Altra Industrial Motion Corp.
Q4 2017 Earnings Call Transcript

Published: 21 Feb 2018

[Operator:]

Greetings, and welcome to the Altra Industrial Motion Corp. Fourth Quarter 2017 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Andrew Blazier with Sharon Merrill Associates. Thank you, Mr. Blazier. You may begin.

[Andrew Blazier:]

Thank you. Good morning, everyone, and welcome to the call. With me today are Chief Executive Officer, Carl Christenson; and Chief Financial Officer, Christian Storch. To help you follow management's discussion on this call, they will be referencing slides that are posted to the altramotion.com website under Events and Presentations in the Investor Relations section. Please turn to Slide 1. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks, uncertainties and other factors described in the Company's Quarterly Reports on Form 10-Q and Annual Report on Form 10-K and in the Company's other filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Altra Industrial Motion Corp does not intend to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. On today's call, management will refer to non-GAAP diluted earnings per share, non-GAAP income from operations, non-GAAP net income, non-GAAP operating margin, non-GAAP operating working capital and non-GAAP free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading Discussion of Non-GAAP Financial Measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q4 2017 financial results press release on Altra's website. I'll now turn the call over to Altra's CEO, Carl Christenson.

[Carl Christenson:]

Thank you, Andrew, and good morning, everyone. Please turn to Slide 2. We ended a year of significant achievement and strong financial performance with solid fourth quarter results. The results for the quarter were at the high-end of the range of the increased guidance that we provided when we announced our 2017 third quarter results. We also achieved our margin expansion goal for the year. Furthermore, the momentum we have going into 2018 gives us confidence that we should have another good year of growth and margin expansion. For Q4, we grew sales by 29.4% and by 9.1% when you exclude our Stromag acquisition. This marks the fifth consecutive quarter that we have achieved year-over-year organic growth, demonstrating both the improvement in the general industrial economy and our success in developing innovative new products for our end markets. For the year, we reported sales growth of 23.7% or 4.2% net of acquisitions to a record $877 million. While we're pleased with our 2017 sales growth, the highlight of the year was the execution of our strategy that set us up for profitable growth for the long term. Our margin improvement initiatives are fully integrated into the Altra culture and we are seeing the benefits. In 2017, GAAP diluted EPS grew 84% to $1.78 and non-GAAP diluted EPS increased 31.4% to an annual record of $2.05, the first time that we crossed over the $2 mark. With that, let's turn to Slide 3 and review our end markets. When I offer sequential and year-over-year comparisons, I will use pro forma results as if our Stromag acquisition, which we closed at the end of 2016, were part of Altra in both the 2016 and 2017 periods. We'll begin with Distribution, which is predominantly made up of sales of aftermarket parts and original equipment parts for small OEMs. Distribution sales accelerated through the year and were up year-over-year as a result of the general improvement in the global industrial economy. Turf and Garden sales were up slightly from last year, which was a record year. Looking ahead to 2018, we expect sales to be flat to slightly up from our strong performance in 2016 and 2017. Customers continue to be optimistic about next year as a result of the strength in the housing market. Farm and agriculture continues to be quite strong with double-digit year-over-year growth, albeit against a weak Q4 in 2016. Strong commodity markets are driving this strength and we are optimistic about the prospects for this market in 2018. Material handling sales were off slightly in Q4 with strong demand in elevator and forklift markets offset by weakness in cranes and hoists. We expect improvement in 2018 overall as the metals and oil and gas markets rebound and drive material handling sales. Turning to energy. Oil and gas was up year-over-year for the fourth consecutive quarter and, despite the recent pullback in oil prices, we do not expect this market to experience significant decline. Last quarter, we mentioned that the sentiment on wind was turning negative with increasing price pressure and a pause on new projects in some parts of the world. This trend affected our performance in renewables at Q4 as sales were down double digits. On the positive side, we're starting to see projects being approved in some emerging markets and we expect that North America and China will be relatively stable in 2018. We are working hard on cost reduction initiatives for products that we sell into this market. Conventional power generation sales were also down significantly in the quarter. We saw some improvement from Q3 when customers began putting projects on hold, but expect 2018 overall to be down slightly from 2017. We reported another strong quarter in the metals market and we expect to see this market recover as plant utilization continues to climb. General economic strength and the positive effect from duties on imported steel should offset the negative impact of the slowing automotive market to result in improved year-over-year metals market in 2018. Mining sales continued to be strong with sales up significantly in the quarter. Sales to mining distributors are leading the way with replacement parts still driving the growth. We expect new project work will begin to flow in as we proceed in 2018 where we should see a healthy improvement over 2017. We believe that we are well-positioned for 2018. The vast majority of our global economies are expanding and there appears to be confidence that the growth will continue. This confidence in the global economy, coupled with U.S. tax reform and strong capital markets, should result in increased investments in the types of equipment that utilize our components as well as increased utilization of existing equipment that drives the repair and replacement business. We saw commodity costs increase and labor markets tighten in 2017. We expect that there will be continued headwind as a result of commodity cost and wage increases in 2018. To offset these cost increases, many of our businesses announced price increases at the end of the year to take effect at the beginning of this year and we will continue to push price increases to offset input cost increases. The incoming order rate in 2017 outpaced shipments and we enter 2018 with a solid backlog that is significantly higher than at the start of 2017. In addition, incoming order rates accelerated through 2017 and the momentum has continued into 2018. Orders so far in 2018 are up high single digits. I'm also confident that barring any significant disruption, we will again be able to achieve at least 100 basis point improvement in our operating margin in 2018. I'm also becoming more confident due to the fact that we are starting to be awarded some excellent new projects. Last year, we mentioned an auto program that came to an end and impacted our sales and profitability in that market. A program that we've been working on for a few years to offset that loss is expected to be in production in the third quarter this year and continue to ramp over the next several years. Once fully ramped, sales of this product should exceed $5 million annually. In the fourth quarter of 2017, we were awarded three projects that were the result of cross-selling efforts related to the Stromag acquisition that total approximately $750,000. As another example, we were also recently awarded the business for a military program that over the next several years will total approximately $3.5 million. These are just a few examples of some really nice new business development wins that we've been working on. With that overview, I'll turn the call over to Christian to review the numbers before returning for a summary and your questions.

[Christian Storch:]

Thank you, Carl, and good morning, everyone. Turning to Slide 4. Another good quarter as revenues and non-GAAP EPS came in close to the high end of our guidance range. This wraps up a great year posting record revenues, exceeding the $2 mark per share for the first time and by delivering on the margin expansion goal that we had set at the beginning of 2017. Overall, we are very excited to have seen the tangible results of our improvement initiatives in our annual performance and expect to capitalize on a much improved cost structure and an even healthier demand environment in 2018. We started 2018 with great momentum from very solid shipments and bookings in January. In the coming year, we will also continue to drive to improve our margin profile as we are closing another facility in the first quarter. Our fourth quarter 9.1% growth, excluding acquisitions, included a 70 basis points contribution from price and a positive FX effect of 290 basis points. Geographically, excluding the effect of foreign exchange and Stromag, North American revenues were up 3.9%, sales to Asia Pacific and other geographies were up 35.7% and European revenues were up 1%. Our operating leverage in the quarter would have been better had it not been for some short-term supply chain disruption issues and commodity headwinds. Through a lot of hard work by some of our associates, we believe that they have made major progress in overcoming the supply chain issues. We also went out with price increases at the beginning of the year to address the commodity headwinds. Our fourth quarter 2017 non-GAAP EPS excludes restructuring and consolidation cost and acquisition-related items, the loss on a partial settlement of the North American pension plans and the benefit from the new tax legislation. The loss on the partial settlement of the pension plans is the result of the preliminary step taken to terminate our defined benefit plans in North America. This termination occurred in two steps. The first step was in the fourth quarter as we paid out lump sum settlements to eligible individuals. The second step took place on January 31 when we contracted with Mutual of Omaha to transfer the remaining liabilities. We also expect a non-cash charge of approximately $5.3 million in the first quarter related to this transaction. Therefore, we have zero defined benefit pension liabilities in North America going forward. These actions should yield annual savings of approximately $250,000. Please turn to Slide 5 for the discussion on tax reform. You'll note that for the fourth quarter, we are reporting a $0.02 per share positive effect on earnings due to the new tax law. This includes a provisional charge of $7.4 million related to the tax on foreign earnings deemed to be repatriated and a benefit of $7.8 million for the revaluation of U.S. net deferred taxes as a result of the lower corporate tax rate. Going forward, due to the lowering of the U.S. tax rate to 21%, we expect our consolidated tax rate to be in the range of 25% to 27%. Please turn to Slide 6 for a discussion of our segment performance. Please note that segment results are not adjusted for certain onetime items. For the fourth quarter of 2017, net sales in Couplings, Clutches & Brakes were $114.6 million, up 54.4% compared with the prior year. Excluding the acquisition of Stromag and the positive effect from foreign currency, revenues grew 10.8%. This segment has ultra-sized exposure to the oil and gas, metals and mining markets. Second, segment operating income was $14.2 million or 12.4% of sales, up from 9.6% a year ago. Net sales in the Electromagnetic Clutches & Brakes segment were $64 million, up 21.2% from the fourth quarter of 2016. Excluding the acquisition of Stromag and the positive impact from foreign currency exchange, sales increased 8.5%. Segment operating income was $5.9 million or 9.2% of segment sales, down from $6.3 million or 11.9% of sales a year ago. And finally, net sales on the Gearing segment were $47.2 million, essentially flat with the prior year ago quarter. Segment operating income was $4.4 million or 9.3% of sales compared with $5.4 million or 11.5% of sales a year ago. This segment is not impacted by the acquisition of Stromag. Please turn to Slide 7. Our cash balance was $52 million at the end of the quarter while book equity was $396.7 million. In terms of use of cash in 2017, we continued to favor paying down debt over share repurchases. We paid down approximately $51.5 million of debt in 2017 and we did not repurchase shares in 2017. Capital investments totaled $9.5 million for the quarter and depreciation and amortization was $9.1 million. Capital expenditure levels in 2017 were elevated as we invested in the upgrade of three facilities. Please turn to Slide 8 and our guidance for 2018. We expect full year 2018 revenues to grow in the range 2% to 4.5% as strong growth in most of our end markets will be partially offset by headwinds in the renewable energy markets. We expect sales in the range of $895 million to $915 million and we expect double-digit growth in net income and EPS as we continue to expand our margins. Net income is expected to be in the range of $61.8 million to $64.1 million and non-GAAP net income in the range of $67.2 million to $71 million, GAAP diluted EPS in the range of $2.12 to $2.20 and non-GAAP diluted EPS guidance in the range of $2.30 to $2.43. We estimate that the benefit of the U.S. tax reform accounts for approximately $0.12 per share at the midpoint of our guidance. We expect our tax rate for the full year to be approximately 25% to 27% before discrete items and capital expenditures to be in the range of $25 million to $27 million. And we expect depreciation and amortization to be in the range of $38 million to $40 million. And with that, I will turn the discussion back to Carl.

[Carl Christenson:]

Thank you, Christian. Let me leave you with three key thoughts and please turn to Slide 9. First, we performed well in 2017 as we grew sales both organically and through the acquisition of Stromag and we drove increased profitability as a result of the success of our margin improvement initiatives. We're proud of what we have been able to accomplish in the past few years as we executed on those initiatives and we are confident that they will result in significant return to our shareholders for the long-term. Second, we're encouraged by the continuing improvement in the industrial economy and we expect that momentum to continue. Companies are increasingly investing in their businesses and the sentiment on the economy and the prospects for continued growth are very positive among our customers. Nearly all of our end markets are growing and our teams are doing a great job in capitalizing on those opportunities. Finally, we're well-positioned for 2018. Our guidance reflects nice growth over 2017 as a result of what we expect to be robust end market demand and a more efficient cost structure. In fact, we started the year out strong with great bookings in January and the beginning of February. We look forward to reporting on our progress during the year. I want to thank you for your continued support of Altra and we'll now open the call to your questions.

[Operator:]

Thank you. Ladies and gentlemen, we’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Duncan with Stephens, Inc. Please proceed with your question.

[Matt Duncan:]

Hi, good morning guys.

[Christian Storch:]

Good morning.

[Carl Christenson:]

Good morning, Matt.

[Matt Duncan:]

So Carl, first question I've got. It sounds like the order rate is tracking up high single digits. Fourth quarter sales were up 9% organically. Obviously, FX helped and FX rates can change. But what – if you're seeing an incoming order rate growth rate in the high single digits, why is the sales guidance 2% to 4.5%?

[Carl Christenson:]

Yes. So I'll start and I'll let Christian jump in. I think that we have limited visibility to the future and we can probably see a couple months out. And all indications that things are really, really good right now. However, we've learned over the years that the penalty for underperforming relative to our guidance is significantly higher than if we overperform. And to not have that visibility and then give guidance based on the first couple of months of some really good order rates, I don't think that would serve our shareholders well. And so – and we don't know what the – what's going to happen with the interest rate environment and anything that could happen in the second half or even in the second quarter. So we're very optimistic right now. Things are going really well. We've got – and the price increases we implemented at the end of the year should have a nice impact also.

[Matt Duncan:]

Well, that was my next question. How much is that price increase? If it's 2% to 4% total growth, how much of that's price?

[Carl Christenson:]

Yes. So we – the effectivity, we believe, will probably be in the maybe 1.5% range.

[Matt Duncan:]

Okay. So the volume growth that you're calling for then is more like zero to 3%, somewhere in that range, let's say? And I certainly appreciate the conservatism right now. It's early in the year, a lot can change. But are you sensing that at all from your customers or is the demand environment still very good that order rates sounds like it's holding up so I would think you're still hearing good things?

[Carl Christenson:]

No, I think there's a lot of really positive momentum and the sentiment is really good. Even in the wind industry, which last year we talked about that there were some projects put on hold around the world because of different things that – we think that's bottomed out and could start to get better in the second half. So there's…

[Christian Storch:]

If I can add, Matt. The top line guidance is muted by the trends we've seen in wind energy. In the fourth quarter, wind energy sales were down 18%. And we do think that we are at the bottom in that market and we are – we believe that in the second half of the year, we'll see that market turn. We've just seen the first orders coming out of India where we haven't had an order in a year. And so India starts to come back. And if that is true, that could be – if wind is better than what we assume, that would be an upside to our guidance. And that is really tempering the top line guidance. If you take wind out, you'll see some much higher growth rates for the rest of – what the guidance would imply.

[Matt Duncan:]

That’s helpful. So the next thing I want to ask about is gross margin. This is the first quarter we've seen a year-over-year decline there in a couple of years. It sounds like it's probably the timing around rising input costs and when you put price through. Do you expect within your guidance for your gross margin to be up in 2018?

[Christian Storch:]

Yes. The answer is yes. Fourth quarter, I think, was not a normal trend. We had done well through the first three quarters in fighting commodity price increases through price increases and stayed ahead. I think we fell back in the fourth quarter. As a result, we increased price on January 1, a lot of our business did to compensate for that. So I think over the next year, we should see continued margin expansion both at the gross profit line as well as the operating income line.

[Matt Duncan:]

Okay, very helpful. I’ll hop back in queue. Thanks guys.

[Christian Storch:]

Okay.

[Operator:]

Thank you. Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question. Jeff Hammond, your line is live.

[Jeff Hammond:]

Sorry, can you hear me?

[Operator:]

Yes, we can.

[Christian Storch:]

We can.

[Jeff Hammond:]

Okay, sorry about that. So it looks – can you just remind us what your renewable energy and conventional power gen mix is of total sales at this point?

[Carl Christenson:]

It's approximately $100 million across wind, solar. The majority of which is wind of the $100 million.

[Jeff Hammond:]

And then, the conventional power gen that you had talked about as being weak?

[Carl Christenson:]

Yes. Wind is probably 80% of that $100 million and conventional is probably 20% of it.

[Jeff Hammond:]

Okay, okay. Perfect. So those seem to be the biggest headwinds. Anything else that is kind of – because it – just to kind of add on to the conservatism, it seems like you're going to get some price, FX has to probably help you by one point or two, so you're really looking at really no volume growth within the guide.

[Christian Storch:]

So at the low end of our guidance, I think that would be correct where the assumption would be that wind will not recover. At the high end of the range, I think we do see volume growth. And again, it's very good performance in mining, oil and gas and all other markets offset by mainly two things, wind being the biggest one and then we have the loss of an automotive project that we talked about in previous calls where we start to see the replacement program ramping up in the third quarter.

[Carl Christenson:]

And, Jeff, we don't put any FX in our guidance.

[Christian Storch:]

So we assume flat – we assume FX at – towards the end of the year, FX rates.

[Jeff Hammond:]

Okay. And then, you talked about some supply chain issues impacting 4Q. What's going on there? Are those behind you or are those lingering into 1Q given some of the strength?

[Christian Storch:]

I think the biggest piece of that is going to be behind us in the first quarter. Those were supply chain issues mainly from European suppliers that affected several of our businesses in Europe. There are still some challenges out of China, certain aspects out of China, but I think the biggest part of that is behind us.

[Jeff Hammond:]

Okay. And then, just finally, can you just address M&A pipeline? Balance sheet's in great shape. Stromag seems pretty integrated. It seems kind of the right timing for you guys to get back into M&A. Thanks.

[Carl Christenson:]

As you know, we can't really comment on our own plans. But with that said, the environment in our sector remains very favorable so – and there's been a few transactions in our sector.

[Jeff Hammond:]

Okay. Thanks, guys.

[Carl Christenson:]

Thanks, Jeff.

[Operator:]

Thank you. Our next question comes from the line of Scott Graham with BMO Capital Markets. Please proceed with your question.

[Unidentified Analyst:]

Good morning. This is [indiscernible] on for Scott. Is there a chance you could quantify the supply chain impact?

[Christian Storch:]

I don't think we can…

[Carl Christenson:]

Yes. It wasn't one issue. It was several issues and some of it is related to expedited freight. Some of it is delayed shipments and higher labor to push things through so that to – so we did not try to accumulate all those costs and put them on there.

[Christian Storch:]

Yes, but it was a meaningful number.

[Carl Christenson:]

Yes. I think…

[Unidentified Analyst:]

If you would have – sorry.

[Carl Christenson:]

No, go ahead.

[Unidentified Analyst:]

If you would have to compare, let's say, the supply chain issue and the inflation, which one had more of an impact?

[Christian Storch:]

I would say the supply chain issues had a larger impact.

[Carl Christenson:]

Yes, they did.

[Unidentified Analyst:]

Now, going to 2018, I know you mentioned gross margin is going to be up. Is there – what progression do you expect? Do you expect first quarter to be still a little weak considering that there are still supply chain issues and then second half stronger? Or how are you looking at it?

[Christian Storch:]

So we think that the supply chain issues, most of them are behind us. And so we're anticipating just the normal distribution, which would suggest that around 51% of our sales in the first half and, therefore, the first half is a little stronger than the second half. The one wildcard in that is how wind is going to behave. We do expect wind to recover in the second half. But overall, I would say we assume in our guidance that normal distribution, 51% to 49% sales and corresponding profitability.

[Unidentified Analyst:]

Okay. Just one more question. SG&A, what are your expectations for that? Do you expect it to come up or stay in the $162 million?

[Christian Storch:]

We expect, as a percentage of sales, SG&A to be relatively flat, maybe slightly down.

[Unidentified Analyst:]

Okay, thank you very much.

[Carl Christenson:]

Okay. Just remember that a large portion of SG&A would be wages and we do have wage increases every year. So the cost goes up, but the percentage of sales should be relatively the same.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Mike Halloran with Baird. Please proceed with your question.

[Mike Halloran:]

Good morning, guys.

[Carl Christenson:]

Hey, Mike.

[Mike Halloran:]

So maybe some conversations in a couple of places here. First, what are the – what are your customers saying to you guys on the CapEx side? Obviously, tax reform is a potential tailwind. Any signs that your customers are thinking of letting some of that out? It might be early days, but what do the conversations sound like there?

[Carl Christenson:]

No. I think that's – last year, we talked a lot about – a lot of improvement in business was in replacement parts and repair and replacement. And I think one of the reasons I highlighted in my dialogue some of the projects that we've won is that we are starting to see some projects get released. So it does feel like some of the CapEx should start to improve this year. And I think that's pretty typical in a business cycle and I think most of – there's a lot of public information out there that there – we should start to see enter into that capital expansion phase.

[Mike Halloran:]

Right. So that's the cyclical piece. I guess, my question was more related to do you see incremental CapEx coming? Are your customers discussing incremental CapEx as a result of the tax changes?

[Carl Christenson:]

Well, specifically the rate of the tax changes?

[Mike Halloran:]

Yes.

[Carl Christenson:]

I haven't heard a lot of discussion about it being relate – about them increasing CapEx specifically related to the tax changes, but I think that's going to improve the economy. And there – when people feel better about what's going on, they will release CapEx money. So if it's not being talked about directly, certainly indirectly, we're going to have some impact from it.

[Mike Halloran:]

Now it makes sense. And then, just on the price cost side, specifically on the price, when was the pricing put into place?

[Carl Christenson:]

So we announced – most of our customers and distributors, we give them 60 days notice so we would have announced in October, late October for the beginning of the year. And our policy is it's price in effect at time of order. So obviously, we have to work through the old orders, but we would start to see some of that starting in January and then rolling through. And we also will continue to increase prices through the year if commodity cost changes. And we did some last year so we had some businesses that had price increases in June, July last year and then also announced again in October. And some that had some last year that we'll announce maybe April, May time frame. So – but we will start to see some of that impact in January for sure and then it will ramp up through the quarter as we work through the open orders.

[Mike Halloran:]

That makes sense. So basically, you're saying that, as far as being relative to inflation, by the end of the first quarter, you feel pretty comfortable you're going to have coverage, assuming commodity prices stay the same? And if they don't, then you have an opportunity set to go back to the market if needed?

[Carl Christenson:]

Correct. Correct.

[Mike Halloran:]

Great. Thanks, appreciate the time.

[Carl Christenson:]

Thanks, Mike.

[Operator:]

Thank you. Our next question comes from the line of Fran Okoniewski with Friess Associates. Please proceed with your question.

[Fran Okoniewski:]

Good morning. I've got a question on the FX. Can you guys break it out or do you guys break out sort of the diminishing impact it could have on margins on a constant currency basis? Is there a little bit of a different picture there, whether end markets or categories or on segment margins?

[Christian Storch:]

No. We don't have that information, Fran. We don't break it out.

[Fran Okoniewski:]

I would imagine it's a little bit of a diminishing impact, I guess, just given the strength of FX in the quarter, right?

[Christian Storch:]

I think on the margin side, we should still have positive impact from currency. As positive margin dollars of our European businesses translate into U.S. dollars at higher rates, we should see higher gross profit. Percentage-wise, I don't think it has an impact.

[Carl Christenson:]

Yes, it shouldn’t have an impact.

[Fran Okoniewski:]

Okay. And then, on the supply chain…

[Carl Christenson:]

And, Fran, maybe just to clarify, I think most of our exchange rate exposure is translational so there's not a lot of exposure on the margin – on changing the margin.

[Fran Okoniewski:]

Okay. On the supply chain, it sounds like this is sort of a onetime in nature kind of event. Was it more in the U.S. or internationally? Or is there any way to sort of quantify its impact on gross margins at all or –?

[Carl Christenson:]

I think it was well-publicized what was going on in China. So in China, they had an environmental crackdown, I guess, for lack of a better term, and they were shutting down foundries for periods of time and they were shutting down chemical plating facilities. And so some of our suppliers in China do utilize foundries and chemical plating and so that had an impact. And so we had worked closely with those suppliers and we have a team of about 12 people in China on the sourcing side that have been out working with the suppliers to make sure that we have a – that we minimize the impact of the supply chain issues there. But then, there were also issues in Europe with some of the European suppliers as the economies ramped up there. It's just more of a lead time issue and then – so you do have expedited freight costs. We have extra labor as we're trying to deal with parts coming in. When they do come in, you have to work on them. And so it's just a multitude of issues that are a result of that, that it's really hard to grab what the total cost impact is on it.

[Christian Storch:]

But one way maybe to grab without having exact dollar numbers, but we had a – when you look at our gross profit margin for the fourth quarter, I think if we hadn't had the supply chain issues and if we didn't have the commodity price headwinds, I would have expected our gross profit margin to be in line for the fourth quarter with the full year. And then, we're talking about 70 basis points or so of – or 80 basis points of delta. So it had a meaningful impact.

[Fran Okoniewski:]

Right. Exactly. That's what I thought. And then, how do you –

[Carl Christenson:]

Go ahead.

[Fran Okoniewski:]

Go ahead.

[Carl Christenson:]

No, you go ahead,

[Fran Okoniewski:]

I was going to say how isolated is this to sort of the fourth quarter? And in terms of the China foundries and sourcing, have you – do you have adequate supply for Q1, Q2? Or does this supply chain thing kind of linger, whether it's Europe or China or wherever?

[Carl Christenson:]

No. We believe it's – that the work we did in the fourth quarter with the suppliers is – that it's largely behind us. There will be some lingering, but we think that between the price increases and the work that we've done to mitigate those issues, we'll be in good shape for this year.

[Fran Okoniewski:]

Okay, great. Thanks a lot, appreciate it.

[Carl Christenson:]

Q4 was really an anomaly so that's how we're looking at it.

[Fran Okoniewski:]

Okay. Thank you.

[Carl Christenson:]

You’re welcome, Fran.

[Operator:]

Thank you. There are no further questions at this time. I'd like to turn the floor back to Carl who will – for final or closing comments.

[Carl Christenson:]

Okay. I would just like to thank everybody for joining us today and we look forward to speaking with you next quarter. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.