piece and then go forward from there. So we have had.

John Lai: Yeah. Let me, let me take the question, the last piece and then go forward from there. So we, we have had a really strong track record of buying good businesses and then making them better over time. And so the lift to EBITDA historically has been almost, you know, close to 30%, 40% in some cases in year 3. But we're staying on soft ground because it, it really depends on the type of business that, that we're acquiring. You know, with respect to our value proposition and, and what we bring to the table, as a people-centric company, for those sellers that, that care about their legacy and that are interested in making sure that their baby, if you will, is in good hands, and their team members, most importantly, are gonna be taken care of, we...

Really strong track record of buying good businesses, and making them better over time.

And so the lift to EBITDA historically has been almost.

Close to 30%, 40% in some cases in year three.

But we're staying on soft ground because it really depends on the type of business that we're acquiring.

With respect to our value proposition and what we bring to the table as a people centric company.

For those sellers that that care about their legacy and that are interested in making sure that their baby. If you will is in good hands.

Team members. Most importantly, we're going to be taken care of.

We through that lens, we typically are the acquirer of choice.

John Lai: Through that lens, we typically are the acquirer of choice. In more recent times, though, it's been more about valuation than it is about, you know, who's buying them and what that means for their team. And what we've shared in the past is that we remain very disciplined with respect to not overpaying for an asset. You know, we wanna make sure that we're focused on quality, not just adding the units to our pile. We're gonna maintain that discipline. So that means we're not gonna swing at every pitch, and we're gonna let certain deal opportunities go. We're already starting to see some deals that are being marketed by investment banks or brokers getting busted because valuations just gotten a little too property.

In more recent times, though has been more about valuation than it is about.

Who's buying them and what that means for their team.

And what we've shared in the past is that we remain very disciplined with respect to not overpaying for an asset.

We want to make sure that we're focused on quality not just adding units to our pile in and we're going to maintain that discipline. So that means we're not going to swing at every pitch and they're going to we're going to let certain deal opportunities go we're already starting to see some deals get that are being marketed.

By investment banks or brokers getting busted, because valuations just gotten a little too.

John Lai: I think the smart buyer is now starting to say, "This is crazy with respect to all the-

And I think the smart buyer is now starting to say this is crazy with respect to all of you.

John Lai: I think the smart buyer is now starting to say, "This is crazy with respect to all the-

Hey, listen one thing I would add there I mean, one of the things right and so due to the unpredictable nature of the acquisitions. This is where we're really optimistic about the greenfields that were building out and we're very very happy with how they're performing they're performing above our expectations and as we look at the white space ahead of us.

Jed Gold: Hey, and Liz, the one thing I would add there, I mean, one of the things, right, and so due to the unpredictable nature of the acquisitions, this is where we're really optimistic about the greenfields that we're building out, and we're very, very happy with how they're performing. They're performing above our expectations. And as we look at the white space ahead of us, we've got just a little over 20% market share in the approximate 70 MSAs that we're currently in. This means that we could double our footprint in our own backyard without moving into any new markets, which is really a good spot to be in, coupling that with the really strong unit economics. And just one clarification to my prepared remarks is that it's 100 greenfield projects in the pipeline, not 300, not 300.

We've got just a little over 20% market share in the approximate 70 Msas that were currently in this means that we could double our footprint in aero backyard without moving into any new markets, which is really a good spot to be in coupling that with the really strong unit economics, and just one clarification to my prepared remarks is that.

It's 100 Greenfield projects in the pipeline not not through hundred not 300.

Okay. Thank you.

Ryan Sundby: Got it. Thank you.

Elizabeth Suzuki: Got it. Thank you.

Again, if you have a question. Please press Star then one our next question will come from Chris So cool with Stifel. Please go ahead.

Operator: Again, if you have a question, please press star, then one. Our next question will come from Chris O'Cull with Stifel. Please go ahead.

Chris O'Cull: Hey, good afternoon, guys. First, I wanted to clarify a comment you made, Jed. I wanna make sure I heard you correctly about the comp guidance. It sounds like you're assuming a slight retail sales deceleration from July to get to the high end of the comp range. Is that correct?

Hey, good afternoon guys.

First I wanted to clarify a comment you made Jim I wanted to make sure I heard you correctly about the comp guidance. It sounds like you're assuming a slight retail sales deceleration from July to get to the high end of the comp range is that correct.

Jed Gold: Yeah, Chris. So when you look at the uncertainties in the macro environment, we've modeled a wider range of outcomes. Our second half outlook for comparable store sales is in line with 3% to 4% range, and achieving a 3% to 4% comp in the second half would put us close to that 5% comp for the full year. So in line with where we were in Q2, but a slight deterioration from where we were in July.

Yes, Chris So when you look at the.

Just looking at the.

The uncertainties in the macro environment, we've modeled a wider range of outcomes.

Our second half second half outlook for comparable store sales is in line with 3% to 4% range.

And achieving a 3% to 4% comp in the second half would put us close to that 5% comp for the full year. So.

In line with where we were in Q2, but a slight deterioration from where we were in July .

Okay I'm sorry.

Chris O'Cull: Okay.

Jed Gold: I'm sorry, in June. Slight deterioration from where we were in June.

Slight deterioration from where we were in June .

Chris O'Cull: Okay, gotcha. And how did you come up with the low end of the range?

Gotcha.

How did you come up with the low end of the range.

Yes, this is where when you when.

Jed Gold: Yeah, this is where when we look at all the uncertainty in the macro environment, we thought it was prudent to model the wider range of outcomes. It's complex, right? One of the unique things with this business is subscription. While we didn't forecast any churn to UWC, we gave ourselves a little bit of cushion, or the other variable is if we saw even continued deceleration faster than what we've modeled on the retail side.

When we look at all the uncertainty in the macro environment.

We thought it was prudent to moderate to model the wider range of outcomes.

It's complex right.

Unique things with this business is subscription while we didnt, we didnt forecast any churn to EWC, we gave ourselves a little bit of cushion or the other variable is if we saw even.

Continued deceleration faster than what we've modeled on the retail side.

Okay.

Chris O'Cull: Okay. Now another question. John, I know the company's been investing heavily in the mobile app with payment options, I believe. But first, can you describe some of the new customer functionality that you're excited about with the new app? And will there be opportunities to do more target marketing or help reduce member churn rates? And then just the timing of when you think that could be fully rolled out.

Now another question John I know that the company has been investing heavily in the mobile app with payment options I believe but first can you describe some of the new customer functionality that you're excited about with the new with the App and would there be opportunities to do more target marketing or help reduce member churn rate and then just the timing of when you think that could be fully rolled out.

Yes, so there's a whole host of features and functions that are going to be.

John Lai: Yeah, so there's a whole host of features and functions that are gonna be very beneficial to our members. But we're focused more on the engagement side than we are on the acquisition side at this juncture, knowing that we've got this very large member base, you know, close to 2 million members, and the more we can do to have them continue to wash frequently, the better. So there'll be all the basic stuff that, you know, one would expect in any dynamic app, you know, where they can, you know, register online, should they so choose to, or through the app. They can update their credit card, they can upgrade to a different program or switch programs.

Very very.

Beneficial to our members but.

But we're focused more on the engagement side than we are on the acquisition side at this juncture knowing that we've got this very large base close to 2 million members and the more we can do to.

Have them continue to wash frequently the better.

So there'll be all the basic stuff that one would expect in any dynamic app, where they can.

Just your online should they so choose to or through the app.

Update their credit card.

They can upgrade to a different program or switch programs.

John Lai: And so features like that are part and parcel with what the app is gonna look like.

And so so features like that.

John Lai: And so features like that are part and parcel with what the app is gonna look like.

Part and parcel with the App is going to look like.

Okay, great. Thanks, guys.

Chris O'Cull: Okay, great. Thanks, guys.

Our next question will come from Ryan Sundby with William Blair. Please go ahead.

Operator: Our next question will come from Ryan Sundby with William Blair. Please go ahead.

Hey, guys. Good afternoon. Thanks for the question.

Ryan Sundby: Yeah. Hey, guys. Good afternoon. Thanks for the question. John, I think you mentioned integration is not for the faint of heart. Should we take that to mean that the half step back that Jed talked about is more like a pullback one this time, or maybe the ramp to get back up is longer than expected? And is that having any impact on the outlook you provided?

John I think you mentioned integration is not a fan of heart should we take that to mean that the half step back that you had talked about it's more like a pull back on this time, where maybe the ramp to get back out because it's longer than expected.

That having any impact on the outlook you provided.

So.

John Lai: So every business that we've acquired, and we've acquired over 100 businesses, company or life to date, is different. And some have a more compressed time horizon, some are more projected. But we have been consistent in saying, you know, it's not about year one EBITDA, it's about year three. And so taking one step back in year one, we're okay with, to make the necessary changes so that we can achieve that year three growth. And for us, that's what it's all about. So material investments from a CapEx standpoint in technology, mechanization, chemistry, et cetera, are all critical from a branding and refacing. You know, for many companies, the first thing they do is they will put up a new sign. That's the last thing that we do.

<unk> business that we've acquired and we've acquired over 100 businesses.

Our life to date.

As different and some have a more compressed time horizon some are more projected.

But we have been consistent in saying it's.

It's not about year, one EBITDA, it's about year, three and so taking one step back in year. One we're okay with to make the necessary changes. So that we can achieve at year three growth and for US that's what it's all about so material investments from a capex standpoint.

And technology mechanization chemistry et cetera are all critical.

From a rebranding and re facing.

For many companies the first thing they do is they put up a new site. That's the thing that we do we want to make sure that we improve the customer experience and really take the employees and the operating procedures and disciplines to a whole another level and while we're doing that we will we take great care and improving the culture.

John Lai: You know, we wanna make sure that we improve the customer experience and really take the employees and the operating procedures and disciplines to a whole another level. And while we're doing that, we will, we take great care in improving the culture of the store and making sure that we have a really well-trained leader that is running that store. And so the investments we're making in training and development are significant. And so the human capital investments, we're probably most proud of, and those are the hardest, but the ones that have the most enduring value.

The store and making sure that we havent really well trained leader that is running that store and so the investments we're making in training and development are significant and so the human capital investments.

We're probably most proud of and those are the hardest ones.

The ones that have the most enduring value.

Got it.

Chris O'Cull: Got it. And then, John, I just wanted to clarify on that last question. As we look at the guidance for the full year, did you say that does include some degradation in churn or trade down at the lower end of guidance? And then can you talk about maybe how this has held up in the past, if you've got something to compare it to here, just recognizing, I guess, that the size of the program is just much different today than it was in the last recession.

Ryan Sundby: Got it. And then, John, I just wanted to clarify on that last question. As we look at the guidance for the full year, did you say that does include some degradation in churn or trade down at the lower end of guidance? And then can you talk about maybe how this has held up in the past, if you've got something to compare it to here, just recognizing, I guess, that the size of the program is just much different today than it was in the last recession.

John I just wanted to clarify that last question and so we look at the guidance for the full year did you say that does include some degradation in churn or or paid down at the lower end of guidance and then can you talk about maybe how this is all about in the past you've got to make it can pull queue here just recognizing I guess at the size of the program is just much different today than it's been.

It was in the last recession.

Jed Gold: Yeah. It's hard to point to a recessionary environment where we have a comp. When you go back to the 2008, 2009 recession, as we said before, it was about 15% subscription. It was largely an interior clean business. So not a great comp. I think the best comp to look at would be during the pandemic, a lot of uncertainty in the broader environment, and during that environment, we actually grew UWC by about 20%. But having said that, this is unique from that. So from a from, we don't expect any degradation of churn. As I said in my prepared remarks, we're not seeing any degradation in churn.

Yes, it's hard to point to a recessionary environment, where we have a complicated when you go back to the <unk> recession as we've said before it was about 15% subscription it was largely an interior clean business.

Not a great comp.

I think the best comp to look at would be during the pandemic a lot of uncertainty in the broader environment.

During that environment, we actually grew <unk>.

<unk> by about 20%, but.

Having said that this this is this is unique from that.

So from a.

We don't expect any degradation of churn is and I said in my prepared remarks, we're not seeing any degradation in churn.

Jed Gold: We've given ourselves some room just due to all the uncertainty and felt it was the prudent thing to do, just given all the uncertainty in the second half of the year.

We've given ourselves some room just due to all the uncertainty and felt it was the prudent thing to do just given the.

All of the uncertainty in the second half of the year.

Simeon Siegel: Got it. Makes sense. Thanks, guys.

Ryan Sundby: Got it. Makes sense. Thanks, guys.

Okay makes sense thanks, guys.

Operator: 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.

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

Thank you operator, we feel very fortunate to be an amazing resilient carwash space and one that brings joy to so many motor as we see the opportunity to continue to scale Mister Carwash and are keeping our heads down as we continue to build the company with enduring value.

John Lai: Thank you, operator. We feel very fortunate to be in an amazing, resilient car wash space and one that brings joy to so many motorists. We see the opportunity to continue to scale Mister Car Wash and are keeping our heads down as we continue to build a company with enduring value. I'd like to thank everybody for joining the call today, and most importantly, I'd like to thank all of our amazing team members out there that do an amazing job. Thank you.

I'd like to thank everybody for joining the call today and most importantly, I'd like to thank all of our amazing team members out there that.

We do an amazing job. Thank you.

Yeah.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Okay.

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Yes.

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Q2 2022 Mister Car Wash, Inc Earnings Call

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