Good day, and welcome to the Mister Car Wash Q2 2021 Earnings Call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

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 -- 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 at ir.mistercarwash.com. With that, I'll turn the call over to John. John?

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 to core 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 bunch, 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 is to even greater heights. We believe a strong culture drives strong performance, and we're executing at a high level right now and clicking on all cylinders. It's taken us over 25 years to build our team. And today, we have an incredibly strong weave 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 that…

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 a 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 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…

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from David Bellinger with Wolfe Research. Please go ahead.

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 some other factors at play? Just what are you seeing as you exit Q2 here?

Yes. David thanks for your question. And 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, the second part of your question there about the -- just any regional outliers, when you start peeling back the layers to this, this is a business that performs well. It comes well across all regions, across 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 and they're moving out of that freshman year into the sophomore year and get picked up in our same-store sales.

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 also potentially as these elevated growth rates potentially normalize over time?

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 a 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.

Thanks, guys. Appreciate the detail.

Our next question comes from Elizabeth Suzuki with Bank of America. Please go ahead.

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?

Yes. Thanks, Liz. It's -- like we said, we're not talking of month-to-month, though we did see this outperformance early with the start of the quarter at record highs, given the strong macro environment. As you think about the second half, keep in mind, that we do have the headwind of the revenue lost $24 million on the year due to the divestiture of the lube business through December of 2021. Also keep in mind that, as you look at the comp on a go-forward basis, it was August of last year that we brought our interior clean services back online, making it just a little bit more difficult of a lab.

Great. Thank you.

Our next question comes from Simeon Siegel with BMO Capital Markets. Please go ahead.

Thanks. Hey, guys. Congrats on the first public call, exciting stuff. So John, to your point regarding the networking effect, can you just remind us what percent of your members use more than one location? And just maybe any change you've seen in the UWC member tendencies, as people have been getting out, any change in frequency? And then, Jed, really nice, obviously, UWC, but also the retail growth that you mentioned. Can you dig into that a little bit maybe give -- speak to the wash volumes versus price or anything else baked into the retail growth? Thanks.

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 clean, in markets where we have increased density, increased penetration in stores and a higher market share, as a result. So markets like Des Moines, Iowa, El Paso, Texas, Bakersfield, California, we actually see a 10 percentage point improvement in the number of stores. 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 and lifting all boats along with that. So it's a pretty cool phenomenon.

Yes. And then, the second part of your question there, assuming about the retail sales and just peeling back that a little bit, as you -- those retail sales are an important part to the business, because it brings in customers who aren't subscription members yet and allows us an opportunity to trade them into the Unlimited Wash Club. We were up -- our retail sales were up 90% versus last year. If we look at it on a two-year stack, they were up plus 2%. But the retail sales growth of 90% compared to the Unlimited Wash Club membership growth -- sales growth of 95%, we're very happy with the growth that retail sales, in particular, exceeded our expectations.

Great. Thanks a lot guys. Best of luck for the year ahead and congrats again.

Thanks.

Our next question comes from Michael Lasser with UBS. Please go ahead.

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 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?

Yes. So when you look at the first half compared to the second half, right, we can't have said enough that the great Q2 and the record quarter. It was -- 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, it 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. So, what we expect is baked into this annual outlook that we provided here.

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 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 prop. 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.

Got it. A quick follow-up question, on the new wash model that you've implemented about a year ago. Can you drive a similar amount of leverage on the cost of labor line? We're forward assuming that sales are going to be similar. And what has been the customer response to the new model?

I'm sorry. Was the question regarding our interior clean services?

Yes. Jed cited the new wash model is being critical factor in driving a lot of the cost of labor leverage in the second quarter and presumably, it's less labor-intensive. And so, I was wondering, if that can drive a more amount of leverage moving forward on a same amount of sales.

Got it. Got it. So Michael, on the -- as far as the sales leverage and the optimization of the labor model, that was an initiative that we started implementing during the pandemic. It's been phased in over a couple of months. We expect to continue to receive benefit from that from a labor hours worked perspective through Q1 of 2021. We do have built into Q2 -- Q3 and Q4 of investments around store level labor to help offset some of the wage compression that we're experiencing and help recognize our A players at the front line.

Jed, I would add, too. Our productivity is at an all-time high on a per employee basis. We're a lot more efficient. I think coming out of COVID, there are some lessons learned. And so, the headlines are cars per labor hour is up over 70%. That's phenomenal. Labor dollar per car is down 30%. And so, when you have both of those trends going in the right direction, it clearly says that we, as a management team, have been able to manage through any labor increases through increased productivity, plus that's the name of the game.

Thank you, very much.

[Operator instructions] Our next question comes from Peter Keith with Piper Sandler. Please go ahead.

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, has there ever been restrictions put in place, where you couldn't operate in a certain market?

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, and we recycled and repurposed 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 car to commercial car wash is actually better for the environment than it is washing your driveway and if there is -- if there were to be any temporary restrictions to be put on the home washer. The second part of your question in my tenure which is been up in 20 years, there's been one situation in Austin, Texas that had to do with a pump at Lake Travis and it had nothing to do with the drought. And with that pump going out, we were asked to reduce our fresh water consumption which we were able to do and continue to wash cars consistently. So, it didn't have an impact on our business at all.

I think that's great detail. One other just on the margin flow-through on sales upside. You've discussed it before. I think based on models -- based on numbers you gave us a couple of months ago, it looks like sales comp came in $4 million upside, EBITDA was around $3 million 70%, 75% EBITDA flow-through. Relative to your guidance for the full year, should we continue to expect a similar kind of margin flow-through on -- in the event of sales upside?

Yes Peter [ph]. So, just given the low variable cost nature of our business these incremental flow sales. They do flow through at a healthy level. Always hesitant just a little bit to talk sales flow-through because they do flow through a little bit different than a traditional retail model due to the subscription element to the business. But going forward, it will likely be slightly less than the 70% as we invest in public company costs at the store level labor and then also some of the development resources and supporting team to help build out the development team. Our wash labor model is a process that's been rolled out and continue to be refined. And like I said, we'll continue to see benefit from that through Q1 of 2022. Although it will be to a lesser extent in the quarters to come.

All right. Thanks guys.

Our next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

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 a little bit of a detail on the topline reinvestment and staffing up at the store location level and reinvestment back in the organization. If you can maybe kind of 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?

So, Michael that was a great summary of everything that we've done. That this has helped drive the margins there. So, I think one other thing that I would highlight is we did have during Q2 some of the store-level labor investments that we were going to make. And some of those were delayed just a little bit into Q3 and Q4. So, that helped from a margin perspective on Q2 just a little bit.

Yes, Jed if I can also chime in here. So, I think it's important to note and this isn't a surprise to all of you on the line. We are in growth mode as a company. And as a growth company, we're investing in a big-time way in our people. And so specifically building out our G&A, building out our development team, so that we cannot just double down, but triple down on our capability and our capacity to put up more stores quite frankly. So, we're investing in our team. Again if our vision some day is to get to 1,000 stores, it takes an army. And we've got an incredibly talented team and we're going to be continuing to add to it.

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.

Yes. Listen there's a ton of white space. There's a lot of pockets in the US and within the markets that we're actually in that are underserved right now. And again, this is emboldening us to as I mentioned before double down on this initiative and continue to expand our footprint. So in the markets that we're in, we're continuing to grow as we also ambitiously look to move into new attractive markets. But when I zoom out and look at just this massive 275 million cars in the US and how many conveyorized car washes there are to serve them, I can easily see in my crystal ball the industry the number of conveyors in the US doubling in size. And right now, there's a race quite to control and have a lion's share of each market. And we're not the only ones that are on our bikes peddling very quickly.

And then Michael the first part of your question around new build performance just a little bit more color there as I said in the prepared remarks. And when you look at the 13 that have crossed the 1-year mark, they're outperforming the proformas that were approved prior to us building those locations. And if we extrapolate that performance out, they're actually exceeding the balance of the express exterior portfolio driving that approximate 3-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 to make investments to drive growth here.

Thank you.

This concludes our questions-and-answer session. I would like to turn the conference back over to John Lai for any closing remarks.

Yes. 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 next -- on our progress for the next call. So thank you very much.

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