Mister Car Wash, Inc.

Good afternoon and welcome to Mr. Carwash's conference call to discuss financial results for the second quarter ending June 30, 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 the 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 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. Please be advised that the statements made today are current only as of this call and and they're 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-K and 10-K reports, 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, and thank you for joining our 2023 Q2 earnings call. We had a solid second quarter where comp store sales accelerated into positive territory. Operating margins improved quarter over quarter. Our limited wash program remained incredibly resilient, and we officially began the rollout of our titanium program. For the quarter, Sales grew 5% to $237 million. Adjusted EBITDA came in at $74 million. Comp store sales were up fractionally. We opened nine new Greenfield stores and acquired one location. And in July, we closed on a five-store acquisition in Los Angeles, bringing our total store count to 454 stores in 21 states. Our Unlimited Watch Club program continues to perform well with strong member retention and new member capture rates. We added 181,000 UWC members in the first half of the year and are approaching the 2.1 million member mark, underscoring the strength and resilience of our business. Subscription accounted for nearly 70% of revenue in the second quarter, and this continues to provide a predictable and recurring revenue stream and cash flow. Q2 marked the official beginning of our titanium rollout. And as of today, we've launched in over 100 stores across eight regions, and the early stage results have been encouraging. For those that haven't had the opportunity to experience titanium, allow me to start with the efficacy of this product. Our proprietary titanium formula is three times more active than anything we've seen in the market, which not only improves protection against corrosion, but produces a mirror-like finish on the paint. The best way to describe the effect titanium has on your vehicle is to imagine that you're looking at the side panel of your car and the finish is so brilliant that it could be used as a mirror to see your face in the reflection. It's that shiny. In fact, true story. Last weekend, our yellow lab named Macy was in the garage barking at my wife's car. Macy rarely barks, so I immediately thought something was wrong. When I went to investigate, I found her going crazy over the reflection of herself in the side door panel. So for what it's worth, titanium passed one of the harder bars, the Macy test. But I digress. Back to the show element of titanium. To make it even more immersive, we developed a unique and visually pleasing application arch with interactive lights, color, and signage, which takes the tunnel experience to a whole new level, making it feel like you're in an IMAX movie. But unlike an IMAX movie, our customers aren't just watching the show, they're in the show, riding through the tunnel, feeling it firsthand, and being thoroughly entertained in the three minutes it takes to get your car washed. With this launch, we've also repositioned our menu and introduced a new premium topside anchor package to provide members with more choice and value, which we believe will have a lifting effect to our revenues and earnings. While it's still early, We're gonna go out on a limb and say that over time, we expect to have at least 10% of our members in the titanium plant. Before I move on, I'd like to give a big shout out to one of the unsung hero groups inside of our company, our amazing facility maintenance teams who've been working overtime getting titanium installed. Cheers to you guys. Switching to new unit growth. Our foot is firmly on the pedal of Greenfield expansion as we've opened 13 new stores year to date and remain comfortable with our full-year target of approximately 35. All our new builds are ramping beautifully and are not only profitable in year one, but comping faster than our existing stores. When I think about the locations that we'll be opening over the next six months and what our real estate teams have in the hopper for 2025, we're really starting to see the benefits of scale and a flywheel effect as we get stronger and better with each successive store we build. I'd like to give another big shout out to our construction and development teams, new build install, IT and operations teams, who are all in growth mode as we continue to increase our greenfield capacity and scale up to help fulfill our vision. From an M&A standpoint, as we've shared on previous calls, we've seen a moderation of multiples with valuations becoming a bit more reasonable, and we remain disciplined and opportunistic as we bolster our position in existing markets, while continuing to assess new and adjacent markets to move into. Our latest acquisition, Cruisers, a five-store express chain in Los Angeles, is a good example of the type of platform acquisition that we tend to like that serves as a beachhead to enter a desirable new market. California is one of our more productive states, and our entry into Los Angeles firmly positions us in a way that will allow us to expand through Greenfield and M&A in an area that we believe has a ton of upsides. Before I turn it over to Jed, I just want to talk about the heat that we're experiencing across the country. Today, we're speaking to you from Tucson, where even though it's a dry heat, we're on track to break the record for the longest consecutive streak of 100-plus degree days in the last decade. And it's not just Tucson. June and July have been one of the hottest months on record across the country, and August is showing no signs of letting up. As a people-centric company, we've always prioritized the safety of our team members, and I want to let everyone know that we're taking extra steps to make sure everyone's properly hydrated, that they're educated on the signs of heat-related illnesses, and that we're given breaks throughout the day to keep our people safe and fresh. I want to take this opportunity to thank the men and women of Minister who brave the heat, bring their smiles to work, and work tirelessly to help make us the special company that we are. I will now turn the call over to Jed to provide more commentary around our financial results for the quarter.

Thank you, John, and good afternoon, everyone. Overall, we had a good second quarter, and we remain optimistic about what the future holds for MISTER. Before I review the details of our second quarter results, let me give you an update on our new titanium offering. We are excited to report that we have implemented titanium in just over 100 stores as of today. This includes the titanium offering along with some rinse improvement technology and reconfiguring blowers to provide an even more superior wash experience for our customers. We are ahead of our implementation plan and now expect all stores to be offering titanium by March of next year. We are refining and testing various promotional offers to help drive trial and adoption. We expect that this will result in a slightly higher churn rate after the promotional pricing period expires, but the churn will be offset by higher membership levels post the promotional period. Based upon our initial analysis, we believe titanium could eventually represent at least 10% of UWC subscription mix longer term. The revenue and EBITDA impact will likely be minimal this year because of the timing of the rollouts. and the promotional offerings and strategy, but we believe it will be meaningfully accretive to next year and could have a multi-year impact. Now, turning to the results of the second quarter. Total revenue increased 5.2% and comparable store sales increased three-tenths of a percent. UWC sales represented nearly 70% of total wash sales and we added 59,000 net members in the second quarter. On a year-over-year basis, the number of UWC members increased 12.2% and we finished the quarter with approximately 2.1 million members. The performance of the subscription business remained very stable in the quarter. Core churn rates and the split between premium and base memberships remained within the historic ranges. On the development side, we opened nine new Greenfield locations and acquired one existing store in the second quarter. The performance of our greenfields remains strong, ramping toward our mature express exterior average unit volumes of approximately $2.1 million and four-wall EBITDA margins of 45% to 50% in under three years. On the expense side of the business, we remain focused on better managing expenses and optimizing the investments we are making. While we continue to experience some increases, we are partially offsetting some of these with productivity improvements. Excluding stock-based compensation as a percentage of revenue, total operating expenses increased 210 basis points to 75.3%. The main drivers are labor and chemicals decreased 90 basis points to 29%. Other store operating expense increased 300 basis points to 38.1%. And G&A expense increased 50 basis points to 10.1%. The labor and chemicals line primarily benefited from better labor scheduling and optimizing regional labor infrastructure and offset average hourly labor wage increases of 5%. Other store operating expenses increased primarily from the fact that we have 54 more car wash leases compared to the same time last year due to the additional cell leasebacks completed during the last year. As a result, cash rent expense increased 15.5% to $24.8 million for the quarter. Utility rates and maintenance service costs also continued to experience some inflationary pressure. G&A expenses, excluding stock-based compensation expense, increased 10.5% and was driven by both continued investments to support growth in areas such as marketing, construction and development, partially offset by lower corporate insurances and other previous investments. During the second quarter, interest expense increased to $18.3 million from $8.8 million last year due to higher interest rates and the expiration of our interest rate hedge last year. It was slightly favorable compared to expectations due to the higher cash balance resulting from the faster pace of closing on sell these backs and the timing of reinvesting the proceeds back into the business. Our GAAP reported effective tax rate for the second quarter was 21% compared with 21.7% for the second quarter of 2022. The decrease was primarily due to the benefit related to the employee stock awards exercised and the benefit related to a change in our estimated state tax expense this year compared to last year. Adjusted net income and adjusted net income per diluted share which add back stock-based compensation of certain non-core operating expenses, were $29 million and nine cents respectively in the quarter. Second quarter adjusted EBITDA was $73.9 million, up 4.1% sequentially from the first quarter. Adjusted EBITDA margin remained high at 31.2%. Moving on to some balance sheet and cash flow highlights. At the end of the second quarter, Cash equivalents were approximately $136.2 million, and outstanding long-term debt was $896.6 million. Importantly, our balance sheet remains strong, and we continue to self-fund our growth and expansion. Demand for the sell-leasebacks remains strong despite the rising interest rate environment. We completed a record 10 sell-leaseback transactions in the second quarter, involving a total of 18 car wash locations for aggregate consideration of $80 million. Lastly, let me make a few comments around guidance and how we are thinking about the year. Our first half performance was in line with the low end of our expectations. Our subscription business performed well. However, the retail side of the business remained relatively soft, causing us to take a slightly more cautious stance on our outlook for the back half of the year. At the same time, we are now starting to factor in some basic assumptions for titanium into our forecast, but these remain minimal given the discussed timing and promotional strategy. Net-net, we are updating our full year 2023 guidance by shifting our ranges down slightly and tightening the possible range of outcomes. A summary of the changes can be found in the earnings release. In closing, we had a solid second quarter and continue to make good progress against our strategic initiatives. I want to thank the entire Mr. Car Wash team for their hard work and commitment to our customers and business day in and day out. With that, we are happy to take your questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one. If you would like to withdraw your request, please press star followed by the number two. Your first question comes from the line of John Heinbockel from Guggenheim Securities. Please go ahead.

Hey, guys. John, I wanted to start with just your thought on real estate and clustering because it looks like you're doing a lot of work in California and Florida today. You know, sort of thoughts on prioritization, and then I would guess, right, there's a correlation, as you referenced, members per location, right, where you've really achieved densification versus where you haven't. So maybe talk to that.

Yeah, so when we assess our position in each one of the retail trade areas that we're in, we have roughly a 20% market share on average, but we enjoy – certain select markets north of 50% share in those markets. We also see elevated AUVs, and we believe that supports our hypothesis that there's a network effect that happens with our unlimited wash club program, where the more options and the more convenient that program is, and if you have a store within a 10-minute drive from anywhere you are in the city, It just makes each one of our businesses stronger, and so there's an all-boats rise with the tide. So to that end, that's kind of supporting our strategy around taking our, on average, 20% share to 50% in each of the MSAs that we're in. So when we look at the markets and we kind of combine them into, you know, 50 different MSAs, we're looking at the ones that are underpenetrated right now and pushing hard to get them up to the level that we think is appropriate.

Okay. Maybe as a follow-up, the retail part of the business has been weak, right? Now I think we've probably cycled it. We're into year two. How do you gauge? You sort of think about the less engaged consumer falls out first. When you look at that, I'm just curious how you think about that business at least starting to get a little bit less challenged. And I guess there's still no magic bullet on a promotion that will work well to bring them in in this environment.

Yeah, you're absolutely right. One, I think we're very thankful that we've built this business up to close to 70% of our revenues that are subscription. But to your point, the retail side in previous months has seen some softness. And we have attempted to try and stimulate demand with various promotional offers. But we're also very conservative in our approach to discounting. and don't want to unnecessarily dilute our revenues in the quest or in the chase to try and drive traffic to our stores. And the challenge, I think, for any retailer, particularly a retailer that is in a fast-paced environment where the bulk of our customers are anonymous to us, is that you can unnecessarily discount an existing customer and trade them down in that quest to try and get that incremental customer. So we're very cautious and we're very measured in ensuring that we don't one, give away the farm and dilute revenues, but do it in a way that is actually focused on that incremental visit. And to date, we haven't cracked the code, but we continue to experiment. And I think the one thing that we have seen that has been effective is that some of our branding and non-discount related messaging actually outperforms some of the discounts, which kind of defies logic. But it does support the fact that at the end of the day, we've built this business not through promotions and not through discounts. We've built it the good old-fashioned way. And so, as a result, we're not dependent upon promotional activity, which, again, can be a slippery slope if you get into that treadmill of having to really discount quarter over quarter, year over year, to drive traffic that you think is linked to that discount offer.

Yeah, and, John, just to add to that a little bit, as you looked at the Q2 retail, trends relative to Q1, we did see on a year-over-year basis, we did see improvement in those retail trends. We were double digits down in Q1, then down high single digits in Q2.

Thank you.

Your next question comes from the line of Simeon Gottman from Morgan Stanley. Please go ahead.

Hey, uh, good morning, John and Jed or sorry. Good afternoon. The, um, you mentioned the heat and you don't, I don't think you blamed any of the weakness on weather. So I'm curious if there was anything to talk about in the, in the second quarter. And then I would, I don't know if the heat that's occurring in the rest of the country is, is a hold back, but maybe you could talk about it, you know, in the context of any other broader headwinds that you faced during the quarter.

Yeah, Simeon, I'll take the first part of the question there on the weather. Net-net, during the quarter, no impact to results from the weather. This is where the benefit of being geographically diverse. We've got good weather in some markets that offsets bad weather in other markets, and then 70% of our sales being subscription further insulates us from those weather patterns. Q1 was an anomaly with the weather impact, which is why we called it out, but that's Net-net neutral on Q2.

Okay. And then sale leasebacks, can you talk about the rates at which you're paying, your rents, and then how those look, and then the terms, and are those evolving? We're hearing about more and more sale leasebacks. Curious if who's the buyer or the seller that's ending out with the better shake relative to your existing sale leasebacks.

Yeah, so recently there continues to be continued demand for our South Eastpac's good bid. We found the 1031 market to be particularly strong for us. And as we reported, $80 million in proceeds from South Eastpac's during the quarter, a record number of South Eastpac transactions. And we're seeing in that quarter low six, kind of that 6% cap rate range. And the way we think about those is we really look at the gross build of our new builds and looking to do a sell-leaseback on the building and construction and the land. And we have some internal targeted coverage ratios just to make sure we're giving ourselves ample cushion. But then we also are tracking on an overall basis least adjusted leverage to make sure that we're keeping that relatively consistent with time as well and not over-levering the business or burdening the business with excess rent.

Thank you. Okay.

Good luck.

Thank you. Your next question comes from the line of Michael Lasser from UBS. Please go ahead.

Good evening. Thanks a lot for taking my question. One of your competitors noted that their view is The car wash sector is becoming more competitive, which is weighing on retail trends. Is that your view as well?

Yeah. Hey, Michael. First of all, competition is nothing new to us. Remember back when you were a kid, did you ever play King of the Hill? And that game where you tried to knock off the guy that was on top of the mound?

I'm still playing that to this day and age.

That's been our world for the last several years where everyone is targeting Mr. Everyone is tempted to try and steal share. So, listen, competition is nothing new to us. We estimate, we look at our portfolio, that over 50% of our stores have a competitor within a three-mile radius. And many of them are formidable competitors that we have the utmost respect for. So we've been duking it out on the street and delivering an exceptional customer experience. And I think at the end of the day, our numbers speak for themselves, right? We're performing in a highly competitive market and we're winning share and we're maintaining or retaining customers. And what we've built is a very loyal customer base.

If I could just follow up on that, is there a case, Sean, where as more players in the market emulate the membership model. It means that those customers who would be interested in a car wash are probably going to be more loyal to a particular organization, which will mean that it's just going to be more difficult to attract retail business as members are tied up and they're going to remain more loyal. Is there any evidence that that's happening? And how would you respond as that happens and the car wash industry becomes more consolidated?

Yeah, so I think we're years away from that, and I think the membership model is materially underpenetrated with respect to the U.S. car park and how many total members the industry currently enjoys. So we collectively as an industry have this massive opportunity to change the way people care for their vehicle, taking car washing from a once-in-a-while opportunity treat, if you will, to part of their regular routine, and that's happening today. But you did touch on something that's really, really important, and that is, you know, I think there is a goal, and it's a goal shared by almost everybody, and that is, you know, the quicker you can convert somebody into membership, you know, there's a switching cost or, I guess, a hassle factor of having to switch plans over to a competitor. So it's a quest to try and get as many members as quickly as possible, and But you have to deliver upon your grant promise. And so if you're not putting out a clean car, as basic as this sounds, Michael, and doing it in a speedy fashion and doing it consistently with great customer service, folks will over time go to the superior operator. And the reality is the switching costs are not that prohibitive. There's no upfront membership fees. There's no cancellation fees. And so people can get in and out of programs relatively quickly. And everyone has kind of emulated our low bar, low threshold model. Unlike, I'll pick on the gym space where they make you jump through hoops to cancel. That's not our approach. So at the end of the day, we have to earn that member's business month in and month out. And that's why we're very, very thankful that our retention rates have remained stable because we've earned their business and we continue to do so.

Let me just add one quick follow-up question, and this is for Jed. There's been a lot of focus on the impact of titanium. You said that it's rolled out in 100 locations. You've now factored it in, but you've also indicated that you're having to be a little bit more promotional, or so it sounds like, in order to drive that. So can you just give us What sales and earnings lift you are seeing as you roll out the titanium offer in these locations? Thank you.

Yeah, Michael, just one clarification. It isn't a surprise. I mean, what we've seen is as we offer some kind of a promotional introductory offer to incent that trade-up, we're able to grow that overall membership mix at a faster rate. than just trying to do it organically at regular prices. It's really not a surprise. Being a subscription business, these customers tend to be sticky, and you've got to educate them on the benefits of titanium, and that doesn't just happen overnight. Think about the sales and earnings lifts. What we've built in is 30 to 50 basis points from a comp perspective. titanium will continue to build toward the tail end of this year. Where we see the real benefit of titanium is in 2024 as we build this titanium membership base and we roll them to the regular titanium price.

Thank you. Your next question comes from the line of Peter Keith from Piper Sandler. Please go ahead.

Hey, good afternoon, everyone. Thanks for taking my questions. John, we'll start off with you. You know, on this competitive front, there clearly have been quite a number of greenfield openings the last two years as the markets kind of moved away from acquisitions. At the same time now, just looking at the 24, it does seem to be some chatter that greenfield growth is going to slow across the industry as higher interest rates and, I guess, less capital available for sell-leaseback. So, What are you seeing out there with your industry discussions? Do you think in terms of this competitive growth, there could be a bit of a slowdown over the next 12 to 18 months?

Yeah, so I think you're spot on. We expect new unit growth to moderate. We're seeing a lot of operators out there that are capital constrained, and some are actually paring back their growth plans. They've been out seeking incremental capital. coupled with, to your point, higher interest rate environment and tighter lending standards. So I don't think that this rate of growth that has been the last several years is sustainable, and it's probably healthy that there's a little bit of a slowdown.

Okay. That's good to hear. And then one other thing we've heard out in the industry, and I'm curious if it's impacted you guys, is just the usage with your subscription members. If there has been any change or slow down in the usage rate?

Yeah, you're hitting on probably the most important metric that we look at inside our UWC program, which is utilization, and we use the term engagement. But we haven't seen any reduction in member utilization, and it's, again, one of those leading indicators to churn. So the fact that people are still enjoying it in these hot summer months we feel great about that number. So that coupled with looking at, and this is all pre-Titanium, our premium mix has remained stable. There's been no trade down. And again, we've looked at this thing and we've sliced and diced it through different individual cohorts. But the membership program has remained unbelievably resilient.

Okay, great to hear. Thank you, John and Jed.

Thank you. Your next question comes from the line of Chris O'Call from Stifel. Please go ahead.

Yeah, thanks. Good afternoon, guys. Jed, I had a question about the 10% sales mix target for the new titanium wash. I was curious if you have an expectation for maybe the platinum membership to take from the base package. I'm just trying to understand whether... you're seeing any kind of mix shift from kind of that base package to the platinum, which may be viewed now as the new standard?

Chris, it's a good question, and listen, it's still early days. At this point, the focus is on driving that titanium mix, but you're hitting on something that's important, and we have an opportunity there to take those base members and also trade them into platinum. We view that as an opportunity. that we're gonna be able to lean on just a little bit more as we think about the second half of this year and early next year, but the focus right now is driving that titanium member mix.

What are you seeing in terms of the retail mix for titanium?

Yeah, so retail uptake, we're seeing a healthy mix there as well as customers are coming in and trying, which we view as a win and a good lead indicator to get people to trade into UWC. When you look at the retail sales per wash in the markets that have titanium, we're seeing about a dollar lift.

Okay, that's great. Thanks. I'll pass it on.

Thank you. Ladies and gentlemen, just a reminder, should you have a question, please press star 1 on your touchstone phone. Your next question comes from the line of Simeon Siegel from BMO Capital Markets. Please go ahead.

Good afternoon. This is Tristan for Simeon. Two questions. One, can you maybe give us a little more insight into how you're thinking of the back half in terms of cadence in kind of relation to your new same-source sales And then also, is there anything in terms of what you're thinking about, whether it's the economy or how you're pricing, kind of just maybe a little more into your thoughts there?

Yep. So, listen, when we laid out our initial guidance for 2023 in February, we accounted for a wide range of outcomes to arrive at that 0% to 3% comp. As you've heard us say, within that range was first half comps down flat to slightly down. We did expect to be toward the low end of the range in the first half of this year and then toward the high end of the range in the second half of this year. We still have factored in the little bit softer lap in the second half and then also the 28 green fields of last year getting picked up in the comp and just that natural ramp serving as a tailwind to the comp store base. And while first half was at the low end of our expectations, we do continue to see retail a little bit softer than what we had expected. And with that retail softness, we thought it was prudent to modify that second half assumption to account for what we see as a more likely range of potential outcomes. Our second half now assumes comps in the low single digits compared to our original expectations in the 2% to 4% range. And this includes now a modest 30 to 50 basis point lift from titanium.

Okay, thank you. And then if I could just one more kind of housekeeping. The 10% target for titanium, did you give a timeline for that expectation?

You know, what we said is at least 10% and at least 10%. It's going to take, we're saying about a year to just build that awareness and get people to trade into titanium. It's a year after it launches in those particular stores, so this will be a little bit of a tailwind as we're rolling out the launch and introduction of titanium over time. And as I said in my prepared remarks, we expect to be done with the implementation by the end of Q1 in 2024. Okay, got it. Thank you. Thank you.

Your next question comes from the line of Justin Kleber from Baird. Please go ahead. Excuse me, Mr. Kleber, your line is now live. Please go ahead.

Hi, sorry, guys. It's Pete on for Justin. Just sticking with the titanium program, the at least 10% penetration, can you give us a sense of why that's the right number? Just curious kind of how you arrived at that. Not that it's high or low, but just kind of get your thinking as to why you think 10% is kind of the right, or at least 10% is the right benchmark.

Yeah, it's still early days as we think about titanium, and it's really just a handful of markets that are a great benchmark. We've tried a couple of different things to hone in on what pricing makes the most sense, how long to run the introductory pricing to make sure that we optimize or grow that titanium membership as quickly as it can without discounting to people that would have traded up anyways. So it's based on a limited number of data points that have run the full cycle of introductory pricing and then rolled off of the introductory pricing to regular titanium pricing.

Yeah. And if I can just add, Jed, to provide a little more texture to this question, I mean, it's really a percentage of what price point too, right? So as we look to widen the spectrum and offer more choices in this premium plan, we're still staying on soft ground with respect to what that ultimate price point will be. And from a pricing standpoint, we do look at pricing through a market-specific basis. And so nothing is locked in stone just yet. So it really does boil down to 10% of what and We can manage that percentage by fiddling with pricing, but we're looking to maximize profitability at the end of the day while offering our customers a wide variety of choices.

Just to build on that, just a little bit more color, what's not factored into that 30 to 50 basis points. Going back to the earlier question, we've got these 2.1 million existing UWC members. It's 55% in platinum, 45% in base. It's that huge opportunity to trade those existing members up in addition to new retail customers coming through and being able to trade them into titanium. And we really haven't factored much of that trade up in yet just because we haven't put as much focus behind it as we believe we can.

Got it. Thanks. That's helpful. And then just pivoting over to the cost environment you mentioned earlier, you know, some levels of inflation still out there. Just curious, the key buckets, chemicals, utilities, wages, I think you said 5%. Just what the outlook is for those buckets as you're thinking about the second half of the year. Do you think you'll get to stabilization or is kind of a little bit of inflation kind of just going to be with us for a while here?

Thank you. Yep. So if you think about the labor, we continue to – benefit from the labor optimization and the new staffing models that have been introduced. We will start to anniversary those in Q4 of this year. As you think about the rent expense, that will be a headwind to the model. We originally had communicated on the year a $12 million increase in rent expense. It looks like it's going to be a little bit closer to $13 million just due to the fact that we've accelerated the timing. And when we close on some of these SELDI specs, So that'll be a little bit more of a headwind. And then as we think about utilities and maintenance services, we expect those to be, as a percentage of cells, in line with what we experienced in Q2. GNA, similar, we expect it to be in line with what we saw in Q2, but starting to really focus on how do we flex that GNA and leverage that GNA further as we go into 2024. Great, thank you so much.

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Lai for any closing remarks.

Well, thanks everyone for joining the call. As we dive into the second half of 2023, we are energized and determined to keep on building, keep on improving, and keep on adding even more value for our customers. We've got an amazing foundation in place that starts with our people, and we're well positioned to continue to scale to even greater heights. We're very optimistic about the future. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.