Advance Auto Parts, Inc. (NYSE:AAP) Q4 2023 Earnings Call Transcript

Advance Auto Parts, Inc. (NYSE:AAP) Q4 2023 Earnings Call Transcript February 28, 2024

Advance Auto Parts, Inc. misses on earnings expectations. Reported EPS is $-0.59 EPS, expectations were $0.24. Advance Auto Parts, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Advance Auto Parts’ Fourth Quarter and Full Year 2023 Conference Call. Before we begin, Elisabeth Eisleben, Senior Vice President, Communications and Investor Relations will make a brief statement concerning forward-looking statements that will be discussed on this call.

Elisabeth Eisleben: Good morning and thank you for joining us to discuss our Q4 and Full Year 2023 results. I’m joined today by Shane O’Kelly, our President and Chief Executive Officer; and Ryan Grimsland, our Executive Vice President and Chief Financial Officer. Following Shane and Ryan’s prepared remarks, we will turn our attention to answering your questions. Before we begin, please be advised that remarks today will contain forward-looking statements. All statements other than statements of the historical fact are forward-looking statements, including but not limited to statements regarding our ongoing strategic and operational review, initiatives, plans, projections and future performance. Actual results could differ materially from those projected or implied by the forward-looking statements.

Additional information about forward-looking statements and factors that could cause actual results to differ can be found under the captions Forward-Looking Statements in our earnings release and Risk Factors in our most recent Form 10-K and subsequent filings made with the commission. Now let me turn the call over to Shane O’Kelly.

Shane O’Kelly: Thanks, Elizabeth, and good morning. Before we dive into the details of the quarter, I want to take a moment to thank the entire Advance team for their dedication and continued focus on serving our customers throughout 2023. I continued to travel coast to coast during the past few months, meeting customers, meeting team members from our stores, and team members from our distribution centers. I remain impressed with our team’s strong work ethic and their unwavering commitment to helping our customers. I want to introduce today our new Chief Financial Officer, Ryan Grimsland. We’re pleased to have Ryan on the Advance team, and he brings vast experience in the omnichannel retail space, serving both DIY and professional customers.

His deep knowledge in finance, strategy, and transformation will undoubtedly help lead our company forward. Now, on to the decisive actions we have been taking to turn around the business. We have continued to act with a sense of urgency to stabilize the business and position the company to return to profitable growth. All of the actions we are taking are geared to help us focus on the fundamentals of selling auto parts, and we will eliminate activities that distract us from that goal. Let me be clear, our results today are disappointing and not at all what I’m accustomed to delivering. We have spent the last several months analyzing how Advance got here, and we now have a better understanding of the work required to change our trajectory. It’s important to note that in recent periods, including this one, there have been several atypical items contributing to our poor financial performance.

Through discipline execution and accountability, we will tighten the fundamentals of our business, which will help reduce and then eliminate elements that introduce noise to our core performance. On our last quarter’s call, we discussed decisive actions. Let’s take you through those actions as well as update you on new activities the company is taking today. Number one, initiating the sales processes for Worldpac and our Canadian business. Number two, significantly reducing our costs to remain competitive while investing a portion of those savings back into the front line. Number three, making organizational changes to position us for success. And now introducing two additional decisive actions. Number four, assessing the productivity of all assets, including Carquest Independence, and number five, the consolidation of our supply chain.

Let’s take a moment and further discuss each of these decisive actions. First, we initiated separate sales processes for Worldpac and Canada. We are very pleased with the interest we have received in both businesses. The Worldpac process is underway and we are actively engaging with potential buyers. We currently expect to conclude the Worldpac process during our second quarter and look forward to sharing more information when that occurs. As it relates to the Canadian process, this is intentionally sequenced behind Worldpac and we have begun the internal work to explore separating the business. Next, as I discussed in our Q3 call, the company’s costs have outpaced our sales growth during the past several years, which warranted changes in how we operate.

In Q4, we implemented significant cost reductions by eliminating roles and initiatives that did not support our commitment to improve the fundamentals of the business and we will realize at least $150 million of SG&A savings in 2024. We’re focused on our frontline team members and are reinvesting approximately $50 million of those SG&A dollars to increase wages, bonus programs, and as well enhancing our training. This represents approximately half of the dollars planned for 2024 for our frontline with additional funding coming from sunsetting previous programs. While we continue rolling out these investments over the next several months, we note that we are already seeing year-over-year improvement in turnover reduction of key frontline roles.

In addition to the Q4 cost reductions, we are now launching an additional initiative focused on our indirect spend, with the goal of eliminating a minimum of $50 million on an annualized basis. We will continue to be prudent with our expense structure and are committed to building a cost conscious culture. Going forward in every operational decision we make, if it isn’t core to the business to help our frontline team members and service our customers, it’s off the table. In terms of the third decisive action, I mentioned on our last call that we had streamlined our management structure and reorganized parts of my leadership team to drive collaboration and accountability. These changes further simplify our structure and they upgrade talent in key positions to allow us to drive improvements in critical business areas.

In addition to Ryan joining us as the CFO, another example of outstanding talent that we’ve recently hired is Elizabeth Dreyer, who joined the Advance team as our Chief Accounting Officer and Controller. Elizabeth brings a robust track record of building and leading high-performing accounting teams and I’m confident she and Ryan will work together to create a high performing finance function. We also recently hired a new Chief Data Officer, Kunal Das, to significantly improve the quality, processing and utilization of our data. In addition, we’ve also hired a new procurement leader who will help deliver against the indirect cost savings that I just mentioned. We’ve also made a number of changes within our organizational structure to better align certain departments with our strategic goals.

For example, pricing is now part of merchandising. In addition, we have consolidated our real estate function from across multiple parts of the company to form a single enterprise-wide real estate team reporting directly to me. Further, our merchandising and inventory teams now directly report to me. They have been working diligently on the implementation of our new core merchandising and inventory system. We expect to complete the remainder of the vendor and skew transitions to the new system this year. That effort involves transforming our current ordering and fulfillment processes, enabling us to move away from antiquated systems to more data-driven capabilities. The fourth decisive action, which we are introducing today, is improving the productivity of all assets in the company including company stores and independently owned Carquest locations.

While we open 61 stores in 2023 we do not plan to open as many this year as we focus on improving our existing store operations and driving profitable growth. In an effort to optimize our Carquest Independent business, we recently terminated our agreements with over 100 independently owned Carquest stores, which will help improve the overall profitability of our Carquest Independent program. In addition to improve store productivity, our IT department has made notable improvements in the reliability of our stores’ POS systems. The improvement in our network and store system resiliency is allowing our frontline to better serve our customers. Lastly, we are announcing our fifth decisive action which is the consolidation of our supply chain to a single unified network.

We know that our current network is inefficient and needs substantial work to improve our cost structure and inventory availability. We have long served our blended box stores by a two distinct DC networks, one from the legacy Carquest business and one from Advance. The first step is completing the implementation of our warehouse management system or WMS across all of our large DCs. With only three DCs remaining, we will complete this by the end of the year. Step two, which we are conducting in parallel with step one, is the conversion of smaller legacy DCs from functioning as a replenishment node to operating as a market hub. With 38 DCs in our Advance and Carquest network today, we view the smaller DCs as valuable assets that can be leveraged more efficiently as market hubs where we will forward deploy the right inventory closer to the customer.

We have recently started our first DC conversion to become a market hub and we will utilize our learnings to scale this key initiative across the network. By leveraging our current DCs we can move faster and more cost-effectively than if we green-fielded a new network. Importantly, once we complete this work, we will be able to order product into fewer DCs, which will help reduce costs and improve inventory productivity. We look forward to sharing more on all of these actions as we continue to improve our blended box strategy. Before I turn it over to Ryan, the last topic I want to touch on is the macro environment. The key drivers of this industry remain strong. These include the average age of vehicles, which continues to increase and is now at 12.5 years, as well as miles driven, both of which are projected to further increase this year.

Combined with the strengthening Do It For Me demand, I’m confident that Advance can begin to capitalize on the strong fundamentals of the industry. Now I’d like to welcome and turn the call over to Ryan Grimsland, our CFO, who will review our financial performance in 2023 and discuss the 2024 guidance we provided in the release this morning. Ryan?

Ryan Grimsland: Thanks, Shane, and good morning. I’m pleased to be here for my first earnings call as CFO of Advance. Before I move to the financials, I would also like to thank our team members for their continued dedication, as well as the warm welcome I received from the team. Since my arrival at Advance, there are several swift changes we have made to allow for the necessary transformation of our finance function. As Shane discussed, we recently appointed Elizabeth Dreyer as our new Senior Vice President, Chief Accounting Officer, and Controller. Elizabeth’s impressive track record in a variety of financial leadership roles will benefit us as we work to remediate our previously disclosed material weakness related to internal control, which I’ll speak to in more detail in just a moment.

In my first 90 days with Advance, I’ve had the privilege to meet and connect with our hard-working and talented finance and accounting teams. I’m committed to providing cohesive leadership as well as ensuring we have the needed incremental resources that will enable us to be a best-in-class retail organization. As you heard from Shane, we are focused on improving the fundamentals across the business to bring rigor, discipline and accountability with a sense of urgency. We have begun to make changes and are committed to elevating ourselves to become a high performing team. The first step has been filling critical roles, including hiring key leaders, as well as a thorough and time-intensive review of our reconciliations and processes across the company.

Within this review, we’ve recently discovered additional work needed to fully realize the intended benefits of our finance ERP system, including potentially sunsetting certain legacy systems. The turnover of accounting personnel over the past 12 months has increased the challenge to operate as an effective finance organization. We have taken aggressive action to bring in resources around our internal controls, both hiring accounting professionals and insourcing contractors at varying levels to provide leadership and oversight. With these actions, we are making significant progress on remedying our material weakness related to people identified in early 2023. In addition, as disclosed in our release, we identified issues with certain previously reported financial results.

We are correcting prior period financial results in our earnings release in upcoming Form 10-K. As you saw this morning, we filed for an extension. We do not expect the results we are discussing today to be impacted. However, we need additional time, principally to finalize our assessment of internal control over financial reporting and the related disclosures. Our financial results discussed today will compare our Q4 and full year 2023 results to the corrected results for the prior periods. Now on to our results. In the fourth quarter our net sales of $2.5 billion dollars decreased 0.4% compared with Q4 2022 and comparable store sales decreased 1.4%. This was primarily driven by softness in DIY throughout the quarter, but particularly in the last four weeks of the year as we lapped tougher comparisons to the prior year.

However, we continue to be encouraged by our performance in pro as we realized strong transactional growth in the quarter as a result of improved availability. The West and Northeast were our top performing regions, while the Mid-Atlantic and Midwest were our most challenged in the corner, as they were impacted by unfavorable weather. From a category perspective, as we improved our availability, we saw strength in filters, heating and cooling, and engine management. In Q4, gross profit margin of 38.6% declined 504 basis points from the prior year quarter. There are business performance issues, along with several atypical drivers that contributed to the deleverage. Inventory related items contributed approximately 280 basis points, of which roughly 170 basis points are related to changes in estimates, and 110 basis points from inventory related capitalization costs.

In 2022, we hired an external firm to identify and recover previously earned vendor incentives over a multi-year period. This resulted in approximately 120 basis points of deleverage. Lastly, elevated supply chain costs contributed approximately 50 basis points. SG&A was $999 million in Q4 2023 compared with $960 million in Q4 2022. As a percentage of net sales, our SG&A expenses deleveraged 176 basis points to 40.6%. The deleverage was driven by a year-over-year increase in occupancy costs, labor-related expenses from our intentional investments in our frontline team members, and new store expenses. These were partially offset by previously discussed productivity actions taken in Q4. Importantly, we also incurred approximately $8 million in expenses related to our restructuring, as well as $5 million related to the strengthening of our accounting resources.

These results are not indicative of how we want to run the organization. As Shane mentioned, we are reducing expenses by building a cost-conscious mindset throughout Advance. Our Q4 operating income margin deleveraged 679 basis points compared with the prior year quarter. Diluted loss per share was $0.59 in Q4 compared with $1.39 earnings in the prior year quarter. This was primarily driven by lower net income as well as higher interest expense. For full year 2023, net sales of approximately $11.3 billion increased 1.2% compared with prior year. Full year comparable store sales decreased 0.3%. Our gross profit decreased 8.3% year-over-year and gross profit margin contracted 414 basis points to 40.1%. Inventory related items contributed approximately 157 basis points.

Cost increases were not fully covered by price, contributed approximately 74 basis points to the full year decrease. As mentioned earlier, the initiative to recover previously earned vendor incentives negatively impacted full year gross margins by 60 basis points. Lastly, elevated supply chain costs contributed approximately 50 basis points. SG&A expense for full year 2023 increased 3.5% compared with 2022. On a rate basis, SG&A as a percentage of net sales increased 85 basis points to 39.1%. This was primarily driven by expenses growing faster than sales throughout the year, as well as an incremental one-time SG&A expenses related to headcount reductions and personnel changes. Our full-year 2023 operating income decreased 82.9% to $114 million.

On a rate basis, our OI margin contracted 500 basis points to 1%. Full year earnings per share were $0.50 compared with $7.65 at the end of 2022. Our 2023 capital expenditures were $242 million compared with $424 million in 2022. The primary drivers of the reduced capital expenditures are related to fewer new store openings and IT related expenses. We expect that our overall capital expenditures in 2024 will focus primarily on IT enhancements and supply chain optimization. We are committed to a disciplined capital allocation strategy on high return initiatives that hold our teams accountable to time, budget, and financial targets. Free cash flow for the full year was $44 million. This year-over-year reduction was due to lower net income results despite lower capital spend.

Since Shane and I have joined Advance, as you would expect, we have taken a deep dive into the business. While we have moved quickly to simplify the business and taken other actions to help put the company on a trajectory for improved performance, we clearly have more work to do. We are focusing on the optimization of our supply chain assets, implementing additional cost-cutting measures, particularly with indirect spend, and improving store productivity. We believe our efforts will begin to deliver incremental improvements this year, which is factored into our 2024 guidance while setting the stage for growth in the years to come. Our assumptions for 2024 include continued pressure on the DIY consumer offset by DIFM improvement and modest inflation.

These factors, coupled with the solid industry fundamentals Shane discussed earlier, are considered in our full year 2024 guidance, which includes net sales of $11.3 billion to $11. 4 billion, comparable store sales of 0% to 1%, operating income margin of 3.2% to 3. 5%, diluted earnings per share of $3.75 to $4.25, capital expenditures of $200 million to $250 million, and a minimum of $250 million in free cash flow. With that, I’d like to turn the call back over to Shane.

Shane O’Kelly: Thanks, Ryan. There’s no doubt that we’ve got our work cut out for us in 2024, but I am confident that with our decisive actions and a focused team coupled with favorable industry fundamentals, we can return to profitable growth. Advance has a proud 90-year legacy, a re-energized frontline team, and a leadership team committed to delivering a powerful comeback. I’d now like to open the call-up to address your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from Chris Horvers at JPMorgan. Chris, your line is open, please go ahead.

Chris Horvers: Thanks, good morning and welcome to everybody on the management team. My first question is going to start at a low level and then I’m going to try to bring it up to a higher level from a margin perspective. You think about the fiscal year items, could you help us understand and in 4Q like the change in the estimate, the vendor incentive pressures, you know what exactly is going on there? Are you essentially writing inventory off that doesn’t exist or are you writing inventory down to a lower market level, you know, such that perhaps when you sell it later, there’s going to be some gross margin recapture. And on the vendor incentive side, totally unclear on what that is. You had accrued for vendor incentives and now you’re writing them off. And what led to that?

Ryan Grimsland: Yeah, Chris, this is Ryan. And thanks for joining us today. Yeah, a couple of things. Those are two really the big drivers of our inventory changes. Some of it is inventory that we’re shrinking out of the system. Some of it is changes in our excess and obsolete calculations. And then some of it is on the incentives, and so approved incentives. Some businesses we maybe no longer do business with, challenges in recovering. We’re just making sure we get the right amount in there that we believe we’re going to be able to recover.

Shane O’Kelly: Hey Chris, it’s Shane. Not unsurprisingly, new CFO, new CAO, digging in in the business and looking at our different methods of estimating what we keep and what’s dead and what’s not and they’re digging in to set us up for success and that’s exactly what’s occurring here.

Ryan Grimsland: And Chris, I’ll add one more thing on that. We mentioned, you know, last year there was a prior initiative to go back and look at vendor income over multi-year period incentives, et cetera. That we have up on the table. That had a positive impact last year that we’re cycling over this year.

Chris Horvers: Okay. So then maybe to clean it up, as you think about on a fiscal year basis, like what are just clean laps, i.e. You going to get X basis points back, you know, in the gross margin line because it was a, you know, there’s an impact this year that it’s not going to affect next year and you’ll get it back, you know, both in terms of the, you know, gross margin and SG&A lines.

Ryan Grimsland: Yeah, Chris, So I would expect roughly 157 basis points of those kind of atypical items that I don’t anticipate us cycling again next year. So that’s a COGS perspective there, a margin rate. From an SG&A perspective, about 12 million, really that’s related to severance. And some of the expenses related to remedial and material weakness on the SG&A side.

Chris Horvers: Got it. Thank you very much.

Operator: The next question comes from Michael Lasser from UBS. Michael, your line is open. Please go ahead.

Michael Lasser: Good morning. Thank you so much for taking my question. Given all the moving parts with your margin structure right now, what do you think an ongoing sustainable operating margin for the businesses in 2025 and beyond? Is the ’24 levels something that you’re working to grow off of?

Shane O’Kelly: Hey, Michael, it’s Shane, and Ryan will add to this. So first, you heard some color from Ryan. We sat at a one OI in terms of what we published. You can kind of put together some of the things that might not be occurring this year to get to a bit of a baseline. We put out our guide, which we feel good about, and then later this year, look for us to give a multi-year perspective on where the business can go. As we sit in the trenches today, we’re looking to be incrementally better every day. And that’s the first step. And as we get that credibility, notably around this 2024 year guidance, we’ll look to continue that journey to further points. But Ryan?

Ryan Grimsland: Yeah, Michael, good question. So that 157 basis points is what I would think from, you know, atypical items that we don’t expect or anticipate to the lab again this year. So that’s 1 data point. In our guide, we do have modest margin rate expansion as we continue to execute on these decisive actions that we talked about earlier in the call. So that’s a modest increase there, as you can see in our OI margin. That’s primarily that OI margin expansion is primarily coming from gross profit.

Michael Lasser: Okay. And then obviously we’re going to get more information on the sale process in the second quarter. So two related questions to that. Can you give us a peek on how that’s going to be impacting the financial performance of the business over the long term so we can get an assessment of what we should be modeling in terms of the ongoing sustainable margin rates for the core business you’ll be holding on to as number one. And two, how are you thinking about balancing, maximizing the value of these assets with the need for resources to improve the business given that free cash flows under pressure, the rating agencies have downgraded your credit rating, and you have a lot of receivables that are factored. Thank you so much.

Ryan Grimsland: Yeah. Hi, Michael. Lots to unpack there. So let’s start with your second question. Worldpac a good business with good team members. This isn’t a fire sale. There’s no sort of urgency that we have to sell the business. It’s really around strategy and where we’re taking the company. We believe that the blended box model is our route to success, selling a pro and DIY customer from our core stores. And so that strategic review led to the idea of selling Worldpac, which I think is the right move for the organization. So there’s not a, as it relates to value maximization, we don’t have to sell. And that’s why we say it’s a potential sale process. The good news is the interest thus far has been significant. We’re seeing a lot of players, both breadth and depth of players who are expressing interest.

Centerview is running the process for us. And it’s going at the tempo that I’ve seen. I’ve done 40 deals of one sort or another. And so as we get to price discovery and working with the potential buyers, we’ll look to complete that process in the second quarter. Importantly though, we do have and have started to think about what we would do with the proceeds. And I can kind of think about them in a couple of buckets. I think debt pay down figures into what we would disposition with the funds. And then secondly, there are some key initiatives. You’ve heard our decisive actions that we can potentially accelerate with additional proceeds. So our supply chain consolidation, I think that can be amplified with some of the Worldpac proceeds. You can think about our IT initiatives.

You heard about our, we’ve got our new inventory system coming online, our PLS system work, that can be accelerated. And then lastly, just on our store infrastructure, either in terms of sprucing up existing stores or with our new real estate team, looking at what we can do in terms of our new store openings. On your first question, not ready to give a definitive depiction of what we look like as a remainder co without Worldpac. Again, we’re tightly in a potential sale process at this point, but as we get closer, we get more information. We’ll certainly provide that. But we feel good that in the wake of that sale process if it goes through. We have a company that’s focused on selling auto parts out of a blended box. That’s what we’re going to do.

Michael Lasser: Thank you very much and good luck.

Ryan Grimsland: Thanks, Michael.

Operator: The next question comes from Simeon Gutman from Morgan Stanley. Simeon, your line is open. Please go ahead.

Simeon Gutman: Hey, good morning, everyone. Hi, Shane. Hi, Ryan. Hey, Ryan, I wanted to look at the guidance in a little different way. If we annualize the fourth quarter EBIT, you get to about $160 million, and then when we add back the cost saves, which I get some of them may not fully annualize, you get back about, you’re roughly a $360 million run rate. That’s a tad below the guidance. So a couple of questions is partly like how much reinvestment is there in some of the savings and then, you know, what improves in the core business to get you the higher threshold. And some of this may be some of the things that don’t repeat, I think to Chris’s question earlier, but there doesn’t seem to be a lot of reinvestment if you just take sort of that mass.

Ryan Grimsland: Yes, Simeon, so one of the things we did do is we invested in the front lines. We took some of the cost savings and we reinvested that back into the frontline. So that was about, of that 150, we invested about 50 million back-end. I think from a, if we look at our full year right now, I think we’re coming in close on an EBIT perspective, 116, we take the 157 base points, I would say, at that back plus 12 million in SG&A. You can get the kind of a normalized rate and then you take that 100 million in SG&A. Now our guide on the top line of 0% to 1%, we’re going to work to manage inflation in our SG&A to get that flow through. So I think that’s how we would think of where we got to our guide.

Shane O’Kelly: Hey, Simeon, just a couple quick follow up on the cost. Hey, welcome to the follow up, just a second. So on the cost, on the 150, that cost is out. So we made the tough call and never easy. Some 400 team members not with the company anymore. So that’s in the run. That’s not an ethereal number in terms of how we’re thinking about the organization. And then as you think about what we need to do, you’ve heard Ryan’s points, but in terms of actual physical initiatives on the ground, you’re gonna see a renewed emphasis on the up and down the street pro from our organization this year. I think it’s an area where we had our eye off the ball a little bit but I also think it’s an area where on a relative right to win in terms of the capabilities of the team members we have out in the field and referring to our CAMS or our outside sales team members and our CPPs who are inside the store pros, that’s an area that they’re excited to go after.

Simeon Gutman: Thanks for that. And the follow-up is, Shane, I’m intrigued by some of the things you’re addressing and your diagnosis of what has been kind of holding this business back. So you mentioned a bunch of things, systems and supply chain. Curious about your take if there is an Achilles heel, whether it is supply chain or merchandising or process versus infrastructure, if you can elaborate a bit on that?

Shane O’Kelly: So I think some of it goes to culture and focus. And the good news is, as I meet the team members in the field, you see that 90-year heritage. You see men and women who sell auto parts who want to win. And so we need to unlock that by making sure that what we do as a company, and from my time in the service, call it the inverted pyramid, that we are geared not as a headquarter-centric organization, but we’re a field-first organization. And if you spend time listening to the customers, they’ll give you the feedback on what it takes to be successful. If you take time empowering our frontline associates, that’s a key route forward for us. Additionally, it’s the blended box model. We, I think, looked at different paths to heaven as a company in the past and didn’t put the emphasis on the blended box.

You can see, demonstrably, in the industry where the blended box works. It works in terms of the breadth of customers you could serve. It works in terms of the flow-through you get, when you get marginal sales in the same location. So that’s really where we’re going as a company in the future.

Simeon Gutman: Thanks. Good luck.

Operator: The next question comes from Greg Melich from Evercore ISI. Greg, your line is open.

Greg Melich: Hi. Thanks and welcome guys. I guess my first question is, I’d just like to clarify a little bit. I know it’s a potential sale. But in your guidance this year, how much of the free cash flow sales, et cetera, are coming from Worldpac or the businesses you’re considering sale?

Ryan Grimsland: Yes, Greg, this is Ryan. In the guidance, we’re not contemplating. We didn’t put anything in there for the sale. We — our guide is based on the RemainCo or the whole company as it is today, with Worldpac and Canada.

Shane O’Kelly: Yes. So we’ll revisit with you at midyear if that process goes through, and then you’ll see the breakout proceeds the RemainderCo and our plan for disposition of proceeds.

Greg Melich: So just to be clear, whatever Worldpac maybe if I ask the question a different way, last year, was — did the RemainCo generate free cash flow, for example?

Ryan Grimsland: We’re not going to talk about specific individual business units at this time, but we’ll come back in Q2 to give you more deals on that, Greg.

Greg Melich: Fair enough. Well, update us then. I guess, Shane, I wanted to follow up a little bit more on the actions taken from — in terms of stabilizing the business from a profit standpoint I think you went through. I’d love to hear a little bit more as you toured the country and talk to the frontline and the customers. It sounds like the focus here is getting up and down the street, serving them. What is it that they need to get that they’re not getting or haven’t gotten from Advance the last couple of years? Is it product quality? Is it speed? Is it in stocks? What — could you narrow that down a little bit more?

Shane O’Kelly: Yes. Great question. So I’ll start with the team members. We’ve got to make sure that our team members feel like they’re valued. And if you looked at where we’d invested dollars, it hadn’t been on the frontline. And so that goes to wage rates, that goes to what their bonus programs are, that goes to training programs and certification so that both their capabilities and sense of pride are amplified. So we’ve got a significant body of work underway, focused on the frontline. And we’re seeing reduction in turnover. So that’s been a key piece. Secondarily, as we spent money, and this goes to the SG&A takeout, we would engage in marketing programs that were expensive, that didn’t bear fruit. And so we’re pivoting anything we do around being successful with the customer in the market as it relates to the customers’ feedback, product availability.

So we would hear from stature of customers who were their first call, and they say, hey, if I call you first, but you don’t have the product, so you are literally driving me to call somebody else. And so we’ve had a lot of work going on in product availability. Our in-stocks are up over 200 basis points this year. We — if you look at our aggregate inventory, it’s down, and Ryan has talked to some of the disposition. But notably, we put $300 million of incremental nutritive inventory that our customers are asking for. We’re capturing those demand signals so that we have better in-stocks. We want to further that in terms of how we cover on the up and down the street pro with our outside sales team members, and there’s a tremendous amount of work there.

I didn’t touch on this in the script, but within our org structure, our pro efforts were bifurcated in different parts of the company. And now, those are solidified. And so we go forward as one team as we think about our pro. So it’s not — if you call the store and you’re the same customer, you get a different set of interactions that you might get if you’re working with our outside team. So that’s going on a much more definitive basis. And the last thing I’ll touch on in the merchandising side of the house is reaching out to our vendors, both to ensure that from a cost position and a product availability and a prioritization for innovation that we’re where we need to be. But I think important for everybody to know, as we talk to the vendors, that feedback is also overwhelmingly positive around supporting Advance.

There is a strong desire to see Advance thrive, and you can say, hey, that’s — the vendors should have that perspective. But that works for us. The idea that we’ve got this collective coalition between the vendors, between our engaged frontline, between customers who want to buy from us, we just need to have our fundamentals right in terms of that product, price and the delivery all working together.

Greg Melich: Got it. And I think, Ryan, you mentioned as part of the guide, you expected a little bit of inflation in the numbers as we reinvest in that inventory and get the right stuff there. Is that fair? 1% or 2%?

Ryan Grimsland: Yes. Our inflation rate right now that we’re looking at is about a 1% inflation rate that we’re seeing and we’re expecting.

Greg Melich: Got it. Thanks, guys and good luck.

Ryan Grimsland: Appreciate it. Thank you.

Operator: The next question is from Bret Jordan from Jefferies. Bret, your line is open.

Bret Jordan: Hey, good morning, guys. On the supply chain initiative, and obviously, that seems like it’s been on for a while. The WMS should be done by the end of this year. At what point do you see actually having the DCs on a single ERP system? And when you use those smaller DCs as a sort of forward inventory, will there be an investment cycle in building more large distribution center infrastructure?

Shane O’Kelly: Yes. So great question. Thank you, Bret. On the WMS, we’ll be done with that this year. So high jump is our WMS system. So we’ll have that in all of what will be our replenishment DCs. The second part of the journey, in terms of creating market hubs, and you see this model probably elsewhere in the industry. We can use our smaller DCs to perform in this fashion. And we’ve had a journey in supply chain, but not a definitive one in terms of creating a unified single supply chain. What we had in the past, we had cross-banner replenishment. But what we were doing is basically asking 38 DCs to function as full on replenishment notes, basically to provide every product to a store requiring that product. And some products, some DCs don’t have the size and capability to do that, 38 is far too many for my past life in terms of where you’d expect your vendors to ship into.

So the idea is we create a national network of larger DCs. We’re not ready to definitively — to define that exact number. But you can look at other companies, and sometimes you’ll see 8, 10, 12, 14 large DCs to give you that national footprint. And then market hubs, both the conversion of our — of the smaller DCs, we’ll add additional market hubs beyond that because I think that, that flow model works. And so if you take those two together and look at the footprint, there are probably some additional large DC efforts that we need to undertake, and we’ll describe that more in terms of here’s our exact number. Here’s where we happen today. Here’s where we might be a new one. That will all be coming in the coming months. But the key for today is that we are putting a flag in the ground to have a unified supply chain, one flow path, one set of systems, and an easier interaction for our vendors to work with us.

Bret Jordan: Do you have a feeling, I guess, internally for what your basis point impact has been to run to despair it pretty inefficient supply chains, like what’s the incremental cost of running as you have been running? Or what might you pick up by consolidating?

Shane O’Kelly: I’ll just say it’s material, right? So if anybody who’s been in logistics, if you’re running two supply chains and everybody else or your previous endeavors as one supply chain, it’s just — it’s just not the path forward for us. So as we will explain with you, we think there’s material moneys that come out of the system. And then importantly, for our customers, the product flows better. The availability goes up. And so there’s kind of a one, two combo there that we’ll describe more at a later date.

Bret Jordan: Great. Thank you.

Operator: The next question is from Steven Forbes of Guggenheim Partners. Steven, your line is open. Please go ahead.

Steven Forbes: Good morning, Shane and Ryan. Shane, maybe a follow-up on the supply chain. You mentioned potentially using the sale proceeds to accelerate the migration to the single unified network. I was maybe just curious, like if we can think through the two scenarios here in terms of time frame to completion of that initiative, right? If the asset sale occurs, is there like a time frame in mind that you have to reach the goal? And then I guess, if the asset sale doesn’t occur, sort of what is that change in the time frame that would result in maybe a difference in sort of the near-term free cash flow proceeds of the business?

Shane O’Kelly: Yes. So this is my third time combining supply chains in companies, and we want it to be sooner rather than later. But it’s a multiyear endeavor. I think that’s just the practical reality of what happens. So can we shave time off? Absolutely, and we will do that with the proceeds. But this isn’t something that this group should expect to be done in ’24. We’ll extend into ’25, and probably into ’26 as we do this. And in particular, there’s both the existing set of efforts, which is what we’ll do with the first 38. Where we have to add net new market hubs or where — if we look at our larger DC structure, where we need to put in a large-scale new DC, those efforts take time. I think, the thing for everybody here to know is that journey is beginning.

And our first market hub conversion is going on. And so — and early indications are, this is going to be a really good thing for us. We will move as fast as we can because we know that the end state creates value for the customers and improve the profitability of the customer. And so more to come, but know that our supply chain team is dedicated. They’re focused and they’re already focused.

Steven Forbes: Thanks. And maybe just a quick follow-up for Ryan. As we think through sort of noncash and cash impact on the margin outlook, any sort of color around the fourth quarter LIFO either benefit or charge? And then sort of what’s implied within the margin guide for 2024 in terms of LIFO?

Ryan Grimsland: Yes. So in Q4, we saw $5.2 million of income related to LIFO. And we expect it to be moderating in 2024, so a moderate expectations in 2024 in our guidance.

Shane O’Kelly: Thank you.

Operator: The next question comes from Seth Sigman from Barclays. Seth, your line is open. Please go ahead.

Seth Sigman: Hey, good morning, everyone. I wanted to follow up on the comps this quarter, down 1.4%. I’m just curious, as you started to implement changes, are you seeing a wider dispersion in performance across the store base? I’m sure it’s noisy with weather, but anything you can point to and maybe quantify to say that some of the early initiatives are working?

Ryan Grimsland: Yes, absolutely. So as we saw availability improve, we did see improvement in the pro traction. So we’re actually seeing good performance in the pro. We’re excited about that, encouraged by our inventory availability. We still see DIY pressured. And so that kind of offsets some of the pro performance in that. And that’s also kind of what’s in former guide going forward. We expect to see good improvement in the pro as we have improved availability, while reducing DIY pressure going forward.

Seth Sigman: Got it. Okay. And then my follow-up question is just thinking about the gap in profitability versus some of your peers, and what — I guess, you’ll ultimately guide us to at some point. How much of the issue/opportunity is just four-wall profitability that’s sales-driven, it’s volume driven versus how much of that profit gap is maybe inefficiency outside of the stores? And maybe both, but I’m curious how you think about that as we contemplate the road map from here? Thank you.

Ryan Grimsland: Yes, it’s a good question. It is a little bit of both. So some of it is — we talked about supply chain conversion, that obviously will generate some benefit for us and how to flow that gap as well. There’s also a mix factor, as far as the type of the product in our mix being heavier pro than DIY, and that margin mix has a little bit of an impact as well. Yes, there’s also other areas where we need to focus on for merch excellence. Shane talked about improving line reviews, et cetera. So there’s some areas there. We’re not going to go into specifics around de-comping all of that, but obviously, there is some work and opportunity to close that gap. But I think the biggest one is that mix impact will keep us from closing it completely, but we do have opportunity, and that’s why we’re focused on the big one here, which is the supply chain conversion.

Shane O’Kelly: Ryan is exactly right. And one way to illustrate, and why we’re focused on the blended box, if you look at revenue per store, and you think about us as a kind of a 1.7, 1.8. And you can look at other folks who have higher numbers. When you add revenue to a store, $100,000, $200,000, $300,000, that money drops to the bottom line at an incrementally larger level, right? So you’ve got your fixed costs covered. So that’s a key for us. So I think your question is a good one, Seth. We need to do both. And as we do both, we see the path forward to continued success. And now that, as we look at where Advance is, we don’t sit and say, hey, let’s benchmark off the other guys. Our goal as an organization is to be incremental, to be incrementally better every day, take care of our customers, look after our team members.

And I’ve seen this movie before in other industries, in fact, in my last organization, and that’s a recipe for success. And we’ll look for that from us, and then look for us later this year to provide a perspective on what that might look like after a couple of years.

Seth Sigman: Okay. Great. Thank you, both and good luck.

Operator: The next question comes from Chris Bottiglieri from BNP Paribas. Chris, your line is open. Please go ahead.

Chris Bottiglieri: Hey, thanks for taking the question. Sort of [indiscernible] seeing some of these inventory adjustments. Just wanted to — I’m not sure I fully understood Chris Horvers question. Is it likely these inventory write-downs and changes in estimates will be reversed in subsequent period when you sell it? Or is that not possible? Like are these permanent changes?

Ryan Grimsland: Yes. No, we don’t anticipate reversing it. This was making changes to estimates and vendor receivables that as we went through that process. I don’t — I wouldn’t expect that these would reverse at any point in time.

Chris Bottiglieri: Got you. And then next question is just — I was hoping you could talk more about the independent businesses that you’ve divested. It looks like you take up the first 100. Is this like an immediate margin saving because you — you’re actually losing money to these customers? Or it’s just — does this enable you to actually shut down some of these Carquest DCs because you wouldn’t need them anymore if you stop serving this under these particular market?

Shane O’Kelly: So I’ll start, Chris, and Ryan can — yes. Thanks, Chris. I’ll start, and Ryan can jump in. The independents are an important part of the business, right? They could serve geographies we can’t get to. They can serve end markets where their depth of capability exceeds ours. So this isn’t a play around exiting the independent arena. This is one where, at times, we were exuberant in terms of adding independents, and as we looked at the sort of balance of trade, if you will, in terms of the benefit to each party, it wasn’t working for us. In some cases, it wasn’t working for the independent either. And so we looked at the aggregate number, and there are about 100 folks that at the end of the day, that didn’t make sense for us to continue that relationship.

And as we did that, it’s a good move for us. Ryan can talk about the impact. But it’s also been received well in the independent network. The independents who are good at what they do, and by the way, they exhibit a lot of pride in their business. They don’t want folks representing the Carquest name and doing it in a manner inconsistent with what our customers would expect. So it’s been a well-received adjustment, and we’re happy with the independence that we have.

Ryan Grimsland: Yes, Chris, I’ll just add that well, we’ll lose some sales on that, but we’re actually going to gain on the bottom line and operating profitability, roughly $3 million to $4 million. So it’s definitely a net positive for us.

Chris Bottiglieri: Okay, that makes sense. Thank you.

Operator: The next question comes from Seth Basham from Wedbush. Seth, your line is open. Please go ahead.

Seth Basham: Thanks a lot and good morning. My question is around the balance sheet leverage going forward. How do you expect that to play out over the next few quarters, including post sale of Carquest? And any implications for the vendor inventory financing program?

Ryan Grimsland: Yes, it’s a good question. So as we said with the sale, and Shane talked about it, if we do get the proceeds from the sales, one of the first things we’ll do is work to delever our balance sheet with some of those proceeds. That’s one thing we’ll look at it. But going forward, I think the business is generating good cash flow, and as part of that cash flow, we will continue to work to delever the balance sheet. We’re going to first invest in the business, but also get that leverage target into a better place.

Seth Basham: Okay. That’s helpful. And as you look beyond ’24, obviously, early, but with the supply chain transformation, should we expect CapEx to rise from ’24 guide?

Ryan Grimsland: The CapEx guide that we put out contemplates actions we’re taking in supply chain conversion. We’re going to be much more focused on our capital expenditures and making sure we’re investing in the right things that drive our business and then we focus on these decisive of actions. So as we said earlier, the capital is really focused on IT and supply chain right now.

Seth Basham: Thank you.

Shane O’Kelly: Yes, I’ll just jump in there. The supply chain transformation is a big one. I think Ryan’s got our guide exactly where it should be for ’24. We could raise it in ’25. And we’ll feel either through the proceeds from Worldpac or just as the business performed better and we’re able to deploy more, again, back to the previous questions, if we can accelerate or wherever we can accelerate the supply chain consolidation, we’ll do it.

Operator: Next question comes from Michael Baker from D.A. Davidson. Michael, your line is open. Please go ahead.

Michael Baker: Okay. Great. I just want to follow up on the 38 distribution centers that you talked about. Any — I’m looking in the case, in past annual reports and everything, and I can’t find a breakdown. I know in the past, you used to talk about PDQs, which are the smaller DCs, but can you just tell us, of these 38 DCs, how many do you consider bigger? What are — what is the bigger DC? How many are smaller? Just trying to get a sense of what you’re going to go forward with in terms of your big DCs, and what may need to be added to that? Thanks.

Ryan Grimsland: Yes. So with the 38, I know it’s hard to approach 38. 38 is the Advance and Carquest DC network. So I think in total, we’re about 50, which would include the Worldpac as well. So that’s, when we talk about 38, we’re specifically talking about the Advance and Carquest DC network.

Shane O’Kelly: So we’ll give you, in the coming months, a complete breakout of all the facilities. I’m a little reticent to be more specific. Obviously, we’ve got team members in these DCs. And if their DC is going to be converted into a market hub as we go through that plan, we want to make sure we’re staying abreast of keeping them in the loop. So we’ll break out the differences. In general, the smaller DCs that are more — that are appropriate for the market hub Conversion K for Carquest, the larger DCs from the Advance model, there’s a substantial size footprint difference. We largely think we have the large DC network that we need. Again, we may refine that a little bit in terms of what that national footprint might look like.

Michael Baker: So you had said to a previous question earlier that based on the other guy, somewhere between 8 to 10 to 12 to 14 is the right number of large DCs. And you’re saying that you think you have those already from the Advance, the old Advance network, give or take, a couple? I just want to clarify that.

Shane O’Kelly: Yes, Michael, good job threading some questions and answers together. The 8 to 12 to 14, that’s my experience in the past life, right? If we hired some of the firms that do the work on setting up national infrastructures, and you say, hey, I want to have a nationwide distribution network. That’s what they’re going to tell you. And that’s what I’ve seen, and that’s what I’ve lived. And so I think that’s an appropriate range for us. And yes, we largely think we’ve got the facilities today. Thank you.

Ryan Grimsland: We’re leveraging our current assets, right? We’re leveraging our current assets that we have — we think we have the assets to create the network that we need.

Shane O’Kelly: Yes. If we came to you and said, hey, we got to put 10 new 500 to 1 million square foot DCs up in the United States, you guys can do the math on what those buildings cost and how long that takes. We’re trying to do this both more quickly and efficiently using the facilities we have. And a national model might come out and say, gosh, the DC you have might be marginally better if it was located an hour this way or that way That’s a little bit of the trade-offs we’ll make, which is minor in terms of the efficiency drag. But in exchange for the speed and the overall cost effectiveness, that’s the right way to go.

Michael Baker: Yes. That makes sense. One other — just from the beginning of the call, if I could clarify. You talked about, you found another $50 million from — to get to frontline employees from sunsetting things. What is that? And I guess on a year-over-year basis, is that an incremental $50 million investment? Or is that netted somewhere?

Shane O’Kelly: Yes. So I’ll make the math easy. The $150 million is out. We took out $150 million. And then we said, hey, we’re going to take $50 million of that, and it goes in the frontline, for wages, bonuses and training. There’s an incremental amount, roughly double that, that comes from — some of it are our ordinary course. So we’ve got our merit plan for the year. But some of it comes from sunsetting. We had some HR programs out there that we spend money on, that weren’t directed towards the frontline. So we canceled those programs and we’re putting those dollars and do just bonuses and train. So it’s no net — it’s no incremental drag to the company. It’s a better use of funds that we were putting in the right place.

Operator: The next question comes from Brian Nagel from Oppenheimer. Brian, your line is open. Please go ahead.

Brian Nagel: Hi. Good morning. Thanks for taking my questions. So a couple of questions. I guess basically both maybe philosophical in nature. But first off, maybe not really fair, but Shane, so for those of us who followed Advance for a while, I think we’ve heard — we’ve discussed in the past, with prior management teams, supply chain fixes. So I guess, we’re talking a lot about that here as a key component of your view of the business. What’s different? I mean, if you look at the — what you plan to do here for the business, from a supply chain perspective, and evaluating what has been done in the past, what are really the key differences here? And then my second question. You have a lot going on here in the near term. How do you balance or how do you think about market share?

Because you have a very fragmented sector. But within that sector, you’ve got a really — a couple of really strong competitors. So how do you think about maintaining market share amid all these near-term type efforts within the business?

Shane O’Kelly: We’ll start with the second question on market share. There’s lots of good companies. There’s lots of people that we compete with every day. And you played — have some have some notable examples. But there are plenty of smaller companies out there who sell auto parts so we know that we’ve got to earn our keep every day. We’ve put out our guide. We think that’s modest. And we know that our engine, as we restarted with this turnaround, we’ll take a minute to get a full head of steam. But the industry fundamentals are very good. This is a disciplined industry. By the way, it’s an industry that even with the big players, there’s still room and runway to grow. By the way, there is just growth that occurs naturally.

And so we won’t be a share taker, but we’re — first step is to be a shareholder, and I mean that in terms of market share. So that’s what we’re looking to do. And we don’t spend the day thinking. Any time you put two companies to get together, the first thing you got to think about is what are you going to do with the logistics infrastructure and so we let two different models exist for a long time and then had sort of a patch solution. And what we’re telling the market today is the right answer for auto parts distribution is to have one single national network. And that’s what we’re doing. And so you won’t be able to identify facilities in terms of that’s a blue versus red EG Carquest versus Advance. We’re Advance Auto Parts, and we will have a national distribution network.

The second thing is the idea of using this market hub. And I think you see that probably. It’s — I think it’s a good way to get product closer to the more SKUs closer to the customer to be more responsive. And I think that’s a function — that’s a bit of an evolution. I think the customers’ expectations have increased in terms of what can you get me in a short time frame. We want to be participated in that, and that market makes that happen.

Brian Nagel: Got it. I appreciate all the color. Good luck. Thank you.

Shane O’Kelly: Thanks, Brian.

Operator: The next question is from Scott Ciccarelli from Truist. Scott your line is open. Please go ahead.

Scott Ciccarelli: Thanks for fitting me in guys. So you talked about 400 teammates that are now gone, but can you provide more color on where you’re able to take out $150 million of expenses from your cost structure. It’s a pretty big number in a short period of time. And related to that, have you factored in some sort of negative impact on sales? Like, in theory, the people there related to that, have you factored in some sort of negative impact on sales? Like in theory, the people there were doing at least something semi-productive?

Shane O’Kelly: So the cost takeout was broad-based. So no functional area was exempt. And if I go back to an earlier comment, I think we had a bit of a headquarters-centric approach to running the business. And with that, you end up with low in your corporate infrastructure. I believe in the inverted pyramid, the idea that we need to be field first, and corporate needs to be lean. Corporate needs to be everybody who sits in a corporate seat needs to be supporting the field. And so we went across the functional areas. I think notably, marketing was an area where there were more significant cuts than in the other areas because we invested in marketing programs that didn’t have a yield. And so we view that cost takedown not only as necessary, but one that didn’t dampen our sales, if anything, I think we’ve got the opposite going out as we cleared out some bureaucracy.

We booked at processes that were inefficient, and we’re empowering the front line. And as we take dollars and put it in the front line and reduce turnover and create energy, those team members feel like they’re heard and supported in a way that wasn’t occurring.

Scott Ciccarelli: Okay. So you don’t think you’ll lose any sales on the reduction in marketing — can you add one other question. Are there more restatements to historical results? And anything on ’23 we should be thoughtful of before some of the new team on the finance side came in?

Shane O’Kelly: Are you saying more than what actually is being reported today?

Scott Ciccarelli: Correct.

Shane O’Kelly: Yes. No, I think what we’re talking about today is what we’ve shared today are the restatements that we plan to see in the Form 10-K. We’ll have the Form 10-K out in short order. It should be within that extension period of time.

Scott Ciccarelli: Got it. Okay. So no more restatements or results. Okay. Thanks guys. Good luck.

Shane O’Kelly: Thanks, Scott.

Operator: Our next question comes from Max Rakhlenko from Cowen. Max your line is open. Please go ahead.

Max Rakhlenko: Great. Thanks a lot thanks. So first, how far away are your in-stocks from where they need to be and where you want them to be? I think you mentioned they’ve improved by 200 basis points. So how much room ahead? And then just how we should think about that timing.

Shane O’Kelly: Max, we didn’t get the question. Can you say one more time, please?

Max Rakhlenko: Sorry, just how far away your in-stocks from where they need to be? I think you mentioned 200 basis point improvement. So how much further room do you have to go? And then just how should we think about the timing?

Shane O’Kelly: Yes. So we’re doing that real time. And as we complete this — our inventory system that comes online, it will get better from where it sits today. So I want to put a definitive number on it, but that journey continues. We do get customer feedback that says, hey, I feel better about your product availability. We get feedback from our world as well. But I don’t want to put a pinpoint but more to come, but material progress that has been noted by customer and field team members.

Ryan Grimsland: Yes, I’ll just add. I think broad-based improvement, absolutely, broad-based improvement, but there’s still work to do geographically. I think 38 different distribution centers, some are smaller, just the ability to allocate the work. That’s the work that we’re doing with the new system and being able to get there. So there’s still work to do, but broad-based significant improvement.

Max Rakhlenko: Okay. And then how are you thinking about pricing on the DIFM side and whether you are where you need to be in order to be competitive? And then just latest thinking around private label versus national brands following some of the conversations that you’ve been having with the pros?

Shane O’Kelly: So I’ll start with private label. We think private label is an important dimension of the business. And we’ve got some great brands that we control. Die Hard, I think, is a premier name. The Carquest name. And think about Carquest as it relates to our platinum brakes product. So we’ve seen growth in private brands and we want private brands to be an important part of the portfolio. I think something we’ve done is, in the past, sometimes our exuberance as it relates to who we work with, we may have had suppliers not in a position to fully represent what our needs are. We’ve come through those issues and our merchant and sourcing teams are making sure that we’re not only getting high-quality products but we’re getting it in the quantities that we need.

On the pricing front, a couple of things here. One, this is a disciplined industry. And I think that’s important, the conduct between the players in terms of how the active customers. I would describe as rational. But customer feedback is an important dimension. I would say we need to be in the ZIP code of the customers’ needs on price. But availability is important, as is speed to service. And that’s something that we’re focused on. We know that if you’ve got a — if you’re a pro and you’ve got a car on a lift, you’ve got a Chevy Tahoe that needs brake rotors, we’ve got to get them to you expeditiously. So we’re focused on that speed of service, which is something we measure. But as it relates to price, we’ll be where the market sort of demands.

Max Rakhlenko: Got it. Thanks a lot.

Elisabeth Eisleben: All right. Thank you all. That is our last question for today. Thank you for joining us. We look forward to sharing more progress on our decisive actions that we covered today when we speak with you again in May. Have a great day.

Operator: This concludes today’s call. Thank you very much for your attendance. You may now disconnect your lines.