Q3 2020 Purple Innovation Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to Purple innovation third quarter 2020, <unk> earnings Conference call. At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad, It's my pleasure to introduce your host Brendon Frey of IC. Our please go ahead.

Thank you for joining purple innovations third quarter 2020 earnings call.

A copy of our earnings press release is available on the Investor Relations section of People's website at Www Dot purple Dot com.

I would like to remind you that certain statements. We will make in this presentation are forward looking statements.

These forward looking statements reflect purple innovations judgment and analysis.

Only as of today and actual results may differ materially from current expectations based on a number of factors affecting the company's business.

Accordingly, you should not place undue reliance on these forward looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward looking statements to be made in this conference call and webcast. We refer you to the disclaimer regarding forward looking statements included in our third quarter 2020 earnings release, which was furnished to the FCC yesterday on form 8-K, as well as our filings with the FCC referenced in that disclaimer.

We do not undertake any obligation to update or alter any forward looking statements, whether as a result of new information future events or otherwise.

Today's presentation will include references to non-GAAP financial measures such as EBITDA adjusted EBITDA adjusted net income and adjusted earnings per share.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available in the earnings release, which can be found on our website.

That I will turn the call over to Joe Mexico.

Thank you and good morning, everyone with me on the call today is John lag, our Chief operating Officer, and Craig Phillips, Our Chief Financial Officer. Following our prepared remarks, we'll be happy to take your questions.

It was another very strong quarter with demand for the purple brand at an all time high our teams did a great job capitalizing on our opportunities as we manufactured and sold more mattresses in Q3 than in any quarter in the company's history to deliver a record revenue quarter.

Topline performance was driven by incredibly strong gains in our DTC channel coupled with a resurgence in our wholesale business as our retail partners experienced improved traffic following Q2 store shutdowns and limited operating hours during the quarter. We also executed key operational strategic and financial initiatives in support of our long.

Our growth strategies.

A few of the many key highlights for Q3 compared to Q3 2019 include net revenue, increasing 59% to a record $187 million gross margins expanding 220 basis points net loss of 1.2 million with adjusted net income of $17.2 million.

Adjusted EBITDA growing 97% to $30.1 million in cash increasing 213% to $98 million, even as we made important investments in the business. We also began work on our new 520000 square foot manufacturing Assembly and fulfillment center in Georgia.

Acquired the rights to an IP licensing agreement signed prior to the formation of purple strengthening our IP portfolio and signed a new five year $100 million senior secured credit facility, including available $55 million line of credit, creating a more optimal capital structure and significantly lowered our borrowing costs.

I'm also thrilled to report that we just received the JD Power award for highest customer satisfaction with mattress online for a second year in a row.

Looking at our performance in more detail DTC revenue increased 98% to $134 million with strong increases over the prior year period in each month of the quarter.

We kick things off with a very successful fourth of July holiday period, creating a lot of momentum that carried into August before accelerating during during an even stronger labor day sale.

In terms of product performance across our DTC channel, we experienced fantastic route for mattress as demand was once again strongest for our hybrid premier product line underscoring the progress we have made advancing the premium nature of the people products and brands the combination of product mix and price increases implemented in early July drug.

A 14% increase in average mattress order value year over year.

At the same time or non mattress categories posted growth rates greater than 100% demand its reaching new heights as we've moved quickly to capitalize on the recent focus on home in both the bedroom and home office, which I suppose or sometimes the same by upholding our marketing merchandising and selling programs for our print.

CMC questions Hello, and sheets.

With consumer demand still leaning heavily on line alongside reduced channel marketing costs, we shifted our marketing strategy to better reach those new to online customers. We pulled back on more expensive lower funnel channels and are now able to efficiently cast a wider net in both traditional media and digital prospecting with its larger addressed.

Mobile market, we were able to substantially increase traffic to our site, while maintaining healthy conversion rates. This approach once again drove significant growth and meaningful expense leverage.

Turning to wholesale revenue was $53 million, marking a return to growth with an increase of 7% compared with a year ago and up 165% from Q2 this year.

Sales in this channel rebounded strongly from Q2 levels as retail traffic steadily improved and consumer shopping our brick and mortar accounts increasingly chose the purple brand. This was evidenced by the strong sell through trends, we witnessed at both existing accounts and recently launched retailers in the third quarter, especially during the key July 4th and Labor day sale Perry.

As we discussed on our last call the strong demand for our brand and products is outstripping capacity and in Q3 likely reduced our wholesale performance. We were also challenged with both foam in coil supply shortages that reduced production levels below our intrinsic capacities.

Isn't it back seven in June helped alleviate some constraints, but until production at our new facility is up and running and support supply shortages are alleviated our ability to significantly expand with existing customers and add new accounts is constrained. We recently made the decision to allocate a portion of production in order to bring on our first interim.

National wholesale relationship I'm excited to announce that as of yesterday purple products are available at sleep country, Canada's leading omnichannel mattress embedding retailer with over 265 doors throughout the country. This includes the launch of an all new mattress, the purple Clos, which adds a premium copper that is cool to the touch and even more.

Readable, along with an advanced new premium comfort calm under the purple Grad that along with a high anticipation supported by the grid further pull heat away from the body, it's a great new mattress and in support of our expected growth in Canada. We have expanded our partnership with Leggett <unk> Platt who'll provide Canadian assembly capacity augment.

During our in House Assembly capacity, we look forward to further expanding our wholesale door count in 2021, once Max eight and nine come online at Purple South to provide an update of the status of our new facility in Georgia, I'm now going to turn it over to John.

Thanks, Joe.

Since I last spoke with you in August we have been extremely busy preparing copel shall to commence operations right. Now we are fully engaged in the build out. So what are you are close to completing the foundations that will eventually house six matches smacks machines at this location.

We are pleased with the progress we have made on backseat and knowledge and expect to have Max eight online within about 90 days along with our first four new Assembly lines.

Next slide is being built in parallel and we expect to bring it online shortly afterwards.

Two additional machines will increase our current production capacity by roughly 25% to 30%.

Allowing us to better meet near term DTC and wholesale channel demand with future growth further supported by two more Max machines slated to be added leader in 2021.

On the logistics side, we are and continue to prepare our warehouse management system physical location solution and hardware in preparation for first quarter distribution fulfillment activity.

Finally, we have ordered additional injection molding machines used for CE Cushing and total production that will double our current capacity. This.

This will allow us to better meet the growing demand for these two categories.

We're very excited to be making progress on this critical infrastructure investment that when completed will significantly expand our U.S. manufacturing and create many new jobs I'm pleased to say that the staffing up the local management team is on track and proceeding as planned and will be from a tapping into the areas large talent pool as we continue to build off to work.

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With that I'll turn it back to Joe Thanks.

Thanks, John along with the activity near Atlanta, The organization is gearing up for a strong finish to the year momentum. The business has experienced since early April has not let up and we're expecting another strong holiday season or focus on meeting both DTC and wholesale demand continuing our omnichannel strategy of supporting our customer well.

However, they choose to engage with our brand weve.

We've already discussed the imbalance between demand and capacity that we are facing until we bring on the additional Max Mitchell James for the fourth quarter, we're still dealing with constraints on our supply of foam, which we use in the core of the purple mattress. This shortages related to upstream chemicals supply challenges facing all phone manufacturers. We're also now facing coil charter.

<unk> is where our specific fabrics used for the coil sleeves have only recently been reallocated for P product, which has limited our capacity of our hybrid mattresses that said. We currently believe we have ample finished goods and inbound supply to meet our holiday needs and are aggressively pursuing alternative sourcing options should demand exceed our expectations.

Patients.

As we navigate this challenge our teams are also executing key initiatives that will set the company up to start 2021 from a position of strength to continue our market share growth.

It's John just outlined we are rapidly building out our new facility and remain on track to begin manufacturing and fulfillment activities and the southeast early in the new year with Max eight and nine online we will be able to resume our wholesale expansion strategy in earnest, which includes selectively increasing our door count with existing partners and adding other leading furniture and bedding retail.

Sellers in regions of the country, where our brick and mortar presence is underpenetrated. Our fourth quarter plans also include accelerated investment in new creative and website design that will serve as the foundation of our 2021 brand positioning throughout this year, we evolved our messaging in order to better support the premium nature of our products as well as our unique innovations with the purple grid.

And our hyper elastic polymer and the very real benefits. They provide the work currently underway will continue to advance. These themes as we capture more of the premium end of the market and look to attract new consumers to the brand.

As to the web site, we continued to make improvements as well as the larger replatforming effort, which we chose to delay initial roll out until early 2021 to avoid any unnecessary risks through the holiday months, we do continue to evolve the existing platform and we believe these efforts have set us up for a strong holiday starting with our new kids' corner feature.

During our new lighter and more affordable Kid mattress paired with our kids pillows and Kid sheets, we have historically seen strong kit demand for our brand which is unique in the category. We have a beautiful holiday gift guide with elevated branding, which includes our just released purple pajamas literally made from our soft stretched sheets and.

Partnership with Sleepy Jones, our soft spreadsheets are so comfortable you can now wear them and we continue to lean into bundles, which offers a great value for our customers and continues to drive up order value and units.

The fourth quarter marks the resumption of our brand show room expansion, which we paused at the outset of the pandemic, who recently opened to shoot showrooms that feature our latest evolution and store design, the new design looks amazing with elevated presentation and continued focus on meeting our customers needs. The first new showroom, it's in Austin, Texas.

Yes, and the second is in Tysons corner, Virginia, we have two additional show rooms under construction that will launch in Q4, one in the mid west and one in the Pacific Northwest. This will bring our showroom count to nine by the end of the year all up our showrooms are performing very well and are now exceeding pre pandemic sales volume, we anticipate starting the new year with some.

Miller momentum of around five new showrooms opening in Q1.

Finally, we are continuing to invest in new product development that we anticipate launching in 2021 with our healthy balance sheet. We are also expanding our investment into research capabilities and we have many exciting programs underway ranging from new and improved manufacturing processes to improved materials and novel New gel formulations.

As well as entirely new consumer technologies I'll now turn it over to Craig who will review the financials in more detail.

Thanks, Joe as Joe outlined we had another very strong quarter from both a revenue and adjusted profitability standpoint, as you will hear later during the quarter, we had a significant non cash adjustment related to the fair value of outstanding warrants driven by the increase in our stock price.

As well as also the extinguishment of debt associated with the replacement of our previous debt agreement.

For the three months ended September 30, 2020, <unk> revenue was $187.1 million up 59.4% compared to 117.4 million in the prior year period.

Revenue increase was driven primarily by strong growth in mattresses in our DTC channel along with higher demand for pillows sheets and C cushions.

Our wholesale business also returned to growth following a difficult Q2, when koby like teen severely disrupted our partner store operations.

For the quarter DTC channel net revenues increased 97.5% year over year, while wholesale channel net revenues grew 6.9%.

Gross profit dollars were 88.3 million during the quarter of 2020 compared to 52.9 million. During the same period in 2019 gross margin at 47.2% versus 45% in the third quarter 2019.

That's gross margin increase of 220 basis points year over year can be attributed primarily to the higher proportion of DTC channel rather.

Which carries higher gross margins our wholesale channel.

Yes, you see revenues comprised approximately 72% of net revenue for the quarter compared with approximately 58% in the same quarter last year.

Additional positive contributions to the gross margin improvement implemented modest product mix shift as we continued to increase our long mattress rather than July price increase in several of our models and improvement in our overall return rates at our DTC channel. This.

This was partially offset by headwinds from higher freight expense nickel middle overhead associated with our new Atlanta facility.

Operating expenses were 34.2% of that.

2020 versus 35.7% in the prior year period.

This improvement of 150 basis points as a cheap <unk> AD spend efficiencies open headcount leveraging our expense base on higher net revenue, partially offset by an increase in marketing costs aimed at driving demand.

And increase brand awareness as well as the additional company owned retail showrooms in the fourth quarter of 2019.

Marketing and sales expense as a percentage of net revenue decreased to 27.4% compared with 29% last year, primarily due to efficiencies in their advertising spend created from enhanced marketing strategies and lower rates in certain marketing channels are the true advertise.

But the third quarter, we reported operating income of $24.3 million compared to 11 million in the third quarter of 2018, an increase of 120.9%.

Net loss for the quarter was 1.2 million compared to net income of 8.4 million year over that period.

Third quarter 2020 included an $18 million noncash expense associated with the change in fair value of warrant liabilities.

I'd point $8 billion loss on extinguishment of debt related to the retirement of the company's previous data.

The point 6 million non cash expense associated with the tax receivable.

Third quarter 2019 included a $1.4 million in cash expense associated with the change in fair value of warrant liability.

Excluding these items adjusted net income was 17.2 million or 27 cents per diluted share based on a fully diluted share count of 64.4 million.

<unk> adjusted net income of 7.3 million or 14 cents per diluted share based on a fully diluted share count of 53.7.

Adjusted net income has been adjusted to reflect the estimated effective income tax rate.

5.2%, the current year period, and 25.6% for the comparable prior year period.

EBITDA for the quarter was 2.5 million compared to 10.5 million in the third quarter of 2019.

Adjusted EBITDA, which excludes non cash expenses associated with the change in fair value of warrant liabilities tax receivable agreement expense and stock based compensation.

As well as expenses primarily related to loss on extinguishment of debt technology vendor impairment legal fees, and then CFO and consulting costs severance previous period sales tax liability and COVID-19 related expense was 30.1 million versus adjusted EBITDA of 15.3 million in the same quarter.

Last year.

Moving to our balance sheet that inventories totaled $15.8 million at September 30, 2020, compared to 47.6 million at December 31 2019.

As of September 32020, the company had cash and cash equivalents of 98 million compared with 33.5 billion at December 31, 2018, an increase of 192.6%.

As we announced in September 3rd we entered into a five year low dollar senior secured credit facility.

New facility consists of a $45 million term loan and a $55 million revolving line of credit.

Yeah on the full amount of the term loan at closing and utilize the proceeds to retire our previous credit agreement.

We have not drawn on our line of credit.

Borrowing rates are based on the company's leverage ratio and our initial rate of LIBOR with a floor of 25% plus 3% is.

Does 850 basis points lower than our previous right.

Based on our strong cash position at the end of September continued demand for our products and our new $55 million line of credit. We feel we are well positioned to continue investing in our business, which includes our new Atlanta manufacturing facility company operated showrooms or branding and innovation initiatives.

Due to the continued uncertainty in the overall economy, we are continuing to refrain from providing guidance at this time, however, I do want to highlight a few important points about our fourth quarter.

As Joe commented.

Mattress industry is currently experiencing a shortage of foam and coils, five which has impacted purple as well.

Iterate, we are working diligently to secure enough supply or to meet consumer demand based on current market conditions. It is possible the shortage may impact our ability to do so and therefore may impact our ability to meet realized the math.

For the fourth quarter as we have seen comparable period to prior years.

We expect to see contribution margin headwinds from advertising rates that are traditionally higher during the holiday season.

As our wholesale partners to continue to see expansion in that business. We also expect a continued increase in wholesale demand that we experienced lower margin rates.

Additionally, we are continuing to invest in our new Atlanta manufacturing facility that will dramatically increase our capacity next year, whether it still left facility is fully operational and producing at rates similar to our grants built facility. We will continue to see margin headwinds from this investment.

Also the incremental website for creative spend Joe touched on as well as higher co op marketing expenses, our retail partners utilize dollars last year.

Here will likely push our marketing and selling expense for the fourth quarter above our target of 40% for.

For the year, though we expect to be at or below that target level.

These factors will cause our adjusted EBITDA margin to trend closer to the fourth quarter, a year ago versus the margins we've experienced in the previous three quarters of 2020.

However, our strong momentum coming out of Q3, we expect year over year quarterly growth rates similar to Q3 revenue and adjusted EBITDA.

I watched with the planned Q baskets and people basi showrooms and infrastructure just discussed.

I also want to spend a moment discussing our share count.

A lot of trouble one through October 26, this year, approximately 8 million public warrants were exercised resulting in the issuance of 4 million class a shares and generating proceeds to the company of approximately $45.6 million well.

Well October 27, we announced that we were dealing the approximately 11 million outstanding public warrants, which are exercisable on a two for one basis in the 2.6 looks little low warrants, which are exercisable, a one for one basis.

The warrant agreement any exercise of warrants between the notice date October 27, and the redemption date that ended thirtyth must be executed only cashless basis.

As of November like 2020, approximately 1.7 million public warrants and all 2.6 million incremental awards had been exercised since October 27, resulting in an additional 3.1 million class a shares being issued.

Considering the impact of these exercises we had approximately 60.9 million class a shares outstanding as of November like 2020.

All of the remaining aforementioned public warrants are exercised on a cashless basis prior to the redemption date, you estimate will issue an additional 2.9 million class a shares this would increase the total outstanding golfing shares to 63.8 million as of November Thirtyth.

It's important to note that there are still approximately 8.5 million sponsor warrants outstanding which are exercisable. Other people one basis, but are not redeemable well now turn it back to Joe with his closing comments.

Thanks, Craig.

We are on track for finishing off an outstanding year of growth and enhanced profitability. Despite the initial challenges presented by co bid and operating under capacity constraints for much of 2020.

Our performance in these conditions highlights the growing awareness and desirability of our differentiated products and the strengths of our Omnichannel distribution strategy, particularly our advanced digital capabilities importantly, the work our teams have done over the past 12 months have significantly strengthened this foundation and put the company on it.

Clear path to maintain our pattern of profitable growth.

Well, there is still health and economic uncertainty in front of US we believe that the positive momentum already demonstrated early in the year remains in place. So regardless of recent positive consumer shifts, resulting from the pandemic. We believe our intrinsic business is well set up for continuing to take share into 2021 I want to thank all.

All of our nearly 1500 employees for their relentless hard work and dedication and the commitment they have shown to maintaining our operational excellence under difficult circumstances. At this time, we will open up the call to questions.

Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone indicate your line is in the question queue.

May press Star two if he would like to remove your question from the Q.

And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the start he's please ask one question and one follow up question and re queue for additional questions. Our first question is from Bobby Griffin with Raymond James. Please proceed.

Morning body. Thank you for taking my questions and congrats on another great quarter.

Basmati rice.

The first thing I want to ask about was just the the sequential change in gross margin understanding the mix up in wholesale from in Threeq versus Twoq. This year. When we think about modeling out for Q gross margin and Youve talked about another mix up in wholesale so could we use that change in threeq you as it as a good kind of.

Starting point it looks like I don't know for every five b five percentage change in wholesale mix its roughly 60 or 70 Bips worth of gross margin pressure or are there other items in there that I should keep in mind, one we're trying to kind of pinpoint where gross margins should be in the fourth quarter based on our wholesale estimates.

Yes did you ask Craig about.

Yeah, our eat whoever it was.

Great are you Joe <unk> wherever you think we're going to.

<unk>, <unk> <unk> or <unk> I'll kick off since I jumped on but Craig can fill in and.

And so as you're trying to model out Q4, I think you need right. It's not just a gross margin story. As you stated we are anticipating continued shift back toward call. It normal channel next you know where our wholesale which.

Q3 was a you know it was more like a sub 30% around 28% a wholesale where in Q4, you know getting back to more of that that third of business being at wholesalers is that current trends, which is where we've always said, we we like to be studied that does.

Great. Some gross margin pressure of course, but I I think the other things to keep in mind as you think about Q4.

Q4 has seasonality that just and it's consistent if you look back at our prior to Q4's in 18, and 19 Q4, just looks different than other quarters. We Ah. It's a more promotional quarter marketing expense is a is typically higher and as compared to Q to Q2, and Q3, where we.

Oh, Yeah, very Oh, yeah attractive marketing costs, you know things are also shifting back to much more normal our marketing expense in Q4 on top of the increased AD dollars that are in the <unk> in the marketplace.

So where we been sub 30% of net revenue and an advertising and selling in the last couple of quarters, we expect to be you know.

Back into that that more 30% Mark.

Then the other thing is we're back into investment mode. We've got a healthy cash you're healthy balance sheet, we're investing in and building out as we've said our new manufacturing facility, we've ramped back up and Batman to end to getting the new site platform built out and some of the creative and design around that as well as.

Reinvesting in R&D in our research capabilities, you know some of which is Ah as leading end to to growth and some of which is catch up on things that we had deferred early in the year, which just makes prior quarters look a little more attractive.

So the key is everything is healthy and normal there is nothing about Q4 that is really surprising at least to us. It's just a very different kind of quarter than we've seen in prior quarters.

I don't know if you want to add any color yeah.

I'd say that I think your question was more around gross margin and there was I'd say the only real difference I don't think you're thinking about it incorrectly, but one of the probably the biggest difference is on the gross margin level will be.

The operating costs in Atlanta, as we really start to ramp that up heavy together.

Got it operational that'll put pressure on the margin.

Okay that does that shift from from holes from DTC more into wholesale that that shifts economics won't change from the shift in prior quarters.

Okay. That's helpful. And then maybe just a follow up and I just want to make sure. We're on the same page from a capacity standpoint, but.

The the plan is to have the the eighth and ninth machine up and running here I think you guys mentioned 90 days or and then the knife a little after the 90 days and then what's the what's the number of machines that will be added after that in the Georgia facilities I'm, just trying to get a sense of where the goal is of how many machines will be up and running by the end of 2021.

Because that will help US then gauge where we should try to put our revenue estimate that based on what we estimate for eats machines productivity.

Yeah. So we did it the facility itself cannot hold six machines and you know theres a number of things that were doing upfront and in parallel so yeah Fred.

Fred sense part of retrofitting that so it is digging and reinforcing some fairly large pets to contain them and we've already belt and a and poured yeah bill.

Built up and port and for all six pets. So we're setting ourselves up to be able to build out in parallel yeah as of that as if we look at this year, we're modeling a little more conservative pace. So were expecting to get you know committing to say, one a quarter or or might access.

Blurred, a little faster than that so for more Max machines from a operational to the point that they are contributing to the year next year. We may have a fifth online right toward the end of the year, but not in a way that it would be part of the modeling for the year.

Okay. That's helpful. Congrats on the quarter and I appreciate all the details and a great to see some of the investments coming back given that the growth outlook. So a best of luck in the in the fourth quarter.

Thank you. Thank you so much.

Our next question is from Brad Thomas with Keybanc capital markets. Please proceed.

Hi, Good morning, Joe Craig in John and let me add my congratulations on a great quarter.

Moving on what's shaping up to be a really great here I was hoping to dig into just the sales trends a little bit more I was wondering if you could give some color on how the different channels had performed through Threeq, you and what you are seeing out of each channel.

Thus far in Tokyo.

Sure well first of all hey, thanks for joining us on certain channels, meaning sales channels. He said wholesale versus retail channel how how did exactly how do you see it performed by month, then and how it's going so far.

Through October and starting November and the same for wholesale just just as we try and get our arms around the trajectory of these businesses.

Got it got it out.

Yeah. So I mean, as we said in the prepared remarks, I mean DTC was continued to remain very very healthy and ER in Q3, such that it can it also as we mentioned put pressure on our wholesale ability we still through much of Q3 had our wholesale partners on some level.

Love allocations.

As a as we just work continued through the quarter to be supply constrained.

We going into Q4 are on the capacity side feeling much more.

Confident that we've got what we need for a a healthy Q4, both in terms of getting the new Max machines, and the labor back up and working through some of the upstream supply challenges that we have had so we it's it's one of many reasons, we expect wholesale to to continue to grow into Q4, as we're better able to service our partners.

In terms of sort of tailwinds going into this quarter, Yeah. I mean, it's a you know these things don't change overnight. So the the strong performance, we've had and strong traffic local levels. We've had have continued into the quarter.

And I think everyone's a waiting to see exactly what holiday is going to look like something that we did see in Q3 is just.

Just to see us I'd say, a demand seem to be spread out a little more on the peaks of holiday tended to be a little less and a you know and and be a customer demand seem to be a more balanced which we view as a very good thing about exactly what that looks like heading into black Friday cyber Monday.

We we our.

Our prepared for it. However, it goes everyone seems to have gone a little promotional earlier this year and and we have joined and with that partly driven by just about challenges and fulfillment networks, but so far what we saw through Q2 is driving driving on.

Very helpful Joe and.

And if I could follow up on.

The new Purple plus model and the brand architecture in General you know it's been my belief that you all still a tremendous opportunity ahead of you to refine the assortment that you have and and add more premium models I guess could you talk a little bit more about what's sort of testing in R&D you did on purple prop plus I know its new to the market.

But when you think it will be available in the United States and.

How you're thinking about continuing to expand and.

At a premium products overtime.

Yeah, no the purple plus it's it's a great new mattress, one one thing to consider with it as you know we really tried to do to put the customer at the center of everything we do and that was a mattress specifically belt in partnership with sleep country for the Canadian markets and one of the things that has performed.

Well for sleep, contrary is premium home core mattresses. So it was designed to be a premium mattress that wasn't a hybrid which again is a different kind of design consideration than than what we've done in the states.

In that regard, it's a phenomenal mattress.

It's it's a much more cranium cover it at just elevated design the cover as as I mentioned to me in the prepared remarks has a cooling.

A cooling capability that it just feels wonderful to touch and we found a novel new foam that we put underneath the the purple grid that is it's really sort of a balance between it's it's a novel New technology. We found that's a balance between.

Some of the best of both way tax and memory foam yet it has the balance that you would want from late tax and it draws heat away, but has some of the shaping capabilities that memory foam and you know pairing that up with our grid has just a magical combination. So it's it's got elevated feature.

There's elevated design, it's a much more premium mattress overall, but the key is it was designed as a premium from core mattress, which is exactly the right product for sleep country in Canada that said well, we'd bring it down to the states I think let's see how it goes in Canada, but there's no reason we couldn't in the states. We are much more focused right now.

Now on more U.S. focused premium expansions and as I mentioned, we are leaning very heavily into our product design and research programs right now.

Very helpful. Thank you so much.

Thanks take care.

Our next question is from Curtis Nagle with Bank of America. Please proceed.

[noise] bigger picture.

Thanks, very much for taking my question guys. Yeah, just maybe a quick one first in terms of Ah.

Just how many doors you have at the moment it doesn't sound like there were any changes so somewhere I guess about 1800 around 1800, you know should that be roughly the same in fourq, you and kind of how do we think about you know expansion.

Into next year.

Yeah sure. We are so so we I think we ended last quarter just shy of 1700, although on the earnings call. I think we were already over 18, hundreds what we announced we with the addition of sleep country, which we just style launched this week at.

Actually it gets us closer to 2100 doors.

At that point at this point, we are we expect that'll carry us through the end of the year really has as its always been until we got additional capacity built out we are sort of holding the line on that kind of expansion one smacks eight and nine come online we continue to have interest with both our margin.

Listing partners as well as some some regional plays and in areas, where less penetrated yeah that that said we continue to say what we've said all along which is we are a retailer first and foremost leading with digital channels.

And aiming credit somewhere between that that two thirds owned two made maybe as much as 60% owned versus retail and where we're going to do everything we can to keep that balance, but we also.

Have done extremely well with our wholesale partnership and as as capacity grows we will continue to lean into wholesale that's appropriate.

Got it.

Interesting.

Yeah, and then Joe your comments on.

He own stores I thought were really interesting I think you said that they were.

Exceeding pre pre corporate levels would which is which is encouraging.

I guess would you be able to kind of frame kind of where that productivity is per box and.

How should we think about our own store growth into 2021.

Yeah, It's it's still something that's in the early days, we you I mean, our original plans were a little more aggressive this year as we had said we were aiming to open about five a quarter and given the pandemic, we put that entire plant on pause for for obvious reasons.

This quarter or were back in the business and we're thrilled that we're opening for more again as I mentioned, we just opened tysons corner in Austin and it's it's a completely revamped a showroom design and we're very very pleased with how it's come out right.

Right now our expectation is to get back to the pace. We originally said, which is about five a quarter. So can these are brand showrooms really trying to bring the brand story to life in a in key metro's.

Yes, the economics remains as we said very good we just lapped a first year on some of them you know the specific economics, we haven't talked about and partly as we've been testing a lot and ER and revising as we go which has been sort of our test and learn conservative approach here, but I'll.

Reiterate were saying industry standard economics here, Yeah, right right in line with other specialty mattress retailers and you know we're very very pleased with the results and just to be clear. They are they are producing profitable results.

Got it thanks very much appreciate it.

Thank you.

Our next question is from Brian Nagel with Oppenheimer. Please proceed.

Hi, good morning.

But you want to add my congratulations on a very nice quarter.

Thank you so much.

So the question I have.

I understand not given guidance here given the fluidity in an environment that I just want to have on <unk> on sales clearly another very strong sales period here in Q3 and good commentary in Q4, but yes. We're all looking at you know it is kobin crisis very much continues but hope.

Hope we were working towards some and beside Meltem is vaccine news.

I've heard your dad, our words you talk to your wholesale partners are you seeing any indications that the consumer story there. There's the consumers maybe starting to back away from this category and refocus elsewhere or just underlying demand for mattress category remained is as good as it's been.

And yes.

Yeah, it's well if anything I'd say demand appears to be very strong right now, which I think this focus on home and health and sleep in general. So I think there are some good strong tailwinds there.

Who has won in that consumer demand has a has shifted a bit adds.

Over the last two quarters, those who have the ability to reach and service the customer through digital channels have have done you have to have been able to arbitrage that demand better and certainly we believe we've we've done very well and leaning into that.

But we we remain optimistic that this is a category that is healthy with sufficient demand and sufficient opportunity for growth.

[noise], Craig if you want to add.

Hi, there.

No I agree I mean, there's still opportunity there.

Very well.

Well. This is the second question I have with what you've been talking about the supply constraints in certain sort of say components for the mattresses. So.

So I guess I'm looking at this point given.

What a purple backers and made good so much of it is manufactured in house is that could you had somewhat of an advantage against the backdrop of supply constraints versus others were core outsourcing much more the components of their products.

I'm I'm, sorry that cut out a little my on can you say that one more time.

Yes, let me rephrase it too so you were talking about the supply constraints.

And the impact that had upon your your business, but so much of your product is manufactured in.

In house verdict.

So does that does that does that dynamic against the backdrop of supply constraints is that going to ever with purple added advantage versus other backers companies, who are outsourcing a much larger portion of their product.

Well, we certainly believe so I mean, we think part of our our ops part of how we have been able to manage through the ever shifting and uncertain environment Weve been and is the fact that we are deeply vertically integrated and can manage our cost structure and our our out but.

You know on nearly a day by day basis, yes. They are.

The majority of the raw materials, and our IP if stuff that.

Isn't where weve been supply constrained and were able to to source those materials domestically and you know and have ample supply, which again is part of being vertically integrated that where we need to stockpile raw materials to protect and ensure that we can manage through any shortages in the industry, we have those opportunities.

So overall absolutely. We believe this is a competitive advantage of ours, yeah and that said there are some components that are you know.

Important ingredients in our mattress is that we don't manufacture such as well and.

In our purple mattress, our entry level mattress, it as a foam core mattress.

And then even our coil mattresses are encased with us call Morales to provide a terrific edge support. So I mean, there is some foam and our mapping says it's not the yes, it's not the primary feature but there is some foam and the foam challenges that have been out there. We we felt most.

Mostly where we've had opportunities to lean in and expand similarly coil, which it's mostly around the fabrics that that that's around the coils.

Have been in short supply primarily in support of Pp. The fabrics that we were using we had chosen to acquire a fabric by design. We felt that continue to make our mattress more premium and we were somewhat insulated on those fabrics as we weren't using the same old fabrics that everyone else was using but even.

Just the demand for P.B. has gone even deeper and even the fabrics. We're using now we're finding our are suddenly being sucked into other people's needs. So even that's been something that has recently been a challenge, but nothing that we haven't been able to work through so yes, I'd say very much I. We believe that's part of our motive.

And part of our part of what makes our business attractive.

Well. Thank you congrats again.

Thank you.

Our next question is from Seth Basham with Wedbush Securities. Please proceed.

Thanks, a lot and good morning.

My question is around the near term outlook that you have I first on the topline just making sure I understand your perspective here to reach a similar growth rates in the fourth quarter versus the third so 59% year over year, you have high visibility to that with the supply constraints that you're considering and if you're able to care.

Additional components could there be upside to that perspective.

Yeah.

John do you want to jump in on that.

Sure. Thanks. Thanks for the question Yeah, we are able to react accordingly based on additional.

Supply capabilities. So we build according to our build plan on a daily weekly monthly and quarterly basis.

And if we see our position on materials improve.

We'll increase our build plan and react accordingly.

Got it okay and allocate capital we have we have the ability to to forward buy if we need to to stockpile of those resources that are that are scarce, where you know a year ago, we did about a dollar.

Certainly until there's some component constraints. If you secure additional thought potentially you could see higher revenue you had the capacity to drive a little bit more production than the 59% revenue growth implies.

Correct.

Yeah, I think it's possible.

But again, that's that's a short term scenario, we're talking about less than two months left in the year. So.

Being able to to buy way in advance and stockpile inventory you know the raw material inventory, that's a little bit tougher in the short term.

Understood, Okay, and secondly, as it relates to EBITDA expectations for the fourth quarter at one point you said that you expect the margin to be similar to the fourth quarter of 19 and in your press release, you commented that you expect the gorilla three to be similar to the third quarter is a 100% ish you get to $10 million in one case in 12 months.

Now, they're a little bit different I can just tell us, which one is we should be thinking about here.

Sorry, I I understood the last part of that so.

But can you just repeat a bit more time I'm trying to follow at some.

Schedule at barely hear you.

Your fourth quarter EBITDA expectations are we thinking about double year over year on dollar basis or similar margin rate to the fourth quarter 2019, which you referenced at one point.

A similar growth rate is what we said on an EBITDA basis. So the growth rate from Threeq to Threeq you.

Similar growth rate in the fourth quarter that we saw or comparable that we saw in the fourth quarter I'm sorry in the third quarter. So.

I mean, you're you're in the ballpark, but you also need to consider that we see.

He said that it would be the similar growth rates, but there were some additional considerations that are need to be looked at we outlined does you know we're adding capacity.

So there is little bit of inefficiency their AD spend is different from third quarter, but yeah. The growth rate in fourth quarter, you know as we said should be similar.

What we saw for third quarter.

Nothing last related question thinking about the EBITDA trajectory going forward. When you think about these additional costs that you're in.

Occurring in the fourth quarter to invest in growth how should we think about your growth related investments in the first half of 2021, while we continue to see pressure on EBITDA during that period or could we see a much improved results.

Well <unk> lunch a much improved it's how you define much we should begin to see more efficiency out of Atlanta has a as we open and start producing and having output from that facility and as we said we were always trying to improve our efficiency in the existing locations and grandchildren alpine.

So HM we don't we don't expect there to be as much pressure going forward, but yeah, Theres no way Atlanta won't be as efficient.

As as the existing facility that has six machines in three or four assembly line running what's a full fulfillment capabilities.

Understood. Thank you very much.

Our next question is from Susan Anderson with B. Riley FBR. Please proceed.

Hi, nice job on the quarter and I was wondering if you could talk a little bit more about the extension and an international market. So sounds like now you're in Canada, I guess, how many more wholesale doors can you be in there and then also is there opportunity to expand into other countries.

Yeah sure happy to take that.

Thanks for joining.

Yeah. So in Canada, we are in a in a in a two year exclusive arrangement with sleep contrary, both online and in showrooms. So we've we've really locked arms with sleep contrary for Canada for the moment given their incredible.

Oh presence there on.

On the premium side, they've got about half the market share. So we feel very confident that we pick the right partner and this really sets us up for a for long term.

Opportunity in Canada, but but that's a that's our current arrangement. There we did launch fleet lot fleet wide with them. So we are in all of their I believe it's a as of now about 280 doors.

So so that gets us going to Canada.

As to beyond as as we talk about other countries. Absolutely. This has always been part of our stated strategy.

We you know given our manufacturing constraints our job one has been to service our demand we have locally here, which we believe there's still a lot of upside.

So we've taken a very cautious approach in terms of expansion we.

We expect in 2021 in addition to continuing to build out our presence in Canada that will begin the process of starting to build the the the infrastructure we need for more international expansion, but we really don't see any meaningful expansion happening until.

2022 and beyond.

Great. That's helpful. And then just to follow up on the Opex, so with the higher marketing and investments in fourth quarter.

I guess, we should expect some additional de leveraging of expenses from third quarter to fourth quarter is that how we should think about it.

Yes, yes, yes, certainly when you're comparing a quarter, where wholesale still wasn't fully back to normal there was still very attractive marketing rates and you didnt have the seasonality that just as part of Q4 Q4 has more days of promotion Q4 has a much more competitive marketing.

Environment.

So yeah and by the way this will be true likely in every year comparing Q3 to Q4. So that seasonality is just part of the business city and we've seen that each of the last two years.

On a year over year basis, we're fully expecting to get leverage. So we continue to see our business improve our top to bottom and we think Q4 will not be an exception on that.

Great. That's helpful. Thanks, So much good luck next quarter.

Thank you so much.

Our next question is from actual as Larry with <unk>. Please proceed.

Good morning, Thanks, a lot for taking my questions. Joe can you provide some talks on how revenues could play out in a post vaccine board. What do you think or is there any the normalized growth rate for the company going forward.

So I.

I asked this question another way purple grew revenues by 50% prior to the pandemic that wasn't 2019 is that something thats achievable at the environment hopefully normalize at some point next year.

Yeah, We Oh, you know what our exact growth rate as we're not giving specific guidance on but are on a trajectory basis.

The.

I mean, what what we believe happened over Q2, and Q3 was just channel shaft. The demand remained and the limiting factor on our growth has been and continues to be fun.

Fundamentally how many mattresses, we can make so we have not seen any waning in demand either on an end consumer basis or in opportunities for wholesale partners to engage.

We have a long list of regional terrific players out there furniture stores and others, who are who would love to be able to put our product on the floor and we'd love to be able to support them. That's why we're investing in this additional half a million square feet in Georgia, and as we build up our capacity we will continue to lead.

And similarly, we've got great National players, who are you know.

We are not penetrated all the way and there's a lot of opportunity for expansion with our existing players. So our number one job right. Now is continue to build up as capacity continue to to get our purple south facility outside Atlanta up and running and you know.

You everything we can for our partners and our customers to service that demand, but we see good tailwinds still.

Great. Thank you and as my follow up Joe as you look forward to the next few years.

Can you rank, which of certain long term initiatives. He really has the most potential so what is it that you're most excited about and then.

How do you manage the execution risk associated with some continuously working on all of these initiatives.

So a terrific question. Thank you.

Long term, it's it gets us much more excited.

Yes, where there's a lot of just operational efforts right now to build out capacity and a and service our customer. We are the name of our company as Purple innovation and we were founded on innovative product.

With our patent portfolio of nearly 300 patents now and there's a lot of untapped potential we have in our labs right now I'm in both the sleep category, which we see tremendous opportunity for innovation and advancement and beyond and the example, we talked about how you know where were up over 100% in our non.

Mattress categories, which includes some sleep like our remarkable pillows switch out we put a lot of design into as.

As well as like RC commissions, which is an example of how our capabilities extend well beyond the bedroom so on product expansion and category expansion we.

Continue to believe we have tremendous opportunity given our core capabilities.

And as we just spoke in the in the prior question. We've been basically just a domestic company and the international opportunities. We have we believe our significant there's very little about our product to give them that we are a product first company that isn't it it's something that can be quite quite easily.

Send that into markets outside the U.S., Yeah. This isn't a marketing player Abram play its a product play with with differentiated premium better product and we believe there is tremendous opportunity for growth beyond the U.S. as well.

Excellent good luck with the rest of the year.

Thank you so much.

Our next question is from Jeremy Hamblin with Craig Hallum Capital Group. Please proceed.

Congrats on the strong results here I wanted to ask some questions about the wholesale business you know it looks like you've you've seen a pretty steady recovery there, but you know.

I think productivity per door still looks like it was negative in Q3, but I think based on the commentary that you had here for Q4, it looks like that might shift to getting back to positive.

Kinda sales per per all wholesale door.

Can you just comment on that you know part one and part two is when you think about the sleep country relationship you know they generate.

Kind of higher sales per door, then youre a bit your current largest partner. So how do we think about the expectations around productivity for those doors.

Yeah there is.

Yes. This is hard to back end there there is a lot of nuance here I'm in part because not all doors are equal as you're suggesting that sleep country.

Also there how we post Rps now is not exactly the same as flow through.

So for example, one of the things we thought going into Q2 as a lot of.

Yeah, well orders that had come in some of which got deferred into Q2, some of which was burn down of inventory on hand, so there's some timing that goes into the quarters on this yes.

All in we added a Q2 to Q3.

I think about 200 doors.

So.

But but all in we also saw that we saw the returned to growth in wholesale revenue.

So you know call it a mix of seeing a rebound in existing doors, plus some new doors coming on.

Yes, and again accounting for some of the timing that goes into how those slowdowns occur.

But all in we're back to growth and you know we're back to expansion, which we country coming on so we feel like we've hit that pivotal points, where this is getting back on track and we see the right momentum.

We do yeah, and then in sleep country, the other challenges and as of right now as part of our launch we we've got two beds on the floor versus say like most of our mattress firms, where we have typically four beds on the floor that does impact the sales per door as well.

Sleep country does produce more per box on average just looking at their overall numbers and we've got good price points with sleep country, and our selling our full assortment through their digital channels and our available for sale at any other sports as well, we just don't have all four on the floor.

Or five really on the floor up there excuse me with our new purple plus mattress. So we just launched literally yesterday.

It's a little early to say, what we're going to see there, but we think theres a tremendous potential.

Got it and then as a follow up with quite a bit of kept capacity coming online.

In 21, you know in terms of you've been somewhat restrained by capacity limitations in adding wholesale doors. This year, but as we look forward into 21, you know it sounds like you could be in a position to potentially add like a thousand wholesale.

Of course.

You know can you kind of reflect on that and you know give us a sense for.

I mean demand continues to be very strong and you're you're making these adjustments on capacity, where I think you're.

You are catching up to demand, but you know can you give us a sense for what the.

Kind of the wholesale door add potential is for 21.

Yeah, I certainly the idea that we could add as you said a thousand more doors is absolutely a.

And the realm of possibility Theres, a as I mentioned earlier.

Sufficient existing demand out there from our existing partners I mean, just from our existing partners, we've got more than I thought a thousand doors right. There so.

So.

For sure we see we see lots of opportunity there but.

The key is just balancing it against our sort of baseline demand growth, we're seeing in DTC and our existing doors.

As well as building out just a healthy capacity they put part of our capacity expansion plans is.

And part of being a good supplier to our partners is making sure that we've got predictable capacity and when you're running all machines all shifts.

Yes at maximum capacity all the time it doesn't allow for high tolerance, if unexpected things happen, where their sudden shifts in demand, which which happens all the time in the real world. So part of our capacity plans is to actually build a little more surplus into our overall capacity, where we can both flax and two.

Two additional equipment and additional lines.

As well as allow for tolerance as as we need to to do maintenance beyond what is normally plan.

So just you know and as as modeling out the expansion.

We're we're expecting on average slightly less productivity per machine not because we're not getting the output we can but because.

We've been operating in a in a way that just isn't healthy for the long term, we've got to have a certain amount of surplus that we can lean into appropriately and protect our ability to support demand at any given moment in time.

Thanks for taking the questions guys best wishes store. Thanks.

Thank you.

And our final question is from Matt Koranda with Roth Capital Partners. Please proceed.

Hey, guys. Thanks for squeezing me in lot of questions been asked and answered, but I did want to dig into the revenue or the guidance for fourth quarter. Just one more time, maybe attack it from just a different angle here. So it sounds like the right number on.

On EBITDA is around $11 million and I'm, just trying to get there with the revenue guidance that you guys provided of just below 200 million.

Even if I boost marketing or sales and marketing to north of 30% of sales and keep other expense items sort of flat versus Threeq you let's.

It seems to imply that gross margins would be in the low fortys or somewhere around like 600 basis points of de leverage sequentially. I'm. Just wondering if you guys could comment on sort of the right way to think about the.

The margin profile of those both gross margin and opex to get to that to that $11 million level and EBITDA.

Yeah, it's well and let me start by saying we are not giving formal guidance for Q4.

We are [laughter], we've we've given a directional nudge, which is basically a more of the same on a growth rate basis, we continue to see a healthy business here and we we continue on a year over year basis to see so see both leverage and a and consistent.

The growth rates.

I, just I want to I want to make sure we're clear on that.

The.

Craig do you want to perhaps jump in on the yeah. So there's it there's a couple of ways to look at best So there was a way to look at it as growth in volume and growth in channel.

And there are a lot of components and again, we're not giving guidance, but what we're trying to do is look at it as are the growth rate that we saw in third quarter is going to be very similar to what we expect to see in the fourth quarter.

But also considering those factors in the fourth quarter that we spoke to all stores such as it's any more promotional quarter. Its a more extensive add quarter. So it's not going to cost us any more or less to make the product and we're going to distributing fulfilled the same way so the gross margin.

Crusher, there we're going to see is going to come from the fact that we're putting a lot of investment into a.

The Atlanta facility, which is going to be some gross margin pressure, but not <unk>.

Not extraordinary.

And then on the marketing and advertising side, there's going to be pressure from higher AD spend and as we talked about some of the investment in brand show.

There are puts and takes and we're trying to help you understand for your modeling purposes that yes. The growth is going to be there there will be a shift in the channel mix.

And there are going to be some headwinds in gross margin from Atlanta and problem from AD spend in marketing and advertising so.

Those are the components that we watch it I understand as you're building those but that was the best way that we can feel to to help give a give at least some indication.

Yeah, and the channel shift is meaningful here I mean, we yes, we this quarter was 28% and getting back to close a third youre talking close to 500 gaps or so of.

Of shift right, there and we saw it going into kind of add on the enhanced margin and profitability as this dramatic shift up and away from wholesale into DTC. We're now as we've been saying along expecting bad things will get more back to normal and we're seeing things go back to normal which remains a very healthy business.

Okay. That's helpful guys and then just maybe if we could break apart the gross margin.

Pressure that we're seeing from the wholesale mix shift, which I think is maybe understood versus the de leveraged for Atlanta, and the ramp up and the costs incurred there maybe that would be one way to help us understand that that gross margin directionally.

[laughter] we haven't.

Publicly did announce.

Now, it's you know where we are on a channel mix shift somebody referred to it earlier in the call and I don't think there there you know completely off the reservation, knowing what that amount is.

They are certainly within the range.

And then the pressure from from Atlanta, it'll be a little more significant than it was in the third quarter.

Again, we haven't we haven't broken down gross margin on how.

How much of the pressure is 10 years ago.

Yeah, I <unk>, okay, but again, it's a significant expense out there.

The press release, the GA release said it was around $21 million of investment obviously, a lot of that capex.

But we've got we've got full time labor out there now that is a that is building out and you.

But there's some of that just rolls into Opex and that's just part of the startup costs and getting us going.

Okay. Then just last one real quickly on the marketing and sales, but just wanted to be clear. It sounded like you said it was headed back into sort of the 30% of revenue range and the reason that we would go to the levels that we saw last year in Q4, I think there were relatively elevated in Fourq you.

Probably 19.

Help us understand that dynamic and then maybe why would be stepping on the gas on a marketing if were potentially supply constrained.

Well [laughter].

I I.

I wish I wish the implication there were true that we could just turn off advertising and sales just comes and I think most cfos ask that question to any market or every quarter.

We we continue to need to fight for Mindshare, where a young brand I mean, we are by no means are we suggesting that where a a commonly known brand.

As people come into the consideration set and yeah. This is a category I mean, given that the majority of our revenues mattress. This is a category that on average people are buying every seven to 10 years. So yes, theres new people entering the market every year and as a young brand many of them have never heard of us. So we fight the good fight every day.

To get more and more consumers educated as to who we are and our premium product offerings and that's never going to hand. The reality is what it takes to do that last quarter is less expensive than what it takes to do in Q4, there's just more noise more advertising out there, which is seasonal and then on top of that we've had very.

Attractive marketing rights adds dollars were pulled out of the market over the last two quarters, it's been phenomenal.

But we're getting back to a more normal marketing environment and that just done that quarter over quarter increases marketing costs.

The year over year, we still expect to see marketing leverage. So as you look at Q4 last year, we fully anticipate leverage over last year.

Great very helpful. Joe Thanks, guys.

Sure.

Yeah every center the question and answer session I would like to turn it back over to Joe for closing remarks.

Thank you so much we built a very effective foundation and our ability to keep successfully executing and maintaining growth is something our whole team is very proud of we have not only had to figure out how to shift from being a startup to becoming a mainstream manufacturer, but I've also had to figure out how to operate in a very challenging environment.

Outpouring of satisfied customer feedback keeps us going every day I'm also thrilled that we've been able to continue to invest domestically and our people having hired over 500 employees. Since the pandemic began looking forward. We remain very optimistic we believe our core business is very healthy and regardless of how this uncertain future plays out we believe we are.

Well equipped to continue to innovate and take share to have all of our customers and partners as well as our employees stay healthy be safe and sleep well.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.