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

Okay. Thanks, everyone, for joining us for this next presentation. My name is Chris O'Cull. I'm one of the consumer analysts here at Stifel. Our next fireside chat is with Mister Car Wash. Mister is the largest national car wash brand in the U.S. with roughly 400 locations in 21 states. The company is expanding by developing new locations and acquiring existing washes, targeting at least high single-digit top line growth and low double-digit bottom line growth. I want to thank CEO, John Lai; and CFO, Jed Gold, for joining us today. Thanks, guys.

John, based on my conversations with several industry participants have concluded that you're one of the few leaders in the industry that can start a sentence based on in my experience, and people should actually listen to it.

If anything, if we zig, they should zag.

Yes. No. I mean it's an industry that doesn't have a lot of experienced leaders. So I'm excited to have you here.

Well, I appreciate that. Thank you.

So with that introduction, I'll kick it off with a conversation. Maybe we'll start with the proverbial high-level state of the consumer question. There's been a lot of discussion at the conference just around the current state of consumer spending and how durable that spending may be this year. Let's just -- I thought we could start with you just quickly describing how consumer spending has been for Mister? And maybe what signs or behavioral shifts that you kind of monitor to determine that spending is weakening?

Yes. So we feel very fortunate. We're in a great space right now, a great category where the demand for our service has remained unbelievably strong. And so I think there's a question looming over this conference, over the entire kind of U.S. economy right now around consumer spend and what's going to happen, particularly as a -- technically a consumer discretionary. Our service behaves and acts more like a staple than it does as discretionary. And if I can simplify cars will always get dirty, they'll always need to be cleaned. And a question around, well, if people are starting to tighten their belts and if their budgets are being stretched thinner and thinner, where does carwash fit in that? And what we're seeing day in and day out is that the demand remains strong and steadfast. We've got cars lined out to the street. We're setting records left and right. And so there's a little bit of a disconnect in terms of the doom and gloom and all the things we're hearing about what's happening in the U.S. economy with respect to inflation. I think a lot of it has to do with the fact that, one, Americans love their vehicles. and want to care for their assets and want to keep them clean. They want to project a positive image and as an expression of themselves, there's an extension that, that car is more than just transportation. So we feel, again, very fortunate that we're in a category where people feel good. It's an affordable service. I don't know if I subscribe to the affordable luxury kind of tagline, but for $9 or $10, you can keep your car clean, and that's an accessible price point, I think, to all Americans. And we serve multiple demographics. When you look at our subscription-based program, which I'm sure you'll have some questions about later on, we've had a $19.99 Unlimited Wash Club package. And if you were to zoom out and look at transportation cost for the average household and what people are typically spending on their vehicle with respect to car payments and insurance and gas and people looking under every rock to say, well, look, miles driven. How does that impact car demand? What you're paying to keep your car clean is a very, very small sliver, and it's one where people actually enjoy that. Fixing your transmission, you may not have as much joy in cutting that check, but keeping your car clean, they certainly do. So for all those reasons, we're smiling today. And there's no wrinkles in our forehead.

And Chris, just to build on that a little bit. So you go back to Q1, put up a plus 11% comp store sales. We reemphasized the guide of 5% to 7% on the year. Q2, looking at a 0% to 2% on the quarter. But I think the part of the magic here is that subscription program, we added 125,000 new subscription members, which was ahead of our internal forecast and what we were targeting. Some of the other metrics that we look at is monitoring that churn and how did churn, we actually saw improvement during Q1 and the churn by about 30 basis points from what we've historically been. And then the other metric that we don't talk as much about, but it's an important one that gives a sense as to the overall health of the consumer and how they view Mister's services is the conversion rate and converting those retail customers into the subscription program, and we saw an improvement of about 40 to 50 basis points on that conversion or that capture rate during the quarter as well. So looking at all the indicators, it's a positive story that especially the subscription model, which has proven to be more of a resilient, predictable reoccurring revenue stream.

That's great. Let's move on to some secular questions here. It's hard to overstate how fragmented the carwash industry is at this juncture. And so maybe help us frame up how you're thinking about the ultimate opportunity in terms of unit potential, wash potential for Mister relative to where you sit today with around 400 washes?

Yes. So with 400 stores, we actually see ourselves as quite small, honestly. Even though we're the leader within our space, it comes with an asterisk less than 5% market share. However you want to estimate the -- in terms of TAM and size of market. So we believe today that the market is underserved. There's more demand than there is supply. And as a result, we've got this beautiful natural tailwind with more consumers coming into the category, more people washing more often with respect to the introduction of the subscription plans and how easy it is for them to keep it clean all the time. And so to that end, when we look at the space, we're guesstimating that there's roughly 10,000 conveyorized car washes in the U.S. We believe, and this is an estimate, that the market can double in size. It's a huge U.S. car park, as many of you know, 285 million vehicles in the U.S. And every store that we're opening right now, we're enjoying amazing success, and it's just emboldening us to not just double down but to triple down to support this ever-growing demand. So today at 400, we've set our targets on 1,000. And even with that, if the market is going to double in size, we would still remain a relatively small market share. And to be in a position where we have this almost unlimited growth opportunity in front of us is a pretty great spot to be in.

What's your market share today in the markets that you compete in? And what's your goal?

Yes. So again, we estimate that we're roughly about a 20% share across the board. So we're in 21 states, about 70 MSAs, depending upon how you want to define that city. And our -- with a 20% market share, we think 50% is a really good healthy target. 100% is not the objective. And we do have examples, El Paso, Texas, Bakersfield, California, Des Moines, Iowa, where we have north of 50% and the AUVs in those markets, how well we're performing. We've coined a word that we thought was kind of cool and sexy called the network effect. But the vision there is that the more options we have for our members, the more stores that are more conveniently placed throughout a metropolitan marketing area, it increases the value proposition of our membership. So again, the bigger the presence, the more convenient it is for our members, the stronger that value prop and it gives us a competitive advantage against the independent operator that may have 1 or 2, maybe 3 stores. And the strength of that, whether or not the consumer is using more than 2 or 3 locations, there's a whole another question. The fact that they have that option, again, is helping us. So we're growing as quickly as we can. I think the challenge for any high-growth company is the rate of growth and doing it in a way where we're actually lifting our standards and making sure that things don't get wobbly. And we're very mindful of that because at the very core for any of you that have been to a Mister Car Wash, we have very high operating standards. And for us, the customer experience is paramount. So yes, growth is a central mandate, but it's growing at the right pace so that we're getting better over time and things don't water down.

So the private market has seen valuations increase significantly the past few years as more financial sponsors have entered the space, and I understand many have been attracted to the economics of the wash and also the recurring revenue with the subscription services. But many of these companies that are being formed lack experience running a wash company with multiple markets. How is the inflow of capital and just that dynamic of having more inexperienced operators come into the system like that? How is that affecting your company? And what are you watching out for with this kind of dynamic happening?

Yes. So first, let me say that we have the utmost respect for some of the great regional operators that are out there that have done a really amazing job, and I can rattle off a bunch of regional brands that do really, really well. With respect to private equity and the influx of private equity that has come bearing into the category, I think oftentimes, you can underestimate or over -- when you look at a market and say, hey, this is highly fragmented mom-and-pop, ripe for consolidation. And there's more than -- there's room for 2 or 3 major players in any 1 region or on a national scale that there's room for more. And what we're seeing right now is so many PE firms desperate to try and replicate the success that others have had are paying up. And so valuations are lofty right now to the point where we want to make sure that, one, we're highly disciplined in our approach to M&A. We're focused very much on the quality of the assets and the upside growth potential. And at the very core, not overpaying for those assets because if you overpay for them, you're living with that for a long time. And so there is a little bit of a disconnect, valuations being so lofty. And as we look at the purchase price of some businesses, and we compare that to our greenfield operations and the economics around what it costs to build a greenfield location. It's really -- the answer is pretty obvious for us to focus on greenfields. And if I can spend some time on our greenfield business, we've taken and leveraged the learns over 100 businesses that we've acquired over the last 25 years. And like in any experiment, you learn good things. There's good best practices that you take, but there's also some things that you don't want to replicate, that you can learn from either the design, footprint, mousetrap, operating procedures. And all those learns have been beneficial for us because we baked them into our new prototype. And the 40-some-odd greenfields that we've opened thus far are performing really, really nicely. And as a result, when you look at those economics, we're saying, hey, that's really where we should be spending the bulk of our energy. We will remain acquisitive. We'll continue to look for good opportunities that have a strategic benefit to helping us get into either a new market or strengthening our position in an existing market. But right now, as we look at our future, we're going to spend a considerable amount of energy on greenfields.

I want to talk about that next. So one last question that I have about the influx of capital coming into the space, I'm a little concerned that you're going to get to a point where you could see a lot of saturation in certain markets that are kind of growthy markets and inexperienced operators opening up right across from each other and a lot of price gouging and that kind of thing. Is that a concern yet in your mind?

There will be a point when the music starts to slow down. We haven't seen it yet so we're trying to predict when and where. I think there's a market specific element to that question, where some markets are a little bit more competitive than others. But broadly speaking, there's a lot of white space. There's a lot of -- I mean just looking in our own backyard, right, in the markets that we are intimately familiar with. And 5 years ago, when we look at building out an MSA, we would look at it through kind of this geographic spatial balance and saying, hey, in the northwest quadrant of the city, we need to have a store. And where we were kind of missing the boat was in some of our more high profile, high -- most productive stores. Should we be a little bit more defensive in making sure that we're kind of building a moat around many of those locations and not letting others come into that space. So this notion of cannibalization and early on in our life cycle, it was like this 3-mile radius notion, which was somewhat arbitrary. Now we're building stores within that 3-mile range and seeing growth in both the mothership store that we built right next to as well as the new store. And so that's, again, telling us that there's a lot of demand out there that we need to fulfill.

And Chris, just a little bit more on that, right? So if you look at the growth by region, right? We're seeing strong growth across all regions. When you break down the growth by vintages and you're looking at our most mature locations, which were 2012 and prior, they were growing at 9%. They grew at 9% during Q1. So really strong growth across the portfolio. So to John's point, we're not seeing that day yet.

So you guys have committed to opening -- to 30 openings this year in state that you'd like to get to a pace where you can maybe open a wash a week. Can you give us an update on where you are in terms of building out the infrastructure of the team to get to 50-plus units a year?

Yes. So we've quadrupled the team in the last 2 years, and we're going to continue to make investments, particularly in the human capital side, right? So making sure both from a real estate sourcing and construction and development as well as look at -- look for more creative ways to partner with some preferred developers in markets where we may not have that infrastructure in place today. So we're, in a lot of ways, in the early stages of this new muscle, but it's one where we're really excited about without tipping our hands to any of the competitors that may be listening to this fireside chat.

Keep in mind, it's about an 18-month build-out. The complexity of a car wash build is -- it's a lot more complex than a restaurant or another traditional retailer just given the science and complexity that goes into this. So it's about an 18-month build-out time, but we're confident saying that, that 1 per week that we're targeting that by the end of next year, which implies we've got the team in place to get to that point by the end of next year.

That's great. Oh go ahead.

Yes, we tell our team that Starbucks opens up 2 stores a day in China alone. And they'd say, take it easy, take it easy, okay. Building a car -- there's a lot of engineering that goes into a car wash, the land prep alone can be north of $1 million just to prep with respect to all of the stuff that is necessary to -- before you even go vertical. So Jed's comment is spot on. I mean this -- and we're looking for ways to compress that time line. Once we actually break ground, we can -- in theory, I think our target is under 6 months, right?

Yes.

But from site selection to washing cars, it's right now about 1.5 years.

And can you guys remind us what the economics are for a new unit? And what I mean by that, what's the average investment for 150-foot tunnel? I mean what's the sales margin maybe in year 1, 3? Just how does that maturity look?

Yes. So really strong unit economics when you look at the car wash base. From a gross CapEx perspective, it's just under $6 million, about $5.8 million, and that factors in some of the recent inflationary pressures that we've been seeing. But then the majority of these new builds were purchasing the land, and then we'll go into a sale leaseback on the land and driving the net investment down to about $1.8 million to $2 million per location. And then by year 3, we're targeting these to be fully ramped, which is just over $2 million in AUV and about a 50% 4-wall EBITDA margin by year 3. But to the point earlier, these are ramping really nicely, and we're getting there ahead and seeing a less than 3-year payback on these greenfields.

Every time we share these numbers, there's an investor in the audience that says, why am I doing what I'm doing, I should be washing cars, literally. and so as a result, the best kept secret is no longer a secret. I mean, it's -- this has become a very hot category, a very -- can I call it a sexy sector? I never thought we'd be viewed as a sexy sector. But as a result, there's a building boom going on. And there's a lot of folks out there trying to build out each of these regional markets.

Would you ever consider franchising Mister Car Wash?

We've talked about it, and it's not the word control freaks, but with respect to the margins that Jed had talked about, we prefer to enjoy those margins ourselves versus taking a lot less through a franchise fee. And I could go into some of the pros and cons of franchising versus company ops, but we like our approach right now.