Special guest Mark Manduca, chief investment officer at GXO Logistics (NYSE: GXO), joins host Nick Sciple and Motley Fool contributor Lou Whiteman to discuss GXO and how e-commerce, automation, and outsourcing are reshaping the way companies get their products to market.

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This video was recorded on Oct. 21, 2021.

Nick Sciple: Welcome everybody. I'm Nick Sciple joining us week by Motley Fool contributor Lou Whiteman. Our special guests today is Mark Manduca, the Chief Investment Officer of GXO Logistics. GXO is one of the world's largest providers of contract logistics services, helping customers like Nike and Disney get their products to market as efficiently as possible. Mark, thanks for joining us today.

Mark Manduca: Thanks so much for your time today.

Nick Sciple: Great to be here with you before we dive deeper into your company just to step a stage, I mentioned, GXO helps provide contract logistics services to some of these big blue-chip companies like Disney and Nike. What does that really entail on a day-to-day basis? What problems are you solving for your customers?

Mark Manduca: High value-added warehousing services. We've got a particular strength within e-commerce. You'll know obviously that we're sitting as a company. We find ourselves at the convergence of some amazing secular tailwinds and as a tremendous growth opportunity in our industry. As you can imagine, it's a $130 billion contract logistics market with the largest pure-play within that space. It's an industry that's highly fragmented. No single-player has more than 10 percent market share, the top five players have less than 25 percent. That's one of the things that gets people excited about the growth opportunity. This is an industry that really serves the purposes, as you said in your intro, of global blue-chip customers wanting to be the best version of themselves within their warehouse infrastructure. Between scale and being global and having a strong balance sheet and being technologically advanced as we are, I'm sure we'll talk about on this call. This is really about an industry that's gravitating toward the scale players in this space. In essence, with e-commerce being as global as it is, what you're finding is that the customers want to play with other global 3PLs, third-party logistics providers, such as us. The industry has been poised for a while for a paradigm shift. We've entered that period now with days of older moving boxes around a warehouse by hand or rover, and we're seeing a new age warehouse emerging like the phoenix, from the ashes. That's the future of this industry. It's the warehouse of the future.

Nick Sciple: When it comes to executing on that vision. Why are these big companies outsourcing to companies like you rather than doing it in-house?

Mark Manduca: It's really from a solutions provides perspective. What you're looking to do here is when I said being the best version of yourself, that's really the key to this. You can employ a number of teammates to push boxes, in your Mackenzie warehouse of 200 years ago. You can push those boxes around by hand and you could probably do a very good job. Fast-forward 200 years to today, where everything thing is no longer about, hours and days and weeks, it's about split seconds making sure that inventory gets to the front of the store, as absolutely quickly as possible, gets into the hands of the consumer as quickly as possible. Given the technology that is implemented within these warehouses, you are at a disadvantage if you are doing this on your own by hand, without the technological innovation and the integration that we can provide as a technology outsourcing company, as an advisory, as a consultancy. The game has just gone from little league to Premier League, and you don't want to be left behind in this tech arms race, so to speak, that's taking place in warehouses. Your competition are doing it, you don't know how to use that Revolve seacom as much as the person who's done it over a 1,050 customers in 869 warehouses. That's us by the way. Therefore you're going to gravitate toward that technologically advanced global scalable 3PL player. That's where this big trend is going. The reason why customers are coming to us, is because they want that technological advancements. They want the value-added services. You mentioned a couple of customers earlier. In terms of the integration and detail that we're doing for them. We're taking hardware, software, we're integrating it. We're doing personalization of equipment. These things can be done in those Mackenzie and warehouses that we discussed at the start. The game has moved on and customers need us.

Nick Sciple: Since you mentioned Mackenzie warehouses, it's transition, we're seeing in commerce, one of the big drivers there is just the emergence of e-commerce. Still a minority of the commerce that we're seeing done in the world. How is e-commerce driving these shifts you're seeing in warehouses in logistics?

Mark Manduca: E-commerce is such an important theme as you know, and it's one of those big secular growth drivers that we talked about, the big three of e-commerce automation and outsourcing those tailwinds that we have on our backs. We built a leading position in e-commerce with 40 percent of revenues from omni-channel retail and e-commerce. Now e-commerce as you mentioned in your question, it's obviously substantially outgrowing the broader economy. We operate the largest outsourced e-fulfillment platform in Europe and have a commanding presence in e-commerce in North America as well. Our presence will continue obviously to grow as e-commerce continues to win market share from that traditional brick-and-mortar retail. As you mentioned, we also have expertise in reverse logistics such an important area of e-commerce and such a fast-growing area as well. Then of course, we have a variety of different software tools to make sure that you can get your products in and out of the warehouse as quickly and efficiently as possible. But e-commerce is high-growth, you're growing at double-digits as an industry and e-commerce. You want someone who is technologically professional, you want someone who has got e-commerce expertise, someone who has reversed logistics expertise, because customers quite frankly come to us, pulling their hair out. They come to a seeing this 200 year-old warehouse for the Mackenzie and times, as I mentioned, where you're returning one-in-10 items today, you're returning one in three. One in three items being returned. That's a headache. As you come to us and you need that help, we're here to give you that service to make sure that, that inventory doesn't sit lately in the back of the warehouse. Instead, you want to make sure that you get it back into the front store so it can be sold. Really, what's happened here is that e-commerce is one of the many reasons why this industry has moved from being a cost conversation for so many customers with their respective 3PL into a revenue, inventory, and reputational risk. You are basically shifting this discussion from three percent of costs to a 100 percent of your revenue. Therefore your 3PL has become a very important part of your infrastructure. That's the game that's changed. It's for moving from a commodity to a value-add. That's what e-commerce has done for this industry.

Nick Sciple: Yeah, I love that framing that you put as far as moving from a commodity through a value-add which maybe ties into some of what you're doing on the automation side. As a business, GXO yard, building robots yourself. You've got to bringing these in-house and really adding value and how you execute on that. Can you talk about the value that GXO really brings in, putting these pieces together into a well-functioning warehouse.

Mark Manduca: There's a few great points to mention. Firstly, warehouses are becoming increasingly automated for efficiency, for speed, and most importantly for safety for our workers and teammates. Now this is clearly this trend of automation in warehouses is transforming the logistics industry, and in so many ways it's really just getting started. If you think about the broader industry, warehouses are barely five percent automated. Clearly, we design as our mentioned, and execute this transition for our customers, and it's backed by our first-mover advantage in some very scalable software solutions. What we do as a technology outsourcing company is we help you as a leading tech innovator and logistics with robots, with goods deposit systems, with wearable technology, we help you be the best version of yourself within the warehouse. With our proprietary software tool on GXO smart, which drives, as I'm sure you're aware, significant labor productivity, savings across the warehouse, we can really give you that all-encompassing solution, that end-to-end solution within your warehouse to provide effectively integrated robotic solutions on a customized basis. That's what we're doing. We're basically taking what was in essence a warehouse that was being pushed by hand and implementing robotics, toolbox, automation, software solutions into a warehouse to make sure that the inventory moves through the warehouse on a quicker, more efficient basis and makes the warehouse safer in the process.

Lou Whiteman: Mark, this is Lou Whiteman, and I was hoping you could dig down a little deeper on some of the nitty-gritty of what GXO does. I think there's logistics as a pretty broad thing we've talked about the warehouse, but it depends on the company in some areas, like with an Apple where they're almost building a warehouse, you're going to run that for them. Versus some of the old direct product from the XPO days where it's just getting scale to smaller players. There's a wide range of things going on just within warehouse management, what you can offer for different size players, is that correct?

Mark Manduca: Exactly right. Direct is a very important part of our infrastructure, but the mainstay of our profit center is a business right now is still very much the dedicated, focused customer facility where we are working for a number of blue-chip customers, as you know, there are a number of logos within our various packs. We're creating very long-duration contracts with customers who want to be with us for significant life-cycles within that product. To keep it simple, if you think about our top 20 customers, on average they're partnering with us for around 15 years and our average contract length is roughly around five years in length. The first thing to make a note of in terms of what we do is we providing duration contracts on a dedicated customer facility basis. Just think about us as being those 869 warehouses, those thousand plus customers within those dedicated facilities. On your point of direct to an important product for us, we provide I would describe it as a facility within a facility such that you have a warehouse that typically would be dedicated for one customer. 

Instead, what you are doing it as you're doing it on a multi-tenant basis, allowing customers to leverage the strengths that you've gone it as a scalable technology professional player, allow them to use those software solutions, use your benefits of scale in terms of hiring, use your ability to source warehouses in the right place, using, all that know-how and expertise and taking a small part of that particular warehouse in a particular location. It can be used for big customers as well as small customers, but it allows you to channel through the various Shopify's and Amazons of this world to get your customers DTC, direct-to-the-consumer on a quick and efficient, and safe basis. We try not to be all things to all people, but we play within certain niches of the market where we can leverage our scalability, globality, and expertise for some of these more medium-sized and smaller customers.

Nick Sciple: We've talked some Mark about automation and your investments in that area, but when you look at running a warehouse, still a very people-intensive business, you just put a press release out here recently. You are hiring thousands of workers here ahead of the holiday surge that we're going to see later this year. How do you balance that the people needs inside these businesses, inside these warehouses with your push toward automation?

Mark Manduca: It's an excellent point, let's pick up on a couple of things. First of all, GXO plans to hire more than 20,000 globally for this peak period as you mentioned. That includes everything from salaried to contractors and also hourly roles. Broadly, if you split that out, you're looking at the better parts of around 9,000 plus for the North American market and Europe is roughly tracking at around 12,000. To contextualize that last year for peak, we had approximately around 8,000 openings in the North American supply chain market thus give you some flavor and some numbers. In terms of goal and I think this is I'll link it and to your point of technology, which I think is very important. Our goal is clearly to be the employer of choice across all our markets. More importantly, we are committed to ensuring a safe and I've mentioned that word a number of times and healthy workplace for our teammates. We're working with customers to stay competitive through this period as you can imagine, we're keeping a very clear eye on detail, but be very clear as well, we also have a first-mover advantage on the tech side, as I mentioned. The way I see the future among all these amazing things that are happening in our industry between picking arms and advanced conveyor belts and automated guiding vehicles, you name it. There's so many wonderful things that are happening within our warehouses and we hope to broadly have around more than 3,100 robots and different automation systems in our warehouses by the end of this year. I would say we're using robotics here to make the workplace safer. I would view it as removing some of the more mundane tasks from the warehouse as well. This is really a case of people working alongside robots, as you saw in the case of the cobalt example I gave. Rather than people versus wearables, which is how the question was tilted. We really feel that this is an environment which actually makes the world a better place to be within the warehouse and more efficient place, a speedier place, and also from an environmental standpoint, a safer place to work.

Lou Whiteman: I guess I said about five percent of the warehouses automated today or somewhere around there. What's the realistic target? Where does that go on? It's not going to become, as you say, the domain of robots, but how efficient, how far can we go into that process, say in five years or however done along.

Mark Manduca: It's a wonderful thing. It's such a great point. The wonderful thing across automation, e-commerce, and outsourcing is that these themes are really in their nascency. You mentioned automation, the five percent that you quoted is really an industry number. Our automation broadly is around 30 percent. If you think about the industry, the industry is really standing from a standing start in so many ways. It is not very automated industry right now. There is no issue in terms of headroom for growth. If you look at some of the other industries, maybe some industries across the freight environment you can see at levels of automation well into the 50's, 60's and 70's, quite frankly. In terms of the journey, I would say there is a lot of runway for growth there in terms of automation. Clearly, we believe that we are one of the leading tech innovators within the logistics space, as I mentioned, with our 30 percent roughly automated warehouse footprint. In terms of the other secular drivers and this is wonderful thing about having three coalescing tailwinds behind you. Outsourcing clearly is only 30 percent outsourced at the moment. 

In a $130 billion market on top of that, you have $300 billion that's still yet to be outsourced and that we are beginning to see, as we've seen in the last couple of years, people increasingly come from the in-house market to the outsourced markets. Then of course, in e-commerce, we all believe that e-commerce has been going on for so many years and it has, but it's still any 20 percent penetrated versus brick-and-mortar. You have a lot of runway for growth. Some of the conversations that we have talked about customers of ours wanting to go from 20-80 percent e-commerce, which tells you the desire to want to have someone who knows what they're doing in this field. There is one in three items being returned, not having pulled out that I talked about. You want to go with the third-party logistics provider that has lived it and done it before for someone else. That scalability of expertise of being a first-mover is so important in what's going to happen over the next decade in this industry. There's going to be a gravitation toward people who are the most automated. We're in that category, people who know how to outsource from the in-house and manage that process for a customer seamlessly at people who have an e-commerce backbone. Remember that 40-50 percent that are courses at the start of this call.

Nick Sciple: You tell the story of a really growing market and where XPO stands out as a scale player with a strong balance sheet expertise. As you look out, you mentioned 10 years down the line, do you view this as an industry that has a handful of scale players that are really dominating outsourcing or do you still see remaining fragmented in the way that it is today with lots of independent players?

Mark Manduca: If you look at other industries across the freight sphere, and remember that 30 percent that I quoted from Lou's question in terms of outsourcing. In terms of the outsourced market currently being at 30 percent, you look at other industries and you actually see two things happening. You see a gravitation toward scale players. Because clearly if you're a minnow in the space from a 3PL standpoint and you haven't got experienced in e-com and you haven't got experience in robust logistics and you don't know how to use that robotic arm because you're not as automated, clearly there's going to be a reluctance by the customer and a wariness of wanting to be treated like a guinea pig first-time out. No one wants to be with the party that's making it their first rodeo. There is that flywheel effect that's taking place within our industry. In terms of your broader point about gravitation, clearly what that points toward is that this element of big getting bigger is definitely a theme that could proliferate.

This idea of seeing a gravitation of market share toward the top-three, top-five players in the industry who have automation experience, who have outsourcing experience, who have e-com experience, who know where to put that robot in the warehouse, next door to the scanners and have lived it and done it and not necessarily showing you a YouTube video as part of the RFP. That I think is a very important process. But I really believe that this is an industry that is on the rise. There are a number of ships here they're going to do extremely well. I'm just pointing toward maybe a slight tilt in the pendulum of where we sit and why we may do slightly better in what is essentially a bunch of ships that will be rising with a rising tide.

Lou Whiteman: You're a $7 billion player. I think what you called a $130 billion market. As an investor, the exciting thing here is to think about the business can double. There's just so much room to grow even at a competitive market. You come from a company, the predecessor XPO was very acquisitive. You have a decent balance sheet right now, only improving. It seems like in your early days, as an independent, there's plenty of room for organic growth. You talked about all these companies that are looking to outsource or looking to get bought that way. How do you weigh organic versus M&A? There's such an opportunity here as XPO has done in the past, it seems like to roll up, but there's also an expertise. How do you view that? Do you see a combination of both or where is GXO prioritized, I guess, for the next few years?

Mark Manduca: I like the point that you raised, Lou, in regards to the heritage. I think it's a very good one. Clearly, we do come from a heritage where M&A has been at the forefront and done with excellence. I would say the contract logistics market is slightly different in the sense that you do have an informational disadvantage when you do M&A in the space. That is, you're far better positioned as you alluded to in your excellent question. Tilting your strong suit to knowing what you know, rather that knowing what you don't know. What I mean by that is very simple. That is when you go in for a contract bid for a certain piece of business where you know the volume data, where you know the pick rates, where you know the location, that is a far easier RFP process than buying a collection of contracts with, as you referenced, someone else's leverage, someone else's teammates, someone else's environment, someone else's balance sheet, all of that stuff that comes with another business. You have to be extremely discerning in an environment where you have to be careful in terms of valuation as always with M&A. The tilt for us is always going to be on that huge organic growth opportunity that we have. Do we look at every thing in the M&A market? Absolutely. 

But in terms of making sure that we're doing what's best for our customers, our shareholders and our teammates across our wonderful company, we're always going to be tilted to the organic growth opportunity here, because as you said, it's so seismic. You mentioned the $130 billion. You forgot the 300 billion on top of that, where you're winning market share from the in-house as well. Where you're landing and expanding, where one customer comes to you and before you know it, you've got three contracts with the same customer. That flavor that you give to the customers, that organic flywheel that I've talked about, that technological edge, it's all gravitating toward the scale players in the industry. Therefore, for us, organic is going to be the focus. That's not to disown M&A at all, but view it very much as a bolt-on strategy. Ten to 150 warehouses at a time, being incredibly discerning about the contracts that you're taking on, the duration of those contracts, know what you know, and play in that field and play to your strengths. Organic first, inorganic second, I would say to answer your question very bluntly.

Lou Whiteman: That's very interesting. Logistics is so interesting right now because it's such a catchall. So much of the business is evolving because of e-commerce and some of these other trends you talked about. We've had notable situations already where the frenemies, for lack of a better word, there was one very large e-commerce company that famously tripped up your predecessor XPO. I think they tripped up FedEx too when they started to go the other way in-house. Today, I would think GXO both would work with the FedEx, and also FedEx is very aggressively building their reverse logistics return business, which would be a competitor. How does the dynamics play out? You're in a land grab time in the business where some of these old economy companies are figuring out what they can do and how far they can extend themselves. E-commerce is moving in or figuring out where they want to be in the logistics change. How does GXO plan for all this now? How do you think things are going to shape out? Are we going to settle or is this going to be a constant evolution in the next five years in terms of who's working with who, who's doing what? How do you plan for that? I guess that's the easy question there.

Mark Manduca: Before you plan, you have to work out what's happened. As you rightly say, there's an element of vindication because for all the words I'm saying there is proof in the pudding that a number of very big companies are coming into this space. You've seen it in the last six months, doing M&A in the space. You've seen it from a European company. You've see it from a US company. They are positioning themselves and you've seen it also from a Middle Eastern company as well, positioning themselves within a space where us three are talking about secular growth right now. There's an element of this. I like what's happening because it's vindicated on what we're saying. But there is huge growth. But there is a huge TAM, a total addressable market. The old companies that you referenced in your question, Lou, those old companies that want to get a direct-to-consumer model up and running, that want to be able to shift from brick-and-mortar to e-commerce, and they want to have a partner that can work with them as an integrated operation, that can work with them with their brand labeled on the lapel, to have someone who can do that for you, a few and far between. We are utterly focused on one thing, pleasing our customers within a warehouse. That is where, if you look at the top 10 players in this industry, the majority of them are conglomerates, which is fine. But being utterly unconflicted and focused on one thing, I believe has a value in this industry. 

To a certain degree, it's exemplified by the lack of revenue synergies from actually spinning out to the business that you referenced. Being selective, really the output of what you're saying is very simple. You've got to be selective about the business that you're doing. The TAM is huge, the chess pieces of moving around because of all the growth that is existing in the industry, all you have to do as a management team right now is make sure we get the right customers on the books, grow with your existing customers, help them expand globally and within the e-commerce channels, please them on a day-to-day basis, breed efficiency through your network, but be selective about the customers that you do business with. The reality is that, you could make a message this by just being too greedy and taking on too much. We're selected as a management team. We've got very clear hurdle rates in place. We work with our customers hand-in-glove with providing a Cadillac-type service, and that's really the output of all the good inputs that you talked about in terms of all the chess pieces moving around the world and all the different pieces of the fragmented puzzle that exist. Old companies want to get direct to the consumer and then making that shift from 20 percent e-com to 80 percent e-com. As they do that, they'll want to be with an integrated dedicated partner. That's us, that's GXO, and that's very exciting for our long-term growth.

Nick Sciple: I love it. Maybe one follow-up, you had mentioned solving the customers problems, delighting them on a day-to-day basis, headlines all over the place. These days of trying to navigate the supply chain morass that is facing a lot of businesses as the holiday season approaches, what are you seeing on the ground as you're trying to navigate these issues for companies?

Mark Manduca: The holidays aren't being canceled. The holidays are happening, which I'm sure you're pleased about. The way I would think about it is very simple. Holidays are just going to be slightly different this year in the sense that certain parts of the supply chain are going through some changes. A company such as ours in the 3PL space could be the solution to that industry-type problem. In terms of the long term and point, let's just attack some of the issues we talked about on this call, even before the pandemic, and the broader supply chain disruptions that you referenced, it was obvious there was a structural e-commerce growth trend in place. I don't think anything that we've seen at the industry level in the last nine months, certainly the last three months, via the supply chain issues has changed that Northstar and final destination. That Northstar is still very much in place. E-commerce still has an amazing growth trajectory ahead of this. If you take the shorter-term point that you made, the more cyclical and seasonal point, which is well-made, peak is still very much going to happen this year. Customers are increasingly choosing, and this is so important, they're choosing to fulfill their orders via e-commerce channels, given the speed-to-market that e-commerce offers, once those delayed goods, as you say, arrive at the port. 

Goods arrive at the port 60 days late, 50 days late, five days late, whatever the number ends up being for that particular good, and the customer is making a decision to channel it through the e-commerce channels rather than putting it in a brick-and-mortar store and wasting another 2-6 weeks before the product reaches the end consumer. Some would argue that that trend is obviously good for a company that is focused and has expertise in e-commerce. The flow of goods is really just changing and you should think about it in terms of an adaptation of the supply chain where part of the solution with a magic dust that sits within the network, and this isn't new to us. We've been planning peak since the summer. Obviously, as a business, we would continue to say that the holidays are still happening.

Lou Whiteman: Mark, I've known you since you were on the sale side and I know you'll understand. The hardest thing about doing this is have to hold companies not accountable, but how to help to judge them over the long term. I thought there would be need to ask you, how are you looking internally at GXO? Keeping score, what metrics are you looking at? If things work out, what should we see in a couple of years out? What should we be looking for? I am not going to just hold you to, you're going to save Christmas for us, to get what metrics do you use and where do you see yourself, the company going in two, five, X number of years?

Mark Manduca: I think there's a few things. With any new company, I think it's very much a case of delivery, and what you say you have to do. Therefore, that's very much front-of-mind for any new company. I would also say that we're creating a category here. There isn't anything in the market that would point toward pure-play, scalable contract logistics. When you're creating a category, there's an element of trust, it doesn't just take a couple of weeks or months, it could take years. But in that process, we have to make sure that as a company, we're clear from a metric standpoint what great looks like. We talked about this oversee on our last conference call, we talked a lot about our pipeline, we talked a lot about our new wins, we talked about the duration of customers, we talked about lands and expand. You obviously saw one of the contracts going from Indiana and to Spain. This idea of pleasing the customer, not just with one contract, but multiple contracts in multiple jurisdictions, and growing the TAM within the TAM almost, growing the TAM within existing customers. That really will be the proof in the putting in this industry. 

To be able to take the existing customer base and whatever the number is percentage-wise in terms of that specific customer that you have, growing the percentage within that customer base as they continue to get pleased and delighted with your existing service. That's really for me, the definition of success. Pleasing your existing customer base and to a certain degree, taking market share, improving the scalability point as well. That will really drive the flywheel. If you think about the three portions that you're really looking to do, you're looking to grow from existing customers in terms of new scope, you're looking to grow in a third-party logistics front from a first-time outsourcer perspective, and you're looking to take market share from people that don't have your technological advantage, that don't have your e-commerce advantage, and they don't have your scale. If you can prove those three things, that makes for a very interesting narrative in a category that you are creating in a high-growth high TAM operation.

Nick Sciple: Got it. Maybe one of the big markers to look for, you call out, you're going to come public presentation that 30 percent of the markets outsourced today. If everything goes the way you like it to and you execute on your plans, we should be seeing in excess of 50 percent by the end of the decade. Something like that would look like success.

Mark Manduca: There are other industries that are 60-90 percent outsourced if you look across the value chain.

Nick Sciple: Excellent. Mark, we've been here for a half-hour or so. Great discussion on GXO. We've talked about your company for half an hour. If you had to blow this whole conversation down to a couple of bullet points for an investor to take away from this about GXO and where the company is going, what would those bullet points be for you?

Mark Manduca: It comes down to four very simple micro points and three simple macro points. That is the flywheel effect is being driven by one, scale, two, globality, three, a good balance sheet, and four, a technological advantage. Those were four things that are really driving the flywheel. Clearly, no summary would be complete unless I talked about the tailwinds at the end, which are clearly e-commerce, automation, outsourcing, lots of runway, lots of opportunity ahead for a company such as ours.

Nick Sciple: Mark, thanks so much for spending this time with us. I hope we can stay in touch. We're looking forward to following what that GXO does in the future.

Mark Manduca: [MUSIC] Nick and Lou, thank you so much for your time today. I really appreciate the questions and time.

Lou Whiteman: Real pleasure, Mark. Thank you.

Nick Sciple: As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show. For Mark Manduca and Lou Whiteman, I'm Nick Sciple. Thanks for listening and Fool on.