Mister Car Wash, Inc. (NYSE:MCW) Q4 2022 Earnings Call Transcript

Mister Car Wash, Inc. (NYSE:MCW) Q4 2022 Earnings Call Transcript February 26, 2023

Operator: Good afternoon and welcome to Mister Car Wash’s Conference Call to discuss Financial Results for the Fourth Quarter and Fiscal Year 2022. Please note that 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 John Lai, Chairperson and Chief Executive Officer and 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 Mister Car Wash’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 results to actual €“ to differ materially from management’s current expectations. Please be advised that the statements made today are current as of this call and are based on our present understanding of the market and industry conditions. While we may choose to update these statements in the future, we are under no obligation to do so unless required by applicable law or regulations. Please review the forward-looking statements disclaimer contained in the company’s third quarter 10-Q as such factors may be updated from time to time in other filings with the Securities and Exchange Commission.

I will now turn the call over to Mr. John Lai. Please go ahead, sir.

John Lai: Good afternoon, everyone. As I reflect on this past year, I’d characterize 2022 as a year of progress and promise, a year where we turned challenges into opportunities, opportunities to strengthen our team, improve our products and services, and differentiate in an increasingly competitive environment. It was a year where we experienced a slowdown in retail frequency, which we believe was primarily driven by the macro economy, while also experiencing inflationary cost pressures across almost every corner of our business, which put downward pressure on margins, but it was also a year where we got stronger and more focused. We reset our labor model and improved productivity and became more cost efficient with a keener eye on managing our expenses while prioritizing projects that have the highest return on invested capital.

With that backdrop in 2022, we ended the year with 436 locations, growing our portfolio by 40 net stores. We increased revenues by 16% to $877 million. We increased adjusted EBITDA 11% to $282 million and grew comparable store sales by 5%. Looking at the fourth quarter, we grew revenue by 12%, increased comp store sales by 4%, increased adjusted EBITDA by 15% and opened a record 13 new greenfield locations as well as acquiring 3 new locations in California. As we barrel into 2023, we have identified 6 pillars that will guide everything we do: number one, expand our footprint while densifying and fortressing the MSAs we are in by accelerating our greenfield development and pursuing strategic M&A; number two, introduce our new premium positioned Titanium 360 retail package and UWC program alongside our new rinse and drying systems; number three, improve our marketing and ad spend by focusing on acquiring new retail customers through more targeted data-driven outreach; number four, continue to focus on growing and strengthening our UWC member base; number five, improve the performance of our existing portfolio by reformatting and reimaging many of our existing stores while continuing to look for ways to improve speed and quality; and number six, never pulling back on the people side of our business by building our leadership bench, which in the end is one of our most distinct competitive advantages.

On that note, at Mister Car Wash, human capital matters. I was recently in Minnesota visiting stores and had the opportunity to meet one of our high-potential future leaders who happen to be a recipient of our tuition reimbursement program. As she pursues her degree in software development, she applied her learnings from school to create a very sophisticated algorithm that combines store-level data into a dynamic regional dashboard to better track performance across all stores in Minnesota. The regional team quickly adopted this, and it’s a great example of how investing in people yields dividends, sometimes in the most unexpected ways. It’s also another example that our culture of taking care of our people can foster an environment where they come up with new innovative ideas to help our business.

We have many stories like her’s and it’s what makes us not just a best-in-class operator, but a special company to work for. As we look ahead to 2023, we know that the immediate road won’t get any easier. We’ve built the most talented and experienced management team in the industry with a shared sense of purpose around doing something that no one has done before: building a national car wash brand that stands for excellence. And behind the scenes, we will never lose sight of our guiding principle, which is to take care of our people who take care of our customers who, in turn, allow us to generate extraordinary shareholder value over the long run. I will now turn the call over to Jed to provide more commentary around our financial results.

Photo by Zulfahmi Khani on Unsplash

Jed Gold: Thank you, John, and good afternoon, everyone. Overall, we are pleased with our results and underlying trends in the fourth quarter. Demand was consistent with the broader trends we have seen throughout much of the year and we are able to offset inflationary pressures with productivity improvements, expense containment and retail pricing increases. As a result, fourth quarter revenue was in line with our expectations and our adjusted EBITDA was modestly ahead of our expectations. As John mentioned, a big highlight of the quarter was new store openings. In the fourth quarter, we opened 13 new greenfield locations, which was a quarterly record, and acquired 3 locations. Our greenfield stores continue to perform very well, ramping toward our mature Express Exterior average unit volumes of $2.1 million and 4-wall EBITDA margins of 45% to 50% in under 3 years.

We remain optimistic about our greenfield development program and continue to view these investments as the highest and best use of our capital. During the fourth quarter, comparable store sales increased 4% and net revenues increased 12% to $214 million. October was our strongest comp month and a wet November followed by storms in December likely had some negative impact on retail demand. Another highlight of the quarter was the continued steady performance of our Unlimited Wash Club subscription business. UWC sales represented 71% of total wash sales, and we added 24,000 net members in the fourth quarter. On a year-over-year basis, the number of UWC members increased by 13.8% to just under 1.9 million members. Once again, we did not see a meaningful change from our historic churn rates, and we did not see club members trading down from the premium package to the base package in any meaningful way.

Looking at the expense side of the business, we were pleased to see some of our cost containment measures beginning to result in lower labor costs and higher operating efficiencies. Overall, fourth quarter adjusted EBITDA margins were better than expected and came in at 30.9% compared to 30% last year. Excluding stock-based compensation and as a percentage of revenue, labor and chemicals decreased 180 basis points to 29.5%. Other store operating expense increased 170 basis points to 38.8%, and G&A expense decreased 280 basis points to 10.1%. The labor and chemicals line primarily benefited from better labor scheduling. Other store operating expenses increased primarily from higher utility rates, increased maintenance service costs and increased rents related to additional sale-leasebacks.

The increase in G&A was primarily from growth-related investments. During the fourth quarter, interest expense increased to $15 million from $6 million last year because of higher interest rates and increase in debt levels and the expiration of our interest rate hedge. During the quarter, we transitioned to a SOFR-based borrowing rate and we are now paying SOFR plus 310 basis points on our outstanding debt. This compares to a previous rate of LIBOR plus 300. Our GAAP reported effective tax rate for the fourth quarter was 25.1%, compared with 11.4% for the fourth quarter of 2021. The increase was primarily due to the exercise of employee stock options and the favorable tax treatment in the year-ago period. Adjusted net income and adjusted net income per diluted share, which add back stock-based compensation and certain non-core operating expenses, were $26 million and $0.08, respectively, in the quarter.

Fourth quarter adjusted EBITDA was $66 million, up 15.4% from the fourth quarter last year. Moving on to some balance sheet and cash flow highlights. At year-end, cash and cash equivalents were approximately $65.2 million and outstanding long-term debt was $896 million. For the year, net cash provided by operating activities was $229 million and gross capital expenditures were $192 million. Lastly, let me make a few comments around guidance. Our initial full year 2023 guidance calls for 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. We do expect comparable store sales growth to be lower in the first half of the year versus the second half of the year.

The primary drivers of this are the more difficult lap and the natural ramping of more greenfield stores that opened in 2022 being picked up as comp stores in the second half of the year. As a reminder, when we forecast interest expense, we use the SOFR forward curve in the market, and this makes for a bit of a moving target. As a result, our 2023 interest expense assumption is currently $73 million versus the $42 million we reported last year. The big year-over-year change is the result of the expiration of our very favorable hedge and the rising interest rate environment. We continue to look at strategies to reduce interest expense going forward, but do not expect any material benefits in the short term. The team did a great job of opening new stores in the fourth quarter, but we continue to experience delays related to the permitting and building process.

We have a robust development pipeline with over 150 real estate sites somewhere in the development pipeline. All of these things considered, our initial guidance for 2023 new builds is approximately 35 new greenfields. Regarding sale leasebacks, we will be opportunistic and disciplined when we execute SLBs, recognizing we need to balance funding our development targets with lease terms that make sense for the duration of the lease life. We continue to operate a number of stores on company-owned properties eligible for sale leaseback. Our guidance includes sale-leaseback proceeds of between $110 million to $130 million for the year. At this point, we believe we can execute our sale-leaseback target utilizing both the 1031 and national REIT market, and it will be accretive to EPS when compared to other sources of financing.

Between the sale-leasebacks executed last year and expected sale-leasebacks to be completed this year, along with rent escalators, we expect 2023 cash rent expense to increase $12 million to approximately $100 million. Our initial capital expenditure outlook for the full year 2023 is $220 million to $270 million. This initial outlook is calculated based on our outlook of approximately 35 new greenfields this year. As a reminder, our CapEx in any given year includes some spending on new stores that are early in the development process and not likely to open until the following calendar year. Also, we did defer some capital projects last year because it was simply more cost efficient to work on certain projects while we were retooling the stores for the new service offering this year.

Finally, regarding the new service offering, we expect it to take approximately 18 months to have it rolled out across the entire base of stores. And our initial guidance for 2023 does not include any benefit from the new offering. As we have mentioned, we also plan to use this opportunity to further standardize many of our wash tunnels. While we do expect the new offering to be accretive to our margins and earnings, it’s simply too early to build anything into the model at this point. In conclusion, while we cannot predict how the macroeconomic environment will play out over the next 12 months, we will continue to strengthen our operations and work hard to earn each and every customer visit. I want to thank all our hard working team members and associates who work hard everyday and for their commitment to help grow Mister Car Wash.

With that, we are happy to take your questions.

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Q&A Session

Operator: And our first question will come from Elizabeth Suzuki with Bank of America. Please go ahead.

Elizabeth Suzuki: Great. Thank you. Just a question on how your costs are expected to flow through throughout the year and also between the other store operating expense and general administration and cost of labor. Just how should we think about those buckets? Where are the biggest increases? And then I have a follow-up question on labor as well.

Jed Gold: Yes, this is Jed. I hope you are doing well. As you think about the €“ just from an expense standpoint and how it impacts 2023 going forward, there is really 3 €“ from an underlying assumption, we are assuming low to mid single-digit inflationary pressure. We believe that the consumers still under a lot of pressure, but there is still some inflationary pressure that’s out there, primarily impacting the store level labor line, the utilities and then also the rent as highlighted in the prepared remarks.

Elizabeth Suzuki: Great. And then my follow-up question is really about labor and increases that you have put through over the last year. And then maybe plans going forward and how much you plan to take up wages and whether historically you can point to market share gains that have been transpired after that €“ those increases?

John Lai: Yes, hey, Liz, this is John. Good to hear from you. I will start by just saying that the state of our workforce is in great shape right now. All of our stores are fully staffed. We have a super engaged crew out there. We just conducted an eNPS survey and we are happy to report that we were rated 42. In the question of, would you recommend Mister Car Wash as a great place to work? We think that’s a terrific score. But looking at some other non-GAAP measures, our applicant flow is up 30%. Our turnover has remained relatively constant. And it kind of fulfills our goal of becoming an employer of choice, making sure we’re creating a great environment. So specific to your question, we have seen year-over-year our wages are up roughly a little over 5%, and that’s been offset by some optimization that we’ve done with our labor staffing model, where we’ve been able to reduce the number of hours consumed per day by the mid-single €“ mid double-digits level.

So overall, we are managing both sides of that equation. Wages are up slightly, but that’s been offset by productivity gains. And this management team is managing through those forces. Hard for us to kind of have a clear insight or view as to what the future holds, but we are feeling better about where we sit from a labor standpoint.

Elizabeth Suzuki: Great. Thanks very much.

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

Simeon Gutman: Hey John. Hey, Jed. Can we talk about the comp guide? It’s a bit of a maybe step down from where you are running. So please if you can diagnose the macro, the consumer, the retail side of the business and how you thought about the 0 to 3?