Vertiv Holdings Co (VRT) Earnings Call Transcript & Summary

Thanks, everybody. Next up is Vertiv. We have CFO, Dave Fallon; and Chief Strategy and Development Officer, Gary Niederpruem. Guys, thanks so much for joining us here.

So maybe we can just start out with how demand is here heading into -- obviously, you booked some very strong orders in the fourth quarter. We'll get to the -- sure we'll get to the price cost at some stage here. But how is demand looking, carrying into the first quarter here? I know you're raising price a decent amount. So you did expect a slowing in orders. How has that kind of played out so far for you guys?

Yes. Sure, Steve. This is Gary, folks. I'll just take the first part, and David could chime in. So demand environment continues to be super robust. All of it is being generated primarily from obviously users like us as well as the cloud providers. And what's happening is those cloud providers are building data centers themselves as well as going into colocation segments. So that piece of the business is very, very strong. And particularly in Americas, we've seen a bounce back from the enterprise. So you guys are probably all familiar with that. And from this red, yellow, green charts we have in our quarterly earnings deck. I've never created a simpler chart that has generated more conversation in 25 years. What we -- probably 2 quarters ago, turned our enterprise business from yellow to green in Americas. And what we've seen is people have started to return back to the office. As this concept of the edge of the network continues to play out that is driving more and more demand closer to the end user. So in general, most of the end markets that we participate in, in the 3 regions that we categorized, it's really been robust. To the Q1 comments specifically, Steve, we have seen through the first 2 months, order rates were pretty decent, and the pricing in those orders were at a rate that was higher than the pricing we would have seen at any given point in time throughout 2021. So we think we've gotten much, much smarter on how to price. And at this point in time, it doesn't seem to have affected demand all that much because the market is just that healthy.

Right. So when you think about the order rate in the first quarter, I think you said it was going to slow from the fourth. Are we talking about low single digit, mid-single digit, double digit? Like what's kind of a rough order rate we can expect here in the first quarter? Just for the -- through the first couple of months is fine, too.

Yes. I'll ask David to comment in just a second on the specific numbers, but I would say last year, we saw like 20% orders growth in the first couple of quarters, and I remember being on the calls with David saying, well we can't expect that every quarter, and it did continue every quarter, to the point where we had 50%, 60% in Q4. So Q1 was up. It wasn't up 50%. But I don't know, David, if you want to comment more specifically.

No, I agree. So I think we mentioned on the call that first, there's a dynamic in China where there's probably some region-specific issues with hyperscale. But if you look at EMEA and the Americas through February, orders were up 5% to 10% and it's not on an easy comp either. So if you look at the first quarter of 2021, those orders were up 20% versus the previous year. So the bottom line is that the end-market demand remains strong. We have -- we are going to market with these higher prices, but the customers are willing to pay them, and that's been reflective in the orders so far year-to-date.

And is China down substantially? And are you guys seeing anything with regards to COVID recently that you'd call out as a bit of headwind?

Yes. So there's a couple of different dynamics in China. So one is what we saw start probably 2 months ago or so, was China starting to put some restrictions on the data centers. They want them to build out the existing data centers before starting to build new ones. And so that's why we downgraded the market in hyperscale in Asia, specifically from a green to a yellow. There's still growth there. There's still spend going on. It's just a little bit slower than it traditionally had been until they start to fill up some of the existing data centers. So that's sort of point number one. And then point number two is, yes, certainly, with the lockdowns that are occurring in Hong Kong, Shenzhen and a couple of other areas, there is going to be some shorter-term China disruption most likely, but we think it's relatively transitory at this point in time.

Right. And I would assume that those orders are being booked at the new prices, which I think are up like double digit, right? So should we -- so is it fair to assume that if orders are up high single digits, that basically kind of the volume of those orders is low single digit, maybe flat?

Yes, I think that's exactly right. I think if you look at the way we've called out for our year, we had 7% or 8% growth in total for the year in 2022. 80%, 90% of that is price, the rest of that is volume. And that's by design. At this point, we're saying it's okay, if things slow down just a little bit from our order rate and our revenue rate, as long as we're getting that price, that's priority #1 for us.

Right. So I guess that low single-digit volume increase, if I'm a bull, I look at it as being conservative. If I'm a bear, I'm looking at as the demand destruction that happens when you raise price. What's the real answer to that? Because it seems pretty low relative to what we're seeing out there in spend and with competitors?

Yes. So I think a similar dynamic that we saw in the fourth quarter, I think the #1 constraint there from a volume perspective is the supply of parts. If we had a free flow supply of electronic parts, fans, other critical components, that volume number would be significantly higher. And I think we talked to the full year organic growth in '21 being 11%. And based on our shippable backlog, we've clearly been in 15%-plus range, right? And we're in a similar market backdrop in '22 as we were in '21.

So what -- so the components I get, but there's this fan apparently is like a magical fan that you guys have had a hard time getting. I mean like you think of a fan, I wouldn't -- I'm an HVAC guy, and I don't think of it as being that differentiated. What is so specific about that component? I know you guys have brought that up a couple of times, and it was like thermal, it was a long pole in the tent as far as getting that stuff out. What is so different about the design of that? And has that been changed and now designed out to an extent or is it critical?

Yes. I think fan is like a 4-lettered word inside of the walls at this point in time, and we are already to go to our own HVAC units in our house and rip fans down and start to ship them to our factories, but it doesn't work that way, unfortunately. So the double-edged sword here is the specifications that we have for some of these fans is unbelievably higher than what your normal fan would bear. And the blessing and the curse is, what we do every day is we say, we solve vital applications. And in order to solve those vital applications, you need to have units that operate at a tighter tolerance, at a higher specifications, can operate in all sorts of ambient environments. And so the fans that we have designed in solve those problems. And in normal cases, it's not a problem. What we found out is obviously in situations where supply is constrained, it becomes harder to get those fans than your normal standard fan. So what there are, it is that it is you need to operate in ambient temperatures from minus 40 to plus 65, which is very difficult to do. You have to operate in all types of conditions. You have to be able to start and stop at any given point in time. And it has to have a variable speed mechanism in there. So in order to do all that, there's a lot of sensitive electronics that are in the motor of that fan that are different than your normal standard fan. And so it's that sort of complicating factor, Steve, that again, in a normal environment, those are all the differentiators that help us solve customer problems and get premium margin in our thermal business. But in these types of times, it's become more difficult to get that type of...

So when you say -- it's more of like kind of a fan package, if you will, as opposed to just like a piece of metal that rotates on a screw?

Yes. Next time we do this, we'll bring one here, so everyone can see it because it does. You have to see it to believe it. It's twice as long as these 2 tables, twice as wide, there's propellers. There's the motor, you strip that motor out, you open it, there's electronics in there, there's a printed circuit board. So it is much more than just a dumb plastic or metal fan.

Right, right. And I guess when we think about the challenge of the fourth quarter, how would you break it down between thermal and the more IT infrastructure part of the business?

Yes. So for the most part, the IT channel, that IRS business that we have, is more flow oriented, so we've probably spent a little bit of money on air freighting some of the components in and some of the products in, so there's probably some costs that we recognize there. To David's point, when we think about we could have shipped so much more in Q4 had we had the supply, most of that was geared towards our IMS business, which is large power and large thermal.

Yes. And it's an important point. So we define inflation probably similar -- a little bit different than some companies. So we include in our definition of inflation, the cost for spot buys and premium freight. So if you look at our inflationary costs in '21 versus '20, it was about $190 million. Between 30% and 35% of that were spot buys and premium freight, not necessarily directly linked to core inflation, but probably more linked to the scarcity of parts. And I know some companies are looking at spot buys and premium freight to be operational and offset by productivity.

Right. Like a net productivity dynamic?

Correct.

Right. Right. Right. So when we think about pricing here, you guys talked about 7% for this year in total. Maybe just the sequencing of what you did in the second half of last year, what you expect to do this year, and then how that compares to your inflationary expectation?

Yes, yes, certainly. So I think if you look at sequentially in '21, pricing in Q1 of '21 was flat. It was probably negative $1 million, $2 million, $3 million, something like that. When you went to quarter 2, it was probably $10 million to $12 million. Quarter 3 was $13 million to $15 million and quarter 4 was $25 million to $30 million, give or take a little bit. So we started off with a really low base. The momentum and the trajectory we felt pretty good about sequentially. It's just that it wasn't enough. But I think we proved that we could get price, it's just that we did not raise pricing enough because there's some lack of visibility on how much worse inflation was going to be. So for the whole year, we ended up probably at 2%-ish of price, 2%, 2.5%, somewhere thereabouts. If you look at the backlog as of January 1, we had about 4%, 4.5% pricing in that backlog. So that's another material step up from where we ended '21, and if you look at the order rates and the pricing we have in the orders in the first 8 weeks of this quarter, the orders that we've taken have been at substantially higher prices than even at 4%, 4.5% rate. So you can do the math. We have 4%, 4.5% of pricing in backlog. We have to do 7% or 8% of pricing for the year. The book and ship stuff, the stuff that we'll book and ship in 2022 has to be 10%, 11%, 12%. And I'd say from what we've seen in the first 8 weeks, we're relatively encouraged that, that will hit that trajectory.

How do you explain -- I mean even in the past, when Emerson owned the company, they didn't really get much price. I mean it was somewhat negative. So there is a history of not being able to get price here other than the inflation, which is fine, but ultimately, what that tells you is it will just -- it will offset over time, right? Like you've got to get productivity to offset the normal kind of price. Has something changed structurally now with the way you're kind of approaching price? And what should we expect as a normal spread now between price and inflation beyond '23, like in '24 and '25?

Yes. Great question, Steve. So I think there's probably 3 or 4 fundamental things that have changed. Number one is, you're right, this business historically under Emerson had probably negative pricing. The single biggest area where we had negative pricing was in China. And that would cause -- I don't remember the numbers back in the day, but it was $20 million, $30 million negative every year in the 2015 time frame. Just take that as one dynamic today. You look at China, China will have positive price this year. So it's sort of like we were able to turn the tide in that worst performing pricing area of the business, and that's a huge swing right there. That's number one. Number two is, there wasn't a big focus on it historically. So in '19 and in '20, both of it -- both years, we got somewhere between $20 million, $25 million of pricing. So that sort of started to teach us that, look, I think we can get positive price after years of not getting any. So that's a little bit of the start of that momentum. If you look at it today, I think there's again 2 or 3 things. Number one is the amount of new product development that we are churning out is dramatically higher. So increase in net R&D spend has allowed us to roll out new products at a much, much more rapid rate, and those new products are at a higher average selling price than the legacy product. So you get this flywheel effect that as you spend more in R&D, you launch new products that are at a higher price point, so that will be a flywheel. That's number one. Number two is we've been very open that in '21 probably only about 1/3 of our active sales force had, in their sales incentive plan, something to do with price or margin. In '22, 100% of our sellers will have some metric into their sales compensation structure that is either price or margin. So there's a mechanical change there. That's number two. Number three, there are just mechanics that we've worked on from a pricing standpoint that are much more robust today. And then number four is there -- Steve, to your point, there wasn't necessarily a culture believing we could do it. So after starting out, getting some positive price in '19 and '20 and -- coupled with all those other changes I just worked through, that culture now is, look, I'm not going to go for 3% or 4%, I'm going to go for 6% to 8% because I can probably get it. And if I have to have a difficult conversation with the customer, I might as well make it worth my while, and so there's a cultural rebirth in pricing that I think the company has been able to have as well. So I think there's really 4 or 5 of those dimensions to it.

So when inflation stabilizes somewhat, and we see more -- a more normal environment, if that ever happens, what should we assume is your normal spread or entitlement? I mean are you going to basically price for neutral? Or are you going to price for something incrementally positive over the year?

Yes. I think -- I don't know what that dollar amount is, but needless to say, it's going to be north of the $20 million or $25 million that we were proud of ourselves a couple of years ago. And pricing in a normal environment should always be a tailwind for us to be accretive. There's no doubt that, that is absolutely what the mindset is.

Okay. And then on a growth basis, you guys had talked about growing 1.5x the market. Volumes are not going to do that this year. It doesn't -- at least in your guidance, they won't do that this year. So in that environment, can you still grow 1.5x the market? Or are you kind of like giving up a little bit of that growth to capture that what would be kind of a renewed focus on pricing spread?

Yes. I think '22, it's all about the renewed focus on price. And to David's point, if we had supply throughout all of '22, then we were probably going to pace that 1% volume growth that you just referenced. So if we had supply, we would do that. But in this environment right now, price is the top priority over everything else.

Right. Just cleaning up on the supply chain issues. Anything geographic, like anything out of Europe that you're -- that you source that's different than in the U.S. that would be impacted by what's happening over there and in Russia?

Yes, not too much. I mean certainly, we have manufacturing facilities in Western Europe, in more Far Eastern Europe, but nothing that is in Russia, nothing that is in Ukraine. Our business in Russia and Ukraine combined is less than 1% of sales from a trade sales standpoint. So there's -- maybe there's -- obviously, there will be disruption of that. But at the end of the day, it's less than 1% of our overall revenue. And from a supply chain standpoint, there's really nothing that I can think of that as meaningful in that general area where those poor people are going through that.

Do you use a different fan over there in Europe or something? I think you guys haven't mentioned that.

We do. We do. It's slightly different. There's different nuances. One, because of UL versus IEC, which is generally the electrical pieces of it. So sometimes that makes it a little bit different. And because the climate is a little bit more temperate depending on when you're deploying, you can relax some of those restrictions on the ambient operating temperature that we talked about earlier. So maybe same type, but there's some different model numbers underneath it.

Okay. Can we talk about the trajectory into '23 then? You should have -- if inflation stabilizes, there should be some carryover on commodities -- or on price, sorry. Is it possible to kind of get back to that 15%, 16% margin? Maybe just talk about the bridge and how we get back there. Because it is a pretty big step up relative to -- but -- so the math works if you hold the price. So maybe talk about the bridge to '23.

Yes, absolutely. And this is the first time we ever provided quarterly guidance heading into the year, right? And I'm not sure many companies do that, but -- in our case, it was very important for us to provide that granularity to understand the story. You can't appreciate it by just looking at the full year. And if you look at the cadence as we go through the year, all of our financial metrics sequentially improve as we navigate through the year. The #1 driver of that is pricing, right? So the pricing that we're going to get in the first quarter is certainly going to be handicapped by the pricing, the lower pricing that we got in 2021 and probably 85% of our sales in Q1 were based on that backlog. When you fast forward to the fourth quarter, about 75% of our sales are going to be based on new orders that we book in 2022, which should have that low double-digit pricing. And many investors, they're doing a little bit different math on how to anticipate 2023, whether they're annualized in Q4 or taking the second half and multiplying it by 2, I would say, conceptually, that logic makes sense, right? And in the fourth quarter, we're assuming in our guidance a 15% adjusted operating margin. Third quarter, it's 14%. If you start that as the base and you look at the wraparound impact of an additional $200 million of pricing into 2022, it's very easy to look at 2023 and look at it not as a good year but a great year. And from an adjusted operating margin perspective, our near-term goal, and we established this a couple of years ago, was to get to 16%. No matter what math you use, we should be in that 15% to 16% range for a full year 2023. The #1 variable, the #1 assumption is executing on the pricing.

Right. But that also assumes, I think, a pretty healthy price cost spread, right?

Correct. So the -- when you look at the price cost for 2022, we're assuming $360 million of incremental price, $260 million of inflation. That assumption for 2023 would be that inflation remains relatively consistent. Of course, it could go either way. So it could be better or worse. But we believe, based on what we're seeing today, and this will definitely play out in the remainder of 2022. If inflation does indeed tick up, we would be able to more than recover that with additional price. And that's the thing, and Gary touched upon it. We believe we have significantly underestimated our ability to get price, historically. And it's all the dynamics that Gary mentioned. When we were carved out of Emerson, the #1 initiative was to start that growth engine. I think the previous 4 or 5 years prior to that carve-out, growth was probably somewhere between 0% and 1%. So we had to develop new products, introduce those to new customers. And effectively, we were probably a little trepid to raise price. And any time we talk about long-term margin goals, we would put price on the list, but it probably was fourth or fifth and maybe hoping that we wouldn't get to that when talking to investors. At this point, we have the confidence to say we absolutely look at price as a strategic lever to get not only to that 16% near-term margin goal but the 20% in the long run. So we haven't established, to your earlier question, what is that target going to be every year, but it's certainly going to be -- if we only get the $25 million, which I think was our previous annual high, it would be an absolute failure. So our ability to get price will be even further enhanced with the products that we're developing with the investment in R&D as well.

But I guess is there a, if you do everything right, that spread to get to the 15% to 16% in '23, the price -- cost price is pretty meaningful, right? What is that -- like what's the carryover that's embedded in that spread?

Yes. So our -- at some point in 2023, we should get back to the contribution margin percentage that we exited 2020. So we look at Q4 2020 internally because that's arguably before all the inflation occurred and responding with pricing. So our internal algorithm is in order to recover inflation. We probably need, on a percentage basis, is to price somewhere between 160% and 170% of the inflation dollars getting that in the top line with price. The realization of that in the P&L is going to be delayed because of the dynamic behind the backlog. But we believe either in the second or third quarter, in 2023, we should be able to get the parity on the contribution margin percentage basis with Q4 2020. So that implies that we believe, to your point, there will be a favorable price cost spread of somewhere in that 160%, 170% range.

Right. Still unclear to me. I thought the number was like $150 million to $200 million or something of just year-over-year in the bridge, if it all carries over.

That's absolutely. So the price cost spread in -- yes, the price cost spread in 2022 is about $100 million, $360 million of price, $260 million of inflation, there's going to be an additional $200 million of carryover pricing into 2023.

And then a little bit of inflation to offset that? Or...

To be seen. But yes, but that implies '22 versus -- or '23 versus '21, about $300 million of additional price cost.

Yes. So then the challenge would be as that -- like you're not entitled to that spread over a year. I guess that just resets to a higher base, then you're going to just grow off of that. So whatever happens the next year, you're going to put through, that's kind of the new bar.

That's right. Absolutely right.

Got it. Why couldn't you go back and reprice that backlog, at least as of like Jan 1, say, look, guys, we just -- we can't take this anymore. Like you can see what everybody else is doing. What was the strategic rationale in being that conservative? Because the other -- I think other competitors are doing it as far as I know.

Yes. Yes. We have done it, Steve. And I'd say we've done it selectively. So if you look at -- we came into the year with $115 million, $120 million of pricing in that backlog, about $15 million to $20 million of that came through making price changes in the backlog at some point in Q3 or Q4 of 2021. So we have done it. Where we have done it is where there's been a very easy way to match incoming cost flows with the outbound specific product or project that we're going to. So if we know sort of there's a one-to-one match, it is easier to go to a customer and say, here's what's going on, I need you to help us out, when it is, you got a whole bunch of something like a whole bunch of screws coming in and they're going to a whole bunch of different customers. It's just harder to justify from that standpoint. But we have done it, number one. We've been a little bit selective when we've done it up to this point in time. The third thing is, it was probably Q3 when we started to materially change -- probably the end of Q3 when we started to materially change our terms and conditions, where we now have material escalation clauses in our Ts and Cs. And from an MSA standpoint with the larger customers, we're adding those as the MSA expires. So now there are material escalation clauses in the Ts and Cs and some of the MSAs. So that way, we don't get caught in the same situation again. So I would say I don't know -- I can't comment if some people have been more bold than us. I have not heard anybody doing it across the board, certainly, but much more in selective orientations, and that's where I'd put us at this point in time.

So putting net income aside, then we just talked about some of the margins in the operating -- turning to cash. There's also -- there seems to be this year some extraordinary cash headwinds. What's normal CapEx for you guys? What should we think of as normal absolute working capital flow, not year-over-year, but kind of the absolute drag year-over-year? What's the normal operating model on cash looking forward?

Yes, and the way we anchor it is against adjusted net income, some people with GAAP net income. Our adjusted net income excludes amortization. So if you look at our guidance for 2022, I think free cash flow is about 55% of adjusted net income. There's 2 significant elements that probably deflate that versus what an expected long-term run rate would be. We have a $20 million payment related to an earn-out from an acquisition from a couple of years ago. And then to your point, we believe CapEx is probably $30 million higher than what a normal expected long-term run rate would be. I think we're guiding for $130 million. I think $100 million is probably more reasonable and very much in line with depreciation, which is between $95 million and $100 million. So if you adjust for those 2 elements, you end up at like 75%, which is a good starting point as it relates to a free cash flow conversion on adjusted net income. But our long-term goal based on some of the work we're doing on working capital is probably somewhere between 85% and 90%. Our general rule of thumb is 20% of change in sales invested in additional or incremental trade working capital. We're doing things to reduce that, like to get that down to 15% in the long run. But one of the challenges in any growth company is if you're growing between 5% and 10%, you're going to have that leakage in free cash flow because of that investment in trade working capital. So I would love to sit here and say our long-term goal is 100%. If we were a no growth or low growth company, that's probably reasonable. But I would -- if I were modeling it in the long run, I'd probably go in that 85% to 90% range.

Okay. Any questions out there right here. You can just shout it out, I'll repeat. Oh, he's coming. He's coming. There you go.

Going back to the 2023 margin profile. As we sit here today, are there any other known headwinds or tailwinds such as you were on a path to increased R&D spend, but then you also have the potential for further E&I synergies. So how should we just think about the other puts and takes in getting to '23?

Yes. Good question, [ Kurt. ] We are absolutely committed to continuing to invest in technology. We had communicated a long-term target of 6%. That math has been a little bit convoluted from 2 things. Number one, adding E&I and then also the impact of the price increases. I think if you adjust 2022, the top line for both those elements and you assume $285 million of R&D, you probably get close to that 6%. But with that said, we more than likely will have another increment of additional R&D spend in 2023. At this point, that investment in fixed cost, in associated sales and marketing dollars that would be needed to launch those new products would probably be the most significant headwind, if you would, in '23 versus '22 from a fixed cost perspective.

Can you just talk about the specific costs we should track going forward that impacted you last year?

The specific costs like the inflationary?

Yes.

Okay. Yes. So unquestionably, if you look at 2021 versus '20, the whole story was price cost, right? $135 million headwind for us in '21 versus 2020. I think if you look at the other costs net of productivity improvements and other cost out that there was probably a $20 million headwind. But...

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Oh, sure. Okay. Yes. Got it. Okay. Yes. So we have about $1.8 billion of direct material, okay? And we buy a lot of components. So from a commodity exposure perspective, we don't buy a lot of coil steel. We buy some slit coils and we do some bending and blanking in some of our facilities. But our direct commodity exposure is probably $100 million, $150 million. If you expand that to exposure in stampings or blanks that we purchase and copper included in some of the components or lead and lead-acid batteries, it's probably between $300 million and $400 million that are commodity-based. But overall, that $1.8 billion spend is just a lot of components, power modules, electronic components.

So Dave or Gary, when I -- just to go back to price. Just when I think about the last couple of years, it's really you haven't had to get price until recently. And now that you realize you need to get it and go after it, what's the competition doing? Just a little more detail on how they're thinking about price? And then secondly, how you go to market? If I remember correctly, it's about pre E&I, about 10% value-added reseller. And is that part of the dynamic that is either keeping a governor on price? Or is it just something you need to train the sales force?

Yes. So a couple of things there. One is, you're right, that IT channel distribution piece was 10% to 15% of our business. That's probably the easiest place to get price because one is distributors typically like it. They don't mind at all, and it turns pretty quickly within the quarters when you can see that be effective. So that's sort of number one. In terms of competitive reaction, I think the best way to answer that question would be it does vary by product line and by region. But if I just sort of aggregated everything and went back 18 months ago to sort of normal times, we always wanted to have a price premium attached to our product because we think between the brand and the technology and the go-to-market and the service that we have, that we can command that. So if you go back 18 months and say that we were the price premium brand in the market. I think probably through the last 18 months, we lost that, and we probably went below sort of the fleet average on any given product line. But with the pricing increases that we did in Q4 and Q1, I think we're probably back to that part where we were 18 months ago, which is probably slightly at a premium compared to the rest of the competition. So they've been raising price as well. And I think if I sort of had to snap a chalk line, I'd say, from a net level, we're probably back today to where we were 18 months ago and that, we're that price premium again.

On the general portion of your business, how much of your sales have contracts meaning like you think to that earlier but you can't just reset it for 6 months, a year. Plus, I'm trying to get a sense of the cadence that you can do to keep the price going forward?

Yes. Yes. There's no perfect answer other than I would say -- the other element I can tell you is probably about 60% of our business is project-based, 40% is flow something like that at this point. So -- and in any given quarter, it might be 50-50. So the best number probably just to keep it clean is by 50-50 roughly project versus flow. The flow stuff is a little bit easier to enact from a pricing standpoint. The project stuff is where you get a little bit longer duration in that backlog. Yes. Again, that's going to vary quarter-to-quarter on those ratios, but yes.

Just a quick question on just operational changes since the fourth quarter and I guess, the disappointment in the January month, I guess. Specifically, can you talk about what's been changed internally so that senior management actually knows how much pricing you need to get to offset raw materials?

Yes. So we've had I would say 2 categories of changes since the fourth quarter. One is from an operational mechanical blocking and tackling. We were extremely disappointed, discouraged, use whatever adjective you want, on our results in the fourth quarter. Some of it was related to the ERP implementation and lack of available data. What I can tell you today is that I get daily information out of the Americas from a cost perspective, I get PPV on a daily basis. I probably have it on my cell phone probably in the last 10 minutes from yesterday, I get daily cost of freight. So that was visibility we did not have in the fourth quarter. So we are tracking costs across all regions, but more specifically in the Americas on a daily basis. And we are looking at pricing in orders on a daily basis as well. And we have very long, detailed weekly meetings reviewing that price with the region. So we're keeping our pulse on the business on a daily basis as it relates to both price cost. So I would call that mechanical blocking and tackling. And the other significant change is related to management. So you probably saw our press release from Monday. We have announced a change. John Hewitt, who is the former President of the Americas. He has left the company, and we have moved Gio Albertazzi who was the former President of EMEA into that role as President of Americas, and we're super excited about that change. Gio has driven a lot of the success in EMEA. So when this business was first carved out of Emerson, I think the operating margin in EMEA was mid-single digits and the fourth quarter operating margin was 18% and all driven by the leadership of Gio and he'll be moving -- or he has moved in to that role effective Monday, and he's already initiating some very significant changes as it relates to accountability, addressing culture, addressing communication. And we're excited about that.

Status of the ERP?

So just to be clear, any time we were -- we'd be talking about ERP is specifically for the Americas. We implemented -- Gio successfully implemented an ERP in EMEA over the last 3 or 4 years. That is fully implemented. The issues we discussed are specifically related to the Americas. So we flipped the switch on that at the end of September, early October. Every ERP takes some time to get to a point where you're 90% there. And this implementation is no exception. But I would say we -- the first 2 months after an implementation are very critical where you identify and prioritize the key issues, and we have done that. And so that system and the information we're getting out of that system here in the first quarter for the Americas is more than sufficient to run that business.

It's all the time we have. Thanks, guys.