Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

I'm pleased to have Nathan Winters here, CFO of Zebra. And I guess we'll just jump right in. So welcome, Nathan.

Thanks for having us. Great to be here.

And I guess for those that don't know about Zebra, if you could give like a brief overview of the company, that'd be great.

So Zebra has a long history of innovation. We've been in business for over 50 years. When you go back to 2014, Zebra made a transformational acquisition of the Enterprise business from Motorola Solutions. And if you look at now the combined portfolio of product and solutions, we're all highly synergistic for our enterprise customers as well as our go-to-market partners. You'll see those in the same workflows in our customers' environment, as well as it escalated the company into -- from a customer perspective. Now we have strategic relationships with leading companies and executives in all the industries we serve, from retail e-commerce, transportation, logistics, manufacturing, health care, now more and more with the government -- and government sectors. And so our strategy is really to advance our Enterprise Asset Intelligence vision, which is to have every asset and worker on the front line connected, visible and optimally utilized. And we're still in the early stages of that journey and excited to go into it more today.

Cool. I thought we'd level set and kind of start with the macro. How is the supply chain? How are your inventory levels? And I have a couple more. We can get into that. And like how has your visibility been improving over the month?

So I think similar to others, it's a very dynamic situation and environment from a supply chain perspective. We think Q1 was really the peak in terms of some of the supply challenges. We have better -- particularly for our printing business. And as we moved here into the second quarter, we have better visibility to supply coming in and, as we go into the second half of the year both from commitments from our key suppliers but also the work we've done over the last 12 months to redesign around some of those critical components as well as add second and third sources of supply, are really starting to come online as we go into the second half. So the expectation is that from a supply availability, we'll see improvement as we go through the second half of the year, but we also expect -- the other side of it is on the freight and freight capacity. If you go back in the fourth quarter, it was really around -- the peak we saw, where we were paying 5 to 8x to air-ship per kilo versus what we were paying prepandemic, that rate has come down and -- by the end of March to 3 to 5x. Still above what we were paying even in the first half of last year, and our assumption and guide for the remainder of the year is that those rates stay flat through the remainder of the year. But again, the big opportunity and benefit in the second half comes from getting the additional component supply that will limit spot buys we have to do on the open market, as well as getting our heavier printers on the ocean, which we'll still have some savings there. So again, it's pretty fluid and something the team is managing day-to-day, but we're starting to see signs of improvement. But it's -- it could change, and that's why we stay on top of it.

Got you. And I forgot to mention, if you have a question, you can type it in, and I'll have it here. And I've -- and then we'll open it up at the end. But -- so let's talk about last year. It was a record year last year. Can you quantify the USPS kind of contribution? What else drove the strength? What were the demand trends you really saw during that really good, strong year?

We had a record year in 2021. Revenue growth of 26%. Our adjusted EBITDA margins ended the year at 23 -- for the full year at 23% and over $1 billion of free cash flow. And all this despite the extraordinary challenges in supply chain. If you look, the pandemic really accelerated a lot of the secular trends driving our business, from the step change in consumer adoption around e-commerce or omnichannel, so buy online, pick up in store, and now, with the labor shortages, really requires all of our customers to invest in driving efficiency and digitizing and automating the workflows they have, and our solutions are positioned to help them do that. USPS was a great win by the company a few years ago and a broad -- over $500 million contract with the Postal Service. We finished the initial deployment of 300,000 mobile computers, a multi-quarter rollout, at the end of last year. I'd say it was a fairly small portion of the overall growth for 2021. And we're continuing to work with the Postal Service on new opportunities as well as our leading position with postal carriers around the globe. So again, we're -- I feel very optimistic about the long-term trends of the company. This need to digitize and automate is not -- that's a trend that's going to continue, and we see a fairly robust pipeline of opportunities to do that with our customers.

Great. So let's jump into the mobile computing side. So the Android installed base, can you provide kind of an update on where that is and kind of where your market share sits?

So if you could take a step back, Zebra was the first to market with enterprise Android-based mobile computer. That really solidified the market share position we have -- leadership position we have, over 50% market share in -- across mobile computing. And mobile computing platform still remains very vibrant in terms of its advancement both with number of applications being used on the platform as well as the form factors of the device, and we expect our mobile computing business to outpace the growth of our core business, which we expect to be around 4% to 5% over the near future. And just to talk a little bit about why that growth and where we see it from, if you take a step -- if you look at it, about 1/3 of all retail workers, frontline workers, are digitally connected in some capacity. Some customers of ours are much further along, having 80%, 90% of their frontline employees connected, so from communication, task management, driving that better employee -- or customer experience. And so as customers across the globe move through that journey and find additional uses and applications, that's a -- it's a huge opportunity to put just a number of devices out in the installed base. And then the other is our -- the Android platform refreshing every 3 to 5 years. We've already had now the first adopters of Android upgrading to the latest platform. And the driver of that is the need for more computing power memory as they've added more applications and data to stay with -- in the needs of their business. So again, we continue to see robust growth from our mobile computing business.

Right. And then on the Windows side, you're still shipping out Windows devices. Why aren't people making that switch given kind of no security support and whatnot?

So today, about 90% of our mobile computers are Android based. So we still sell some of our mobile computers on Windows. I'd say customers stay for a variety of reasons. But if you look, Japan is a great example. This is one of the largest markets in the world. Still is yet to make the transition to Android, and we see that as a great opportunity for us and -- to partner with some of the local Japanese providers to take advantage of that transition to Android. So again, it's -- I'd say it's a -- we're now on the slower path with -- minus some of these exceptions like Japan. But it's -- yes, still an opportunity, but not quite what it was a few years ago.

Okay. And if you could talk about kind of the competitive environment in mobile computing. How sticky is this business? How difficult is it to displace someone? What are kind of the switching cost?

Obviously, once you have the installed base, you have an advantage. There is a cost for our customers to switch. But what we see is we continue to take share from competition that have long-established relationships with the customer. And we look at it as how can we build the overall ecosystem. So the security -- the protocols we have, even now as we advance into some of the software applications, of partnering reflects as task management, workforce management with a mobile computer. VisibilityIQ is another software platform we have that's integral with the mobile computer. This all adds stickiness to our platform that makes it more challenging for a customer to switch. But ultimately, we have to continue to deliver that value. And if we do, we have a pretty high retention rate.

Great. And then, I mean, this industry has really been dominated by a couple of players, but there was some risk of maybe Apple getting into the mix. Samsung is getting into the mix. How competitive of a threat do you see kind of the Apple and the Samsungs and some of these other guys in the world?

Yes. So the -- I'd say the competitive nature of a, say, consumer-grade device has been there. I joined the company 4 years ago, and the risk was there 4, 5 years ago as it is today. And you'll see certain customers switch to a consumer-grade device for a variety of reasons, whether that's kind of wanting more of that employee experience, what they expect or what they see in their -- on their own personal phones. But we tend to see a lot of them come back to the -- to an enterprise-grade device, and -- both for the security as well as just the resiliency you have. And you start looking at the overall service cost. That really becomes the key differentiator when you look at the cost it takes to replace and keep a mobile computer running in the types of environments that they're in today.

And then just on the margin profile of the mobile device, how has that trended? Where are you kind of raising prices where you can?

Yes. So our core margins not just for mobile computing, I'd say across the entire platform, remain very healthy. But that's being masked by the transitory or the premium supply chain costs we've highlighted now for the last several quarters. In respect to pricing, we did two price increases both in Q4 last year and February, and those were largely targeted at offsetting the direct component inflation we were seeing from our suppliers. The price increase we announced just recently that goes into effect here in the second quarter was a shift and really meant to start to offset the freight inflation that we were seeing as we don't expect rates to go back to where they were prepandemic anytime in the near future. And in aggregate, some of our products have increased -- if you look at all three of those price increases, some have gone up double digits. Others we haven't touched. So we're -- we take a very kind of micro view from a pricing, both on the product family, the region, the end market, to ensure that we have the right competitive positioning in those respective markets so we're not losing share but gaining share, but also ensuring that we maintain our overall profit pools. And then we expect total price increases to be about 2 points of growth -- attributable 2 points of growth for the year. So it's a little bit lower than you might expect with the price increases. But once you look at, again, the products we've impacted or touched, the kind of rollover effect of how we've implemented the price increases throughout the year, and then the realization rate as we still have several large customers on contract prices we need to negotiate and as well as a big chunk of our business goes through competitive bidding processes. So again, pricing is something we look at all the time, and we'll continue to do so to ensure we're competitive in the markets we serve as well as maintaining our profits.

Okay. So I have a couple of inbound questions here. You have somewhat of a tough supply chain in Q2 on some of the China lockdowns. Where are you seeing improvement? I guess the whole status there.

So as we said in our April guide, our assumption at that time, and we've seen that play out, is that we'd see steady improvement in the output from our supply chain and the providers within China, particularly the Shanghai area. And I'd say that it's not a unilateral -- most of our plants were operating in some capacity even during the major part of the lockdown, whether that's, say, of folks on site who are quarantined within a bubble so they could keep up some level of output. But as we expected, we had our DC open just this past week, so they started shipping. Again, we have folks on site who are quarantining within a bubble that allows them to continue to operate. So again, as we -- based on our guide, a steady reopening until we get to the month of June, where we need to kind of get back to where we were, we're not quite back to 100%, to achieve our objectives here for the second quarter.

Great. So I have another couple of questions coming in. But I guess to level set, the industries you play in for mobile computing, where are you seeing pockets of strength? Just in general, like where are you seeing the biggest opportunities against? And kind of the split on which verticals you're kind of playing in as well.

Yes. So I'd say within mobile computing, it's -- there's solid strength across all the key verticals. I mean if you look at, as I mentioned earlier, retail e-commerce, many of our customers who kind of go along a journey of -- they may have a handful of devices really focused on inventory tracking, inventory management. Then they may add mobile computers for a couple of select departments to -- again, to improve communication, the customer experience. They see the value there. And then you have some that are in the full spectrum of having a mobile computer within every associate in the store, including one we did -- we talked about in the fourth quarter where we've now had the mobile computer could also turn into -- plug right directly into a docking station to remove all of their desktop mobile -- desktop computers. So as you can see -- super strength there. And that continues along with the Android refresh. The same thing in transportation and logistics. It's been a great area of growth for us. Postal services around the globe are continuing to deploy our technology to meet their demands in terms of parcel delivery. And then health care, again, has it starts and stops as they shift and adjust to what they need to from a COVID perspective and getting back to, I'd say, more regular business. But again, that continues to be an area of strength for the mobile computing platform.

Okay. So let's switch gears to kind of the printing business as this is kind of your core legacy business. But what's been the demand strength there? The margin profiles have been quite steady. Where are some pockets of growth that you're seeing there as well?

Our printing business, the demand has again been very strong. If you look, though, Q1, we had disappointing results. Our printing business was down high single digits year-on-year, but this was entirely attributable to supply chain where we had shortages on a few key components. We signaled this in February. We knew that going into the quarter, Q1 would be a challenge for print from a supply perspective. But we had visibility coming in at the end of the quarter and here into Q2. So we expect sequential improvement in our printing business really driven by strength particularly in manufacturing. And underneath that, our supplies business has seen phenomenal growth, including our Temptime business. So again, we expect sequential improvement. And then you'll see the margin rates for the overall AIT segment improve. As we go into the second half with the new components coming online, getting our heavier printers back on ocean as well as limiting some of those component spot buys will be a big driver of margin improvement in the second half.

And how comfortable you, I guess, across the whole business on your inventory levels and your relationships with your manufacturing partners and all that?

Yes. I'd say the relationships we have with our contract manufacturers has never been stronger. I think even going back to the work we did with each of them through the tariff just for 2019/2020, we took a pretty big effort to diversify our Tier 1 supply base outside of China. So now we have the dual capacity within China and then between Singapore -- or, excuse me, Taiwan, Vietnam and Malaysia. Again, so that's given us a lot of flexibility to shift capacity, depending on where there might be a COVID outbreak, or to meet growth in demand in any given quarter. And we work very closely with our contract manufacturers, with our -- down to a Tier 2 component supply. So who's got the better relationship? Who has the better purchasing power? In some instances, we have that direct relationship and long-term contracts. In other cases, it might be the contract manufacturer where they have, again, the -- more buying power given their size and strength. So again, great relationships there. And then inventory in aggregate looks okay. We have leaned in to ensure we have the right component parts at our Tier 1 manufacturer so that when we get the final missing part, we can make -- quickly produce. So that's given us some advantages here, particularly with the lockdowns across China. But we need more of that to shift to finished goods as we get towards the end of the year and going into 2023.

And then if you could talk about your kind of sales channel and your distribution channel, the direct versus indirect. I mean indirect is a big part, but how are those relationships in terms of kind of managing all the logistics and getting things on time and how the relationships been trending there?

Yes. So for background, about 80% of our business goes through the distribution channel and 20% or so was direct. That ratio has been roughly the same for the past several years. So I think the one advantage we've had is our commitment to the channel. We've never wavered from that. We think long and hard before we'd ever take a customer direct or around one of our channel partners in rare occasions we've done that since I've been with the company. And obviously, our lead times are much longer than our end users and distributors would like. It's much longer than we would like. Historically, you'd look at a lead time of 4 to 6 weeks. Now we're out into the months. So again, working with our channel partners, the end users to ensure they know to the best of our ability when we expect to supply. In some instances, this has helped. So we've -- now we're getting firm POs months in advance, 6 months in advance, which lets us know what we need to build versus have them do a -- go into a quarter and prebuild around maybe historical run rates. So that visibility has helped us in a particularly supply chain challenged environment. Again, very strong relationships with those distributors, and we don't expect that to change.

Okay. Switching another gear here. So the RFID business, how large is this? Is this expected to become a little bit more material over time? Or are there some primary use cases?

Yes. So RFID is a -- today is low single-digit percent of the overall portfolio in terms of revenue. But we're excited about the combination -- actually with the combination of RFID and locationing solutions. As a combined business, we think, it can grow in the mid-teens here for the near future. In the RFID market that we play in, we'll quickly be approaching about $1 billion market here over the next few years. And we're seeing really exceptional growth driven by the improvement in technology as well as the lower overall cost to deploy the technology both from the overall deployment as well as the price for a tag or the readers that go into it. And so what you're seeing is now customers can have a good positive ROI on new applications that maybe didn't work in the past. And you're seeing this -- so now you're seeing beyond retail apparel, which is really the sweet spot historically for RFID, into other departments within the store package tracking within manufacturing, health care. And just in the last couple of weeks, you saw Walmart and UPS both publicly announced initiatives to expand their use of RFID. So I think that's a -- both shows the emerging trends within the overall space but also a great opportunity for us to play in, in both those opportunities.

Cool. We have some disruptive technologies like the Amazon Go opportunity, for example. I know you have some technologies that could address this, but do you see this trend growing? And how are you guys positioned if that does kind of take off?

Yes. I'd say the form factors of how kind of the department store evolves, I think we'll see how that plays out. But the good news is our products are positioned very well. So whether that's moving to more self-checkout and some of the self-checkout technology we have, where you can use a visual camera with a self-checkout to ensure that the right thing is being checked out, where you might see a lot of leakage and someone switching a tag to RFID technologies that could be used in the future. And again, that's where we spend -- that goes back to that strategic relationship we have with customers of understanding where they're moving to, what's that technology look like and where we can partner to help them make the best decision possible.

Okay. We'll move on to acquisitions in a minute. But just on your kind of revenue visibility, right? It's mostly kind of book and ship, but you do have some of these larger contracts that kind of come into play. How good is your visibility out -- 1 quarter, 2 quarters out and how that kind of changes?

Historically, we've been primarily a book-and-ship business within the quarter. What I'd say is the example I give. Historically, we may have -- we work long and hard with especially our large customers on a large deployment that says, if they need x number of devices in September to roll out before they get to peak holiday season, we would know that today and will be working with them today on that opportunity, but we may not have the PO in hand historically. Today, we're getting that PO in hand earlier because they know they need to give it to us if they want to ensure supply and get in line for supply. So I'd say the visibility is not different than was in the past, but more secure. Obviously, it helps when you know you have the firm PO in hand versus an opportunity sitting there waiting to get that PO that we may have received 6 weeks in advance historically. So that's it. We haven't seen a big shift in that. It's just been getting that secure commitment earlier given supply constraints.

Got you. So let's move on to some exciting things that you guys are doing on the acquisition front. So Fetch, how big can this contribution be over time? Talk about your Rakuten. I don't know if I pronounced that right, but talk about that relationship. And is that kind of leading to other discussions, et cetera?

Yes. So we're very excited about the autonomous mobile robot or AMR space. If you look at the portfolio we have today with Fetch, it's really two areas' material movement, heavy material movement around a manufacturing environment or a warehouse as well as optimized picking within a fulfillment center. And so Fetch today is at -- at the time of acquisition was around $10 million. So it's a small portion of the business, but one of our key expansion areas, an area we expect to grow quite quickly here over the coming years. And our value proposition is orchestrating the robot with a technology-enabled worker. With an overall software platform, we think that's our competitive advantage against some of the other competitors in the space and one that we're really excited about. If you look at that overall market that we play in, again those two specific use cases, approaching $1 billion here over the next few years but quite fragmented, if you look. So the competition really can be -- vary by the use case or the application as it's still an emerging space and one that we're excited about. And you mentioned Rakuten. So Rakuten is a large third-party logistics provider. They chose our solution to improve the efficiency of their warehouse specifically around their picking operation. So think a large warehouse doing small picks for e-commerce delivery. Instead of a warehouse worker walking back and forth across a warehouse or driving a fork truck back and forth, they can stay in a particular zone, pick the item, put it on our robot, and the robot will do the walking, that kind of wasted time, to where the shipping department is. So it's -- again, it's that collaboration between the robot and the picker and driving that efficiency that's the value proposition. And we have many other pilots with large customers that we're looking forward to.

Right. And if you could expand on kind of the warehouse, and this is a question that came in, warehouse -- kind of state of the warehouse where you had a couple of big guys kind of spending quite a bit. How is that -- do you feel like there's still some digestion for some products and -- that address a lot of solutions? Or where are we in that investment cycle?

So we still see the warehouse as an attractive space. I mean there's obviously -- some customers are at different evolutions of where they're at in an investment cycle. So while some maybe were able and ahead of the game coming in or through the pandemic and coming out of the pandemic, there's others that are catching up in terms of the footprint they need both from a maybe national warehouse, smaller regional logistics centers. And again, our technology is critical in every one of those steps. And again, that's another reason -- back to the Fetch acquisition, to address the labor shortages, the robot -- the AMR is a great tool to supplement with a worker that you can do at an attractive ROI and a quick ROI when you partner the two together. So again, we see there's still a lot of space both from a -- where the overall growth is coming from as well as where our technology is deployed.

Cool. Let's talk about Matrox. So how material can this business grow over time? I think it was around $100 million. What's been the reception from your existing customers across your other products? And then who are you directly competing with? Are you bumping up against Cognex, KEYENCE and SICK and all those? A lot there to unpack.

Yes. So let me start. Again, very excited about the Matrox acquisition, which will close here midyear. We've been in conversations with Matrox now for several years. So we know the company quite well. It's a carve-out of their imaging business, and it's a private health company based in Canada. And so again, we're excited about this opportunity to really scale and accelerate the growth of our fixed industrial scanning portfolio that we launched last year using the strength and the breadth of Matrox's portfolio in the machine vision space and partnering that with our global go-to-market and reseller capabilities. We see that as, again, a really nice opportunity to grow. I think customers and partners have welcomed Zebra having this combined portfolio. They know our commitment to the channel, which is a strength. Being able to have fixed industrial scanning, smart cameras, vision controllers and really a world-class software library -- imaging library is a key strength today. And the other advantage is Matrox has great relationships with advanced manufacturing, pharmaceutical space as well as in the semiconductor industry that we think can be advantageous for our core portfolio. And you had mentioned competition. I mean the -- look, this is a multibillion-dollar industry growing quickly. But even outside of those few that you mentioned, it's a fairly fragmented market. And so we see this as, again, a great opportunity with our combined strengths to continue to take share if we execute the strategy.

And the margin profile of Matrox, how accretive can this -- it is definitely accretive, but how can it be over time? And I guess if you could talk about Fetch. I forgot to ask about the margin there as well.

Yes. So on Matrox, again you mentioned it, about $100 million portfolio today. The gross margin and operating profits are accretive overall to Zebra but not quite to where some of the other public companies in the space are at. So again, we think that's, again, a great opportunity for us to grow and expand margins with -- across our machine vision portfolio over time as the business scales. And similarly -- slightly different with Fetch. So Fetch, just given its maturity and where it's at in its life cycle, was dilutive to EBITDA at the time of acquisition, but one that, over time, with the subscription model it has, we think both accretive to gross margin as well as profitability as we scale that business.

Okay. To talk about the now holistic picture that we have here with all these different assets that address so many different things. You're looking to become kind of this one-stop shop for all enterprise needs across multiple different verticals. Are you happy with the current portfolio now? Are there anything you want to kind of add tangentially? Or yes, if you could talk about that strategy.

Yes. So if you look, and we laid this out in February, new long-term growth and we think about our core business, near adjacencies, so things like our supplies business, RFID and then the three expansion areas we identified of retail software, machine vision and automation or robotics, I think when you look at the portfolio today, there's nothing in the portfolio that's preventing us from winning, right? So there's not a gap that we look at and say, if we had that, we'd be more competitive, or that's the reason we're not winning a competitive deal because we don't have some capability. With that said, there's -- again, there's markets that are near adjacent that we don't participate in today that we think are complementary to our technology, complementary to our go-to-market capabilities and fit our overall vision. So again, we're -- we still see M&A as a priority, and we're looking to continue to target bolt-on acquisitions as well as high-growth opportunities. But I'd say it's really important for us that it fits the overall vision of the company. We're not a portfolio company of tuck-in acquisitions, we're a -- we operate as a combined group both from how -- our product designs all the way to go-to-market. And so that's really the things we look at as we're identifying new target opportunities.

Okay. Just we've got a couple more minutes here just to end on cash flow. Everybody loves cash. So talk about your conversion for this year. Talk about supply constraints and how -- your expectations for free cash flow conversion.

Yes. So look, our set objective is to achieve 100% free cash flow conversion over a cycle. We've exceeded that the prior 2 years. This year, we'll be below 100% free cash flow conversion. A couple of factors. One part of that is the incentive compensation payment this year just based on last year's performance is a headwind from a timing aspect, as well as we're seeing a shift in our sales linearity to the back half of the quarter due to the supply constraints. And we expect that to continue through the remainder of the year, particularly as we move some of our business on ocean. That will just delay when we can finally ship, recognize and collect some of the receivables. So cash from a free cash flow conversion is a little bit lower than 100% this year due to that as well as we want to give ourselves flexibility that in the event inventories availability improves, that we can build up our finished goods inventory as we go into the end of the year and early next without impacting our free cash flow guide for the year.

Got you. So we have a couple more minutes for any questions in the audience. Anyone? And then I have another one here. So yes, I guess a question again on market share relative to Honeywell. Like where are you in terms of share? And are you taking share, et cetera?

Yes. So yes -- and I would say it's a little bit again, different for each market. If you look, our scanning portfolio has been steady, around 30% market share and growing, not quite to the extent we've seen in print or mobile computing. And I'd say the dynamics each quarter are a little different really now based on our supply capacity in any given quarter, but we're very confident in our overall share position and believe we can continue to take share with the portfolio that we have today.

Now when you're sitting back in the executive conference rooms, what are you and the leadership team most debating right now about the clarity of the future of the business?

So what's -- what are we debating about the -- in terms of -- the most in terms of the future of the business? It's a tough question. I think what we've learned over the last few years, and it isn't different, it's how do you build resiliency into your model because you don't know what's going to happen next, right? I think that's -- so I'd say rather than trying to -- what exactly could be the next outcome is do we have resiliency in our supply chain based on what we've learned over the last few years so that we can be nimble and pivot? Are we investing so that we have a diversified -- continue to diversify the portfolio and, again, so that we can withstand the ups and downs in the market and wherever that might be? So I'd say that's where we spend the time, not so much on what's to come or what's the biggest concern but how are we, again, advancing the portfolio and building the resiliency in the company to withstand whatever may come next.

Great. And -- okay, we've got one last question.

Nate, can you talk about the margin potential of your business ex premium freight, ex some of these -- having to pay spot prices on components? Is there a lid -- is there a ceiling on where your margins can get? Because ex the premium freight and the component shortages, we're talking 400 or 500 basis points this year, right?

Yes. No, thanks for the question. So one of the reasons -- and if you look at our earnings, we started to call out and highlight that -- the impact from the transitory or premium supply chain cost, which will now be $200 million for the year. The reason we did that is because we do believe those will either come back down to parity or we'll raise prices to offset. And so if you look at that $200 million, as you noted, that's a 400 or 500 basis point improvement in gross margin and equal from an EBITDA rate, and we believe we can get there. And that's the reason we highlight it and talk about it the way we do either through the actions we're taking, through our supply chain or with pricing. And the other thing I'd say is the markets that we're entering are all inherently higher gross margin and higher -- or higher EBITDA rates as we scale each one of those expansion opportunities. And if you look at our overall cost structure, we're operating on a single ERP, a single distribution center network that gives us a ton of leverage as we grow the business. So we don't think about it as a cap or a ceiling on where our EBITDA rates could be, it's really about getting past some of these supply chain challenges and then really executing on the expansion areas. And margins should take care of itself.

Margins take care of themselves. We will wrap with that. All right. Thank you. Thank you, guys. Thank you, Nate.

Thanks.