Mister Car Wash, Inc. (NYSE:MCW) Q1 2023 Earnings Call Transcript

Mister Car Wash, Inc. (NYSE:MCW) Q1 2023 Earnings Call Transcript May 2, 2023

Operator: Good afternoon and welcome to Mister Car Wash’s conference call to discuss financial results for the first quarter ended March 31 of 2023. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. Please note this call is being recorded and a reproduction of this call in whole or in part is not permitted without written authorization from the company. Speaking from management on today’s call are Mr. John Lai, Chairperson and Chief Executive Officer; and Mr. Jed Gold, Chief Financial Officer. After John and Jed have made their formal remarks, we will open the call to questions. During this conference call references to non-GAAP financial measures will be made.

A complete reconciliation of these measures to the most comparable GAAP measures have been included in the company’s earnings press release issued earlier today and posted to the Investor Relations section of the company’s website at ir.mistercarwash.com. As a reminder comments made on today’s call may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company’s actual results to differ materially from management’s current expectations. Please be advised that the statements made today are current only as of this call and are based on the company’s present understanding of the market and industry conditions. While the company may choose to update these statements in the future they are under no obligation to do so unless required by applicable law or regulation.

Please review the forward-looking statements disclaimer contained in the company’s latest annual 10-K and 10-Q reports as such factors may be updated from time to time and other filings with the Securities and Exchange Commission. I would now like to turn the call over to Mr. John Lai please go ahead, sir.

John Lai: Good afternoon everyone, and thank you for joining our 2023 Q1 earnings call. The headline for the period is our Unlimited Wash Club program eclipsed the two million member mark. This is a huge milestone for our company and I’d like to give a special thanks to the hardworking Mister team that made this possible. We feel fortunate that nearly 70% of our revenues are subscription-based providing a recurring and predictable revenue stream and consistency to our free cash flow. And while the first quarter retail sales were a little softer than what we would have liked primarily due to weather, the subscription side of our business continue to perform well with strong member retention and new member capture rates. From a labor standpoint, our stores are fully staffed and in good shape.

Wages on a year-over-year basis are up modestly but that’s offset by our reset labor model that’s resulted in improved productivity across almost every store. And on the G&A front given the opportunity to scale our company, we’re playing the long game by making smart investments primarily in people, while responsibly managing through near-term margin expectations. For the quarter, sales grew 3% to $225 million. Adjusted EBITDA came in at $71 million, a 5% year-over-year decline. Comparable store sales were down 1.6% and we opened four new greenfield stores. Outside of the financial numbers, we remain laser-focused on our strategic pillars that will drive growth in the near and long-term. As a reminder our strategic pillars are; number one, expanding our footprint by accelerating our greenfield development and pursuing strategic M&A; number two, implementing our new premium position Titanium 360 retail and UWC offering; number three, improving our marketing and ad spend by focusing on acquiring new retail customers; number four, growing and strengthening our UWC member base; number five, improving the performance of our existing portfolio; and number six, investing in people and building our leadership bench.

We’re making progress in each of these key areas but the one that I’d like to highlight is the launch of our new Titanium 360 product. Early stage results have been encouraging. We currently offer Titanium 360 in around 30 stores across three markets and are fine-tuning our marketing and launch strategies. We’re also taking this opportunity to make material improvements to our rinse and drying systems as part of this rollout. Given the significance of this introduction, we want to take our time and get it right. I’d like to remind everyone that one of the things that gives us a distinct competitive advantage is our vertically integrated chemical program. Titanium 360 like our proprietary HotShine Carnauba Shield and Wheel Polish before it is a truly differentiated extra service that helps us stand out for many of the off-the-shelf products that are out there.

What’s truly remarkable about this game-changing new offering is the level of shine and protection it provides. And what’s most important is that this gives us the opportunity to introduce a new premium unlimited wash plan, which we feel confident will drive average revenue per member over time. Now we know that many of you are chopping at the bit to model this out. We’re not going to provide any more details, because we’re still tweaking certain elements of our launch strategy and it would be irresponsible for us to throw out numbers until we have more data to project the uplift over time. We ask that everyone have some patience with us with more to come. Finally, we continue to build a world-class team and we’re thrilled to publicly announce the appointment of Mary Porter as our new Chief People Officer.

Mary brings over 30 years of experience from Nordstrom and her background is a perfect fit to lead our people-related initiatives. I will now turn the call over to Jed to provide more commentary around our financial results for the quarter.

Jed Gold: Thank you, John, and good afternoon, everyone. We knew the first quarter was likely to be our most challenging comparison of the year. Last year’s first quarter benefited from a strong macro backdrop, favorable weather conditions and lower store labor costs. The trends heading into this year’s first quarter were obviously very different and we knew that growing the top and bottom line was going to be difficult. Embedded in the full year guidance that we previously provided was the assumption that first half comparable store sales could be flat to plus or minus or a point or two while the headwinds from weather did impact the first quarter more than expected, our results were still within the range of expectations. In the first quarter, total net revenue increased 3% and comparable store sales decreased 1.6%.

Setting the difficult lap aside on a two-year stack basis, comparable store sales increased 9.2%. As John mentioned, we don’t often talk in much detail about the weather, because it’s simply not a significant swing factor in most quarters. But this was a quarter where it was simply too big to ignore. Many of our markets received excessive amounts of rain and rain hurts our business, particularly on the retail side. In total, we estimate the weather negatively impacted the first quarter comparable store sales by approximately 250 to 300 basis points. Our subscription business remained strong and steady in the quarter. UWC sales represented 69% of the total wash sales and we added 122,000 net members in the first quarter. On a year-over-year basis, the number of UWC members increased 12.6% and we finished the quarter with more than two million members.

Over the course of the past three years we’ve added one million members and doubled the size of this program. This is a significant milestone for our company. Once again we did not see a meaningful change from our historical churn rates and we did not see club members trading down from the premium package to the base package in any meaningful way. On the development side, during the first quarter, we opened four new greenfield locations and this was in line with our expectations. The performance of our greenfields remains strong ramping toward our mature Express Exterior average unit volumes of approximately $2.1 million and four-wall EBITDA margins of 45% to 50% in under three years. On the expense side of the business, we continued to experience cost headwinds and inflationary pressures.

Including stock-based compensation and as a percentage of revenue, labor and chemicals decreased 40 basis points to 28.7%. Other store operating expense increased 410 basis points to 39.6%, and G&A expense increased 10 basis points to 9.2%. The labor and chemicals line primarily benefited from better labor scheduling and optimizing regional labor infrastructure. Other store operating expenses increased primarily from higher rents utility rates and maintenance service costs. We have 40 more car wash leases compared to the same time last year due to additional sale leasebacks completed during the last year. As a result, cash rent expense increased 13% to $24 million for the quarter. G&A expenses were relatively flat and reflect both continued investments to support growth in areas such as construction and development and some leverage against public company costs and other previous investments.

During the first quarter, interest expense increased to $18 million from $8 million last year due to higher interest rates and the expiration of our interest rate hedge last quarter. Our GAAP reported effective tax rate for the first quarter was 24.1% compared to 18.9% for the first quarter of 2022. The increase was primarily due to a smaller benefit related to the employee stock options exercised this year compared to last year. Adjusted net income and adjusted net income per diluted share which adds back stock-based compensation and certain non-core operating expenses were $27 million and $0.08 respectively in the quarter. First quarter adjusted EBITDA was $71 million down 5.2% from the first quarter last year, but up sequentially 7.2%. Adjusted EBITDA margins were down on a year-over-year basis, but increased 50 basis points sequentially from Q4 2022 to 31.4%.

Moving on to some balance sheet and cash flow highlights. At the end of the first quarter, cash and cash equivalents were approximately $69.9 million and outstanding long-term debt was $896 million. Importantly, our balance sheet remains strong and we continue to self-fund our growth and expansion. For the quarter, net cash provided by operating activities was $67 million and gross capital expenditures were $72 million. We completed two sale-leaseback transactions for aggregate proceeds of $9.2 million in the first quarter. Our guidance for the full year 2023 is unchanged. We are still expecting net revenues of $925 million to $960 million. Comparable store sales growth of 0% to 3%, adjusted net income of $100 million to $115 million and adjusted EBITDA of $277 million to $297 million.

As a reminder, our guidance does not include any benefit from the new Titanium 360 offering, while we do expect the new offering to be accretive to our margins and earnings over time, it’s still too early to build anything into the model at this point. We remain comfortable with our new store target of approximately 35 greenfields in 2023 with roughly 40% of the openings in the first half and 60% in the second half. A couple of other quick callouts around 2023 guidance. Our interest expense assumption remains $73 million and we are still projecting sale-leaseback proceeds of between $110 million to $130 million. Between the sale leasebacks executed last year and the expected sale leasebacks to be completed this year along with rent escalators, we continue to expect 2023 cash rent expense to increase $12 million to approximately $100 million.

In the second quarter thus far, we have closed on 13 sale-leaseback locations and expect to close on more before the end of the quarter. As a result we expect second quarter rent expense to be up approximately $1 million from the first quarter. This will impact our other store operating expense line. Capital expenditures are still expected to be $220 million to $270 million and given the longer lead times to open new stores this includes expenditures for planned greenfield openings in 2023 and 2024 as well as some deferred capital projects in 2022. In addition to rolling out our new Titanium 360 offering, we are making significant improvements to our rinse drying and TDS Water Solutions systems throughout the majority of our stores. The full implementation and reconfiguring process across the entire store base is expected to run through the end of next year.

In closing, we feel good about the progress we are making against our strategic initiatives but recognize there is still a lot of work to be done and the macro environment is likely to remain challenging for the foreseeable future. I want to thank the entire Mister Car Wash team for their discipline and dedication to our customers and the success of our business. With that we’re happy to take your questions.

Q&A Session

Operator: We will now begin the question-and-answer session. And the first question will come from Michael Lasser with UBS. Please go ahead.

Michael Lasser: Good evening. Thanks a lot for taking my question. Given the shortfall in the retail side in the first quarter, did you make any changes to your internal assumptions for the rest of the year? What’s going to drive an improvement in the business? Is it just the weather getting more favorable?

Jed Gold: Yes, Michael this is Jed. First of all good afternoon, and good to hear from you. So as we look at the balance of the year, so the weather obviously, the factor in the – we view that as transitory. And there was a meaningful impact as we look at Q1. So as that adverse weather rolls off and what we’re seeing in April is these April trends have gone on an overall comp basis. They are positive. So we have seen a little bit of a normalization in the overall comp, which gives us some comfort as we look at the balance of the year and being able to come into and hit guidance.

John Lai: Hey, Michael, this is John. The only thing I’d add is I can’t see it getting any wetter than it did in Q1. So we had an unusually wet first quarter the country did, particularly in California but other states like Michigan, Salt Lake City, Boise Idaho, if I could use the term perfect storm but it was one of the wettest years on record and it had an impact on our business. So over time though we believe weather normalizes and we should get back to regular business.

Jed Gold: Yes. And Michael just one other thing I would jump in and add is when you look at Q1 while it was impacted by the weather, what we had talked about on the last call is first half being at the low end of the range, second half being toward the high end of the range, due to the difficult comparable that we have. In Q1, we were at the low end of that range.

John Lai: Michael, we also internally have a saying that we never use weather as an excuse for missing budget. Although, this quarter we’ve given ourselves a little bit of a buy on that one because when it’s raining out people aren’t washing their car.

Michael Lasser: Makes sense. My follow-up question is understanding you don’t want to quantify the impact from the Titanium program. What have you already tweaked in a program as a result of what you’ve learned so far? And once you get the program to the state of where you want it to be, how fast will you be able to deploy it across the entire chain?

John Lai: Hey, Michael, so we are still tweaking certain elements of our marketing and launch strategy tactics. And the 30-odd stores that we have them in right now, we’re seeing some early-stage favorable results. Again, we’re not in a position to share any specifics around how – what the performance looks like other than to say, it’s exceeding our expectations and we’re very pleased. But at the very core, there’s things around pricing and there’s a little bit of an art to ensuring that we’re positioned this thing correctly in the quest of trying to make it as attractive to as many people as possible, while maximizing revenue and trying to strike that right balance. And then the only other piece that I think we’re still fine-tuning is our approach in articulating to existing members.

And we have a model that is designed around speed, where customers literally will zip through our stores with their windows up and they become so accustomed to not even interacting in some cases with our team members because we’ve made it so convenient getting them to stop and pause and introduce the service to them. What we’re working through different approaches to where we don’t impede their experience but make them aware.

Michael Lasser: Okay. Thank you very much.

Operator: The next question will come from Kate McShane with Goldman Sachs. Please go ahead.

Kate McShane: Hi. Good afternoon. Thanks for taking our question. We just had two questions, one regarding the retail markets where maybe you didn’t see as high a rainfall how they trended versus maybe the company average. And we’re just wondering since the weather was pretty adverse in the West. Just was wondering if that’s impacted or delayed your greenfield projects at all or pushed it out a little bit at all?

Jed Gold: Yes, Kate, I’ll jump in. I’ll take the first part of the question. So when we look at the markets where — and there were a small handful particularly when you look in the Southeast, in Florida. When you look at the number of days was precipitation this year versus the number of days with precipitation last year. And keep in mind, it’s not just the number of days with precipitation. It’s just the threat of rain. It has an impact particularly, on the retail side of the business. So Orlando, for example, we saw the number of days with precipitation. It was favorable 44% this year compared to last year, and comp store sales were up double digit in that particular market. So in a handful of markets in the majority of the markets where we saw, favorable weather impact we saw a high correlation with favorable comps as well.

John Lai: Yes. And I’ll take the second part. So with respect to any delays in greenfield, I don’t think it’s going to have an effect. We are still on track to hit the 35 that we’re projecting to do this year, and we don’t see the weather slowing us down.

Kate McShane: Thank you.

Operator: The next question will come from Peter Keith with Piper Sandler. Please go ahead.

Peter Keith: Hi. Thanks. Good morning, everyone. A bit of a short-term question, but I think we go back a year ago was when you first started to see some of the retail weakness perhaps in April of 2022. So, it sounds like April is getting better. You get some weather noise in there. Does it feel like as you lap these easier retail compares that you’re starting to see some improvement or stabilization on the retail side of the house.

Jed Gold: Yes. So, as we look at April in particular, on the retail side and then Peter, you’re right, that the lap does get just a little bit easier as we move into the second quarter. We are seeing those April retail trends moderate to be more in line, with historic averages largely as the weather improves and benefit there.

Peter Keith: Okay. Great. Good to hear. And then, I wanted to clarify on the Titanium 360 rollout, Jed it was just right at the end of the script. Did it — I think you said, you’re going to finish it by the end of next year. Or are you still sticking to the midpoint of next year, just if it is ended next year maybe it’s going to pushed out a little longer.

John Lai: Yes. So, you’re actually poking both Jed and I simultaneously, with that question because my belief is that, we can get this thing all wrapped up and launched by the middle of next year. And Jed being the conservative CFO that he is, wants to give us a little bit of wiggle room and has suggested that maybe we put in just a little bit of cushion. So, we’re pushing the internal team as hard as we can. We don’t want to rush it. And again, to Jed’s earlier comment, that this is a material transformation of our entire rinsing and drying system, coupled with the new product launch, coupled with new menu structure and pricing. So to that end, we’re going to — as we’ve stated on multiple occasions, we’re going to do it right and take our time. But there’s nobody that’s more anxious to get this in place. Our stores are chopping, at the bit. But to get this in place and then see what we hope to be this lift revenues over time than this management team. So…

Jed Gold: Keep in mind Peter, as we think about the rollout, as we’ve gone in this early, days we continue to learn as we go into this. And we’re going to leverage the maintenance teams that are going to be there on the ground not only implementing Titan, but also we’ve talked about the rent improvement technology, blower configuration just optimizing the overall car wash experience at each of these locations. So — you don’t know, what you don’t know. And so while we’re pushing the internal team as hard as we can, we want to make sure we’re not getting ahead of our SKUs.

Peter Keith: Okay. Yes, appreciate the conservatism and certainly sounds like an exciting change. So, thank you very much,

Operator: Your next question will come from Randy Konik with Jefferies. Please go ahead.

Randy Konik: Thanks, guys. I guess two questions. My first one, I guess I just want to understand differences or changes that you’ve seen or expect to see in the deal environment, as interest rates have gone up. I’m sure there’s more sellers out there and so on and so forth. So I’m just curious and just give us that perspective, on how you think the deal environment really kind of morphs over the next 12 to 24 months. That would be super helpful to start. Thanks, guys.

John Lai: HI, Randy, so sure the interest rate environment I think is going to have a little bit of a headwind, but I think there’s other forces at play that are also driving what I’m seeing as kind of a cooling effect on multiples. Right now, we’re kind of — the market, I would say, on average, is in the low double-digit range for most assets. And I think more folks are interested in quality right now. And, kind of, underscoring their approach to looking at real EBITDA versus EBITDA with a lot of adjustments. So the folks that were more interested in scaling up and establishing their position early in the market we’re leaning in. But I think rationality has set in now and that’s a good thing.

Randy Konik: Got it. And then, Jed, I think you gave us some good perspective on the changes in comp in the unaffected weather market, I believe, Orlando of double digit. Can you give us a similar perspective on how a market like that performed from a new member growth perspective, because you’ve shown nice strength in that metric two quarter — second quarter in a row, it was up 14% I think first quarter — up 13% in fourth quarter and up 13% in this quarter. So I just want to get some perspective on kind of balancing out in those non-effective markets how that membership growth continues to be robust or more robust than the corporate average?

Jed Gold: Yes, Randy. So, I mean, the top of the funnel is that retail volume, as we’ve talked about. And so, that retail customer tends to be more sensitive. What we’re seeing is they’re more sensitive to the macro headwinds. They’re more sensitive to when there’s any type of weather across any market. And so, when you look at how that impacts Orlando specifically. First of all, when you look at overall UWC sales, it’s held together very, very nicely. Like, we’ve talked about, we haven’t seen an uptick in churn. We haven’t seen members trading down. I think that’s an important piece. And that’s across all markets, both the markets he had weather and those that didn’t. But when you look at a market like Orlando that had positive retail volume, we saw UWC sales up there were up double digit as well, being fueled by that increased retail volume.

So on the other end of the spectrum, in California, for example, Modesto Bakersfield the San Joaquin Valley. California as a whole was about 170 basis point headwind to the overall comp alone. So — and UWC volume there, or UWC sales in those particular markets were impacted by the lack of retail volume that was coming through due to the weather. We expect that — and we expect that to come back as the weather improves there.

Randy Konik: Super helpful. Thanks, guys.

Operator: Your next question will come from Simeon Gutman with Morgan Stanley. Please, go ahead.

Simeon Gutman: Hey, guys. I’m going to ask two. Hopefully, it’s not too noisy. First, just a follow-up, Jed, I think you said it twice, you said churn, just to clarify, that means the — I guess, the number of additions and subtractions overall hasn’t changed, or is it that maybe additions picked up and subtraction hasn’t. Like, what was the mechanic of churn basically staying the same to see if the complexion is different? And the second question is, any updated thoughts on how membership may evolve in a tougher backdrop, recessionary backdrop. I know it’s a tough question to answer, but curious if you’ve kind of done any more thinking on it. Thank you.

John Lai: So the first question. The second question was, how will subscription be impacted in a high inflationary environment. Maybe I’ll start with the second one first. And I think one of the neat things we see about our membership is one that is extremely affordable, $19.99 and $29.99, that’s within reach of almost every consumer out there. And with respect to their overall transportation budget, it is a really tiny fraction of their total cost of getting from point A to point B. And for all the things that you spend on getting from point A to point B, it’s the one feel good in that expenditure bucket. So to that end I think, it’s a very fair question, one that I think a lot of people are wondering out loud in a — and let’s just say, if there’s a recession that’s looming, will people start cutting back on discretionary subscriptions, a carwash subscription.

The fact that our churn has remained flat throughout this last 12-month period I think speaks volumes to the stickiness and the — again the loyalty that we’ve engendered and how much people have valued it. So with all the knock on wood, Simeon, we’re hoping that, with all the different memberships that folks are subscribing to right now, we believe that the car wash is one that is in their top quartile of the ones they value the most and that is going to hold steady.

Jed Gold: And then, Simeon, just to break down that churn rate just a little bit further. So the way we think about churn it represents the percentage of the members who were active at the beginning of the month and then those that were fell off by the end of the month. And that churn rate during the quarter is in line with what we have historically seen. To John’s point, we didn’t see an up-tick. I mean as we talk about UWC as a whole adding 122,000 UWC members with the macro headwinds and then the retail traffic impacted the way it was. I think overall, we’re — we always want to see more growth there in the UWC membership, but overall, we’re pleased with how UWC has held together. And particularly we’re seeing a slight up-tick in capture rates as the team becomes just that much more focused and educating the consumer on UWC and the benefits of the program but then also, the price differential between retail and UWC helps intense customers to trade into that UWC program.

John Lai: Yeah. Simeon the only thing I’d add is that internally we say, thank God for UWC and thank God our UWC member base has remained so loyal and sticky, because I can only imagine had we not had this program in place and it wasn’t close to 70% of our revenues. And let’s just say, worst case scenario, we did see an up-tick in cancellations. It would be a whole lot different story, but we’re not. So we’re in a really, really good spot. And we’re very grateful to have this program and for it to be central to our business model.

Simeon Gutman: Thank you. Thanks. Good luck. Thanks for the color.

Operator: Your next question will come from David Bellinger with ROTH. Please go ahead.

David Bellinger: Hey guys. Thanks for the question. Another follow-up on the churn levels and you mentioned no real change there and that’s been steady for some time. But if you peel that back and you look at call it voluntary churn versus involuntary churn and maybe through some type of credit card expirations. Just anything like that you can expand upon as a read-through to your core customers. Is anything going on under the surface there?

John Lai: No, there hasn’t been any changes. As we’ve shared previously, roughly half of our churn comes from credit card declines. We have very little control over that. But we do know that once a customer, member I should say, oftentimes when a member cancels they will get their house in order if you will and come back into the program. And we have this beautiful trend where 30% of our former members re-sign up and part of that is due to financial kind of hiccup in their lives and/or they’re taking a temporary hiatus going on a long vacation. But the fact that they come back there’s a boomerang effect. And that’s really neat. But we dissect the other reasons why people churn and the opportunities that we have being more proactive on the engagement front which has been a real big initiative for us internally, is how can we get out in front of folks where their utilization of our program is starting to tail off.

And again we’re still working on fine-tuning that business model if you will, because we’re not quite there yet but we have the pipes in place to do it. And now we’re in the throes of figuring out how to get that Peloton user that is now down to one-times per month back on their bike two times a month or three.

David Bellinger: That’s helpful. Appreciate it, John. And just my follow-up on the reconfiguring the rinse and wash systems with titanium. So once those are fully complete, should we expect your stores to handle some kind of a different level of volume on a per unit basis? Is there some kind of throughput implication once you finally get through tweaking the store footprint?

John Lai: No. No throughput implications. It’s an interesting question because the way we’re set up to maximize throughput we’re running very highline speeds right now. And we do process flow optimization have created this beautiful flow through all of our stores where people can literally get in and out in five minutes. So we’ve de-bottlenecked operationally our stores and that’s created an unbelievably easy experience for our customers. So from a throughput standpoint we feel really good about where we sit today. But the real objective here is to move people into more profitable premium packages but do it in a more natural way and have them trade up because the value is going to be intense.

David Bellinger: Great. Thank you.

Operator: Next question will come from Justin Kleber with Baird. Please go ahead.

Justin Kleber: Hey, good afternoon guys. Thanks for taking the questions. I wanted to follow-up just first on one of the prior questions as it relates to the funding environment. But thinking about it from a greenfield perspective, are you seeing any of your competitors pull back on greenfield openings or any change just in the pace of new builds as the cost of capital has risen pretty dramatically here in the past year or so?

John Lai: So, I’ll kick it off and then Jed, you can talk about the kind of the financial environment. But it seems like almost everyone is pushing a density strategy right now and attempting to build up their network of stores. But as the cost of capital goes up, I think folks are having to revisit how much cash they actually have to fund future growth. And there’s an upward limit just in terms of if it’s funding from free cash flow through operations what your high watermark capacity can be. And so to that end I think that there’s a number of platforms out there that had very aspirational — vision to aspirationally move into a whole lot of new markets. And I think there’s a lot of folks that are just having to revisit how expansive they truly can be. And a lot of that’s driven by — to your question the current funding environment, which has gotten much tighter and much more expensive.

Jed Gold: And Justin just a little bit more to add to that is I mean first of all, not all competitors are equal. I think access to capital looks different for different competitors in different markets. And keep in mind it’s about an 18-month build-out for these greenfield locations. And so what we’re seeing is we’re committing capital to these greenfields. We’re in a fortunate position where we have been one of the larger players in the space having the free cash flow that’s generated that gives us flexibility that perhaps others may not have just from the sheer cash flow that’s being generated from this business due to the scale that we have.

Justin Kleber: Got it. Yes. That makes sense. An unrelated follow-up just on Titanium and we noticed you were offering one month of Titanium for no additional cost if you’re an existing member. Is that one of these marketing elements you referenced you’re tweaking, or is that tactic being deployed across all stores where the service is launched just to incentivize your existing members to trade up?

John Lai: Yes, that was a test and that’s being tested against the control as we speak and we’re currently assessing whether or not that makes sense going forward.

Justin Kleber: Got it, okay. Thanks guys. Best of luck.

Operator: Your next question will come from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull: Thanks. Good afternoon guys. I had just a follow-up to that prior question. John are you seeing any of the markets that Mister competes within that could be saturated soon based on just competitor development?

John Lai: Yes. No, I still think the industry has a really long runway from a growth standpoint and we’re not anywhere near in apex where things are going to start to mature and we’re starting to duke it out for share. That said, there’s always a couple of exceptions in any pile. But for the most part, we think just looking at the TAM of the space and what the total white space potential can be that we’re kind of in the middle innings and that we have another call it 8,000 to 10,000 more car washes that the US car park can support. And so that’s what’s driving this unit level expansion. If the question is centered around are we seeing any impact with this elevated level of building in our existing markets in our backyard, I think if anything as the intensity has picked up, where we are the market leader, we may see a temporary impact to one or two of our stores but we recover quite nicely because at the end of the day, we think that the operator that delivers the most superior customer experience is going to win.

And that’s kind of what we’ve been built on focusing on all the fundamentals quality, speed, customer service. I can draw on and on about clean dry and shiny. But at the end of the day if you’re not delivering those basics you can throw up a whole bunch of units. But I think in the end there’s going to be not a day of reckoning here, but ultimately, all platforms will be evaluated by the — underlying health of their business will be on comp store sales, right? So, let’s see how everyone fares year three, year four in their maturation curve. And what do those AUVs look like? Because there are some folks that are more interested in just an aggregate unit number. We’re more focused on quality right and building really beautiful stores that are set up for super high volume and they’re going to reflect our brand standards in good locations.

Chris O’Cull: Okay. Have you guys estimated any kind of impact the competition may be having on retail sales in some of your markets?

Jed Gold: Yeah. I mean Chris, as we’ve looked at this from a competitive perspective, as John had said, not all markets, not all competitors are and the impact are the same. What we see is just as John had highlighted that the markets where we have more store saturation more of a market share. The impact is short-lived. And then perhaps in a handful of markets where we don’t have as big of a store presence that that impact is a little bit measured. But that’s really as we’ve looked at that there’s really one market that we can point to. And it’s one competitor that we could point to without giving names that has — we’ve seen a sustained impact from.

John Lai: Chris, can I give you just — Chris I give you a personal anecdote. This one resonates with me anyway. But I was taking a drive with my wife the other evening. And here in our own backyard in Tucson there was a competitive carwash sign that was going up. And she looked at me and goes are you aware of this? Like I was asleep at the switch or something. I’m like yes, Honey I’m aware of this and they will remain anonymous out of respect for our competitors. And she goes, why would anybody ever want to go wash there when they only have one or two stores and you guys have 20 stores in this market. So wherever I go in Tucson, I can get my car wash in any Mister. How are they going to be able to compete? And I said “Honey that’s a great question.” Maybe I’ll bring that up when Chris asked the question during our catch you Chris.

But so back to market density and the whole notion around fortressing really at the core that is our central strategy and we are committed to doubling down and taking what is a really strong footprint. We’re the market leader in almost every market with a few exceptions and increase in that presence so taking our 20% share to 50% share. And again, there’s no hubris here. We’re not going to own any market. Nobody, no one player ever will. There’s always going to be room for one or 2 if not three good players in every NSA and we’re going to fight for our share.

Chris O’Cull: Thanks. That’s helpful. And then just one last one. I was just curious are you able to choose sites or maybe even change the design of some of the new greenfield locations. So they have the potential to come out of the gate with much higher UWC memberships than the typical 5000 members you see?

John Lai: Yeah. That’s a great question. And so from a — I guess technically how we’re loading vehicles today, we have three unintended payment stations and the design on the front end is set up where two of those lanes are dedicated to our membership and one lane is to retail. But when you first launch a store, it’s actually the opposite where 80% of your business is retail and so you’re forcing almost everyone into that retail lane and that’s — we’re not doing that just to make it less enjoyable for them because we open up all lanes to get them in. But from the very get-go, 66% of our lane assignments are for membership again, with a focus on prioritizing their experience again not to screw the retail guy but to really make that UWC person feel very special.

Chris O’Cull: Great. Thanks.

Operator: The next question will come from Liz Suzuki with Bank of America. Please go ahead.

Liz Suzuki: Great. Thank you. So just a question on the store operating expense. You gave some helpful color on the impact of higher rent. And then just with regard to utility rates and maintenance service costs, should we expect those costs to be ongoing, or how are you budgeting for those costs going forward?

Jed Gold : Yes, Lisa, it’s a good question. So the utilities maintenance services, as you break that down, I mean, it is a byproduct of the inflationary environment, while we have seen it moderate just a little bit from where we were a year ago. We do continue to expect some pressure, but coming down ever so that pressure continuing to lessen as we think about the second half of the year. But keep in mind, as you look at maintenance services and utilities as a percentage of that overall other operating store expense, it makes up a small amount. The rent is the bigger piece there.

Liz Suzuki : Got it. And then just on the sale-leaseback strategy, and now you’re paying more in rent. How should we think about what your comp leverage point is? And then like what level of comp growth do you need to reach in order to leverage your operating expenses?

Jed Gold : Yes. Just one clarification there. The increased rent, it’s primarily driven by the fact that we have more sale leasebacks not because we’ve seen pressure on the cap rates. Where we have seen some pressure, it’s not as meaningful as the fact that we’ve got 40 more car wash leases this year compared to last year. So it’s the number of leases not the incremental cap rate. We have seen them widen, call it 75 basis points from when we were at our best, or the market was at its best about just over a year ago. But that’s not the meaningful driver of the rent increase.

Liz Suzuki : Great. Thank you.

Operator: Our next question will come from Simeon Seidel with BMO Capital Markets. Please go ahead.

Garrett Klingshirn : Hi. This is Garrett Klingshirn on for Simeon. Thanks for taking our question. Most of my questions have been asked and answered, but I do have a few follow-ups if you guys don’t mind. I guess, first thing first and John you kind of touched on this a little earlier, but the new greenfields are obviously very heavy retail focused. I guess, over the last year out of the greenfield units that have opened, has there kind of been a slower ramp to getting to the normalized unit economics? And how do you kind of think about that within the broader context of continuing the greenfield strategy of prioritizing those and keeping on that cadence of 30 to 40 openings or so a year?

John Lai : No. So, short answer to your question is we are very, very happy with how our new stores are opening. And I’ll just say that they’re opening with strength and that in aggregate, we’re very pleased and they are exceeding our expectations. So that is further emboldening us to continue to just double down and see what we can do to accelerate the pace of new store openings. And for us it’s always a little bit of a juggling act, because we want to push the envelope and grow at a quicker rate. But at the same time back to my comment about quality, we don’t want to grow too quickly where either we overheat or we build a house of cards. And really ultimately all of that manifests in the customer experience. And so if we throw up units and then they’re not executing to the degree that we expect them to.

Everything kind of gets watered down over time. So we’re trying to continuously recalibrate that rate of growth and grow at a quicker clip. And I think, that’s for any growth company that is scaling very quickly it’s arguably one of the most challenging things from a management standpoint is how fast is too fast or not fast enough. So right now our goal is to add 35 stores this year. If we can eclipse that that would be awesome but 35 would be a great number for us. And then the path is to get to a store a month or maybe a store week.

Garrett Klingshirn: Okay. That’s great. And I guess one follow-up, if don’t mind just thinking more kind of on the cost side. The control you’ve seen in the last few quarters on kind of labor and chemical side has been really impressive and you guys have kind of highlighted the scheduling efficiencies as well the vertical integration benefits in the chemical side. I’m just curious, how can — are there further opportunities there? Do you guys see the work you’ve done to this point and you’re happy with that and we’re going to lap that here maybe in a few quarters, or is there — I’m sure you guys are always tweaking and looking for areas to improve. Is there anything there we should keep in mind?

Jed Gold: I mean, Garrett this is one of those things that is what we’ve built into the guidance is I mean, basically what we’ve already locked in and realized from a — so having said that, we’re always going to look for opportunities to become more efficient, how can we wash more cars with less labor but not compromise on the consumer experience. And that’s always the tight rope that we’re having to walk as we think about cost containment and management and making sure that we continue to provide a superior customer experience.

John Lai: Yes. Well said, Jed. I think when we look at I’m surprised there was no margin contraction questions and margin expansion questions, but our margins have been driven by our top line and when we look at labor a lot of folks will look at labor through a cost lens. We look at it through a productivity lens and an engagement lens. And so again, we’re happy to pay people more and offer them more comprehensive benefits, but then treat them well. And as we do that we’re washing more cars with less people and delivering an exceptional experience. So that’s been a winning formula for us and we’re committed to that. And so we’ve proven out that you can also pay people well and deliver outsized return for our shareholders over time.

Garrett Klingshirn: Appreciate that guys. Thank you so much for taking our questions.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. John Lai for any closing remarks. Please go ahead sir.

John Lai: Okay. Well, thanks everyone for joining the call. This was a tougher quarter for us to report on. But as we stated in our opening comments we expect the weather to normalize and we are extremely optimistic about the future of Mister Car Wash, and where we sit. I want to give a big shout out to all of our team members, who are working their tails off and again delivering an exceptional customer experience. We feel very fortunate as an organization to be in a leadership position, with a long history of operational excellence. We’ve got amazingly strong level economics and most importantly a culture that values people. So, the opportunity in front of us to continue to scale our company, and grow to new heights is tangible and real and in our sight lines and we are very optimistic about that future. Thank you guys.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.