Mister Car Wash - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good afternoon, and welcome to Mister Car Wash First Quarter 2025 Conference Call. 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 that this is being recorded, and a reproduction of this call, in the whole or in part, is not permitted without written authorization from the company. I will now turn the conference over to Eddie Plank, Vice President of Investor Relations.

Eddie Plank (VP of Investor Relations)

Good afternoon, everyone, and thank you for joining us to discuss our first quarter financial results. With me on the call today are John Lai, Chairman and Chief Executive Officer, and Jed Gold, Chief Financial Officer. After John and Jed have made their formal remarks, we'll 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 mrcarwash.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.

While the company may choose to update these statements in the future, it is 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 SEC filings, including its most recent 10-K and 10-Q reports, as such factors may be updated from time to time with the Securities and Exchange Commission. I'll now turn the call over to John.

John Lai (Chairman and CEO)

Thanks, Eddie. Good afternoon, everyone, and thanks for joining our first quarter 2025 earnings call. We are very pleased with our continued momentum in Q1, during which we delivered strong comp store sales growth of 6% and record revenues and adjusted EBITDA, which increased 9% and 14%, respectively. These results exceeded our expectations, led primarily by strong demand during the quarter and efficient execution by our best-in-class operations team, who maximized throughput and continued to drive UWC membership. Q1 marked eight consecutive quarters of overall comp growth for Mister and the first back-to-back quarters of positive retail comps in three years, which also helped fuel better-than-expected UWC member growth. In terms of industry dynamics, we've seen a steady reprieve to competitive intrusion, with the number of competitor new builds opening within a three-mile radius of Mister becoming less intense since the peak of 2023.

We view this, along with some of the recent industry restructurings, as an opportunity to extend our leadership position and build upon our strong foundation. As the market rationalizes over the next several years, we believe we're optimally positioned to capitalize on the shifting landscape in our space. While there's still uncertainty around the tariff environment, our exposure is primarily limited to the indirect impacts the tariffs may have on consumer spending and on our supplier base. As a consumer services company, we are better positioned than most traditional retailers, and our cost structure eliminates most of the direct exposure, keeping it fairly well contained as a percentage of our total spend. Moving forward, we continue to make meaningful progress on our four strategic pillars to drive sustainable long-term growth. I'll now provide a brief update on each pillar, starting with expanding our footprint.

We opened four new Greenfield stores in the first quarter, fortifying our position in key markets, and we remain on track to add 30-35 new stores in 2025. As a reminder, we're taking an even greater data-driven approach in our analysis of both core and new markets to identify sites that will generate the highest ROI, as we aim to increase our share and expand our store footprint across the country. Given the large opportunity in front of us, we remain confident in our potential to organically double our store count in the U.S. over time. That said, as our history demonstrates, we are agnostic with respect to avenues of growth and will opportunistically pursue M&A where it makes strategic and financial sense. Next, increasing our innovative solutions.

We believe one of our many competitive advantages is our ability to consistently innovate and develop new products and services to create even more value for our customers. Our motivation is to continuously elevate and enhance the customer experience and look for ways to further distinguish ourselves to create an even bigger competitive advantage. Innovations like our proprietary Titanium 360, with its mirror-like finish and underbody protection developed by our in-house R&D team, have had a tremendous impact on our top and bottom line while delivering an exceptional car to our customers. We're also continuously assessing our value-to-price ratio across the country and saw an opportunity to implement a $3 price increase in most markets to our base UWC program, which represents approximately 40% of our membership tiers. This puts us in line with many of our competitors and is the first increase to our base program since inception.

Moving on to driving traffic and growing membership, we increased UWC membership by 5% year-over-year in Q1 to over 2.2 million members. As we increase our investment in marketing this year, our goal is to drive retail traffic with messages and offers that resonate down to the individual level. To that end, we are running a media test in six different regions across digital, radio, and paid social to drive visitation, and we have also run targeted promotions to increase membership signups. As we refine and more fully implement these efforts, we believe it will help expand our customer reach, drive increased traffic, and deliver higher membership growth. Finally, building a best-in-class team. From our senior management team to our rock stars in the stores, we continue to strengthen our bench, improve our capabilities, and increase our capacity for growth while working diligently to improve our culture.

In the end, it's all about people, and I couldn't be prouder of our team who have an extraordinary will to succeed and are constantly evolving and getting better each day. Looking ahead and with a somewhat uncertain macro environment in the near term, we remain confident in our ability to deliver positive results and build upon our leadership position. The American consumer has embraced express exterior car washing as part of the regular routine, and the popularity of our subscription program is driven by its convenience and affordability. Over the last 30 years, we've managed through various economic cycles and demonstrated how resilient our service remains. Before I hand the call off to Jed, I want to express our sincere gratitude to our amazing team who shows up every day, works incredibly hard, and makes our strong results possible.

I'll now pass it to Jed to provide more commentary around our financial results.

Jed Gold (CFO)

Thanks, John, and good afternoon, everyone. We are very pleased with our strong start to the year. As John indicated, our results in the first quarter exceeded our expectations, marked by a solid improvement in retail and consistently strong UWC trends. This resulted in a record Q1 by many measures, including revenue, which increased 9%, and adjusted EBITDA, which grew 14%. Before I get into the details, I'd like to touch on a few highlights. From a top-line perspective, our stronger-than-expected sales were driven by mid-single-digit UWC and retail comp growth. Sales were particularly robust in January, led by a high teens increase in our non-subscription business. This drove healthier membership signups, which, combined with our lower best-in-class churn, resulted in total membership growth that exceeded our plan.

Converting one-time visits into higher UWC membership highlights the real power of our model, as the stickiness of our members provides a durable and long-lasting tailwind to revenue. While weather provided a favorable backdrop this quarter, it was our operational strength, coupled with great site layouts, which facilitate strong throughput, that enabled us to take advantage of the increase in demand. That said, comp store trends moderated through April, largely due to a stronger lap and the timing of Easter. Keep in mind that the Easter holiday fell later this year compared to last year, creating a slight headwind to our Q2 comp. Despite these factors, comp store sales are still running positive low single digits. Our subscription business continued to provide us with a meaningful and steady stream of reoccurring revenue, driven by continued strength in our Titanium membership.

Titanium accounted for 23% of our membership mix, contributing to a roughly 6% increase in express revenue per member during the first quarter. We continued to tightly manage our expenses during the quarter, which, along with a timing shift in marketing expenses, allowed us to lever SG&A and drive strong cash flow and adjusted EBITDA levels. Great revenue growth, coupled with good expense management, delivered strong flow-through to EBITDA, as well as a healthy increase to adjusted EBITDA margin. Furthermore, we voluntarily paid down approximately $62 million of debt during the quarter while still maintaining a strong and flexible cash position. As a result, we anticipate that our net leverage ratio will improve to just under two and a half times adjusted EBITDA by the end of the year.

Finally, and building on John's comments around the competitive environment for a moment, in addition to the rate of competitor new builds slowing down, I'd like to point out that even when competitive intrusion has negatively impacted the performance of our stores, comps at those stores have consistently bounced back over a roughly two-year period to outperform the chain average. This tells us that while customers may initially be tempted to try a new competitor site, over time, they eventually come back to Mister for our superior offering and exceptional value proposition. Now, let me provide some more details on the first quarter numbers. For simplicity, I'll be referring to adjusted numbers only, which exclude items such as stock-based compensation and gain or loss from the disposition of assets. The reconciliation of adjusted figures can be found in our 8-K filing and earnings press release.

Net revenues increased 9%, driven by a combination of 6% comparable store sales growth and the contribution of incremental revenue from new store openings. UWC sales represented 73% of total wash sales, and we ended the quarter with more than 2.2 million UWC members. On a year-over-year basis, the number of UWC members increased by approximately 5%. At the end of the quarter, the membership split among Base, Platinum, and Titanium was approximately 42%, 35%, and 23%, respectively. The average express revenue per member in Q1 increased approximately 6% to $28.78, driven primarily by the success of our Titanium membership tier. Overall, we are very pleased with the team's focus on expense management. Total operating expenses were $176 million in the quarter. As a percentage of revenue, total operating expenses decreased 130 basis points to 67.3%.

Labor and chemicals decreased 160 basis points to 27.3%, driven primarily by leverage on our stronger sales performance, as well as efficiencies we realized from our optimized labor model and some savings in chemical costs. Other store operating expenses increased 90 basis points to 33.3%, primarily driven by higher rent expense related to our new store growth and sale lease backs, as well as higher utilities, equipment, and facilities maintenance costs. G&A expense decreased 60 basis points to 6.7%, driven primarily by better expense management. In addition, G&A benefited from the shift of roughly $1.5 million of planned marketing spend from Q1 to Q2. Overall, we remain focused on doing more with less, tightly managing expenses, and optimizing the G&A structure of the business. EBITDA increased 14% to $86 million, and EBITDA margin increased 130 basis points to 32.7%.

First quarter interest expense decreased 20% to $16 million, primarily due to lower average interest rates year-over-year and lower borrowings compared to last year. Finally, first quarter net income and net income per diluted share were $35 million and $0.11, respectively. As noted in our earnings press release, our new methodology for calculating adjusted net income and adjusted EPS no longer excludes non-cash rent expense, which totaled approximately $2 million in Q1. Moving on to some balance sheet and cash flow highlights at the end of the quarter. Cash and cash equivalents were $39 million. An outstanding long-term debt was $858 million, a $67 million sequential decrease as we opted to pay down a portion of the long-term debt. Our balance sheet remains healthy and flexible, and we continue to self-fund our growth and expansion.

Although we did not execute any sale lease backs in the first quarter, we feel good about trends in the market and will continue to focus on driving cap rates even lower, given the strong demand from buyers interested in purchasing Mister locations. Now, I'll provide an update to our full-year outlook. Given our recent momentum, we are even more optimistic on the health of our business and our positioning in the marketplace. As a result, we are revising our guidance to reflect these encouraging trends. Specifically, we are raising the low end of our full-year guidance range for revenue, comparable store sales, and adjusted EBITDA by flowing through the Q1 beat. Embedded in our outlook is a cautious view of the consumer given the current macro backdrop.

We are balancing our optimism about our business and momentum against the uncertainty of the consumer environment and the potential economic fallout and turbulence from tariff negotiations. As John mentioned, we are well insulated from the direct tariff exposure. Our chemicals and materials are predominantly sourced within the United States, and we have contracted prices locked in to further hedge our short-term exposure. However, although our cost exposure is indirect, the broader downstream impact on the consumer is unknown and difficult to predict. This could create greater volatility in our business, particularly retail, where we are retaining a measured view on our expectations for the remainder of the year. For additional context and color, I'm including some factors to assist you for modeling purposes.

First, we continue to expect total comparable store sales growth to be stronger in the front half of the year compared to the back half, as we lap the full price rollout of Titanium in May and then face more challenging comparisons in the back half. The impact due to the timing of the Easter holiday this year compared to last year will be an estimated 30-40 basis point headwind to our full quarter Q2 comp. Number two, we continue to expect the implementation of price increases on our base membership to provide support to revenue per member, helping to offset some of the expected pressure in the back half. Number three, as I mentioned earlier, roughly $1.5 million of marketing spend shifted from Q1 into Q2. For the full year, we expect a modest uptick in our marketing investments versus last year.

Number four, we continue to expect roughly 70% of our new greenfield openings to occur in the second half of this year. Number five, our new methodology for calculating adjusted net income and adjusted EPS no longer excludes non-cash rent expense in the calculation. This results in approximately a $5 million and $0.02 negative impact, respectively, to our full-year guidance. Without this change, our outlook for these metrics would have improved to $145 million-$152 million and $0.44-$0.46, respectively. For even more details, the full list of our initial outlook ranges for 2025 can be found in the table in today's earnings release. In conclusion, as we look at many of the changes occurring across the industry and anticipate where the industry is heading, coupled with our strong positioning, we are optimistic about our long-term outlook despite a tough macro backdrop.

Our operational excellence is unparalleled in the industry, and the depth and experience of our management is second to none. With our strong brand, dedicated team, leading subscription business, and robust unit economics, we are well positioned to drive growth and create long-term value for our shareholders. Operator, that concludes our prepared remarks, and we will now open the call for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, please press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Simeon Gutman from Morgan Stanley. Please go ahead.

Simeon Gutman (CFA)

Hey, guys. Good quarter. I wanted to ask first about the comp guidance. Jed, I know you just were very detailed on it. I wanted to follow up. The math on the next three quarters at the high end is just, I think it's just 2% at this point to get to the high end three. Is that scenario weaker consumer and tough compares? At the low end, I think it's just flat at this point. You did say you're confident in the business. You just ran two quarters of six, granted tough compare, but are you thinking recession? Consumer pulls back a lot. How do we get to that low end? Thank you.

Jed Gold (CFO)

Yeah, Simeon. When we think about, first of all, the quarter, really, really happy with what we saw during the quarter, +6% testament to 75% of the business subscription. The challenge, just the environment that we're in. As we look at where we made changes to the balance of the year, revenue per member growth still in that plus low single digit to plus mid single digit range, consistent with the guidance that we had in Q4. Comp store member growth, slight positive to low single digit, once again, consistent with what we laid out on the Q4 call. We gave ourselves just a little bit of room as we looked at retail sales.

At the high end of the guide, it was a negative mid single digit comp at the time of the Q4 call, and we've taken that down to negative high single digits. Just given the choppy backdrop and some of the turbulence, the tariffs, and then as I shared in the prepared remarks, we did see a little bit of a moderation in April, although we're still running, we're positive. A little bit cautious and tepid, just given the backdrop that we're in.

Simeon Gutman (CFA)

Can I just ask an unrelated follow-up on free cash flow? Can you just remind us how you, I guess, philosophy on it? Are you using cash not just to grow? It looks like you paid some debt down in this first quarter. Are you trying to keep neutral or the business should throw off cash as it continues to grow and build?

Jed Gold (CFO)

Yeah, right now, the way that we model it out is roughly neutral. Simeon, if you recall, in the Q4 call, we did pull back the number of new builds just a little bit, and that gave us some excess cash flow that we used to help pay down the debt. Broad high level, if you look at the high end of the guidance, $346 million of adjusted EBITDA. We've got $305 million in CapEx. That includes both the core store and the new build CapEx. We've got roughly $50 million in sale lease backs on the year, $61 million of interest going out the door, and then a little bit for cash tax. It's roughly a positive $25 million free cash flow on the year.

Simeon Gutman (CFA)

Okay. Thank you. Good luck.

Jed Gold (CFO)

Thanks.

Operator (participant)

Your next question comes from Randy Konik from Jefferies. Please go ahead.

Randy Konik (Managing Director)

Yeah, thanks, guys. Good afternoon. I guess one question. If I looked at the UWC member growth, I believe it was up 5% in the quarter. I believe coming out of the fourth quarter it was up 2% on a year-over-year basis. A nice healthy acceleration sequentially. Can you give us some perspective? Is that kind of just doing a better job on these different marketing tactics? Any particular kind of reasons for that better conversion, if you will, in the quarter sequentially?

John Lai (Chairman and CEO)

Hey, Randy. This is John. I think the plus five that we posted on member growth in Q1 was a direct result of the increase in retail traffic that also was plus five. It just proves out that when we get customers in the door, we're able to convert them. Our capture rates have remained steady, right around 10%-ish. When we get those retail customers in, we're able to sign up members, and that was the direct line to member growth.

Randy Konik (Managing Director)

Great. Just to follow up there, a follow-up. When you look at the price, just to clarify on the price change on the base, is that a universal or in most markets? I just want to clarify there. As you think about titanium penetration, I think, again, for the second quarter in a row, about 23%. Can you just give us some perspective on any variability by markets to give us kind of your thoughts on where long-term penetration might sit for titanium over the next few years? Thanks.

John Lai (Chairman and CEO)

Yeah, I'll start with your last question first, Randy. We're happy with where our titanium mix sits today. As we've shared before, it's been beautifully accretive, and the customer acceptance has exceeded our expectations. We don't expect any degradation. Again, we're happy with where that sits today. Our approach is more of a pull versus a push, allowing our customers to make their own choice. They've spoken very loudly. We're enjoying that. When you look at our membership mix, 22.5% of our overall UWC members are in Titanium, and that's held steady quarter over quarter. I forgot what was the first part of the question.

Randy Konik (Managing Director)

Base price increase?

John Lai (Chairman and CEO)

Yes. Yeah. The answer to your base price, in most markets, we are taking a price increase to $22.99, and that started roughly a month and a half-ish ago, and it is kind of a rolling rollout, if you will. We expect the full impact to start hitting the till around May-ish and then having it fully implemented by June.

Randy Konik (Managing Director)

By the way, quick question on that. In the markets that saw the base price increase, have you seen a measurable difference in the uptake of Titanium relative to that 23% overall or no?

John Lai (Chairman and CEO)

No, the mixes remain the same. We just saw very, yeah.

Randy Konik (Managing Director)

All right. Cool. Thank you.

Operator (participant)

The next question comes from the line of David Bellinger from Mizuho. Please go ahead.

David Bellinger (Senior Equity Analyst)

Hey, thanks for the question. Good afternoon. Understanding this is a very, very fluid consumer backdrop here, but I thought some of the competitive comments were a little different this afternoon. It sounded more positive, especially with these restructurings happening in the space. You had a few quarters of decidedly positive comps here in a row. Should we start to think about this as Mister starting to hit some kind of inflection point here where sales could flow decidedly positive from here on out?

John Lai (Chairman and CEO)

Yeah. Hey, David. This is John. I'll start, and Jed, you can add. I think we're very fortunate that demand for express car wash services continues to grow. Consumers have more choice. I think the stuff that's in the market today is not going away. We are in this world where consumers have more choice. We have to get better at our craft and win the war on the ground by delivering an exceptional customer experience. What we've seen, whenever there is competitive intrusion, we might see some impact to our business in the first year or year and a half. We start to see a rebound in those customers coming back. That, again, gives us some encouragement that we're on the right track and we're, from a value proposition, delivering on all the fundamental tenets that our customers expect.

Jed Gold (CFO)

Yeah. David, it seems like kind of the battle royale kind of peaked in 2023. When we look at the number of new competitor new builds within a three-mile radius, Q1 of 2025, we estimate seven new competitors within a three-mile radius. Q1 of 2025, 15 competitors. And then going back to Q1 of 2023, 33. We are seeing fewer competitors coming within the existing trade areas that we operate. To John's point, the ones that came in in 2023, we are still battling it out with them. Ultimately, we believe we are better positioned just with our superior product offering, our team, and all the investments we have been making over the years to prevail.

John Lai (Chairman and CEO)

Yeah. I think, Jed, if I could just add, rationality is setting in as our competitors are reevaluating their growth trajectories and realizing that it's not grow and scale at all costs, and they got to be as smart as us.

David Bellinger (Senior Equity Analyst)

Yeah. Yeah. Thanks for those data points. Incredibly helpful. Then just my follow-up here. Looking at the UWC as a percentage of total wash sales, that went down year-over-year. I think that's the first time that's happened as a public company. How do you diagnose that? Just understanding that it seems like the retail customer slowed a bit here in April. Stepping back, does UWC down year-over-year, is that sort of an indicator that the retail customer could possibly be back? Is that a positive signal from retail?

Jed Gold (CFO)

Yeah. The goal is not to get that to 100%. And so what's happening in Q1, David, what you're seeing is the +5% comp retail growth. As we get more retail customers coming in, eventually, it pulls that number, that subscription mix down just a little bit. For us, it's not something that we get overly concerned about. We look at that data point, but we're not concerned. If anything, it's a good thing, especially when we're running 10% capture rates because it translates to more members.

David Bellinger (Senior Equity Analyst)

Very good. Thanks, guys.

Operator (participant)

Our next question comes from Peter Keith from Piper Sandler. Please go ahead.

Peter Keith (Senior Research Analyst)

Hey. Thanks, guys. Nice quarter. The tariffs make sense that you would not have any direct exposure on day-to-day operations. I am wondering on equipment and if there could be some equipment from your suppliers that is imported or impacted by steel tariffs. Any talk of that coming off the car wash show that might increase the cost of new builds looking forward?

John Lai (Chairman and CEO)

Yes. As Jed mentioned in his prepared remarks, we have multi-year agreements in place with most of our major suppliers that provides a hedge against any inflationary inputs that could cause a spike for those that do not have that in place. We feel pretty good with where we sit in talking to the OEMs and some of the key strategic players that we work alongside with. Given our buying power, we feel pretty good with all the knock-on woods. Outside of a few things, perhaps there might be a slight uptick in towels, for example. Outside of that, it will not be material.

Peter Keith (Senior Research Analyst)

Right. Okay. That's refreshing to hear. Moving on to marketing. Jed mentioned a slight uptick in marketing this year. We've done some work. A few of your peers. And you guys historically have spent about half a percent on marketing. It does seem like some of your peers spend more like 2%-3% of sales. Notably higher. John, I guess, are you still kind of in a testing mode this year? Do you think you'll ever get above 1% of marketing percent of sales? It just seems like there is an opportunity to really drive more traffic here.

John Lai (Chairman and CEO)

Yeah, for sure. Really fair point. We all want to increase our ad spend and drive more retail traffic, which then leads to UWC member conversion. As we've shared, we want to be measured. While we're accelerating our marketing efforts, we're measuring everything and making sure that the offers are not just targeted, but they're relevant, and that they do ultimately drive incremental growth. Oftentimes, measuring that incrementality can be elusive for not just us, but for our competitors. Once we have more data that supports the return on the advertising investment, we expect to do more and incrementally grow.

Peter Keith (Senior Research Analyst)

Okay. Very good. Thanks so much.

Eddie Plank (VP of Investor Relations)

Our next question comes from Phillip Blee from William Blair. Please go ahead.

Phillip Blee (Research Analyst of Consumer)

Hey, guys. Afternoon. Thanks. Appreciate the question. If you're assuming that retail revenue is down more high single digits for the year, given a potentially softer consumer environment, should we then consider the membership is more flattish or just slightly up quarter over quarter for the remainder of the year? Should we consider anything like impacts from churn during a potential recession? Just any color how to think about this metric evolving throughout the year would be very helpful.

Jed Gold (CFO)

Yeah. So membership growth, I guess, sequentially, I mean, from a year-over-year perspective, Phillip, which is how we model it out and think about it, we're expecting positive low single-digit comps to our member growth. And from a churn perspective, we're expecting our core churn levels to be in line with where we have been. One caveat is we built in a small period of elevated churn due to the base price increase. We saw this in the six stores where we did the test last year. When we pushed through that price increase going from $19.99-$22.99, we see a slight uptick in churn for about one month. The churn levels will settle back in going into month two, three, post the price increase. We factor that into the guidance.

We don't expect, and consistent with what we saw in the financial crisis, what we saw in COVID, that the subscription business is consistent. It's predictable. We don't expect periods of elevated churn. People, especially those subscription members, they value a clean car despite the macro backdrop. And that's consistent with what we've seen over time.

Phillip Blee (Research Analyst of Consumer)

Okay. Great. Just a different topic, but understood on the lack of direct tariff impacts. Any color around the materials for Greenfield expansion and ability to hit your store target for this year? Have you seen any early indicators around potential delays or lack of availability of materials later on this year that can make it harder to hit your full year target, especially given the second half has a bigger exposure there? Thank you.

Jed Gold (CFO)

The pipeline is largely set, not just for 2025, but we're starting to lock in 2026 as well. We haven't heard any early indicators. I mean, some whispering around masonry and concrete indirect through our general contractors, potentially some pressure there. As we look at the total spend, we don't expect it to have a material impact on the cash-on-cash returns that we're able to generate. Lumber is another one that we've heard a little bit of pressure with just with the general contractors. When you think about how we source for our new builds, a lot of that's sourced on more of a regional basis or a site-by-site basis with those general contractors.

Phillip Blee (Research Analyst of Consumer)

Great. Thanks a lot.

Operator (participant)

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

Michael Lasser (Equity Research Analyst)

Good evening. Thank you so much for taking my question. John, is there a case where the retail business is simply becoming more volatile from month to month, not just simply because of the overall state of the macro environment, but given how much capacity has been added to the wash industry over the last few years, there are simply fewer unattached customers for the retail business, which is going to create more volatility from period to period? Do you think there's any evidence that you saw that from the last four months where it seemed like retail was up double digits in January and then down to maybe as much as high single digits in April? Thank you very much.

John Lai (Chairman and CEO)

Hey, Michael. Thanks for the question. I wholeheartedly reject your premise. I say that with a smile on my face because I like to give you a hard time. No, if you look at Q1 and the plus five that we posted, I think that speaks to the health of our space. It speaks to the health of our business and how the demand for our service is omnipresent and continuous. With respect to the competitive impact and its impact on our retail volume, as I've previously shared, we're seeing a decel in new unit growth coming into the market. It is slowing down dramatically right now, which, again, is going to be a favorable trend for us. There will be less competitive intrusion over time.

That said, again, customers have more choices than ever before, and we need to execute at store level to win their business, earn their business day in and day out. That is what we are really good at because we have built a massive member base of 2.2 million members. We are processing over 100 million cars on an annualized basis. When you look at the US car park and the growing demand for express exterior car washes and what we believe to be an undersubscribed TAM for membership, we are actually very bullish.

Michael Lasser (Equity Research Analyst)

Gotcha. My follow-up question is, on the heels of raising the base price membership shortly after rolling out Titanium, all of this is happening into what could be an accelerating broader inflationary environment. Does taking this much price or generating this much additional revenue per member give you pause in what could be a more pressured consumer environment? If that were the case, given what happened the last time there was a lot of inflation, it did seem like the business slowed a bit. What levers would you push this time in order to drive the business? Thank you.

John Lai (Chairman and CEO)

Thank you, Michael. Fair question. We believe that our membership value offering is strong. When you look at the $22.99 divided into what is a $10 on average median base retail price point, the consumer is actually getting tremendous value on that third visit. They do the calculus in their head. At the third visit, they're getting a discount. The fourth visit, in their minds, is a free car wash. The affordability and the value of membership is actually stronger than it ever has been. I will add that the $22.99 price increase from $19.99 was, in the overall scheme of things, we believe to be very modest and one that we held the line for many, many years until we felt the time was right.

The pass-through and what we're seeing right now and the lift in revenues was kind of supporting the decision.

Michael Lasser (Equity Research Analyst)

Is there anything on the levers you might pull in the event there is a slowdown?

John Lai (Chairman and CEO)

Listen, we've managed through various economic cycles in the past. As we ratchet up to continue to build and grow our business, if we were hit with any major headwinds, we would certainly, as a management team, look to ratchet down certain expenditures so that we can live to fight another day. Our business, Michael, acts a little differently. I know technically everyone wants to clump it in a consumer discretionary category, but it really acts like a staple. In good times and in tough times, people want to take care of their assets. They really value their vehicle. There's a strong argument that if they're going to forego or delay that new car purchase, they really want to take care of their core assets. We benefit on either end.

Michael Lasser (Equity Research Analyst)

Thank you very much and good luck.

Jed Gold (CFO)

Thanks.

Operator (participant)

Our next question comes from Chris O'cull from Stifel. Please go ahead.

Chris O'cull (Managing Director)

Thanks. Good afternoon, guys. I had a question about the media test. How do you guys plan to measure the return on that investment? I am also curious how many markets you believe could be media efficient.

John Lai (Chairman and CEO)

Yeah, Chris, hey, this is John. Through the traditional ROAS, we're looking for a three-to-one lift when you look at ad spend and then revenue. For our business, given the longer-term lifetime value of a member, it really does support us doing more and getting an actual better return. Through that traditional lens of a three-to-one ratio, that's how we're measuring the promotional effectiveness of each campaign. If we apply an LTV target to that number, it actually makes it look like an even smarter investment.

Chris O'cull (Managing Director)

Do you have a sense for how many markets could use media?

John Lai (Chairman and CEO)

Right now, we're testing across six different markets. For the six, we're seeing some very promising results against the controls. Then iterating from each of those tests so that we can scale this program, but scale it, again, in a responsible way. Over time, if it justifies and helps move the needle, I could see it applying to almost every market.

Jed Gold (CFO)

But Christ, you touched on a really important point and something that we have had a lot of debate behind the scenes on. That's the efficiency. Which markets do we go in and test knowing that that media spend is relatively fixed at the DMA level? A DMA where we only have six stores versus a DMA where we have 30 stores, you obviously get a bigger bang for the marketing buck in those markets. On the other hand, you don't want to completely neglect those stores in the smaller DMA. A lot of debate. That's also part of the calculus when we look at the return. Looking at all of this on a test and then relative to a control group and how much of an incremental lift are we getting relative to that control.

The variable, though, as John said, is just the subscription element of the business and that lifetime value of those subscription members that you're able to convert.

Chris O'cull (Managing Director)

Okay. That's helpful. John, you mentioned developing innovative solutions is obviously one of your guys' strategic pillars. Titanium 360 has obviously been a success. I'm curious, how would you characterize the pipeline of new ideas that you have for maybe future tests? How are you thinking about potential timing if you've got a new idea that you'd like to roll out?

John Lai (Chairman and CEO)

Yeah, I think our cadence for new product solution introductions is roughly 18-24 months. That is the target. We have some things in the hopper that we're not going to share on this call that we think are not just going to be transformative and extremely value-added, but accretive ultimately to our top line and then subsequently our bottom line. How can we create more value for our customers and also increase profitability? That is the goal. That is what we're working on right now. We've got some really cool things through our in-house R&D team that they're working on. We can't wait to share that with you sometime down the road.

Chris O'cull (Managing Director)

Okay. Fair enough. Thanks, guys.

Operator (participant)

Our next question comes from Justin Kleber from Baird. Please go ahead.

Justin Kleber (Senior Research Analyst)

Hey, good afternoon, guys. Thanks for taking the questions. Wanted to first follow up, Jed, on your churn comment as it relates to the base price increase. I know you're building that into the plan, but just curious, the response you're seeing real-time as this price increase has been implemented more broadly, is it consistent with what you saw on the test markets? Just any color on what you're seeing.

Jed Gold (CFO)

Yeah, Justin. When we look at the markets as we're rolling them out and just a little bit more color on a price increase in this market, you take the in this industry, you can take the price increase, and those that are signing up, overnight, they start paying the new $22.99 base price. You have to give a notice to your existing members. It takes about 30 days before they start to recharge at that new $22.99 price point. We're watching this churn closely. So far, everything is consistent and in line with what we saw in the markets that we tested in at the end of last year.

Justin Kleber (Senior Research Analyst)

Okay. Just the we noticed you're at a higher level in Minnesota. It was like $25.99. Just curious, what's driving that decision? Should we ultimately expect you to move towards that level over time across the chain?

John Lai (Chairman and CEO)

Yeah. Good call out. You've done your research. The great state of Minnesota, it's one of our strongest regions. Maybe now is a good time for me to give a shout-out to all of Team Minnesota who absolutely crushed their membership targets and goals. That's also a market where there's just a higher cost of living, higher wage rate. We have, as we look at regional pricing, that's one market where we have a slightly different price point that's a little bit higher that's driving that revenue number.

Jed Gold (CFO)

Yeah, Justin, one of the inputs into this is we look at how we're priced relative to competition. That $22, many of our competitors are already at the higher price point. We look at that on a regional basis. That's also part of the math as we look at $22.99 versus $25.99. Minnesota's an exception. We don't have, that's not the goal. It's $22.99 is going to be the system average.

John Lai (Chairman and CEO)

I think if I can just tag one more thing. Even at that elevated price point, the fact that they have had elevated sign-up numbers, again, speaks to the point that at the end of the day, while price is important, it's not the determining factor of why people choose to sign up for the program.

Justin Kleber (Senior Research Analyst)

All right. Thank you, guys. I'll pass it on.

Operator (participant)

Our next question comes from John Heinbockel from Guggenheim. Please go ahead.

John Heinbockel (Senior Managing Director and Equity Research Analyst)

Hey, John. When you look at average per-member visitation by month, how does that differ by tier of membership and geography? I am also curious, if you go back, how has that increased over time? I imagine it has increased, right, over the last five years?

John Lai (Chairman and CEO)

John, I don't have the membership frequency by tier, but I can get back to you on that one.

Jed Gold (CFO)

It's consistent. It's across all tiers.

John Lai (Chairman and CEO)

Okay. That's a great question.

Jed Gold (CFO)

About 3.2 times per month.

John Lai (Chairman and CEO)

I just got educated by Jed. It's consistent, if you heard that, across all three segments, all three membership tiers, I should say. With respect to regionality, again, it's oftentimes the time of year. During the winter months in the northern climates, we see a higher frequency in the summer months in the northern tiers. It gets even more nuanced. In California, for example, in Northern California specifically, the period is the summertime when agriculture is at its high. I can go down to love bugs down in the Southeast. I mean, each market, if you have pollen in Georgia, those really act as spikes to demand in a beautiful way.

Jed Gold (CFO)

Yeah. John, when you look at it, when you look at that frequency of use over the last four or five years, it's been very consistent at that 3-3.3 times per month. You do see, to John's point, a little bit of fluctuation just based on seasonality in the particular market. Q4, we'll see it'll go from a 3, 3.2 down to a 2.8-3 visits per month, but nothing significant.

John Heinbockel (Senior Managing Director and Equity Research Analyst)

All right. And then just the quick follow-up just on the mechanics of the price increase. You give a 30-day notice, and then the price goes up. Now, are you going to give a 30-day notice all at once, or you'd stagger it across the year, right? Because you think about a 15% increase on 40% of your business, right? You're not going to get that lift immediately. Is that realized over a 12 or 15-month period or sooner than that?

John Lai (Chairman and CEO)

Yeah. It is a little bit more nuanced than that. The way we approach it is we broke the country into five different subcategories. Part of it is the training that we need to do with the frontline team. We do not want to shortchange that. We are pretty methodical and intentional in making sure that we give all the tools on the ground so that the team members are prepared to answer any questions should they come their way. As we roll it out, I did not want to correct Jed earlier, but it is technically 30-60 days after the initial communication when we start to see the lift, right? The way our members are billed over the course of a 30-day period, you have kind of an even distribution, if you will, from day one to day 30. We give a 30-day notice.

The existing members will start to, those that signed up on the first will see their price increase. We'll see it rolling there through. Jed, are you following my logic? Okay. Through 60 days. Bottom line, John, is May is when we're starting to see things hit. Jed's got a little skip in his step as a result.

John Heinbockel (Senior Managing Director and Equity Research Analyst)

All right. Thank you.

Operator (participant)

Our next question comes from Bobby Griffin from Raymond James. Please go ahead.

Bobby Griffin (Managing Director)

Good afternoon, guys. Congrats on a good start to the year. Just two quick questions for me. It might be too early, but have you seen anything from a competitive side of things on the markets where you did move the price? I think you mentioned some competitors are not there yet. Did they come up, or is there any response there to share?

John Lai (Chairman and CEO)

Yeah. For the competitors that we compare ourselves against, we were getting to their median. There are certainly other players out there that have different pricing strategies. I can't speak to every single one of them. We were definitely not the leader in price at $22.99 in almost every market where there was a whole bunch of folks that were already there.

Bobby Griffin (Managing Director)

Yeah. I was just curious more in the did they have any changes? Just where you look at the operating costs of this industry being more expensive than it was a couple of years. Everybody's pricing more rationally now. They took advantage of a tier like you moving up. Did they move up, or they stayed the same? Just anything around that?

John Lai (Chairman and CEO)

Yeah. I think it's too early to tell. We continue to monitor and gather as much competitive data as we can. I'm not in a position to opine on every region.

Bobby Griffin (Managing Director)

Fair enough. Secondly, for me, just on the chemical and labor line, continuing nice performance there. Just curious what the guidance embeds for further labor optimization or chemical savings.

Jed Gold (CFO)

Yeah. As we had talked on the Q4 call, we have realized most of that chemical optimization and labor optimization during Q1. The year-over-year improvement that you've seen, we do not expect that to continue in Q2, 3, and 4, at least at this point. It's all been flowed through on a year-over-year basis.

Bobby Griffin (Managing Director)

Thank you. Very helpful. Good luck the rest of the year.

John Lai (Chairman and CEO)

Thanks.

Operator (participant)

The next question comes from Tristan Thomas-Martin from BMO Capital Markets. Please go ahead.

Tristan Thomas-Martin (Leisure Analyst)

Hey, guys. Just one question for me. You called out comp trends moderate a little bit in April. Anything else to kind of flag, whether it's consumer income demographics or geographic trends in specific markets? It'd be helpful.

John Lai (Chairman and CEO)

Yeah. I'll start. I think the neat thing about our business is that it has universal appeal across all segments of the motoring public. When we break down the different average household income cohorts, we see consistency across the entire portfolio. That's terrific. You would think that the lower end might be under more pressure, which, again, we're not saying that they're not, but it really hasn't impacted our business. For that, we feel very fortunate.

Jed Gold (CFO)

Yeah. Just to emphasize a couple of points that were made in the prepared remarks. First of all, I think as we look at April, UWC sales, they remain really strong, resilient, as we've been saying all along, consistent, predictable source of sales. Easter, the timing of Easter, when you look at the impact on the month, it's about 100 basis point impact on the month, which translates to 30-40 basis point impact on the quarter. Just the Easter timing. If you go back to 2024, there was some weather impact in Q1. April came back really strong. We had a stronger April lap, particularly on the retail side. As we said, total comp store sales, they do remain positive in April and trending to that low single-digit range.

Tristan Thomas-Martin (Leisure Analyst)

Got it. Thank you.

Operator (participant)

Our next question comes from Thomas Wendler from Stephens. Please go ahead.

Thomas Wendler (Research Associate)

Hey, good afternoon, everyone. Just one quick one from me. I want to go back to the base membership churn one more time. Do you expect to see those customers returning as they shop around and kind of see your updated pricing is in line with the market? What would the timeline look like for those customers to return? Would it be similar to the two-year timeframe to outperform when a new competitor moves into the market?

John Lai (Chairman and CEO)

Yeah. We saw in the first month post-announcement, a slight uptick in churn. It came back down to historic levels literally in the second month. Immaterial in the overall scheme of things. Again, the very slight uptick in churn was offset by the benefits that we enjoyed from the price increase.

Jed Gold (CFO)

Keep in mind, it's the first time we've taken a UWC price increase in 15 years. We don't have a lot of data points to say if after six months, a year, two years, these customers eventually come back. We did not build any of that into the guidance or the model. I think it's plausible to say that somewhere over time, if they had a good experience with Mister, they're eventually going to find their way back.

John Lai (Chairman and CEO)

Yeah. I always have to add, Jed, that unlike a gym, when you cancel your membership, you can't get back into the gym. At Mister Car Wash, oftentimes, people will temporarily suspend their membership if there's seasonal issues or reasons where they're going to their lake house, what have you. They come back. For us, a churn customer is not a lost customer in most cases. Many times, they default to retail.

Thomas Wendler (Research Associate)

Perfect. I appreciate the color.

Operator (participant)

This concludes our question and answer session. I'll now turn the conference back to John Lai for closing comments.

John Lai (Chairman and CEO)

Thank you all again for joining us today. We appreciate your interest in Mister and look forward to speaking with you again when we report our second quarter results.

Operator (participant)

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