Skechers U.S.A., Inc. (NYSE:SKX) Q4 2022 Earnings Call Transcript

Skechers U.S.A., Inc. (NYSE:SKX) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Greetings, and welcome to the Skechers Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to Skechers. Thank you. You may begin.

Amanda Starsiak : Hello, everyone. My name is Amanda Starsiak from the FP&A team. Thank you for joining us on the Skechers conference call today. I will now read the safe harbor statement. Certain statements paint herein, including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events may constitute forward-looking statements that involve risks and uncertainties. Specifically, the COVID-19 pandemic has had and is currently having a significant impact on the company’s business, financial condition, cash flow and results of operations. . Such forward-looking statements with respect to the COVID-19 pandemic include, without limitation, the company’s plans in response to this pandemic.

At this time, there is significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. The dynamic nature of these circumstances means that what is said on this call could change at any time. And as a result, actual results could differ materially from those contemplated by such forward-looking statements. Additional forward-looking statements involve known and unknown risks, including, but not limited to, global, national, local economic, business and market conditions, including the impact of inflation, Russia’s war with Ukraine and supply chain delays and disruptions in general and specifically as they apply to the retail industry and the company. There can be no assurance that the actual future results performance or achievements expressed or implied by any of our forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the company’s filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of all other significant risk factors that may affect the company’s business, financial conditions, cash flows and results of operations. With that, I would like to turn the call over to Skechers’ Chief Operating Officer, David Weinberg; and Chief Financial Officer, John Vandemore. David?

David Weinberg: Thank you for joining us today on our fourth quarter and full year 2022 conference call. 2022, our 30th year in business was a significant milestone for the company. We achieved record sales of $7.4 billion, an increase of $1.1 billion or 18% year-over-year. On a constant currency basis, sales would have exceeded $7.7 billion, an increase of over $1.4 billion. Our fourth quarterly sales records in 2022 are the result of our focused marketing efforts, extensive distribution network and core design principles, style, comfort, innovation and quality, all at a reasonable price. From a product perspective, we further cemented Skechers as the comfort technology company with the introduction of Skechers, hands-free slip-ins and continue to innovate our performance solutions with the launch of Skechers Pickle wall shoes.

Among many other standout moments, Footwear news named Skechers Company of the Year for the third time, and our relief golf athletes, Matt Fitzpatrick and Brooke Henderson won majors wearing Skechers Go Golf. It was also a year that presented challenges including temporary COVID -related store closures in China and rising freight and logistic costs, which have started to moderate. We also experienced supply chain disruptions that created inventory congestion throughout the distribution channel as we move through the year. We overcame those challenges and achieved record annual sales due to the flexibility, creativity and dedication of the global Skechers organization, offices and distribution centers our sales teams in the field and our retail associates throughout our global network of Skechers stores, each and every one of our team members is an important contributor to our ongoing success.

We remain focused on meeting the demands of consumers continuing to replenish stock at all our Skechers retail stores worldwide and partnering with our global accounts to ensure shoppers have access to the leader in comfort footwear. For the fourth quarter, Skechers achieved sales of $1.88 billion, a 13.5% increase, marking a new fourth quarter record and slightly above our previous quarterly record. This notable achievement was led by increases of 16% in wholesale and 11% in direct-to-consumer. Domestic sales increased 22% and international sales increased 9% with international representing 62% of our revenues for the quarter and 59% for the full year. By region, EMEA grew 29% and the Americas grew 22%. APAC sales decreased 7%, which included a China sales decrease of 23%.

Excluding China, APAC sales increased 31% and approximately 62% of our global sales for the year, wholesale remains a key element of our growth strategy. As a consumer-driven company, we focus on what shoppers want and deliver it as efficiently as possible to our global wholesale partners. This allows us to reach our loyal base where and when they want to shop, be it department stores, family channels or their favorite specialty store. In the quarter, wholesale increased by 16% in both the U.S. and international. The international growth was driven by double-digit increases across many markets globally. Overall, wholesale sales were driven by increases in unit volume of 9% and average selling price per unit of 6%. The Americas wholesale business grew 19% attributable to double-digit growth in nearly every market, including a 16% increase within our domestic wholesale channel, which saw a double-digit growth in our men’s and kids lines and single-digit growth in women’s.

Of note, for the quarter, men’s rose to 41% of our domestic wholesale business as we saw increases in most product categories. Recently, we have seen strong sales drivers across several men’s key categories, and we believe that performance across the board speaks to the relevance and broad acceptance of our men’s styles. EMEA wholesale growth of 31% was primarily driven by double digit improve in Germany, Spain and Central Eastern Europe as well as to our distributors including Turkey, Middle East, Scandinavia, and Greece. This is partially offset by determination of shipments to Russia. APAC wholesale grew 32% as we experienced growths in other markets most notably in India and Indonesia with high double-digit growth and Taiwan with triple-digit growth.

A key focus area for the company is direct-to-consumer where we are working to create a more seamless omnichannel experience. The 11% sales increase in the quarter was the result of 27% growth in the Americas and 19% in EMEA, partially offset by a decrease of 7% in APAC. Again, primarily due to China. Direct-to-consumer comparable same-store sales worldwide increased 7.5%. Domestic direct-to-consumer sales increased 30% due to strong triple-digit growth in our e-commerce channel as well as a double-digit increase in our brick-and-mortar stores. International direct-to-consumer sales were flat due to declines in China where at 1 point over 35% of our stores were temporarily closed. Outside of China and Chile, which was impacted by economic volatility, every other market experienced growth within our company-owned Skechers store portfolio and nearly market grew in our direct e-commerce business.

In total, that rep to consumer unit volume increased 15% and average selling price was down 3.5%. In the fourth quarter, we opened 62 company-owned Skechers stores and closed 22, of which 17 were in China. Included in the openings were 29 in China, 7 big box or outlet stores in the United States, 4 in India and our first company-owned store in Ireland, a flagship location on Grafton Street in Dublin. We ended the quarter with 4,537 Skechers stores worldwide, of which 3,093 were third-party stores, which include 157 that opened in the fourth quarter, 94 were in China, 16 in India, 9 in the Philippines and 7 in Australia. In the first quarter 2023, we’ve opened 7 company-owned stores, 6 big box locations in the U.S. and 1 concept store in Germany.

Year-to-date, we have closed 1 location in the United States. We expect to open a total of 35 to 40 company-owned stores worldwide in the first quarter and between 100 to 120 stores over the course of the year. In the fourth quarter, we launched our first Skechers e-commerce site in Japan and are pleased with the initial reaction from consumers. We remain focused on growing our direct-to-consumer business to efficiently drive sales and connect with our loyal consumers. To this end, we have planned additional e-commerce sites, including Peru, Colombia and an update to our existing platform in Chile which is already one of our most productive international e-commerce sites. Last month, we also launched our Sketch + loyalty program in Canada and plan to roll out this program to more countries throughout the year.

Our fourth quarter growth across all segments of our business and the increases in nearly every market demonstrate the robust demand for our comfort technology products. The relevance of our footwear collections, the effectiveness of our marketing efforts and our commitment and ability to execute in the face of headwinds. Many of the shipping challenges we faced within our own distribution centers have eased and we are seeing improved operations in our recently expanded 2.6 million square foot North American distribution center. By the end of the first half of 2023, we expect to be shipping out of a new 427,000 square foot center in Vancouver that will improve delivery times for Canada and to have relocated our new Chilean distribution center doubling our space to 430,000 square feet.

Additionally, in India, the 660,000 square foot Phase 1 of our new 1.1 million square foot distribution center outside Mumbai is expected to be completed by year’s end. As always, we believe demand creation is critical to our brand’s success. To support and drive awareness of our diverse product offering, we leverage a roster of notable talent, both globally and in regional markets. The talent is as diverse as lifestyle Guru Martha Stewart, retired athletes, an elite major championship golfers, Brook Henderson and Matt Fitzpatrick. We also signed Pickleball Pros, Tyson McGuffin, Catherine Parenteau in early 2022 to correspond with the launch of Skechers Viper Court Pickleball shoes. We are now the official footwear sponsor of the professional Pickleball Association Tour creating an undeniable connection between the fastest-growing sport in America and Skechers.

Skecher’s employees, a 360 degree marketing approach, digital and social media, television, out of home, print, radio, PR and translates our campaigns into dozens of languages, wherever consumers are, be it the most watched soccer matches in the world, a subway in Asia, billboards in South America or fashion magazines in Europe, we are there. And wherever consumers shop, phones, high streets or malls, we are there. All these marketing techniques build brand awareness and drive consumer demand. While we fully expect to face continuing challenges throughout the year, the recent elimination of zero COVID policy is a positive for a business in China and we believe both consumer confidence and more normal shopping behavior will build throughout the year.

In addition, despite the recent inventory challenges impacting our domestic distribution network, we remain confident in the strength of our brand and the demand for our products. Further, we are beginning to see freight and logistic costs normalize, foreign currency rates moving in our favor and our retail stores full of fresh inventory. We had a strong December and January direct-to-consumer sales tracked ahead of last year giving us confidence that we’ll see continued growth in 2023. And now I would like to turn the call over to John for more details on our financial results.

John Vandemore: Thank you, David, and good afternoon, everyone. 2022 was our 30th year in business. And as I reflect on the past 4 quarters, I’m incredibly proud of our talented team around the globe for navigating one of the most turbulent macroeconomic environments in our 30-year history, while remaining steadfastly focused on executing against our long-term growth strategy. In this complex year, Skechers achieved record quarterly and full year results. Surpassing $7.4 billion in annual sales, an impressive year-over-year increase of over $1.1 billion, driven by global growth across our channels. These results demonstrate the strength of our brand as the comfort technology leader and the robust consumer appetite for our innovative product portfolio.

We remain excited about the growth opportunities ahead and are committed to stylish, comfortable, high-quality and reasonably priced footwear for Skechers consumers around the globe. Now let’s review our fourth quarter financial results. Wholesale sales increased 16% year-over-year to $1.05 billion, representing 16% growth in both our domestic and international markets. We continue to see broad-based demand for our products evident in the increased number of units sold and higher average selling prices achieved. During the quarter, our supply chain team continued to work diligently to alleviate the congestion stemming from the unprecedented supply chain disruptions last year. While we continue to experience some processing constraints at our distribution centers from record input volumes, we are pleased with the progress we have made to improve efficiencies, expand capacity and reduce on-hand inventory while also maintaining the pace of shipments to our wholesale customers.

Direct-to-consumer sales increased 11% year-over-year to $829.6 million, driven by 30% growth domestically from a triple-digit increase in e-commerce and a double-digit increase in our retail stores. Both channels benefited from healthier inventory levels compared to last year’s supply-constrained environment. International direct-to-consumer sales were flat year-over-year due to a decline in China. However, excluding China, sales increased 22%, driven by double-digit growth in both our stores and online. The expansion of our digital presence internationally and continued penetration of our retail stores contributed to strong growth as we further develop direct relationships with both our long-standing and new consumers. We are excited about the growth opportunities in our global direct-to-consumer business, both physically and digitally, and remain focused on weaving our omnichannel capabilities into a seamless consumer-centric experience and showcasing the breadth of our full product assortment.

Now turning to our regional sales. In the Americas, sales for the fourth quarter increased 22% year-over-year to $925.6 million driven by double-digit growth across all channels, reflecting healthy consumer demand for our compelling product portfolio and improved inventory availability. In EMEA, sales increased 29% year-over-year to $413.7 million, driven by double-digit growth across all channels and in most countries, led by Germany and sales to our distributors. We continue to experience strong brand momentum and consumer demand in EMEA throughout the quarter. In APAC, sales decreased 7% year-over-year to $539.5 million. However, excluding China, sales grew 31%, driven by double-digit growth in all channels. We saw particular strength in India, one of our fastest-growing markets in the region and in sales to our distributors.

In China, sales declined 23% due to continued COVID-related disruptions, including the closure of over 35% of our stores at 1 point. Our China team has done an excellent job managing through these challenging conditions and persistent disruptions, and we thank them for their tremendous poise they have shown throughout. Fourth quarter gross margins were 48.4%, a decrease of 40 basis points year-over-year, but an increase of 140 basis points quarter-over-quarter. The year-over-year decrease was the result of higher product costs and planned strategic promotions in our direct-to-consumer business. Operating expenses increased 60 basis points as a percentage of sales year-over-year from 43.2% to 43.8%. Selling expenses increased $19.1 million or 14%, but were flat as a percentage of sales compared to the prior year.

The dollar increase was primarily due to higher demand creation expenses in digital and brand marketing globally. General and administrative expenses increased $88.9 million or 15% and 60 basis points as a percentage of sales year-over-year. We incurred approximately $25 million of incremental logistics costs globally to minimize disruption in delivering products to our customers in addition to increased volume-driven distribution expenses. We are making considerable progress on restoring efficiency and accelerating the capacity expansion in our domestic distribution center, where notably, inventory was down 12% from the prior quarter. However, we continue to expect to incur some incremental logistics costs over the next several quarters, albeit at a moderating amount.

Photo by Venti Views on Unsplash

Earnings from operations were $86.6 million, a 7% decrease compared to the prior year, and our operating margin for the quarter was 4.6% compared to 5.6% in the prior year. Earnings per share were $0.48 per diluted share on 156.3 million diluted shares outstanding compared to adjusted diluted earnings per share of $0.43 in the prior year, a 12% increase. Our effective tax rate was 9.6% for the fourth quarter and 17.8% for the full year. The lower-than-expected tax rate was attributable to the utilization of foreign tax credits and benefits from certain discrete items. And now turning to our balance sheet. We ended the quarter with $788.4 million in cash, cash equivalents and investments, a decrease of $252.1 million from December 31, 2021, but an increase of $106.9 million from the prior quarter.

We continue to invest in working capital to drive sales and ensure we have product available in the right place and at the right time to meet consumer demand. Inventory was $1.82 million compared to the prior year, but up only 2% versus last quarter. We continue to experience supply chain disruptions, but we are pleased with the progress we are making to reduce elevated inventory levels. Accounts receivable at quarter end were $848.3 million, an increase of $115.5 million, reflecting higher wholesale sales. Capital expenditures for the quarter were $95.4 million, of which $40.2 million was related to the expansion of our distribution infrastructure globally, $23.8 million related to investments in our retail stores and direct-to-consumer technologies and $21.7 million, primarily related to the construction of our new product design center.

Our capital investments are focused on supporting our strategic priorities, growing our direct-to-consumer business and expanding our brand presence globally. Now turning to guidance. As we begin 2023, it will come as no surprise that there is a meaningful degree of uncertainty ahead. For example, while we continue to see robust consumer demand for our product evidenced in strong comparable store sales trends and sell-through. There are also many recessionary signals in the marketplace. Our results will be significantly influenced by what prevails, but embedded in our initial guidance for 2023 is the following: Continued sales momentum in most of our international markets throughout the year. A China market recovery characterized by continued near-term challenges but improving steadily over the course of the year; a domestic wholesale marketplace gradually overcoming elevated inventory levels and supply chain constraints, resulting in declines in the first half of the year before returning to growth in the back half; a steady improvement to our distribution operating efficiency as expanded capacity and other remediation efforts bear fruit.

And finally, the gross margin benefits of lower logistics costs particularly in freight, maturing into our results over the course of the year as we deplete the inventory we acquired last year. For fiscal 2023, we expect sales to be in the range of $7.75 billion to $8 billion and net earnings per diluted share in the range of $2.80 to $3. For the first quarter, we expect sales in the range of $1.8 billion to $1.85 billion and net earnings per diluted share in the range of $0.55 to $0.60. Our effective tax rate for the year is expected to be between 19% and 20%; and we expect total capital expenditures to be between $300 million and $350 million as we continue to invest in our strategic priorities, including additional stores, added omnichannel capabilities and incremental distribution capacity in key markets like India, China, Chile and more.

We also expect to continue our discretionary share repurchase program, of which approximately $425.8 million remained available at December 31, 2022. As we move forward into 2023, we remain confident that our long-term growth strategy will continue to provide a strong foundation and ensure Skechers is positioned to drive long-term profitable growth underpinned by our unwavering commitment to deliver value through our innovative comfort technology product portfolio at compelling prices for consumers globally. With that, I will now turn the call over to David for closing remarks.

David Weinberg: Thank you, John. The past 30 years have been marked by unforgettable moments from our first store opening, first television commercial and first $1 billion in sales to now operating over 4,500 stores, collaborating with Martha Stewart and many others for our Comfort footwear, being named company of the Year by leading trade publication footwear news and achieving well over $7 billion in sales this year. At every point along the way, the many milestones or the challenges we have faced over the years, 1 thing has been consistent. Our incredible employees; sales personnel and customer service teams on the front lines, a talented and creative group of designers and marketers; our logistics and operations force that makes it all check, managers and executives who drive the vision.

There is truly nothing like the global Skechers team, and we thank the entire organization for making 2022 an incredible year. 2023 will continue to present challenges, but we believe that with our loyal partners and dedicated team, Skechers will continue to reach new heights, including $10 billion of annual sales by 2026. Now I would like to turn the call over to the operator for questions.

See also 13 Cheap New Stocks To Buy and 11 Tech Stocks with Low PE Ratio.

Q&A Session

Operator: And our first question comes from Jay Sole with UBS. Please proceed with your question.

Jay Sole: Great. My question is just about China and what’s embedded into the guidance. John, you mentioned you expect an improvement throughout the year. But can you tell us sort of right now in fourth quarter? What — how would China sales are trending year-to-date — sorry, quarter-to-date and then sort of what you expect for Q1? And then maybe if you can sort of quantify a little bit how you expect the year to play out, that would be super helpful.

John Vandemore: Well, we’re not going to give a year-to-date trend for ’23 other than to note that what we referenced in the guidance certainly includes that perspective. I think there are a lot of unknowns in China currently, having departed from the COVID zero policy, you’re still seeing COVID effects as there are infections and other protocols in place in response to that. That is one of the reasons why the fourth quarter saw the declines that it did. Currently, we expect the challenges to continue for at least the first quarter and potentially reaching into the second, but a more significant rebound opportunity in the back half of the year. I mean, admittedly, though, we’re going to have to see how the situation unfolds.

We have seen some positive indications lately with regards to foot traffic and in-store performance that we haven’t seen for quite a while. So that’s very encouraging. I think the inventory position is well suited for that market to rebound. But ultimately, that’s one of the bigger unknowns in our view for 2023. We are optimistic though. I’d say what we see right now is encouraging, but it’s been a long road in China over the last couple of years that they’ve dealt with COVID, and so we want to make sure that we’re cautiously optimistic before we get overly optimistic.

Jay Sole: And if I could maybe ask 1 more. Just on G&A in the quarter. I think, John, you called out the $25 million incremental from some of the processing constraints I think that’s related to. Can you just talk about if there was other sort of onetime items in SG&A this quarter? And then if we think about Q1, it sounds like there’s still some constraints that might continue to impact SG&A. If you could just talk about those, that would be helpful as well.

John Vandemore: Yes. I mean the most significant item, Jay, as you identified, was the challenges that we’ve continued to have to battle from a network congestion perspective. And I think it’s important to know that, that’s not just Skechers distribution centers that are having challenges. We’re seeing that those challenges exist downstream as well. And then unfortunately, that causes a backup into our own distribution centers that we have to deal with. So the most significant driver — single driver was continuing what I’d call, congestion-related costs similar to what we discussed in Q3. We did see a noticeable step down this quarter, which is, I think, a testimony to the comments both David and I made about seeing improved efficiencies in our network.

. The next most significant driver, quite frankly, in the G&A was volume related. That’s attach themselves to our business operations when we see sales increases of the scale that we saw this quarter. We did put a little bit more into some media. That stayed flat as a percentage of sales, but it was a conscious effort to make sure we’re bringing forward the comfort technology products that we’re emphasizing right now. And I’m sure many of you have seen commercials out there for our new slipping, which are doing tremendous. So absent that, no, nothing really to note in the period that I would consider to be kind of outside the ordinary course.

Operator: And our next question is from Laurent Vasilescu with BNP Parabas. Please proceed with your question.

Laurent Vasilescu: Great to hear about the target for $10 billion still intact. I remember — I recall, I think, John, that you were guiding for U.S. wholesale to grow at a mid-single-digit CAGR over that time period. Is that still the right framework as we think about long term? And then I think you made some comments about first half, second half. How do we think about U.S. wholesale for the year? And can we see first half like down mid- to high single digits? Any framework on that would be very helpful. .

John Vandemore: Absolutely, Laurent. But I think we first had to acknowledge that the operator pronounced your name right, which is amazing, but that’s the first in my experience. Yes. I would first say as well, though, that the $10 billion goal for us is still imminently achievable. Now we feel very good about where we sit as a brand, the strength of our product portfolio. What we’re seeing across the broad swath of where we operate in the world today. I mean I think it’s noteworthy that we saw growth pretty much across the board, certainly in all channels, but for those that continue to be impacted by COVID. Relative to the domestic wholesale, this is going to be really, I think, a year of kind of 2 different periods of the first half and the back half.

The first half is looking like at the moment, that it’s going to continue to suffer from the challenges of elevated inventory downstream. And I think is important to note about that is we’re still seeing very strong results for the Skechers brand throughout our network in our own stores and in our partner stores. So this really is not a question in our view about Skechers product building up. It’s really, quite frankly, the impact of the broader inventory congestion that’s being felt downstream. That is, as we’ve noted in a couple of quarters ago, that has been impacting order behavior for the first half of the year. I really think once we get clear of that, the door quite openly opens for us to return to growth on the domestic wholesale side, and we’re optimistic about that in part because of the great product lineup we have coming.

I think that also then adds to our faith in that long-term guide that we’ve always provided, which is kind of a mid-single-digit domestic wholesale. Now we’ve been beating that pretty handsomely over the last couple of years. So I would take that into consideration, you’re going to have your ups and downs because nothing goes up in a straight line. But we’re still very confident in that contribution to the $10 billion objective, which, again, I just double emphasize here, we still are very, very confident in our ability to achieve.

Laurent Vasilescu: And then piggybacking off of some of Jay’s questions on margins. John, can you maybe kind of quantify how much freight — ocean freight contracts, just all of it, just how much of a press reporting was for the full year FY ’22. Was it — can we assume like 300 basis points of gross margin pressure? And if that’s the case, how much do we — should we expect to recapture? And then on the SG&A line, I appreciate that you gave us the $25 million incremental distribution cost there. So in aggregate was $75 million for the second half. I understand you’re going to have a little bit more in the first half of this year. But net-net, should we assume it’s like about $60 million lapping as we think about FY ’23 SG&A?

John Vandemore: A 3-part question there, Laurent. On the freight side, what I would probably give you as the best indicator is when you take everything together, and it’s not just ocean freight, obviously, is the biggest piece. The year-over-year decline in gross margin is nearly entirely the result of that and more because we did put in pricing. I mean, of note this quarter, we improved the gross margin, I think, by about 140 basis points, which is a very strong result and that reflects some of the pricing that we’ve been talking to. We didn’t get all the way to match prior year. That was a bit of a mix shift, quite frankly, and some delayed shipments that occurred because of the congestion we’ve spoken about, but we grew gross margin quarter-over-quarter.

And I think that’s a good testimony to the actions we had taken that we had spoken about. But when you think about freight and logistics last year, and what that — the toll that took on our business, you need to look no further than kind of the gross margin differential and understanding that we did mitigate a lot of that over the course of the time period. So obviously, gross margins would have been down further had it not been for the actions we took. On the congestion cost, it’s difficult to get a precise quantification because a lot of that is going to depend on factors outside of our control. We mentioned that a lot of the congestion we’re seeing now is actually downstream. It’s not in our own distribution centers. It’s our ability to ship on because others are having a similar congestion-related issue.

So it’s somewhat contingent upon that. We do think year-over — sorry, quarter-over-quarter continues to be a lesser number how far below this quarter’s $25 million is something we’ll have to watch carefully. But we see it declining over the course of Q1 and Q2, hopefully gone by Q3. The last note I’ll just give you, though is although you are right in quantifying the second half amount, we would estimate that the full year charges we incurred because of congestion is actually closer to $90 million, all in. So we had mentioned previously, there were some costs in Q2. We just hadn’t considered calling those out then. But when you look back on the full year, there’s close to $90 million of costs that we would attribute to this congestion that have been working their way in the P&L for a while.