© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon and welcome to Mister Car Wash’s Conference Call to discuss Financial Results for the Fourth Quarter and Fiscal Year 2022. [Operator Instructions] Please note that this call is being recorded and a reproduction of this call in whole or in part is not permitted without written authorization from the company.
Speaking from management on today’s call are John Lai, Chairperson and Chief Executive Officer and Jed Gold, Chief Financial Officer. After John and Jed have made their formal remarks, we will open the call to questions.
During this conference call, references to non-GAAP financial measures will be made. A complete reconciliation of these measures to the most comparable GAAP measures have been included in the company’s earnings press release issued earlier today and posted to the Investor Relations section of Mister Car Wash’s website at ir.mistercarwash.com. As a reminder, comments made on today’s call may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company’s results to actual – to differ materially from management’s current expectations.
Please be advised that the statements made today are current as of this call and are based on our present understanding of the market and industry conditions. While we may choose to update these statements in the future, we are under no obligation to do so unless required by applicable law or regulations. Please review the forward-looking statements disclaimer contained in the company’s third quarter 10-Q as such factors may be updated from time to time in other filings with the Securities and Exchange Commission.
I will now turn the call over to Mr. John Lai. Please go ahead, sir.
Good afternoon, everyone. As I reflect on this past year, I’d characterize 2022 as a year of progress and promise, a year where we turned challenges into opportunities, opportunities to strengthen our team, improve our products and services, and differentiate in an increasingly competitive environment. It was a year where we experienced a slowdown in retail frequency, which we believe was primarily driven by the macro economy, while also experiencing inflationary cost pressures across almost every corner of our business, which put downward pressure on margins, but it was also a year where we got stronger and more focused. We reset our labor model and improved productivity and became more cost efficient with a keener eye on managing our expenses while prioritizing projects that have the highest return on invested capital.
With that backdrop in 2022, we ended the year with 436 locations, growing our portfolio by 40 net stores. We increased revenues by 16% to $877 million. We increased adjusted EBITDA 11% to $282 million and grew comparable store sales by 5%. Looking at the fourth quarter, we grew revenue by 12%, increased comp store sales by 4%, increased adjusted EBITDA by 15% and opened a record 13 new greenfield locations as well as acquiring 3 new locations in California.
As we barrel into 2023, we have identified 6 pillars that will guide everything we do: number one, expand our footprint while densifying and fortressing the MSAs we are in by accelerating our greenfield development and pursuing strategic M&A; number two, introduce our new premium positioned Titanium 360 retail package and UWC program alongside our new rinse and drying systems; number three, improve our marketing and ad spend by focusing on acquiring new retail customers through more targeted data-driven outreach; number four, continue to focus on growing and strengthening our UWC member base; number five, improve the performance of our existing portfolio by reformatting and reimaging many of our existing stores while continuing to look for ways to improve speed and quality; and number six, never pulling back on the people side of our business by building our leadership bench, which in the end is one of our most distinct competitive advantages.
On that note, at Mister Car Wash, human capital matters. I was recently in Minnesota visiting stores and had the opportunity to meet one of our high-potential future leaders who happen to be a recipient of our tuition reimbursement program. As she pursues her degree in software development, she applied her learnings from school to create a very sophisticated algorithm that combines store-level data into a dynamic regional dashboard to better track performance across all stores in Minnesota. The regional team quickly adopted this, and it’s a great example of how investing in people yields dividends, sometimes in the most unexpected ways. It’s also another example that our culture of taking care of our people can foster an environment where they come up with new innovative ideas to help our business. We have many stories like her’s and it’s what makes us not just a best-in-class operator, but a special company to work for.
As we look ahead to 2023, we know that the immediate road won’t get any easier. We’ve built the most talented and experienced management team in the industry with a shared sense of purpose around doing something that no one has done before: building a national car wash brand that stands for excellence. And behind the scenes, we will never lose sight of our guiding principle, which is to take care of our people who take care of our customers who, in turn, allow us to generate extraordinary shareholder value over the long run.
I will now turn the call over to Jed to provide more commentary around our financial results.
Thank you, John, and good afternoon, everyone. Overall, we are pleased with our results and underlying trends in the fourth quarter. Demand was consistent with the broader trends we have seen throughout much of the year and we are able to offset inflationary pressures with productivity improvements, expense containment and retail pricing increases. As a result, fourth quarter revenue was in line with our expectations and our adjusted EBITDA was modestly ahead of our expectations.
As John mentioned, a big highlight of the quarter was new store openings. In the fourth quarter, we opened 13 new greenfield locations, which was a quarterly record, and acquired 3 locations. Our greenfield stores continue to perform very well, ramping toward our mature Express Exterior average unit volumes of $2.1 million and 4-wall EBITDA margins of 45% to 50% in under 3 years. We remain optimistic about our greenfield development program and continue to view these investments as the highest and best use of our capital.
During the fourth quarter, comparable store sales increased 4% and net revenues increased 12% to $214 million. October was our strongest comp month and a wet November followed by storms in December likely had some negative impact on retail demand. Another highlight of the quarter was the continued steady performance of our Unlimited Wash Club subscription business. UWC sales represented 71% of total wash sales, and we added 24,000 net members in the fourth quarter. On a year-over-year basis, the number of UWC members increased by 13.8% to just under 1.9 million members. Once again, we did not see a meaningful change from our historic churn rates, and we did not see club members trading down from the premium package to the base package in any meaningful way.
Looking at the expense side of the business, we were pleased to see some of our cost containment measures beginning to result in lower labor costs and higher operating efficiencies. Overall, fourth quarter adjusted EBITDA margins were better than expected and came in at 30.9% compared to 30% last year. Excluding stock-based compensation and as a percentage of revenue, labor and chemicals decreased 180 basis points to 29.5%. Other store operating expense increased 170 basis points to 38.8%, and G&A expense decreased 280 basis points to 10.1%. The labor and chemicals line primarily benefited from better labor scheduling.
Other store operating expenses increased primarily from higher utility rates, increased maintenance service costs and increased rents related to additional sale-leasebacks. The increase in G&A was primarily from growth-related investments. During the fourth quarter, interest expense increased to $15 million from $6 million last year because of higher interest rates and increase in debt levels and the expiration of our interest rate hedge.
During the quarter, we transitioned to a SOFR-based borrowing rate and we are now paying SOFR plus 310 basis points on our outstanding debt. This compares to a previous rate of LIBOR plus 300. Our GAAP reported effective tax rate for the fourth quarter was 25.1%, compared with 11.4% for the fourth quarter of 2021. The increase was primarily due to the exercise of employee stock options and the favorable tax treatment in the year-ago period. Adjusted net income and adjusted net income per diluted share, which add back stock-based compensation and certain non-core operating expenses, were $26 million and $0.08, respectively, in the quarter. Fourth quarter adjusted EBITDA was $66 million, up 15.4% from the fourth quarter last year.
Moving on to some balance sheet and cash flow highlights. At year-end, cash and cash equivalents were approximately $65.2 million and outstanding long-term debt was $896 million. For the year, net cash provided by operating activities was $229 million and gross capital expenditures were $192 million.
Lastly, let me make a few comments around guidance. Our initial full year 2023 guidance calls for net revenues of $925 million to $960 million comparable store sales growth of 0% to 3%, adjusted net income of $100 million to $115 million and adjusted EBITDA of $277 million to $297 million. We do expect comparable store sales growth to be lower in the first half of the year versus the second half of the year. The primary drivers of this are the more difficult lap and the natural ramping of more greenfield stores that opened in 2022 being picked up as comp stores in the second half of the year. As a reminder, when we forecast interest expense, we use the SOFR forward curve in the market, and this makes for a bit of a moving target. As a result, our 2023 interest expense assumption is currently $73 million versus the $42 million we reported last year. The big year-over-year change is the result of the expiration of our very favorable hedge and the rising interest rate environment.
We continue to look at strategies to reduce interest expense going forward, but do not expect any material benefits in the short term. The team did a great job of opening new stores in the fourth quarter, but we continue to experience delays related to the permitting and building process. We have a robust development pipeline with over 150 real estate sites somewhere in the development pipeline. All of these things considered, our initial guidance for 2023 new builds is approximately 35 new greenfields.
Regarding sale leasebacks, we will be opportunistic and disciplined when we execute SLBs, recognizing we need to balance funding our development targets with lease terms that make sense for the duration of the lease life. We continue to operate a number of stores on company-owned properties eligible for sale leaseback. Our guidance includes sale-leaseback proceeds of between $110 million to $130 million for the year. At this point, we believe we can execute our sale-leaseback target utilizing both the 1031 and national REIT market, and it will be accretive to EPS when compared to other sources of financing. Between the sale-leasebacks executed last year and expected sale-leasebacks to be completed this year, along with rent escalators, we expect 2023 cash rent expense to increase $12 million to approximately $100 million.
Our initial capital expenditure outlook for the full year 2023 is $220 million to $270 million. This initial outlook is calculated based on our outlook of approximately 35 new greenfields this year. As a reminder, our CapEx in any given year includes some spending on new stores that are early in the development process and not likely to open until the following calendar year. Also, we did defer some capital projects last year because it was simply more cost efficient to work on certain projects while we were retooling the stores for the new service offering this year.
Finally, regarding the new service offering, we expect it to take approximately 18 months to have it rolled out across the entire base of stores. And our initial guidance for 2023 does not include any benefit from the new offering. As we have mentioned, we also plan to use this opportunity to further standardize many of our wash tunnels. While we do expect the new offering to be accretive to our margins and earnings, it’s simply too early to build anything into the model at this point.
In conclusion, while we cannot predict how the macroeconomic environment will play out over the next 12 months, we will continue to strengthen our operations and work hard to earn each and every customer visit. I want to thank all our hard working team members and associates who work hard everyday and for their commitment to help grow Mister Car Wash.
With that, we are happy to take your questions.
[Operator Instructions] And our first question will come from Elizabeth Suzuki with Bank of America. Please go ahead.
Great. Thank you. Just a question on how your costs are expected to flow through throughout the year and also between the other store operating expense and general administration and cost of labor. Just how should we think about those buckets? Where are the biggest increases? And then I have a follow-up question on labor as well.
Yes, this is Jed. I hope you are doing well. As you think about the – just from an expense standpoint and how it impacts 2023 going forward, there is really 3 – from an underlying assumption, we are assuming low to mid single-digit inflationary pressure. We believe that the consumers still under a lot of pressure, but there is still some inflationary pressure that’s out there, primarily impacting the store level labor line, the utilities and then also the rent as highlighted in the prepared remarks.
Great. And then my follow-up question is really about labor and increases that you have put through over the last year. And then maybe plans going forward and how much you plan to take up wages and whether historically you can point to market share gains that have been transpired after that – those increases?
Yes, hey, Liz, this is John. Good to hear from you. I will start by just saying that the state of our workforce is in great shape right now. All of our stores are fully staffed. We have a super engaged crew out there. We just conducted an eNPS survey and we are happy to report that we were rated 42. In the question of, would you recommend Mister Car Wash as a great place to work? We think that’s a terrific score. But looking at some other non-GAAP measures, our applicant flow is up 30%. Our turnover has remained relatively constant. And it kind of fulfills our goal of becoming an employer of choice, making sure we’re creating a great environment.
So specific to your question, we have seen year-over-year our wages are up roughly a little over 5%, and that’s been offset by some optimization that we’ve done with our labor staffing model, where we’ve been able to reduce the number of hours consumed per day by the mid-single – mid double-digits level. So overall, we are managing both sides of that equation. Wages are up slightly, but that’s been offset by productivity gains. And this management team is managing through those forces. Hard for us to kind of have a clear insight or view as to what the future holds, but we are feeling better about where we sit from a labor standpoint.
Great. Thanks very much.
Our next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.
Hey John. Hey, Jed. Can we talk about the comp guide? It’s a bit of a maybe step down from where you are running. So please if you can diagnose the macro, the consumer, the retail side of the business and how you thought about the 0 to 3?
Yes, Simeon. So, we are still seeing some softness on the resale side of the business. As you know, we had a really strong September and October as we highlighted on our last call. Those trends moderated just a little bit and didn’t transcend into November, December and going into Q1. So our full year guidance calls for comps in the 0% to 3% range. Keep in mind, particularly Q1, we have some really, really strong lap, and so given that difficult year-over-year comparison, we think that the first half could be 0% plus or minus, and the high end – and then at the high end of the range plus or minus in the second half of the year due to the laps that we talked about and also just the natural ramping of some of our greenfields as they start to get picked up in that comp store.
Yes. And Jed, I would add to Simeon’s question. I think when we look at our retail business, which we’re right now laser-focused on. We have seen what we’re considering a reduction in frequency. It’s not necessarily a lost customer. It’s a customer that’s coming in less often. We believe it’s primarily macro driven, less so weather, less so competition. We also believe – we don’t have any hard data to support this. This is coming from probably the bottom quartile of our cohort customer base. I think the good news when we look at just other metrics that we keep an eye on our ticket average year-over-year is up over $1, north of 9%, which is good. We haven’t seen any material trade down in any package – percentage of package sales. So our premium package mix is holding up nicely. And as you know, the margins on those premium packages are beautiful. So the business is on solid footing and on healthy grounds. And what we need to do now is just get better at marketing and see what we can do to drive retail traffic.
Fair enough. And then competitive backdrop as well as the deal flow or the deals that you’re looking at, has anything come in yet as far as more attractive because there is more willing sellers? Or is everyone frozen given the rate environment and you’re just keeping your head down waiting for the right chance?
Yes. So when we look at unit growth, we have, as we’ve shared in previous calls, we’re really doubling and tripling down on our greenfield development given the attractive economics and kind of how well we’re performing. As you’re aware, M&A has been a big part of our story and has helped us get to where we are. But given how – what we believe to be overpriced assets and us being very disciplined in our approach to M&A., we’ve been happy sitting on the sidelines and making sure that we’re not overpaying for businesses at the very core. So what we’re seeing right now is a slowdown across – and we’re not alone right now. So what we’re seeing is a slowdown in M&A activity across the industry, kind of coming back down to earth from a multiple standpoint. We think that, that’s all healthy because things have gotten a little too exuberant, if I can use that word. And again, I think that, that’s a natural reset of where things ought to be. So we’re very conservative when it comes to our M&A approach going forward. We’re not going to swing at every pitch. We’re going to make sure that we look for the right strategic opportunities in existing markets and probably do just onesie-twosies. That said, if there is a platform that comes along that looks attractive, and it helps move us into a new geography. We’ve been known to surprising people. So more to come.
Okay, thanks, John. Thanks, Jed. Good luck.
Thanks.
Thanks.
Our next question will come from Michael Lasser with UBS. Please go ahead.
Good evening. Thanks a lot for taking my question. So currently looking at the UWC membership base, the growth of 13.8% is as slow as it has been in the last 4 years. You mentioned the attrition has been stable. So obviously, that means it’s been difficult to attract new customers, assuming that’s because the retail business is down. So can you give us a sense of how the curve is going to look from here? Assuming that retail business remains under pressure, what will the growth in UWC membership look like over the next couple of quarters, especially if the macro gets worse from here?
Hey, Michael, this is John. You had to throw that last piece in with the macro gets worse. So we’re hoping that the macro gets better, but we’re also managing this business as if hope for the best, but expect the worst. So we have, on the cost side, batten down the hatches, and we’re running as efficiently as we need to. But as we look at our UWC member growth, you hit the nail on the head. With a slowdown in retail as a top of the funnel kind of input to our UWC member conversion, we’re also anticipating a slowdown in UWC member growth in the near-term. And so really, we’re focusing on how we can drive retail traffic to help us accelerate our UWC member growth. And we – I can spend some time talking about some of the things we’re doing there. But the bottom line – short answer to your question is that it’s going to be relatively flattish over the next several quarters. And we’re not anticipating any significant growth.
Yes. Michael, just to add a little bit more color there and how we’re thinking about it as we put together the guide and the model, right? We still believe that consumers, they are still very pressured. And when you look at economic indicators, balance sheets are running thinner, savings rates are declining relative to previous periods. And so from a UWC perspective, as you know, we don’t provide a guide on actual UWC members that we expect in 2023, but we did assume that similar year-over-year trend that we saw in 2022 continuing into 2023, given the softness on the retail side of the business.
Michael, if I can just add one more comment. I think – just if we zoom out for a second and just say, hey, 70% of our revenues are subscription. So they are recurring, they are predictable with a really beautiful margin profile. We feel very fortunate that we have built what we believe to be the largest carwash loyalty member base in the entire industry. And I think one of the things that I was kind of waiting for you to ask, so I’ll just go there. When we look at attrition or churn, that’s remained relatively constant and so one of the things that I think some people were anticipating was an uptick in churn in a down economy, and we haven’t seen that, which again speaks to the loyalty and I think the strength of the member base that we’ve built.
Understood. My follow-up question is going to be in two parts. Number one, how much have you assumed of a contribution from the rollout of the titanium offering to your same-store sales growth this year? And then my second part is if your same-store sales fall short of what you’re guiding to, how much de-leverage will you see on that shortfall? Obviously, a defining characteristic of the car wash business is that the marginal profit on an incremental wash is fantastic given the modest costs – incremental costs associated with each incremental unit, but that can cut both ways where you lose out on some washes and that falling revenue can have pretty sharp decremental margins as well?
So on the – we will start with the first question that you asked, and John can jump in and provide some more color. But from a modeling perspective in Titan, it’s still early days. We’re piloting that in a handful of stores and while we’re encouraged with the early results that we’re seeing, there are some things that we still need to tweak and as we think about continuing to roll that out over the next 18 months. So right now, the model assumes just a little bit of a headwind because of some of the investments that we need to make, particularly in the first half of 2023. On the labor side, we’re offsetting some of that with some productivity initiatives as we’re looking at labor scheduling and tightening that up. But we aren’t assuming any upside due to titanium in 2023.
Yes. Jed, can I provide some more color as to the why it’s taken us so long to roll this thing out? And I want to overstate that this is more than just a product launch. This is an entire reengineering, reconfiguration of our rinse and drying system as well as adding a brand-new service, brand-new package, brand-new program. And we’re also resetting and putting in place a better service delivery model for our customers. And so that massive amount of transformation, we think, is going to have a huge lifting effect, but because of the massive size of it, we’re going through this in a very thoughtful and intentional way, region by region as we always do our rollouts. This is not a flip the switch. And the next day, we’ve got a new product with new pricing. And as we’ve shared before, we’ve always felt that we need to earn the customers’ trust and deliver exceptional value. And so this is going to be a natural, what we believe to be, pull where people are gravitating towards this service, not through aggressive sales tactics, not through slick promotional gimmicks, but through demonstrating the value from the service. And we’re really encouraged by the early-stage results, but I’ve been asked to not share any of those results because you guys take that and run with it from a modeling standpoint. And then I’m out there having said too many things. So bottom line is we’re optimistic, we’re excited, but we’re staying kind of on soft ground with respect to the impact this year. But we’re really confident about what that lifting effect is going to have in years following.
And then, Michael, the second question around the sales de-leverage, it’s a tricky one in the sense that – I mean, right now, we are very focused on different marketing initiatives to try and drive retail volume to bring in that retail traffic. And we’ve been testing and trying different things. But quite frankly, we haven’t seen anything that – to our satisfaction that makes sense to do a wholesale rollout of yet. But we are continuing to lean in there. The other thing that we constantly look at and assess is where and when it makes sense to take pricing. While we don’t have anything planned at this point, it is something that we continue to look at and assess. And then from a cost containment perspective, I believe we’re still early days, particularly as we look to leverage the scale of Mister in recognizing some various cost containment initiatives that will help offset any potential sales to leverage if we found ourselves in a scenario where sales were decreasing.
Understood. Thank you so much and good luck.
Our next question will come from Peter Keith with Piper Sandler. Please go ahead.
Hi, thanks. Good afternoon, everyone. Good to hear from you. John, you talked about some of your pillars of growth. One of them was improve the marketing spend with the data-driven outreach. It seemed like that had kind of been in test mode this past year. And so I’m not sure if you’re indicating you’re kind of ready to push forward on it. But maybe you could give us an update on where you stand and where you see the opportunity?
Sure. Hey, thanks. Good to hear from you. So while some folks do A/B testing, we do A, B, C, D, E, F and G testing, and having some fun there. But we – to Jed’s earlier comment, from a promotional effectiveness standpoint, we’re very – and I’m going to harken back to 20 years plus of – in the early days of car washing where there was a lot of very aggressive discounts and promotions that were very dilutive. It didn’t really move the needle and in the end, unnecessarily discounted existing customers and/or members. So we are determined to make sure that we preserve this very profitable and valuable member and customer base, while not giving away the farm while we’re doing that. So in our testing, part of the equation is getting the engine up and running and this is a great time for us to announce that our digital app was just released on the Apple website as of last night. And so that’s been a long time coming, building out this native app. This is not an off-the-shelf app that you can buy from your point-of-sale provider, and every Tom, Dick and Harry is using the same one with a different face. This is a customized solution that we think is really going to drive member engagement as well as customer acquisition.
So bottom line is, we are testing, to Jed’s point. We have yet to determine which one is ultimately going to move the needle. We’re not done testing, and we’re going to continue to experiment so that we can drive retail traffic. But as I mentioned, it is a priority for this company. And to be quite honest with you, as we reflect back again, we have been so successful in that old school word of mouth and taking existing customers and converting them into members that we hadn’t needed to advertise. We didn’t need to discount.
And perhaps in hindsight, we took our foot off the pedal, and we probably should have been perhaps more aggressive knowing that there was going to be some point in the curve where we’re going to experience a slowdown in retail and here we are, but we are pivoting and we’re moving very quickly right now from a marketing standpoint. And there is a lot of things going on behind the scenes. So again, we wish we had more tangible stuff to share with you guys on this call, but we’re not in a position to do so at this time.
Okay. Fair enough. And then I wanted to also just ask kind of a big picture question around the retail weakness. Certainly, this is not a Mister problem. It’s across the entire car wash industry. But I know that you, John, and others in the industry thought that it was gas prices, lower gas prices would start to drive the retail traffic. And that really hasn’t panned out. I know we can blame the economy although a lot of other goods retailers talk about the shift from goods and services. You guys are a service business. So I guess the heart of the question is, do you think that – is it just more competition out there that could be playing a role and maybe do you see pockets of the country where there is a lot of greenfield growth that there is extra retail weakness?
Yes. This – I think we’re not there yet. To be quite honest with you, I still think it’s more macro driven than it is competition or weather. And again, we’re speculating that it’s the bottom quartile of our customer base perhaps. And the thing that has been our saving grace is our membership, which has held steady. And I keep on circling back to that. The fact that we have not seen any degradation to our member foundation, we feel good about. We wish it was continuing to grow at the same rate as it has historically. So we just think that this is a temporal mode that we’re in. But to your question, the retail softness has been month-over-month now for quite some time. And we’re not the only ones experiencing this right now. So we believe it’s the American consumer at the low end of that segment that is probably impacted – being impacted most right now and they are just having to cut back temporarily.
Yes. Just to jump on and add a couple of points to that. So first of all, it’s the retail, as we’ve highlighted, and I think it’s important to emphasize that, that 70% of the sales are UWC. We’re seeing that part of the business hold together. And then to John’s point, when you look at those stores that are in a surrounding income demographic of less than $40,000, and we have a handful of stores in that demographic, they are down more than the balance of the portfolio. When you look at the plus four that we did in December, they are actually slight – those stores are slightly negative during the quarter.
We think though, Jed, they will come rolling back when the sun breaks. So I want to emphasize that this is just a temporary moment in time.
Okay. Thanks, guys. That’s really helpful insight on the demographic feedback. So thank you. Good luck.
Thanks.
Our next question will come from Simeon Siegel with BMO Capital Markets. Please go ahead.
Hi, this is Garrett Klingshirn on for Simeon. Thanks so much for taking our call. Just like to expand on that last point a little bit, if possible. Looking across UWC members across different regions and different metro areas, I’m just curious if there is been anything notable to call out among member growth. Are you not seeing it this year that you’ve seen in previous years? Are there weather concerns potentially maybe being an issue as well, too? Is there anything noteworthy within kind of your different pockets that you operate in that could be causing [indiscernible], I guess?
Yes. The short answer is no. And I think part of it is because at the very core, we have changed people’s behavior. We’ve changed the way people care for their vehicles. Once you get a customer to having your car clean all the time, you get really uncomfortable when your car is dirty. And in the overall scheme of things, we still believe that their car wash expense as a percentage of their overall transportation expenses is a very tiny fraction and it’s feel good. So as a result, the member base has remained unbelievably resilient. And for that, we’re very grateful.
That’s great. Appreciate the color. And Jed talked about this a little earlier and you guys have mentioned this in the past, but what is the availability to conduct sale-leasebacks at current levels, I guess? Is there still kind of – because you mentioned previously, it was somewhat challenging and cap rates were getting a little pinched, I guess, from an attractiveness standpoint to do those deals. I’m just curious how that’s kind of trended over the last few months and you just did some. Was that an area where that was an issue? And how are you guys thinking about that for – within your guidance next year with your planned sale-leasebacks?
Yes, Garrett, just one clarification there to your question, it wasn’t necessarily the attractiveness to do these still. It was just as you see the cost of borrowing increase, and so what we look at closely is the 20-year treasury and how it’s trending over time is, it does start to manifest itself in the sale-leaseback market and put some upward pressure on those cap rates. But we are still able to get deals done in the sale-leaseback market, particularly the 10/31 market where they get that bonus depreciation, the economics from a buyer’s perspective and buying a Mister Car Wash is still very, very attractive for them. And so we have a number of deals that are currently under LOI right now, and we feel good about being able to hit our target – our sale-leaseback target and generate the proceeds that we need to fund the growth that we have planned here in 2023.
Great. Appreciate it. Thanks so much for the questions and answers.
Our next question will come from Kate McShane with Goldman Sachs. Please go ahead.
Hi. Thanks for taking our question. I just wanted to ask a quick question on price increases. I think Jed had mentioned that as an option going forward. And just was wondering if any additional price increase was taken in Q4. How much more flexibility do you have to take prices up? And how much of a reality is it, especially in the context of what seems to be labor expense still being high?
Yes. Hey Kate, this is John. I will start by saying I think we are appropriately priced in each of our markets. That said, we continue to reassess our position and, like any company, we are going to remain opportunistic and make a move when it feels appropriate. We do believe we have some additional pricing power. But to your point, in this kind of tougher macro environment, it’s probably not the right time for us to lean in on that and push the envelope. So, we are going to hold the line for now and obviously not telegraph on this call any moves that are coming down the turnpike. And we are going to focus more on our titanium launch and moving upstream to more premium packages with a higher price point. And again, we are very confident that this will be accretive over time.
Thank you. And just any update on your Florida acquisition and/or any further detail on the couple of carwashes you acquired in California?
Sure. I will start with Florida. So, the Clean Streak Ventures deal was our biggest acquisition. And as such, it’s taken us longer and quite frankly, a little harder to integrate. What we adopted into the fold was three different operating platforms or three different point-of-sale systems. And that’s actually not uncommon. There is a lot of PE-backed platforms right now that are running with multiple systems, and this one was a PE-backed platform. And so they had kicked the can down the road and chose not to make the investment in standardizing their back-end systems. We knew that going in. And as a result, this is really three major post-acquisition integrations that looks like one on paper. But we are making great headway. The team on the ground is doing an amazing job. And as we have focused on three different kind of clustered MSAs, the Cape Coral, Fort Myers market was first. We are now getting very, very close to pulling the trigger in the Tampa St. Pete market. And then shortly after that, we are going to be ready to go in the Orlando, Central Florida pocket. So, we will probably be fully integrated here midyear, then start seeing the lift that we were hoping for. So again, this one has taken a little longer than we anticipated. On the California acquisitions, these were three beautiful tuck-ins in the Central Valley where we are very, very strong. California is our third largest market, and we are rocking and rolling right now. There is a huge car culture in California, and they love to keep their cars clean, and we are happy to wash them. So, we are kicking back there. It was a little bit of a wet period, as I think everyone knows, California went through a really unseasonably wet December/January. But now that the clouds are cleared, it’s – we are set up nicely for what we hope to be a great summer, which is when their peak demand period is. So, strengthening our position in California made a ton of sense, and it kind of speaks back to our M&A strategy, where we are going to do strategic bolt-ons to increase our penetration and further densify and progress [ph] the markets that we are in and the markets that we just don’t only want to protect, but we want to be proactively on the offense in.
Thank you.
[Operator Instructions] Our next question will come from David Bellinger with ROTH MKM. Please go ahead.
Hey John and Jed. Thanks for taking the question. So earlier, you mentioned the app rollout and trying to improve retention rates. So, can you just tell us where average retention times are now sitting? And maybe talk about the potential benefits you could get from keeping the customer just for one extra month and what that could mean in terms of upside and incremental profitability if you are able to attain that?
Yes. So, we don’t share that as a KPI, just because we don’t want to fault trap to that. It’s a singular KPI and there is a whole lot of other metrics that we look at when we evaluate our EWC program. I will say this, though, that our member retention rates are growing from a length standpoint. And again, that speaks to the stickiness of the program. And so the longer they are on the program, the better that goes without saying. And so we are moving that needle in the right direction. But with respect to the app and the opportunity for us to improve engagement, since it just launched last night, we don’t have a lot of data to share with you. But there is going to be, again, a lot of cool functions that we will roll out here over the next several months. And again, the objective is over time that, that number becomes even more sticky.
And David, just a data point to help you think through that right. So, if you look at the blended average on the EWC program, I mean one additional month and what it’s going to mean, right. One additional month for a customer, it’s roughly $25 per month for that customer. So customer retention, this is an opportunity for us. And we believe the app that John had mentioned is going to help with that as we look to going forward.
Got it. Okay. And then my second question is on guidance and the EBITDA margin compression that’s baked into 2023. So on the low end, we are close to about a 30% rate there. And just understanding you haven’t been as focused on margin expansion, you are still in this member and new unit growth mode, where could we see EBITDA margins ultimately bottom? There is much more competition in the space. You have got the softer retail business. There is a lot of promos out there. So, do you see 30% as sort of this lower bound on margins over the near-term, or is there something else behind that?
Yes. David, we believe that the fundamentals of the business remain intact. And as we have said all along, we are looking at this over the long-term. We still believe that 30% to 35% margin that we have shared still holds true. As you think about margin in 2023, I do think it’s important to emphasize that a couple of headwinds, right, that rent expense, as you think about the sale-leasebacks that we closed on in 2022 and those being pro forma, which is why we have shared the $12 million in the prepared remarks. We also have a little bit of bonus reset when you look at 2022 and underperforming just relative to our internal expectations and resetting those bonuses back up to 100% payout, create a little bit of a headwind. And then some – as we look at unemployment rates relative to historic averages, we believe that there is going to continue to be some pressure on the store-level labor line in particular. And so we built in a little bit of a headwind. It’s consistent with what we saw in 2022 going forward into 2023. Hence, that’s creating a little bit of margin compression in the guide. We are going to be able to offset some of that through some productivity initiatives. We really haven’t talked much about yet, just the team, and they have done a great job of scheduling labor even better. And the number of people that we have on the clock, when we have them on the clock, and this is something we have talked about in the past, but we continued to look at and refine, looking at it through a lens of both interior clean and express and tightening and getting better going forward.
Yes. Jed, if I can add too, I think that the cool thing about this story is that we are looking at this thing through a long-term lens, and we are making investments, particularly on the human capital side in people, in future leaders to help support our growth opportunity. And so what we have not done is pull back on those investments in managers and training, and our OLP program and making sure that we are continuing to invest in people that are going to help us support our growth. But those investments continue throughout our facility maintenance organization where many of our competitors are outsourcing their facility maintenance. For us, it’s a competitive advantage where we have taken it in-house. And we now have the best trained and the largest facility maintenance infrastructure in the entire industry with the best coverage ratios that we have ever had in the history of our company. So, it’s really set us up nicely. So, we could obsess about margins and margin expansion. We are not – again, our margins have grown beautifully through top line growth. We are managing our business responsibly, but we are not going to pull back on doing what we know we need to do if our opportunities get to a thousand stores, that would be very shortsighted. David, are you still there?
Our next question will come from Justin Kleber with Baird. Please go ahead.
Sorry guys, it’s Pete on for Justin. Thanks for taking the question. First, just around some of the top line stuff. Can you give us a sense for the average ticket assumption that’s underlying the comp plan this year, the zero to 3%, presumably lower than it was this year, but just curious about that. And with respect to the first half comps, I think you said flattish. Just given what you have seen so far, should we be thinking potentially the negative comps in the first quarter, then maybe a little better in 2Q? Just trying to better understand what you are seeing at this point.
Yes, Pete. So, the average ticket, it works just a little bit differently in this business than what you would see in traditional retail. You have got an average ticket on the retail side and average ticket for the UWC side of the business. It’s not something that we disclose externally. But we do have just a little bit of pricing that we took last August that’s impacting that average ticket. We believe about 1.5 percentage points is the overall impact of the comp, and that’s having some impact, but we don’t have any other planned pricing increases built into the model for 2023. So, what we are seeing in Q4, relatively consistent, just knowing that we will anniversary that August increase here in August 2022, obviously. And then how you laid out the kind of the first half, second half, it’s – like we said, it’s expected to be at the low end of the range. So, that’s 0% plus or minus in the first quarter in particular, first half, and then expect to be at the high end of the range during the second half of the year, largely driven by just how the lap plays out and then just the natural ramp as you think about the 28 greenfields that we brought online in 2022, as those start to pick up momentum and get picked up in the comp.
That makes sense. Thanks. And then just a follow-up, just on the marketing, I know there is a lot of initiatives out there. The member discounts or the new member discounts you guys have been testing kind of new locations, just curious how those have performed relative to your expectations, retention rates. Is that something you think you continue to do, or do you just try to tweak that going forward?
Yes. So listen, surprisingly, we are still very early stage in that journey as well. And some of the offers that we have extended to try and accelerate the ramp of our member base have been pretty elementary to be honest with you. And part of it goes back to just our gun shy discount averse mindset, where we have done such an amazing job of building a really big member base on a per store basis without having to do any types of discounts that there is a whole chorus inside of our organization saying why, don’t give away the farm. At the same time, there is another voice that’s saying, well, perhaps we can get there quicker if we were to do some more clever tactics. And so to that end, we are similar to our retail promotions, doing A, B, C, D, E, F, G, testing. And we will probably know a whole lot more a year from now in terms of which ones are really moving the needle and which ones aren’t. But it kind of speaks to just our conservative approach. So, we are – as old school as it sounds, it’s the slow and steady wins the race. And we have gotten there without having to put a whole lot of pressure on the customer or at store level. And we are very thankful that we haven’t had to get hyper-aggressive as others have with some of their discount strategies.
Understood. Thanks so much, guys. Appreciate it.
And our next question will come from Chris O’Cull with Stifel. Please go ahead.
Thanks. Good afternoon guys. Jed, I apologize if I missed it, but can you help us with the cadence of the wash openings for the year? And maybe what volume you are assuming for new washes in year one? And then what maybe – or what the full investment you are looking for per wash excluding land, I guess?
Yes. So, as we think about – I mean just Q4, we will start there, 13 greenfields that we opened in Q4 of 2022, really pleased with how the quarter came together and the number of new builds that we are to open. As we think about the approximate 35 over the course of 2023, we did not disclose the cadence, but it will be slightly favored to the second half of the year versus the first half of the year. And then as we think about the overall investment, it’s in line with what we have historically seen, just under $6 million gross CapEx investment and that we are able to do a sale-leaseback $4 million, just over $4 million. We still believe that we are going to be able to get less than a 3-year payback on these greenfields. We are seeing 50% cash-on-cash return by year two in our greenfields. These continue to perform extremely well. And this is the highest and best use of our capital. And so we are making investments and building these as quickly as we can, but making sure we have a good quality asset that’s going to withstand the test of time. We have got the team in place to operate them to our operating standards. But we – as you heard in our prepared remarks, we have got a very robust pipeline, not only for 2023, but we are working towards 2024 and even 2025 at this point.
Can you – what are these new washes averaging in terms of UWC membership levels in their – maybe their first year, or maybe how quickly do you think they are going to ramp to, let’s say, 4,000 members?
Yes. Chris, for competitive reasons, we are not going to talk in a lot of detail on that. As inferred on the earlier question, though, we are A, B testing, doing discounts in some of these greenfields opening out of the gates and some where we aren’t doing discounting and trying to isolate those variables as to where a discount helps us reach that kind of targeted UWC member base earlier. Obviously, the faster we can grow that UWC member base in these greenfields, it’s going to help in the long-term returns and what we are targeting.
Okay. Thanks.
And this concludes our question-and-answer session. I would like to turn the conference back over to John Lai for any closing remarks.
Well, thank you, operator and thank you everyone for joining us today. We are really proud of our team and all the great men and women out there in the field. They have done an amazing job this past year, really buckling down and demonstrating who we are and what we are made of. It’s one thing where you have got a whole lot of tailwind to look great, but when you face some headwinds and you are able to demonstrate your resolve, demonstrate who you are by delivering an exceptional experience to our customers. It really kind of speaks volumes to how well positioned we are as a company. As the macro environment improves, we are very confident that our growth trajectory will continue. And for us, it’s going to be up and to the right, and we are just getting started. So, the future is super bright for us, and we will check back a year from now and see how we fared in this – over the next 12 months. I know we will be checking back in 90 days. But we are confident that we are going to continue on this path, and continue building a beautiful company that’s very people-centric. So, thank you guys.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.