Beazer Homes USA Inc (BZH) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Beazer Homes earnings conference call for the quarter ended December 31, 2017. Today's call is being recorded, and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com.

At this point, I will turn the call over to David Goldberg, Vice President and Treasurer.

Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal year 2018. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors, which are described in our SEC filings included in our Form 10-Q, which may cause actual results to differ materially from our projections. Any forward-looking statements speaks only as of the date on which such statement is made, and except as required by law, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is not possible for management to predict all such factors.

Joining me today are Allan Merrill, our President and Chief Executive officer; and Bob Salomon, our Executive Vice President and Chief Financial Officer. On our call today, Allan will briefly review our results for the first quarter of fiscal 2018, then discuss our ambitions for the remainder of fiscal 2018 as well as our longer-term strategic objectives. Bob will cover our first quarter results in greater depth, where we stand relative to our 2B-10 goals and our expectations for the second quarter of fiscal 2018. I'll then come back to provide more details about our land spending this quarter and provide an update on our balance sheet, followed by a wrap-up by Allan. After our prepared remarks, we will take questions in the time remaining.

I will now turn the call over to Allan.

Thanks, David, and thank you for joining us on our call this afternoon. We had a terrific first quarter with results that were at or above our expectations across each of our core metrics. We generated strong growth in revenue and gross margin, which led to another big improvement in our EBITDA. At the same time, we improved our sales pace, increased land spending and completed our first acquisition in many years. All in all, it was a very productive quarter.

Of course, you will also notice that we generated a sizable net loss on a GAAP basis caused by a couple of onetime expenses. One, related to the remeasurement of our deferred tax assets after the recent tax reform; and the other related to our refinancing transaction in October. Looking past these charges, we remain on track to achieve our 2B-10 target of $200 million in EBITDA this fiscal year, while also retiring an additional $100 million in debt.

Beyond these near-term objectives, we continue to execute against our balanced growth strategy, which we define as the expansion of earnings at a faster rate than our revenue growth, supported by a less leveraged and return-driven capital structure. In even more specific terms, we're driving toward a double-digit return on assets without adding operational risk.

Let's review how we are going to achieve this from both an operational and a capitalization perspective. We've created a very desirable strategic position in what is clearly a healthy market for new home sales. A powerful combination of consumer confidence, favorable demographics and job and wage growth is contributing to high-quality sales traffic and online interest in our communities. With a limited number of completed new and used homes on the market, we've seen higher home prices, which, in turn, has highlighted affordability as an emerging concern. Given broad-based expectations for higher interest rates, affordability is only going to become more important to consumers.

Now if you've listened to our calls over the past several years, you know that we have anticipated both of these dynamics, higher home prices and rising interest rates with our long-standing consumer positioning. We call it extraordinary value at an affordable price.

Our view is that the 2 growing demographic cohorts we serve, Millennials and Baby Boomers, recognize and expect extraordinary value. We build our customer strategy around creating this value through our locations, our focus on providing choice and the energy efficiency of our homes. Our commitment is to provide all this while remaining affordable to the largest portion of these cohorts.

In order to improve profitability and our return on assets, we've been very intentional in our allocation of capital and in our efforts to make our balance sheet more efficient. We bought smaller deals, selectively used land bank capital and activated a lot of formerly mothballed assets. Operationally, while we've clearly benefited from higher home prices, we've driven faster sales paces and boosted gross margins, both of which are now within our longer-term targeted ranges.

These efforts have resulted in a huge increase in our EBITDA, even as our total assets, excluding our deferred tax assets, have remained flat. Looking forward, we have a clear path to additional improvement as we start to generate returns on previously nonearning assets.

On the capitalization side, we've also made enormous progress. David will speak to this in a few minutes. The one example of the success we've had is the reduction in our cash interest expense. It's down about $16 million so far, and it will drop by another $5.5 million when we retire the remainder of the 2019 senior notes later this year.

This wedge between our return on capital and our cost of that capital is where value creation happens for shareholders. Taken together, that's how we hope you will think about Beazer, extraordinary value and affordability for homebuyers and improving returns and less leverage for shareholders.

With that, I'll turn the call over to Bob to discuss our results in more detail.

Thanks, Allan, and good afternoon, everyone. I will begin with a review of our first quarter results, then move on to our 2B-10 performance before concluding with a discussion of our expectations for second quarter of fiscal 2018.

In the first quarter, our sales absorption rate was 2.4 sales per community per month, up nearly 11% versus the prior year. Net new orders totaled 1,110 units, an increase of more than 10% compared to last year. This included 21 orders from the Bill Clark acquisition. We generated year-over-year growth across all of our regions, with impressive gains in Las Vegas, Maryland and Atlanta.

Homebuilding revenue rose more than 9% versus the prior year to $368 million. This was a function of a 7% increase in closings, coupled with a 2% rise in our average selling price to $345,000. Additionally, we generated a backlog conversion ratio of nearly 58%, up about 6 points compared to last year.

In line with our expectations, average community count for the quarter was 155. We ended the quarter with 156 communities. Our acquisition of Bill Clark assets added 4 communities late in the quarter, with 2 others expected to be activated soon. Our first quarter gross margin, excluding amortization -- amortized interest was 20.9%, up 40 basis points versus the prior year. This marks the fifth consecutive quarter in which we posted a year-over-year increase in gross margin.

SG&A as a percentage of total revenue, including both homebuilding revenue and land sales, was 13.9%, which was flat year-over-year on a comparable basis. Combined, this led the first quarter adjusted EBITDA of more than $28 million, up $4 million or 16% compared to the same period last year. Total GAAP interest expense, which includes both interest amortized for cost of goods sold and the interest included in other expense, was slightly under $20 million for the quarter, down about $1 million versus the prior year. In turn, our interest expense as a percentage of revenue for the first quarter was down 90 basis points year-over-year. We expect to further improve our interest leverage over time.

Our tax expense in the quarter was $108 million, which included $113 million expense related to the remeasurement of our deferred tax assets as a result of the tax reform enacted in the quarter. We expect our average annual tax rate to be approximately 27% for fiscal 2018 and approximately 24% thereafter. We have included additional details about our deferred tax assets in the appendix of this presentation.

We recorded a net loss from continuing operations of $131 million, which is driven entirely by the 2 onetime expenses we've discussed.

We are making progress toward achieving 2B-10, our goal to get to $2 billion in revenue and a 10% EBITDA margin. On Slide 9, we have provided details on our performance relative to our 2B-10 metrics. For the trailing 12 months, our total revenue was over $1.9 billion, up more than 50% from when we first introduced our 2B-10 Plan. Over the same period, our adjusted EBITDA has more than doubled to $183 million.

Moving on to our expectations for the second quarter of fiscal 2018 compared to the prior year. Order should be flat to up slightly with a stable community count. Closing should be higher, driven by a backlog conversion ratio in the mid-to-high 60s. ASP will be in the mid-to-high $340,000s, up year-over-year.

Gross margin is expected to be relatively flat, inclusive of the purchase accounting impact of the Bill Clark backlog. SG&A as a percentage of total revenue should be down year-over-year. Taken together, we expect EBITDA to be up year-over-year.

And finally, cash component of land spend will be up relative to last year. As we've discussed previously, we are significantly increasing our land development spending this year to facilitate new community openings in fiscal 2019 and beyond. At this point, I'll turn it over to David.

Thanks, Bob. In the quarter, we spent $142 million on land and land development, with acquisition spending up about 30% and development spending up 60% versus the prior year. Additionally, we activated nearly $60 million of land previously held for future development in Southern California. Since speaking in 2009, our total land held for future development has declined from $420 million to $97 million, a reduction of nearly 80%. In turn, active assets now represent 93% of our total inventory.

While predicting future community count timing is difficult, you can see that we have 35 communities expected to close out over the next several quarters. This will be offset by 35 new communities scheduled to open over the same period. Looking beyond the next 6 months, we've a pipeline of new community openings, including 34 communities that are currently under development, 14 of which were previously classified as land held and 26 communities that have been approved and are currently under contract. This should contribute to a gradual expansion of community count over time, including a growing number of Gatherings sites.

As discussed on last quarter's earnings call, in the first weeks of fiscal 2018, we issued $400 million of 10-year senior notes at 5 7/8%. Once we complete the retirement of the remainder of our 2019 note at the end of this year, we will have no debt due before 2022.

With the improvement in profitability and the reduction of debt, our net debt to adjusted EBITDA has declined to 6.3x down from 7.6x at the end of the first quarter last year and down from more than 11x just 4 years ago. We expect further improvements moving forward as we continue to grow our profitability and reduce net debt.

Over the last 3 years, our debt reduction and refinancing activities have extended the weighted average maturity of our debt to 7.3 years up from 5 years, generated annual cash interest savings of about $16 million, which will expand to more than $21 million following the retirement of our 2019 senior notes and reduced our weighted average interest cost by more than 30 basis points.

With that, let me turn the call back over to Allan for his conclusion.

Thanks, David. Fiscal 2018 is on to a strong start, and we look forward to making further progress as we continue to execute our balanced growth initiative, track down 2B-10 this year and drive toward a double-digit return on assets. I want to thank our team for their ongoing efforts. With their talent, I'm confident we have the people, the strategy and the resources to reach our objectives.

And with that, I'll turn the call to the operator to take us into Q&A.

(Operator Instructions) Our first question comes from Michael Rehaut with JPMorgan.

First question I had was on demand trends and how things perhaps if you have any commentary so far into 2018. We've seen a lot of builders talk about -- or report orders rather that have come in a bit above our estimates and I think most people's expectations. And you're seeing a nice improvement in sales pace yourselves relative to the past few quarters. So -- or at least relative to the last quarter. So I was wondering if you could kind of talk about what's driving the improvement in sales pace. If you're seeing certain markets that are really leading that improvement, and maybe also delve into if product mix is also playing a role.

All right. Well, I'll take a stab at all that, Mike. First of all, I would say in the first quarter, we had each month above the prior year comparable month, which was a nice pattern. And certainly, it's a tricky time seasonally. Weather patterns are influential. And we often find ourselves in the face of competitors with fiscal year-ends that match up with the calendar year-end being particularly aggressive. And we've been very disciplined about that, not attempted to compete on the basis of price in that period of time. So I would tell you that the demand characteristics were quite positive, particularly for that time of the year because we didn't find ourselves having to be exceptionally aggressive. I'll just make a comment briefly about January. I would tell you that our January has been -- was up nicely year-over-year as well, but I'll also say that February and March tend to be much bigger months. And so I don't think we want to get ahead of ourselves being overly enthusiastic, but the data through the first quarter and into January has been very strong. Now in terms of kind of underlying reasons for that, I always like to make sure our team hears and knows that their efforts really make the biggest difference. It's how we execute. I think the macro factors, you could find arguments for and against in any period of time. So I can't really say that I think it's been entirely a tailwind. I think we're just very focused on making every community perform. There are a couple of markets that have been exceptionally strong. And I know other builders have talked about it. But Las Vegas has really recovered nicely from a demand perspective, and our homes are still very affordable there. And so I think that's been a particular point of strength for us. But it's a pretty small market. So its ability to affect our overall organization is limited. But it clearly is a standout market during the period of time in question.

No. That's helpful. I guess, maybe taking it a step further, you're saying that January is up nicely and granted, it is the smallest month of the quarter. Is there anything that -- given that your upcoming second quarter does have a little bit of an easier comp, is there anything that's kind of driving the orders for the second quarter overall to be flat to only slightly up? Do you see certain -- is it more of a community mix timing issue because again, if you have an easier comp and you're saying January is up nicely, what's -- is it just more conservatism or what would be driving a shift more to just flat to slightly up?

Okay. So I think facts first. Q2 last year, we did 3.4. We've only had in the last 16 quarters, 2 quarters that were 3.4 or higher. So I wouldn't really put that in a category of an easier comp. It was a very strong quarter last year. We are proud of it, and I'd be happy to do it again. So that's, I think, the starting point. So I -- just sort of a premise issue, Mike. I think 3.4 is a great number. We'd love to do 3.4 again. If we do a little better, that will be nice. But I think that would be over the last 4 years, the single best quarter we'd ever had if we get much ahead of 3.4.

No. No. That's fair. I get that. I guess, I was just looking at the year-over-year growth when I was talking about the easier comp, but I understand your point. I guess, second question just on the gross margins, you did have a little bit of improvement in the first quarter, up 40 bps year-over-year. Looking for more flattish in the second quarter, which would be on a pre-interest basis down slightly. I guess, what's -- what were the kind of key movements on first quarter with the expansion? And typically, I think you do often see a little bit of sequential improvement throughout the year. Should we expect something similar for 2018?

So this is an area where, during the course of the year, comps do get a little bit tougher. But I think the first point is, we have had 5 quarters in a row of comparable quarter improvement. I think as we look into Q2, there's nothing fundamentally different in the mix of our business or the margin of our backlog with the exception of the fact that we did bring in some backlog with the acquisition. And as you know, we'll write that up to essentially its realizable value and that will act as a headwind on margins, particularly in the second quarter. So that's really the only kind of unique factor that I would point to. I still think we see a constructive environment. We've definitely seen a narrowing and an improvement in spec margins, a narrowing relative to to-be-built margins. So I would say that our thesis of eking out incremental gains is broadly intact. This quarter has just got a little bit of potential headwind. We'll see. But I thought it was prudent for us to acknowledge that that's something that's different that's in the mix of numbers this year relative to last year.

The next question comes from Susan Maklari with Crédit Suisse.

My first question is just around Gatherings. And as this kind of product starts to gain momentum, and it sounds like you've got some more product that's coming online over the course of the next several quarters, how do we think about that as you think about driving a double-digit ROA and kind of improving the overall turnover that you're seeing in this business?

So the thing that we know historically to be true is that in the 10 years we've been developing this active-adult product, exclusively until now in the Mid-Atlantic, it has had characteristics of higher sales basis and higher gross margins than the rest of the business. And that's one of the reasons we've taken comfort in exporting that technology and that capability into other markets. I think it's also fair to say that we want to be careful. We've been very selective with the initial sites in each of the markets, and we're going a little bit slower than I think we will ultimately go in the markets as we introduce this to the city. And I would tell you, it's just an example. We're in a phenomenal location in Orlando at Lake Nona with our Gatherings community, but there hasn't been an active-adult, age-restricted, condominium product in an amenitized master plan in Orlando. Now it's a sophisticated market, enormous population, incredibly target-rich. What we want to do is make sure that we have created the awareness in the marketplace so that we can really optimize the value of that asset; and then we've got a second, a third, a fourth, a fifth, in fact, up to 8 buildings in that location. So I think part of this is, as we get started in each individual new market, we are being very disciplined. We're being kind of patient because I don't think that, that first 6 months, 9 months, first building will ultimately represent what's possible because we are learning as we go. But longer term, it is a business that we believe has ROI characteristics that are accretive to the company.

Okay. And then the second question is just around technology perhaps. And it sounds like this is becoming a bigger and bigger factor in this industry. How are you guys thinking about that and adapting it in your business? And maybe specifically too, it seems like there's a lot that can happen potentially on the mortgage side of things. And given your mortgage choice business, are you hearing from any of your partners in that, that they are starting to think about or potentially trying out some different things there?

So there's a lot to this. And I would tell you that -- let me start with your mortgage choice question, and then we'll kind of expand it a little bit to some other categories because technology could mean pretty different things. In the mortgage space, one of the things that makes me most enthusiastic about having multiple vendors compete for the right to write a mortgage for one of our buyers is that they are having to provide service and technology and low rates in order to win the business. And so you are right on it. We have absolutely seen an explosion of initiatives from vendors trying to get faster, better, quicker, cheaper to our customers. And I love the fact that it's their R&D, it's their budgets, it's their technology departments that are deploying that, ensuring its compliance from a regulatory standpoint and we get to create that opportunity for our customers. So that's a very happy set of circumstances as we see technology really being adopted into the mortgage market, and we don't end up being a brake or a gating, slowing component in that or a facilitator. That's a great place to be. I think your question more broadly about technology probably gets to a couple of different things. On the marketing side, I chuckle a little bit when people ask me about this. And it's not common for me to use the pronoun I, but I did spend 7 years in online marketing before I was at Beazer. We went entirely digital in our advertising when I became CEO. We haven't bought a newspaper ad since. So we have been deeply involved in online marketing and online media for an extended period of time. And it constantly changes as there are new platforms and new technologies, I feel very good about ROA of being exposed to the right kinds of prospects. We need to keep doing more, others will keep doing more. But it's an area where I feel like, just because I had some background in it, we had a little bit more ambition earlier and we've been working on it for a while. I think the other area that gets a lot of discussion is on the production side. And there are definitely some start-ups out there. And I probably shouldn't call them start-ups because a couple of them have been exceptionally well capitalized, but there are some component manufacturing enterprises that, I guess, what I would say is the market is strong enough, both on the multifamily and on the residential side to attract the kind of risk capital to create those kinds of enterprises. We are tracking them closely. We're working with one of them in a particular project. I think it's too early to say that it represents a definitive solution, but I'm pretty optimistic that the additional capital deployed into that kind of production capacity is one of the ways that we and others will be able to deal with what's clearly going to continue to be a labor-constrained environment. So I think that's a little longer tenure, but I'm pretty optimistic about it. So hope, Sue, that helps kind of touching on all 3 of those.

The next question comes from Alan Ratner with Zelman & Associates.

Allan, I'd love to dig in a little bit more on the Bill Clark lot acquisition in the quarter. It seems like a pretty interesting opportunity for you guys. I mean, if I just run the quick math you have in your Q here, it looks like you paid $29 million, roughly $65,000 a lot for communities that are effectively ready to go right out of the gate. So it seems like that's a pretty attractive price that you paid. So I was just curious, as you compare that acquisition versus a traditional lot acquisition, how should we expect the margins, the returns, the absorptions on these projects to compare versus what you're underwriting for the rest of the business? And I guess, if you could just walk us through a little bit how this opportunity came to be, that would be helpful.

All right. Well, Mr. Clark has got a phenomenal reputation in the Carolinas. He's been a builder for over 30 years. He operates in a bunch of places. But I think as his business evolved and as he got a little bit older, he was trying to simplify. He hired an adviser and ran a process. We were exceptionally interested in Raleigh and in Myrtle Beach, places where we have a good presence. We knew his assets and -- so we expressed interest early and often. And I think that, that was a big part of us ultimately having the opportunity was being early and being patient. I will say that sometimes, it's hard to do a $29 million deal as a $2 billion deal. And the documentation, the paperwork, we were just exceptionally patient. We didn't create any artificial deadlines. We just kind of worked through it. Candidly, I thought this is a transaction that might have come to past 90 days earlier than it did. But it's one of those things where it's not ready until it's ready, and so we just allowed that process to play itself out. In terms of the assets themselves, I would tell you that the attraction to us is that they were good replacements for community purchases that we otherwise would've made with a terrific advantage that, as you say, they were effectively ready to go. In terms of margin characteristics and pace characteristics, first of all, in the overall scheme of things, I think that the weighted averaging effect will be negligible, but I would say, they were very consistent. And we use similar underwriting criteria in terms of margin and modified internal rate of return to evaluate this collection of assets. I hope that helps, and let me know if I left something out.

Yes. No. That was perfect. I appreciate the color there. And I guess, in a similar vein, we've been asking a lot of builders this question, and I'm not sure there has been a clear consensus. But with tax reform lowering the effective tax rate for builders, and I know you guys are not, today, paying cash taxes, but most others are, it's not entirely clear how that's ultimately going to flow through to the land market in terms of underwriting. I know some builders have talked about pretax returns that they think about. Most don't talk about it in the after tax. But when we talk to land sellers, they feel like that in reality that is what happens. So I'm curious from your shoes, obviously, there's no near-term benefit from tax reform from a cash standpoint. Are you worried at all about other builders kind of competing away that and making it difficult for you to be active in the land market or competitive in the land market? Or do you think that the builders are really going to hold on to that discipline and look at it more from a pretax standpoint?

It's awfully hard for me to worry or know what other builders are going to do. I'd say we always worry in the market -- in any individual land market about someone giving away an undue portion of the homebuilding profitability in a land deal. And fortunately, we've exercised pretty good discipline on saying no because it hasn't been broad-based. It hasn't been persistent. Where it's happened in certain markets, we've taken a pause in our land acquisition and been able to deploy capital in other places. I do think, Alan, over time, most builders have adopted an internal rate of return, a pretax sort of mindset. I think that's the way the models work in most companies. Now whether or not people start to find a little extra, lean in to their underwriting, I don't know. But I would tell you that I think when you represent good pace and a good customer experience, that's not the -- that's not lost on the land sellers. So I think their price is certainly important, in fact, drives most of those conversations. But I think being a builder of choice who does what we say we're going to do matters a lot as well. And I would say I think that plus having plenty of liquidity, I'm not too worried about finding land deals.

(Operator Instructions) Our next question comes from Jay McCanless with Wedbush.

So I have 3. I'll try and be concise with them. But first, with the spike hiring rates we've seen the last couple of weeks, what if anything are you guys hearing from the field on how that's affected customer attitudes and/or the ability to qualify?

So far, Jay, and at the risk of being wrong tomorrow, we haven't heard a lot about it. I think there has been a general understanding in the market that rates were trending higher. It may be catalyzing activity right now, but I have not got any evidence from the field as of today that we've heard much about or anything about the spike in rates.

Good to hear. So the second question, the improvement in the SG&A as a percentage of total revenue was mainly on the G&A line this quarter. A, should we expect that to continue and drive the SG&A improvement next quarter? But also, are you guys -- what are you hearing on co-broker? Are you all maybe getting a little bit better co-broker rate these days because that's what we're hearing from some other builders?

Jay, I'll handle the G&A part. Yes, the G&A did drive, and we do expect to see additional leverage next quarter from that G&A side. If you look at our commissions line, it's been relatively constant over the last several quarters and years.

Yes. I'm not saying a lot on the co-broke side. I mean, there's obviously 2 components to that. The percentage of transactions where a realtor is represented on the buy side and then the commission paid to the realtor. And I would say, that that's moved little bits in both directions in individual markets, but sort of standing back and looking at it overall, I don't see a particular message or theme in either the proportion of realtor-represented transactions or in the aggregate commission rates. I don't see anything there. I'll go look for it, but I haven't seen it so far.

Okay. Okay. And then the last question I had, a nice sequential tick-up in the average backlog price. I'm assuming that's more California coming into the mix. When should we expect that to start impacting the average selling price?

Well, we've been on an upward trajectory with ASP, and I expect that to continue for a little while. Bob gave a number of the high $340,000s for the next quarter, and I think it will continue to move up through the balance of the year. San Diego, in particular, is contributing a larger share of our closings.

The next question is from Alex Barrón with Housing Research Center.

I wanted to just clarify your guidance on the gross margin. You said flat. Was that year-over-year or sequential?

Year-over-year, Alex.

Okay. And I guess, just hypothetically, if interest rates were to keep trending higher, what do you guys anticipate would be, I guess, your response to that? Would it be just kind of more incentives? Or what do you guys foresee if rates were to keep trending a little bit higher from year to year-end?

Well -- and in fact, I made some risk-making interest rate forecast Alex, but I think that may happen. So as I said in the script, our focus is on remaining affordable despite rising prices and interest rates. So the square footage of homes, the included features of homes, those are absolutely the first places that we go, not to incentives.

Got it. So if we look at your square footage, and maybe what you would characterize as affordable housing, where is that today? And where do you -- what percentage of your homes fit in that category of affordable? And where would that be trending towards year-end?

Well, affordable is obviously in the eye of the beholder. We actually put a slide in that showed just a normal distribution of incomes to kind of try and tell a story around the fact that there are price-sensitive or price-exclusive buyers that we don't target. And there are buyers at the other end of the income distribution within any submarket that are up a quartile or up a quintile. That's not our target. If you kind of take the median income in a submarket and that's important. It's not an MSA issue. And look at the housing affordability around that median income, that's where we want to be. Obviously, incomes differ greatly between markets, and therefore, the definition differs. The vast majority of our product is in that sweet spot plus or minus a little bit around median income. We have a few communities on the East Coast that are in that upper component. We have a few communities in Las Vegas right now that are in the lower component. But for the most part, we're right around that median income line. That's our target buyer in every market we're in.

Our last question comes from Michael Rehaut with JPMorgan.

Just wanted to follow-up and make sure I understood on the tax rate guidance. It looks like on an effective basis, this quarter, when you ex out like the charges, you're a little bit below. I think the press release said to use 26.6%, so let's say, 27% tax rate. So I assume that as you said, 27% for this year, that should be that type of consistent numbers throughout the next 3 quarters, and then effectively we would just see a drop to 24% in fiscal '19 off the bat?

That is correct, Michael. You use the average effective tax rate for this year, and then that will be 27% and next year will be 24%. It's exactly right.

There are no further questions.

Okay. I want to thank everybody for joining us on the call. We'll be back next quarter. Thank you, and let me know if you have any questions.

Thank you for participating in today's conference. You may disconnect at this time.