Blue Apron Holdings, Inc.
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Ladies and gentlemen, good morning, and welcome to the Blue Apron Holdings First Quarter 2018 Earnings Conference Call and Webcast. This call is being recorded. Following the conclusion of today's remarks, the Blue Apron team will be taking your questions. With that, I'd now like to turn the call over to Felise Kissell, Vice President of Investor Relations and Corporate Affairs. Ms. Kissell, please go ahead.

[Felise Kissell:]

Good morning everyone, and thank you for joining us. On this morning's call, we have Brad Dickerson, Chief Executive Officer of Blue Apron; and Tim Smith, Senior Vice President and General Manager of Consumer Products. Various remarks that we make during this call about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important risks and other factors, including those described in our earnings release and the company's SEC filings. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligation to update these statements. During this call, we will be referencing non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. You are encouraged to refer to the earnings release and SEC filings where we have described these measures in more detail and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. In addition, reconciliations of certain forward-looking non-GAAP measures referred to during this call are on our Investor Relations Web site located at investors.blueapron.com, under Events & Presentations. With that, I would now like to turn the call over to Brad Dickerson, Blue Apron's CEO. Brad?

[Brad Dickerson:]

Thank you, Felise, and good morning everyone. Tim and I look forward to spending time with you today. I'll be providing an update across key areas of our business, including a review of our growth opportunities ahead. I'll then turn the call over to Tim, who will highlight our focus in driving agility and innovation as he propel our consumer product roadmap forward. Finally, I will discuss our first quarter financial results in greater detail as well as our outlook for the remainder of the year before taking your questions. We reached an important milestone in the first quarter as we began to realize meaningful operational efficiencies, improved customer metrics, and increased marketing investments with a particular focus on attracting customers with high affinity and deepening our engagement with current customers. Our progress in these areas position us well to capitalize on the transformative initiatives currently underway. In the first quarter, we significantly outperformed our adjusted EBITDA guidance provided on the last earnings call by approximately 60%, driven by our commitment to expense management as well as accelerated cost of goods sold efficiencies gained in our performance centers, particularly in Linden. We improved adjusted EBITDA by 13% quarter-over-quarter, and 63% compared to the prior year. As we began to methodically reaccelerate marketing late last year, net revenue increased 5% quarter-over-quarter. These efforts highlight our renewed confidence in the business. Before I discuss the three strategic principles guiding our business forward, I want to take a moment to provide additional detail on our multi-channel strategy, as well as the exciting news that our first uniquely designed Blue Apron meal offerings are now in select retail locations. First and foremost, our direct to consumer platform is our most valuable asset, the closest connection we have with our customers and greatest competitive advantage. A predictable and anticipated meal solution our customers trust and rely on week-after-week is a significant learning opportunity for us. This consistent engagement provides extensive behavioral insights that we use to drive our innovation agenda. We will continue to enhance this experience, and reinforce the customers to benefit directly connecting to our platform where they will receive comfier services such as early access to new products and invitations to exclusive events as well as our broadest and most unique offerings. We are now leveraging the strength of our core competencies to deepen customer engagement and broaden our reach to attract new audiences. The number of food occasions we can potentially serve is a vast. We will be expanding the Blue Apron ecosystem by building new products to serve more occasions, introducing on-demand offerings selectively through our platform, or in partnership with others that have either national reach or a strong regional footprint. As we accelerate our transformation to a multi-channel platform, we will maintain a disciplined mindset focusing on initiatives that are adjusted EBITDA accretive to the business as they scale. Our product segmentation strategy and pricing architecture will be evident as we activate new partnerships, more news to come in the near-term. Pricing considerations will improve product attributes such as protein type, ingredient count and serving sites, geographic locations, and specific partners. As we move into this new multi-product multi-channel environment, we are thoughtful and deliberate about how we segment and differentiate our products to ensure a compelling value proposition to consumers. One piece of this growth strategy is the launch of our first retail expansion with Costco, one of the largest retailers in the world. We began selling Blue Apron meals specifically designed for Costco members in select locations across the Pacific Northwest and San Francisco Bay area with the opportunity for further integration. The meals which will rotate monthly are designed as a convenient on-demand dinner solution. This pilot extends our existing relationship with Costco, while exposing the Blue Apron brand's new consumer segments. In the months ahead, we will continue to launch new partnerships with different products and price points to further broaden our geographic reach, introduce the Blue Apron brand to new consumer segments and expand our total addressable market. In our view, we have only scratched the surface of how the Blue Apron Meal experience can engage with consumers. Our business is taking a dynamic turn that is invigorating for our team based on our relentless focus on three strategic principles, driving operational improvements throughout our supply chain, evolving our product offerings to serve more consumer segments while deepening our relationship with existing customers and building a consumer lifestyle brand that symbolizes the emotional human connections created through incredible cooking experiences. We've achieved significant progress increasing efficiencies in our Linden New Jersey fulfillment center. We have reached the strong point of stability across our fulfillment center networks including demand created by our first retail expansion in additional opportunities we are actively pursuing. We are ahead of schedule and meeting targets for primary operational efficiency metrics, food, labor and packaging across our three fulfillment centers. In fact this quarter we saw our strongest margin performance since the second quarter of 2016. This is the result of the team's hard work to streamline processes across our supply chain and fulfillment center operations. We also leverage additional automations in our Linden facility such as our vertical form/fill/seal machines, which has favorably increased ingredient throughput 10 times compared to our previous process. We have seen similar efficiency gains on our borrowing lines. We will continue to pursue additional automation capabilities throughout the year to build on the increased throughput and greater cost efficiencies this technology has delivered today. We have the efficiencies and capacity needed to manage customer demand that we expect will alleviate any significant capital improvements in the near future, while always maintaining a mindset that operational optimization is an ongoing strategic priority. Our ability to launch new products, create differentiated customer experiences and achieve our 2019 goal of double-digit revenue growth with break even adjusted EBITDA is inexplicably linked to continuous margin enhancements. We are working diligently to increase efficiencies throughout our fulfillment network and building infrastructure that can support our growth opportunities. Now, I'll provide a brief update on how we are evolving the Blue Apron product offerings, for our core direct to consumer product we continue to merchandise around customer cooking and taste preferences, building upon the tailored offerings we have launched to-date. We will optimize our core business by further advancing merchandising capabilities, expanding recipe options and introducing products that complement the Blue Apron culinary experience such as meals designed for special occasions or adjacent products including appetizers and desserts. As we expand into new channels, we plan to leverage insights from our direct platform that complement our post work with external partners to understand the behavior as an attribute of their customer base to create differentiated product offerings. Tim will provide more detail shortly on our data driven approach to innovation including specific products and partnership opportunities underway. As we transform our business, we will continue to build the brand that customers trust to unlock the best moments of their day. Our brand is our strongest asset, it gives us the permission to evolve and meet consumers in new ways. We are proud to lead our category and brand awareness and have established ourselves as a trusted culinary authority. In the coming months, we will be increasingly visible and vocal in affirming the strength of our brand with initiative that support our product and channel expansion and deepen our engagement with customers. Our team of chefs who have experienced from some of the most distinguished restaurants in the world will have an elevated role as some of our most powerful storytellers and authorities. I would also like to take a moment to congratulate our culinary and content teams for winning two highly coveted awards from The International Association of Culinary Professionals one for The Blue Apron Cookbook and one for our podcast Why We Eat What We Eat. In a few weeks, we're excited to launch the series of experiential brand activations in cities across the country that reflect particularly strong growth opportunities, this initiative will include a short-term retail pop-up location in New York City. Our goal of these activations is to create physical experiences where we can celebrate our customers giving them the opportunity to interact with our brands and explore new products including our On Demand offerings. I look forward to the insights gained from these brand building activations as we pursue strategic initiatives that elevate the Blue Apron experience to consumers. I'm now going to turn the call over to Tim for his perspective before discussing our financials for the first quarter and outlook for the remainder of the year, Tim?

[Tim Smith:]

Thank you, Brad and good morning everyone. It is great to speak with you today. As many of you know, I lead the consumer products team at Blue Apron. A group that includes our consumer insights meal experience, culinary sourcing and packaging design functions together we are responsible for building a portfolio of products that serves the diverse needs of our customers. As you just heard from Brad, we are transforming our business with a focus on meeting consumers when and where they think about specific meal occasions and have a number of exciting initiatives underway all centered around creating a more distinctive and engaging customer experience both for our core direct-to-consumer offering and the products we're launching into new channels. Today, I would like to discuss our data driven approach to innovation and provide an update on our consumer product roadmap including new offerings you will see us launch in the near future. As earlier last quarter, the consumer products team works in close partnership with our technology team to ensure that analytics, the extensive knowledge we have on consumer food ingredients, dietary lifestyle and cooking preferences underpins our entire decision making process. Every opportunity we pursue is informed by robust understanding of current and potential customers, this includes new, more specialized recipes, smarter more personalized recommendations and more convenient access to our products in channels such as retail stores or on-demand delivery. As we expand our offerings and the channels through which we distribute our products, we will continue to advance our knowledge of the customer and build more specialized and attractive products while exerting financial discipline. We are creating products for our direct consumer business with specific areas of focus in mind. First, we continue to optimize our recipes around a deep understanding of customer needs, wants and preferences to cite a few examples, this quarter we launched two specialized offerings, Whole 30 and Mediterranean diet to serve our customers meals that align with their specific lifestyles. Looking ahead to summer knowing consumer needs change at various points of the year, we're designing a series of grill friendly menus to serve customers who enjoy cooking outside during warmer months. Next, we are expanding beyond our core offerings with adjacent a la carte options. One product I'm particularly excited to share with you today is our new special occasion offering, after hearing feedback from our customers that they were using multiple Blue Apron meals to host large gatherings, we knew there was an opportunity to extend into these special occasions. The multi-course meal which will include an appetizer, two sides and a choice between two proteins for the main dish was thoughtfully designed to provide customers a stress free achievable and fun hosting experience. Our special occasion box will be available for purchase on our marketplace in the coming weeks and at the New York Retail Pop-Up store Brad mentioned a few minutes ago. As we continue to evolve our product offerings, we remain unwavering in our commitment to sourcing high quality ingredients for our customers. Our meals include ingredients that are thoughtfully curate by our culinary team and used by some of the most respected restaurants in the country. This quarter, we were proud to add sustainably-sourced shrimp to our menus as members of the Asian Seafood Improvement Collaborative or ASIC, we worked in partnership with the Monterey Bay Aquarium and a group of mission driven seafood organizations on a project to help improve aquaculture operations across Southeast Asia. We completed the project in early 2018 and launched this new shrimp offering to customers in early March, we are proud to be the first U.S. customer for shrimp raised to ASIC sourcing standards. We also recently partnered with Vital Farms, a recognized leader in Certified Humane Eggs to add pasteurized eggs to our recipes, while 100% of our fresh eggs are currently cage free, we are transitioning our fresh egg supply to Hens that have continuous access to Pasteur. In addition to being ethically sourced, these eggs provide our customers with a number of taste and quality benefits, we will begin featuring Vital Farms eggs on our menus two weeks from today. Our team is committed to developing customized products and offerings that excite our customers while helping us reach more households across the country. Thank you for your time today, with that I will now turn the call to Brad to take you through our financials.

[Brad Dickerson:]

Thanks, Tim. Now, I will share a more in-depth view of our first quarter results, in my earlier comments, I reviewed our first quarter net revenue including our marketing efforts that reflected 20% on net revenue in our adjusted EBITDA performance. Another key leading indicator for our business is cost of goods sold excluding depreciation and amortization as a percentage of net revenue which favorably gained 310 basis point year-over-year and 430 basis points quarter-over-quarter. We are extremely pleased with our operational progress in the fulfillment centers particularly in Linden. And I want to take this opportunity to commend cross functional teams who worked tirelessly to the substantial improvement that exceeded even our own expectations. Majority of these gains are attributable to labor cost improvements and favorable food and packaging costs realized through enhanced planning and process driven strategies in our fulfillment center operations. Product, technology, and G&A or PTG&A decreased 22% year-over-year to $49 million, and decreased 7% quarter-over-quarter, as we remain disciplined on managing costs. Net loss improved 39% to $32 million compared to the first quarter last year and improved 19% quarter-over-quarter. Regarding our outlook for the remainder of 2018, we expect to make ongoing progress in our financial performance. This improvement will derive from our core direct to consumer business in addition to the initial implementation of our multi-channel strategy. As a result of our actions that I outlined to this morning, we now expect net loss for 2018 to be in the range of $126 million to $131 million and adjusted EBITDA loss of $55 million to $60 million reflecting year-over-year adjusted EBITDA improvements of 55% to 60%. Our performance will be driven by cost of goods sold efficiencies reflected in our first quarter results as well as benefits from operational initiatives currently underway. Cost of goods sold as a percentage of net revenue is now expected to be approximately 65% to 66% in 2018, a 500 to 600 basis point improvement from 2017. As an organization we are extremely focused on achieving double-digit revenue growth combined of break-even adjusted EBITDA in 2019, we could also be reaching as early as the fourth quarter of this year. We are building momentum in the business despite significant pull back in marketing spend during the second half of last year, we continue to project full-year net revenue to be moderately down year-over-year while this outlook could favorable change depending on the success successful launch of our multi-channel expansion. More specifically for the second quarter of 2018, marketing spend as a percentage of net revenue is expected to be comparable with the first quarter with a deliberate focus on attracting customers with high affinity and deepening engagement with current customers while making progress in key areas of the business, net revenue is expected to be in the range of approximately $185 million to $190 million due to seasonal ordering patterns. Cost of goods sold excluding depreciation and amortization are projected to be in the range of 65% to 66%. Cost of goods sold efficiencies will continue to be recognized from additional labor improvements, enhanced planning and process-driven strategies in our operations although recognizing that we are now entering a period of increased packaging and food costs. Net loss is expected to be approximately $36 million to $38 million and adjusted EBITDA loss of approximately $15 million to $20 million. Our adjusted EBITDA loss reflects our continued commitment to invest in marketing and brand building initiatives. In summary, we are taking transformative, strategic actions that we expect to drive strong and sustainable growth. We have reached an important inflection point in our business as evidenced by the progress and strategies outlined today. I am proud of our team for their achievements to-date as well as their ongoing pursuit to capitalize on immediate growth opportunities ahead. And with that Tim and I will now take your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Graham of Canaccord. Please go ahead.

[Michael Graham:]

Hey, good morning, and thanks for all the info. I just wanted to ask you a little bit more on the Costco and sort of the multi-channel strategy, maybe you could help us understand the timeline there in terms of what milestones you are looking for in rolling out past pilot phase with Costco. It would be great to hear anything about the pipeline of additional deals that you may have. And then maybe just help us understand any business model differences. I think there are probably some different things about the way you manage the supply chain and sort of with the business model with that approach. So, just love to hear your thoughts on that. Thanks.

[Brad Dickerson:]

Great question, Michael, thank you. And I'll answer the broader picture strategy about other partnerships and the business model, and then I'll pass over to Tim to talk about Costco specifically. But as we've been talking about, this is a broader strategy around having an on-demand product to reach consumers on how they want to access our brand. So, obviously over the last five-and-a-half years, we've been very focused on our current business model as a way to interact with our consumers, and I think that model was built of [ph] the foundation of obviously great culinary experiences, great meal experiences, you know, obviously being the [indiscernible] authority in the space, we've been doing it longer than anybody else, and strong brand. But our current offering is really more of a weekly planning mechanism for customers to plan out about a week in advance of how many meals they want to kind of lock in for the week from our offerings. So, this has been obviously very successful to-date, but we do realize that there is a vast number of consumers who maybe want to interact with our product in a different basis, and maybe want to make decisions more closer to the actual meal experience that they're going to encounter. So this on-demand feature we think is an important part of the evolution of our offerings to our customers. We still believe there's going to be a strong nucleus of customers that we are going to absolutely focused on, that are going to continue to want to interact with our brand the way they've been interacting in the past with us. The on-demand feature just vastly opens up access to many, many more consumers that otherwise wouldn't want to interact with us in that manner. So, on-demand can be, and on-demand in our platform as I talked about it in prepared remarks, it could be on-demand and other folk's platforms like Costco that Tim talk about in a second. So we are really -- we are out talking to a bunch of folks who can't get into a lot of detail right now about who and the timing of things, but I will tell you is that it's important for us to have partners with national reach. It's also important to have strong regional players in this. The conversations that we are having kind of across the board folks have been very positive relative to the strength of our brand and excitement about putting our brand in their locations and their platforms and accessing their consumers. So in general, lot of positive conversations. There obviously is a very methodical approach and we want to deal with partners who are brand right, we want to deal with partners who have consumers that we think match our consumer base to some degree, but just maybe want to interact with us more on an on-demand basis, so, more to come on that. What I will tell you is that we look to rollout other partnerships as you work our way through the year. And again, what you'll see with that is kind of a variety of national versus regional players, obviously product segmentation and pricing architecture will change as we go through kind of all those players over the course of the year specifically. So, on the business model side, it's going to be a little bit unique on a case-by-case basis because what we're trying to solve here obviously is different banks for different partners and different consumers, but in general what I would expect to see is compared to our existing model is although it's going to be EBITDA-accretive, we anticipate as we scale this business out, it should be EBITDA-accretive to our existing business, more profitable on the bottom line. There might be some nuances above EBITDA that might be a little bit different in our current model, so for instance, the variable margin structure is working through a third-party platform and probably will be a little bit less than our - obviously our direct variable margin structure because we are giving some of that margin away to that to our partner. However, there are things even in variable margin that yet it's taken to play that, there is going to be less packing cost and shifting cost to be more efficient because you are not shifting to individual customer locations. So there will be some give and take there on the margin side but in general obviously with a third-party partner, our variable margins will build a less. But as you can imagine kind of the low variable margin marketing cost and cost of acquisition leveraging the strength of our brand and leveraging a third-party platform is a much more efficient way for the marketing perspective to access those customers. So we would anticipate that to be much more efficient and obviously our operating cost, although will have to incur some operating cost directly to run that kind of business. We could leverage a lot off of our existing infrastructure and that bring cost too. So, a little bit less than the margin side, much more efficient than marketing and cost side and overall as we scale this business beyond pilot EBITDA-accretive to our existing model. I will let Tim talk about Costco specifically there.

[Tim Smith:]

Yes, on Costco specifically, I think one of the benefits that we had with Costco is a pre-existing relationship. We have a very nice gift card business with Costco. I think the other thing really is greatest, we have a shared philosophy for how we think about quality and ingredients and standards of ingredients, they know a tremendous about their members and I will say, as Brad mentioned, in remarks that one of the benefits of our -- one of the many benefits of our direct model is a deep understanding of our customer, which we were able to bring to the conversation and I would tell you that the backbone that we've created through our fulfillment center and the way that we source in and bring in ingredients served as a tremendous platform for what became a product or a process of co-creation with the Costco team. We have aligned on a couple of recipes that everybody is excited about, and as Brad mentioned, there in market and we are pleased with performance and we see a continued opportunity to continue to refine with them to ensure that we are meeting needs of the customers that Costco has in their current membership base. So, we do think that product will be slightly different, given the needs of our customer in-store relative to our direct model. We've got that information to our consumer segmentation and then they've bought a lot to the table through their understanding of the number. So we are pleased about Costco as an initial partner and moving into an on demand space.

[Michael Graham:]

Okay, thanks a lot.

[Operator:]

Our next question comes from Matthew DiFrisco of Guggenheim. Please go ahead.

[Matthew DiFrisco:]

Thank you. I had a question but also just a little follow-up. So will it be exclusive them with Costco, did they have the ability to do multiple meal kits and some competitors and then also it just sounded like you mentioned that the product will be different, but are you still looking to present it in a weekly format or will it be maybe even a smaller format, so then the more frequency of coming in. I just look at this as I want to figure out, is it a long term strategy of staying in the store or you are looking to convert the customer to a direct consumer where you can hold them a little bit better in your own eco system.

[Brad Dickerson:]

That's great question there, so on the exclusivity obviously we are in a pilot stage, so there is not an exclusivity here for us to and within Costco and Costco already does have other meal kits in some of their select store. So, there wouldn't be expectation exclusivity from our perspective right now in our pilot. Our job here is to broaden and strengthen this relationship and have a Costco over the last two years and perform and if we perform and believe things will just take care of themselves and again. We actually are excited about going up against competition in store relative to the strength of our brand and strength of our culinary team, the strength of our operations and logistics to get the product from our costumer centers to the location. So I'm really excited about the opportunity to show up on the retail floor. As far as different products and so forth, the idea and this will involve in change because a big part of this is about learning. So I have the whole point of a pilot, it is you know, put product in their learn, get customer feedback and so forth. So the idea right now is that, there will be and the current product in Costco is a four serving product, two in -- two separate recipes four servings and the thought process initially is that it will change over with kind of once a month or so. Once each will change over the product, so there will be some consistency in the product on a week-out, week-in basis which is a little bit different again there are core online, which changes everything as the every single week, 12 unique recipes. So this will be a little bit more consistent and that was something we work through with Costco as far as how we wind up - how the wind approach is going forward and so you will see that was recipes kind of just for few weeks and again this could evolve as we get marines overtime. As far as getting customers and having them engage with us and go through our core online business, I go back to my comments is that the world that we are looking in it today is, there is going to be a strong nucleus consumer that we will continue to invest and then continue to grow that base that we believe will once interact with us in that manner and they are going to want to have a deeper relationship. They are going to want to engage in products and more often basis with us. They are going to like the attribute of a weekly planning mechanism, they are going to like the attribute of getting to new products earlier than other customers maybe able to that chronically say we want to invest in, that's the chronically has helped with our brand truthfully. But there is also consumers out there that are going to want to interact more on a on-demand basis as they want the product, need the product, for whatever reason that maybe. So this is less about trying to get customers in Costco to come online, it's about trying to meet the customers on their terms. And that customers want to engage with us on a more often basis and have will have a deeper relationship probably online direct with us is going to be the best way to access our brand. If the customer wants to interact more, I'm thinking about dinner tonight, it's 3 O'clock in the afternoon which a lot of people and that's the attribute of a lot of folks out there. They are probably going to access with more an on-demand feature whatever platform is acceptable for them and best for them. So we are not really looking at necessarily trying to pull customers from part to the other, let's try and meet their attributes and try to meet the value proposition of how they want to interact with us and then I think either way will be possible depending on their lifestyle.

[Matthew DiFrisco:]

Yes, thank you.

[Operator:]

Our next question comes from Matt Trusz of Gabelli & Company. Please go ahead.

[Matt Trusz:]

Good morning. Thank you for taking my question. Brad, on the core online business, can you take us through your philosophy on acquiring new user versus getting more out of existing customers and where you are more focused right now, especially on the context of marketing efficiencies, competition. And then, a quick follow-up for Tim, did you say something about on-demand delivery in your prepared remarks and if so, would you elaborate along on the scope partner's power to timeline? Thank you.

[Brad Dickerson:]

Well, I'll take the first one Matt and then I'll probably start the answer on the second one, and hand it over to Tim, but on new users and marketing existing customers and so forth, so we talk a lot about this on the last earnings call too and there is a reality in our business kind of a subscription type business that we are in that momentum is a really important part of this and obviously in the back half of '17 pulling back on marketing pretty substantially, in fact when you look back at the spend in Q3 and Q4 over the course of the last three years. It's some of our lowest spend quarters that we've had over the course of last nine quarters truthfully and flipping into Q1 where we obviously spent up not as high as some quarters in the past but relatively increased amount of money. And we talked about this transition into trying to get momentum going from the other way in the back half of '17 to start to spend money up again and get momentum heading forward but there is a little bit of transition doing that and I think I -- like I said in last call, we don't really understand quite yet but that impact to that would be as we transition through that and as we went through Q1, we spent up, and we obviously acquired new customers or obviously trying to engage a bit with existing customers but I think there is some truth to that momentum piece that switching momentum from a downward trend in spend to an upper trend in spend does just take a little bit of time. And it's still a little bit unclear even at three months like what does that mean now as we start to spend up again, what's the benefit of spending up in Q1 and future quarters as we spend also? So that's part of the uncertainty ratio is that we went from the very low spend back half of '17 to now starting to trying to dial up and we are still trying to figure out the impact of that is. Obviously, focusing in that spend on engaging new customers, the majority of our spend being on engaging new customers but going from your remark are also trying to spend a lot more on engaging customers too. So putting dollars into not just on the marketing side but product side that Tim mentioned of new offerings, starting to look at with - get a deeper kind of engagement with customers especially get into Q2 here with talking to customers and engaging the customer and experiences. So that's going to be a bigger and bigger part of our brand and marketing spend, as it's engagement featured, it does go back to our philosophy of in the long term what we feel like we are going to be happier is a coffee, a core strong customer who likes to engage with us on a very regular basis and buy a lot of products from us because they mean their need on a more regular basis. We want to keep spending on them and investing on them and investing in near experience but there is also going to be a lot more customers out there who probably want to meet us from their needs more on demand basis too. So trying to balance this marketing spend forward on going after new customers in our core who most likely meet the attribute of what we're talking about as far as deep engagement versus just going after any customer, because the reality of some of those customers who may be going after on the online side might be better in an on-demand type world. So we want to be very careful about what we're trying to acquire while we're also trying to engage customers. And on the on-demand side, look at on-demand as a more universe of the product. So we talked about this over the last few quarters about venturing into new products -- about a multi-channel strategy, that's more of the universe of this product, is it enables us to now have a kind of on-demand, same-day on-demand type mechanism to get to that type of consumer and that value proposition. So when we say "On-demand," and we look at the scope of the world, our platform and how we act as our customers, third party platforms, anybody who meets those attributes of how we can get product to their customers kind of on an on-demand feature this product would work with, again, national players, regional players and so forth. Products specific on an on-demand world, I mean, Tim -- the differentiation will be a little bit different on a channel to channel by channel…

[Tim Smith:]

It definitely will. I'll go back, thanks Brad, to -- at our core within the consumer product stand, we are thinking about how do we reach consumers when and where they're thinking about specific meal locations. And as you think about dinner and all of the ways that we as consumers, I as a consumer get my dinner on any given evening, that may be through a core-existing model that may be through a traditional retailer that may be through a number of other models that bring them to my doorstep. So we're excited about what we're doing with Costco and not only because of the Costco opportunity, but what it is teaching us from a how do we create a single recipe in a single package and what that can do from our ability to reach and attract new customers.

[Matt Trusz:]

Great, thank you very much.

[Brad Dickerson:]

Thanks.

[Operator:]

Our next question comes from Ross Sandler of Barclays.

[Ross Sandler:]

Hey guys, two questions. Just back to the gross margins, so pretty solid all around here in the first quarter and you talked about labor and packaging driving some of the improvement. So given that things have turned up at wind in -- and given your guidance for '18 in terms of the COGS 65%, what do we see is the long-term goal here for gross margins? And then the second question is you talked about double-digit growth as the goal in either 4Q or 2019, can you just parse that between the base online business and some of these new brick and mortar initiatives, how material could the latter be? Thank you.

[Brad Dickerson:]

Great. Thanks, Ross. On the first question, on the variable margin side, yes, obviously great improvement in Q1, again, a testament to the teams, and a lot of focus and hard work over the last few quarters to get there. If you think about the improvements that we've made and where we are and the state of the union there and what the opportunity is, the biggest improvement is coming out of our Linden facility, obviously it's almost half of our national footprint relative to volume. And the improvement, like, sequentially, quarter-over-quarter in Linden have been mostly in the labor area. From Q4 to Q1 a lot of improvement in labor efficiencies obviously taking advantage of some of the automation equipment we have there. A lot of that is just labor efficiency itself, but it's also the pre-planning mechanism of making sure that we're going to utilize the equipment upfront, and that's been fantastic for us. So the vast majority of improvement in Linden has been through those mechanisms. But other facilities are also seeing improvements both in labor and also just efficiency in food and packaging and reducing waste and again in the planning mechanisms that are helping Linden are also helping our other two facilities. So as far as a look forward, Linden is still a few percentage points behind our other two facilities. And historically we've said that at some point in time Linden should be our most efficient center. So as we start to look forward, as we get towards the back half of this year into next year, some of the biggest opportunities we have is just getting Linden to the point of being efficient and utilizing all the investments we've put into it. So we do anticipate Linden to be our most efficient center as we approach 2019. It could happen as early as Q4, but in 2019 our goal and expectation would be that would be our most efficient center all the while our other two centers are also getting more efficient too. So that just kind of gives you the roadmap of how much improvement we can still see. So we've talked historically about the opportunity to get margins closer to that 40% range longer term that is still a mark that we have our eyes set on. That has been marked at -- we have our eyes set on relative to our goal of hitting EBITDA neutral in 2019. So the teams are working three things, and the good news here is as you look at the rest of this year, there is a little pressure in the summer month because of the summer packaging and summer produce, but just based on where we are today and coming out of the summer months in the Q4, we anticipate a pretty decent margin in Q4 heading into 2019. So I think overall, a lot of room to improve still. The teams are still driving forward you should see that improvement as we look to the back half of the year outside of summer packaging, and in produce, and especially in '19 as we work towards EBITDA neutral. On the double-digit growth Q4 '19 base versus new channels, we're being really careful right now on the anticipation of what the new channels will see. So although in both of those numbers Q4 and 2019 there is some assumption around this on-demand product and in third party platforms we're tempering the expectation right now, because we'll be five days into it. So there's not much in there relative to that. So we do believe that if that part of our business goes beyond our expectations that can only improve those numbers.

[Operator:]

Our next question comes from Ed Yruma of KeyBanc Capital Markets. Please go ahead.

[Ed Yruma:]

Hey, good morning, thanks for taking the questions, guys. I guess, first on innovation I know that some of the current innovation you had planned got held up by some of the operational difficulties at Linden. At this stage are you certain to face more of that and then how should we think about the trajectory? And then as a follow-up, I know you're going to do some limited pop-ups, is that considered market expense or will that be some kind of impact? Thanks.

[Brad Dickerson:]

Yes, on the innovation side, yes, that was definitely the case as we were very, very focused in the back half of '17 on the operational side of things and that did delay some of the output of innovation on the product side. So what you're starting to see now is we kind of worked our way through the operational side of things, getting back on track relative to our variable margins, is this probably a thought process going forward of a more steady stream of adding products to the customer. And so the on-demand product is obviously a major one, but it's one of those. But Tim mentioned a couple of other ones specifically that we're going to have as we work our way to this core product offering through online. So you will see so much more of that as we go forward. And then in the pop-up side, yes, the pop-up side will -- all the cost of the pop-up will live in marketing. Again, this is more of a focus on driving brand and engagement. And is less of a focus on driving revenue, although we will be selling some product in these stores that's not really the focus of it. The selling aspect of the stores is more to get customer feedback on some of the new products that we're talking about. It's really more about engagement, being more vocal in the marketplace and having more brand presence than anything. So the cost of those things will fit in marketing.

[Ed Yruma:]

Great. Thanks so much.

[Operator:]

Our next question comes from Heath Terry of Goldman Sachs. Please go ahead.

[Heath Terry:]

Great, thanks. To the extent that we're seeing sort of an improvement in net customer adds or stabilization relative to what you're spending on marketing, can you give us a sense of sort of where churn plays a role? I know you guys don't report a specific churn number, but just sort of what you're seeing in churn and the impact that it's having on that stabilization. And then to the extent that you're seeing the improvements that you talked about on operational metrics, particularly with the Linden facility, can you -- and obviously showing up in the gross margin numbers this quarter, can you give us a sense of where you are along that path? Are you 10% of the way there in terms of seeing fully optimized operations, 50%, 75%, just trying to get a sense for how much more margin leverage there is from operational improvements?

[Brad Dickerson:]

Yes. Great, thanks. Yes, on the customer adds, I think "Stabilization," is the right word that we're using. We were fighting some pretty heavy headwinds in the back half of last year relative to pulling back on marketing and a decreasing customer count. So we actually have looked the metric in Q4, you know, our customer count went backwards about 13%. So coming into Q1 we kind of already had a headwind. And I think that pulling some more spend into our P&L in Q1 really helped to offset that kind of negative headwind coming into the year. And obviously, we were able to grow our customer account by 5% or so, which is great. But it is more of a stabilization right now as we look forward going back to my earlier answer to a question. Still a little bit unclear if this whole transition of pulling back on marketing to leaning more into marketing and how that impacts positively, negatively and the timing of that. That's a little bit of how we -- what we have to work through here in 2018. But we're really focusing on the stabilization. And then obviously, eventually the growth of that customer base as we work our way through the year specifically in the back half of the year, we do think it's going to take a little bit of time to get that back into kind of more of a substantial growth mode because of that negative impact of pullback in marketing last year as far as churn goes and you're right we'll talk about that but I'll go back to some comments that I had in the past that, it's less about churn, it's more about the customer base in general both acquiring new customers and keeping and engaging customers and there is two pieces of this that I think are really important innovation and obviously customer service. So customer service was a challenge for us in the back half of 2017 and we talked about OTIF a lot, there is a reason we're not talking about OTIF right now because it's back in line with where it should be, we are always going to focus on improving OTIF but it's back in line but that was a big part of the back half of 2017 and again getting new customers, keeping customers retaining and keeping engaged when your customer service levels are a little bit challenged, you do see the impact of that. I also think innovation is an important thing, we've not innovated a lot in our history and the cool thing about what we've seen is when we have innovated even a little bit, we've seen this very positive impact to metrics and when we haven't innovated we've also seen the opposite event. So as an example in the back half of last year as you know, we had kind of our first kind of broad product expansion where we're offering more recipes on a weekly basis and giving customers a choice between more or less recipes a week and that was specifically designed on our two person plan and we did not really do that on our family four serving plan. So some of these kind of metrics around the ease or difficulty of acquisition, engagement with the customers and retention of customers we've seen what we've innovated much more positive impactful things metrics and we're on family, we've seen a little more challenge. So obviously it's we're not talking about all the innovations we're going through and product expansions we're going through this year but we're really focused on continuing to drive better engagement and better retention through product and innovation both on the two person plan which is majority of our revenue but also on the family plan we haven't necessarily innovated a lot in the past. So you'll see some more both of those going forward again we believe based on recent activity where we do innovate, where we do give customers more of what they want, we've seen very positive impact of that, so, more to come on that as we work away through the -- product comes out. On the gross margin side, it's tough to say what percentage we are I'd say that as we work our way through Q4 into Q1, I'd say there's some parts that I would say were probably low hanging fruit that we took care of and there were some parts there were a little bit more heavy lifting, I'm more excited about the heavy lifting parts throughput, it's a indication of our team's ability to get through some pretty decent challenges over the course of the last few quarters and it also aligns us to opportunities in the next few quarters. So I would say we're probably about half of the way we want to be relative to efficiencies across all of our centers and the other 50% to go, I think is taking advantage of again some low hanging fruit that's just kind of out there that we've been kind of facing over time. So a lot of opportunity and things like waste in the system, food waste and packaging waste within the process of fulfillment centers but I think we can get some improvements on over the course of the next 12 to 18 months along with the trajectory we're on currently with current initiatives and some of the more heavy lifting things that are just going to take a few more quarters to get through. So I'd say we're about half the way where we need to be relative to our expectations, also mentioned at some point taking advantage of some of these efficiencies which is great from a business model bottom line perspective, I also want to balance that with, we also are extremely focused on putting some of that back into the customer experience and back to the value proposition of the customer to drive more innovation, to drive more engagement, to drive more differentiations. That is the equation.

[Heath Terry:]

Great, thank you very much.

[Operator:]

Our next question comes from Youssef Squali of SunTrust. Please go ahead.

[Youssef Squali:]

Okay, thanks a lot and congrats on the Costco deal, just couple of financial questions Brad, can you talk a little bit about your expected cash burn in 2018 and appreciate the guidance you've given in terms of EBITDA breakeven, any insight into when you think free cash flow breakeven kind of happens and then on your Q2 revenue guidance in particular, I think at the midpoint it implies about a 21% year-on-year decline even in the phase of improved market inefficiency, in the phase of improved new offerings, deeper engagement with different brand experiences that you just spoke about, just help us understand is that kind of how conservative is that guide as you are basically almost halfway into the quarter? Thank you.

[Brad Dickerson:]

Yes, great. Thank you. So first on the cash burn side, so if you just take a look at our current guidance and you look at what we're guiding right now for EBITDA, look at the business model in general obviously a tremendous improvement in EBITDA year-over-year looking at our guidance of $55 million to $60 million full-year loss compared to last year which was approaching $140 million of EBITDA loss, obviously we had $17 million of loss in Q1, so that equates to approximately $40 million loss to rest of the year. The ability for us to possibly break even in Q4 is not really incorporated into that guidance because that still kind of targeted and goal of ours. So hopefully, if we can get to that stage in Q4 that would only better that number to some degree, so a lot less cash burn coming out of the business model out of the P&L, on top of the EBITDA numbers, CapEx we roughly see somewhere in the $20 million to $25 million range of CapEx spend for the year, most of that is around optimization equipment automation that are part of our margin improvements truthfully. So we only spent roughly about $5 million in Q1, so maybe another $15 million to $20 million or so in this year of cash burn, as we get into 2019 with the teams really, really focused on EBITDA breakeven, I would anticipate we'd obviously still have some capital needs in 2019 although I think they would probably be relatively minimal maybe mere 18 to some degree and maybe -- we still have to work through that but not a lot because lot of that investment has been done already in our business. So I would anticipate in 2019 that cash burn will be pretty minimal especially in EBITDA breakeven model. So obviously beyond 2019, I hope we keep that trajectory going forward and get into obviously a cash flow positive situation as we move away forward past EBITDA breakeven goal in 2019. On the Q2 revenue guidance, it's really hard coming out of this back half of last year, we pulled back on marketing substantially it's the year-over-year metrics are little bit tough, we were spending a lot of money in Q1 last year especially we spent $60 million in marketing in Q1 last year and grew 42% in revenue and in Q2 last year definitely benefited from that marketing spend, there is that momentum is really important thing to really understanding our model specifically in this kind of subscription type model as you build a base in Q1, you get the benefit of that in Q2 or vice versa. So we spent a lot of money last year in Q1 $60 million and Q2 last year benefited from that, we grew our revenue I think 18% in Q2, so the year-over-year comps are going to be a little bit difficult. As we work away the back half of the year obviously here your comps will get little bit better because it is easier comps in the back half of the year, that's kind of what we're looking at sequentially right now is probably a better indication of the health of our business, we pulled back on marketing spend a lot in the back half of 2017 again going back to my comment in Q3 and Q4 were some of our lowest spends in quarters and marketing over the last nine quarters, coming into Q1, trying to turn that dial up obviously offsetting some of that headwind. But we're still facing a little bit of that as we come into Q2 and that year-over-year mechanism is going to be really hard to compare, I would look more sequentially and if we can kind of stabilize in the near-term here stabilize kind of customer base and revenue to some degree in our core business as we work our way into transitioning into spending more marketing dollars. I think that gives us a great ability with new products and multi-channel expansions start to build up that base into the back half of the year and that's why look more sequentially probably for this year is probably a better indication of the health of our business and then looking maybe just at year-over-year as we start getting into more Q4 and next year, I think the year-over-year comparison is going to be more reasonable as we kind of get through this comp up spending less last year.

[Youssef Squali:]

Okay, that's helpful. Thank you.

[Operator:]

Our next question comes from Brian Nowak of Morgan Stanley. Please go ahead.

[Brian Nowak:]

Thanks for taking my questions. I have two, the first one I understand is a lot of moving pieces within the customer count, can you just maybe help us understand what your expectations are for gross new customer additions to the platform for the course of the year to get to your guidance and then a second one is kind of going back to your point on how your brand is your biggest asset and sort of customer loyalty maybe help us better understand the composition of your subscribers or customers at this point, what percentage has been around for two, three, four years what percentage are new in the last year, just so we can sort of get an understanding for almost the harvest/cash flow customers versus newer customers? Thanks.

[Brad Dickerson:]

Thanks, Brian. Yes, on the customer count, I think whoever looking at this again is probably more holistic view of where we're heading in 2019 and beyond of a strong core customer base that deeply engage with us in ordering on a regular basis and those are the customers that we want to go after on our core platform and continue to focus on them and build that base of that way. So we're being thoughtful about our spent in acquisition and making sure that we're focused on the health of that customer base going forward and that they're deeply engaged. So my expectation as we look through the rest of this year is more of a stabilization of that customer base through the next few quarters, seasonality does not only come into play relative to ordering behaviors of customers especially in months like June, July and August where many people are traveling but as you can imagine in acquiring new customers, you want to live with the same challenges people are traveling a lot, they're not really focused on adding subscription model to their portfolio of things that they're looking forward in those months when they're not as actively engaged. So I think you'll see it the impact of that as we work our way through the next few quarters as our goal is stabilizing that customer base in the near-term and I think if we head into more active months get into the back half of the year, our goal will be to start to grow that customer base sequentially as we start to get into the back to school timeframe in Q4 timeframe, where customers tend to be a little bit more engaged. So the thought process here as Tim talked a lot about the series is new products, more offerings, expanding our existing products all of those things it's a little unclear what the benefit of that could be to acquiring customers and engaging our customers but those are all things that will be in place to work our way into back half of the year. So we're looking forward to see the reaction of our customers on that. As far as brand customer loyalty, the metrics that we look at really are more around percentage of our existing customers that come into the quarter versus the new customers you acquired during the quarter and as you can imagine with pulling back on marketing in the back half of last year and even though we're turning the dial up this year, there's a heavier lean towards customers who have been with us 10 years a little bit longer than we have historically seen and that goes back to our comments around our customer base today versus what it looked like maybe a year ago or two years ago is a more 10-year base, who is more engaged, our revenue for customer is up year-over-year. So it's a more tenure based, more engaged and we're relying less on new customers as we have maybe been in the past. So, our marketing spend although driven for acquisition is also being very thoughtful about making sure that we're adding customers in the pipeline to the best we can just decipher that are going to be engaged in our brand and want to reach us in that mechanism and the reality of our on-demand product in a multi-channel environment is the good thing about that is customers who historically may have come in to our acquisition model that may have met those attributes more clearly now have the ability to access our brand in the right manner, to meet their lifestyle which is more on-demand. So I think that equates to basically a healthy core consumer base and access to a much larger consumer base outside of the core that wants to activate with us on an on-demand basis.

[Brian Nowak:]

Okay, thanks.

[Operator:]

Our next question comes from Kerry Rice of Needham. Please go ahead.

[Kerry Rice:]

Thanks a lot. Just maybe a quick one on the competitive landscape, I know there was an acquisition by competitor recently and I was just curious if you've seen any other kind of changes out there that you feel have changed the dynamics within the landscape or maybe just thoughts on ongoing consolidation within the industry? Thanks.

[Brad Dickerson:]

Yes, I think this goes back to our view of the world and meeting consumers on their terms, some of that is just physical access to our products, some of that is preference and some of that is dietary preference, some of that is I want to have quicker prep time meals, I want to have more experiential meals. There is different customer attributes that we've always kind of been focused on but a little bit constrained based on some of the operational things in the past that we had to go through and now with working where operations are and work with the product team on board that Tim leads, he came on board during last year and the focus on products. I think our ability to reach more customers in a manner they want both physically access but more importantly the product type they want. The ability is now they're first do that, so we're going to be very thoughtful in the product on how to do that but more choice to customers, more focus around dietary preference, more focus around prep time and so forth. So I think in general being a much more approachable company to our customers in all aspects going forward.

[Operator:]

Our next question comes from Mark May of Citi. Please go ahead.

[Mark May:]

Thank you. Just a couple on the offline channel, I think you talked about how the product was going to be different obviously the volume and the way you stage that is different than the online channels, so the question is how are you going to deal with this from a capacity perspective and are you going to need to either develop dedicated or new capacity for that channel or expand some of your existing capacity to deal with that And then I know a lot these retailers used private label. Could private label end up being an element of your business model could you possibly partner with Costco and others private label part as well? Thanks.

[Brad Dickerson:]

Yes, Mark. I'll take the first part of that question and Tim take the second part, so on the product itself and on demand feature itself going forward in the capacity needs of this. The good news is there's a lot we can leverage off of existing infrastructure. There is definitely going to be some need for some investment as that business become successful and scale. Obviously, we would need to support that but there's a lot of leverage points in our existing model that we can take advantage of from the fulfillment perspective from a logistics perspective and so forth, so the teams will be working for the math make sure that we can take advantage of those things that we already have, so there's no doubt that the process of packing these individual on demand recipes versus our core products a little bit different but again there's a lot of things that are not that different that you can leverage off of. From that perspective I think capacity-wise from a technology and infrastructure perspective for this new business. There will be definitely be some need to invest in some technology and infrastructure to support it as it scales that necessarily ahead of the scale but as it scales. But it's not anything that drastically significant or anything like we extent as far as capital expense in the past, so and there but all be included in kind of the guidance I'm giving around CapEx right now. There's also the ability for us obviously to lean on other third party partners, wherever we may have capacity constraints and using those constraints partly be in a very near-term, short-term basis if things are going well. We could obviously partner with some of third party folks to help us in this process also, so I'll let Tim take the second part of the question.

[Tim Smith:]

Great. Thanks, Mark. As we reach out and talk to potential partners and start to think about how the product take shape outside of our co-direct model. We go back to our consumer segmentation and our understanding of how consumers both interact with our core model as well as, how they think about meal occasions outside of direct through more traditional model and that leads us to product changes like we recognize that meals need to be able to bit quicker. We think about that in a mix of the family we're certainly thinking about different lifestyles, specifically for Costco for instance. Those meals are much more biased to faster meals. I think on the average they will have a few less ingredients than some of our core enthusiasm on our direct model they're a little bit more complex and really kind of push consumers to learn, so we will continue to go back to our consumer segmentation as we expand beyond our core direct model. And ensure that we're meeting the use occasion of this specific channel opportunity. As it relates to the brand one of the things that's been really exciting as we've been engaging in conversation is the power of the brand to help bring to life a new category in the retail space. I think what we're seeing is that there is a tremendous potential for full meals within the retail space and as consumers move to a new category they look to trusted brands that bring credentials. To adopt the new category while we have a set of consumers in our direct model our brand and the strength of our brand stretches well beyond the consumers that both use us today have tried us in the past and just have a general awareness of what labor in stands for, so as we've had conversations with partners. The brand is really what is compelling and then the quality of the product that we're able to deliver based on our current infrastructure.

[Operator:]

Our next question comes from Mark Mahaney of RBC Capital Markets. Please go ahead.

[Mark Mahaney:]

Great. Just one question please, can you talk about if there are any new marketing channels that show promise to you as you increase your marketing spend is it just more, is it just more an existing channels or any thoughts about them having up more into one channel versus another or something that looks more efficient than what you tried in the past? Thanks a lot.

[Brad Dickerson:]

Yes, Mark, thanks. Good question and on the marketing side, I have nothing drastic there outside of what we've talked about earlier about starting to spend some money on engagement more which is it's not necessarily acquisition focus but engaging our existing customer base focus. As far as channel for spending, we were constantly testing leaning out of channels trying to gain efficiency and so forth but as I look year-over-year, when we tend to spend up a lot in a quarter, a lot of that spend up tends to be more on offline channels than online channels and we tend to spend down, the reverse happens. We tend to focus away from the offline channels, so as an example Q1 of last year with a large spend, we lean more into offline than we normally would, as you get into Q4 of 2017 pulled back on marketing a lot, most of our spend was focused on online. Coming into Q1 of 2018, I think it was little bit more balanced there again because we're turning the dial-up, so little bit more of a balance between online and offline, I wouldn't say that to the extreme to where Q1 of last year but we're certainly seeing the Q4 mix of 2017 and the Q1 mix of 2017 last year as far as online versus offline not really any significant channel differentiation, I will say the partnerships like Whole 30 and Mediterranean diet have worked pretty well for us, so those are things that we're continuing to focus on in the future, those things have been very intriguing to us relative to engaging and accessing other customers. So I would say that's probably the biggest thing in change is that we see some positive impact to those things going forward.

[Mark Mahaney:]

Thanks Brad.

[Brad Dickerson:]

Thanks Mark.

[Operator:]

This concludes our question-and-answer session. I will now turn the call back over to Mr. Dickerson.

[Brad Dickerson:]

Yes, thanks everybody. A lot of exciting things going on here right now and obviously a lot of change from just three months ago to today, we're looking forward to three months from now to get back and engage with you and talk to you more about the exciting things that are happening here, we are fully focused on all the key metrics and all the key initiatives in our organization, we do know that we have to focus on driving the ball forward here and getting revenue growth and we're very focused on that multi-channel expansion, the on-demand product is really exciting. So we continue to focus on that with more on that three months from now and I've got team here and this is a fantastic energy and environment here folks that are really rolling up their sleeves and diving deep into getting our operational efficiencies in line, getting new products out the door, entering new channels that doesn't happen by itself, it happens a lot of hard work from a lot of our folks across different functions in our fulfillment centers. So very commendable to work with them, we're really excited about where we are right now and look forward to keep the conversation going move the ball down the field. Thanks everybody.

[Operator:]

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