GTES - Earnings call transcript Q4 2017 | Gates Industrial Corporation plc

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Operator

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Gates Industrial Corporation Q4 2017 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. now call will Waelke. to I Instructions] turn over the Bill [Operator

may conference. begin You your now

Bill Waelke

and available the website. different is On for our our us a within or today, Waelke, and will our we by is GAAP statements segment you our could to available our a Shortly now public refer be year are includes Relations among include, Thank updated accompanied after joining reminder XXXX. answers Ivo. full slide such Today’s we with until described we our over fourth and turn CEO as company. earnings filings actual performance is the provide Investor as the earnings on at our and X-K will Securities the X statements. that call results that on release now A Slide closed to quarterly have for presentation, CFO, make other website the SEC and XXXX to be to update I review forward-looking of also call not our we which quarter during to which measures These a financial Ivo well Ivo expressed results in financial call the at forward-looking that disclaim by Form our may our the Jurek, SEC. these being forward-looking include investors.gates.com. copy and am call We David call as I use today market website. a of published and Bill will with me of statements Head any guidance Litigations Reform with all. statements, presentation, remarks non-GAAP David Relations obligation next subject call to will is which if results Please webcast of risks These and cause Investor from on risks our of Private on those of that materially are reconciliation Act. meaning forward-looking implied the and others, matters this our filed a Naemura. first afternoon, this is

Ivo Jurek

Thanks, you joining our fourth and today Bill. for to I and us will Good year afternoon. X. begin provide Slide Thank for results on review XXXX. quarter full outlook

demand the able We XXXX, full In are company. growth capitalize initiatives strong and pleased to on to organic quarter the strong as this experiencing over report we earnings a the year on many first were results in fourth year, the year. fourth growth we growth. and Throughout quarter our and delivered full call revenue public strong of for our core resulting end-markets, revenue across environment of X% we industrial are

emerging presence We experienced to also in we expand continue core in XXXX. longstanding double-digit markets where our revenue growth

of revenue of adjusted performance strong to execution Gates deliver QX year able result a operating system, EBITDA. As the were the we full record and and continued

points basis further in This ability position margin growth. expansion for impact XX and margin further business was year while the We fourth full expand also acquisitions excluding adjusted margins XXXX our increasing both achieved I in the continued EBITDA ourselves to to with roughly to momentarily. cover that the invest we will demonstrated quarter of the

particularly supplemented Over commercial fluid our engineering year, line our the power segment. the course and in capabilities, product of and we upgraded

demands. growth we as In initiatives emerging late position and customer XXXX, as continued future presence We accommodate also made to develop. those to our expanded as capacity our invest well in replacement to fluid decision the commercial channels additional markets power in strengthened our

this come online year of existing and are we half We of Gates locations, which manufacturing into expect the nearing completion new constructed plants up at two ramp now XXXX. to the second power fluid in

We in time capacity a industry. significant where expect there excess is to well investments not at position us the particularly growth, for these

in our also mentioned and and a also portfolio initiatives. of As related and portfolio capabilities. hydraulics Atlas in Hydraulics, adds complements industrial two acquisitions North Flexibles, our we technical fittings power and June, segment product XXXX, to accelerate Techflow hose to market. manufacturer during our design American of tubing bolt-on the specializes acquired for high-pressure applications fluid completed is in and product in and in oil the gas presence our acquired that assemblies, October, manufacture growth our expanding

revenue year For XXXX, growth. contributed the full acquisitions these total of our X% over just

With our progress goal we leverage. on Finally, of mid-term business. our of XXXX adjusted getting growth toward improve expected make us flow of net metrics strong expect to generation goal the leverage continue below combination our and de-leveraging of a saw to additional Xx cash free EBITDA,

We name industrial particularly solid with maintenance and are Slide applications now with transmission revenue X.X% focuses transfer the segment, construction, business served and believe of core by and of the fourth most power transmission where Turning end lower a belt-based to requirements year in and on growth full for chains, markets. to results quarter X.X% transmission, to X our performance of respectively. lighter power. part inherently We general strong growth delivered and our performance just their few segment drive markets, in efficient other energy devices by across XXXX these and that beginning power the belts, weight, saw ag systems better power mechanical applications due advantages. all The

our markets these Our a of growth organic emerging higher growth performed also reflection countries. in initiatives well, focused

the to and mobile and broader chain-to-belt examples We space, are initiative in of we which early industrial MRO the currently personal equipment applications. conversion out innings number rolling mobility include opportunities, of continue of pursue a our conversion

be of Our on this larger area penetrate can in applications fewer, will focus opportunities meaningful where in we size. markets

growth through manufacturing business Slide we points our and fit-for-purpose on offers segment achieved full of QX the delivered core organic primarily in On X.X% our all full and basis of solutions. improvement volume delivered The also core fluid in power These basis a initiatives, XXX growth. gains for contributed markets XX In basis. power products results premium applications with during year. were execution array wide the fluid growth terms other in The of the hydraulics revenue acquisitions a customers during for during revenue of year EBITDA X, points growth fluid two and adjusted and industrial year end margins, the of healthy demand continued improvement we fluid XXXX QX, power XX.X% industrial year-over-year transfer our to that completed productivity.

believe combined building end-market with market in the of additional sites. while expand other favorable our addressable our our demand at growth capacity a these new In manufacturing comes that initiatives out us a two our to that and I investments, hydraulics further will capacity strong put we fluid certain power are position online. We mentioned, addition facilities in to existing

quarter full While inorganic we the the year, margin EBITDA our for on made our and fluid have investments the organic growth strong adjusted does in power fourth and in an basis. segment delivered reflect both growth

in next two with improvement, which clear our are on Our the performing in XX a to to parity are expectations path over we months. result earnings and XX line acquisitions expect to margin

numbers to being are help application see segment. line, strengthen made Since investments capabilities and to approximate exposures clarify earnings organic of is also product development business. help and in establish we are end-market product to engineering revenues the to context call, on first Our opportunities the baseline our our this XXXX our I add this growth and would our like us commercial based deliver on to what understanding help to

different We on our Slide revenue X. few have of provided breakdowns a

of show replacement further chart, generated versus charts from exposures. on the reflects the detail one-third reference first-fit will center and in by channels end noting benefits out of markets I the breakdown that will pie total well-established of strategy. and the markets, I our emerging frankly some our a point our which over that in-region/for-region First, revenues our far our In start our are market presence right pie we these revenues and end-markets, in typically exposures. markets being nature. market the and fact end-market our and due XX% are to general revenues volatile are positively one ag to with XX% the Beginning correlated trucks, channels, in any recurring our are which construction, and or duty that less industrial production industrial about end principally replacement largest the individual more industrial with of the total first-fit through of first-fit, after-market revenues is of global heavy not

of of note revenues was and add-on revenues, the First total of points XXXX with China XX% was markets, the were about our X% first-fit X% that U.S. Developed from the of sales the markets customers about XX fit being in largest single would being add-on of first-fit sales I in total majority in emerging only country. out

take. very selective around remain first-fit to is strategy business Our we this

a for to tends our presence, a we and aftermarket our a the The are reflects objective where opportunistic markets, single revenue, differentiated applications We we the which a of channel to participate will total new is emerging other into approximately largest products replacement presence manufacturing, being introduce developed participate. majority develop sales end-market look will of markets serves industrial, applications is to we to technology. us industrial industrial large helped portion key of which of general facilities. markets. and end and be can how first-fit there in decide less be and aftermarket In developed into of majority our channel it with and industrial business Replacement process XX% the

ag, largest heavy construction, truck, our oil are Beyond gas. general industrial, duty end and markets and

currently fleet applications automotive age is approximately very to by most economic market. fuel behaves of emerging we the demand the sales aftermarket as the are much the the a first-fit driven fleet And as price view age to we growth miles our see particularly are serves this do-it-for-me which the the that is and of primarily driven, of China, in portion the focused automotive demand. XX% markets, where as well business range, into given of replacement sub-segment North We differently is such fleet as the to Sales Our in positive America geography, and total than conditions. lastly, general age tend on XX-year X of a in in trend the the favorable. as factors

some developed X% baseline. it point revenues over from plan are So, applications of industrial do related at half of We in I total, on revisit the applications. this to on but in not end-market helpful this establishing about auto basis, future. our total and in information is first-fit providing a consistent is markets may exposure hope our

commercial to first-fit markets. we regions. of end geographies, Moving combination certain of This targeted applications, see driven increased on across in growth in emerging sales markets can was experienced primarily by as industrial growth on and revenue X, strong Slide core strong most globally actions, our you

solidly. growth in in growth America by China year. strong growth have India, and gas Our end our replacement was Asia in for markets in South we The America like gas by also and markets, strongest where contributing full offset with end East all across in our double-digit and followed came North the markets China, headwinds oil America. core offshore had growth EMEA, and rig recovered the In land oil North was continued which market driven not the

and with to our provide particularly We take throughout these are environments we in-region/for-region manufacturing David? presence I of our significant inputs positive now seeing our dynamics. commercial over advantage well-positioned, that, financial believe to generally results. With this additional macro favorable on David and to are market will regions turn strategy

David Naemura

North heavy-duty on ag was particularly industrial large quarter of currency our Ivo record Thanks, points and The delivered X.X% revenue of QX you regions. X.X% about adding our about have mentioned QX about and growth from truck adjusted see up driven growth XX%. Slide an EBITDA, was foreign to of Ivo. and of was from acquisitions total the to driven growth part performance where and we financial cover growth revenue on by points as primarily growth gas strong the that oil in can growth of in now I in X, and growth additional beginning X.X for all construction, X.X at XX% our our grew will growth results which where core with earlier, end-markets, in by major bringing XX% XX.X%. our core Energy America

of increase impact with Adjusted margin QX. of in temporary prior diluted or the adjusted year. the Our was an year XX% over $XXX $XX million EBITDA XX.X%, the about prior million was to acquisitions of due year EBITDA flat the

$X increase with points the did offset materials impact XX some adjusted see XX.X%, we about year Excluding about more price quarter, We million, prior an the in the with was inflation within EBITDA of modest basis acquisitions, quarter. over QX. which raw increasing margin the of than

later impacted recurring Our in of that This for net by net the from earnings were U.S. a designated were benefit of through about of see tax euro-denominated therefore tax is and the a impacting year the $XXX our for debt a on I resulted slide. P&L. net more as impacted will revaluation Earnings talk quarter one-time full and favorably benefit don’t future. that few hedge we the by about investment million. portion a items Also, reform, of earnings non-cash which the a was implementation not flows

in as the year-over-year intangible adjusted As of pre-tax non-standard adjusts P&L amortization other we structuring, the from future from which the number, IPO million few from comparable items QX earnings $XX.X to this a as in this full a in part income presented our adds have a flowing impact removed back XXXX. year for net The with through have negative revaluation and $XX.X million we impact On this for also appendix. periods. these items negative XXXX LBO in provided was well slide, reconciliation and

Now full growth points resulting year FX X% from additional from Slide was results revenue acquisitions, growth talking core into total with the X.X XX, and on of an full XX.X%. point in year X.X

most applications. profile end-markets growth of in oil well that and America driven fourth and number ag was primarily in and full growth double-digit general our construction across for serves industrial markets category. North as Our gas the industrial quarter, as This the in end similar to with a core by year

key inflationary XX%, full million for XX the impact by EBITDA the major prior margin in driven raw basis that both to $XX increases did year, offset price the XX% latter of we our shortage grew of commercial in For and the the believe end-markets react modest all material of environment in company. XXXX. replacement adjusted of that with most our our margin pricing believe where two year, points representing the greater the the comparable excluding general offset a the XXXX. and effectively we as basis adjusted our well and of of and that inflation with agree inflation in EBITDA of partially year appropriate. quarter We records inflation ended the fully focus We remain we in the views as of in as committed We $XXX with to of will brand, we apples-to-apples the given XX% market by On earlier was portion all first about XXXX an over over a about regions entering this well. was increased an are input are the strength in the major global grew that million EBITDA we with XXXX at see more of well-positioned And regard. end with the and margin year. of acquisitions year, than XX.X%, of We adjusted just we expansion year year polymer in during this be our

flowing XXXX a on due as amortization through from trade focus provides we as higher improved normalized in working basis interest year deferred resulting the fees Slide EBITDA adjusted the debt business, as excluding April. rate of net XXX XXXX of our items to benefits higher XX the increased Hydraulics, with offset and points well income the by key percent cash in partially in higher on Atlas for continued our accelerated million tax refinancing that working adjusted in $XX de-leveraging expense the financing flow with the the acquired Our sales. over incremental the XXXX of about capital capital trade detail by a

prior This on flow CapEx flow unfavorable provided as flow free presented free operations that conversion conversion and measure cash a net less is year and cash of basis. versus dollar reflected net income. by as have the We adjusted cash

EBITDA in improved increasing dollars, XXXX growth growth than with lower of the at we over had year, was sales higher had our we and CapEx associated prior years. performance Although working prior our though rate it even investments impact a in capital the

refund tax have did $XX year. from a benefited Finally, we XXXX also that we million this in not

our of primarily up investments to growth of For initiatives. CapEx X.X% rate power X%. growth is organic to with build-out the about additional support the historical CapEx higher capacity associated sales, was of our This fluid additional from X.X% XXXX,

we increasing or percentage slightly possibly growth that the basis even spend next this years. over Given see, the on opportunities level of couple anticipate a maintaining of we

leverage, of under IPO all were Xx. with proceeds on net purposes, Finally, debt be point ratio basis reduction will leverage just a XXXX just a the were we at for ended XXXX used that Xx. If for year we and over end look adjusted forma at net leverage on our that to pro

approximately by net few we a tax $XXX tax. non-cash to by driven million offset our tax of primarily the tax items, rate one-time liabilities new deferred Turning U.S. U.S. transition benefit at lower a reform, of partially received revaluation negative primarily

artificially a tax revaluation pre-tax Excluding debt and these effective of our for to rate underlying around XXXX is I this tax items, loss our was run-rate for tax high the not before purposes. a rate for we benefit, favorable effective bit which including due deductible tax income, which mentioned Normalizing XX%. our euro-denominated see on

still plus the baseline determining effective of normalized impact XXX our from rate all the minus XXXX go-forward basis points be estimate XXXX of about the in are tax but to impacts We XX%. of currently or tax would reform,

year in our our outlook execute initiatives. Slide to our continue believe we as good Moving we on performance another and see to of on that as we growth end-markets XX, will XXXX large strong be momentum

guidance growth growth that XX.X%. X% the will are believe range X%. range in growth the of revenue core XXXX Underlying for be of to we in X.X% We revenue is to introducing total this

million fluid power in in our product outpace expect growth We to are continue hand between will and million around XX basis to believe about XXXX XXXX. that Ivo. $XXX of not I guidance, back and organizations commercial for We that, points plan that but XX.X% margin adjusted $XXX level and over EBITDA now or With will invest line adjusted EBITDA transmission. it power be providing that to will our expansion segment again

Ivo Jurek

am were our while delivered margin execution of solid the core to to our company in our invest markets and further adjusted to supplemented in business the team. which in continuing and for improve organically Dave. able position the grew our We for acquisitions. reduce extremely result we Thanks, performance leverage pleased entire XXXX, with with a also is I global growth our growth. We EBITDA

to not improving just have progress and productivity build safety factory and from the but well. made our continue as that on operations quality we We standpoint, in

We are turn as up excited to next and objectives to company the operator a we achieve are to our over while that, well open I to shareholders. phase creating this value will have gained growth strength remaining focused on in our With positioned the for Q&A. call believe public we

Operator

[Operator Jeff Instructions] first Hammonds Your question comes Keybanc. with from

Jeff Hammonds

Hey, good afternoon.

through touched be into you you the price then year? on just what this that just walk you can in more us So, raw pricing by? year can through major inputs walk you us what some impacted you – you And would announced on material cost, captured last of recently if price

David Naemura

Yes, sure.

So, shock of generally in butadiene with speaking really first rapid was happened last system year. the a inflation the year, bit the quarter of of a there that to

we to most there a So, supply during but in make did reacted think that of delay the was we that saw as doing from reacted think that say we factor rubber it was more the tires, over that I kind to would I chasing used year. those half that was in synthetic with price, things whole We chain. year. I the of inflation a of And the all people industry were polymers – disruption

fluid our end-markets, items that principally progressed year power and in demand second saw was respond we up the fluid particular lot The did on industrial in half the we half with both side, obviously in metals, the and steel ramp the power the impacting we year. the of of inflation price these a further As of saw the business. around additional second

always be to accomplished and I fair think good seeing to price so It are nature thought positioned that. but what the minus, plus or have far we think always raw pretty year, into we are we the have the will carried given materials on we price of well even side. business our we I

and our sales as XX% biggest inputs, would I categories. far significantly. are raw those two and inputs materials, As about tell of material are most biggest two Raw of polymers the is our you, metals cost

Jeff Hammonds

just ex And Okay, but explained that of bit. power, you would that? in came headwinds around looked any that’s just don’t little XQ But I if seeing or tough that some the have fluid it acquisitions, on then in you business know that or of contracture the mean, even the are just great. noise around elevated margin comp I rapid a impacted you any rate looks which growth from

David Naemura

Yes.

touching think it, you are Jeff. So two things, I on

the So first, business. we invested in

few in over excited we actually industry we that well of manufacture some expediting we usually there the associated kind of to were power disruptive as other that fluid that R&D snapback side of efficient and Example was saw then stock the freight be more that. things on kind Also a and outsource the some little that a ourselves we to would was and are would spend products pretty we factors rapid that us we have transmission So, as there with initiatives typically reallocated some as some that. like we to power about. like slab got had growth new that inefficiencies on side rapidly

to of guys OE customers take whatever look We care it of have lot a and do we takes. and important those

bit that the two a those were in So, fourth things quarter. disruptive the were really

Jeff Hammonds

Okay. Thanks, guys.

David Naemura

you. Thank

Operator

next RBC Dray Capital from Deane with Your Markets. question is

Deane Dray

I’d everyone. like start afternoon, Hey, with to China. Good

not We XX%. pretty numbers out of to are all but some used strong growth coming seeing China,

questions growth there and end-markets a what’s and issue up your confidence begs level sustainable double-digits, were all where strongest and this you comp So was is about were they – that of the said looking that where rate what’s then ahead?

Ivo Jurek

conversations. terrific a as year have discussed in Deane. we in Thanks. Yes, past had China Hi, we

in China. seen growth end have And industrial making general significant all continuing been in strong to strong investments sides see nice performance very our have and very frankly, in for positioning of market market, We segment. in markets both auto, strong that ourselves across infrastructure we growth, on

So, we are very we remain do bit have for XXXX forecast again, slightly are but see growth we timid region accounted China our in about give XXXX, positive what and we by the that about forward necessarily guidance teams nor although by – we a to putting forecasting don’t in quarter, lower execute. effort

Deane Dray

hear to that’s as that capacity hear. fluids. Okay, good around like to would then question, more And I follow-up the a you are adding in

are You have plants two got the that coming online.

also You level other trigger existing we said what capacity you plants. hit your utilization, the to are at pull do did and capacity what need in At adding – point say, you of the level? And quickly add, that this online, your how much of up? capacity you will these facilities when in where for look ramp on visibility terms is coming spoken already How at demand? was then

Ivo Jurek

QX, of planning of to project we questions XXXX, were Yes, new of two as and in of which capacity to start wasn’t kind expansion great had one. sites many foresight tell a in in that the industrial time talk downturn. about capacity we the the expansion I come the in you QX the midst green will frankly

of of investments in about as last kind a felt downturn exited growth we organic the year. capacity our initiatives, it middle the Well, line of middle in the so will necessitate product we little thinking expansions industrial bit faster that And our further XXXX. in we were

add some to footprint. made decisions our have existing incremental in quick capacity We

And during that. two QX That part sites capacity is and with market coming start much onstream very QX. going that is it’s into to new from capacity received. done QX coming going how a I the of to Deane, we is of this this see the expect of presently way in that stay disposed, would robust away well latter onstream capacity the measured have I be We year from

Deane Dray

first and earnings. congratulations you on Thank Great. your quarterly

Ivo Jurek

Deane. Thanks,

David Naemura

Deane. Thanks,

Operator

Your next Andrew is Citi. Caslowitz question with from

Andrew Caslowitz

the Hey, Congrats good on quarter. afternoon, guys.

Ivo Jurek

Andy. Thanks,

Andrew Caslowitz

going, core entire power was can or I growth give a higher the What industrial I was mean give had that you know construction the ag because growth mentioned? we the there transmission And color just breakdown color growth early anything in it Dave, ‘XX? was is as little transmission a really the at in all was fluid us very on and little Ivo X.X% then any of X.X% auto business? power was higher is of in in there the business modeled regarding XQ core acceleration and lower, – replacement you chain-to-belt us or could in maybe the than performed how you

David Naemura

I Briefly, China automotive a fourth little we by how Yes. the in say quarter would first-fit the on were bit side. was robust surprised

did, know, were particularly markets, that but have and year-over-year personally as that of QX bit was I you Last in emerging – little and the we was grow off engines and we that modeling China, like the first-fit a really sized we in compare automotive the lower government would much As China we in incentives a growth but did XXs, growth off lower emission in engines as – crazy. we decline. place robust very didn’t actually given that year, that was think think on

driven in think little emerging robust higher the were on came by I market first-fit. industrial we side, So, a we

Andrew Caslowitz

sort is or Did replacement, low of is grower how single-digit auto a that business? that

David Naemura

stabilized in automotive but think saw I growth markets, in do. we developed continuing automotive well to I kind typically particular, saw replacement think click in we markets, replacement as we of in in steady-eddy along emerging

Andrew Caslowitz

that’s want And ahead, Ivo? – say to something, then go Okay, helpful. do you

Ivo Jurek

AR. particularly Andy, conditions QX, America would in exiting maybe have we Yes, just North seen I improving as were that probably we say

in sign a what probably of happening market. more So, was that was positive that

Andrew Caslowitz

And Ivo, that current you business can it. that expectations? do Got Is think grow your in that XXXX?

Ivo Jurek

to are grown Again, nicely America. we outside performance see particularly we improved going we age that are of have the America, the North is old going but is X to that in XXXX-XXXX Andy, car start part North entering through XX the of a year registrations business drop expectation, my now part. where to car in and recession Yes, filtering in very AR, car phase that –

you that for and tailwind China. the see the America North that and growth in in emerging obviously particular the some business in So in provide growing frankly economies registration should

more have And well. explained, So, as significantly we been dynamics capitalize have there we positive start market should well. as investing we that on quite there seeing to

Andrew Caslowitz

you And maybe you your on That’s closer flat of without year-over-year helpful. could margins been ask And to just you if follow-up mentioned very did. a bit investment I then David a and Would have fluid higher power, fluid outsourcing them growth you things? slow know actually Would bit growth. the supplier if capacity constrained want power? I call constraints, higher have you in those your your been a don’t to if down weren’t then that

David Naemura

investments were to the it the up full quarter, – capacity is bring the if we for in and down year-over-year maybe kind why how would – or system look, Yes. look, the quickly bps the to of not year we I XX without and say, had is down of idea you impact the we say investment where full to investment. R&D excluding were the year I an impact the would was the the bps that the in about year of have better, would acquisitions. X come if gives shock

of of the was So bit more shock issue. QX little kind a supply a

spring – in stuff be will really really would had out, think – okay have around are are the Look about and running. been is about the in been I talking we that. we we been for new more exciting BA/BE think would yes, is that I some we products have we excited bringing for putting So, where we investment

frankly, existing online the good as Yes, we that. are we are continued the to we out ground. and have capacity capacity arrow about as space plants could we coming to up we could we probably open not in the on in bringing quarter. more? speak as feel down And of are and sold kind floor far fill that why ramping we that’s the So the we wood putting And fourth behind also,

we bring So as quickly capacity continuing can. up to we are as

Andrew Caslowitz

Got it. Thanks, guys.

Ivo Jurek

Thank you.

David Naemura

Thank you.

Operator

question Revich is Your next Goldman with from Jerry Sachs.

Jerry Revich

good hi, Yes, everyone. afternoon,

Ivo Jurek

Jerry. Hi,

David Naemura

Jerry, hi.

Jerry Revich

wondering and baked I am into if is process the much how as as that increase look the where operating bringing headcount? production on can you you drivers sure you Gates plan? am about footprint, context have some just system in the us scope those do areas utilization additional capacity global in the to continue manufacturing you the operating are Can production areas, folks I those across versus you of give talk bottlenecking growth on tightest

Ivo Jurek

have Ivo. Yes, all see Asia. constraint there. solid bringing very that is there. growth frankly capacity the I saw capacity fastest say that Jerry, this We you tightest is in would Again seen numbers we

reasonably I feel geographies situation demand. the with pretty able developed fluid is in positioned as to developed of support we Greenfields the are start get to up fast in – outlined speak remarks. a sometimes the And as market, expect and can as prepared all getting across as to we well And markets, our marketplace capacity we QX. the running running we the in and I indicated in So to being now robust starting power we

we from now tight very right there out sit. where So

the not are pretty On with will in good transmission, power we good probably China tell geographies, to place. in you, the in are a degree a that power have tightest And Again, I fluid in capacity that we transmission. the place. but we the powers seen other

more create we pretty System, Operating Gates good our drive feel to that. capacity, productivity, continued drive We about so

Jerry Revich

then ahead see pricing on in about think of philosophically, improvement, X years you that call of business and suggest will price Gates now obviously do lot inflation of costs ‘XX ability efficiency in in we pricing you from over push been through material operating past the it time a are about characteristics is, you Operating System how and the couple didn’t of on to cycle focus inflation the Okay. that Gates would System that ahead what your optimistic costs described we going ‘XX, that standpoint, see at Operating the about place? years a the And has forward, a pricing

David Naemura

to before get will activities Jerry, first get from a to it lot manufacturing all, that product will X as I lower try introduce out have of I we relates System, done constant that say Gates one, albeit as BA-BE things of we perspective. than the we would that a continue more a will a take to it’s the efficient of more I splinter mode. Operating Dave. that will and last are And improvement cost products Yes. to where see benefits, in we rate were think we transition have that years at

System side. to the Gates So front transitions as product is trying Operating to well that I development influencing the think design as of new end where

kind has that side, of price-cost place the philosophy. in On been always been our and always

did the bit end better have the quarter XX% my I a but have remarks, lag price-cost little for and that in XXXX, for think of we we getting it. I priced I are seen. We we at we be will in neutral rapidly inflation we again said think this think inflation at think I the I of which saw came

appropriate around are ahead, I uncertainty a to I other that. and of marketplace a we is things are center out enough, of for mean it but I can continue is think we We we us. There – are uncertainty there pricing and and will you are there. we and we being assure do it lot positioned, in think lot well is be front so the inflation will

Ivo Jurek

on company to the and add ensure that more can that’s the environment. we to I that if is maybe material want probably about way way that economics best enter this inflationary think the Jerry to and offsets we it And run as pricing

Jerry Revich

for And Dave getting from you to pricing first quarter that not make that the the ‘XX, in up quarter, clarification, XX% just seeing first but are enough offset are correct? inflation a is shortfall to only in that you

David Naemura

year. lag what catch the at idea measured of the That’s up here. lagging what catch that quarter should coming we the this mean was month we will plus were I Obviously, see biggest and that out in quarter. anticipate. yes, it’s end we will – the the so what of we are up we we But

Jerry Revich

you. Thank Okay.

David Naemura

Thanks Jerry.

Operator

Brady Humphrey. from with Robinson question Your next is SunTrust Charley

Charley Brady

impact into particularly guidance guys, you the up do plant capacity some are evening is and the XH, would your was you you online for that, a for year the just of of coming on accretive, half obviously footprint up inefficiencies when Greenfield get on the the spool just full-year, first there quick, big the but going to existing on I and additional you make up rate? probably obviously, XXXX, curious does capacity, And year pretty probably then that’s the because I it’s is margin it’s like the plants that into that spooling am offset Thanks. factors think do that that obviously flow going Good for are it’s impact margin. going run that the the in, how margin on additions are got on wondering have I how to plants come in a coming

David Naemura

Yes.

some large existing they as So there the at are we stand up are plants. Thankfully, sites. impacts, inefficiencies these

think continue opportunity we to you have of we for kinds but we a have XXXX, those get will impact the XXXX. benefits and XX gross And and don’t of put margin, baked about the EBITDA we idle will to margin basis we right, build these XXXX things, indirect we that’s on inefficiencies ultimately lot out throughout into that capacity the the So of and is as are guidance forward some get then into have large to footprints. points

Charley Brady

be an and that on of the of types little like there? specifics helpful. that’s you get And you the you wondered it’s to ramp-up that ultimate understanding that but an over I if of going really opportunity, I opportunity, remarks, ultimately granularity expand Great, a of just obviously to the chain upon in bit then maybe kind think the that more can prepared belt applications on conversion maybe for you folks on to pursuing size spoke are helpful, a about said, just what’s time expansion

Ivo Jurek

but as market in number are to it opportunities. of in we of we future are Look, as have see Sure. well significant the the identifying a early we attraction this Yes. very begun realizing in opportunity,

On belt, opportunity. the a chain to it’s significant

few say elevators, material currently focusing aggregate handful so process, industrial on to infrastructure, and forth. convert and on wide are distribution a grain of in We applications opportunities so

including we saw and to in China, are in which personal these documented, continues look ramp XXXX, this that have XX months $XX have in the think we So way had bike which something $XX in million we was somewhere well number the conversions to probably entered the that of bikes up. share million probably expect over at mobility, initiatives we last in we years Look, are it’s to over the next X be entering a organic of $XX market the XX able convert should generate just where we growth applications. being runways market, to IPO we able show. years, think again, a road investors in nice stages communicated that And progressively we early the billion during we of to to the have drive with range of the space set ongoing

Charley Brady

you. Thank

Operator

Cook Jamie is question Suisse. next from Credit with Your

Jamie Cook

that continue but two follow-ups, we organic free XXXX, the more growth, just any you get it’s of any what given if I to the some seen And demand the investments strong just a just been of trends my although you early to know any cash quarter, provide X% there. little then and second sort I trends have in anomalies, do inventory or good given assume color manufacturing evening, on order of Hi, first are build can can and in year in is questions color that, you on strong? flow the Thanks. they my just to the one question, of so most guess comment trending have just targeted your answered, would above far be don’t so I demand X% sort have I

Ivo Jurek

sure. Yes

that pretty some strong quarter. of QX are strongest the the our in is that account business. late me an QX we patterns not are weakest QX but was into QX, forecasting taking start Please QX, with which speaking, see our order see Generally seasonality say we QX with Look, let that and So strongest, that that quarter, remember would second are similar the orders, quarter we have us. seen trends. order for a is we is there we the kind I in

we different presently QX. why what QX have trends So is and we flow? don’t we order that exiting seen that say don’t you the environment market than have cash Dave, into with would free anything take

David Naemura

Yes.

build And invest. that for we about of XXX% the bring inventory income lower invest a flow as side, real these around amount year and because higher. and this continue that general we I of adjusted capital I guidance consideration in new at growth up We if would rate higher would rate we the target target prior continue converted bit sales, would that conversion or is CapEx. give our we less, a think percent say you On as better year invested at the as to the same would we we net guess slightly than on metric more I cash I free would little a here facilities to the except not

on. So I probably you think color would give anomaly one that’s the some I

Jamie Cook

Okay. you. quarter. Thank back nice I in queue, will get

David Naemura

Thank you.

Operator

Your next Morgan Sawyer from Rice Stanley. with comes question

Ivo Jurek

Hi Sawyer.

Sawyer Rice

out the blocks Hi, good of on evening. quarter the here. first Congrats

Ivo Jurek

Thank you.

Sawyer Rice

front, thinking focus prior Most Thanks. of asked areas reaching net Gates but been that in pipeline? of the any to just the for have and maybe you M&A mark particularly about leverage M&A mine the on for one Xx guys have just then M&A, answered, and appetite

David Naemura

bet. a you balance Look, M&A has be to got for Okay, us.

where consistent good leverage. and I think we are we large organic business, say appropriate, of not looking a the our M&A priority mindful deal accelerate focused have ultimately, our de-leveraging saying been on is use never but ultimately transformational growth. about go pretty really do but we never, being will And are we growth priorities to to

that fragmented to highly lot play that returns tend in. bolt-ons of given there have of the is So we higher think a we the markets for nature and out opportunities there

pipeline. a have we continued So,

market We emerging looking are deals.

about We associated still with it. thinking industrial what and initiatives in you of growth kind the of opportunities range in XXXX are how is are of our saw looking at kind we

So but for thanks asking we will as that. see that develops,

will question. think we last take I one

Operator

Winoker Steven from comes UBS. question with last Our

David Silverman

in over about of David business Hey, and time. today you even more comparable I important you thanks. immaterial ICE your become relative but to have vehicle Winoker. content amount you likely thinking hybrids, how electric talk are EVs Can about Steven to on Theoretically, for dollar ICE, in think This more content to Silverman is proliferation? it’s a

if for So, and your business electric vehicle just to prepare are growth? you positioning wondering how

Ivo Jurek

we look questions. to Yes, that’s similar Thanks the for on ICE. EVs have have content an we addressable on Sure. what

car around that XXXX globe, to on a you in of care we This that’s player extrapolate majority are we sort electric primarily to FP Although that X of on the BT projections about we EV, years to we are the from of car expectation as content to that insignificant. part X% XXXX, aged car at – very so see But look part, we is that XXXX, growth, about be that X% would we aged very, part again, by should so that part that the by still car part where the aftermarket feel the hybrid able to content and miles XX be we full hybrid good set is Gates biggest car growth Look, be products car opportunity set take applications in more will of in very applications. is well-positioned and adoption and going old. have of to position sub-segment miles continue and the shift a full in capture part very automotive with that more the that to those applications. and majority significant much on optimistic vehicles content pretty differentiated to

terms the So it where the in opportunity primarily EV. to relates very We hybrids on. are primarily in feel we we we of we and as good good about aftermarket terms focused feel stand stand where that of

David Silverman

helpful. That’s Thanks.

Ivo Jurek

Thank you.

Operator

call I presenters. the the will now over And to back turn

David Naemura

joining for this here us everyone Thanks call. inaugural on

future. our are objectives the have the on update on to our delivering progress. on update progress our to excited opportunity you We We you forward to to look and growth in continuing had

Operator

call. conference today’s concludes This

You may now disconnect.

Gates Industrial (GTES) 19 Mar 182017 Q4 Earnings call transcript