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

Great. Thanks, everybody. We're going to wrap up the day today with Mister Car Wash. And we've got John Lai, Chairperson and CEO; and Jed Gold, CFO. Thank you guys so much for joining us. This is a great way to end the day, I think.

So I wanted to talk about the demand environment a little bit. We've seen some -- we've been tracking credit card data for the category, which still holds up incredibly well on a 3-year growth basis and versus a lot of other auto service categories, too. But I'm curious if you've seen any divergence between lower income versus upper customers? What your typical demographic is actually? And then whether there's a big -- any big variance in how you're seeing spending activity?

Yes. So I'll kick it off and then I'll turn it over to Jed to answer the specific questions around demographics and what we're seeing inside of our portfolio. But let me start just on the broadest level. What we love about our business and our service is that everyone loves a clean car. And so we serve multiple demographics across this wide spectrum of the U.S. car park. And when we look at the positioning of our stores, we have beautiful stores that do really, really well in affluent neighborhoods, but we also have stores in more working class neighborhoods that do as well. And so we feel very fortunate that we deliver a service that everyone loves. And at the very core, having a car -- have been in a business where cars continuously get dirty and will always need to be cleaned and then people love the service and they deeply value the fact that the car is clean all the time is a really good space for us to be in. With respect to how our stores have performed, particularly those in the lower demographic profile, Jed, you've analyzed, the FP&A team has looked at that.

We've looked at quite a bit of this. And as John had said, that this is a business that performs well across all income demographics. We've got carwashes in lower income demographics, higher income and everything in between and these stores, the top line continues to comp positively. One of the drivers of that is 70% of the sales are subscription. And as we've said, the subscription part of the business has held together really nicely. We haven't seen an uptick in churn haven't seen our Platinum members trading down into the base package. And the usage of those UWC members has remained relatively consistent. Where you double click on that and you see a little bit of a moderation is on the retail side of the business, about 30% of the sales, and that is concentrated. It's concentrated on the lower income demographic that 150 stores or so that are in the lower quartile of income demographics. They're about 500 basis points lower than the average retail sales for the overall portfolio. So a couple of hypothesis behind that and then I guess the leading hypothesis would be just the softness in the broader macro environment impacting those customers more than other.

Jed, I would say, too, that when we look at that contraction that what we think is temporal contraction in retail volume, it's really more of an effective frequency and a reduction in frequency. And I think there's also -- it's important to note that we have done such a great job of taking our retail customers and converting them into members. And so we're moving this retail customer that is relatively infrequent into a program where they're adopting it as part of their regular purchasing pattern. And we've done such a good job that now we need to focus more on the retail customer acquisition side, which had not been a priority up until recent times. But to your point, I think it was beginning -- kind of in Q2, we started to experience this slowdown in retail, which is a top of the funnel to our member growth has led to a slowdown in our member growth. And so for us now, the focus is, hey, what can we do to drive retail traffic so we can continue this upward trajectory on the membership side.

Got it. And then you talked about how you're not really seeing your platinum-level customers trading down into other levels. And now you've added on the titanium level. So can you talk about that and how that helps you pass through higher cost to the customer as well?

Yes. So we think our pricing strategy is pretty aligned with the value of the service that we're delivering. So we've never been the low-price leader. We believe that we're delivering a premium service that our pricing reflects that. So today, it's a very affordable retail price point of roughly $10 for Express wash or $19.99 for the base Express membership plan or $29.99 for the Platinum Express plan. And to your point, we haven't seen any trade down in membership plans from the premium to the more economical plan. And for us, that's a huge win, right? That shows the stickiness and the loyalty. And quite frankly, how much people value the waxes, the tire protections, the underbody sealants, et cetera. So all the extra services that we provide, people love those extra services. What we hadn't offered though, to your point, was an ultra-premium plan. And so we had erred on the side of a very simple 2 program model. And we knew that we were leaving some money on the table that there was an opportunity for us to offer a premium program. We refer to that as our topside anchor and in early test results we're seeing very favorable adoption of this membership plan. But it's too early for us to share any numbers because we're still in pilot and we want to see how things ultimately settle out. But we're very optimistic that this is going to be accretive to what degree will be determined. But as we shared in our previous conversation, the rollout of this new Titanium 360 extra service is more than just a new product launch. It's actually a reengineering of our entire wash process. So we're taking our rinse improvement system and making it even cleaner. And we're also implementing a blower reconfiguration model. So we're kind of reengineering both how we not just clean the car but rinse the car and then drive the car while applying this extra wax application. And that's a pretty involved process. That's going to take us roughly 18 months of conversion, given the size of our portfolio, which is now north of 430 stores, and we want to do this on a regional basis. So again, it's one where we're very optimistic about the lifting effect that it's going to have to our revenues. And it's going to be, we believe, to be a natural trade-up for any members as well as acting as a lifting effect for our Platinum Program too, but the impact to our financials will -- there will be a lagging effect, and we're kind of staying on software with respect to when we're going to experience that, given the staggered rollout approach that we're taking.

Yes. And just to build on that just a little bit. We highlighted in less than 20 stores, we haven't built anything into the guidance for 2023 for Titanium. But we do believe, to John's point, as we think about this over the longer term, it is going to be accretive and it's going to be a natural tailwind because if you think about we've got to 1.9 million existing UWC members either in that base or Platinum. So in addition to those retail customers that are coming in, they now have 3 different options. We also have those 1.9 million existing customers, UWC customers that now at bats to trade into this higher super premium package.

Got it. Okay. Well, I definitely want to spend at least 5 to 10 minutes on people. I mean I think carwash business is very capital intensive. And I've been fortunate enough to be able to walk through one of your car washes, thankfully when it was turned off. So it's not traditionally thought of as a labor-intensive type of business with these tunnel car washes. But there are a number of personal interactions that happen between the customer and Mister Car Wash employees when they come in. So can you tell me about just how you've prioritized that in your process, how that's differentiated? And then what's happening behind the scenes that the customer doesn't even see you from a people standpoint?

Yes. So let me start by saying it is a low labor model. So we're able to staff a store and wash a whole lot of cars, in some cases, 150 to 200 cars per hour with at the very lowest level 3 people on the clock, but sometimes 5 people on the clock. So there's a whole lot of efficiencies there, but we've been able to do that through leveraging a lot of technologies, mechanization and chemistry and automating almost every aspect of the wash process. But to your question, there's these very key touch points because we are in the customer service business. And so as service providers having highly engaged, motivated and there I say, happy employees on our lots, our customers feel that. And particularly in an environment where oftentimes is a drive-through society that we're in, people's windows are up, and we have 70% of our business is membership. So the membership -- our members don't need to roll down the window. they can zip through the car wash and what they're agreed with is a wave and a smile, so that nonverbal communication, that interaction is actually very, very important because it shows a level of respect and gratitude that oftentimes, you don't experience in most retail environments. And how we're able to deliver that is through some very basic fundamental tenets of taking care of our people. And when we talk about taking care of our people, it starts with wages and offering comprehensive benefits, and then really intense training programs and then career path progression. And when we're -- for us, that's our Mister's hierarchy of needs, On top of that then culturally how we take care of them by treating them well, we think has led to what we consider industry-leading eNPS scores. So employee Net Promoter Scores, which are industry-leading, as I mentioned. And as a result, when you visit Mister Car Wash, you see a skip in people's step, a smile on their face and it doesn't come through having smile posters in the back room or cracking the whip. It comes from treating people with a level of respect, paying them well and treating them well. And so there's that direct link, which a lot of other companies have either are figuring out or figured out, which is when you take care of your team members, they're going to take care of the customers, which will ultimately take care of the shareholders. And we think that, that's a really key contributor to our strong [ AUVs ] and our strong financial performance.

And at the same time, I mean, a lot of companies here at this conference and over the last couple of quarters, excited wages and benefits as a pressure point on margins. And you've made a lot of investments in that, too. So how does that impact your turnover rate, which -- because turnover is obviously really costly for a company as well? And how do you think about the return on investment from a human capital standpoint?

This is where Jed comes in, right? So he and I are the ying and the yang, so I can wax poetic about taking care of people and making them feel good. But Jed's like, well, where's the ROI, right? Where do I see an improvement in productivity and Jed, there's a number of metrics that we use to measure how efficient we are, right? How productive our people are. And through that lens, maybe you can expand upon.

Yes, sure. So I think there's a couple of other ways that we think about this and look at productivity initiatives internally, particularly around labor where when you look at our cost structure, it's more representative of a consumer services company. And so if you look at the store level labor chemicals line on our P&L, about 90% of that is labor and that store-level labor. So we're always looking at ways that we can become more efficient And here recently, we introduced a new store labor optimization model where we've been a little bit more prescriptive in the targeted labor hours per store. And we've seen about a 15% improvement going from 52 store-level labor hours per day to 44 store-level labor hours per day in our Express stores. That's been partially offset by some of the rate pressure lives that you were highlighting, rates in Q4 were up about 4% on a year-over-year basis during the quarter. And then also partially offset by some of the investments that we're making in the talent development with our MIT [ OLP ] program, which is essentially the program that we have in place to develop our frontline team members that are going to move into these greenfield locations that we're building and are going to operate those.

Yes. Jed, I would also add that when you look at the labor market today, at least the way we look at it, we have -- the profile that we're looking to attract is we're looking for people, people. We're looking for folks that have good personalities that have -- are quick to smile, and we can train them on the skills. But we're not the only ones that are looking for those types of folks out there. And so there's competition for that talent. And right now, with the unemployment, which maybe you can expand upon unemployment, right, now because it's a little bit of a head scratcher, I think, for most economists. It's still a very difficult market. And so we're having to pay up for that talent. We're happy to because, again, we see elevated performance and increased productivity. But what we haven't done, we've been very conscientious of not just taking price to offset some of the weight. So for us, it's about how can we wash more cars per labor hour, how can we wash more cars per labor dollar and we're demonstrating that we're able to do that. through resetting our labor model, which by the way, again, I'm not going to say we were running fat, but we were -- we certainly had some wiggle room, particularly in our top quartile stores that -- there's an old saying in car washing that volume cures all ills. So for the big dog stores, they were given a whole lot more leeway than some of the stores on the bottom half of our portfolio. And so we said, hey, guys, everyone needs to chip in right now, this is the time when we need to run efficient across the board. But the one piece that we're not going to sacrifice and Jed touched on it is on the operations leadership our management and training program is a front-end loaded investment. So that shows up as an OpEx expense, right, Jed. But it's front-end loaded. So when we look at our growth opportunity in front of us and our ambitions in this trajectory to be able to build more stores and complemented that with some tuck-in bolt-on acquisitions. We need to have a team to be able to support that. And we're not going to pull back on the throttle even though we feel some pressure right now to continue to expand margins and grow the top line. We know that if we pull back on that investment lever is going to have a negative consequence down the road. So we're committed to that level of capital investment, and we think it's the one area that really differentiates us in the end.

Yes. And there's just one final point on this, right? So net-net, all the investments that we're making, the efficiencies on the labor staffing, what we saw on the quarter was a 200 basis point improvement on a year-over-year basis when you look at store level labor as a percentage of total sales...

So Jed, were you taking a victory lap now on that?

We're going to be happy about that one.

If we can hold the line on labor and this kind of environment, I think, again, that speaks volumes. So we didn't really answer your turnover question. Not that we're dodging it. I mean so turnover has remained relatively constant. And we think we've shown year-over-year improvements in turnover. We look at other metrics, though and one that is not widely accepted as a common KPI, but it's something that's important to us is eNPS. So employee Net Promoter Score, which is the simple question, would you recommend Mister Car Wash is a great place to work? And as basic as that sounds, we score very, very high in those employee surveys. And that's something that we keep a close eye on because I'm going to circle back to happiness. And as corny as that sounds, it's really important to us because happy employees just perform better.

Yes. No, it's great. And it was actually -- it was interesting at lunch. There was a presentation by David Tinsley from the BofA Institute, and he showed a chart of where like generationally, we've lost workers, people just coming out of the workforce in Gen Z, was one of the bigger ones, which is really interesting. So maybe they'll start coming back. They've already moved to new areas and might start finding jobs.

I just read another article where you're happiest in life when you're a baby. And then there's the -- so if you look at a smile, that's the happiness curve in life. And then from your 30s and 40s, you're the least happy. And when you get 50s and 60s, you start getting happier. So that's why I can see some happy people...

Just 37...

Is the young guys that all stressed out. But life is short. So why not enjoy the ride.

Right. All right. Well -- and then I guess my last question on people then is just is that really what holds back your growth from just going through the [indiscernible] capital, finding the right people, staffing your stores, making sure you have a bench of talent for running management in each of these locations.

It's a great question. I mean, the hardest part for us is determining so turning up the knob and scaling this company and accelerating our rate of growth, it's so obvious. We have this leadership position in the space, right? We're #1 in the U.S., but it's still a very relatively small market share that we enjoy. And so there's opportunity for us to continue on this path and continue to grow to get to 1,000 stores is right in front of us. So why don't we just add more stores and do it even more quickly. What we don't want to do is build a house of cards. We don't want to do is scale so quickly that our standards start to wane. And you've seen that perhaps in other sectors and other companies that perhaps there was outside market pressures as I said, grow baby, grow. And for us, while growth is clearly a mandate, we want to do it the right way. And so the cadence that we're on right now, this current path, historically, if you looked in the rearview mirror and said, hey, Mister Car Wash, primarily through acquisitions had grown historically about 40 to 50 stores per year that had been kind of our sweet spot and our comfort level, but we continuously try to push that envelope to see how can we get there quicker because there is a race right now in the United States. This race to who can control and who can have a more meaningful share in each one of the [ MSAs ] and we're feeling that pressure as well. But we don't want to do it at the expense of our standard starting to go the other direction. So for us, to your question, it is all about people at the end of the day. And if they are the most important piece of the equation, we can't just pluck them off of a tree and plug them into a store. They have to be well trained. And I think there's a misconception, and it's something that I learned a long time ago never underestimate the complexity of anyone else's business. And this business is clearly not a push button, send the cars through and they come out clean magically on the other end of the line. It's one that we have a big workforce, 7,000 team members that are really, really critical to our success, and we need to continue to invest in them.

Great. So I want to turn to longer-term investments. You talked about growth and that being a mandate. So how should we think about acquisitions versus greenfields? You've done more acquisitions in the past, but sort of changing over into more of a greenfield expansion model. So just thinking about priorities for future capital, like where does that stand?

So yes, I mean, the path to 430 some-odd stores had been primarily driven through M&A and allowed us to scale up, I say, relatively quickly, relative to 20-year time line, but it got us to this critical mass position. But we also saw the benefit of greenfields roughly 4 to 5 years ago, and some could argue that we were a little late to the dance, but we quickly pivoted and have transitioned our focus to greenfield development. And Jed can speak to the economics. For us, it's the highest return on invested capital is through greenfield and a much greater return profile than M&A today. So we're very, very focused, but we're not the only ones, right? We're very focused on greenfield development. And for us, given just the cash-on-cash returns, the payback periods and how that compares to what people have been paying historically in M&A. Greenfields for us make a ton of sense. I don't know if there's anything else you can add, Jed?

The thing I would add to that is, I mean, as we look at M&A opportunities, it's looking at it through the lens of the opportunity cost of if we put the capital to work on an M&A front, what it's going to take away from greenfields. And so we're seeing a year or 2 cash-on-cash return of just over 50% on our greenfield development. And so the highest and best use of capital right now is those greenfields. Also, I'd put up there, I mean this new initiative that we're working on with Titan, we expect to see a really strong return on that capital that's put to work as well and then continuing to make these OpEx investments in the business as well. And so we're making a little bit more of an investment in 2023 behind marketing than what we had in 2022. We're testing a few different promotions and tactics to try and drive retail volume and trade -- drive trade into the UWC program. But then also, as I touched on earlier, the investments behind MIT, [ OLP, ] those people investments, which are key to supporting the greenfield development and what we have coming down the pipeline. But we can't say enough good things about the greenfield program. We've got over 150 projects that are in the pipeline, somewhere in between site selection and open. It's about an 18-month process to get these stores open. It takes a little bit of time. But we've -- not only we have the 150 stores, we've also got the capital lined up to support this between cash on the balance sheets and then sell leasebacks on properties that we currently own. So it's not as though we're going to have to go out and take additional leverage on to support that pipeline as well.

Yes. I think the cool thing is just the free cash flow from operations is significant enough for us to fund this growth opportunities in front of us. And so we're in a really good position from a balance sheet standpoint.

Great. And I guess property value is getting any more attractive. We actually just had a real estate panel and granted, these are landlords talking about their business. So of course, they think there's tons of demand and you don't have a traditional model where you could just be in any type of shopping center, like you have to have a specific type of a lot. So I'm curious about what current real estate values are looking like and how you approach that?

Yes. So back to -- we're not the only ones that are on a building spree right now, and there's quite a bit of activity in our space. And so demand for good locations is at an all-time high, which as a result is creating some inflationary pressure and competitive pressure on some of these A lots. And if I could emphasize A lot because we're -- we will, in some instances, roll the drums on a B lot, but we're not looking to just build stores indiscriminately just to add stores to our portfolio because there is a direct correlation to location, location, location. And to your comment, for us, there's some unique characteristics about the profile of a location, starting with size, and so we typically need about an acre, but then the ingress and egress and the quality of that site traffic and really the profile of that retail trade area and the blend of rooftops and retail, all those things are taken into consideration. That said, we're somewhat agnostic with respect to demographics because, again, our service appeals to a broad range of the [indiscernible] public. But with respect to land values, which was your question, we are seeing a slight uptick in the price of land, but the economics around just what we're able to generate in year 1, 2 and 3, it's not that meaningful right now.

Got it. I think, traditionally, when you've entered a new market that you've done so through an acquisition and then you kind of build on top of that. But would you -- have you ever or would you ever enter a new market through greenfield exclusively?

Yes. So we have in front of us today, technically, it's about 70-plus MSAs that we're in. But if you cluster them and do it the way we look at it through more of an operational perspective, we're arguably in about 50 markets right now. And in each one of those 50 markets, we have growth opportunities. And quite frankly, we think we can double our footprint in our own backyard. So before we seek new pastures, it would make sense for us to continue to densify fortress and increase our penetration in existing markets before we go out and move into new markets. That said, there are adjacencies where if we're in a market like California, and we're in the high desert just outside of Los Angeles, we see L.A. as an underserved market. And we haven't been able to find an attractive acquisition opportunity in the city of Los Angeles that perhaps our penetration should be through a different path, which is the greenfield development. But it's really important for us to have that infrastructure in place. And so the thing, again, that helps us deliver these outsized returns is that we have a team in place from operations management, facility maintenance, training and HR in market, not in the every tower in our corporate office. And so having that infrastructure, which again, adds to our technically G&A. And so regional...

Our regional expense, which hits in store level labor.