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 has 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.

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 thank you 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 continues 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 eager 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.

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 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 comparison 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.

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

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?

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 is a 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.

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.

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 comparison that we have. In Q1, we were at the low end of that range.

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 cars.

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?

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 are different approaches to where we don't impede their experience but make them aware.

Okay. Thank you very much.

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

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?

Yes, I'll answer the first part of your question. When we examine the markets, particularly a few in the Southeast like Florida, we notice a difference in the number of days with precipitation this year compared to last year. It's important to consider not just the number of days with rain but also the threat of rain, as it affects our retail business significantly. For instance, in Orlando, the number of days with precipitation was favorable at 44% this year compared to last year, and as a result, comparable store sales increased by double digits in that market. Overall, in several markets where we experienced favorable weather, there was a strong correlation with positive comparable sales as well.

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.

Thank you.

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

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?

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.

Okay. Great to hear. I wanted to clarify on the Titanium 360 rollout. Jed, at the end of your remarks, did you say you plan to complete it by the end of next year, or are you still aiming for the midpoint of next year? If it is set to finish next year, could it possibly be delayed a bit longer?

Yes, you're actually addressing both Jed and me with that question. I believe we can have this project wrapped up and launched by the middle of next year. However, Jed, being the cautious CFO, wants to allow some extra time and has suggested adding a bit of cushion. We are pushing our internal team as hard as we can without rushing the process. As Jed mentioned earlier, this is a significant transformation of our entire rinsing and drying system, along with the new product launch and changes to our menu structure and pricing. We are committed to doing it correctly and taking the necessary time. However, no one is more eager to implement this than our management team, and our stores are very anxious to see the anticipated increase in revenues over time.

As we consider the rollout, we are continually learning during these early days. We plan to utilize the maintenance teams on the ground, not just for implementing Titan but also for enhancing the rent improvement technology and optimizing the car wash experience at each location. We acknowledge that there are things we may not yet understand. While we are pushing our internal team to the fullest, we want to ensure we are not advancing too quickly with our SKUs.

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

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

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.

Hi, Randy. While the interest rate environment may create some challenges, I believe other factors are influencing what I'm noticing as a cooling effect on valuations. Currently, the market is generally in the low double-digit range for most assets. There seems to be a greater emphasis on quality right now, with a focus on real EBITDA rather than figures that include numerous adjustments. Those who were eager to scale up and establish their positions early on are still engaged, but I think a sense of rationality has emerged, which is positive.

Got it. Jed, you provided some valuable insight into the changes in compensation in the unaffected weather market, specifically in Orlando, which saw double-digit growth. Can you offer a similar perspective on how that market has performed in terms of new member growth? You've demonstrated solid strength in that area for two consecutive quarters, with a 14% increase in the second quarter and a 13% rise in both the first quarter and this quarter. I would like to understand how membership growth in those non-affected markets compares to the overall corporate average.

Yes, the top of the funnel is that retail volume, which we have discussed. Retail customers tend to be more sensitive to macro headwinds and weather conditions in various markets. Specifically looking at Orlando, overall UWC sales have remained strong, and we have not observed an increase in churn or members downgrading. This stability has been consistent across all markets, regardless of weather conditions. In Orlando, retail volume was positive, contributing to UWC sales rising by double digits. On the flip side, in California, particularly in Modesto, Bakersfield, and the San Joaquin Valley, we experienced about a 170 basis point headwind to the overall comparison. UWC sales in those areas were negatively affected by reduced retail volume due to adverse weather. However, we anticipate that sales will bounce back as weather conditions improve.

Super helpful. Thanks, guys.

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

Hey, everyone. I have two questions. First, Jed, I want to follow up on something you mentioned regarding churn. Just to clarify, does that mean the overall number of additions and subtractions has remained steady, or have additions increased while subtractions have not? I'm trying to understand how churn can stay the same and if there's a change in the overall situation.

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.

The first question was about how subscription might be affected in a high inflationary environment. Starting with that, one positive aspect of our membership is its affordability at $19.99 and $29.99, which is accessible to nearly all consumers. In relation to their total transportation budget, this expense is a small fraction of the overall cost of traveling from point A to point B. Among the various costs associated with transportation, it represents a positive investment. It’s a valid concern that many people may have about whether they will start reducing discretionary subscriptions like a car wash subscription if a recession is approaching. However, the fact that our churn has remained stable over the last year indicates our service's strong retention and the loyalty we have built among our customers. We’re optimistic that, despite economic uncertainties, car wash subscriptions will remain in the top tier of valued memberships for our customers and continue to hold steady.

To break down that churn rate further, it represents the percentage of members who were active at the beginning of the month and those who dropped off by the end of the month. This churn rate during the quarter aligns with our historical observations. We did not notice an increase, and while we added 122,000 UWC members despite macro headwinds and retail traffic challenges, we always aim for more growth in UWC membership. Overall, we are satisfied with how UWC has performed. Additionally, we are observing a slight increase in capture rates as the team intensifies its efforts to educate consumers about UWC and its benefits. The price difference between retail and UWC also encourages customers to transition to the UWC program.

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 uptick 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.

Thank you. Thanks. Good luck. Thanks for the color.

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

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?

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 time per month back on their bike two times a month or three.

That's helpful. Appreciate it, John. And just my follow-up on 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?

No. No throughput implications. It's an interesting question because the way we're set up to maximize throughput we're running very high line 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.

Great. Thank you.

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

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?

I’ll start the discussion, and then Jed can dive into the financial environment. It appears that nearly everyone is pursuing a density strategy and trying to expand their store networks. However, with the rising cost of capital, companies are reassessing their available cash for future growth. There is a limit to how much can be funded through free cash flow from operations. Consequently, several platforms had ambitious plans to enter many new markets, but they are now re-evaluating the extent of their expansion capabilities. This reassessment is largely influenced by the current funding environment, which has become significantly tighter and more costly.

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.

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?

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.

Got it, okay. Thanks guys. Best of luck.

Your next question will come from Chris O'Cull with Stifel. Please go ahead.

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?

Yes, I believe the industry still has significant growth potential and we are far from reaching a point of maturity where competition for market share becomes intense. There may be a few exceptions, but overall, we see that we're in the early to middle stages of growth with additional capacity for 8,000 to 10,000 more car washes in the US market. This is fueling our expansion at the unit level. In terms of the question about the effects of increased construction in our existing markets, we've noticed that while there may be a temporary effect on some of our stores, we recover well. At the end of the day, we believe that the operator who provides the best customer experience will be the one who succeeds. Our focus remains on core fundamentals like quality, speed, and customer service. It's essential to uphold these standards; simply increasing the number of locations without delivering the basics won't lead to sustained success. The long-term evaluation of all businesses will ultimately be based on comparable store sales. We should observe how companies perform in years three and four of their development and analyze their average unit volumes. While some may prioritize overall unit counts, we are dedicated to quality and constructing exceptional stores capable of high volumes that align with our brand standards in prime locations.

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

Yes, Chris. From a competitive standpoint, as John mentioned, not all markets and competitors are affected in the same way. We observe that in markets where we have higher store saturation and market share, the impact is temporary. Conversely, in a few markets with less store presence, the impact is somewhat more significant. However, based on our analysis, there is really only one market and one competitor we can identify that has resulted in a sustained impact.

Chris, let me share a personal story that really hits home for me. The other night, while driving with my wife, we noticed a new competitive car wash sign going up in Tucson. She turned to me and asked if I was aware of it, as if I had missed something. I assured her that I was indeed aware, and I chose not to name our competitors out of respect. She questioned why anyone would choose that car wash when they only have one or two locations compared to our 20 in the area. I agreed, noting that it raises a good point, and I could mention it when you ask during our discussion. This conversation brings me back to the idea of market density and our strategy to fortify our presence. We are committed to leveraging our strong position as the market leader in nearly all areas, aiming to increase our market share from 20% to 50%. It's important to clarify that we don't have any illusions about completely dominating the market; there will always be space for one or two, if not three, strong players in every region, and we'll continue to compete for our share.

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?

That's a great question. Currently, we have three payment stations for loading vehicles. The design initially allocates two lanes for our members and one for retail. However, when we first launch a store, the situation is reversed, with 80% of the business being retail, which means most customers must use the retail lane. We open all lanes to facilitate access, not to inconvenience anyone. From the start, 66% of our lanes are designated for membership, prioritizing their experience. Our aim is to make membership customers feel valued without disregarding retail customers.

Great. Thanks.

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

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?

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.

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?

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.

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

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?

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 a week.

That's great. I have a follow-up regarding costs. The control you've maintained over labor and chemicals in the past few quarters has been impressive, and you've noted the scheduling efficiencies and benefits from vertical integration in the chemicals area. I'm curious if there are further opportunities for improvement. Are you satisfied with the progress so far, and do you expect to maintain that pace in the coming quarters, or are there still areas you're actively working on to enhance?

Garrett, what we've integrated into our guidance is essentially what we've already secured and recognized. That said, we are constantly seeking ways to enhance our efficiency, striving to wash more cars with fewer employees without compromising the customer experience. Balancing cost control and management while ensuring we continue to deliver an exceptional customer experience is a challenge we are always addressing.

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 fewer 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.

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

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.

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.

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