Welcome to the Advance Auto Parts fourth quarter 2016 conference call. Your lines have been placed on listen only until the question and answer session of today's call. To ask a question, you may press star one on your touch-tone phone. This conference is being recorded. If you have any objections, you may disconnect at this time. Before we begin, Zaheed Mawani of Investor Relations will make a brief statement concerning forward-looking statements that will be made on this call.
Good morning. Thank you for joining us on today's call to discuss our fourth quarter results. I'm joined this morning by Tom Greco, our President and CEO, Tom Okray, our Chief Financial Officer, and Robert Cushing, our Executive Vice President for Professional. Tom Greco and Tom Okray will open the call with prepared remarks regarding the quarter, and Bob will join them to answer questions for the Q&A portion of the call. Before we begin, I'd like to remind you that our comments today contain forward-looking statements we intend to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address future events, developments or results and are subject to risks, uncertainties and assumptions that may cause our results to differ materially.
Our comments today will also include certain non-GAAP measures, including certain financial measures reported on an adjusted basis to exclude the impact of costs in connection with the integration of General Parts International and the recurring amortization of General Parts' intangible assets. Please refer to our earnings press release and accompanying financial statements issued today for important information and additional detail regarding these forward-looking statements and the reconciliation of non-GAAP measures referenced in today's call. The company intends these forward-looking statements to speak only as of the time of this conference call and does not undertake to update or revise them as more information becomes available. Let me turn the call over to Tom Greco. Tom?
Thanks, Zaheed. Good morning, everyone. Welcome to our fourth quarter conference call. I'd like to begin by acknowledging all of our team members and independent owners across the broader AAP family as our initiatives to improve top-line performance drove meaningful progress in Q4. As we closed out our fiscal year, we accelerated growth, building momentum from the previous quarter and delivering comp sales growth of 3.1%, our strongest quarterly comp performance in the 12 quarters post the GPI acquisition. We're taking decisive actions to improve performance and better serve our customers. I'm confident we're on the right track. Before I review the drivers of our comp sales acceleration, it's important to note that our Q4 sales performance benefited from a year-over-year holiday shift as New Year's Day moved from Q4 in the previous year to Q1 of this year.
We also had a very strong finish to the quarter as a result of exceptional winter-related demand in December. These factors had a positive impact on the end-of-year performance in Q4 and will have a negative impact on the beginning-of-the-year performance in Q1 of this year. Net, it will be important to look at our business across Q4 and Q1 combined to get a true picture of our sales growth improvement. Regardless, we're very pleased with our improving comp sales performance. Specifically, the acceleration of sales growth we've achieved over the past two quarters is attributable to three primary areas of focus. First, we've been very clear up and down the organization that everyone's number 1 priority is caring for the customer, which drives top-line sales growth. Across all of our businesses, we're seeing adoption of this mindset.
Second, we're driving positive results from sustained investments in availability, customer service, and frontline incentives. These investments strengthen our execution and position our teams to serve our customers more predictably, more reliably, and more consistently. This is driving improved performance in both transactions and ticket on both sides of our business. We're also driving higher levels of customer engagement and lower levels of turnover across the board. In fact, we're now experiencing the lowest frontline turnover levels we've seen in years. Third, we're delivering improved levels of execution throughout our supply chain. This includes higher fill rates from DCs, better in-stock rates in stores, and reduced order-to-delivery time to customers. All of this ladders up to providing a superior experience for our customers. Relative to where we were, these improvements are translating to accelerated growth. In fact, all of our businesses had strong sales performance in the fourth quarter.
Advance, Carquest, Autopart International, our independent network, Worldpac, and our Canadian business. In the U.S., we saw sequential comp sales improvement in every one of our regions, with the Northeast and Great Lakes delivering the largest improvement. We completed our transition from 5X to 3X delivery frequency in these markets and more reliable fill rates improved store-level service. We'd like to highlight that our Carquest independent network had a terrific Q4. We have a reinvigorated focus on this vitally important part of our business, comprised of approximately 1,250 stores and teams of dedicated professionals. In most of these independent stores, there are literally decades of experience in auto parts sales and service. We're leveraging this institutional knowledge much better than we have in the past, and our renewed focus on the independent team resulted in our strongest quarter for this group since the GPI acquisition.
Based on the productive conversations we've been having with our independent advisory council recently, we firmly believe there is still plenty of upside ahead for us. As we strengthen the partnership with our independent operators, we expect that both they and we will accelerate our success. As we said repeatedly, our first priority was to sharpen our focus on the customer and the drivers of customer satisfaction. We focused on, and will stay focused on those customer metrics which drive top-line improvement. We're extremely pleased that actions to improve the customer experience are delivering results in the top line and driving positive comps sooner than expected. Over time, you'll see progress in bottom-line profitability margins. This was always the plan and continues to be the plan. Improving the bottom-line profitability is highly visible and completely within our control.
Turning to operating income, our performance reflects some deliberate choices along with clear opportunities for improvement. We chose to sell down inventory in order to optimize our inventory mix and improve working capital. We invested to better serve our customer. These two decisions drove over two-thirds of our adjusted operating margin deterioration versus the prior year. Finally, we continue to identify opportunities for improvement in cost management. The end result of these three factors resulted in an adjusted operating margin rate of 6% and adjusted EPS of $1. Allow me to go deeper on each element. First, as expected, we took planned and proactive steps to reduce inventory levels. In doing so, previously capitalized supply chain costs flow through the income statement as an expense and reduce our margin, but not impacting our cash flow in the quarter. This is a direct result of the planned reduction in inventory levels.
This is absolutely the right thing to do for our business. Over the long term, reducing inventory is a large cash flow driver. Therefore, we plan to continue our inventory optimization work in the same thoughtful and deliberate manner without disrupting customers. Secondly, also as planned, an important priority for us in Q4 was to make incremental investments to better serve our customers and accelerate top-line momentum to regain market share. This included investments in parts availability, customer service, and frontline incentives. These investments will pay dividends over the long term as we're already seeing dramatic improvements in customer service metrics, increased sales, and reduced turnover. Finally, a little less than one-third of our margin contraction is attributable to the fact that we are still in the very early stages of our transformation.
At this point, cost visibility and our expectations for cost management are still not where they need to be throughout the organization. As a result, we had performance opportunities on some cost lines in Q4. These cost shortfalls are completely unacceptable. I know that, and my team knows that. We also know exactly where these shortfalls are, and we have a plan to fix each one of them. Going forward, we've constructed a robust five-year productivity pipeline and sequenced it across the five-year strategic plan horizon. Our actions, by design, are not yet positively impacting short-term cost performance across our P&L, both in cost of goods and SG&A. Our productivity plan is to permanently reduce costs in our systems with actions we know are sustainable and do not impact our customers. Our productivity pipeline is material and thoughtful in order to drive long-term value creation that is sustainable.
To reiterate, our first priority is caring for the customer. When we improve margins, we will do so the right way in the best interest of the business. We're determined to permanently and properly remove waste in our system that will allow us to further invest in our valued customers while expanding margins over the long term. In summary, we're pleased with our top-line sales performance in Q4. Jump-starting the top line was our first priority in the transformation journey, and we're ahead of where we expected at this point. Without question, accelerating growth and regaining momentum with our customers is an important first step towards driving sustainable long-term performance improvement. With regards to flow-through, we knew our transformation was not going to be perfectly linear. We remain confident in the long-term opportunity as we build new muscles to drive productivity and accelerate margin expansion.
I said from the beginning that turning this business around would be a marathon, not a sprint. Over time, we absolutely will balance top and bottom-line performance. Let's talk about 2017. We're excited about 2017 for a number of reasons. As we shared with you in November, we have a very clear and cohesive strategy. Our aligned and fully integrated five-year plan is enabling us to execute a focused agenda, to drive change and to improve performance. As we shared at our investor day, our strategy has four major growth planks. First, supply chain, second, professional, third, DIY, and fourth, productivity. We're going to be relentlessly focused on these growth planks over the next five years and beyond. Allow me to provide a brief update on each. First, supply chain.
We're reinventing our supply chain with a laser focus on improving availability, as it's the most important thing our customers want from us, to get the right part in the right place at the right time. As shared previously, we implemented a number of lead markets in the back half of 2016, where we tested different ways of positioning inventory, different ways of assorting parts, and different ways of delivering throughout our network. We're excited about the performance from these lead markets, highlighted by improved availability. This translated to meaningful sales lifts, higher levels of customer satisfaction, and lower levels of inventory. As a result of these lead market successes, we're rolling out the key elements of this plan across the country later this year and into 2018. We expect the improved availability we saw in the lead markets to drive incremental sales in new markets where it's implemented.
Secondly, on the professional side of the business, we feel terrific about our parts assortment, which our customers tell us is the most comprehensive and attractive lineup in the business. Under Bob Cushing's leadership, we're ramping up sales and customer service capabilities. This is enabling us to regain first-call status with many professional customers. We're packaging up all of AAP's assets in one place for professional customers. This includes market differentiators like our TechNet program, along with the Carquest and Worldpac Training Institutes. Bob's also leveraging best practices and technology platforms across all of AAP's professional businesses to simplify things for our customers. Finding ways to drive sales and profits for our professional customers is job one here, and we're making terrific progress. Third, in DIY, we're focused on delighting DIYers at every single touch point. We're hard at work to strengthen our Speed Perks program and build stronger loyalty.
We've also initiated lead markets for DIY designed to improve the customer experience in the store, online, and overall. This includes more focused and enhanced training, along with investments in mobile and digital to better serve our customers when and where they want to be served. Our customers have been actively telling us we're making progress in DIY, as measured by steady sequential increases in positive feedback from our customers. We track this on our customer service hotline, as well as through social media channels. The improvements we're seeing are quite dramatic. Our team members have always wanted to serve our customers better than we have in the past. Now we're giving them the tools to do so. In Q4, our DIY initiatives drove sequential growth improvement at the same rate we saw on the professional side of the business.
Finally, Tom Okray and I are extremely energized about the productivity pipeline we've constructed for the future as we remove at least $500 million of unnecessary costs over the strategic business plan horizon. This requires us to thoughtfully change the work. Our approach to cost reduction will be very different than it's been in the past. As we implement our productivity agenda starting this year, it will be done so by materially changing the work, not short-term cost reduction. In summary, the five-year strategy we shared with you in November is well underway, with 2017 representing year one of our journey. The great news is, executing our strategy without frequent shifts in direction is already enabling us to improve execution. We enter 2017 with a relentless focus on a narrow set of relevant metrics and a goal of delighting our customers at every single touch point.
I expect our execution to improve every quarter this year. Finally, we've done a substantial amount of work on our people strategy in support of our business strategy. The primary goals here include growing talent, building new capabilities, and evolving our culture. We plan to grow talent and build bench with high-performing internal talent, and where needed, by attracting external talent to AAP, where we've already had considerable success. Throughout Advance, we're hard at work at evolving our culture to one which is obsessively focused on the customer, and one which has an exceedingly high level of accountability, ownership, and drive for results up and down the organization. As part of this, we conducted a deep dive on our organizational health to help us understand what we needed to do in order to evolve our culture to be relentlessly focused on the customer.
The output of this work has enabled us to provide very clear direction on what we expect from team members in order to achieve a step change in our results. Our team members are excited about our new cultural beliefs. As examples, be accountable, champion inclusion, and take action, to name just a few. Our frontline team members have embraced our cultural beliefs. Now we need to bring them to life with every customer, every day, in every store. Once again, I'd like to thank both AAP team members and our independent partners across North America for raising our game in Q4 by caring for customers first and by stepping up our comp sales growth. While I knew this transformation would take some time, we're encouraged with our progress and confident we'll accelerate performance going forward.
I'll now pass it over to Tom Okray to share financials and walk through our 2017 outlook.
Thanks, Tom. Good morning, everyone. Total sales for the fourth quarter increased 2.4% to $2.08 billion as compared with total sales during the fourth quarter of fiscal 2015. The sales increase was driven by comparable store sales growth of 3.1%, inclusive of a positive impact of the year-over-year timing of the holiday shift. As Tom referred to earlier, our gross profit rate decline of 114 basis points was primarily driven by headwinds associated with reducing inventory levels and our productivity agenda that is still gaining traction. As planned, our adjusted SG&A rate increased 58 basis points year-over-year, driven by continued investments in customer service initiatives related to store labor, frontline incentive compensation, and improvements in availability. All in, our fourth quarter adjusted operating income came in at $125.6 million. Adjusted operating margin decreased 172 basis points over the same period last year to 6%.
As Tom referred to earlier, approximately one-third of the adjusted operating margin decrease was related to reducing our inventory levels. Approximately another third of the adjusted operating margin decrease was driven by our investments to better serve our customers. Finally, just less than a third of the adjusted operating margin decrease was related to performance shortfalls in a few concentrated cost lines. These included items that will not be part of our long-term cost structure. As Tom indicated, we have tremendous visibility on cost performance opportunities and great confidence we will address these shortfalls as we ramp up our productivity pipeline. Free cash flow for fiscal 2016 was $241.3 million versus $454.9 million last year, primarily driven by the combination increased inventory versus the previous year and lower sales. Turning our attention to the full-year outlook for 2017.
We expect to deliver comparable store sales in the range of zero to 2% and an adjusted operating margin increase between 15 and 35 basis points for the year. Notably, our full-year adjusted operating margin expansion estimate also includes new inflationary pressures and expected cost increases in 2017 that either did not exist or were not material for us in 2016. These year-over-year increases are primarily from the salary adjustments due to the adoption of new FLSA regulations and minimum wage increases for our frontline teams, as well as projected higher incentive compensation in 2017, driven by our expectation of improved operating and financial performance. Moving on, we expect to open between 75-85 new stores inclusive of new Worldpac branches, capital spending of approximately $250 million, and an effective tax rate between 37.5% and 38%.
We are also focused on generating cash flow improvement over 2016 and expect to deliver a minimum of $400 million of free cash in 2017, driven by improved operating performance and a strong focus on working capital as we take additional steps toward optimizing our inventory and payables. In summary, we are very pleased with our meaningful top-line progress in Q4 and remain confident in our strategy that we shared with you in November. With that, we will open the call for questions.
We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one. If you would like to withdraw, please press star followed by the number two. Please limit yourselves to one question and one follow-up. Our first question comes from Simeon Gutman of Morgan Stanley.
Thanks. Good morning. I thought on the Q3 or the call or the meet and greet, we talked about gross margin being weighed down similarly by some of the inventory capitalization costs. I thought the commentary was that Q4 shouldn't be as bad as Q3. Is that right? What changed for Q4?
Well, first of all, we definitely signaled that it was going to continue to be a drag, Simeon, in the fourth quarter. On the gross margins side, we really look at the total picture, right? We're looking at our operating margin broadly. With regards to that, as we said in our prepared remarks, over two-thirds of the overall margin contraction was a function of some deliberate choices we made. First of all, to reduce inventory, and secondly, to invest in our customers. We're really managing the business for the long term. On the balance of the shortfall in our overall margin, we're disappointed but not surprised by the fact that we had some cost performance shortfalls. We've got a new muscle to build here on productivity, and we've got to figure out a way to reduce costs thoughtfully over time.
The net of it is we significantly increased the visibility of these costs in the organization. We have a plan to fix the performance of the costs. We provided very clear, relevant metrics to measure performance. We dramatically increased visibility throughout the organization. I can tell you that the muscle to drive cost out of the organization is being developed. It really hasn't been part of our DNA in the past, and it's going to take some time. The new team's running the business very differently than before. The zero-based budgeting process is helping us build a very disciplined productivity pipeline where we're going to really change the work and permanently remove those costs. I have tremendous confidence that we're going to balance the top and bottom line over time, including the gross margin. It's actually the most straightforward aspect of our strategic agenda.
My follow-up, I'll just make it two parts. Following up to that answer, does this capitalization expense now roll off? Are we through it, and therefore we should see that improve, meaning the gross margin rate improve from the lack of that headwind? Second part of the follow-up, if you take the 15-35 basis points of margin expansion in next year's guidance, is that purely a function of the leverage from the comp range 0-2%? Or is there anything contemplated in the timing as you get some of these SG&A savings? If that goes better, is that in that guidance range as well?
Simeon, let me take that one. With respect to the capitalization supply chain costs, that's going to continue as we rightsize and optimize our inventory. Quite frankly, it's the right thing to do for the shareholders. It's the right thing to do for the company, and we're going to make that decision every day of the week. It's going to be lumpy over time, but that's something that we need to do as we're building this transformation for the long haul. There's tremendous amount of cash flow opportunity by getting our AP ratio in line. Definitely underperforming our peers, not where we want to be. With respect to the guidance, I think it's going to be both of the things that you said. One is it's going to be the top-line growth of the 0-2%.
As we build this productivity muscle that Tom described, we expect to also see benefits from not only SG&A, but also the gross profit line.
Okay, thanks.
Our next question comes from Michael Lasser of UBS.
Good morning. Thanks a lot for taking my question. I guess what the market wants to see over the long run is that you can generate sales, gross margin expansion, SG&A leverage consistently on a quarter-to-quarter basis. Have you seen anything in the business that would prevent you from doing that over time? How long do you think it's going to take for you to get to be able to sustainably producing that algorithm?
Well, thanks, Michael. First of all, we really are excited about the performance in the fourth quarter on the comp sales. That was the most difficult piece that we had to tackle, was to improve our comp sales performance and start to regain share momentum with our customers. This is a turnaround situation, we're building new muscles throughout the organization. We've got to build a cohesive strategy that we stick to. We've got to elevate the operating intensity across the organization to drive better execution and to improve cost management. Both of those are extremely important. We're building those muscles as we go. Part of that is to get some talent into the organization that can help us with that, to build new capabilities. What you do first, second, and third is really important in this type of situation.
We've made some conscious choices along the way. To answer your question directly, I don't see anything getting in the way of what we shared with you in November. We're building momentum on the top line. We see tremendous opportunities to take cost out of the organization. Tom has come in, Tom Okray, really helped us with thinking through the productivity agenda. We've sequenced it over the five years. We're very confident we can take the cost out over time. It's just a matter of sequencing them in the right order.
My follow-up question is that you gave a lot of moving pieces around the margin during the quarter. You mentioned that two-thirds of the margin decline was due to inventory disposition and incentive comp increases. Another third was due to the early stages of the turnaround. Are those distinct factors so that accounts for 100% of the margin decline? Maybe another way to say it, would you have levered your 3.1% comp had it not been for those factors?
Well, as I mentioned in the prepared remarks, we're not satisfied with the operating leverage by any stretch of the imagination. If you deconstruct it, as you just articulated, about two-thirds of it was very planful and thoughtful. We entered the quarter knowing exactly what was going to happen in terms of inventory, knowing exactly what was going to happen in terms of the investments in the customer. The investments in the customer are obviously pretty broad-ranging. We're investing in parts availability. We're investing in our employees. We're investing in delivery. All of those things are factors that drove the lion's share of the operating margin contraction. The other third is just this building out this muscle on cost. We don't have structural impediments to taking cost out of the organization. We just lack overall leadership to really take on these cost issues.
We lack the visibility that would normally be in a company that's performing at a really high level, and we lack the action plans that we needed to drive the costs out. I feel very confident that we can address those cost shortfalls that we had in the fourth quarter. It concentrated in a few areas. It wasn't a huge surprise to us because we're still building out those muscles, but they're not structural, and they're just process-driven, basic things that we can tackle over the course of the strategic plan.
Thank you, and good luck.
Our next question.
Thank you.
Our next question comes from Steven Forbes of Guggenheim.
Actually, John Heinbockel on for Steve. Tom, two things. One, if you think about permanently changing work, where do you think the biggest opportunities are? Is it store level? Is it regional level? What type of tasks would have the greatest potential?
It's really pretty broad-ranging. We're looking at it from a process flow standpoint. I think in November we shared the six major cost buckets that we're looking at, how we distribute throughout our distribution center network from DC to store, how we're operating inside of the stores, how we're distributing parts from our stores to our customers. All of those cost lines are integrated, we're looking at how we can build out a much more meaningful and impactful way to effectively and more efficiently deliver parts to our customers. We're looking at the processes holistically, we're looking inside the four walls as well. Inside of a distribution center, how many times are we touching parts? How many deliveries are we making from a store to customers throughout the week? What's the average size of those deliveries?
There's a number of things that we're working on that are going to address both the holistic approach in terms of our total value chain to the customer and inside each cost area, such as a store, to try and drive costs out. We're looking at it very broadly, we've got very clear plans. We've sequenced our productivity agenda for 2017 across each period, we know how the year's going to unfold, we also have a pretty clear idea of how the $500 million-plus that we're going to be removing over the strategic plan horizon is going to unfold. We've got that pretty well, I think about 80%, mapped out at this stage. It's pretty comprehensive. We are leveraging zero-based budgeting, which is a very effective tool, it's really revealed some of the big opportunities that we have inside the company.
All right, as a follow-up, I know you've done some consolidation in the field level organizational structure. If you look at it today, are you generally satisfied with where the structure is right now? Or do you anticipate some further changes as we look out over the next year, two, three?
Yeah. Obviously, we're not going to talk about specific changes we're complementing or contemplating inside of the organization, everything is on the table, okay? We're looking at every aspect of our business as we consider how to work more effectively and efficiently with our organization and with our customers. You can draw your own conclusions from that.
Okay. Thank you.
Our next question comes from Seth Sigman of Credit Suisse.
Thanks. Good morning. Obviously, a lot of good progress in the quarter. Tom, you mentioned a number of focus areas that seem to be helping. As you sort of isolate the core drivers of the improvement across various markets and channels, how would you rank those sources of improvement between the external environment that seemed to get a little bit better late in the quarter in December, as you mentioned, versus some of those specific focus areas?
Yeah, I want to reiterate, we clearly benefited from the holiday shift and the increased winter-related demand in December. We're going to give some of that back in January and in Q1, which I think you've heard from some others. That said, we're very excited about our progress. I think the organization is really rallying around a care for the customer-first message, and that, I think, has been a big driver. I think we're getting an extra level of discretionary effort from our own team members and from our independent operators out there in the marketplace. The heightened focus on the customer is driving improved execution, and it's contributing meaningfully to the top line. As I think I said before, we focused the entire field organization on input metrics. We hadn't been as focused on important input metrics like fill rate, like order-to-delivery time.
Our turnover is down dramatically. I think that's been a big factor. We're delivering the parts faster to the customer. I think we are creating somewhat of a virtuous circle here. As we improve our service, we're getting more traction with our customers. We're going to continue to be absolutely relentless in ensuring we delight the customer. When we do, we're confident that we'll grow faster.
Just given the calendar dynamics you mentioned with Q4 and Q1, in light of that, does that imply that Q1 would fall below the 0%-2% comp range? I'm just wondering if there's any other considerations as you think about the cadence for comps throughout the year.
I'm not going to comment specifically on Q1, but I think it will be important, given the dynamics I just mentioned, to look at performance over 28 weeks to include Q4 and Q1, just by virtue of what happened at the end of the year. We're not managing this business quarter to quarter. We're building a very long-term approach to the business. We're focused on what we control. We're focused on doing what needs to be done today to ensure maximum value creation for the long term. Having said that, these kind of short term, macroeconomic, winter related shifts that can move volume around from week to week and quarter to quarter, those aren't things that we're tremendously focused on. We're focused on the long term.
Okay, great. Just one quick follow-up. You gave us your long-term productivity improvement target. It sounds like a lot of the planning is done. Just curious, are you able to give us a sense of how much you're targeting for 2017 and what's built into that margin guidance?
Yeah, obviously we gave you $500 million over five years. Just do the math. We would expect to get at least $100 million into this year, we're setting our goals higher than that, I can tell you that. We're really focused on building this thing out in a way that's sustainable. As was asked earlier, that involves changing the work fundamentally, which is honestly harder than just, "Hey, let's just cut a bunch of things. Let's cut travel," or whatever the case may be. We're building out a productivity muscle that just didn't exist here, and I couldn't be more excited about it.
Okay, great. Congrats on the progress.
Our next question comes from Chris Horvers of JPMorgan.
Thanks, and good morning. A couple margin follow-up questions. First, on the capitalized inventory cost, is essentially understanding that you'll drive working capital through AP to inventory, but do we just have to get to a point where the inventory growth is less than the sales growth and that capitalized inventory pressure should go away? How should we think about that occurring during the year?
Yeah, Chris, how you should think about that is, once we stop reducing inventory versus the prior period, we will no longer have this hit to margin. We're not going to get into specifics about how that's going to play out during the year. Just understand that a priority for us is optimizing our inventory, getting our inventory right sized, because it's just so key in taking care of our customer and getting the right part to them in the right time. Obviously, this will not be part of our long-term cost structure going forward.
Understood. On the SG&A front, a couple of things there. Tom, you mentioned at least $100 million this year of cost. As you think about the discrete items in the fourth quarter that you're attacking, do those turn quickly such that you could see an impact to those line items in the first quarter, or does that build out over the year? Just broadly on that $100 million, does it take time to build that muscle out such that $100 million sort of grows at an increasing rate over the year?
Well, we certainly have a plan to layer productivity on top of productivity. That is the plan. As I said earlier, Chris, we're trying to make sure that this is sustainable. To do that, you do have to make changes in fundamental work processes and design it. You've got to manage change. You've got to move it through the year. It's not just in SG&A. We're doing that throughout each of our cost lines. I think you should expect to see it unfold and build momentum as we drive this thing out. That's what I've experienced in the past. Productivity, when the muscle's lacking, as I mentioned earlier, it has to be built up. The visibility has to be high.
You've got to put experts in charge of very specific cost line items inside the organization that can drive best practices, that can increase the visibility, and really put the kind of action plans in place that are going to take it out permanently. We've just begun to do that, starting at the end of the year, beginning of this year. You can draw your own conclusions from there.
Just on the fourth quarter items, I guess, can you attack those quickly? Would you consider those discrete to the fourth quarter, or does that require some muscle build out?
A little bit of both, to be honest. I think in some cases, we need to build a new muscle that just doesn't exist today. In other cases, we should be able to attack them fairly quickly. Honestly, part of it was just straight non-recurring. We're not happy with it. We've got to address it quickly, and we're going to attack these costs with a tremendous amount of intensity. I'm pretty excited about being able to get those out so we can invest in the customer, which is where we want to make our investment choices.
Understood. Best of luck, guys.
Thanks.
Our next question comes from Ben Bienvenu of Stephens Inc.
Thanks. Good morning. I'm curious on some of the frontline improvements that you've made, how far along are you in implementing performance-based compensation? Ultimately, what balance of fixed versus variable compensation do you expect to roll out? The turnover trend shift that you mentioned says a lot, but I'm curious if you can provide some additional color on what you're hearing from customer-facing employees in response to the changes you're making.
Okay. Well, a lot there, Ben. I'll try to be concise. I think in terms of the performance-based elements of the compensation, we did introduce more performance-based elements into the compensation last year, and we had tremendous response from our team members. They like to be measured on how well they're doing versus their peers, versus their goals, and that's something that was lacking, to be honest. I feel really good about that. Fixed versus variable, obviously, when you move more to performance, you're moving more towards variable. We're going to continue to look at ways to do that. We're doing that throughout the organization, not just in our frontline team members. We're doing it in our executive population as well. The turnover numbers that we've seen in the field have dropped dramatically. We're talking about significant reduction in turnover.
When you're out there with the stores, they're excited. Their CPPs, their commercial account managers, the general managers are really excited about the future of the company, and they're much more engaged in the key things that we're trying to drive through the organization. The frontline of our organization, the independent operators that sweat blood every single day to drive our business, are just central to the success of this business. They are the key linchpin in the turnaround effort. Getting that moving in the right direction was a critical priority for me, and we're going to continue to stay focused on it.
That's great. Thanks. Tom, in an answer to an earlier question, you had alluded to improving share momentum. Can you comment, is your sales improvement a function of slowing share loss or winning share? If it's winning share, where do you think that share is coming from? Is it bigger share of wallet with existing customers, new business? To the extent you can tell, are you winning from independents or larger competitors?
Obviously difficult for us to say there, Ben, with this industry where you don't have the kind of market share visibility that I'm accustomed to. You're sort of reduced to a fairly limited number of sources, including when other people report their sales, which is probably the simplest way to look at it. We do know that we're making a lot of progress on both sides of our business. Sequentially, we improved comparably DIY and professional. We know how many customers we're selling to every week. We know what our average sale per customer is on the professional side, and we know the parallel metrics on DIY, and we are seeing progress on pretty much every one of those metrics. In terms of geographic performance, it's much more difficult for us to measure that, but we improved in every geography in the country.
As I said on the prepared remarks, we had a bigger surge in the Northeast and the upper Midwest. Part of that, I think, was related to the winter demand that we've talked about. Overall, we look very closely at each region of the country every single week, and we measure their performance against defined metrics on each of the items that I just mentioned.
Great. Congratulations on the progress and best of luck.
Our next question comes from Daniel Weber of Raymond James.
Thanks. Tom, in light of where the fiscal year 2016 EBIT margin finished, can you help recalibrate your five-year target? Are we still thinking 500 basis points on top of the 9.4%?
That's correct.
The one reason I'm asking that is with just a modest improvement in FY 2017, that implies about a what, 115, 120 basis point annual increase for the following four years, which looks a bit aggressive.
Yeah. I'll give this to Tom.
Yeah. Let me comment on that. First of all, I haven't said this yet on the call. While we're happy with the progress we made on the top line, from my perspective, the bottom line is totally unacceptable to us and not where we want to be. With respect to the aggressiveness, when I was on the last earnings call, I'd been in position a couple of weeks. I can tell you that since I've been here 100 days or so, there's even more opportunity than I had imagined before I started, as well as in those first two weeks of time. There is just a tremendous opportunity for productivity and changing the culture here.
The important thing, I've got the privilege of working with a great CEO and a great board that doesn't want to do this short term, wants to do it thoughtfully, understands that we cannot hurt the customer by doing this. Long story short, I don't think it's aggressive at all. If anything, I am very bullish on our productivity agenda. It's just going to take a while to build the muscle, to go in the depth that we need to go in to get the right level of focus, to get the right bandwidth and leadership. I am extremely confident that we will be putting big points on the board.
You're not backing off of the 500 basis point increase?
Oh. It hasn't crossed my mind once.
Just kind of related to that, Advance does own a few businesses that have inherently lower EBIT rates. Think about Worldpac, fast capital turn, but lower operating margin rate. When you set forth that goal of a 14%-15% EBIT rate, you are including the impact of those lower EBIT businesses that you own. Is that correct?
Absolutely. I'll let Bob talk a little bit about Worldpac and Autopart International. These are great businesses for us. When we look at the overall math of the company, of course, we're going to look at the portfolio of businesses and arrive at that margin increase based on the expected growth rates within each of those businesses, so that ultimately, what you look at from a total AAP standpoint ladders up to that overall margin improvement. I'll let Bob talk a little bit about Worldpac and AI because he's overseeing all of our professional businesses, and I think it's important for all of you to understand how he's pulling together a much more cohesive strategy on our professional business.
Thanks, Tom. Importantly for ourselves is we're looking at the customer market by market, looking at customer segmentation, who's best served to end up servicing that customer, the requirements of that professional customer. Importantly, when you look at the holistic view of this and you look at the brand and product portfolio that's out there, it's industry leading. From our vantage point, we're going to the market to ensure that we provide the professional customer all that they need. We're building out the technology, we're building out the catalog, we're building out the B2B portal. We're driving all of that technology to make sure that we have all the business units, the best of all of them, coming to the marketplace to create first call capability across the enterprise.
I think both for all of North America, Tom mentioned earlier, independents are another critical part to all of that. We're working with them as well. I think importantly, we're bringing the best of all the business units together and taking what we know works best. We have a lot of years of legacy experience on the technology front, certainly on the catalog, over 30 years, on the B2B portal with SpeedE Dial, over 20 years. We know what it takes, the demand analytics to drive availability into the marketplace. All of that is being brought to the marketplace today, again, to drive first call capability across the enterprise.
Okay, great. Thank you.
Our next question comes from Greg Melich of Evercore ISI.
Hi, thanks. I really had two questions. One, just to make sure on the top line, I'm getting it right, the holiday shift and weather, you have to put the two quarters together, but should we just assume the holiday was 100 basis points, just a selling day, or how should we think about that?
Morning, Greg. I'm not going to give any specifics on that, but it's a day. January first moved, as you know, from 2016 into 2017, which means it's a lower sales day. It's not insignificant when you consider the professional side of the business. It's a reasonably good size number.
Okay. We'll assume it's a normal selling day. That'll be our best estimate. Bigger picture, what I want to talk about was the three buckets of margin that got hit in the quarter, just to think about what's sort of ongoing and what isn't. If you had 50 bips each, if the inventory, the investments to serve customers, which I guess a lot is the incentive and how you're paying people, and then the shortfall in execution. It sounds like the first two buckets of that, the part to serve customers will stay with us. The part inventory will happen again, but we're not sure when it'll happen. The last bit is the stuff that you can really control and fix. Am I interpreting that correctly?
You're pretty close. I think, first of all, reducing inventory is absolutely the right thing for our business. We have too much, and we have a lot of duplication. We're going to do that thoughtfully, Greg. Given the turns of our business, and I think you know this, we've got to be really thoughtful about how we reduce inventory and do it in a way that doesn't disrupt our customers and our customer service. We are
going to take our inventory down over time. You're going to continue to see that one be a drag. Obviously, part of the math here is in the fourth quarter, as we were taking our inventory down, it was lapping a period when we were taking our inventory up. That dynamic changes over time. We are going to continue to reduce inventory. You are correct. We're going to continue to make investments in our customer, in our overall capabilities. As Bob just said, we want to make sure that we're providing world-class service for our customers, for our independent partners, for our team members to go out there and win in the marketplace. The third bucket, as you indicated, which was about 30% of the overall margin contraction, that bucket is the one that we're attacking with a tremendous amount of energy on the productivity side.
That will definitely not be part of our long-term cost structure. That's where we're going to get the basis point improvement over time, and that's where we're constructing a zero-based budgeting, overall five-year productivity pipeline to take out.
That's great. If I could, in terms of that converting to free cash flow, how are you guys thinking about the capital structure? Whether it's a year or two, three, four out, do you have a debt-to-EBITDA target you think is right for the business? Or how should we think about what happens with this $400 million plus of free cash flow? Are we just paying down debt?
Yeah, Greg, I'll take that one. Our first priority is maintaining our leverage ratio of 2.5%. That's our number 1 priority. Second, investing back in the business, primarily investing in the customer, and then third, as we said back in November, distributing cash to the shareholders with a preference of share buybacks. Recognizing that this is a fairly general way of portraying this, we're in discussions with our board and expect a more detailed policy coming out later in the year related to the share buybacks and our capital structure.
That's great. Good luck.
Thank you.
Our next question comes from Scot Ciccarelli of RBC Capital Markets.
Good morning, guys. Scot Ciccarelli. Tom, you indicated that a lot of your cost improvements should come from materially changing how you do some of your work. I think we all kind of get the zero-based budgeting, can you provide maybe one specific example of a process change that you're implementing to drive that productivity improvement?
Sure, Scot. Best example is probably just how we're delivering parts to customers. We don't use a formal transportation management system to deliver parts at the moment, and we're going to. That's just a simple change that I think is fairly common within the industry, where you're able to be a lot more thoughtful about miles driven and more efficient with your driver network.
Is that something that should wind up being kind of an iterative process? You make some changes, and then you continue to roll out those changes, or is that kind of a one-time step function?
That example is probably a little bit unique. In some cases, we're going to get some experience before we roll out. Other ones are kind of no-brainers. In this case, that one is. We're not going to have a lot of testing on something like that. We know that if I drive 50 miles, and I drive 40 miles the next time, that's a good thing. Those are different situations. There's different situations, but we are going to be very thoughtful about those that affect customer service or potentially compensation-related changes. Those are very important and ones you want to absolutely get right. Then there's some others where just a higher level of visibility, a more focused agenda, a leader who's driving it hard can just drive cost out without that type of testing and that kind of thing.
Got it. All right. Thanks a lot, guys.
Thank you.
Our next question comes from Seth Basham of Wedbush Securities.
Thanks a lot, good morning.
Morning.
My question is first around the guidance for operating margin improvement in 2017. Wondering if you could provide any more color between gross margin and SG&A leverage. In other words, would you expect any gross margin improvement in 2017?
Yeah, Seth, I'm going to go back to what Tom said earlier in the call. Quite frankly, we're just not running the business that way. We're not looking at chunking into gross margin and SG&A. We're looking at productivity agnostically throughout the P&L, and we're more focused on aligning it to the right person in the organization, making sure that it doesn't hurt the customer, making sure that it provides end-to-end synergies. We're just not looking at it from a gross margin and an SG&A perspective.
Okay, fair enough. My second question is thinking about the distribution center structure going forward. Can you provide a progress update on where you are in terms of integrating the Carquest and Advance DCs?
Yeah, we've obviously integrated that agenda into our overall strategic plan. We've got a very clear strategy for the next five years. Within the strategy, we've identified what we call tier 1 priorities. There's a fairly small list of those that we're executing against. Part of that is to what we formally called as integrated availability, we're now calling it streamlined supply chain, is very much a part of that agenda, and it's sequenced at the appropriate time. We're looking at all of the priorities that we have. Again, as I mentioned, what you do first, second, and third is important. We have to sequence it because there's an organizational capacity question, and we've worked through that sequencing very deliberately. It's part of the five-year plan. We absolutely see an opportunity to reduce stem miles and simplify things for the organization.
We'll update you on that when we're in a position to have more clarity on it for you.
All right. Very good. Thank you.
Our next question comes from Matt Fassler of Goldman Sachs.
Thanks a lot. Good morning. My primary question relates to incentive compensation structure. If you could just talk about how much more variable, if there's a way to quantify it or describe it, the comp structure is getting, just as we think about flow-through of incremental sales improvements. Was the fourth quarter an aberration in that regard? To the extent that you continue to comp at or above the high end of your range, does the SG&A, or at least that piece of the SG&A, move fairly closely aligned with the top line?
Hey, morning, Matt.
Morning.
First of all, what we introduced really in the back half of the year does give some more variable compensation for our frontline team members, which as I mentioned, we are so excited about. We've had tremendous energy from the team to really grasp a hold of that. It's now part of our base, certainly in the back half of the year, and we have rolled out a variant on it for 2017, which again, has been very well received by our team members and will drive the kind of discretionary effort that is necessary for us to win customers over time. We think it's very important. Ultimately, having team members who really know our business, who build genuine relationships with their customers, who go the extra mile to get that part to the customer when they need it, is an important part of our agenda.
That cultural shift that we're enacting of accountability, of taking action, of really driving for results, is something that the incentive plan is designed to enable. I believe it's working.
Very helpful. My second question, just as another follow-up on the inventory and gross margin question, I know you've gotten a bunch on this. How much is left in the system for you to flush? Is this all aged inventory? In your view, is this an issue that has a finite end date or at least a finite quantity? Just trying to understand when we work through this, because I know you've talked about it for a while, you've driven it for a while, and you guys have been in place for a while to be able to work through this issue. Are we most of the way, some of the way through this as a drag on the margin rate?
Well, we're really looking, Matt, differently, I guess, how we approach this question. We work from the customer back. That's how we're approaching it. We need to get the parts we need closer to our customers, which has required a very different set of rules and principles and thinking. To do that, we're looking at our whole network. We're not looking at, well, gee, I've got this many stores. We're saying, well, wait a minute, I have 40 million sq ft of buildings throughout this country that I can position inventory and get parts closer to the customer. That order to delivery time, which is so critical in our business on the professional side of the business, we're taking that number down.
It was down substantially in the fourth quarter, we're going to continue to drive that number down into 2017 and beyond because that's how you win business. That's how you do what Bob talked about in terms of driving first call advantage. It is a very holistic approach on the inventory. We're looking at it broadly, candidly, we don't have inventory in the right place at the moment, and that's what we're continuing to work through over time. We're going to do it thoughtfully and deliberately. The goal is to get the parts closer to the customer so we can drive more top line.
Is the gross margin impact of that then essentially the cost of moving that inventory around as opposed to clearing older inventory, which sounds like it might have caused the pressure over the past couple of quarters?
It's really more of the latter, honestly, in the case of the fourth quarter. It really is this move from the balance sheet to the income statement by virtue of taking it down. On the Advance side of the equation, by the way.
Got it. All right. Thank you guys so much.
Thank you.
Our next question comes from Michael Baker of Deutsche Bank.
Thanks. Two real quick in the interest of time. One, you said you expect better execution each quarter of the year. Does that mean operating margins up each quarter in the year, or is it more likely down in the first half, up in the second half in terms of the operating margins?
Yeah. Michael, we're not going to give specific quarterly looks, but you know what our laps look like, so I'll let you figure that one out.
Okay. We can't necessarily take the comment of expect execution to improve every quarter, better execution doesn't necessarily mean up year-over-year operating profit. Is that fair to say?
That's fair.
Okay. Second question, you talked about some of the lead markets getting a meaningful sales lift. How many stores are in those lead markets? Can you quantify the sales differential going forward?
We have a statistically significant number of stores in the lead markets, I can tell you that. We measured it in a very disciplined fashion. The sales growth is substantial. A very significant amount of growth experience based on where we were. We're able to drive meaningful sales lift. We took elements, we had multiple lead markets that we tested, different elements of the plan, and we packaged up those elements of the plan into a Blue Book that we are rolling out into stores across the country.
That rollout will be complete in 2017?
It's going to be really over two years.
Okay.
It's not something you can just immediately do, because you've got to make sure. We're not going to take this to a market unless we're absolutely ready to execute it flawlessly, which requires us to look at the leadership team, look at the district managers, look at the general managers, making sure that we've got everything that contributes to success in place, then we're going to roll it out. We obviously have a plan to do that, but we also have a readiness assessment that has to be done and has to be passed. It's not an automatic that it's coming to a market near you. It has to be passed by the leadership team locally in order for them to get that benefit.
Okay. Finally, I think it says something about your company-specific turnaround that an hour and 10 minutes in and Amazon hasn't been mentioned. I guess I'll just ask, as you talk to your field leadership and the people in the stores, how big of an issue do they see Amazon? Is that something that store managers are talking to you a lot about, or are they focused elsewhere?
I've asked the question a lot. I've asked it to hundreds of team members when I'm out there. I'm always interested in how we're doing and who's impacting you, and have you noticed, and that type of thing. I've talked to a lot of professional customers. I've read all the industry work. Whether it's a DIY customer or a professional customer, we've done our own version of that to understand what drives choice for them in key situations. Amazon's not new to auto parts. They've been around for a long time, and when we benchmark our performance, Bob mentioned Speed Dial earlier, versus Amazon in different aspects of our value proposition, there's some things they do better than we do, and there's some things that we do better than they do. I haven't seen an impact.
We have not seen an impact of Amazon on our business at the moment, and we don't see material disruption in the near term from online competition. I will say that with disruption comes opportunity for us. We look at these types of situations as ways for us to rethink our business model and how can we capitalize on the growth, which is clearly we're seeing more move to online, and we want to participate vigorously in that growth, but we're doing it on our front foot. We're very excited about the opportunity to pick up more of that business. We haven't seen a material impact on our business at the moment.
Okay. I appreciate the color. Thank you.
Our next question comes from Bret Jordan of Jefferies.
Hey, good morning, guys.
Morning.
Question on the supply chain question earlier, I guess, as far as integrating the IT and coming up with a common catalog, you mentioned that was a high priority. Is that not necessarily a 2017 priority anymore?
The common catalog, Bret? I want to make sure I understand your question.
Basically, having access to Advance and Carquest inventory across both distribution networks.
Yeah, that is what I was talking about earlier. We do have it on the roadmap. The way it was designed originally, we're refining, let's just say. We see an opportunity to get the benefits of an integrated supply chain without necessarily the kind of cost that was originally contemplated in the plan. We're pretty excited about that. We want to make sure that our stores have access to the inventory that's closest to them, but we want to do it in a way that makes sense and without the kind of investment that was originally contemplated. We're working through that, and more to come.
Okay. Then a question for Tom on the accounts payable. It's sort of low 70s, and the debt to EBITDA is just over 2.5x. Is that something you see getting more leverage out of the AP and getting the leverage on the balance sheet down in the shorter term, or is that something we see more of 2018?
I'm not going to comment on the timeframe. All the discussion on the inventory, it's obviously a big area of focus for us. Not happy with the accounts payable ratio of 71.3%. Don't like that at all. We're going to work both the numerator and the denominator very hard.
Is that 2.6 debt to EBITDA a limiting factor? I guess, are your supply chain or the vendor receivable programs more expensive as your leverage gets up, or is that really not impacting the cost of the program yet?
No, really not a factor at this point.
Okay, great. Thank you.
Thank you.
Our next question comes from Chris Baddeley of Wolfe Research.
Hi, thanks for taking the questions. Couple of clerical questions to start off with. How many DCs still need to go through the, reducing the daily delivery frequency? Are you through that yet, or there's still more to come?
We're pretty much done, Chris. We executed that in the third and fourth quarter. Feel really good about it. Our stores are getting better service. Their accuracy is up, the fill rates are up. Primarily, I think you'll recall that was in the Northeast. We're done.
Got you. Okay. It's been a while since you commented on this, but to what extent are super hubs still part of your strategy? Can you quantify how many you have today or how those may or may not be working?
Yeah. Again, we're working a little bit differently than we have in the past, Chris. We're starting with the customer, we're working back, the deployment strategy of, when in doubt, build a super hub, we're just not doing that anymore because it doesn't necessarily give us what we need to serve the customer better. We've rethought the supply chain and the fulfillment process from the customer back, and we're looking at it in the context of what we believe is important for our DIYers and what's important for the professional customers, and we're building it out from there. Again, it's not just about, gee, I got a hub, I've got a super hub, I've got stores.
I have 40 million sq ft of fulfillment centers that I'm gonna use to get my inventory positioned properly, and I'm gonna get it in a place where I can get it to the customer faster and more accurately and more reliably and predictably than before. It's a bit of a terminology shift for us. I appreciate that from your side of the desk. We're really excited about that approach, and so are our people.
Okay, cool. Just one big picture question. It seems like from my outside perspective that it seems like a lot of the suppliers in the news more recently. One, you've had a unique opportunity to come in as a fresh face to the industry and meet with a lot of suppliers for the first time. How would you characterize overall industry dynamics in relationship between suppliers and retailers? Secondly, could you maybe anecdotally tell us on some ways that suppliers are supporting you in your turnaround?
Well, good question. First of all, we are really reliant on our suppliers. They're really partners to us in this journey. Bob can speak to some of the ones that we've forged the strongest partnerships with over the years, but I can tell you all of them want to see AAP do well in the marketplace. I think that's important for them, and it's important for us, and we want to see them do well. It's really important that their partnership allows us to really drive our agenda. We have a wide range of brands in our house, with Bob's leadership of Worldpac, with our private label at Autopart International, and with the many branded players that we have. They're critical for our success. We've been very excited about how engaged they've been as we've built out our journey, and we're gonna build on that.
I think there's an opportunity for us to forge even deeper relationships with our supplier partners, and you can count on us to do that going forward.
Okay, great. Thanks for the help. Appreciate it.
Our final question today comes from Carolina Jolly of Gabelli.
Oh, great. Thanks for sticking me in last minute. Just wanted to ask about the Do-It-For-Me versus Do-It-Yourself. I know they performed similarly this quarter. Can you talk about if you've seen any segment perform better relative to self, any stronger improvement in either segment?
Sorry, segment performed better to what? Sorry, Carolina.
To itself. Has either of them have you seen accelerated improvements in either of the segments?
Yes. We saw it in both. It was proportionately similar. We've had really good success, as Bob alluded to on the professional side, regaining momentum with professional customers, picking up more customers, and also selling more to the customers we have on the professional side. On DIY, honestly, our team members are really helping us here. They've always wanted to serve our customers better, and we're now giving them the tools to do that. We measure our performance there, obviously, in terms of our customer hotline. We measure it in terms of social media reviews. I can tell you our social media reviews in DIY are up by a factor. Not by percentage terms. They're up by a factor, and we're really excited about that because our team members are really putting the customer first, and they're caring about them, as are our independent partners.
When we put the customer first on the professional side, we gain more business. When we do so on the DIY side, we earn that extra trip, that extra item in the basket. We're growing proportionately with the two groups, and both are critical to our long-term success.
Perfect. Thanks.
At this time, there are no further questions. I will turn the call back to our CEO, Tom Greco, for closing comments.
Well, I'd like to thank all of you for joining the call. As we step back and think about 2016, it was a challenging year for Advance. Our team members experienced just a tremendous amount of change last year, starting with my appointment in April. Given the level of changes we implemented, I'm very encouraged with the overall progress, and I'd like to thank all of our team members and all of our independent partners who care for our customers every day out there in the marketplace. They're putting the first back in customer first, and it was really their dedicated commitment and focus on the customer in the back half of the year that enabled us to deliver a strong finish and a positive top line that improves share. Going forward, our overarching focus is clear. We're gonna put the customer first.
We're always gonna do that. Our goals remain clear. We plan to accelerate sales growth to above the industry average. We're going to close the margin gap versus our competition. To achieve it, we're evolving the culture of the company to one that's excessively focused on the customer and one with an exceedingly high level of accountability, ownership, and drive for results. We're really excited about 2017. We'll be working with a high level of urgency to deliver on our objectives. We look forward to updating you again on our progress next quarter. Thanks again for joining our call.
That concludes our call today. You may now disconnect. Thank you for joining us.