Mister Car Wash, Inc. (MCW) Earnings Call Transcript & Summary

Hi, everyone. It is Simeon Gutman, Morgan Stanley's hardline, broadline and food retail analyst, and it is my distinct pleasure to welcome Mister Car Wash inaugural visit to our conference. We are represented by John Lai, President, CEO and Chairperson of the Board; and Mr. Jed Gold, Chief Financial Officer. Sorry, Jed, if there weren't multiple titles.

Simeon, you forgot Chief Bottle Washer as well.

We'll get into that. Maybe that will be my first question. I have a quick disclosure to run off, and then we'll get right into the questions and answers. First, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, we're clear to have a conversation. First, again, welcome. I'm glad to have you hope your fixture in this conference for every year we hosted going forward.

John, let me ask you to start about competitive landscape. Maybe just paint the broad strokes, how the car wash business is across the country, competitive-wise, increasing, decreasing or staying about the same?

Terrific. Well, thank you, Simeon. It's our pleasure and honor to be invited to this conference. We wish it was in-person. I always get energized by Manhattan in the great state of New York. So Zoom have to do, but hopefully, next year, we'll have an opportunity to do this face-to-face. So big picture, the industry is a very fragmented category, primarily driven by mom-and-pop independent investors. We have, by our own conservative estimations, less than 5% market share. We enjoyed 365 stores today, and we've been growing at a very rapid clip. The industry is in consolidation mode. It's also in growth mode. So there's new units being added daily. But there's also folks that are looking to build out and strengthen their position within each region. We're in that same mode as well. So when you look at the 21 states that we're in today, the 65 MSAs that we're in. We have on average, about a 21% market share. And our opportunity to continue to scale and grow inside our existing markets in our own backyard is right in front of us. We have certain markets like Bakersfield, California or Des Moines, Iowa; El Paso, Texas, where we enjoy an elevated market share of north of 50% and we see elevated performance as a result of that. And so that's emboldening us to continue to expand and increase our penetration in those markets, while we continue to remain opportunistic and very aggressive in looking at going into new markets as well. So the competitive landscape, if you look at the top 20 folks below us, there -- I'm going to say, 90% of them have some form of institutional capital/financial sponsorship. And so they're well capitalized, and they're looking to attempt to replicate doing what we are doing as well. And so things have gotten a little bit more competitive from an M&A perspective as more people are bidding on fewer quality assets. I think the difference in our approach has been focusing on quality, not quantity and making sure that we're buying really good businesses that have great upside potential that strategically are complementary to what our growth vision is. And at the end of the day, what we're attempting to build is this premier brand, this premier service, an enduring company with long-term value, and we're not in this just to roll up or consolidate.

Thanks for that, John. And I regrettably forgot to include maybe my own intro not that anyone wants to hear from us, but this is a truly special business across our entire consumer spectrum, not just in terms of retailers, but in terms of service companies. And I think there is a real culture, which you can say there can be a culture in a car wash business, but I think there is and a real focus on excellence and acumen. And I couldn't believe the level of detail, the angle of the curve, the thickness of the brush, even how you clean the interior of your own, how you construct it so that it's easy to clean for your own sake anyway.

But Simeon, if I could add to that, though, so there's the technical, mechanical automation and all the things that we do to process cars quickly and efficiently. I think the magic, though, is through our team members, and we are at the very, very core, a consumer service provider. And by definition, customer service is a piece of that equation. And when most people think of car washing, they think of it through more of a utilitarian clean dry and shiny done quickly, where we're able to differentiate through our 6,500 amazing employees is this elevated level of customer service. We've barred from Danny Meyer at Union Square Hospitality, this notion of hospitality as a key piece of our value prop. And so what we've done is taking care of our team members who take care of our customers, and we're treating them well. We're paying them well. We're offering them full benefits and there's great career path progression. But as a result, we have this magic in-store that you have to experience and you have to go out and feel it.

Yes. And by the way, I'm going to piggyback. I -- we have, and we've gone through other car wash and there was nothing like it. And I wish the video on my phone would work or also can give a little example. I'm going to pivot a little bit. It's not going to be a curve ball, but you said Bakersfield and Des Moines. And if you could just -- if you can relate -- if you can make the rest of the chain, look like Bakersfield or Des Moines, we can have a pretty short discussion. Meaning can we get to 50% market share? Is that a real vision? How do you get there in those markets? And maybe answering that would answer a lot of questions.

Sure. So we are on our bikes pedaling very quickly right now to build out and continue to expand our greenfield growth initiative. And we have done extremely well with that arm of our unit growth strategy. As you know getting to where we are today, the bulk of our portfolio has been built through M&A. But as we got to a certain point using El Paso as an example, where there weren't any additional attractive acquisition opportunities that we felt made strategic sense, we needed to build. And as we started to build out to provide more optionality for our customers, we saw this all boats rise the tide in this elevated performance, which is a beautiful thing. And so again, that's emboldening us to not just double down, but triple down on this greenfield development arm while we remain acquisitive, continuing to look for good acquisition opportunities. So the question that you pose is, is it realistic to get to a -- let me stop and say, 100% market share is not the objective, right? So not all businesses make sense for us to acquire. But we think 50% is a good number. It's a target for us. And if we have today, this opportunity to double our footprint in our backyard, in our existing markets, that's pretty cool while we continue to look to move into new markets.

And Simeon, the one thing I would add there, right, I think it's important when you look at the limiting factors, it really centered around the people. And so we've -- as you've heard us talk about before, we quadrupled the size of the development team here recently. We have more people focused on finding sites, building these sites. But then also the investment that we highlighted on our Q3 call, we're investing in the pipeline of talent that's going to help operate these new builds as we operate, as we open them, right? And then going even 1-layer deeper, some of the investments that we're making around Mister or which is a part of online learning platform to help with the training and development of this future pit pipeline. We've got a Mister specific curriculum that their team members will go through. And then another one as we called Mister Connect. It's a mobile platform that allows our team members to go on and share best practices across the portfolio. Also a way for us to cascade information and highlight and recognize our team members, which is also a big part of the culture and who we are at Mister as well.

Random question for you, John. If I -- you could have had the absolute best location, best corner, best sight line off of an intersection or you'll be a mile away and the service level at that while away is better than that even perfect location. Meaning is it location? Or is it service do you think at the end of the day, that why your share is as high as it is in those markets?

Yes. So let me be very precise. Hard corns for us are not ideal in car wash space. Typically, there's impediments to ingress, egress and flow depending upon what side of the corner you're on. So after the light, it's a little easier, but oftentimes, it creates some congestion challenges because we need to be able to get people on and off elegantly and swiftly. So mid-block locations typically are actually more ideal, which is a little counterintuitive when you think of retail because I won't think the hard corners are always the best spots. But at the end of the day, to answer your question, location, location, location is absolutely critical. But once you get that location and you've built a beautiful physical plant to be able to process a lot of cars, you then need to be able to operate it. And I think this is where we excel. We have, Simeon, 25 years of experience. We have built this organization 1 person at a time. And we have now this operations infrastructure that is second to none. We believe in what we call close coverage and close ratio. So we have a 6:1 regional manager to store ratio. We have 2 stores for every facility maintenance technician. We have in-market regional development specialists, regional training specialists. So what we're doing is we're not building out this organization, this infrastructure at the ivory tower level. We're building out at the regional level, so we have these regional hubs of close coverage support to help develop our teams. And that gives us a huge competitive advantage because that strength and when you see how well we execute is because we have this team in place that focuses on all those fundamentals, right? Clean dry and shining, training our team members, supporting our team members and allowing them -- it's ultimately making their jobs easier, so they can focus on servicing our customers, where there's other models where the managers are expected to be technicians. And if something were to break, they have to jump into the conveyor and fix it. We've taken a lot of the pressure off of our site leaders so that they can focus on people, customers and our team members less on the mechanical side.

And because the car wash industry now has so much attention, and you mentioned the private equity that's involved. Given that level of investment, are you -- first, the level of competition, is it getting better, but they're clearly investing in sites and they're maybe taking up spots that you would have eventually have gotten to. So does that create any impediment or a limiting factor in the market share that you can ultimately take?

Yes. So right now, there's a race in almost every market as others are trying to build out their share. And so we're in that similar race. And we think we've got first mover's advantage, but we've been at this for a while. And so sometimes those that have more experience and a little bit longer lead time with that come some advantages. But we're not resting on laurels, and we see some really good competitors that are doing some really beautiful things, and we have the utmost respect for them. And so we're focusing on what we know our customers love, which, again, is the fundamental tenets, which are easy to articulate, hard to execute upon. But we're doing that, and we're doing that daily. And I will say this that -- sorry for the background noise. But the one thing that I hear time and time again -- and for us, the table stakes are quality, right? So we have to get that clean dry shiny car. We have to do it very quickly and efficiently and efficiency is we all see businesses that are run really, really well. And we also see stores that are sometimes clusters. We would like to be seen as the former. Aesthetically, our stores are in a beautiful shape. We understand the benefits of curb appeal and site cleanliness. But what we hear time and time again is how do you get your team members to smile? How do you get your team members to walk with a sense of purpose and a quick clip and to engage with our customers? And what we tell folks is that we're not doing it by cracking the web or putting up smile posters in the break room. We're doing it by treating them well. And so if Costco is viewed as one of the kind of the gold standards for employee engagement, our goal is to try to get to that level. And what does Costco do really well? They pay their people well and they treat their people well. And those are very simple principles that we subscribe to as well.

And Simeon, if I can just jump in there and add, right? So we can't overstate it enough. Not all car washes are created equal. And so to John's point, the investment that we make, starting with our team members, that will then translate into a superior consumer experience, but then also some of the investments that we're making from a growth CapEx perspective, on average, we're investing about $100,000 per location. We're investing behind the maintenance to make sure that they upkeep and that our washes are continuously operating. And then as you know, we -- when we acquire these washes, we convert everything that we acquire to a Mister, put it under a standard banner. We're building a national brand. And then going even 1-level deeper, right? The science behind the wash and the team that we have behind that and the science behind the regional upkeep and maintenance, there. It's about doing a lot of little things right. And you touched on it in your opening remarks, the attention to detail and doing those things, those little things right, ultimately add up and provide a point of differentiation for our consumers.

Great. So I think the 2 stools or legs to this story, the way the financial model will play out is you're going to open stores and I think you're going to grow memberships. I think those 2 things happen. I mean the market share will take care of itself. The quality is already in place. So maybe let's start with opening stores. Maybe just to frame it, how -- what's your target? And then how does M&A play into it? And I know, John, you get this all the time, you're not afraid to do something if it presents itself, but might you end up doing something bigger than you thought if it makes sense at some point, and how the opening is going? So that -- let's just stick on footage growth and acquisition growth?

Yes. So let me start on the M&A front. And so we have been highly acquisitive historically, getting to 360 locations. We've done over 100 deals to get there. And we remain very optimistic and aggressive in pursuing good assets that have good upside potential. As others are rolling up and consolidating on a regional basis, there's some -- there's a notion or there's some conversation about is there a potential for us to combine forces and would it make strategic sense for us to either complementary fit or to strengthen our position in a market that we're already in with another platform where we were to come together, and we'll certainly continue to look at those opportunities. And if we can make it work, we would be happy to. But on the greenfield front, that's certainly something that's more predictable and it's more consistent, and it's not quite as lumpy as the M&A front. But it's ones where we can build the stores to our specifications, right? And the mousetrap that we have designed has been based on the learns over the last 100 businesses that we've acquired, and we've baked that into this new prototype that is really set up for volume. And so as we're doing really, really well on the greenfield front, it's really evolving us to not just double down but triple down on that effort while we continue to look at acquisition opportunities.

Sorry, Jed, if you want to say something.

I was just going to -- just from a target perspective, Simeon, just to make sure we lose out on that. So when we look at the target for this year, we're targeting 16 to 18 greenfields. Going back in time, we did 4 in 2018, 4 in 2019, 12 in 2020. So we're making the investments, we're ramping this up. As we look ahead to 2022, we believe that there's a little bit of upside at this point. We categorize it as a handful, but we'll provide further guidance on our Q4 call. From an M&A perspective, the way that we're talking about that is 50 acquisitions -- 50 stores over 5 years, so built into the bottle of 10 per year. Some years, it's going to be higher. Some years, it's going to be a little bit lower. To John's point, though, we're not in the business of just aggregating. We're not going to chase a number just for the sake of chasing a number. But there may be some acquisitions where it makes sense for us to lean in a little bit if strategically it fits into the broader portfolio, bolsters our position, helps facilitate and build out the network effect and you've heard us talk about giving our consumers just that many more locations within the market where they can access our services.