VeriSign Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 12 speakers on the call.

Operator

Good afternoon and welcome to Mr. Car Wash's conference call to discuss financial results for the 4th quarter and Fiscal Year Ending December 31, 2023. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Please note 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.

Operator

Speaking from management on today's call are John Lai, Chairman and Chief Executive Officer and Jed Gold, Chief Financial Officer. After John and Jed have made their formal remarks, we will open the call for questions. During the conference, 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 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.

Operator

Please be advised that the statements made today are current only as of this call and are based on the company's present understanding of the market and industry conditions. While the company may choose to update these statements in the future, they are under no obligation to do so unless required by applicable law or regulations. Please review the forward looking statements disclaimer contained in the company's latest annual 10 ks and 10 Q reports as such factors may be updated from time to time in other filings with the Securities and Exchange Commission. I would now like to turn the call over to Mr. John Lai.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon and thank you for joining our Q4 earnings call. This past year, we delivered solid results, driven by our focus on continuously improving our services, our physical plans and our teams, which resulted in a better overall experience for our customers. Our obsession around delighting our customers begins with delivering a consistently clean, dry and shiny car with exceptional customer service in a super speedy way, all of which takes a team of highly trained and motivated operators who love what they do. During the Q4, our results were in line with our expectations. Sales grew 7% to $230,000,000 adjusted EBITDA increased 5% to $69,500,000 comp store sales increased 0.7 percent and we opened 14 new greenfield stores and ended the year with 4 76 locations.

Speaker 1

Reflecting on the year, it was one of the more challenging years, but it was also a year where we demonstrated our mettle by working through some macro forces such as increased competition, high inflation, high interest rates and an abnormally tight labor market. Despite these pressures, we were able to grow sales by 6%, adjusted EBITDA by 1.5%, same store sales by 0.3% and we opened a record 35 new greenfield locations and acquired 6 locations, all while adding 194,000 new UWC members. What we're most excited about is the introduction of Titanium, our new super premium service, which will act as a nice tailwind to revenues over the next several years as we trade people up to our new premium membership plan. I'm extremely pleased to report that we're able to compress our rollout timeline and convert our entire portfolio ahead of schedule and now have 100% of our stores with titanium. We're just now beginning to see the fruits of our labor as introductory promotional offers will often select markets.

Speaker 1

Early stage adoption rates are exceeding our expectations from a percentage of members in the program standpoint. Jed will share more details in a second about what we're seeing. We think about our Unlimited Watch Club and how that's changed every aspect of our business, it's important to note that for many years, our primary focus has been on net member growth and converting retail customers into members. Over the last 6 months and into 2024, we're going to prioritize trading up existing members into Titanium versus converting retail customers into UWC members. Given our multiple lanes format, we're now positioning our guest services specialists in the membership lane to accomplish this task.

Speaker 1

As a result of this shift in focus, we're expecting a period of more modest net member growth, offset by the tailwind of accelerated growth in revenue per member. Retail volume has been a headwind for us and appears to be weaker across the sector, driven by a more difficult overall economic environment for consumers and an increase in competitive activity. The good thing is that 2023 was the year when the number of new units coming in the market began to moderate. After years of explosive growth, the market is resetting, which is a good thing. And we believe that things will begin to abate in 2024 and dial down in 2025.

Speaker 1

While others are pressing pause, we're pushing full steam ahead. The next several years will be a period of opportunity for Mr. Car Wash, opportunities for us to advance our position in the market, but do it in a disciplined and opportunistic way. With a strong balance sheet, access to capital and a long history of being best in class operator, we're in a great position to play offense, while others are playing defense. Looking ahead into 2024 and moving at a pace that feels right to us, we plan to open approximately 40 new Express locations and from an M and A standpoint, continue to evaluate good opportunities that help us densify and fortify our leadership position across the country.

Speaker 1

And finally, we're on a multi year path to accelerate our leadership development program, which is our pipeline for future store managers. We're very proud of the fact that 90% of our store managers started their careers as hourly employees. And building an organization from the ground up, 1 leader at a time, has created an amazing team that knows how to process cars efficiently and maximize throughput during peak demand. When asked about our competitive advantage, I don't even blink when I say it's our operations team and the support infrastructure we've developed that's allowed us to elevate our standards and scale our business to heights no one thought was ever imaginable. In the end, it's all about people and we're very proud that throughout our journey we've never lost sight of our guiding principle, which is to take care of our people, who take care of our customers, who in turn will allow us to generate extraordinary shareholder value over the long run.

Speaker 1

I will now turn the call over to Jed to provide more commentary around our financial results.

Speaker 2

Thank you, John, and good afternoon. Overall, we had a solid 4th quarter. From a top line perspective, sales were within our guidance range. Comp trends were strong in the first half of the quarter and moderated as the quarter progressed, primarily on the retail side. From a bottom line perspective, the team exercised strong financial discipline and adjusted EBITDA and adjusted net income came in ahead of our guidance range.

Speaker 2

We managed expenses well in the quarter and are finding opportunities to operate more efficiently. As John indicated, we completed the rollout of Titanium ahead of schedule and we are now focused on driving trial and adoption across all our locations nationwide. As noted on our previous earnings call, our initial penetration target for UWC was at least 10% of UWC subscription mix within a year of implementation. We have already surpassed that goal and titanium penetration levels are running over 15%. With that said, let me run you through the 4th quarter numbers.

Speaker 2

In the 4th quarter, total net revenue increased 7 0.4% and comparable store sales increased 0.7% versus last year. UWC sales represented nearly 74% of total wash sales and we added 6,000 net members in the 4th quarter. On a year over year basis, the number of UWC members increased 10.3%. The performance of our subscription business remained very stable in the quarter. Core churn rates outside of the Titanium promotional offering remained in line with the historic ranges.

Speaker 2

On the development side, we opened 14 new greenfield locations in the Q4, which was a quarterly record. Greenfield returns remain very strong and continue to be the highest and best use of our capital. On the expense side of the business, we remain focused on managing expenses and optimizing the investments we are making to support the long term growth and development of the business. We are also identifying areas where we can leverage our scale to drive efficiencies and do even more with less. Excluding stock based compensation and as a percentage of revenue, total operating expenses increased 170 basis points to 81.2% year over year.

Speaker 2

The main drivers were labor and chemicals decreased 53 basis points to 28.9 percent, other store operating expense increased 175 basis points to 40.6 percent, G and A expense was flat at 10.1% and gain and loss on the sale of assets increased 45 basis points to 1.6%. Breaking this down a little further, from better staffing models focused on maximizing throughput and delivering a great customer experience. Our team works with a sense of purpose and it's one of our strengths. This was partially offset by an increase in average hourly wages. Other store operating expenses increased primarily from an increase in rent expense and from the fact that we have 45 more car wash leases compared to the same time last year as a result of the additional sale leasebacks done over the 12 month period.

Speaker 2

In the quarter, cash rent expense increased 13% to $26,000,000 G and A expenses excluding stock based compensation expense as a percentage of revenue were flat year over year and we are starting to leverage the growth investments made over the past few years. In the Q4, interest expense increased to $20,000,000 from $14,900,000 last year due to higher interest rates and the expiration of our interest rate hedge in October of 2022. Our GAAP reported effective tax rate for the Q4 was 26.8% compared with 25.1% for the Q4 last year. Adjusted net income and adjusted net income per diluted share, which add back stock based compensation and certain non core operating expenses were $24,000,000 and 0 point 0 $7 respectively in the quarter. 4th quarter adjusted EBITDA was $69,500,000 up 5% from the Q4 of last year.

Speaker 2

Adjusted EBITDA margin was 30.2% versus 30.9% in last year's 4th quarter. Moving on to some balance sheet and cash flow highlights. At the end of the year, cash and cash equivalents were $19,000,000 and outstanding long term debt was $897,000,000 Our balance sheet remains healthy and we continue to self fund our growth and expansion. We completed 5 cell leaseback transactions involving 5 car wash locations in the 4th quarter for an aggregate consideration of $23,800,000 We continue to see healthy demand at favorable rates in the southeast back market. Lastly, let me make a few comments around guidance and some of the factors that help shape our initial outlook for 2024.

Speaker 2

First, we expect to open approximately 40 new greenfields this year. The majority of these will be in existing markets where we have opportunities to densify, fortify and grow our market share. The timing of these openings will be back half weighted with an estimated 30% of the first half and approximately 70% of the second half. 2nd, we will continue to promote titanium across various markets to drive trial and adoption, particularly across our base of approximately 2,100,000 unlimited wash club members. Once customers experience the speed and convenience of being a member of our Unlimited Wash Club or the shine and efficacy of Titanium, the majority of them recognize the value and continue with the program beyond the promotional pricing period.

Speaker 2

We tested this to varying degrees last year and we'll be re launching introductory pricing promotions in certain markets this year to help drive trial and adoption even further. This will drive titanium penetration rates, but will also put some short term limits around revenue lift and flow through from titanium this year, particularly in the first half. 3rd, last year, we grew UWC by just over 10% with 35 new greenfield openings and 6 acquisitions. This year, we are targeting approximately 40 new greenfield openings and focused on driving titanium conversion and revenue per member. 4th, we expect G and A growth to slow a little and we should be in a position to leverage certain expenses this year due to various productivity initiatives and an even greater focus on doing more with less.

Speaker 2

Lastly, we are not anticipating any changes in the macro environment. Many consumers remain challenged and we have not seen a meaningful consolidation across the industry yet, which we think warrants a certain level of cautiousness in building our initial outlook for this year. Full list of our initial outlook ranges for 2024 can be found in the table in today's earning press release. In closing, I would like to thank the entire Mistre team for their work and dedication. We are a team that cares for one another and our customers.

Speaker 2

2023 was another important year in our long standing history. We came together as a team and delivered strong execution and with solid results and it's a testament to the culture and type of people at MiSTer. With that, we are happy to open the call to questions.

Operator

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

Speaker 3

Hi, thanks. Good afternoon, everyone. Hope you're doing well. I wanted to follow-up on a couple of the comments you made around Titanium 360 rollout. So you mentioned that you've already reached 15% penetration.

Speaker 3

That was a little bit confusing. So I'm wondering if that was at some of the earliest test stores, if you could clarify. And then secondly, you had mentioned that probably limited benefit from T360 in the first half. And I guess is that I think it's from promo pricing, but maybe you could just help us understand while promo pricing is driving no benefit, but you're already at 15% penetration in some stores?

Speaker 1

Yes. Hey, Peter, this is John. Good to hear from you. So we're still in execution mode and we're going to get we're going to continue to get better at upgrading our members over time. We are ahead of where we thought we were going to be at 15%.

Speaker 1

We expect that number to grow quite frankly. But with respect to the promotions that we have put in place to encourage early adoption, we are now just on the cusp of having those promotions roll off and we're going to enjoy, I think, a nice tailwind from a revenue standpoint as we get further down the road here as the months progress.

Speaker 2

Yes, Peter, just a little bit more color around that and the impact of titanium in Q4. You had touched on it, right? So overall, pleased with titanium, how it's mixing, right, mixing just north of 15% overall, but the impact during Q4, it was just a little bit muted because of some of the promotional offers that we are using to drive trial amongst our members.

Speaker 3

Okay, very good. And then maybe on the retail side of the house, that is a little bit of softness in the back half of Q4. Any observations on what's driven that? It seems like the retail side, probably industry wide, just can't seem to get off the map. And then maybe any commentary with Q1 with some of the erratic weather?

Speaker 3

Is that something we should keep in mind as we're modeling our Q1 comps?

Speaker 2

Yes, Peter. So you touched on it, right? So as we've talked about that retail volume, it is a little bit more susceptible to some of those exogenous factors such as gas prices, right, some of the discretionary spending events, gas prices and also competitions having some impact there on the retail side of the business as well. But retail comparables in the second half of Q4, they did moderate from where we were seeing them at the time of the Q3 call to where we overall in the quarter, we saw just a little bit of moderation on the retail side of the business relative to where we were during Q3. And as we look at how that's translated into Q1, really tricky to say Q1, 2024, just because of the extreme cold, the weather throughout much of the country.

Speaker 2

Last year, we talked about the impact of the weather on the business. As we look at the number of precipitation days in those markets where we operate, it's actually higher this year even than it was last year we looked at it during January. Overall, January comp was still positive, but it did fall short of what we were expecting. So it's really difficult to come to any conclusions just because of the early quarter weather impact that we saw. I would say for Q1 2024, we do expect positive comps just given how we typically see the month play out, March being the stronger month historically of the Q1.

Speaker 3

Okay, very good. Thanks so much and good luck.

Operator

The next question comes from Justin Kleber with Baird. Please go ahead.

Speaker 4

Yes. Hey, guys. Thanks for taking the questions. Good afternoon. Just a follow-up first on Titanium.

Speaker 4

The market that got the service, I guess, almost a year ago, kind of where is penetration trending in those areas? And then can you isolate what type of same store sales uplift you're embedding in that in the 24 comp outlook from Titanium?

Speaker 1

Yes. So I don't know if we're going to be able to drive or you're going to be able to drive much from the early regional launches because quite frankly we weren't promotional. We were launching and focused more on product efficacy and making sure that the product profiles were where they needed to be. Once we got those in place and we checked the quality and performance box, we then started to get more effective ways that we could trade people up. So the RPC lift, I think, is again something that we're going to enjoy going forward.

Speaker 1

And I should say RPC and RPM. But for the early stage regions, there's really not a lot to draw upon.

Speaker 2

And then, Justin, the second part of your question, just the full year 2024 guide of 0.52 plus 2.5. So from a titanium mix, right, we're mixing it about +15%. I think the variable there is how quickly we get these markets on regular way pricing, which as John had highlighted, we're moving quickly toward. And then the variable of what happens to how retail sales perform. To get to the high end of the guide, the plus 2.5%, you don't have to model an improvement in the retail trends that we saw in Q4 in order to get to the plus 2.5%.

Speaker 4

Got it. Okay. That's very helpful. And then, John, you talked about having a strong balance sheet and access to capital. So the question is around what you're seeing in the M and A environment and how comfortable would you be in taking on additional leverage if there was a transformative M and A opportunity that became available at a reasonable price?

Speaker 1

Yes. I'm going to kick that one over to Jed because he's our leverage king with respect to the balance sheet.

Speaker 2

Yes. Justin, so I think when you look at this business and just the amount of free cash flow that's generated, right, there's a lot of cash, a lot of that's committed right now for greenfields. When it comes to leverage that we ask ourselves what are we going to use the leverage for. And if the return profile is where it makes sense, then and it's an acquisition that's going to fit in with the broader portfolio. We're going to be strategic and opportunistic about M and A.

Speaker 2

Having said that, we do recognize that we're sitting at the high end of the 2x to 3x target that we've put out there and it's going to have to be a really good asset for us to lean in.

Speaker 1

Yes. And Jed, I would add though that we can justify leaning in when we can pro form a out year 2, year 3 growth, which will lower that effective multiple, which will help us get our ratios in line or in a better place. So if we if there wasn't a good opportunity, we certainly would take a hard look at it. The one other

Speaker 2

does serve as a little bit of differentiator where we have equity in theory for the right asset and if the seller saw the upside and the synergies of a combination between MiSTer and their platform where potentially equity would serve as a currency on a larger scale acquisition.

Speaker 4

Got it. Okay. Makes sense, guys. Thanks and best of luck.

Operator

The next question comes from John Heinbockel with Guggenheim. Please go ahead.

Speaker 4

Hey, guys. I want

Speaker 5

to start with a question with regard to pricing on titanium, right? So you talked about promo pricing, regular pricing. So I guess regular pricing, are you settling in at $39.99 And is the promo pricing sort of roughly half of that? So that's sort of number 1. And then as part of that, right, John, when you think about you guys have always used retail as sort of the feeder for membership.

Speaker 5

Is there a good way or a way to not use retail to kind of as you densify just attract members without them being retail first and can that move the needle?

Speaker 1

Yes. So let me answer the second part of your question first. So we have actually thought really hard about that particular question. And our belief originally was that someone needed to come in and try us through a retail purchase first and then we would wow them with our subscription based membership plan. We've actually turned the tables on that.

Speaker 1

We're actually leading now with membership because what we found is that it was taking it was too long of articulation and we were perhaps protracting out that time horizon. So in our new approach, we're finding that actually working and is dispelling what was a conventional wisdom inside of our own belief system, which was that we wanted to take this slower boat approach to membership growth. So we're doing just that. To the first part of your question with respect to promotional pricing, yes, we're still experimenting actually with a couple of different approaches. And we want to actually move away from the price value piece of it, but we also know that it's also a very effective lurehook to get folks interested in trying it.

Speaker 1

But we really haven't settled in and established something that we think is going to be the game plan in perpetuity because we're constantly refining, constantly reassessing and determining how can we do it more effectively and quite frankly shrinking that discount line while achieving the same types of capture rates. As Jed alluded to in his opening comments, we're really, really pleased with where we sit today in terms of the percentage of our existing members that are have traded into the program. And we've got a lot of momentum, John. There's a lot of untapped potential. And when you have an embedded pace of over 2,100,000 members, it is really where our focus is right now, which is trading those existing members up into our premium plans.

Speaker 1

And we're excited about where we sit.

Speaker 5

Secondly, if you think about densifying, right, which you're doing and some others are too, Are we reaching a point where that is acting as an impediment to someone thinking about coming into a market? And when do we get I mean, it seems so obvious that when you look at other sectors and how they've progressed, that at some point here, we need to see significant consolidation regionally and maybe starting regionally, right? How far away we are from that with people still raising money and with the amount of private equity participation? Do think we're still a couple of years away from that process?

Speaker 1

So the market has been consolidating pretty aggressively over the last, I'm going to say 5 years, but it has cooled and it's cooled primarily due to prices that have gotten a little wonky. Folks that have really pushed the envelope with respect to sale leaseback financing and quite frankly run out of growth capital to fund their ambitions. And that cooling effect I think is healthy and long overdue. So we're seeing contraction in multiples and as prices come down that will create more opportunities for us going forward. But with respect to the competitive moat, if you will, and densifying our existing footprints, We still have a long runway to go inside of the close to 70 MSAs that we're in to get to a point where we think that we've got a strong enough position that would prevent a whole lot of folks thinking about coming into our own backyards.

Speaker 1

And we are seeing less encroaching than we have over the last several years. Folks have really started to say, hey, the AUV profile that was 5 years ago is a little bit different today because the pie is getting sliced up a little bit thinner.

Speaker 4

Thank you.

Operator

The next question comes from Jason Haas with Bank of America. Please go ahead.

Speaker 6

Hey, good afternoon. Thanks for taking my questions. It looks like the guidance from doing meth right implies some margin compression in 'twenty four on a year over year basis. Can you just add one anything to be aware of there in terms of margins?

Speaker 2

Yes. So listen, Jason, first of all, good afternoon. Good to talk to you. Overall, when you look at the guide, overall trends for the most part are in line with 2023, the two points where there's a little bit of compression. The first is on the store level rents as we've done more sell leasebacks and we plan to do more in 2024.

Speaker 2

It create just a little bit compression to margin. The other piece is on the labor side, particularly with Greenfields, when we run a full labor load, but the store hasn't fully ramped. Reason we didn't see that as pronounced in 2023 is we had the labor staffing, the optimization of the labor staffing model that really offset that. But we anniversaried that in Q4 of 2023, won't have that benefit helping offset it. So creating just a little bit of labor compression.

Speaker 6

Got it. That's clear. That's helpful. And then as a follow-up, maybe going back to the competitive environment, I guess, good thing to hear that, got a little bit less competitive for locations and acquisitions.

Speaker 5

What about

Speaker 6

on the pricing side? Are you seeing any easing of competition there? Does that mean pretty competitive in terms of pricing, especially on the retail side? Thanks.

Speaker 1

Just to be clear, you're talking about prices of car washes?

Speaker 6

Yes, that's right.

Speaker 1

And what we're seeing from a competitive landscape perspective, just to be clear, are you talking about our own pricing strategy?

Speaker 6

What you're seeing from a competitive landscape perspective?

Speaker 1

Yes. So I think things have cooled a bit. There were some folks that were that have chosen to get I can't speak to anyone else's strategy but our own. But when we assess the marketplace, where we sit visavis, the bulk of our competitors, where we're kind of right at the median. And again, I think in this kind of consumer environment, it's not the best time to be taking price.

Speaker 1

And so, I think everyone's kind of feeling it. And we're not the only ones that are experiencing some retail softness. So, if there's retail softness out there, it really does not create the type of environment where you think that you can pass through additional price increases.

Speaker 6

Awesome. Thank you.

Speaker 2

Yes. And Jason and for the rest of the call, just one point of clarification on the guide. The our full year 2024 comp store sales guidance is a +0.5 to a +2.5. There'll be a correction to the 8 ks that went out earlier with that correction shortly.

Speaker 6

Got it. Thanks for clarifying that.

Operator

The next question comes from Philip Blee with William Blair. Please go ahead.

Speaker 7

Hi, guys. Thanks for taking the question. You spoke about the ongoing shift focus on the upward migration with existing membership. Should we then expect membership to decline throughout 2024 under the current guide? If so, what to or to what degree?

Speaker 1

Yes. We don't expect it to decline. We just think that it's the growth is going to moderate because of our focus on upgrading existing members. And as I mentioned in my opening remarks, we're repositioning our guest services specialists to be positioned in the members lane and that old adage of taking existing customers and increasing the value of those customers versus trying to acquire a new customer that that's our primary focus, which is going to result in a slowdown in net member growth. We'll still see some growth, but just not at the same rate.

Speaker 7

Okay. And then is there a certain target then I guess you have for upward migration here? Or I guess said in other ways, is there a certain point where you shift your focus back to new member additions and how do you determine that balance going forward?

Speaker 1

Yes. For us, it's really hard to set targets, particularly for a new product launch. What we don't want to do is underestimate the potential. If we look back at our pre titanium mix between our former premium package, which was platinum and our base, We enjoyed close to a sixty-forty shift or mix ratio of premium to base. And so we would love to see that ratio remain the same, but bucketed inside platinum and titanium and then perhaps growing over time.

Speaker 1

But we don't want to limit ourselves. So we're going to continue to focus on member upgrades until we start to see a slowdown and then from there we'll shift. But we consistently reassess where we sit. But right now, we are so early in this adoption curve that this is going to be, I think, for the bulk of 2024 our focus.

Speaker 7

Okay, great. Thanks a lot. I appreciate it.

Operator

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

Speaker 8

Good evening. Thank you so much for taking my question. Is it fair to say that across the wash industry, the cost of business is going up as a result of higher membership acquisition costs, higher labor rates, higher rental rates and this is offsetting the benefit from higher revenue per member post that this is putting the downward pressure on the profitability of the sector and this is going to continue for an extended

Speaker 1

Yes. Michael, this is John. You broke up just a little bit there, but I think I got the gist of your question. So I think from a business fundamental standpoint, if you can grow your revenue line faster than you can grow your expense line, then that's the name of the game. That's the goal.

Speaker 1

And that's what we're focused on right now. So with respect to some rising input costs, and I can look across the board and it's the things that to your earlier comment, Evelyn is experiencing, How do we increase our ticket average? How do we and how do we increase the lifetime value of our members? And so while you all are focused on near term performance and we want to deliver near term performance, we're looking at this thing through a longer lens, saying lifetime value and Jed is lifetime value a GAAP measure? Not quite.

Speaker 1

It's not, but it really is what our Holy Grail is, which is taking a customer that washed relatively infrequently and changing their behavior and having them adopt a super premium plan. And if you think about it, Michael, it's an interesting time for us to be launching a premium offering without really taking any historical price increases on the base side. And if I can go down that path for a second, in this somewhat tepid environment from a consumer standpoint, the fact that we still have this value offering at $10 base retail, dollars 19.99 Unlimited Wash Club to appeal to that more price sensitive customer or member, while we launch this super premium, which will ultimately and I didn't really answer John Hambachol's question around price point for titanium, but if it's going to settle in at $39.99 what we're seeing is that even in this environment, people are willing to trade up for good quality. And if you deliver great value, they are more than happy to pay for it. And that's why we're super excited about what we're seeing in this very early stage of our launch.

Speaker 2

Yes. And Michael, just to add a little bit more color there. I think, first of all, all industries are exposed to the pressure of rising input costs. It may be a little bit more pronounced in this. But I think that's where we're optimistic is because we're in a unique place with this 3rd package rollout that, to John's point, is going to help offset some of these rising input costs.

Speaker 2

So all in all, we're very, very optimistic with Titanium and its ability to help continue to drive the top line longer term.

Speaker 8

And so the obvious follow-up is when can we expect Mr. Car Wash to generate margin expansion and what has to happen in order for that to be the case? Thank you very much.

Speaker 1

Yes. Boy, he's putting us on the spot yet. He wants an exact date.

Speaker 8

Yes. No hours, no minute. That's okay.

Speaker 1

So and I'm not trying to

Speaker 2

be cute here, Mike, when

Speaker 1

I say this. So maximizing revenue is our first order of business. We are less focused on margin expansion right now as we make the right investments to deliver the type of experience that we expect to deliver. That said, we're very mindful of making sure that over time, we have 30% net margins, your favorite line, Michael, it's a beautiful thing, But we have a really nice margin profile today. But it's our collective goal to show some margin expansion incrementally over time.

Speaker 1

We hope to do that perhaps in the back half of this year, but right now we're focused more on top line and driving adoption.

Speaker 8

Thank you very much and good luck.

Operator

The next question comes from Tristan Thomas Martin with BMO Capital Markets. Please go ahead. Hey, good afternoon.

Speaker 9

Good afternoon. Question around the competitor response to Titanium 360 and some of the relaunch of your introductory

Speaker 1

anything, we were I'm not going to say late to the dance, but most of our competitors have been offering 3, if not 4 membership programs already. And we had aired on the side early in our careers on the simplicity piece where we had a 2 tiered program and having a in the good, better, best kind of mindset, having a best package out there to offer, If anything, we relate to the dance. So we're launching we've launched it. What we have seen from a competitive activity standpoint, and this is going back over the last couple of years, is that there's many folks out there that are getting very aggressive with their promotional strategies, but from a discounting their list prices standpoint, we really haven't seen that.

Speaker 9

Okay, got it. Thank you.

Speaker 5

And then just maybe just kind

Speaker 9

of your general thoughts on the industry in 2024 and 2025. I think you're talking about M and A, but I think you said abating in 'twenty four and then dialing down in 'twenty five. So just maybe kind of curious what the difference is there?

Speaker 1

Yes. So it's our view that with respect to how hot this category, this sector has been over the last several years that it was right for a correction, if you will, and a reset. And we started seeing the slowdown happening just this last year. And so pick a word, but we're using abate for 2024 with and when I say abate, it's a slowdown in the number of new units coming into the market. And 2025, a little less new units than they were in 2024.

Speaker 1

So it's cresting, if you will. And again, I think that that is healthy because there was a lot of stuff that was being built that perhaps shouldn't have been built. And those folks are having to run those operations for a long time.

Operator

The next question comes from Christian Carlino with JPMorgan. Please go ahead.

Speaker 10

Hi, good afternoon. Thanks for taking my question. Could you talk about how ticket and traffic grew in the quarter and then how you're thinking about those components broadly in 2024?

Speaker 1

We're not going to give specifics, but we will say that our ticket average is up. And you're speaking specifically to our retail ticket, Is that right?

Speaker 2

Yes. I think, Christian, I think just the business behaves just a little bit differently than traditional a traditional retailer where over 70% of our sales are subscription. And so really, we look at it 2 different ways. You've got revenue per member, multiplied obviously by the number of members that you have in the program. That's what we collect as part of the subscription program, proven to be very resilient, consistent, predictable.

Speaker 2

And then the retail side, which performs and looks a little bit more like a traditional retailer where you have average ticket and number of transactions. We really haven't spoken or disclosed that in that level of detail. I think you can back into and get pretty close and to what the average revenue per member with the information that we've provided when you look at a mix of about 55% platinum priced at roughly $29.99 and then 45% of our base members, which is priced at roughly $19.99 So you can back into a rough revenue per member there.

Speaker 10

Got it. That's helpful. And on your comments about the industry slowing unit growth this year, could you talk about how you're thinking about just market growth generally? And what you're baking in, in terms of share gains for your guide? And would you expect share gains to sort of pick up relative to the past couple of years as a result of slower unit growth in the industry?

Speaker 1

Yes. I'll start by saying it's a big market out there and there's still a lot of growth potential. We have less than 5% market share. And as the industry leader, put an asterisk next to that as a caveat by saying while we're relatively large inside our industry, we're actually quite small and our upside growth potential we feel is tremendous. We've reset our vision for how many stores we believe is tangible and realistic and attainable, and that's 1500 stores, not 1,000.

Speaker 1

And so as we will this year have more than 500 stores in our portfolio, which is for us a really big milestone. But in a lot of ways, we're just getting started and it feels very early innings.

Speaker 10

Got it. Thank you very much.

Operator

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

Speaker 11

Hey, good afternoon. Hey, John, the slowing expansion or the moderating expansion, any sense to quantify how much the industry was seeing new units or supply growth over the last couple of years, what that curve is moderating to in 'twenty four, what it looks like in 'twenty five and beyond?

Speaker 1

Yes. And this is data that is hard to substantiate, but in talking to various OEMs and trying to triangulate around what we believe to be the total number of new units into the space in the U. S, it depends on who you talk to, but kind of around the 800 store range over the last 2 years. And again, we've seen that we're seeing that top out. And what that new rate of growth is going to look like in 2025, really hard for me to predict.

Speaker 1

But we feel pretty confident that it's going to be less than what we saw in 2023 2024.

Speaker 11

Okay. And one clarification to a question I think John asked earlier. When you're talking about opening in existing markets versus new markets, You said you have a lot of pipeline to go in existing, meaning if it doesn't make sense for you to go to new markets because of just the better returns of densifying, how long can you keep opening, call it, let's say 40 or 40 plus stores a year by sticking with existing markets?

Speaker 1

To 10 years. Okay. Okay.

Speaker 2

Simeon, when we've talked about the 1,000 plus and we look at the TAM, that's really looking at the growth within our existing markets. We don't plan to grow exclusively in our existing markets. Over time, we'll start developing in adjoining markets. And I think as we look at the anticipated ramp of both, we expect good ramp in both scenarios with the healthy cash on cash returns that we've seen here recently.

Speaker 11

If I can sneak one more in for you, Jed. The clarification, so the new guidance of the comp plus 0.5 to 2.5, Did you suggest that there's no improvement beyond what retail is doing today, meaning getting to that number is the math of what's happening with titanium rolling into that number?

Speaker 2

What we saw no improvement from what we saw in Q4.

Speaker 11

Okay. Got it. And but that second part that I mentioned is no improvement in retail, but it's the conversion element that adds to that comp to get you there?

Speaker 2

That's correct.

Operator

That's correct. Okay.

Speaker 11

Appreciate it. Okay, great. Thanks, guys. Good luck. Thank you.

Operator

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

Speaker 1

Thanks, operator. I'd like to conclude by saying as a pure play car wash company, our strategy is laser focused on growing our Titanium member base, opening up new stores of strength and building the best in class team while driving shareholder value. And at this moment, there's never been a more important time for us to live and breathe our culture, which is customer centric to the soul. We're at a beautiful juncture in our growth trajectory, where the challenges that others are facing will create opportunities for us to continue to scale and build a brand with enduring value. I look forward to checking back with you in our next quarterly call.

Speaker 1

Thank you everyone for joining.

Operator

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

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Earnings Conference Call
VeriSign Q4 2023
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