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spk04: Good morning and welcome to the Garmin Limited fourth quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session. To ask a question, you will need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Terry Slack, Director of Investor Relations. Thank you. Please go ahead.
spk03: Good morning. We would like to welcome you to Garmin Limited's fourth quarter 2023 earnings call. Please note that the earnings, press release, and related slides are available at Garmin's investor relations site on the internet at www.garmin.com. An archive of the webcast and related transcripts will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position revenues, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, market shares, product introductions, future demand for our products and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Limited this morning are Cliff Pimble, President and Chief Executive Officer, and Doug Besson, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pimble.
spk09: Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin delivered outstanding results in the fourth quarter with strong growth in consolidated revenue and profit. Consolidated revenue increased 13%, to nearly $1.5 billion, representing a new fourth quarter record with three business segments delivering double digit growth. Growth and operating margins expanded year over year to 58% and 23% respectively, resulting in operating income of $340 million, up 27% for the year. This resulted in pro forma EPS of $1.72 up 27% over the prior year. We entered 2023 cautiously optimistic, but as the year continued, we experienced better than expected momentum in multiple segments, which resulted in a record-breaking year. Consolidated revenue increased 8% to $5.2 billion, which is a new annual record. Operating income increased 6%, to nearly $1.1 billion, and operating margin came in at 21%. During the year, component lead times and availability continued to normalize, while shipping bottlenecks eased. These factors, combined with healthy demand for our products, reduced inventory levels and boosted free cash flow to nearly $1.2 billion. We believe current inventory levels are appropriate and expect inventory will grow from this point forward at a rate that is roughly in line with sales. Looking forward, we have a robust lineup of recently introduced products and additional product launches are planned throughout the year. We anticipate 2024 consolidated revenue will increase approximately 10% to $5.75 billion. Our results and outlook for the year give us the confidence to propose an annual dividend of $3 per share, an $0.08 increase over the prior dividend amount, which will be considered by shareholders at the upcoming annual meeting. In addition, our board of directors recently approved a $300 million share repurchase program over the next three years. Before moving on to the performance and outlook for each business segment, I want to mention the recognition we received recently from Forbes, who ranked Garmin number two on their list of best large employers in America. We're honored to be recognized for creating a best-in-class workplace. Garmin associates are passionate about what we do and we share a deep commitment to serving customers and each other. Moving next to segment highlights, fitness revenue increased 21% for the year, with growth across all product categories, led by strong demand for our new running watches. Full year growth and operating margins were 53% and 17%, respectively, and operating income more than doubled to $232 million. At the recent Consumer Electronics Show, the Venue 3 was recognized with three awards, including best of innovation for outstanding engineering. With its rich wellness and fitness features, bright display, and long battery life, the Venu3 is indeed a best-in-class product. Looking ahead, we have a strong lineup of recently introduced running, cycling, and wellness products, and expect to launch additional products during the year to support growth. With this in mind, we expect fitness revenue will increase approximately 7% for the year. Moving to outdoor, revenue decreased 4% for the year, as solid performance in the second half of the year could not fully offset the weaker first half. Full-year gross and operating margins were 63% and 30%, respectively, resulting in operating income of $515 million. During the fourth quarter, we expanded our lineup of underwater diving products with the introduction of the Descent G1 Solar Ocean Edition, our first-ever product made with recycled ocean-bound plastics. We also launched the new Descent MK3 dive watch and the Descent T2 transceiver with enhanced sub-wave communication technology that enables diver-to-diver messaging and tank pressure monitoring on the wrist. For over two decades, our eTREX series of handhelds have been an essential product for outdoor adventurers. We recently launched the eTREX Solar, our first handheld GPS with solar charging technology. This new handheld can operate indefinitely, using only the power harvested from the sun. which is a game changer for hikers, explorers, and off-the-grid adventurers. Looking ahead, we expect that our strong outdoor product roadmap will result in revenue growth of 7% for the year. Looking next at aviation, revenue increased 7% for the year to $846 million, a new record driven by growth in OEM product categories. Full year growth and operating margins were 74% and 27%, respectively, resulting in operating income of $226 million, up 6% over the prior year. During the quarter, our G3000 integrated flight deck was selected by Embraer-backed EVE Air Mobility for its electric vertical takeoff and landing aircraft. EVE Air Mobility joins a growing list of advanced air mobility companies who have selected our state-of-the-art cockpit systems. More recently, Garmin was ranked number one for the 20th consecutive year in Professional Pilots 2024 Avionics Manufacturers Products Support Survey. This accomplishment is the direct result of the strong commitment and hard work of our aviation team and the investments we have made in this business. In recent years, the aviation segment has experienced growth in OEM equipment categories driven by an increased interest in private air travel. We expect this trend to continue in 2024 as aircraft makers work through historically high back orders. On the other hand, we expect softer aftermarket sales in the coming year. With these things in mind, we expect aviation revenue to be approximately flat to the prior year. Turning next to the marine segment, revenue increased 1% to $917 million, a new record, and included approximately $42 million of revenue from the recently acquired JL Audio business. Excluding JL Audio, revenue from marine decreased approximately 3% for the year. The marine market has slowed in 2023, with many players reporting double-digit revenue declines, but we outperformed by capturing market share from our competitors. Full-year gross and operating margins were 54% and 20%, respectively, resulting in operating income of $179 million. During the fourth quarter, we launched the ECHOMAP Ultra 2 chartplotter series designed with premium sonar, mapping, and wireless networking capability. We also launched the GFD28 sonar with rapid return technology for higher resolution imaging in deep water. These innovations demonstrate why our marine segment is performing so well in an otherwise soft market. Looking forward, we expect marine revenue will increase approximately 10% for the year, with growth driven by JL Audio, which is expected to be about 15% of total marine sales. Moving finally to the Auto OEM segment, revenue increased 49% to $423 million, a new record with growth primarily driven by increased shipments of domain controllers to BMW. Full year 2023 gross margin was 23%, and our losses narrowed progressively throughout the year, ending at just under $10 million for the fourth quarter. Many are wondering what lies beyond the BMW programs that are currently fueling our growth. I'm pleased to report that during 2023, we were awarded a new multi-year contract with another premium automaker to supply domain controllers on a global basis starting in 2027. This is projected to be the single largest award in the history of our auto OEM business, expanding our market share and customer base for domain controllers. We're also winning new business in other categories. We recently announced our motorcycle entertainment solution was selected by Yamaha Motors for certain motorcycles and smart scooters. This award adds to the already strong business we have with Yamaha across both two-wheel and marine vehicles. I'm proud of the progress our Auto OEM team has made in 2023. Looking ahead, we expect revenue to increase approximately 50% as deliveries of domain controllers continue to ramp up, and we expect to reach profitability on a quarterly basis in the back half of the year. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug.
spk11: Thanks, Cliff. Good morning, everyone. I'd like to begin by reviewing our fourth quarter and full year financial results. Provide comments on the balance sheet, cash flow statement, taxes, and 2024 guidance. We posted a revenue of $1,483,000,000 for the fourth quarter, representing a 13% increase year-over-year. Gross margin was 58.3%, increased 130 basis points for the prior year quarter, primarily due to lower freight costs. Operating expense for passenger sales was 35.3%, 120 basis point decrease. Operating income was $340 million, 27% year-over-year increase. Operating margin was 23%, 250 basis point increase from the prior year. Our GAAP EPS was $2.82. Oforma EPS was $1.72, 27% increase in a prior year Oforma EPS. Looking at the full year results, the posted revenue of $5,228,000,000 was an 8% increase year-over-year. Close margin was 57.5%, 20 basis point decrease from the prior year. Operating expense, percentage of sales, 36.6%, comparable to the prior year. Operating income was $1,092,000,000, 6% increase. Operating margin was 20.9%, 20 basis point decrease from the prior year. Our GAAP EPS was $6.71, pro forma EPS was $5.59, 9% increase from the prior year pro forma EPS. Next, We look at our fourth quarter revenue by segment and geography. During the fourth quarter, we achieved record consolidated revenue and double-digit growth in three of our five segments. By geography, America's DMA regions achieved double-digit growth of 13% and 19% respectively, while the APAC region achieved growth of 4%. For the full year 2023, we achieved 8% consolidated growth with record revenue in three of our five segments. By geography, we achieved 8% growth in Americas, 9% growth in EMEA, and 5% growth in APAC. Looking next, operating expenses. Fourth quarter operating expenses increased by $46 million, or 10%. Research and development increased approximately $22 million year-over-year, primarily due to engineering personnel costs. SG&A increased approximately $21 million created prior to the quarter, primarily due to increases in personnel-related expenses in addition to the JL Audio business. After that expense, increased approximately $4 million, primarily due to higher co-op advertising. A few highlights on the balance sheet, cash flow statement, dividends, and share of purchases. We ended the quarter with cash and marketable securities of approximately $3.1 billion. Count receivable increased sequentially and year-over-year to $815 million due to seasonally strong sales in the fourth quarter. Inventory balance decreased year-over-year to $1.3 billion to execute our strategy to optimize inventory reductions in our consumer inventory, more than offsetting the increases associated with our AutoEM business addition, the JL Audio inventory. During the fourth quarter of 2023, we generated free cash flow at $417 million. $108 million increase from the prior year quarter, primarily due to a lower use of cash for purchases of inventory. For the full year 2023, we generated a free cash flow of $1,183 million, $639 million increase from the prior year, which was primarily due to a lower use of cash for purchases of inventory, which we do not expect to repeat in 2024. 2023, our capital expenditures were $194 million, a $51 million decrease compared to the prior year. 2024, we expect free cash flow to be approximately $750 million, approximately $375 million of capital expenditures. 2024, we expect to continue to make investments in platforms for growth, including facilities and IT-related projects. 2023, we pay dividends of approximately $559 million. Also, we announce our plans to seek shareholder approval for an increase in our annual dividend beginning with a June 2024 payment. Proposal is a cash dividend of $3, or $0.75 per share, per quarter. This is a 3% increase from our current quarterly dividend of $0.73 per share. For 2023, we used $99 million of cash to repurchase company shares, completing the previous $300 million share purchase program. Our board of directors recently approved a $300 million share purchase program, which is authorized through December 2026. Our full year 2023 performer effective tax rate was 8.5%, compared to 7.9% in the prior year. Fiscal 2024 performer effective tax rate is expected to be 15.5%, 700 basis point increase over the prior year. Expected year-over-year increase in the 2024 performer tax rate is primarily due to increases in the combined Switzerland tax rates, impact of implementation of global minimum tax requirements. Turning next to our full year guidance. We estimate revenue approximately $5.75 billion, an increase of approximately 10% over the prior year. We expect gross margin to be approximately 56.5% per basis point year-over-year decrease, which is primarily due to segment mix as AutoEM becomes a larger percentage of our business. We expect an operating margin of approximately 20%, and the full-year pro forma effective tax rate is expected to be approximately 15.5%. This results in expected pro forma earnings per share approximately $5.40. This concludes our formal remarks. Julianne, could you please open the line for Q&A?
spk04: Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our first question will come from Joseph Cardoso from JP Morgan. Please go ahead. Your line is open.
spk07: Hi, good morning, and thanks for the question. First question here is just on the auto OEM business. I guess it's a two-parter. First, can you just expand? Obviously, auto OEM revenue expanded $150 million in 23. You're targeting to expand another $200 million in 24. As you think about your target for $800 million by 25, how are you thinking about your ability to overachieve on it, given the current trajectory that you're on? And then, in a similar vein, with another year of ramping this business under your belt, you know, how are you thinking about that margin profile as we approach this level of $800 million in revenue now? Particularly, is there any implications we should think of from the new customer wind that you'll eventually onboard? Thanks, and then I have a follow-up.
spk09: Thanks. Good morning. So, on the first part of the question, in terms of our ability to overachieve what we've mentioned as a peak of about $800 million in 2025. I would say that we don't project that far out in terms of ability to under or overachieve. We're going by input from the manufacturers who provide us with their longer-term forecast, but those can go up and down as production dates near. So I think in general, those are just reference points for people to consider. In terms of the margin profile, we've been telling people that the margin in auto OEM is expected to go down, as it has been doing. We do expect to be in that mid-20% kind of range for the segment. That's our target. But it's based on a mix of very high volume, lower margin products, as well as some lower volume, higher margin products that are only speculative.
spk07: I got it. I guess just follow up there, and I'll use this as my second question. You know, just in terms of the new wind that you're onboarding, though, can you just talk about how you're thinking about the elevated cost that you need to ramp that new customer? Or are you not assuming that you'll need to onboard or increase expenses there? I guess that's kind of what I was getting at in terms of the margin profile on the AutoEM business as you kind of think about bringing in that new customer. Like, how are you thinking about the implications or headwinds to margins as you start to ramp with that new customer? Thank you.
spk09: So the most significant new win that we mentioned with the Global Automaker is a program that does not require a significant amount of R&D investment. So as a result, it will be lower intensity in terms of the investment that we will make in that to bring that customer on board.
spk10: Got it very clear, Cliff. Thank you.
spk09: Thank you.
spk04: Our next question comes from George Wang from Barclays. Please go ahead. Your line is open.
spk01: Oh, hey, guys. Congrats on the quarter. Just two quick ones. Firstly, just in terms of the capital return, nice to see additional 300 million for share authorization. Just curious, kind of any additional color you can share in terms of the cadence? You know, do you guys plan to front load some of the buy back near term or kind of more evenly spread. So just kind of try to get, you know, any possible additional colors. So beyond this, you know, kind of award over three years.
spk11: Yeah, thanks, George. Yeah, we just completed our previous $300 million authorization, and the board authorized additional $300 million over the next three years. So, you know, that cadence of acquisitions will be just based upon, you know, the marketing conditions, business conditions at that point in time.
spk01: Okay, great. Just to kind of follow up in terms of the business, it's nice to see revenue kind of approaching, can't stand a growth year over year, obviously partially aided by the auto EM business. So my question is really kind of, you know, as you sort of project for FY24 by segment, but since three months back, Any major sort of incremental data point you kind of want to share from any of the segments, whether it's the fitness or the outdoor? Just curious, anything has changed in theory over the last three months?
spk09: Yes, George. I think we did, you know, demonstrate some good momentum in Q4 and really in the back half of all of 2023 in both outdoor and fitness. So as a result, we've become incrementally more positive on those two, especially considering our current product lineup and the roadmap of products that we have out in front of us.
spk01: Okay, great. Thanks for the comment. I will go back to the queue.
spk04: Our next question comes from David McGregor from Longbow Research. Please go ahead. Your line is open.
spk02: Yes, good morning, everyone. Great quarter. Congratulations. I wanted to just start off by asking you for your impressions on kind of the fourth quarter holiday sales season, you know, what you were seeing from the consumer, what patterns you were noticing, how people were responding to different price points. I mean, any color you can provide on the state of the consumer, what you took away from kind of the fourth quarter.
spk09: I would say generally that the response from the consumer side was better than we expected and actually seemed quite strong. Our sell-through appeared to be very, very good and, of course, drove incremental production that we did in the third and fourth quarter to supply demand.
spk02: Any kind of competitive dimension here we could color in for us?
spk09: Probably not a lot to say other than the remarks we made, particularly in marine, where we're taking some market share. It is probably also true that we're taking market share in wearables as well. But our product lines and our position in the market is much different because of the unique nature of all the products that we have in that market.
spk02: Yeah. And you're not seeing any mix down or any dynamics like that?
spk09: Actually, I would say that the response to our higher end products in the recent quarter to the back half of 2023 has been very good.
spk02: As a follow up, I just wanted to ask on the automotive business, you noted that you expect the business to turn profitable in the second half. How are you thinking about an end of year exit run rate on segment margins?
spk09: Well, we've guided people to think about gross margins in the range of mid to upper teens and operating margins in the mid single digits.
spk02: That's for the full year, right?
spk09: No, that's really on a run rate basis. I think for the full year, you know, we mentioned in the remarks that we expect to exit the back half profitable on a quarterly basis. We don't expect 2024 to be profitable as a full year, but then we'll work into 2025 on that basis. Got it.
spk02: Thanks very much. Good luck.
spk04: Our next question comes from Jordan Leone from Bank of America. Please go ahead. Your line is open.
spk12: Good morning. Thanks for taking the time. Would you guys be able to give more color on what drove the lower revenue in aviation aftermarket?
spk09: Yeah, I think aviation aftermarket, Jordan, is an interesting topic. market because it's a very narrow distribution channel through specialty installers, doesn't have the same kind of retail dynamic. And we did come off of 2022 and into 2023 with significant supply chain challenges, which drove behaviors on the part of those dealers and installers to have more inventory on their shelves. During 2023, we saw them essentially burning that off as they had installs come in and they were working on aircraft, and we expect some of that to continue also in 2024. Got it. Thank you so much.
spk10: Thank you.
spk04: Our next question comes from Eric Woodring from Morgan Stanley. Please go ahead. Your line is open.
spk06: Awesome. Thank you very much for taking my questions, guys, and good morning. You know, maybe my first question for you, Cliff, is a bit of like a philosophical question, which is, you know, if we look back historically at kind of the Garmin story, it was always about kind of premiumization, obviously amazing gross margins that generally have trended higher over time. You know, your strongest growing segment is now also going to be your largest, sorry, your lowest gross margin segment. So how should we think about, you know, the what the model really is now. Is it more about maximizing operating profit dollars as opposed to margins? Can you just help us think through how that change is taking place now that you have this really kind of exploding auto OEM opportunity? And then I have a follow up. Thank you.
spk09: Yeah, I would say, Eric, that there's probably no one mold to put Garmin in when it comes to the breadth and depth of our businesses. We still and always will serve those premium niche markets in our traditional markets. And we see new opportunities like Auto OEM as a way to leverage the strength we have in vertical integration, our smart factories, our supply chain capability, and our ability to serve customers, which has been very attractive. So at the end of the day, it's profit dollars that we can put in the bank. And going about doing that, we simply try to play to all the strengths that we have.
spk06: Okay. Okay, that's really helpful. And then maybe the second question is, over the last few years, we've seen a bit of a deviation or gap, somewhat unusually, between the outdoor and fitness businesses, somewhat reflective of key product launches. For 2024, obviously, you've kind of guided those businesses back to tracking in line with one another. So just maybe my question is, when we think about maybe the product launch cadence and the importance of those product launches, should we think about those being a bit more evenly split across both of those product lines as opposed to maybe focusing on one or the other? Is that the right way of thinking, kind of your emphasis on product launches for the entirety of 2024, just in these two segments specifically?
spk09: Well, I would say that ideally we would want to have a very even cadence between those two segments when it comes to product launches. It doesn't always work out that way just because of the nature of product development and the complexity of the various product lines that we take on. I would expect in 2024 that outdoor will be more active than fitness, but then again in 2023 fitness was more active than outdoors.
spk10: Okay. That's really helpful. Thank you very much for the color, Cliff. Thank you.
spk04: Our next question comes from Noah Zatskin from KeyBank Capital Markets. Please go ahead. Your line is open.
spk05: Hi. Thanks for taking my question. Maybe just one on kind of marine for me. I'm just wondering if you could kind of expand upon how you're thinking about end market dynamics this year and just any color on your OEM business versus aftermarket and how you're thinking about that dynamic playing out as we look into 2024. Thanks.
spk09: I would say, Noah, that the market, as we mentioned in the remarks, is softer. I think in general, I would say that we estimate the market declined about 10% in 2023 when you look at all the various players. We outperformed with market share gains, so we're thrilled with that, and we expect in 2024 that we'll continue to perform ahead of the market. In terms of the dynamic between OEM and aftermarket, in marine, the aftermarket is really the bigger slice of the pie, if you will, so we're influenced more by those dynamics. We do expect 2024 will be offset, in terms of any softness, will be offset new revenue from JL Audio, which we expect to be about 15% of the segment revenue for the year.
spk05: And then maybe just one in terms of, I know you're guiding to perform a tax rate of 15.5%, but any update on kind of when the tax rate officially changes?
spk11: Yeah. So yeah, we are guiding to a 15.5 for the full year. So it's really related to the increase in the combined Switzerland tax rates and the impact of notation of a global minimum taxes. So in December of 23 here recently, the Canton of shop house and actually pass some legislation, which effectively combined or increased the combined Switzerland tax rates to 15%. So that is basically effect beginning of the year, 2024.
spk10: Thank you.
spk04: Our next question comes from Ben Bolin from Cleveland Research. Please go ahead. Your line is open.
spk08: Good morning, everyone. Thanks for taking the question. Cliff, I'm curious how you think about the contribution of new activations versus refresh across both outdoor and fitness. And then I had a follow up.
spk09: Yeah, so new customers to Garmin are still the majority of our registrations that we have on our platforms.
spk08: Is there any differences that you've noticed between outdoor and fitness? Does one seem to be more of a refresh versus the other or is it pretty linear across segments?
spk09: No, I mean it does vary by segment and more specifically it varies by product line. Some of our product lines do tend to be driven by existing customers, while others tend to be driven actually by new customers.
spk08: Okay. The last one for me is, I'm curious what you're seeing in China and India, just bigger picture. What's your strategic initiative there? What are you trying to do? What type of performance have you seen? And that's it for me. Thanks.
spk09: I think in China, the economic situation has been more challenging. I think our Our performance has been okay. Some countries in Asia do better than others, but in general, I would say it's doing fine given the situation there. We do have a mix of retail partners and our own retail shops in various parts of Asia, including China. So we tend to go a little more direct to customer in some of those countries. In India, we've kind of reset our our approach there, and we've got a new distribution partner that's working the market, and we expect to see improvements there. But in general, India is kind of a small market for us right now.
spk10: Thanks.
spk04: Our last question will come from Ivan Feinseth from Tigris Financial Partners. Please go ahead. Your line is open.
spk00: Good morning. Congratulations on the great quarter and year, and thanks for taking my question. I have a couple questions. You mentioned gaining market share in smart wearables. There was recently another notable large smart wearable company that had an issue with their pulse ox readings and eventually dropped right now from their product offering. Did you see that as a major driver of consumer choice to the Garmin watches?
spk09: Yeah, I don't know that that was a specific major driver, Ivan. But certainly we do offer that feature, and we have a feature that's very different from any other player that's out there. But in general, I would say that our products are doing well because they're strong on a broad basis across all kinds of features and the ability to monitor both health and wellness functions as well as strong activity performance as well.
spk00: And then you started to roll out significant upgrades to your Connect app. And what are still your thoughts on maybe tiering that as far as a premium subscription level?
spk09: Well, we continue to look at options for how do we monetize our app base. That's not something that we're eager to plow into because we recognize that a lot of people use our platforms and trust Garmin, especially with the security and and the privacy of their data. But there are premium features that we will look at that could possibly result in premium tiers for some of our apps, much like we've done, for example, in golfing.
spk00: And two questions on the automotive OEM side. You mentioned that the new customer you're onboarding will not require much R&D. Is that because you're going to get a lot of mileage going forward from the R&D that you've invested so far and that each incremental customer will be more and more profitable?
spk09: Oh, there's certainly some leveraging of the technologies that we've developed in order to be able to support this kind of customer. But this is actually a build to print opportunity. So the design work has been done. And so we're leveraging our factory and our process engineering to bring it into our Garmin factories.
spk00: And then my last question, you mentioned the strong product momentum going into 24. Can you give us some idea of what areas in new products we could expect to see?
spk09: Well, we don't mention any of our upcoming releases that aren't already public, but just yesterday actually we did announce the 4165, which I'm super excited about. It's a really strong entry-level watch with a bright OLED display, and I think I have a lot of personal expectations that it will be a popular product.
spk00: All right. Thank you. Congratulations, and wishing a big 24. Thank you.
spk04: We have no further questions. I would like to turn the call back over to Teri Sec for closing remarks.
spk03: Thank you all for joining us this morning. Doug and I are available for callbacks, and we hope you have a great day. Bye.
spk04: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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