Q3 2024 Mister Car Wash Inc Earnings Call
Good afternoon, and welcome to Mister car Wash as conference call to discuss financial results for the third quarter ending September 30th 'twenty 'twenty four.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: We will conduct a question and answer session.
Speaker Change: And instructions will follow at that time. Please note that this is being recorded and the reproduction of this call in whole or in part is not permitted without written authorization from the company.
Speaker Change: Speaking from management on today's call are John My Chairman, and Chief Executive Officer, and Jud called Chief Financial Officer.
Speaker Change: After John and Joe has made their formal remarks, we will open the call to questions.
Speaker Change: During this conference call references to non-GAAP financial measures will be made.
Speaker Change: A complete reconciliation of these measures to the most comparable GAAP measures have been included in the company's earnings press release issued earlier today and posted to the Investor Relations section of the company's website at Mister car wash Dot com.
Speaker Change: 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.
Speaker Change: Please be advised that the statements made today.
Speaker Change: Our current only as of this call and are based on the company's present.
Speaker Change: You're standing of the market and industry conditions.
Speaker Change: While the company may choose to update these statements in the future. They are under no obligation to do so unless required by applicable law or regulation.
Speaker Change: Please review the forward looking statement disclaimer contained in the company's latest annual 10-K or 10-Q reports as such factors may be updated from time to time in other filings with the Securities and Exchange Commission.
Speaker Change: I will now turn the call over to Mr. Lai.
Mr. Lai: Good afternoon, and thank you for joining our third quarter earnings call. We're feeling good about the business and how things are trending.
Mr. Lai: Our titanium introduction continues to exceed our expectations.
Mr. Lai: WC member engagement remains strong and we're seeing a reacceleration in retail traffic.
Mr. Lai: The team has also done a fantastic job of managing expenses and increasing productivity, while we continue to invest in our stores and our people to support our long term growth opportunity.
Allow me to update everyone on Q3.
Mr. Lai: Sales increased 7% to $249 million.
Mr. Lai: Comp store sales increased two 9%.
Mr. Lai: Which is now six successive quarters of positive comp store sales growth.
Mr. Lai: Adjusted EBITDA increased 10% to $79 million.
Mr. Lai: And we opened 10, new stores, including our 500 location, which was a huge milestone.
I'd like to begin by giving everyone an update on our marketing efforts and what we're doing to drive retail traffic.
Mr. Lai: We've broadened our reach by implementing a full funnel media strategy.
Mr. Lai: We're experimenting in new channels like digital out of home, while increasing investments in existing channels like paid social digital display and search.
Mr. Lai: We will continue to test different offers throughout Q4 and will be fine tuning, our messaging and frequencies based on how customers respond.
Mr. Lai: Our goal is to drive retail traffic and leverage our AD spend while we ramp up the intensity of our marketing strategy throughout the remainder of this quarter and well into 2025.
To be crystal clear, increasing AD spend to be more promotional doesn't necessarily mean, we're getting more aggressive with discounts on the contrary those that discount the most usually do it for a reason.
Mr. Lai: We're extremely disciplined in making sure we don't dilute our brand by competing on price, which for most customers is not why they're using us in the first place.
Mr. Lai: At Mr. Our goal isn't just to satisfy our customers we want to delight them.
We call every touch point in our service delivery model allows them and we train our teams to greet every customer with a wave and a smile, which by the way is not easy to do for 10 straight hours a day.
Mr. Lai: Our net promoter scores remain extremely strong with the highest marks around the friendliness of our staff and how good we are and making them feel welcomed.
To give you a sense of what we're hearing I thought I'd share a couple of select comments.
Mr. Lai: Here's one from one customer I love to Shine on my car and your employees are just the best friendly and helpful.
Here's another customer comment the workers are so nice everyone's always courteous and respectful.
And finally from another customer the availability of multiple locations means that I can get my car wash well on our way to just about any kind of business.
In addition to receiving feedback on things we should continue to do we also received instructive feedback on things we can improve upon.
Such as our vacuum efficacy during peak demand.
Mr. Lai: We found out that about a third of our portfolio's vacuums weren't keeping up join our 100 plus car hours and we needed to improve our section.
Mr. Lai: Turning data into actionable items by listening and responding to our customers is a hallmark of ours.
As we speak our facilities maintenance teams are in the process of tightening seals, improving novel seats and upgrading producers to fix the issues.
Mr. Lai: At our National leadership conference two weeks ago. The primary theme was the voice of the customer and what we need to do to get every team member to act as a brand ambassador.
Mr. Lai: We start by establishing a culture of elevated hospitality and focus heavily on etiquette, and manners, which has become synonymous with our brand promise.
As we continue our March upward with more than 500 stores. The Mr brand continues to get stronger.
Mr. Lai: Building out our network of locations intensifying within each MSA provides even more convenient options for our members.
Mr. Lai: Further supporting the benefits of being a skilled operator.
At the very heart and soul of our company is our people who are absolutely the best.
Our employee engagement scores, which are a proxy for our culture are at record levels.
Mr. Lai: Which tells me we're not just building the largest car wash platform in the industry, but we're doing it the right way by taking care of our people.
Mr. Lai: The experience and knowledge matter in this industry and we're fortunate to have built a team of Ninja Warriors, who are highly skilled in their craft and dedicated to improving each day.
Before I turn it over to Jed I wanted to say thanks to the entire team for a great quarter, we're off to a good start in Q4 and have some wind at our back are.
Mr. Lai: Our business is performing well right now and we couldnt have done it without the amazing effort by our entire organization.
Thank you.
Jed: Thank you John and good afternoon, everybody overall.
Overall, we are pleased with our third quarter results. We delivered strong results and are encouraged with the momentum we are seeing in the business before we get into the details let me touch on a few highlights.
Our subscription business remains resilient member utilization has remained constant which is a key indicator of member satisfaction. Additionally, during the quarter, we didn't see any material changes in our core churn levels from previous quarters.
Jed: Our new titanium membership offering continues to ramp ahead of our expectations and at the end of the quarter membership mix was nearly 24%.
Jed: The vast majority of our titanium memberships recharged at the full regular monthly rate, which helped drive a 9% increase in express revenue per member during the quarter.
Jed: Importantly, retail sales trends improved when compared to the first two quarters of the year in particular, we saw a meaningful uptick in the second half of the quarter that continued into October.
Some of the recent hurricanes that made national headlines were disruptive to our business and cause some clothes store closures during the quarter, However, with subscription accounting for nearly 74% of wash sales in the quarter, coupled with our geographic diversity helped to provide some insulation to weather and these events.
We opened 10, new express exterior car washes in the quarter and are tracking towards approximately 40 openings for the full year.
Jed: Third quarter adjusted EBITDA was strong who came in ahead of our expectations driven by better comp sales tight expense management and the timing of some marketing investments.
Jed: Now, let me run through the third quarter numbers.
Net revenues increased 7% and comparable store sales increased two 9% driven largely by the strength of our titanium offerings and new store openings.
WC sales represented 74% of total watch sales and we ended the quarter with more than $2 1 million you WC members.
On a year over year basis, the number of EWC members increased by 39000 members or 2%.
At the end of the quarter the membership split between base platinum and titanium was approximately 39%, 37% and 24% respectively. In the third quarter. The average express revenue per member increased over 9% to $28 33.
Versus $25 88 in.
In the third quarter last year.
Jed: Okay.
Net income and earnings per diluted share were $22 million and seven <unk> respectively.
When adjusted for noncash stock based compensation and certain noncore or onetime expenses adjusted net income and adjusted earnings per diluted share were $29 million and nine respectively in the quarter.
Adjusted EBITDA increased 10% to $79 million and adjusted EBITDA margin increased 100 basis points to 31, 6%.
Jed: Total costs and expenses were $200 million in the quarter and included $7 million in stock based compensation and related taxes.
And a $2 million gain from the disposition of assets.
Jed: Excluding these items total expenses as a percentage of net revenue decreased 10 basis points to 78, 2% the.
Jed: The decrease was driven by decreases in labor and in chemicals, and G&A expenses, partially offset by an increase in other store operating expense as a percentage of net revenue.
Jed: Excluding stock based compensation related taxes, and other one time or noncash expenses labor and chemicals decreased 165 basis points to 28, 4% driven.
Driven primarily by optimizing the labor model at our interior clean locations and leveraging our scale in purchasing and shipping of chemicals.
This was partially offset by increased labor rates.
Other store operating expense increased 130 basis points to 32, 6%, primarily driven by higher rent expense related to our store growth and sale leasebacks and some utility rate inflation.
G&A expense decreased 60 basis points to seven 4% driven primarily by better expense management, and some deferred spend on marketing systems and people.
Jed: In the third quarter interest expense increased 8% to $21 million, primarily due to increased borrowing borrowings, partially offset by lower average interest rates year over year.
Jed: Moving on to some balance sheet.
Jed: Cash flow highlights.
At the end of the quarter cash and cash equivalents were $16 million and outstanding long term debt was $931 million.
Jed: Our balance sheet remains healthy and we continue to self fund our growth and expansion via sale leasebacks.
In the third quarter, we completed for sale leaseback transactions involving four call carwash locations for an aggregate consideration of $19 million.
Since the end of the third quarter, our sale leaseback activity has picked up exponentially and we currently have over 20 properties under contract or LOI.
Now, let me provide an update to our full year outlook.
On our last call we reiterated our previously provided guidance ranges, but indicated we thought revenue was likely to be at the low end of the range and adjusted EBITDA was likely to be at the high end of the range.
Given the recent trends in the business, we are a bit more optimistic and are revising our guidance to reflect this positive momentum specifically, we are tightening our full year revenue guidance range to the low to midpoint of the range.
Tightening our comparable store sales to the high end of the previous range.
And raising our adjusted net income and adjusted EBITDA guidance range above the previous high end.
Our updated full year 2024 guidance ranges can be found in a table in the earnings release, but to recap we now expect the following.
Net revenue of $988 million to $995 million.
Comparable store sales growth of two to two 5%, which equates to 2% to 4% in the fourth quarter.
Jed: Adjusted net income of $114 million to $117 million.
Adjusted EBITDA of $313 million to $318 million, representing approximately 9% to 11% growth year over year and representing a margin.
31, 7% to 32%.
Jed: Adjusted earnings per diluted share up 35% to 36.
Interest expense of approximately $81 million.
Rent expense of approximately $110 million.
Capital expenditures of $330 million to $350 million.
Sale leaseback proceeds of $120 million to $135 million.
And new Greenfield locations of approximately 40.
As John mentioned earlier, we plan to increase our media spend in the fourth quarter.
The incremental marketing spend in the fourth quarter is one of the deferred investments that we have mentioned the past two quarters and will impact our operating income and adjusted EBITDA margins during the fourth quarter.
Let me wrap up by also thanking our amazing and dedicated team members, who work hard and do all they do to make Mr. A best in class operator, and a company. We can all be proud of the team has done a tremendous job of managing expenses thinking like owners and managing different obstacles.
Look forward to continuing the momentum from our two recent quarters and working with our team to build the Mr brand for years to come.
That concludes our prepared remarks, and we will now open the call for your questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
You are using a speakerphone please pick up your handset before pressing the keys.
Anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one question and one follow up question at.
At this time, we will pause momentarily to assemble our roster.
Jed: Okay.
Jed: Okay.
The first question comes from Jeff <unk> with Baird. Please go ahead.
Hey, good afternoon, guys. Thanks for taking the questions first one is more short term.
The cadence of comps, we know July was soft due in part to the hurricane that hit Houston. So just curious how much <unk>.
Up in August and September and then if you could put a finer point on how October is tracking just given you had the two hurricanes.
That hit the South East.
Speaker Change: Yes, Justin.
I think as we said in the prepared remarks overall, we're really pleased with the momentum that we're seeing in the business right now.
As you had highlighted there was some impact from the hurricane that impacted July.
But we saw sequential improvement each month.
During the during the quarter and that continued into October. So August September were in the mid single digit range and further improvement into October.
Speaker Change: A few months doesn't make a trend.
Speaker Change: We believe that the guidance that we provided adequately reflects that trend and also the expectations that we have.
Speaker Change: For November and December.
Okay. Thanks, Jeff that's great to hear and my follow ups just on revenue per member up 9% this quarter similar to last quarter.
Speaker Change: And it comes from Simeon Gutman with Morgan Stanley. Please go ahead.
Hey, guys.
My first question.
I think I may have missed it in the prepared remarks, but anything you can share and customers that are in that.
It's here can you talk about the assumption in that level and that's something like a same store basis.
Yeah, Hey, Simeon John here, so it's been amazingly sticky and strong we haven't seen any degradation post promotional.
Closure and as a result, we're just super thrilled with where we sit today at close to 25%.
Okay, and then a follow up if you look at first the question Tom.
Spread between.
Speaker Change: <unk> market share market.
Speaker Change: Penetrating markets.
And then has that spread changed at all.
Speaker Change: For the fourth quarter.
Yes, I think it's been a pretty even distribution to be honest with you we havent seen any.
Speaker Change: Unusual curves you would think that the bottom quartile of the lower cohorts.
Speaker Change: Would behave somewhat differently, but we haven't seen it.
I think our interpretation is that again universal demand for our service spread across all income brackets.
And again it speaks to the appeal of Carwash services.
Speaker Change: And the broad appeal.
Okay fair enough.
Speaker Change: Good morning.
Speaker Change: Have a good fourth quarter.
Speaker Change: Thanks Simeon.
Next question comes from John <unk> with Guggenheim Securities. Please go ahead.
Speaker Change: Hey, John wanted to start with maybe expand a little bit on some of the marketing initiatives right.
Right and when you think about trial stimulating trial versus brand awareness.
John My: How do you think about that.
Unaided brand awareness kind of progression there.
John My: And what do you think is the right for this model and what is what is the right amount of marketing spend.
As a percent of sales.
And keep in mind. It is we've talked about before it's not uncommon for our retail sales to be down in kind of that mid to high single digit range because of the conversion of retail customers into your WC.
John My: This has been an improvement from what we've seen in the last couple of quarters.
And obviously benefiting from that titanium.
When you look at it from a sales perspective that revenue per customer is helping drive that itself that retail sales improvement and titanium is behind that.
You know there was a material improvement in those retail trends during the months of August September and continued going into.
Into October.
Speaker Change:
Speaker Change: Yeah.
So were optimistic with what we're seeing at the cadence of those retail comps during the quarter, yes, Jed if I can just add to having two major hurricanes back to back was pretty intense and so there's a little bit of a double edged sword. So.
Speaker Change: Temporarily impacts volume and our ability to wash cars, but then that pent up and then it.
Just again speak to you at the end of the day people other clean carb and when their cars dirty for an extended period of time one of the things we're particularly good at is when demand is at its peak post weather event, we're able to really maximize throughput and get cars through the turnstile.
We never blame weather for missing budget, we never use weather as a force for why we're doing well but.
How does this may sound that the weather has actually been favorable and helpful for us.
Okay. Thank you.
Speaker Change: The next question comes from David Bellinger with Mizuho. Please go ahead.
Hey, guys. Good afternoon nice results here.
Just on the comp sales up almost 3% a clear reacceleration, probably your best pace at about two years I want also dig in on the retail improvement, especially in the back half of the quarter do you have an idea of just how much of that was internally driven we've been talking about the new marketing tactics at I think some of those are in place now was that the key acts.
Speaker Change: Yeah.
Good evening. Thank you so much for taking my question what have you seen with regards to the conversion.
Speaker Change: <unk> retail customers.
Members as of late obviously the question is due in part to the metric of members per store.
Speaker Change: <unk>.
Speaker Change: At continued paid in.
The third quarter it looks like it was down around 6%, which was a slight weaker slightly weaker outcome than you would see in the last few quarters.
Yeah, Hey, Michael So youre right Theres been a slight contraction in net members overall and again thats due primarily to the softness in retail overall and then also our focus over the last year on upgrading existing members in the titanium and upper.
Upgrading to platinum's, so due to that focus on the softness in retail we have seen a slight decrease in net members.
I will say to your last the last point in your question.
We've been very good at converting in those numbers remain consistent.
Speaker Change: Most 10% conversion conversion rates, which we're very happy with.
Speaker Change: I also think it's important just to kind of puts us in the context that our average members per store or two times greater than the industry average. So we enjoyed we come to the table with.
Industry, leading membership per store.
Speaker Change: And at this time.
Speaker Change: So.
As we continue our march to grow and add to our.
Speaker Change: Our stores with more options for our members.
We have stores that we think are pushing the envelope in terms of peak number of car.
Taking process during peak periods.
Speaker Change: We're actually taking a different approach to how we densify and seeing how we can take some relief off of those high demand stores.
I mean, the other thing I would say about 2025, while you are right that membership per store is an important metric.
Speaker Change: The other thing we're watching obviously and encouraged by is retail and how retail is trending which which is a barometer of how membership growth is going to grow but that revenue per member as well.
Titanium, obviously is a nice tailwind and helping driving revenue per member will expect that to continue to a certain extent into 2025, and then frankly, we've talked quite a bit about churn reduction initiatives and what we can do to reduce churn.
And then what happens to conversion rates those two to a lesser extent, but but there's some other levers that we can focus on as a team.
To help drive 2025 beyond just membership per store.
Speaker Change: Thank you very much good luck.
Speaker Change: Thanks.
Next question comes from Christian <unk> with J P. Morgan. Please go ahead.
Speaker Change: Hi, good evening, thanks for taking our question.
Could you talk about I guess, what's your sense of where the market is growing right now and and how is your relative performance evolved over the year as the industry has seen a similar bump into <unk> or is this an improvement in your in your share position.
Speaker Change: Okay.
So again as I, just said the number of new units coming into the category is receding. This.
Speaker Change: This year and we expect it to decline again in 2025 based on what we've been seeing.
We don't have insight into how our competitors are performing so we can only speak to what we're doing and we're seeing again sequential quarter over quarter growth and we're feeling very optimistic about the trends currently in the business.
Given the improvement in retail trends could you provide some color on the broader demand trends maybe by income level.
Yes, again, it's been pretty consistent across the board, we haven't seen any unusual.
Speaker Change: When we see.
Slice and dice it by average household income.
Again, you would think that the bottom quartile.
Would be behave differently.
But we're just not seeing that so it's a little head scratching to be honest with you.
And our interpretation again is that the universal appeal of Carwash services in fact that if anything if people who have been holding back theyre starting to come back.
Speaker Change: Because the cars are really dirty and they want to get them clean.
Speaker Change: Brian.
A little bit more on that so thats further for Q3, it's pretty consistent across all the income demographic thats a little bit different than what we saw in Q1, and Q2, where those lower income demographics. It seemed like they were under a little bit more pressure. So we're pleased to see that lower income demographic bounce back just a little bit from how they had been trending.
Speaker Change: Got it that's helpful. Thank you and then a quick follow up is there any longer term impact related to churn our membership usage given the duration of the hurricanes and storms.
So we don't we don't believe so.
Got it thank you.
The next question comes from David Landes with Wells Fargo. Please go ahead.
David Landes: Hey, good afternoon, guys. Thanks for taking our questions just wanted to see if you could provide an update on the M&A market and if multiples continue to trend down to more ideal levels here.
Speaker Change: Yes.
Yes, it's been pretty quiet on the M&A front, we haven't seen a lot of transactions of any.
Speaker Change: <unk> size.
Quite frankly over the last year.
Speaker Change: Multiples have.