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

Thank you very much, everybody. We are so excited to have the team from Mister Car Wash with us. Mister Car Wash has been such an interesting story to get to know, in part because it's become the leading player in an industry that has evolved considerably over the last 20 years. And I've really enjoyed getting to know the leadership team, and I'm sure you'll see why today. To my immediate left is John Lai, who joined Mister Car Wash in 2002 at the age of 4 and became President and CEO in 2012. Do I have that right?

Correct.

And then Jed Gold is to his left, who is the Chief Financial Officer of Mister Car Wash after having a long and distinguished career at several places, including Yum! Brands. So he has a wonderful perspective on not only consumer companies, but also site-based consumer companies.

I want to start our conversation at a very high level. John, you've been part of this industry, the wash industry for a long time. And you've seen it change quite a bit. How -- as it stands today, how do you see it playing out from here in terms of growth rate for both revenue and units after what has been a really good run for the wash industry up until now?

Sure. So welcome, and nice to be here. I want to start with a comment on your stock gain, which is next level. But to answer your question specifically, starting with -- it's a big category. It's a big industry. So we -- 300 million cars in the U.S., rounding up slightly. Huge car park. We believe that there's roughly 13,000, and that's a guestimate, conveyorized car wash units, exterior conveyorized car wash units. So the real question is around TAM and what is the potential for growth. We see a lot of underserved pockets throughout the United States and in the markets that we're in. We have roughly a 20% share in technically about 70 of the MSAs. We cluster them into operating regions of about 50. And in those 50 markets that we're in, we could double our footprint over the next several years. And it's going to take us about 10 years to double our footprint to get to what is today of 500 -- close to a 500 store chain of car washes to 1,000. So we've reset our vision to get to now 1,500 as we look at tangential opportunities to expand, not just in our core, but then in markets that are adjacent as we continue to fan out it's a tremendous upside for us and feels unlimited.

And coming back to the original question, is your view -- yes, there's been a lot of growth in the industry and maybe the industry is leveling off into a more sustainable, albeit maybe slightly slower rate of growth.

Yes. So a lot of conversations around competition and what has happened over the last 5 years and there's been an insane amount of growth, right? So the last 5 years, there's been a number of private equity firms that have entered into the category. A lot of them through the M&A kind of path to try and scale their way, grow their way to a material size. And then in more recent years, a lot of new unit growth, greenfield growth. That has now started to taper off and we're using words like moderate and crest. But we expect this year, 2024, to be the year where things start to flatten out and there will be a de-acceleration, if you will, of new units into 2025, and we expect that to continue and that's a good thing.

Yes. And it's a fascinating industry, not only because they have very colorful characters who operate it. But there are really powerful drivers that are at bay, that are influencing the growth of the wash industry. Throughout the time that we got to know each other, there was a lot of talk about how consumers feel really have an affinity to their vehicle. They want to keep it clean and tidy. Wouldn't you say, though, that there are other factors? The fact that vehicles today are made of composite materials versus rough, more metallurgic materials back in the day where if your car is rusted, it's not going to help to get a Titanium 360 wash. But now, if you have a vehicle made out of composite materials that last for 15 years with the same chassis, you want to make sure keep it clean. Plus global warming is creating havoc on all assets, physical assets and then the rise of ride sharing, these are like the folks who go to the buffet and maybe go a couple of times. But it's really all these three factors that have come together in the last couple of years to create a really interesting backdrop for this industry.

Yes. So I think we're fortunate because the demand for our service has remained omnipresent and consistent. Cars will always get dirty. They'll always need to get clean. And when you look at the average age of a vehicle, which is, I think, now pushing 12 years on the road today, we tend to service that 0 to 12. We're not washing a whole lot of cars that are 17, 18 years old. But those folks like to keep their assets clean. And so to have a business where there's just this recurring kind of nature of they get dirty, they need to be cleaned. And really, why do people clean their car. This is perhaps utilitarian benefit of feeling that your asset is clean, but it's more of a feel-good experience. And for many Americans, their automobile is more than just transportation. There's a symbolic/aspirational element to their cars and to that end, we play directly into that. So having a nice, shiny car is awesome. I was at a SEMA APAC show, which is Automotive Aftermarket Show a number of years ago. And at the time, the big three automobile manufacturers were promoting or using as their showcase cars, these matte finished vehicles, which for a short minute were kind of this trendy cool thing. And I thought, is that perhaps a headwind to our space if people adopt matte finishes and kind of this dull black look as the new cool? That has quickly faded away. And so at the end of the day, shiny objects and shiny vehicles, people naturally gravitate towards. So what we do is we make them shine and we make them pop, and that's what our Titanium service is doing.

Literally inside baseball, they both measure the performance of the washes by whether or not they can see their reflections. And if you had smiles like these two guys, wouldn't you want to see your reflection in the vehicle?

So all joking aside, can you measure the reflective value? There's a tool called the reflectometer where we will shoot a ray of light off of a painted finish and measure the refraction rate. And we're able to actually quantify the level of shine and the depth of shine. But to that end, if I can just do a quick commercial on Titanium.

You do it.

So our Titanium...

Prospective members here.

Our Titanium 360 is not just a 360-degree layer of protection, particularly for the under chassis, which a lot of folks north of the Mason-Dixon line are concerned about rust to their underbody. But more importantly, this depth of shine and the reflective value is absolutely amazing. And the word titanium, just for the record, we launched that pre-Apple's titanium phone. So if there's any concerns about us copycatting, they copycatted us.

Invert, yes.

Yes. But at the end of the day, you can get somebody to try something once with a special offer, but is it going to stick? And do people truly value -- do they see the value? And is it demonstrable? And so what we're seeing today with our Titanium launch and the stickiness of that membership base that is trading up to it is supporting the fact that we're providing real value in that package. And that package for those of you that are familiar with our pricing structure is $39.99 per month and for retail purchase is about $25.

Got you. And we will get more into this, and we'll dive deep into some of the geeking out on washes in a sec. But before we move to more about the Mister Car Wash, I want to make sure we discuss some of the dynamics in the industry because one of the key debate has been how is the competitive landscape rising as consumers. You can see a new wash pop up on a lot of street corners in the United States, which is interesting because these are capital-intensive businesses. They are good unit economic businesses. The way I typically describe the allure of the wash is the incremental profit of adding one car through a wash is really quite compelling. You should see Jed slide up when he talks about it. And perhaps that's why there has been an increase in competition. With that being said, how do you see the competitive landscape playing out over the next few years? Is there going to be a shakeout because of the capital intensity and now some of these folks who thought they could operate and take share are going to reconsider those decisions, and that will provide an opportunity for Mister Car Wash?

Yes. So I would simplify it by saying there's three big buckets as we see it. And in the first two buckets, there's these private equity-backed platforms that have looked at this category and said, hey, fragmented space, primarily mom-and-pop. I mean, with our close to 500 stores, we have less than 5% market share. There's an opportunity for 2 or 3 players to create a super regional or perhaps someday a national brand. And so through acquisitions, through M&A, there was a lot of frothiness and a lot of people leaning in to pay up for businesses that looked attractive. But what many of them underestimated was the capital -- the CapEx requirement to reinvest back in the business, the operating model, the operating infrastructure, the team that's required to actually deliver the service consistently. And so there's a lot of deferred CapEx. There's a lot of folks that have unusually high leverage and a lot of debt service to support. And as a result, they have underinvested and are now struggling quite frankly, and trying to figure out what is their next course. There's another bucket that has also piggybacked that has good operating models, have healthy balance sheets, good management teams, and they're doing quite well, that's the minority. And then there's a third bucket, which is the regional operators that are -- we have the utmost respect and deference for that are really, really good at their craft and have stayed kind of within their capabilities and haven't grown too quickly. And there will always be a place for that regional operator that delivers great service. But what we do really, really well, and we see ourselves as operators, first and foremost, is these very basic fundamentals, which sounds a little bit mundane, but critical to our equation, which is quality, speed, customer service and doing it consistently at scale. And we've been able to deliver that because we're myopically focused on technology, mechanization, automation and being able to deliver that car by leveraging the things that are not manually intensive or labor intensive. And as a result, we've created this expectation and the value proposition to our customers where they know that they can get in and out of our stores in under 5 minutes. And speed has become one of the key points of differentiation where we elevate that and take it to the next level on the customer service side, which is hard to quantify, but one of the things that we do particularly well is create our customers as they're treasured guests that we haven't seen in a long time. And they can feel that warmth, that etiquette, that professionalism that we've been able deliver. And as you become our calling card. And what we hear most often from most of our customers is how do you get your frontline team members to wave and smile and hustle and have a skip in their step? We're quick to say that we don't do it by cracking a whip or put a smile poster in the back room. We treat them well. We pay them well. We train them and we support them and we create a culture where they know that they're super important to the equation. And that sounds a little touchy, feely, but it's absolutely been the key to our success.

So there is a lot to unpack there. Number one, I want to dig into the competitive landscape. It sounds like the thought process right now for the wash industry is that there will be a few leading players that rise to the top. In most cases, they will dominate certain regional or super regional markets. So you'll have mister who is great in Minneapolis, Minnesota, certain parts of Arizona, other big markets, you might have a few other operators who do well.

Right. But there's a race to densify.

Race to densify. And maybe explain why densification...

So this notion of fortressing, right, Domino's famously coined the term, but it's building out this network effect, where we have within a 7.5-minute drive time of wherever you are in the Twin Cities, you can find a Mister Car Wash. And so the value proposition for you as a member of signing up of our $19.99 program or $20.99 or $30.99 program is that wherever you are to get your car wash. That value prop compared to an independent carwash operator that may have 1 or 2 or 3 stores is much greater. Now whether or not you use more than 1 or 2 stores is a whole another matter, but the fact that you have that optionality and that ability to is huge. And we hear that a lot. So Tucson who we're based, we have close to 20 stores. Wherever you go in Tucson, there's a Mister Car Wash. Wherever you go in the Twin Cities, there's a Mister Car Wash.

And -- you go.

Yes. I think, Michael, just to jump in there and put a finer point on this. When we look at our 2.1 existing...

2.1 million.

2.1 million existing members today, over 30% of them will use multiple washes. So that network effect. Obviously, the more densified the market, you see that percentage cross utilization increase and then the lower densified markets, it's not quite as high.

And as one of those 2.1 million members and as kids who do use sports and I'm driving all over the community on the weekend, then I can drop my kids off, go get a wash at the local club, it puts in very real terms benefit from having a network.

So competitive advantage, right? So what is our strength, vis-à-vis, the new guy that opens up across the street, the person that gets there first, and it's not just one player, right? So there will be room for 2 or 3 in any one market. But there will be consolidation. There will be this kind of densification, if you will. And right now, that race to the top 3 in any market is going on throughout the U.S.

And it does seem like the -- having that ability to get in and out of a wash very quickly is key distinct advantage for Mister. If you had to compare yourself to the average player in the industry, how would you characterize or quantify the benefit of Mister Car Wash's throughput in its washes?

So I think the ultimate litmus test is during periods where demand is at an all-time high. So -- and let me pause for a second and take a step back. So because of our Limited Wash Club model, where 70% of our revenues and volume is subscription based, we've actually had a flattening, a smoothing, if you will, of our demand curve where back in the day, it was Saturday, Friday, Sunday, and then kind of a Monday through Thursday in terms of how the peaks and valleys would look. And then within the day, there would be a 10 to 2-ish kind of bell curve. All of that has smoothed out because our Limited Wash Club customers are coming in during some nonpeak periods, and that's made it easier for us to operate. That said, there are still the Saturday at noons when you have a whole lot of retail customers that are coming in and how well do we perform during those peak periods. And I think, again, that's one of the points of differentiation where we could wash easily 150 cars per hour. We have some stores that are pushing the envelope north of 200 cars per hour, which is pretty quick while delivering good quality service. And I use this I Love Lucy example, but the demographics in this audience are too young to remember I Love Lucy, but there's a famous scene where she's working on a chocolate factory...

There's a couple of guys in the back...

The conveyer belt gets turned up. So you can turn up the conveyor belt and then all of a sudden, s*** hits the fan. And so can you -- as you're balancing speed and quality, you can turn up the conveyor, but if your quality starts to diminish because you have less time to wash that and dry that vehicle, customers are very finicky and they're very particular and they will notice if there's water drops on their windshield, their hood, side mirror drift, backs of SUVs. So we have to balance the wash process and have the equipment in place to be able to deliver that quality. But the other points that we use musical terms like tempo and rhythm and pacing and there's a flow.

Conductor.

There's a flow. And our general managers have the conductors of the Philharmonic. But there's a flow to our stores where the American consumer is insanely obsessed about their time, and they are -- we are freakish about waiting in lines. And God forbid, it's like, you're the King of Siam that you have to wait three cars deep, and don't you know who -- this is -- you've got to get through, but we recognize that. So when we look at our stores, and what we've done to increase the throughput, we look at every pinch point, every bottleneck and say, how can we -- where is there friction? And the first point of friction is in the transaction section where oftentimes we have unintended sales kiosks. There's someone that's unfamiliar with the technology on the retail side. On the membership side, we have, on average, three lanes, two lanes are dedicated to membership and other lanes dedicate to retail. But the way we've set up our membership plan, it's -- we call it windows up. Their windows are up. And again, here's another kind of weird commentary on the American state of affairs. People don't want to talk to anybody, right? So they don't want to interact in some cases. So your windows are up, you have an RFID tag and you fly through the store. I say fly, you go through the store very, very quickly. But that all helps you get in and out and on with your day. And if there's any pinch point, it's kind of like the easy pass here. If you're the retail customer that's fumble in a bumble with your credit card, trying to get through the turnstile. And that actually adds an additional why you should get into the membership plan. And if I could just hang on the membership plan value prop for a second. So initially, the model was launched through this lens of you can increase -- you can save money on your third or fourth visit, right, a lot of...

That was the pitch to me.

A lot of people start -- yes.

Spend $10 or get a...

They'll do the calculus and say, hey, if I'm paying $15 for today's car wash, for $5 more you can come in every single day for the rest of the month. And so my second or third visit, third visit is free. But what we found over time is that while there's always this value component to, I'm saving money, it's more about their ability to "skip the line" because you don't want to wait in that long line and that has become really, really powerful. And I think if I could borrow from Walmart, they used to be -- we can save you money, but now they're saving money and save time. And that's really what we're -- this convenience factor, which has been the explosive growth of express exterior car washing and subscription and then keeping your car clean all the time is why we feel, again, very fortunate that we've got this massive -- at the IPO, there was a lot of bankers that were saying, you need to position your company as a subscription company that happens to wash cars. And we're like take it easy, there's still a car washer, but the subscription piece has been absolutely game-changing.

Yes, for sure. I mean also on the IPO, a big part of the story was Mister's ability to build the muscle around opening organic locations. This way you control your own destiny, you get the inlets and outlets that you want. You are able to commit the capital in the way you want. How has this journey of building that organic greenfield muscle been going? And where do you see that from...

Sure. It actually started 25 years ago. So we've grown to almost 500 stores primarily through acquisitions. So the original model, and again, when folks look at this space, fragmented mom-and-pop right for consolidation, it's a roll-up play. Our approach was different, though, because when we went in as operators, we were looking for, and this sounds a little weird, but we call it reverse synergies, where we were looking for best practices. We were also identifying perhaps mistakes that will be made. But over the course of 25 years, we've acquired over 100 companies. And if you think about it, those were 100 different experiments where we were able to see both good things. We've learned from every single business that we've acquired that has been now baked into our operating model, all those good things. But also you know that old adage in sports that you learn more about yourself from a loss than you do from a win?

I know that one.

We've learned a lot about ourselves through some of the things that others have -- other mistakes. We've made our share of mistakes too, but it's all about experimentation, right, and learning from each one of those. So over the course of 100 businesses that we've acquired in 25 years, of learning and figuring it out, we have baked that into our greenfield operating model, and that's why these stores are absolutely crushing it. So the AUVs, which you guys are probably already aware of, north of $2 million a store, close to $1 million in EBITDA, overall margins that are 50%. We get to 3 years of full payback on that $2 million of invested capital. But we are really crushing on the greenfield side to the point where we're almost -- so we've been very acquisitive, but we've pivoted and we like to build. The con to the build is that it just takes longer because it's about a 22- to 24-month cycle to get a store up and off the ground versus you could buy very quickly, but you then need to operate them.

Yes, Michael, let me jump in and just provide a little bit more color there. So when you think about the greenfield program, and it's something that we're really optimistic and excited about. So last year, we built 35 greenfields. In 2022, we did 28. In 2021, we did 17. So it's been this ramping about the time of the IPO, we made some material investments on the G&A front to build out this in-house greenfield development team. They're doing a great job. As we look ahead, we're going to start to leverage some of those investments. We expect this ramp to continue. We've guided to approximately 40. So that flywheel, that momentum and with each one of these greenfields, we learn something. We're able to apply those learnings to where we're becoming just more and more efficient with each one. And as John had highlighted, we're seeing great year 2 cash-on-cash returns of about 45%.

That means maybe two things. One, you will see the benefit of the different vintages of new washes that are coming online, picking up steam, becoming more profitable over time. And two, you, by virtue of learning and getting better, will also be able to refine and optimize the model, which will help.

And another point that I think is a relevant one. When you're looking at this compared to other traditional retailers or restaurants, is the lead time, that cycle time to build these, it's just a little bit longer. So the CapEx that we guide to in 2024, while some of that will go to our 2024 new builds. Some of it also goes to the 2025 and also the 2026 pipeline as well when you think about a roughly 22-month cycle from the time we start site selection until we actually get the location open.

And is there a limit to how many locations you feel comfortable opening in any given year at this point?

Yes. I think the constraints are really going to be around the people side and making sure we're disciplined. And one of the key pieces to this equation is making sure that we've got the team to run and operate these up to the Mister standards. And then, obviously, we have capital constraints, and we want to lean in and take advantage of the white space and the opportunity in front of us, but there's some real capital constraints for any business and making sure we're balancing those two different dynamics.

It's a judgment call. So nobody wants to turn the knob quicker than us. And so back to you if we're -- as we define it in about 50 markets, technically 70, but 50 as we organize them. And our bandwidth today and what we feel is a reasonable rate of growth is 50 stores. That's one store per market per year. That's not enough. So we need to turn up the knob, but we need to grow even faster. But if we're getting over our skis and if we grow too quickly where we can't support it, and to Jed's point, if I can double-click on that, building a store in the 22-month cycle, 24 months in some cases, is one piece of the equation. But getting an operator that can handle 150 cars per hour consistently over the course of 10 hours during the day, you have to be well trained, completely dialed in. And it takes at least a year, if not 2, to be in that position where you can plug into a store and handle it. You thought your job was hard...