Q3 2022 Mister Car Wash Inc Earnings Call
Okay.
Good afternoon, and welcome to Mister car Wash its conference call to discuss financial results for the third quarter fiscal 2022.
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 from management on today's call are John line.
Listen and Chief Executive Officer, and <unk>, Chief Financial Officer, After John and Chad have made their formal remarks, we will open the call for questions.
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 management's current expectations.
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.
Please review the forward looking statement disclaimer contained in the company's second quarter 10-Q, and such factors may be updated from time to time.
And its other filings with the SEC.
During the call today management will also refer to certain non-GAAP financial measures a reconciliation between the GAAP and non-GAAP financial measure can be found in the company's earnings press release issued earlier today and posted to the Investor Relations section of Mister car wash its web site at IR got Mister car wash Dot com.
I will now turn the call over to Mr. John <unk>. Please go ahead Sir.
Good afternoon, everyone I'd like to begin with a quick update on our teams in Florida and the effects of hurricane.
I'm happy to report that everyone is safe and our stores held up nicely.
Our leadership team was amazing and went into Battened down the hatches mode, securing our stores and making sure everyone had access to food shelter and medical resources.
Team, Florida.
Sort of how you came together and showed how tough you are particularly when you face a really big one.
Moving on to our third quarter results overall performance was in line with expectations and despite a tougher macro backdrop. Our business continues to perform nicely and has proven over many different economic cycles to be strong and resilient.
Revenue increased 12% to $218 million.
Adjusted EBITDA increased 6% to $66 million.
And comp store sales increased two 9%.
We opened eight new Greenfield locations and acquired three new car washes, which brought our total store count to the end of Q3 to 420 locations.
Are you WC program added 19000, net new members and I'm happy to report that member growth and retention rates remained consistent with historical trends.
<unk> has proven to be very resilient.
<unk> and those that are expressed some concerns around a potential pullback in consumer discretionary spend.
Motorist take great pride in their automobile and a clean cars not only a reflection of themselves, but it helps them feel good.
To say that has changed the way people care for their vehicles would be an understatement and.
And with membership starting at 1999 per month the offers.
It was a great value.
Today with nearly 70% of our business being subscription we are deeply grateful to have built such a massive member base that provides a beautifully predictable and recurring revenue stream.
Moving on to the cost side of things.
Similar to the past few quarters.
Continued to see inflationary cost pressures across many areas of our business, which we partially offset with continued improvements in productivity a tighter focus on our expenses and re prioritizing longer term projects.
As a seasoned management team, while we're building the business for the long term. We're also cognizant of the short term realities of the current environment and are prudently doing what it takes right now as things get a little harder and a shifting market.
We took a modest retail price increase back in August which was done with very little resistance.
And to remind everyone as a philosophical belief, we've always been more interested in maximizing volume versus maximizing ticket average which is reflected in our <unk>.
But we're also not afraid to make a move when we feel it's the right time and this recent move quite as depart each market and was long overdue given the pressures we've been feeling on the cost side.
All of our stores are executing wonderfully and putting out a good car at speed.
But unemployment is still low and the labor market is still stubbornly tight making competition for the best talent, even more challenging.
To continue to attract and retain the best we've had to incrementally increase starting hourly rates with average non managerial wages up 6% year over year.
These wage increases are being offset by improvements to our staffing model, which we call Express <unk> hundred 60, where everyone's cross trained crews are tightly knit and the team culture of all for one and one for all has resulted in improvements in cars per labor hour reductions in labor as a percentage of revenue and reductions in our labor.
<unk> dollar per car.
Speaking of our teams I'd like to highlight the continued growth of our management training program through our <unk>, Mr. Learn certified trainer network.
We've spent considerable energy training the trainer and now have an addition to our close coverage regional manager team and additional network of trainers to help accelerate our leadership pipeline.
We have a long history of promoting from within and over 80% of our senior ops team started out as an hourly team member on the frontline.
If you were to ask others, what makes Mister Carwash, who they are they probably answer they're good operators, particularly at scale.
This hasn't happened by accident, we have a culture of operational excellence and it's something we're deeply proud of.
Investing in human capital and our high potential future leaders as one of the smartest things a company can do.
We've built a laser focused system developed a national infrastructure and now turning out the nextgen leaders that can be plugged into new stores or markets and hit the ground running in a high throughput environment.
Before I turn it over to Jed I'd like to take a moment to thank our teams that deliver these results.
We are the largest car wash operator in the United States with a footprint that stretches from coast to coast from California to Pennsylvania, and North and South from Minnesota to Texas.
We may be geographically spread out, but we act and move as one.
Delivering a consistent customer experience no matter, which Mr. You visit.
It's taken US 25 years to build the best team in the industry and I couldnt be proud of everyone has contributed to our success.
Jed I'll now turn it over to you.
Thank you John and good afternoon, everyone.
Overall, we had a good third quarter and our results were in line with our expectations similar.
Similar to trends in the previous quarter demand remained relatively consistent and we continue to partially offset inflationary pressures with productivity improvements as well as retail price the retail price increase that we took in mid August .
Our greenfield stores continue to perform very well and are exceeding our expectations. We are experiencing first year average unit volumes in the area of $1 4 million and four wall EBITDA margins in the range of 30% to 35%.
These stores continue to ramp nicely beyond year one.
For comparison, our average mature express average unit volumes are $2 $1 million with four wall EBITDA margins of 45% to 50%.
The significant opportunity to extend expand our store footprint, coupled with these solid returns and our world class operations capability, having burdened us to continue investing behind our greenfield expansion capabilities.
In addition to Newbuild expansion, we see opportunity to invest in a number of strategic initiatives. While also taking steps to manage our near term expenses and cost structure.
During late September and early October we experienced a disruption to our business in Florida as a result of hurricane in.
We have 72 locations in Florida, and all about three stores temporarily closed for an average of three and a half days.
A benefit to the majority of revenue being subscription based is the reoccurring revenue helps insulate us from the financial impact of weather related events, such as a hurricane.
Having said that the hurricane has resulted in some construction delays in Florida that we are working through.
During the third quarter comparable store sales increased two 9% and net revenue increased 12% to $218 million.
Comparable store sales growth was positive in all three months of the quarter with growth in September outpacing the growth in July and August .
The EWC subscription side of our business remains steady and represented 69% of total watch sales in the third quarter in line with our expectations. We added 19000 net uwp members during the quarter and 204000 net uwp members during the first nine months of the year.
On a year over year basis, the number of EWC members increased by 19%.
Similar to last quarter, we did not see a meaningful change from our historical churn rates and we did not see club members trading down from the premium package to the base package in any meaningful way.
During the quarter, we also experienced some stabilization on the retail side of our business with third quarter retail sales in line with our expectations and second quarter levels.
Similar to my commentary on comparable store sales retail volumes were better in September than July and August .
Turning to expenses.
These were also in line with our expectations, but continued to be impacted by inflationary pressure.
Excluding stock based compensation and as a percentage of revenue labor and chemicals decreased 90 basis points to 33%.
Other store operating expenses increased 190 basis points to 31, 2%.
And G&A expense increased 70 basis points to eight 1%.
Labor and chemicals continue to benefit.
From some labor efficiencies.
Other store operating expenses increased primarily from a combination of higher utility rates and increased maintenance service costs.
And the increase in G&A is primarily from public company costs and growth related investments.
As we have previously discussed the biggest expense increases impacting adjusted EBITDA are coming from growth initiatives as we continue to build out internal capability and vertically integrate in areas, where it makes the most sense.
However, we have started to take a more balanced approach to managing our near term cost structure with.
With long term growth objectives and are tightening our belts, where we can around labor hiring systems, and becoming even more efficient at aligning our investments behind our strategic priorities.
During the third quarter interest expense increased to $10 1 million.
From $5 $7 million last year due to the higher interest rates on the unhedged portion of our debt and additional debt added as part of our clean streak acquisition.
As a reminder, our favorable interest rate hedge expired in mid October and we are now paying LIBOR plus 300 basis points on our outstanding debt.
Our GAAP reported effective tax rate for the third quarter was 26, 9% compared with 19% for the third quarter of 2021.
The increase was primarily due to the exercise of employee stock options and the favorable tax treatment in the year ago period the.
The benefit to our GAAP tax rate related to the exercise of stock Awards.
Exercised was negligible in the third quarter compared with $2 6 million in the third 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 $30 million and nine <unk>, respectively in the quarter.
Third quarter, adjusted EBITDA was $66 $1 million up five 9% from the third quarter last year.
Moving on to some balance sheet and cash flow highlights.
At quarter end cash and cash equivalents were approximately $75 million and.
Standing long term debt was $895 million.
For the first nine months of the year net cash provided by operating activities was $185 million and gross capital expenditures were $132 million.
Lastly, let me make a few comments around guidance.
Given the inline trends of the third quarter and modest acceleration in trends across the months of September and October we remain comfortable with our previously provided outlook for the year and are simply tightening the ranges.
Our updated full year 2022 guidance now calls for comparable store sales growth of 4% to 5% net.
Net revenues of $865 million to $880 million.
Adjusted net income of $123 million to $128 million at.
And adjusted EBITDA of $273 million to $278 million.
As a reminder, when we forecast interest expense, we use the LIBOR forward curve in the market and this makes for a bit of a moving target.
With the shifts in the forward curve over the past 90 days, our 2022 interest expense assumption is now $43 million instead of the $42 million that we mentioned last quarter.
Interest expense continues to be a meaningful headwind to the model as the fed increases interest rates.
We continue to look at strategies to reduce interest expense going forward, but do not expect any material benefits in the short term.
With hurricane in causing some construction delays in the state of Florida, and some of the supply chain delays earlier in the year. There are a few greenfield openings that could get pushed into early 2023, and our guidance for new Greenfield locations is now a minimum of 25 this year.
With a number of stores slated to open right at the end of the year, we do not expect the modest delay in timing to have a material impact on revenue or expenses in the fourth quarter of the full year.
As stated earlier, we will remain opportunistic when it comes to sell leasebacks.
Our model now assumes total proceeds of between 90% to $95 million in 2022 versus the $140 million to $150 million previously forecasted while we could end up doing more should the terms be favorable. We currently do not plan to do more deals in that terms are consistent with our recent closings.
Our capital expenditure outlook for the full year 2022 is now $200 million to $240 million versus our previous range of $235 million to $285 million.
This is largely a function of conservatism built into the original guide along with some capex projects projects that we have chosen to combined with next year's work around.
The new service offerings, given the magnitude of the work related to the new service rollout. It is simply more efficient to defer certain projects and complete these next year instead of this year.
In closing I would like to add my thanks, and appreciation to all of our hard working team members and associates, who are executing the business every day and helping us fulfill our mission of being <unk>.
America's Premier Carwash with that I will turn it over to the operator to begin the Q&A session operator.
We will now begin the question and answer session classical.
A question you May question, then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the key.
Jonathan The question queue. Please press Star then two.
Ill, let you limit yourself to one question and one follow up.
Our first question is from Elizabeth Suzuki of Bank of America. Please go ahead.
Great. Thank you I'm, just curious what youre seeing in the market currently in terms of acquisition multiples and whether they've gotten more attractive since the beginning of the year. I mean, you added the three stores. This quarter just curious if anything more chunky is becoming available at reasonable price.
Yeah, Hey, Liz this is John Great question, So we have seen multiples.
<unk> a bit here in recent times.
I think thats a combination of a couple of factors one private equity firms typically.
We will lean in on their first.
Platform acquisition too.
<unk> entry into the space and then we see rationality kick in on their second and third and fourth acquisitions. After that obviously borrowing costs are going up which is going to have a little bit of an impact on the economics of a deal.
But yes, we have seen.
Actually a number of broken deals here in the most recent period, which.
We actually view as healthy because things were getting a little too frothy. So multiples have have come back down still.
Still not where we want them to be and throughout this entire process as we've shared with you in the past we're going to remain very disciplined very selective in our approach to M&A and really look at things through a very strategic lens.
We have never.
<unk> been in this thing too to just get big and scale up from a sheer number standpoint.
It's more about the quality of the asset.
And how that fits within our overall portfolio.
Great. Thank you and then just one quick one on hurricane Ian and whether or how much do you think that impacted total sales in the quarter just given the number of stores do you have in the market and just in general when there are weather events like that is it correct to assume that those sales just get lost as people wait and other ways to get their cars last.
No I think I think we as one of the great things about this model is that with the subscription element.
It's just really the retail sales that are impacted during a weather event such as this so.
We estimate the impact to be about half a million dollars in lost revenue over the three five days that we were closed but what's.
Once again. This is this is where the beauty of the model helps.
Helps insulate us from from these short term economic downturns or regional downturns and then some of this is weather patterns that come through.
Alright, alright, thank you.
Okay.
The next question is from Simeon Siegel of BMO capital markets. Please go ahead.
Thanks, Hey, everyone afternoon hope, you're all doing well.
Can you, let us know or any help on what youre expecting for new EWC members in Q4 into next year and then can you speak to retail trends, whether you're like there was any other than Florida any regional or maybe you had kind of discrepancy is you might be seeing thanks guys.
Yeah, I'll kick it off and Jed can chime in here when we look at our historical growth rate quarter over quarter, typically Q1, and Q2 is when we see the bulk of our registration sign ups.
So we have modest expectations for Q4 as we as we did in Q3.
We're really gearing up towards having a strong first half of next year.
That said, we expect to grow as we have.
In each of the quarters that we've been in this program.
From a retail standpoint again.
<unk>.
We characterized retail is stabilizing in Q3.
We're feeling optimistic that.
The worst is behind us and that as retail gets healthier.
From a pipeline standpoint lead to more at bats for us to be able to continue to grow our membership program. Yes, I mean, the one thing I would add there as you look at the sequential trend of those retail volumes during the quarter and seeing this slight improvement month.
Month over month during the quarter to John's point, because there's some optimism, but we're staying on soft ground here, knowing that theres a lot of uncertainty with the macro backdrop and then as you look at Q4. It does tend to be a higher beta quarter for us and it tends to be.
With the weather and the number of retail customers that come through.
And to see a little bit more volatility in Q4 relatively more volatility during Q4.
Great. Thanks, a lot best of luck and happy holidays to you and your families.
Thank you.
The next question is from Michael Lasser of UBS. Please go ahead.
Good evening. Thanks, a lot for taking my question can you give us a sense for how much the like for like pricing.
<unk> contributed to the overall same store sales growth in the quarter.
And I believe one of the reasons why you look to raise prices with that provided a bit more cushion to be.
Promotional when you needed to have you already begun to be more promotional and have you seen others in the marketplace.
Greece their promotional intensity as well.
Hey, Michael This is John I'll kick it off and then I'll turn it over to Chad to talk specifically about what the price increase meant from a contribution standpoint.
But let me just kind of kick it off by saying, we generally don't like to talk publically about our pricing strategy for obvious reasons.
But as we noted the most recent price moved guidance to par and almost all of the markets that we're in.
And it was met with very little resistance. So.
As Jed reported we didn't see any material trading down to any lower price packages, which is always a good sign.
And from a just big picture standpoint, we do believe that we still have some pricing power, but we don't think now is the right time for us to.
Make any moves in if we were we'd probably want to be sharing that with you guys on this call anyway.
The second part of your question.
What was the what we've done promotional intensity returns.
Returns leader.
Yeah. So so we are in the early stages of testing various promotional campaigns right now through multiple channels Omnichannel approach, both digitally and through some direct and.
We're.
Collecting the data and assessing the promotional effectiveness of those campaigns and we're not at a point right now to say whether or not there.
Having a desired effect and move the needle I think it's important to note that.
But we've been I guess promotional universe as a company, we're definitely not into discounting and we're definitely not position as the price player in the industry.
And so as a result, when we see others.
Getting more aggressive with promotions and sometimes that can be a signal that things are not always as healthy as they need to be.
That said there is nothing that's off the table for us.
<unk>.
<unk> had been growing beautifully to the put is that old school word of mouth.
People, telling their friends and family and our advertising budget has been virtually nil up until recently, but that doesn't suggest that we shouldnt experiment and try new strategies to acquire new customers trade them up to more profitable packages get them into our program and we are seeing some very clever strategies around it.
Accelerating membership.
Through different initial introductory offers and again, we're going to be experimenting with those as well so the jury's still out Michael hopefully, we'll have more to report and in our subsequent calls with you guys.
But for now we're very much in test mode, and then Michael the first part of your question about the price increase just as a reminder, when we take pricing.
Little bit different than what you would see in a typical retailer where you take pricing youll see a little bit of an impact of that retail volume, but because of the delta between the retail price and EWC helps increase that value proposition and actually helps instead of a trade up into.
<unk> net net we believe that the August price increase it performed as expected.
Benefiting the third quarter comp by about 300 basis points.
Okay Jay.
If I could ask one other question it looks like your interest expense next year will go up by about $15 million to $20 million, depending on where interest rates shake out. So a is that correct and b, given where your debt position and the rise in interest rates does that have any.
Influence over the timing or your willingness to do additional bolt on deals right now.
So I'll take the first part right so.
Depending on where the way that we forecast our interest expense as we take the forward curve for the next year.
And we're paying LIBOR plus 300.
So your math is about correct with where when we look at the quarterly run rate on our interest expense right now without the hedge it's about 16% to $19 million per quarter.
Incremental interest expense.
And then the second piece to your question around the cost of debt and impacting.
Potential acquisitions.
There is a we believe the free cash flow model that the free cash flow generative model is more than adequate to fund the growth in the Greenfield expansion and that's as we've talked about previously that's the priority at the highest and best use of capital and where we want to allocate it but as different M&A opportunities.
Come available, we'll look at them and we'll see whether the economics work or not.
Really going to be on a case by case basis.
It's a tough one to answer and say definitively it really depends on the multiple that we're going to pay and ultimately what the borrowing cost is going to be at the time that we would we would make the acquisition.
Thank you so much.
The next question is from Peter Keith with Piper Sandler. Please go ahead.
Hey, good afternoon, everyone wanted to just kick off with more of a shorter term question around the improvement in retail Carwash with September .
Is that something that's continued here with October and then Theres been some theories that maybe lower gas prices would have helped retail car wash it didn't seem to really kick in over the summer, but maybe it's kicking in now do you have any thoughts on what's driving this recent improvement.
Yes, well, we can we can't speak to the the last month's performance, obviously, but we are optimistic that retail will improve.
We had hypothesized that cat there was in a relationship between gas prices and retail demand.
To your point, we didn't see that play out.
Gas prices dropped specifically in the July August timeframe.
So so much for our hypothesis right.
But you would think that with more money in People's pockets. They would then have the ability to do more stuff.
So yes, I mean, the other I think metric that we think is important is miles driven.
There is a direct link between miles driven and how.
Dirty a vehicle will get and that number has remained fairly consistent which is a good sign that even though gas prices fluctuate either up or down people still are getting from point a to point b and the cars are still getting dirty and they'll still need to get cleaned and the beauty of our business is that people have a clean car.
The one thing I would add there is I mean, there still is there still a lot of uncertainty out there in the broader macroeconomic environment, but this is really where you WC helps insulate us from from a lot of these macro pressures.
And that subscription element really helps differentiate us from from other retailers in.
And then other companies that you may be following.
Okay helpful. And then maybe to pivot to a longer term question just on the Greenfield unit growth opportunity.
I think you've said.
Partially acquisition, but a lot from Greenfield you thought you would get to a 1000 units over time I'm hearing just out there that a lot of operators have pivoted to greenfield growth because of the acquisition multiples hearing as many as $850 to 900, new Greenfield stores this year industrywide.
So is that a number that you would agree with and does that change the outlook or the pace of trying to get to 1000 stores over the coming years.
Yes, I think that number.
As a pretty good industry estimate right now it's hard for us all to get really accurate data, but that number feels right.
But when you just zoom out and look at the size of this U S car Park.
And what we estimate to be the total number of <unk> car washes in the U S. We still believe that.
The market is underserved and that there is strong demand.
Needs to be met.
So we think that Theres a lot of runway for growth with a lot of white space out there there are certain markets like Phoenix like Lubbock, Texas that have been.
<unk> very saturated and highly competitive.
And so.
There are pockets of the country that have gotten really really intense.
But when we look at our geographic footprint, we believe that we can double our footprint in our own backyard.
While continuing to look for new markets to move into either Adjacencies or brand new geographic areas. So.
We're still very very bullish on our upside unit level growth opportunity.
Our vision has not changed whatsoever.
Okay sounds good guys. Thanks, so much and good luck.
Thank you.
Yeah.
Again, if you have a question. Please press Star then one and next question is from Simeon Gutman of Morgan Stanley . Please go ahead.
Hey, guys. This is Michael Kessler on for Simeon Thanks for taking my questions.
I wanted to start with the comments you made in the prepared remarks about.
It sounds like a little bit of a total shift on labor efficiencies and some of the cost savings in the near term.
So I just wanted to ask a little bit further.
On that.
Theyre doing if there's anything different or new or how you're responding to.
The demand backdrop.
Yes, I think it's less about the demand backdrop and it's more about just kind of how we are reassessing, what we're focused on so coming out of the pandemic. We took on a lot of initiatives added a bunch of folks at a very accelerated rate.
But since this economy has shifted somewhat we'll reevaluate and re prioritizing and.
Identifying what are the most important initiatives that we need to focus on so for us.
Innovating from an R&D perspective.
Although greenfield development will always be priorities leadership pipeline development that those are super important to us.
But in terms of.
Buckling down and becoming even more efficient there are always opportunities in any organization, particularly organizations that are growing as fast as we have.
To get leaner and get get tougher and in one particular area, where we have as we've shared previously and elevated staffing model at store level.
Inside that staffing model, there was an opportunity for us to tighten that up a bit without impacting the customer experience quality <unk> speed annual customer service.
So we were able to improve our total labor hours used per store.
But then also look at some longer term projects that had.
Longer term payoffs and choose to perhaps put those on the backburner and to give you. Some examples if we were looking to re images a store that has a few few years on its on its odometer.
Maybe maybe we hold off on that temporarily while we focus on the items that I just I just mentioned.
So for US we think that we can be.
In investment mode and cost reduction mode simultaneously is not an either or.
And so we're going to continue to invest for the long term to continue to grow this thing, but at the same time, we're going to be prudent and we're going to be smart and this management team. We've got a bunch of tough cookies here that have managed through a bunch of different economic cycles.
And for US. This is just another cycle that we're managing through.
And the fact that our margins are so strong already it gives us room to get even tighter.
Yeah.
Great. Thanks, John and maybe one follow up on just on clean streak, how thats going the integration of the <unk>.
Bantering.
No if it was at all delayed because of the hurricane.
The integration process, but Samsung update there would be great. Thanks.
Yes listen we're on track this one was.
We reported.
From day, one this is going to take us a little bit longer than the average integration and as we've shared in the past.
<unk> acquisition integration definitely not for the fan of hard, but what we do really well is we buy good businesses and make them better and to do that we implement a number of initiatives starting with improving the physical plant the processes and programs and transitioning all of those in an elegant way and then the hardest part, but arguably the most important part is.
Getting the team.
Synced up getting the culture, right and making sure that they are highly engaged and happy and that takes time. So we are taking this on a kind of a.
<unk> regional basis, we are a little over a third of the way through the transition we are in the midst of the second third of that.
And we hope to.
By the end of Q1 of next year be completely finished its taken us a little bit longer than what we anticipated.
Which is just pushed back that proved just a little bit, but again, we're not going to cut corners of short change anything.
Sure.
Thank you so much.
The next question is from Chris they'll call of Stifel. Please go ahead.
Great. Thank you this is Patrick on for Chris.
Jed It seems like your guidance implies <unk> comps in the flat to up 4% range, which is which is pretty wide. So is that right first of all on if it is is it safe to assume that youre running within that range currently.
And then what are the key factors that would lead you to land in the low or the high end of that range.
Yes.
Math is right Patrick flat, 2% to 4% in Q4 in order to get to the midpoint of the guide it would imply a Q4 comp of 2%.
As you look at the quarter, we did two 9%, but as we.
If you look at particularly November and December historically, there is a higher beta on performance in those months plus.
Still a lot of uncertainty.
And the macro backdrop. So we still believe it's prudent to model the waiter the wider range of outcomes that you're seeing there.
Okay got it that's helpful and then I mean, how many sites do you guys. Currently have under construction now and then can you give us a sense of how many leases you have got signed for next year as well.
Give me a second here as I look.
Patrick and I apologize.
He pulls up some so.
We typically don't disclose how many projects, we actually have under construction today, but.
I mean, as we had said in the prepared remarks and in the <unk>.
Revised guidance, where we're trending to a minimum of 25. This year you can look at the historic pace of new builds that the rate that we've been adding them. We've also got the long term growth algorithm of high single digit unit growth.
To use as guardrails as Youre thinking ahead to future future years and quarters.
Am I allowed to say Jed that we have that pipeline.
Can I use that word.
But listen under construction is one piece being signed under contract currently being negotiated on being researched.
The definition of the pipeline.
There's a lot of.
Liberty's that people take to define their pipeline.
But you were very precise in saying how many are under contract. So we can circle back.
And provide more detail if we're allowed to.
Needless to say we.
We're really really optimistic about our greenfield development.
Initiative, and we hope to get to this cadence where.
By this time next year, we're on pace to open up a store week.
Great. Thanks, guys I appreciate it.
The next question is from Justin Kleber.
Please go ahead.
Yes, good afternoon, everyone. Thanks for taking the questions.
Just wanted to first ask just a follow up on your comment on sale Leasebacks, you mentioned less favorable terms given the backup in cap rates.
Yes, as we think about next year, and then bonus depreciation starting to step down.
Do you think these transactions get harder to execute and does that I guess in any way impact your thoughts on that.
Store growth or our capex going forward.
Yes, just to just just one clarification.
So cap rates, we have not seen at least in the recent closing less favorable cap rates on the deals that we've actually closed on as we look ahead.
We're going to be very opportunistic and disciplined in making sure that we keep those cap rates relatively consistent with those recent recent closings.
But listen I mean, these are our leases are structured to be 20.
<unk> 20 year leases.
So.
Signing into something just for today to try and generate some capital doesn't make a whole lot of sense. We're looking at this over the long term, we believe with the cash that's generated from operations fit that we can fund our expected growth and we're not going to have to pull back, but we're going to continue to market. These deals and see what we can get.
Using a combination of both the national REIT partners that we have great long standing relationships with along with the 10 31 market that we're very active in as well.
Got it okay. That's helpful. Thanks for that clarification, and then just a follow up to that.
Emotional question Michael asked.
Noticed you are offering a membership discount with at least one newbuild in Florida, obviously.
Obviously many of your peers use that approach. So was that just kind of want to confirm John was that one of the tactics you were referencing that youre youre testing and I guess, just any initial feedback on what sign ups look like when you when you implement that maybe compared to a legacy newbuild.
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Yeah, No you are.
Youre exactly right and I compliment you on your on the ground field due diligence actually getting out of the office and go in and kicking the tires.
So you get extra credit.
<unk> analyst ratings from our perspective.
But now what you saw was exactly one of the strategies that we're testing and evaluating right now.
Again, there can be lots of different iterations, we want to make sure that we're.
From a control standpoint than an AB testing standpoint.
We're not just discounting just to discount in that.
The discounts that debt or the promotions that we do.
Elect to deploy actually move the needle at a rate where it makes sense.
So we.
Early on in our lifecycle.
This industry was riddled with a whole lot of inefficient promotional tactics and as a result, I call. It scar tissue, but we have learned a lot along the way.
And when do you pause and say what is your objective is to draw.
<unk> customer acquisition or trade people up to more profitable packages or convert them into membership you need to be very mindful of not diluting existing customer revenue trading people down unnecessarily.
Because there's a whole lot of folks that you apply a discount to that.
Don't necessarily needed.
I just kind of asked did you when you visited the store in Florida did you actually sign up for our <unk> program.
Yes.
Actually just came across.
The press release, so I can't take credit for.
Let the Gulf the goldstar gets taken away.
You actually got out of the office alright.
Good nice nice desktop diligence and how is that.
Alright, guys. Thanks, Thanks for all the color I appreciate it okay. Thanks Patrick.
The next question is from David Bellinger of MTM Partners. Please go ahead.
Hey, everyone. Thanks for the question good to be back on the call here.
First one on the more recent stabilization in retail volumes given the notion that member growth is very dependent on the retail single wash customers as a lead generator for conversion.
This lower retail over the past few quarters, I mean for the business into 2023.
We see some kind of air pocket in member growth as we get into next year, you're expecting and is there any way to potentially size that impact.
Hey, David John Here. So I think bottom line is we've done such a good job of converting so many customers into our membership program.
To your point, we now need to spend more energy on driving retail, which has bubbled up to the top of our priority list.
So the recent campaigns that we have described in select markets and we're being somewhat vague intentionally.
We are really intended to drive retail traffic to ultimately then lead to boost in membership growth.
The term air pocket.
Clever term on your part.
I hope that we don't experience that air pocket.
And that we continue to see.
LT and steady growth quarter over quarter.
But yes, we are.
As I mentioned earlier, we're still in the early stages of assessing which promotional strategy is going to truly move the needle.
And and we hope to continue our upward trajectory in terms of member growth.
And David just one other point you heard in my prepared remarks. So we added 204000 members during the first three quarters of the year up 19%. So this is where our focus on member retention and making sure that we keep those rates within the historic within the historic range.
<unk>.
But.
History, and what we've seen here recently, despite the macro headwinds as the team has done a good job of being able to retain those members and so we're optimistic as to what that means going forward.
Got it and then maybe just a follow up for you Jack.
What's implied in the updated guidance seems to be a very similar year on year decline in EBITDA margins for Q4, I think that will be a fifth quarter in a row of EBITA margin contraction and fully understanding that lapping these higher volumes plays into that.
Should we continue to expect margin pressures to linger over the next few quarters are you seeing any evidence that some of these cost pressures are starting to level off or will begin to abate a bit.
Yes, so as we've said the inflationary pressures we are continuing to experience those in the business were considered continuing to see that pressure and we don't expect that to subside any.
Anytime soon other than through some of the the various cost saving initiatives that we're taking to help help offset that we obviously have the August price increase that's helping offset some of that as well.
As we think about it the longer term and zooming out just a little bit we still believe that the fundamentals of the business are strong.
That 30% to 35% margins that you've heard us talk about before is achievable.
Jed I would just add so we have made.
<unk> strong four wall EBITDA margins and the health of what we are.
What we're generating in store levels tremendous we built and invested in this infrastructure to accelerate our growth.
And Dave we certainly could if we chose to.
Pull back on the throttle and boost the margin profile.
But at what expense and so prior to going public margin expansion was never a priority for us. It grew naturally just by focusing on topline growth.
We kind of remain in topline growth to be quite honest with you. So for US. We think it's more important to drive member growth to drive unit sales in retail traffic.
We have as we've mentioned.
Kind of shifted our focus a little bit to get smarter on the cost side.
Two if anything stabilize the margins and then hopefully improve them.
But it's never been a priority to maximize our margins at least today there.
There will be some point in our curve when things start to mature and perhaps slow down then we can certainly deliver margin expansion, but it's not the top priority for us right now.
Very helpful. Thank you both.
This concludes our question and answer session I would like to turn the conference back over to John Locke for closing remarks.
Yes, I just wanted to thank everyone for joining us on the call today, we look forward to.
With all the knock on woods, a solid fourth quarter and circling back with you guys and sharing the results once the quarter concludes thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.