Earnings Call Transcript - MCW Q2 2021

Operator, Operator

Good day, and welcome to the Mister Car Wash Q2 2021 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Megan Everett, Senior Director of Communications. Please go ahead.

Megan Everett, Senior Director of Communications

Good afternoon, everyone, and thank you for joining us today for Mister Car Wash's second quarter fiscal 2021 earnings call. Speaking today, are Chairperson and Chief Executive Officer, John Lai; and Chief Financial Officer, Jed Gold. After John and Jed have made their formal remarks, we will open the call for questions. Before we begin, I do need to remind everyone that comments made today 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. These statements speak as of today, and except as may be required by law, the company does not have any obligation to update or revise such statements, if circumstances change. Please review the cautionary statements and risk factors contained in the company's registration statement on Form S-1 filed with the Securities and Exchange Commission on July 27, 2021. As such factors may be updated from time to time in its other filings with the SEC, including its quarterly report on Form 10-Q for the quarterly period ended June 30, 2021. During the call today, management will also refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed with the SEC today and posted to the Investor Relations section of Mister Car Wash's website. With that, I'll turn the call over to John.

John Lai, CEO

Good afternoon, everyone, and thanks for joining us on our first earnings call. It's great to talk to all of you again as a new public company. It's been a little over six weeks since we rang the bell, and we're still feeling the glow and positive emotions over the significance of going public. Morale within our organization and the industry from coast to coast has never been stronger. It was an extremely validating feeling and a testament to our amazing team and all the hard work that led up to this historic event. We came into the IPO as a passionate and mission-driven group, but coming out of it, there's a new sense of purpose as we set out to do what no one else has done before, which is to build a true national car wash company and scale it to even greater heights. We believe a strong culture drives strong performance, and we're executing at a high level right now, clicking on all cylinders. It's taken us over 25 years to build our team. And today, we have an incredibly strong network of talented, hard-working, and passionate leaders who love what they do and are having fun building a very special company. Before I dive into the numbers, I'd like to share a quick story. During the IPO, we launched an employee stock purchase plan to give our team members an opportunity to buy stock and own a piece of the pie. I had no idea what level of participation we were going to get, but I'm thrilled to share that over 30% of our workforce participated. That's almost 2,000 people who voluntarily invested back into the company they work for. Given the size of our organization, when you have that many people who deeply believe in the company, it becomes incredibly powerful for us to get stronger and stronger. Just the other day, I was getting my car washed when one of our crew members, who looked like he was just out of high school, came up to me and said, 'Mr. Lai, thanks for setting up the ESPP program. Without the payroll reduction plan, I wouldn't have been able to participate. I hope to someday get into the MIT program.' It highlighted the fact that at the end of the day, as service providers, it's all about our people. And when they feel good about the company that they work for, they perform well. For our call today, I'd like to begin by briefly recapping our second-quarter results and then share some background on our growth drivers, our strategy, and how we're going to deliver long-term shareholder value. Then Jed Gold, our CFO, will discuss our financial results, including the impact COVID-19 had on our comparisons, as well as the divestiture of our quick lube facilities completed in December of 2020. Jed is also going to review our guidance for fiscal 2021. I'm pleased to share that our Q2 results materially exceeded expectations. For the quarter, we delivered total revenue of $197 million, an increase of plus 93% over Q2 of 2020, and adjusted EBITDA of $73 million, which were all-time records for quarterly sales and adjusted EBITDA. This performance capped off an incredibly strong first half with adjusted EBITDA of $135 million; revenues were up 45%; same-store sales were up 50%. And as of today, we added eight new stores through acquisitions and opened eight new greenfield locations so far in 2021. As Jed will discuss, as we look ahead, we're well-positioned to deliver on our unit level growth outlook for the remainder of the year. For those of you that are newer to our company, let me provide some background on our history. Since our founding 25 years ago, we've grown to become the largest national car wash brand in the US, with 350 geographically diversified locations, 1.5 million unique Unlimited Wash Club members, and we wash over 70 million cars annually. Our 39 consecutive quarters of positive same-store sales growth pre-COVID is an amazing number and was driven by our awesome field management team and their relentless focus on operational excellence. Our biggest competitive advantage is our people, who deliver an elevated level of customer service day-in and day-out. Over 90% of our managers have been promoted from within, and we support all of our team members with competitive wages, excellent benefits, best-in-class training, and career path progression. Employee engagement has never been stronger. Our ENPS score of 55 puts us in the best-in-class category alongside some of the most legendary brands in consumer retail. As we think about our future, our focus will be on continuously adding value to the customer experience while continuing to build and acquire new stores to strengthen our portfolio. Comp store growth will be driven by increasing our Unlimited Wash Club member base, maximizing throughput, and investing in our team. UWC has changed the game, representing over 60% of our overall business. This predictable, recurring subscription-based business model has transformed every aspect of our company as we become very member-centric. As we increase store density, we expect our membership numbers to grow, as the associated network of more stores equals greater optionality for our members, which increases the value proposition as our market share grows. We're calling this the network effect, and it's having a positive, symbiotic relationship with our greenfield program. Our unit growth will be driven by greenfield development to infill existing markets, complemented by highly selective strategic acquisition opportunities in new markets and existing markets. Looking ahead, we see a lot of opportunity for continued growth. The US car wash industry is large, highly fragmented, and very resilient. Demand for our services has never been stronger as the US car park continues to expand and more new users come into the category as motorists continue to shift away from doing it themselves to having someone do it for them. In the end, cars will always get dirty; they're always going to need to be cleaned. When you have that kind of persistent demand for your service, that's a good thing. From a big picture standpoint, while we're the largest car wash operator in North America with less than 5% market share, we actually see ourselves as quite small with a huge runway for continued growth in front of us. With all the fundamental building blocks in place and the best team in the industry, we're in an excellent position to achieve our 2021 outlook, as well as our longer-term target to grow our topline in the high single-digit range and grow adjusted EBITDA in the low double-digit range. Now, I'd like to turn it over to Jed.

Jed Gold, CFO

Thank you, John, and good afternoon everyone. As John said, we are very pleased with our performance for the first half of this year, including our second quarter results, which exceeded our expectations, marking a record quarter from both our revenue and adjusted EBITDA perspective, driven by the exceptional performance this spring. We believe that our performance to date positions us well to deliver against our outlook for the year. Before I review our guidance for fiscal 2021, let me provide some additional detail about our second quarter and year-to-date results. My results will focus on our adjusted non-GAAP results. Please refer to today's press release if you would like more details on our financial performance and our methodology in calculating non-GAAP metrics. In the second quarter, our business benefited from the strong macro backdrop and increased mobility trends. Revenue increased 93% to $197 million from $102 million last year, driven by the comparable store sales growth of 93% and unit growth of 7%. Our comparable store sales growth includes UWC membership growth of 39% since June 30, 2020, as UWC membership grew to over 1.5 million members from approximately 1.1 million members as of the end of Q2 last year, accounting for 62% of total wash sales during the period. In addition, we had solid retail comparable store sales growth or non-UWC membership sales growth of 90% during the quarter. Important to note, our revenue growth for Q2 fiscal 2021 was impacted by a $5.1 million decrease in oil change revenue as a result of the divestiture of our quick lube facilities in December of 2020. We are also comparing to the prior year period when we temporarily suspended our services, including UWC billings at more than 300 of our locations between March of 2020 and May of 2020 in response to the rapid onset of the pandemic. Compared to 2019, revenue growth was 25% and comparable store sales growth was 22% for Q2. With respect to unit growth, we added five stores through acquisitions and two new build locations in Q2 this year. Greenfield unit expansion is a key driver for our growth strategy, and we continue to be very pleased with the performance of our new locations. We now have 13 greenfield locations that have passed their one-year mark, with productivity and profitability nicely exceeding their planned projections due to ramping memberships and again, bringing new car wash users into the category as we expand our network of stores. We feel great about our store pipeline and our ability to deliver against our long-term new store model parameters as we continue to grow our footprint. Now switching gears to provide perspective on the balance of the P&L. This year's Q2 cost of labor and chemicals excluding the $31 million impact of non-cash stock and compensation expense related to the acceleration of the vesting of store-level team member performance options was $57 million or 29% of revenue, a 500 basis point improvement versus Q2 last year. This improvement was primarily driven by sales leverage, which we define as spreading the fixed cost of the business over a greater number of sales and the optimization of the wash labor model. The redesign of the wash labor model was initially implemented in 2020 in response to the COVID-19 pandemic and is based on location-level demand metrics such as wash volumes, wait times, and peak hour needs. The improvement versus Q2 of 2019 was approximately 1,000 basis points largely driven by the same factors. Fifteen percentage point leverage in our other store operating expenses was related to more normalized levels of revenue in Q2 this year versus a pandemic-impacted Q2 2020. Compared to Q2 2019, other store operating expenses improved 100 basis points as a percent of revenue driven by leverage on the sales increase. General and administrative expenses in Q2 this year excluding the $171 million impact of non-cash compensation expense due to the acceleration of vesting of performance options were $18 million or 9% of revenue compared with $14 million or 13% of revenue in the same period last year. The 93% revenue increase was the primary driver of this year-over-year expense leverage. The $2.5 million year-over-year decrease in interest expense was due to slightly lower rates and debt levels. Given the timing of our IPO at the end of Q2 and the subsequent debt pay down, we would expect interest expense to be approximately $6 million per quarter in Q3 and Q4. Our effective tax rate during Q2 2021 was 28.8% compared with 27% last year. Adjusted net income increased to $41 million from $800,000 last year. Diluted earnings per share was $0.14 in the second quarter of 2021 compared with breakeven in the prior year period. And finally, as a testament to the execution by our best-in-class operations team, strong flow-through on the 93% sales increase drove a 160% increase in adjusted EBITDA to a record $73.1 million for Q2 this year. This is despite a decrease of $700,000 of adjusted EBITDA due to the divestiture of our quick lube facilities in December of 2020. Moving on to the balance sheet and cash flows. Cash and cash equivalents as of June 30, 2021, were $155 million compared to $58 million as of June 30, 2020 and $115 million as of December 31, 2020. As you know, we completed our IPO in June of 2021, which generated proceeds of approximately $433 million after offering-related costs. We used those proceeds to repay our long-term loans and our total debt as of June 30, 2021, was $615 million, resulting in a net leverage ratio of 2.1x. Also in conjunction with the IPO, we closed on an amendment to our revolving commitment and upsized capacity from $75 million to $150 million, creating additional liquidity for future growth. Capital expenditures increased approximately $17 million to $44 million in the first half of fiscal 2021. Net of sale leaseback proceeds, CapEx decreased $1.5 million to $22 million. Maintenance CapEx was $9 million in the first half of fiscal 2021 compared with $1.6 million in the first half of fiscal 2020. Let me now turn to our guidance, which you saw outlined in our earnings press release. For the full year fiscal 2021, we expect revenue growth of approximately 30% against 2020 revenues of $575 million based on comparable store sales growth of 29% to 33% and 16 to 18 new greenfield locations. As a reminder, our sales growth expectation also takes into account the $24 million negative impact from the loss of revenue associated with the divestiture of our quick lube facilities as well as the conversion of interior clean to express stores. With the inherent leverage of our operating model, adjusted EBITDA is expected to increase between 53% to 56% to $247 million to $252 million on the year. Adjusted diluted earnings per share are expected to increase to $0.39 to $0.44, assuming diluted shares outstanding as of December 31, 2021, of approximately 330 million shares. This outlook also assumes full-year interest expense of approximately $39 million and an effective tax rate of 35%. Note that the tax rate being used to compute adjusted net income is approximately 26%. We expect total net CapEx of approximately $83 million for the year. Gross Greenfield CapEx will total $85 million or $28 million net of planned sale leasebacks and tenant improvement allowances. In addition, we expect $18 million for maintenance with the remainder being spent on other growth initiatives and integrating acquired stores.

David Bellinger, Analyst

Hey, guys. Thanks for taking the question, and congrats on your first quarter as a public company here, nice results. So, if we could just start on the makeup of sales growth in Q2. Can you walk us through the monthly trends for the quarter? Any changes across geographies to call out? And as you assess the exit rate or even early part of Q3, is there anything you can correlate with some of the more recent headlines around the Delta variant or other factors at play? Just what are you seeing as you exit Q2 here?

Jed Gold, CFO

Yes. David, thanks for your question. We aren't going to provide comps by month, but I will highlight that we did see a very strong spring from both a revenue and EBITDA perspective, with March through May at record highs. Certainly, we benefited from the increased mobility trends and the pent-up consumer demand. And then, regarding the second part of your question about any regional outliers, when you start peeling back the layers to this, this is a business that performs well across all regions, all cohorts, across all income demographics. Usually, when we see a skew at the regional level, it's because there's a higher sales mix from our greenfield and acquired stores that are still ramping, moving out of that freshman year into sophomore year and getting picked up in our same-store sales.

David Bellinger, Analyst

Yes. Thanks for that. It's very helpful. And just my follow-up here. On the member growth, again, very strong this quarter, up almost 40% year-over-year. So, how should we think about the trajectory of member growth, both over the next few quarters with this new digital push and how these elevated growth rates potentially normalize over time?

John Lai, CEO

Yes. David, a terrific question. When I look back over the last six months, what we've done to grow our UWC member base is nothing short of phenomenal. And with respect to not getting too excited, the 300,000 new members through June, plus 24%, quite frankly, I'm not sure that that's a sustainable rate of growth. If we stop adding new members for the rest of the year and finish the year plus 20%, that would be awesome. Historically, when we see member growth, the bulk of it does come in the first two quarters. But given the consistency of our business that Jed just outlined, we anticipate continued growth with our membership program, probably not at the same rate, but growth nonetheless as we continue to increase the value proposition of that program. So, we're very bullish and optimistic about UWC as we continue to increase that member base and again provide more optionality for our members.

Elizabeth Suzuki, Analyst

Great. Thank you. So regarding the full year same-store sales outlook, I mean, there appears to be a bit of a deceleration in the two-year comp assumed. I mean, is that largely conservatism about the pace of reopening, or were there other factors that may have elevated growth in the second half of 2019 that creates a bit of a difficult two-year comparison?

Jed Gold, CFO

Yes, thanks, Liz. As we mentioned, we're not looking at month-to-month figures. We did experience strong performance at the beginning of the quarter with record highs, thanks to the favorable macro environment. However, as you consider the second half, remember that we face a challenge from a $24 million revenue loss for the year due to the divestiture of our lube business, which was completed in December 2021. Additionally, keep in mind that when looking at future comparisons, we reintroduced our interior clean services in August of last year, making it a tougher comparison moving forward.

Simeon Siegel, Analyst

Thanks. Congratulations on the first public call, it's exciting. John, regarding the networking effect, could you remind us what percentage of your members utilize more than one location? Also, have you noticed any changes in the UWC member behaviors as people are getting out, particularly in terms of frequency? Jed, great job with UWC and the retail growth you mentioned. Could you elaborate on that? Perhaps you could discuss wash volumes in relation to pricing or any other factors contributing to the retail growth. Thank you.

John Lai, CEO

Yes, Simeon. Let me take that first part and then I'll hand the second part over to Jed. So when we look at the network effect and the impact of having more stores in market, more optionality, on average today, a little over 30% of our members use more than one location to get their car cleaned. In markets where we have increased density, increased penetration in stores and a higher market share, we actually see a 10 percentage point improvement in cross-utilization among members. So it's a little north of 40% cross-utilization, which we think is a terrific number. So it's really supporting our thesis to increase penetration and provide wherever you are in the city, whichever city you're in, there's a convenient Mister Car Wash location for you to get your car clean. As we add stores, that value proposition just continues to strengthen, lifting all boats along with that. So it's a pretty cool phenomenon.

Jed Gold, CFO

Yes, regarding your question about retail sales, those sales are crucial to our business as they attract customers who are not yet subscription members, creating an opportunity for us to convert them into the Unlimited Wash Club. Our retail sales increased by 90% compared to last year. Looking at it over the past two years, they grew by 2%. We're pleased to see that retail sales growth of 90% aligns closely with the 95% growth in Unlimited Wash Club membership sales, and we are particularly happy with this growth since it exceeded our expectations.

Michael Lasser, Analyst

Good afternoon. Thanks for taking my question. You had set your guidance a couple of months ago when you last spoke. The assumption was that people will be going back to work through the end of the year, probably more likely after Labor Day, and that mobility would increase. Now it looks like most people are not going to go back to the office until next year. How do you factor that into your outlook for the second half?

Jed Gold, CFO

Yes. So when you look at the first half compared to the second half, we can't have said enough that the great Q2 and the record quarter. The quarter was 18% higher from an adjusted EBITDA perspective than any other quarter in the history of Mister Car Wash. And that the guidance that we provided, the revised guidance we provided in early June, where we took adjusted EBITDA up to $246 million, factored in some of the investments that we're going to be making, in particular, to help offset wage compression, public company costs to help. What we expect is baked into this annual outlook that we provided here.

John Lai, CEO

Yes. Jed, I would just add, too. When we look at Q2 and as thrilled as we are about Q2, it was a little bit of an anomaly. I mean, there was so much pent-up demand. And with respect to the kind of unprecedented spike in car traffic, as Jed certainly had positive impact for sure. But it created this perfect storm for being able to sign up even more members, given our really strong value proposition. As I look at the back half of this year, we're still going to be growing our business, but to say that we're going to grow it at that same rate is a pretty tall order. So we expect to grow at this predictable steady pace, and we plan on doing it.

Robert Friedner, Analyst

Hi, good afternoon, guys. It's Robert Friedner on for Peter. Thanks for taking my questions. First, I wanted to ask about some of your Western US markets and issues with water shortages going on right now. When there's water restrictions, is that a good or bad dynamic for your business? And John, during your tenure with the company, have there ever been restrictions put in place where you couldn't operate in a certain market?

John Lai, CEO

Yes. First of all, let me say that we take water conservation very seriously at Mister Car Wash. We've been out in front of this for years. And when you look at the average number of freshwater gallons that we use per car, we've made year-over-year improvements. We recycle and repurpose roughly 15 gallons per car today. And so, we see ourselves as really responsible stewards of the environment. For us, it's a really key part of what we stand for. With respect to the Western states, we have not seen any stoppages of businesses. Most municipalities know that in a drought situation, washing cars in a commercial car wash is actually better for the environment than washing your driveway at home. If there were to be any temporary restrictions placed on home washing, we would be able to continue operations. In my 20 years with the company, there has been only one situation in Austin, Texas, regarding a pump at Lake Travis that caused a reduction in our fresh water consumption, which we managed to comply with without impacting our operations.

Jed Gold, CFO

Yes, Peter. Given the low variable cost nature of our business, these incremental sales do flow through at a healthy level. However, we are hesitant to discuss flow-through margins as they can differ due to the subscription element of the business. Going forward, it will likely be slightly less than the 70% as we invest in public company costs at the store level and also some of the developmental resources and supporting teams to build out our capabilities.

Michael Kessler, Analyst

Hey guys. This is Michael Kessler on for Simeon. First, I wanted to ask a quick follow-up actually on the margin piece. When we look at the first half EBITDA margins in the call it mid to high 30s, the implied in the back half is more in the kind of low-ish 30 range. I was wondering if you could maybe dissect the components of the lower margin going forward between the topline reinvestment and staffing up at the store location level and reinvestment back in the organization. If you can maybe size up if you can or kind of give us an overview of where those pieces are coming from? And then also how should we be thinking about that margin beyond 2021 in perhaps a more normalized backdrop?

Jed Gold, CFO

So, Michael, that was a great summary of everything that we've done that helped drive the margins. I would highlight that we did have some of the store-level labor investments delayed slightly into Q3 and Q4. So, that helped from a margin perspective in Q2 just a bit.

John Lai, CEO

Yes, Jed. If I can also chime in here. It's important to note that we are in growth mode as a company. We're investing substantially in our people, specifically building out our G&A and our development team, so that we can scale our operations effectively. If our vision someday is to reach 1,000 stores, it requires a robust team. We have an incredibly talented team, and we will continue to add to it.

Michael Kessler, Analyst

Great. And a quick follow-up. Maybe this is more of a bigger picture question. I guess first can you talk a little bit about how the new greenfields that you're opening how they're continuing to ramp? And then kind of relatedly thinking about the whole industry longer term. I know you guys have said before you see that there’s a lot of capacity available for continued growth and for you guys to grow into an industry that’s also growing. I was wondering if you could just maybe expand on that and give us a sense of how you think about capacity and your ability to grow into it and also for the whole industry to support capacity in longer-term as you guys add more and more greenfield locations? Thank you.

John Lai, CEO

Yes. Listen, there's a ton of white space. There are many pockets in the US and within the markets that we're currently in that are underserved right now. This motivates us to double down on this initiative and continue to expand our footprint. In the markets that we're in, we're continuing to grow as we also ambitiously look to move into new attractive markets. When I zoom out and look at this massive 275 million cars in the US, and how many conveyorized car washes there are to serve them, I can easily see the industry doubling in size. There's a race to control and capture share of each market, and we're not the only ones biking fast.

Jed Gold, CFO

And Michael, to add more color on the new build performance, as I said in the prepared remarks, when you look at the 13 that have crossed the one-year mark, they are outperforming the pro formas that were approved prior to us building those locations. Extrapolating that performance out, they are actually exceeding the balance of the express exterior portfolio, driving a return on investment around the approximate three-year payback for those particular locations that have a sale leaseback. We're very optimistic about the performance of our greenfields and plan to continue making investments to drive growth here.

John Lai, CEO

Well, thank you all for joining us on today's call, and we deeply appreciate your interest in Mister Car Wash. We look forward to updating you on our progress during the next call. So, thank you very much.

Operator, Operator

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