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

Okay. Good afternoon, everyone. Simeon Gutman, Morgan Stanley's hardline, broadline food retail analyst, and it is our pleasure to welcome Mister Car Wash represented by President and CEO, John Lai; and CFO, Jed Gold. So first, thank you for being here. This is the inaugural time you're showing up at this conference, only our first opportunity, and it's good to spend some time in person. I think most people know this business, but it's one of the more unique consumer-centric businesses where you wouldn't expect you can bring consumer centricity to a car wash, but they somehow do it. I have videos of the car wash laying, if you want to see what it looks like. I'm going to read a quick disclosure, and we'll sit down and have a discussion with John and Jed. 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. Thanks for being here. We were joking that the mics were hot, and we were learning some things about the business that I hadn't known before, but that was just a joke. So largest carwash operator, single-branded in the country. You have ambitions to grow several times over. The car wash has been around for decades. We've known it for a long time. No national brands really besides you. What makes this the company that's going to buck this trend and take advantage of all this fragmentation?

So good morning or good afternoon, everybody. I'm happy to be here. Thanks for inviting us. Can you bring up the volume a little bit, I'm somewhat soft spoken. So yes, we're the largest player in our space, but in reality, we see ourselves as quite small. And so we're a little tiny dot on a little tiny spec in the outermost regions of the Stratosphere. So given our current position in the market, we're kind of considered within the space, the 800-pound gorilla, but in the overall scheme of things, we have less than a 5% market share. So our opportunity to scale and take this thing to great heights is right in front of us. We, to your point, have been at this for a long time. This is 25 years in the making. So we've been grinding it out the first 15 years of our existence, where the gestation period, the learning period, the period in which we developed and honed and fine-tuned our operating model and all the best practices that we've developed over time, and more importantly, built the infrastructure to set the business up for accelerated growth and scaling this thing. So today, we're in 21 states, close to technically 70 MSAs, but as we cluster those MSAs, it's probably more like 50 cities. And when we look inside each of the markets that we're in, and our current position, we're very bullish and optimistic about our opportunity to double our footprint in our existing markets while we continue to look to expand into new markets. So yes, it's a fragmented business. There's no national player. We have aspirations to someday have a national footprint, but it's not going to happen overnight. It's going to take us some time. Our growth trajectory and our kind of unit level expansion has historically been about 50 stores-ish a year, give or take a store or 2. And that feels like a good pace for us. We're very intentional and mindful of not growing too quickly and getting over our skis. And for us, becoming the biggest was never our ambition. It was aspiring to become great someday. And so we do live by the theory of good to great or never -- the day you think you're gray, the day you're washed up. So we're always trying to get better every single day. So bottom line is, we have a great opportunity in front of us to take what we have created and now replicate that and cookie cover it, if you will. And from a growth project -- perspective, the bulk of our growth has been through M&A up until recent times. But over time, we realized that we can actually develop our own mousetrap that is set up for high volume and maximum throughput and learn and leverage all of the best practices that we've acquired from over the 100 companies that we've bought and baked that into our new model. And we're absolutely on fire right now with the greenfield.

When I grew up on Long Island, I think Charles Oakley started opening car washes. I feel like you're in maybe New York routes, too.

Yes.

Why did he not the car wash is such a great business. So why don't we have bigger scale national players?

Well, I would never tell the Oaktree that he didn't succeed because he would smoosh me with his 2 fingers. But now there's great regional players across this industry that we have the utmost respect and admiration for. But the question around why haven't others scaled and taking this thing beyond their kind of geographic territory? And I think a lot of it is due to just -- we're all kind of control freaks. And so within a 2-hour drive time, if you can ensure that the standards that you're -- that you've created are being met, you feel comfortable. But moving beyond those boundaries where you have to set up shop, so for us, when you look at our footprint, we're coast to coast, so from California to Maryland and from Minnesota to Florida and 21 states in between. It's a big footprint for us to support. And what we have done is create this regional infrastructure, what we call close coverage where we have facility maintenance, regional operations, regional HR, regional training resources that can ensure that, again, our standards are being met, and that we're constantly looking to raise that bar.

Random fact. I think you're -- you own Tucson. You control the market, I think, but you're not in Phoenix. Is that right?

Yes. So I'm technically not allowed to use the word global domination or own or anything like that, but we have a meaningful market share in Tucson. We're not in Phoenix. So to get there with your question, there are a couple of markets in the U.S. that have gotten kind of crazy. Phoenix is one of them where there's a lot of car washes. And one can argue that it's not over-stored, but they've kind of reached their zenith. They're the exception, and there's maybe 2 or 3 other markets, Lubbock, Texas, is another example. So yes, we're in Tucson just south of Phoenix. And we have north of a 50% share. We have other MSAs, Bakersfield, California, El Paso, Texas, Des Moines, Iowa, where we also enjoy this elevated market share. And when you look at our current share in each of the MSAs that we're in, it's approximately, and this is our guesstimation, about a 20% share. So again, if we're 425 stores strong today, we think we can double our footprint in our own backyard before even moving into any new white space.

And that was the loaded question. I think it's fascinating that 1.5 hours north you don't have a presence in a highly densely populated market. It speaks to how you stayed in your lane to not chase both M&A or greenfield. But then the other question is, eventually, don't you have to play there? Or no, is that a misperception?

I don't know if you have to do anything. But I think, eventually, over time -- so our approach, right or wrong, has been to enter into new geographic territories through an acquisition, a platform that gives us some density. And, for us, in a fragmented space, density could be a 4-store chain that gives us that starting point in which to build out. And historically have been through bolt-on acquisitions, but in more recent times, it's not greenfield. There's an internal kind of discussion and argument around if we can't find that platform opportunity given the fact that we think that we're pretty good operators, should we just go in and start building. So we're inspired by of all people the in and out burger chain on the West Coast that they didn't buy their way into Tucson. They built their way into Tucson. And I think they're up to 5 or 6 in an outs now and in the city. But we certainly are very confident in the operating model, the AUVs that we're enjoying. And we know that because this is a very local business, it's a very convenience-driven business that, given what we're currently doing right now, we can move into a market that we're not in through a greenfield approach. It's just be a -- it will be a slower boat to China.

And I think, Simeon, it's worth noting, we've talked about that it's more of an internal target than anything. 1,000-plus stores. We're at 400 and -- just over 420 locations today. We believe within the 71 existing MSAs, we can get to that 1,000 just by infilling the existing markets, just speaking to the opportunity that we believe we have in front of us.

I want to go back to 1,000 stores before we do talk about what makes this business different. And for those who haven't been through a lane, with some help from management to understand what's set up different? How the length of the in-lane is shaped, the fast, the express lane for members, the width of, I don't know what the -- the rail?

Conveyor..

Yeah. There you go. Even the width of the [ shammy ] that you're customizing most of the time. So just can you talk about some of those technical things in a way, you could say they're overthinking it, but that's the consumer centricity that different about this business.

So I think we all know about the American consumers that we're obsessed with speed and efficiency and, god forbid, any of us have to wait in line for anything and how inpatient we've become. So for us, lines kill, kill lines slow down production. And we're efficiency freaks, right? We're obsessed with looking at every pinch point, every bottleneck. And what can we do to -- we use a lot of music metaphors, rhythm, pace, cadence, tempo, but how we can flow customers through our stores in a seamless way where -- and the American motorist, by the way, is a distracted motorist. And it's a motorist that sometimes can be error prone. And so getting them through quickly and safely is not for the faint of heart. So our businesses are set up where we can wash easily 160 cars per hour, and in some stores, 200 cars per hour. And when you compare that to what the current industry is doing, most car washes at 100 cars per hour, it becomes chaos. It starts to struggle. And the example I give, which dates me and most people don't get is the I Love Lucy scene where she's on the chocolate factory line. And so when you turn up the conveyor, all hell breaks loose, does anyone remember that, I Love Lucy scene?.

Eats a lot of chocolate.

All right. So you can turn up the conveyor, but you know what can hit the fan. The way we've set this thing up through mechanization, lot of automation, technology, specifically with the different brush configuration, the chemistry, water quality and then the speed of our conveyor, and we balance all of those things to be able to deliver a clean car quickly. And then the area where we're able to cut the lines down and get people through even faster is with our RFID technology, which, again, is not proprietary to Mister Carl Wash, but we set up our lanes where going through the Midtown Tunnel license plate recognition. We're still using RFID technology, which you could say is old school. We should probably leap fog into LPR technology, but we want to take another step even further and move beyond that into some object orientation for the machine learning and ultimately move to mobile controls and mobile phone payment, which we think is going to be the future. So our investments in those systems to allow you to drive up and the gate flies open and you go through, we want to get to that midtown tunnel approach where -- that's a bad example because that's still a bottleneck, but where you don't even have to stop, there's no gates. But our customers have really come to enjoy the speed card. And in their minds, it's skipping the line. It's having this express lane. And when we have stores where traditionally, in almost every one of our locations, we have a minimum of 2 lanes that lead into 1. If we have 3 lanes or more, given our unlimited wash club subscription-based model, where 70% of our revenues are subscription, 2/3 of those lanes are typically assigned to members, which gives them that advantage of getting an even quicker.

Jed, back to 1,000 stores. Is there any reason why you can't go past that? And then in terms of pacing, you mentioned it, John, a little, we don't need to, but is there anything about pacing that you would do different?

Yes. Listen, I think the DNA of Mister, we're constantly reassessing and looking for ways where we can become more efficient, we can do more. We've said that the goal is to get to a store per week by the middle of this coming year. Once we get through that, we're going to reassess -- once we get to 1,000, we'll step back, we'll reassess and see what the market looks like and how many more we can add. But it's going to continue to push and continue to grow from there.

Okay. The macro backdrop, the consumer -- sorry, we probably spend more time than you wish talking about this stuff on the last maybe 8 conference calls or if we've had that many, 7? How do you ensure a position the business can grow through periods of discretionary spend slowdown. It's proven fairly resilient this year despite the weakness to what do you attribute that? And you think that remains the case if we need to buckle up?

So I get it. Technically, we are a consumer discretionary services business. And if I'm in the audience, and I'm concerned about some pullback in discretionary spend is a car wash something that people have to have? Or is it something that is kind of a nice add-on to their life? What we see and what we are experiencing is that our business acts almost more like a staple than it does a discretionary. We have -- if I can use the word trained, but our customers have become accustomed to keeping their car clean all the time. It's a very attractive price point. So you can get your car watched for $10 at one of our stores, you can set up for a membership for $19.99, which is a very attractive price point. And if you look at the overall transportation expenditures of the average American, $20 to keep this very valuable asset of ours clean and then as a result, you feel good, is something that most people loath to give up. So we have, with all the knock-on wood in this super high inflationary environment, have not seen any uptick in churn of our membership. There's been a little retail softness, but I think that's being experienced broadly across all sectors. But we think that, that's also temporal. But in the overall scheme of things, and I can only talk about through Q3, our comps are up 5%, which, again, with all the knock-on wood, I think, speaks favorably to the demand for our services, which we have seen be unbelievably resilient.

Just one thing to jump in on there, Simeon, is when you look at the '08, '09 financial crisis, right? And at the time, our business was 15% subscription, the comps, we were down 5% during that time period. The other little asterisk in that is that the business skewed into our clean at that time versus express exterior today, plus it had a Houston skew to the business as well. So I mean one of the parallels that we bat around internally is that there's some similarities between when you looked at makeup and cosmetics and carwash, people like to have their car wash, they're going to pay for that during good times and bad, just like they would with a cosmetic or makeup.

Yes. John, you teased something on the call or 2 ago around a new add-on to the lane. We talked about that since?

No, but I've been asked not to talk about it anymore.

Sure.

So we're not going to talk about it.

Okay.

No joking aside. So we we're an innovative company that has invested heavily in R&D. We have introduced over the course of time some of what we believe to be revolutionary extra services, HotShine, Carnauba Shield, our wheel polish application. We have a 4-step automatic wheel cleaning system, which we're very proud of. That is, again, automated the cleaning of wheels, which is traditionally a very manually intensive, labor-intensive service. So we are -- we have developed a new extra service that is being piloted right now, and we hope to roll that out in '23. And I'm not going to be any more precise other than we hope that it's going to have a lifting value to our revenues and our profitability.

Very nice. Talking about maybe a tougher backdrop, how do you balance managing the P&L of this business, which, I think, often -- the perception is there aren't a lot of levers to manage versus investing for growth. I'll just keep it at that level, open it up.

Yes. So this is a business we have. It's a low variable cost structure. When you look at the variable cost of the business, it's really labor. You got chemicals -- or excuse me, you got chemicals, you got utilities and then credit card swipe. We view labor as more of a step cost where, over time, it's going to step up. But, to your point, we really look at the growth and the margin expansion has come through growth through the top line. We've got us saying internally where we'll say sales is the key role. So growing that top line has proved well. We are balancing that just a little bit and looking where we can leverage some of the other investments that we've made and as we look at the margin opportunities going forward. And here, recently, over the last year, there's really 3 factors that are creating some headwinds. When you look at the investments that we're having to make on a G&A perspective, just public company costs, we've got about $10 million of public company costs that are flowing through the P&L. We have the inflationary pressures on chemicals and utilities and the wage inflation that everybody else has experienced. And then the investments that we're making for future growth as we look at continuing to ramp this pipeline and add greenfield locations, it's taking some investment on the G&A side.

We expect to start to flex that just a little bit as we look ahead here to the future. And Flex and in terms of cost structure or the top line?

Growing so that the G&A as a percentage of revenue and how that's trending a little bit of a step up here recently, and we'd expect to flex that as we look ahead.