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

I'm very excited. So it's Simeon Siegel at BMO. Very excited to have John and Jed from Mister Car Wash team over here. I got to meet these guys a little bit early -- probably a little bit over a year ago, maybe a little bit more than that. And the notion of being asked to fly across country to see a car wash probably wasn't the first thing on my mind. And once I got there, I think I learned that it was kind of a Willy Wonka if you're really into PVC and water pipes. And it was a real eye opener really seeing the nuance on the details and John teaching me about the curvature and the degrees with which go into building the kind of everything that goes into this. So I learned a ton and actually found out and got to really appreciate the business here that seems simplistic on the side, very cash generative but finding out what goes into it, both from the actual capital, operational capital and human capital side became a very important part of this story. So before we jump in, I'm going to hand the floor over to John, who I think want to say a few things.

Yes. Good morning, Simeon. Thanks for hosting us. We're excited to be part of this conference even if it's virtual. Just real quick thumbs up. Can you hear me okay? I was scrambling here to get all of the acoustics and the lighting correct. And there's nothing like a bright halogen light shine in your face to bring out the best in you. Assuming you think I've got some prepared remarks I'd just like to share. These are updates, I think, for the broader audience. So as you guys know, we're currently in our quiet period, and we won't be sharing any numbers for Q4 2021 during this conference. We shared our expectations and ranges on our last earnings call and still feel confident in those. As hopefully everyone saw, we did announce 2 sizable acquisitions that we closed in late December, Clean Streak and Downtowner both in Florida. We ended the year with 396 carwashes across 21 states. This includes 38 acquired locations, 31 of which were acquired late in Q4. As well, we opened up 17 greenfield locations this past year, 6 of which we opened in the fourth quarter. We couldn't be more excited about more than doubling our footprint in Florida as we continue to grow the Mister Car Wash brand. With the most recent acquisitions, we've gotten some questions around our store growth targets for this year. so I'd like to address that upfront. At the time of our IPO, we had planned to open 23 new greenfield locations in 2022. And in our third quarter call, we said we thought there could be some modest upside to that number. In addition to the 23 originally planned greenfield openings, the Clean Street acquisition included another 10 locations that are in various stages of development that we also plan to open sometime this year. Including those 10 locations, our plan is to now open a minimum of 33 greenfield locations in 2022. This is breaking news, Simeon, just so you know. All while continuing to remain opportunistic on the acquisition front. So we're really excited about the momentum we have right now and are looking forward to a great. And with that, that concludes my prepared remarks. Simeon, we can go straight to Q&A, and I'll be less robotic.

You didn't tell me you're going to give me the scoop. This is -- look at that. I didn't know what I was signing up for.

All right. That's great. I'm definitely going if you want to touch a little bit more on the acquisitions because I think as we go back to the deal, you were able to effectively tap your 5-year plan in fewer than 5 months. So that will be worth digging into. Before we do, though, why don't we -- I don't know who's on this call. So why don't you -- let me take a step back. Let's talk about Mister Car Wash. For those that aren't familiar, how do we get here, maybe what makes you special. And what I want to just touch on is what got me was you're the leader, but all things considered and take this the right way, you're still so small. So maybe talk about, give a little bit of background on the business and we'll go from there.

For sure. So we've been at this for close to 25 years now. So we're definitely not an overnight success story. As I mentioned, we have almost 400 locations. And to your point, even though we're the country's largest car wash chain, we actually see ourselves as tiny with less than 5% market share. So our opportunity to grow and to scale this to even greater heights is right in front of us, and we're super thrilled about that. We are so proud of going public and all the blood, sweat and tears that went into this big event. But in a lot of ways, and this sounds a little cliche, but it's the early innings for us. and for us to double, if not triple our footprint is in our immediate sites, and that's what we're working very feverishly to get to. In a nutshell, up until recently, the bulk of our unit growth has been through acquisitions. We've acquired over 100 businesses to get to close to 400 stores, and we've learned a lot along the way. And so if you look at it through this lens, we've had 100 different experiments, 100 different mouse traps that we've been able to analyze and assess. And from that, there's been a ton of learn, and that learn has been baked into our new prototype. And our prototype in the form of our greenfield model is absolutely crushing. So you have the opportunity in Salt Lake City to see what that model looks like. It's set up for super high volume, super-efficient. We process a lot of cars. We focus on all the fundamentals of clean, dry and shiny, done very quickly, the convenience factor of our business. I think, is what's driving a whole bunch of new users to the category. And then what's changed our entire business model is the Unlimited Wash Club, the subscription-based business model where it represents over 65% of our total revenues. It's a flat monthly fee where you can wash your car as often as you like and has absolutely transformed every aspect of our business. And so in a lot of ways, we see ourselves as a subscription company that happens to wash cars, and that's a little too cute in terms of phraseology, but it's true. I think the key point of differentiation though, Simeon, is our people. At the very core, we are as a consumer services company in the services space. And so customer service is a critical piece of the equation and across 6,500 amazing men and women that crush it and bring it every single day. We've been able to lift their lives and we focus on things like paying them well, offering them great benefits, training and supporting them and then offering career path progression. And by doing those things, which are easy to say, by the way, but hard to execute upon across the country because we are doing it at scale. We've been able to create this magical customer experience in store where with Jed and I and the broader team here over and over again, yes, we get a clean car quickly, and it's just in a really, really clean environment. But they say, how do you get your team members to smile? How do you get your team members to transfer this kind of this level of respect where it's almost like you're in a Ritz-Carlton? And we say because we take care of them. So we subscribe to the theory of taking care of your people, who take care of our customers who will ultimately take care of our shareholders, and it's been a really winning formula for us. So I guess in the end, if you were to say, what is your point of differentiation? I would say it's our culture.

Jed, were you jumping in there? Okay. So you just named 3, I think, interesting way to think about your points of differentiation. You have your people, you have the people that you cater to, and then there's the buildings. It's probably worth touching on all 3 of those because we're -- you're addressing a Wall Street crowd, and we're a special breed of people. So I can attest to the fact that your -- the love you have for your employees resonates. I saw it. Do you want to give us any thoughts on how to parlay that into quantify? Like we talked about turnover in the past, right? So because there's a real manifestation of what that means. It's not just fluff. So when thinking about the benefits that you see from this focus on your people, how would you characterize that from a business perspective?

Yes. So listen, the fact that we're in a tough labor market across the country, and this is a moment where I think every business is working feverishly to retain their best people as well as attract even better talent. We were way ahead of this curve going back a number of years ago. So being the leader and paying the most competitive wages in our industry has made it easier for us to take care of the A and the B players. And back in August, we proactively went out and gave additional raises to our workforce to be able to get out in front and do more to make sure that we don't lose those good people. So, so many companies have a talent acquisition department. I think there should be a talent retention department as well. Because keeping your people, I think, is almost more important than actually attracting even better people. So we're doing both simultaneously. And what we did in August created some pressure from a margin standpoint. We quickly followed up with some pricing moves that we did in November that we think are going to help soften that impact on the labor front. But bottom line is our net margins are north of 30%, which many of you guys already know. So we're in a really good spot right now. We're highly profitable. We're taking care of our people. if any skeptics are out there about that are thinking, well, okay, we hear a lot of CEOs and CFOs talk about the importance of people. How do you measure that? How do you quantify that? Well, there was a thing called eNPS, Employee Net Promoter Score, which is another version of a Net Promoter Score, which ask employees, your team members, how likely are you to recommend Mister Car Wash as a great place to work. And when we took that survey, when we surveyed over 4,000 of our 6,500 employees voluntarily, in an anonymous way responding to that. We scored a 55, which puts us in this rarefied area next to the Costcos of the world that I think are in the mid-60s and far ahead of the Starbucks and the Chick-fil-As. So we're in a really good spot, taking care of our team members who are taking care of our customers, and it's been the magic formula for us.

Simeon, the one thing I would jump in and add there, right? We're seeing a return on these investments that John is highlighting in the form of a reduced turnover. When we look at our turnover and how it's trended, right? It's improved about 20 percentage points over the last 2 years, and that's looking at it across the broader team. And by the way, the way we calculate our turnover as if somebody shows that it works and then were to leave the next day, we take that against our turnover. There isn't a 30-day or 6-month grace period, which is a little bit unique. There wasn't a universal way to CapEx. But even when you go back that just 1 more layer, right, 1 of the most critical positions, the most critical position in operating our business is our general managers. And that turnover figure for our general managers is just over 20%. So we're making these investments. We're seeing a return in the tenure of our team and our ability to retain and maybe keep the top talent, which is integral and helps differentiate the Mister Wash from what somebody would get if they went somewhere else.

So okay. So that's great. We've talked about that a lot. Jed, do you want to -- I'm getting into nuance? Should we take a step back for a second, just remind people about effectively the way you think about the long-term algorithm of the business. I mean the beauty here is there's a lot of fun details. But at the end of the day, you have boxes, you're growing those boxes, you're comping those boxes, and there's very minimal incremental CapEx involved. So do you want to just catch us back up on the way you think about the story?

Yes. So the way we think about the long-term growth algorithm is growing new units, high single digits, growing our comps at a mid-single-digit clip. And then high single-digit sales growth, which translates to a low double-digit EBITDA growth. There's going to be ebbs and flows in that, Simeon, as you had highlighted in your earlier remarks, right, we're well underway on hitting our unit counter. And the way we talk about our M&A is 50 acquisitions over 5 years that was built in 10 per year, and we've basically hit that just within our first year of operating as a publicly traded company. So there's going to be some ebbs and flows in the short term, but we're confident in this algorithm where they're long term and our ability to deliver against this, especially as we continue to grow the subscription side of the business and increase the UWC penetration in the various markets that we operate in.

So let's dig into that and you -- either of you can decide where you want to go with it. If people are first near and dear to your heart, I think UWC is next. So as you think about what you introduced and the business changes with the membership program, let's talk about UWC, where it's been, where it is, where it's going, and then maybe contrast it to your retail customers and how they become top of funnel.

Sure. I'll take a stab, and then Jed, you can add any color. So listen, we're north of 1.5 million unique members, which is huge. And so I tease Jed that he's got the easiest CFO job in the world because we have this guaranteed predictable recurring revenue that comes in daily. And it's really smoothed out our business and made it so much more less dependent upon the weather, quite frankly. And back in the day, the weather had somewhat of an impact, if it would rain in the Southeast, we would feel it for sure. Now has become less of an issue. Bottom line is its lift the lifetime value of our customers by we estimate close to 5x. And we've fundamentally change the way people care for their vehicles. So back in the day, pre Unlimited Wash Club model, car washing is somewhat of a treat that the average frequency of the average customer was approximately once a quarter for us, once every 6 months for the rest of the industry. And what we've done is taking car washing that was a once in a while treat to now part of their weekly routine. So if you can change their behavior and get folks to actually adopt this as something that they do on a weekly basis. It has absolutely changed everything that we're doing. So we're very bullish on this program. It's something that we're kind of myopically focused on, and we're continuing to look for ways to add even more value to grow our member base.

Simeon, the one thing I would trend there to add, though, is so the subscription piece, that's our goal, right, is to -- and these retail customers play an important role. They represent about 35% of the business of the sales. But it gives us those add VATs, where we're able to trade this customer into the other wash club. And many of you have heard us talk about you take the average retail customer that will come in approximately 3x per year, pay $20 per visit. If we can trade them into that Unlimited Wash Club, where they're then paying $30 per month, you get a 6x sales lift in our ability in those app VATs and being able to trade them into the Unlimited Wash Club. So it serves as a very nice tailwind to the business, but also adds this element of predictable, recurring, consistent cash flow that does make this, as John said, it does make the job a little bit easier.

You didn't know you had such an easy job, didn't you? So -- and do you want to talk about over there the idea -- I mean, I'm going to get to COVID and kind of thinking through the dynamic of visibility and how that helps. But just as you're thinking about you, you and I talked historically about the breakeven point. I mean I think the fact that you have such a little -- the incremental expense is de minimis, I think is an important point. So maybe thinking through or talking through that element a little bit going from a retail to A, like how many uses, how many washes does the person have to do where it flips over?