GTES - Earnings call transcript Q4 2021 | Gates Industrial Corporation plc

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Operator

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Gates Q4 2021 Earnings 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. Instructions]. [Operator you. Thank of Head you begin. may Bill Investor Waelke, Relations,

Bill Waelke

call this our briefly Jurek, fourth Thank passing our you our XXXX who on us joining the before by language I'll for will quarter be CEO, Brooks morning earnings and forward-looking to followed over our non-GAAP Mallard, Ivo cover CFO. call.

is and at A copy results. the opened we today, year site market Web published the full available release Before investors.gates.com. our our fourth quarter on of

turn disclaim any updated update things I'll quarterly and Form be annual Reform be in being webcast XX-K at presentation. slide performance. the call, is next are Litigation remarks among is accompanied all. each different we forward-looking available results Our X refer that actual to could those in Web Act. Private measures to slide that other SEC. presentation, filings the of morning our of we obligation call is evaluating which non-GAAP These Reconciliations matters to a believe and others, Ivo. our meaning Investor on by statements our such These of a recent to will non-GAAP cause provides earnings With financial subject Please in that which Securities are section are On expressed reminder the forward-looking We will refer our to in site. this with of that forward-looking the by include report historical may most useful in our make release or we risks call, include, now implied included from statements. statements, this materially we of these earnings Slide within financial Relations over forward-looking in until and not to which risks that, certain measures statements the our if described the presentation, have

Ivo Jurek

our the quarter joining Gates. of begin the you excellent morning fourth and for an with Slide Good of everyone Bill. call you, overview marked today. outlined conclusion thank for The Thank X presentation. year on I'll the

Our of challenging to our the material our to winning markets. are our by business targeted service to making incremental global solid exposure higher company company's teams benefiting new grow the investments from The while reposition unwavering end capacity, science, commitment growth strong in during growth, delivered execution these we managing customers revenue strategy innovation, business demand position and to times.

reduce to and supportive specifically, trends of we not our margins the proactive Free early us year. in year, delivered We strong, relatively able were pricing, incremental to inflation demand approach XX%, significantly half segments. both our second despite we remain fourth the XXXX continued rise rapid In underlying net year. particularly the in levels. of all enabled neutral cost generation the was the Channel quarter, inventories the to leverage lean. our also in to of nearly customer enabling for demand. Our price us remained flow the from Despite order experienced cash execution, satisfy in focused

in COVID market a in in levels. monthly for expected highest build provided seeing quarter at temporary rate results our is operational rates above backlog the delivered Global supportive issues, challenges notwithstanding, order was efficiency. X. the record in particular, the From we with to our logistics and and availability external book strong, well material company's as Our with in as the America, are perspective, production disruptions an impacted that ongoing These outlook significantly history XXXX. maintained well North guidance navigated order greater than And line we January. we

environment we anticipate to these in we issues will QX. through operating the persist work abate of start XXXX, as many While challenges QX

to at deliver detail us the performance revenue X%, the on we on expect a taking X. top $XXX pragmatic let's in into range are of With of that, XXXX. While results we another including of over Slide quarter's move end million, the put of provided. environment, of strong we the growth view Total operating more the core

well, in light the executed delivered a quarter QX and outperformed record to as environment another compared growth teams business. XXXX. Our of operating From perspective, replacement channel a OEM of our

diversified decline & initiatives Our focused once in in OEMs. offsetting the significant sales growth delivered again markets to Mobility growth, and Recreation industrial most the other end

a well, performed on strong Our sales QX modest delivering to in performance very automotive replacement customers growth XXXX.

quarter $XXX for million adjusted of adjusted was fourth EBITDA Our XX.X%. an EBITDA margin

specifically that margin went included related guidance the points, of quarter, to up. the early Despite will was challenges in into ramp midpoint progressively headwind XXX profitability with addressed which expected, with basis our and costs, being incremental in this the effect As line price we a is provided. approximately operational this pricing additional of quarter,

of are beginning operational expect critical of most challenges to signs availability material issues these improve. Although to are we the most that continue, there some

through the $X.XX quarter. earnings in the XX% compared and increase year the tax were favorable Our that adjusted representing share items quarter, per came in some to an period, prior of included

Moving exceptional core segments, the in both to which Slide X growth saw XXXX. now and highlights our in

end Power segment core high markets. growth by XX% Our for XXs Transmission year, in had the over of growth led industrial

OEM. saw end Recreation. quarter over growth growth automotive industrial & The the the strong decline offset in market we XX% Additionally, in Mobility in

progress strategy our to of business well. continues to portfolio long-term Our reposition

is micro-mobility Industrial Drive Carbon the Asia. equipment, partner announced manufacturer free Gates its electric with ecosystem maintenance in rising chain rechargeable smart belt exclusive key This of operation in drive we in sustainable system. in utilizes a Belts battery relationship exchange an growth quiet Beyond a warehouse strategic pioneering to robotics and entry in enable QX, into scooter Gogoro, wins automation to processing and semiconductor

and key towards as a these Transmission, increasing are with additional pipeline growing, further win our leading has in order is of electric an position secured also continued Power backlog reinforcing on markets manufacturer Overall, to We platform, vehicle build. our in move electrification. conversion end rates opportunities solid a new

XXXX, of industrial in diversified end Fluid end core off-highway in Our our market. diversified XX% in strong end revenue market X% year-over-year, and performance led by and approximately fourth industrial In notable the the included acceleration grew Power by segment again quarter, saw markets. energy led growth

We with continue our order in particular. stationary forklift securing in applications hydraulics, wins build products new our to construction key and book,

impacted in segments respect profitability, operational impacted opportunities fourth making the We to making and launched results. recently business opening in progress segments nice are additional we up segment the full solid of challenges on through turn respect With expansion in I by are mentioned to the additional we hydraulic year. also production margin execution by investments during line I with my In Brooks? With our capacity book opening teams of Transmission innovation initiatives. product market further color were that, the with company. our remarks. for in both The over growth quarter, for differentiated strategic a our will delivering Power call to additional successful further our are was new margins delivered the expansion support both Brooks of for business

Brooks Mallard

you, Ivo. Thank

Moving regional our breakdown now and the X performance. Slide to of core revenue

global growth. Replacement and continued which was and markets. Europe, both XXXX. automotive performance, delivered In led the diversified auto and well, of with end more perform in over in delivering to and OEM by end record industrial diversified channels decline end in growth solid saw revenues than off-highway QX markets, industrial the markets including Our year we offset full industrial XX% business strong

growth Industrial. single we end by industrial Moving Recreation, led diversified Energy, saw to in high Mobility North the QX, America, digit in & markets and

industrial our in Our performed total sales channel, replacement first-fit particularly made into near-term expectations broadly automotive the line over digit in the we years. the well, our by replacement investments auto the business we've and OEM. offsetting with saw performed in in declines replacement Despite remain markets. double channels We China China, also offset channels low slowdown, was decline on in past which in end bullish the in our growth primarily the construction, quarter. several on-highway the

Finally, and South the East Asia India America and performance had quarter. varying in our in businesses

South all decline the OEMs. growth in and industrial was across Asia ag. India, East auto markets largely diversified America offset led saw solid by In end and the strong by markets, end industrial in growth

to with XX%. and net income some free cash growth flow year-over-year LTM on XXX% key flow sheet Moving generated cash cash strong details free balance Slide X conversion items. We over of of approximately in flow adjusted quarter the now and on and in

within Our net income flow of guidance adjusted to flexibility. our which targeted free capital conversion effect, year providing without our cash discrete provided. tax free range Xx, year was increased further benefit was corresponding Xx cash full well items, X.Xx, above negatively increasing in full the flow cash midterm leverage impacted conversion Net Without a by XX% we allocation to this period. the improved

year-over-year remained Our strong return at points. of increase basis capital a XXX on representing invested XX.X%,

our now to Slide X Moving outlook. and

the supportive, the and and of for core to the of expectation first a year. end of majority X% our markets still our constraints taking of half but We are We X%. labor and the are introducing growth continued remain will through in material level year anticipating view some anticipate measured revenue the range full regions

first On $XXX the a environment for half price year. the earnings ongoing the transition the million, $X.XX our a account between the EBITDA operating The guidance cost per expectation $X.XX uncertainty adjusted to mentioned Our share adjusted year. per the of result of in of and into is XXXX. guidance $X.XX by in discrete outlook $XXX we earnings this and million call, items headwinds last a in of as taking as a to are $X.XX earnings other, decrease and tax made increase tax up primarily reflects our offset providing operating for accordingly share of midpoint well as

most seasonality quarter last and will have sequential inflation, Since QX the over that, continue in of expect with With thoughts. the actions to With CapEx expansion. first to line the pricing million greater significant million sales take be multiple margin turn current modest respect back final conversion of $XXX flow and driven flow, it expect view cash inefficiencies pricing to We and year Ivo growth normal by our to impact operational to than we necessary. moderate in will call, full as free have to implemented cash from I our for XX%. $XXX from range increases in price further we some with

Ivo Jurek

Thank you, Brooks.

our world Moving I full challenging these Their begin wrap times drove the thanking up summary now truly to performance. outstanding the commitment effort year Slide would associates and around takeaways. X was key a and by like Gates' our the perseverance during execution remarkable. few to on whose and

science, our demonstrated business investment growth and solid progress. innovation Our initiatives in material

our particularly revenue We of accelerating clear with secular growth transition end markets, are towards the higher applications tailwinds. in

our performance deliver balance continue growth, capital sheet, and we a allocation of another entered supplement have year solid well our we as for As to profitable a is value financial capital optionality growth of XXXX stronger evaluate and shareholders. return all delivered and positioned With result, to opportunities stakeholders. to to high

we turn With opportunity believe made I on the challenges a ahead, for is our anticipate begin and moving strong Although provide that, the we to will a forward. now footing have business Q&A. investments substantial we back operator the call over to the foundation

Operator

[Operator Instructions]. you. Thank

Deane Our Markets. with first Capital question from Dray is RBC

open. is line Your

Deane Dray

everyone. Good morning, Thank you.

Ivo Jurek

Good morning.

Brooks Mallard

morning, Good Deane.

Deane Dray

hitting Hi. all for your was Congrats an milestone a important I on and know deleveraging you commitment. target. that

like through. So that seeing come

Ivo Jurek

you. Thank

Deane Dray

calibrated, amount you Just so anything all in has quarter. or demand the backlog out to And size into go organic? that Are of you there? that said that hearing did backlog, been you all the there any not of were so was it We're meaningful dollar cancellations satisfy what or we're either many fourth companies. from percent able able to

Ivo Jurek

strong. Look, question. great remarks, prepared a able we it of that digit kind not would said is of in It's what to my we Deane. single way And business I were as the felt size the mid we very Thanks, remains deliver.

was is solid. January Our very quite bookings rate strong.

on we as we the don't have like to that And book sometime have to And we while cancellation we a coming at you being good where our cancellation, products been back going about not And frankly for most getting backlog. so progress conversations the more the the so making expect to would have, supply, to know, that have we to making if certainly am be that and cancel like backlog any ship we with adding more are customers we backlog the constrained a are but should capacity also we of than we -- start order. this point are on we mentioned should the really eating get with some progress time. highly would early we not associated demand incremental ability is I mode in greater business, that to elevated capacity be anticipate is products anticipating question some having I we into in online that in all Coming our and seen have backlog. QX

remarkable that are to everything is performing into we're the globally level, satisfy our certainly teams So account at environment taking And this possible. demand. doing

Deane Dray

hear. would to question EPS This to just transitioning last quarter. you second is That's how guidance? said all adjusted you include what do good And be on you are would

here. now its it maturity the of doing That's a for You're sign ability. the us company,

talk can So throughout your year, items repeating, to a that it you the regard begs start comment puts for of cadence maybe you with don't Brooks, would And expected start? comments with can about are just Thanks. on you that fourth question, takes, I quarter, not about seasonality? tax earnings the great the to the be especially Ivo and know place or just the

Ivo Jurek

Yes.

a seasonality of couple in think So normal -- let right. with for we haven't the we business a me start really years the had row, of seasonality I expect

Then had had You 'XX. COVID. you

we're we second first XX/XX half. -- versus of half So expect seasonality normally, kind the

that the work expect more headwinds these bit weighted half a in as be second external some half. through We little of to the to first we

we more year. XX/XX XX/XX expect to of half maybe be versus half So second first the or do it

In in behind about taxes, we've of and we and think if you hopeful tax, allowances. earnings, planning improvement a estimate we evaluation the We're we've related look at tax one-off just normalized. you expect created that to about the got some some general, think the on secondarily think much of changes -- also about how the I that in be lot you done to when think us. items that's more changes deferred

XXs. that really low rate more is So in that normalized tax

those issues the getting all that so won't on -- bit again, it. in labor-related QX. fully we be going Omicron-related, as think half little cadence, have still really get from ramped better. I work see But of We're the noise first do of And we to the output And then you back get fully year part much well first get as through side, the is on system to labor material the up the as seeing as tougher thing the third we that to some there. the issues some COVID-related have the profitability on material and the a into in work

a than perspective. So better the definitely or second half half first we the a to bit half the expect little better than from see first profitability

Deane Dray

That's helpful. really

Ivo Jurek

all Did your I get questions?

Deane Dray

forward on and X. Yes. to look Really all appreciate it seeing you March

Ivo Jurek

you. Thank

Operator

Research. question is Nigel from next with Wolfe Our Coe

is line open. Your

Nigel Coe

Thanks. Good everyone. morning,

Ivo Jurek

Good morning.

Nigel Coe

So points margin cost XXX I you think I think price was XQ. mentioned in basis the of dilution to

really, organic inflationary wondering in have Just much And we now to it? seeing as right X% that price how seen you curious then just embeds peak well pressures increases? the XQ? And how see or X% are we

Brooks Mallard

the question me price handle first. let Well,

total for about right, So you what and full the headwind price about volume is What XX our cost much of don't had that. the QX versus bps. we of if price talked price impact. for We said really XXXX, more margin a -- about margins core year talked always total volume. versus think is is it on about We about of on haven't bps was how growth talk about we -- in XXX our

we think definitely margin forward a perspective. cost our we a cost you price about expect neutral If goal perspective. into to And be certainly be is positive as move from from XXXX, to price dollars

that question, the side. the was remind on at And it So leave that part again? of first your I'll price what cost me

Nigel Coe

price in The to in How And that we XQ? basis XX neutrality points dilution. dynamic, cost does do of get XQ? look

Brooks Mallard

then we'll of that's said that the the back ramp the of profitability QX, in will of Price half kind it's year, were well. right. what part than think in the be a better I half first but we year. second as really into before, And to I of Well, question cost the

going the we it’s half see going to the year of of should and be as some of Some to dynamic. the through, we it’s abate that that be headwinds production cost first then in price the move

the increase seen usually first on you've ramp. at we a the half, basis price in As almost price looked get all as inflation layered quarterly price

pricing quarter got sequentially move in. as will through. and about good And the we've perspective, laid so toughest will price we it QX from be the we get cost a each quarter feel better

Nigel Coe

Great.

Ivo Jurek

additional on maybe Nigel, color pricing.

year discussed up that So with inflation in last the priced we've in times create repricing significantly, last that felt look, ensure the partners we QX. frankly work chaos ramped don't several pricing that particularly we to announcing to as book. we wanted we've price call, additional quite channel On are through steps. We

from And will But that shape quarter neutrality deliver steps we’re this so be needed. cost additional able reasonable we taking to is of price XXXX. have we we to beginning in. Pricing in if that for margin and in rolling be layered feel the and

Nigel Coe

Thank your into the a guidance basis, My How do Great. you bit both. now range? $XXX on guidance hold is you on buyback that EPS share you're count follow more. matters to have quick of much million

Brooks Mallard

We haven't don't that. that far. opportunity with in dialed we've got really we much really anything allocation capital so Because consider so

Nigel Coe

makes Okay, sense. Thanks. that

Operator

question next Josh Our is Morgan Stanley. Pokrzywinski with from

Your line is open.

Joshua Pokrzywinski

guys. Good morning, Hi.

Ivo Jurek

Good Josh. morning,

Joshua Pokrzywinski

us you don't XQ, sequentials a bit margins. help if out Brooks, especially little on adjusted mind, the EBITDA into

cadence XQ that there's trending historically, look we a like think necessarily they -- while, you to usually haven't don't this but pure normal and a year XQ. I know they mentioned they're do had in if can How year? down I for you back look a see

Brooks Mallard

our able expect go in operating There's uncertainty the out to availability labor get you said as QX opening the stuff lot think when being to you move improvement. the of door. or QX on profitability in market from external I to if environment modest what Well, Omicron right, we back the the comments, in we impact a and still about

year We is being in sometime to production that's cadence bit and moderate normalized start the And cautious be the first then we half. on as because we to expect expect more that a normalized back expect we And do to terms of QX happens, QX, of we're cautious getting And skis going little out. be move through why significantly to how into in when and in unknown. a cadence. so its again, more some half to to we're out operating over going and the be better and to that our be second to back just

helps that hopefully, up. So frame it

Joshua Pokrzywinski

well. remark Yes, I in that the must that's helpful. missed have as opening

on And business where big you question vertical, about the pretty guys healthy, you'd that. that it's visibility useful. percentage of Thanks. some appreciate some inventories talked would your customer seen Ivo, these been make you strength. or today? there have kind seems what's second It observations just I like recreational of So into around then but consumer those a that kind of channels? overall kind like as is be of How of help Any

Ivo Jurek

Thank Yes. you, Josh.

look high at long bikes these product of end kind trajectory. motorcycles evolve believe As getting electrified, of are and range that more discussed, kind of nicely as got the believe reliable particularly said, a drives. products initiative market quiet this very efficient early line you coverage only a line and and where our our we as applications we coverage electrification that have have adoption We consumer-based products of play applications. this of very And at really of strategic belt these, that with quite we and we nicely. to from the to you a continuing to invest mainstream continue product been And has ours, not full expanding to in

XX% think during about over time, of there's offering, secondary that over that And that populace of nine we these. are opportunities years, substantial kind And a a that motorcycles particularly period strong anticipate electrified. quite very we as on of million get and have have annually. built of represents the e-bikes outlined our I that XXX a we for content us, next that eight, about set should

grown And It's very around so we are It's of X% quite excited. strongly. revenue. total

it So XXXX. X% in as in XXXX out, and was revenue it's you Josh, nil well of pointed nearly nearly

constraint areas going very we executing one teams to into are initiative. of of seen well have where continue we a significant the on anticipate also that And is our this capacity. look, those this future. that so And well is And our

inventory channel. But in well struggling are coming So very demanding really your into coming question, somewhat keeping back have inventory positioned. future. opportunity with people up well And any we the the excited And products. to they frankly, demand. is don't We we we're Incremental are see about our more very on capacity this a stream. of

Joshua Pokrzywinski

Great. I guys. a the lot, appreciate color. Thanks

Operator

is next Our question Mike from Baird. with Halloran

line open. Your is

Mike Halloran

Hi. Good everyone. morning,

Ivo Jurek

Good morning, Mike.

Mike Halloran

context the that here? this this what backlog And So you think historically? backlog, is versus about does in to like guidance of that stretching How the out is then on could starting as you normalization point? point give at what at some level long look normalize, help embedded

Ivo Jurek

I are are business. ship Mike, I'll book remind really question. a and say And great a not So, we everybody, business. we just backlog

We've backlog, So backlog do means that been able able And anytime to keeping having doing everything reached that of that you're is to and you with that. not all we're be up difficulty has have demand. the just levels. demands it meet frankly the record to possible

his comments, material supply in the have been raw we is As hit hard exacerbating that frankly are issues that with. dealing pretty by Brooks outlined we

by baselines. it's really capacity. by completely It's chemical steel So really from exacerbated our various polymers, aluminum and been driven some additives, installed not

we're their second of reasonably not going ability we've really dealing our half in has we little it hitting increased tough are And been Omicron with about cautious as year. has when underlying the that million we're our our of the of although in level breakthrough And overcome. is situation raw to quite in factories has raw been believe the to obviously suppliers, better guidance, bit from $XX we slightly materials imbedded And we that absenteeism particularly biggest QX of the we're supply by hard. issue so kind getting to believe pretty maybe a and that that required. to on the demand, backlog that lot see being getting And better is material are visibility, the supply frankly, a

high, worked is little of the able little be in a we things optimistic very will backlog guide up get way, and when demand. our will are longwinded bit very And to through do, being that catch they better. a in we So embedded to

Mike Halloran

Thanks for a maybe optimistic optimism? know just I maybe first-fit give outlook But characteristics. you an market as that's for And market those markets forward little that. some the but What's we softer, And the on how market highlighted different the as you move has here? about. feel the track end think reason

Ivo Jurek

So the the OEM we litany that driven have automotive been of going the said that our in weakness weakness I'm markets not OEMs. particularly the are of through facing. to issues they go into

to believe little We that been we about end those got into and that that reduced level driven to that I supply a highly what realistic really go well really is reasonably it's belts them, predominantly bit didn't. business in recover would engineered recovering. worse. issues accounts even telling half. by have precision of market. this back going And the as that are OEM we automotive can't demand, And didn't Then We it supply it say that at polymer going in second really

are being certainly be those to we coming don't forecasts planning believe to was are as as realistic on what some it's OEM And headwind with XXXX. are And believe substantial more that so auto going reasonably We recovery. we for about in impactful out. QX. of that And not end in market we us the happen is probably maybe rosy going

to what's going about OEM with think the being end I realistic So market. happen we are that

market lots of, see the of prolonged the of with a and in the that personal they discussed a Now we've that believe amount obviously conversely demand products of see going first-fit strength. our remains for filters and mobility our industrial are Again, for we the And and demand their bullish certainly that end on businesses strong. hydraulics good cycle quite through industrial products. good amount ultimately side, and they quite customers

Mike Halloran

you. appreciate I Thank Ivo. that,

Ivo Jurek

you. Thank

Operator

Thank you.

Our with Revich from Sachs. Goldman question is next Jerry

open. line Your is

Jerry Revich

Yes, morning, hi. Good everyone.

Ivo Jurek

Good morning.

Jerry Revich

the part just expand like call. the on supply can really early course we've of the looks good cadence of had we had XXXX. I'm in It wondering conversation you that over this

comps if organic So year-over-year start Omicron I year, would the revenue the the rate double the exit believe Ivo, way your we correct half, that appears. talk expecting spoke me in on quarter, and comments I'm year-over-year know your digit Thanks. the that but guidance wrong, first makeup on Omicron implied fourth half down but year-over-year a revenue about imply the right? which is cadence year-over-year understanding basis. basis? Is second correctly? the at about of comments a you I certainly comments of versus just Am just Can I the growth you're

Brooks Mallard

Yes.

So my then line and what remarks, to from we you go modest was to moderate sequentially if comments in profitability, improvement said QX. I improvement sequential the top back as prepared move QX

So in to At shortages. by to started the started material quarter, of the QX we were Omicron impacted COVID an be more of -- end issue.

work particularly will it's and factories our start America impacting I we moving we think to through as absenteeism, COVID-related we in still where produce. ability issues to improve, to these material got but through move through QX, think some the our of North

“normal” I than a to seasonality. the As half the is on Again, two-year it’s of normal from be that's I half, expect the because been use bit a a which in a little cadence that said, we here. little less we're run not year what quotation first reversal the right expecting bit of kind of marks, second really, normal we now But know. based

not, our to cautious that's it right. the at we're at of visibility sized best better. that And now. we've maybe If get this cadence looking taking that that's in really view. a we're right Now, get kind time. if But point things they got Hopefully, better,

Jerry Revich

you what's wondering quarter, you Okay. And I of since the Day, Ivo. win color. I'm new then appreciate it last way the the manufacturer awards the possible Analyst side? have revenue to conversation through a versus could same separately, just new electric business the you consumer vehicle is the the you cadence talk opportunity similar the for EV stepped this your mentioned on folks about for it been expectations? And sizing

Ivo Jurek

Jerry. absolutely, Yes,

be certainly the at If March that sizeable view you Day. bear thoughts, size the actually have our changes business very all making. of opportunity we'll that the for quite We been some design of to been amount we've we on talking business. about awarded. awards our directional the the pleased the X I'm opportunity us, and wins with a of opportunity unveil with as We'll Analyst of

you gotten if back or we a quarter a that passed I think don't that XX/XXXX, electrification. win go haven't business award I nice a new design maybe think in has

like of we business. So our out

we spending and frankly operate, have molding and more And portfolio we long We substantial as believe our we case fleet to March. that get our Analyst, over be we years electrification the around bigger is in X our And R&D position, midterm are we even car car come to XX-year more get that electrified early to But that where aged believe bit And our most Day like they bigger which in to a our pass fleet. and -- car this the point that during age channel. resources a will fleets technology to ready, on particularly get and that takes the certainly Shareholder serves to customers. the as maintain to believe we replacement been where automotive only the term, but have be quite leadership hold. not opportunity of

Jerry Revich

Thanks. it. to forward Looking

Ivo Jurek

you. Thank

Operator

is next Julian with Our Barclays. question from Mitchell

is line open. Your

Julian Mitchell

around to things wanted sort of and Good Hi. Maybe inventories just understand conversion. morning. cash couple of a

telling So companies season many are sky own inventories bottom. rock their inventories their high, us has been customers' this all industrial are earning that but

And perspectives how cash then XXXX up guiding really in on that bifurcation even you Gates' when think step big you're you is? So own a for look flow such a just up in substantially. and wondered CapEx with inventories, do plausible at conversion your about

over year? the the through the cadence talk around maybe that working liquidation Just capital of balance

Ivo Jurek

morning, Sounds great good. Good a It is Julian. question.

I to levels, think in we as and Brooks, But there’s on pass then look, as when assess it the I'll channel. because are generally speak, on bit well. quite start to me unpack we that the a question Let replacement particularly inventory focused

so we lean. looking inventories, would And the remain reasonably replacement it as I channel are at they term

want to All of buy our more. customers

preventing us your calls from devices. I about customers, because we The our we it you not, demand, worried chief are building call, that the look, the the I've hey, I'm our think more need earlier are officers said are Julian. from from of products, purchasing on getting

products helping are center so in And front kind we marketplace. and to them their the of very of into get much

kind saw part think we I on So the inventory track Again, not the very levels that of based of we the point that it. the addressed indicator overinflated. data carefully, sale and OEM that of I see are

our sense get of so would key are a that be honest And the on, From we secure out can with shape. is to we to good materials our that some hands you. point reasonably in our that we trying side, are raw I

some or been have of year. is that being been last compounded last Act was removed engineered the issue, of So whether it impacted the highly them That's, late that quarter. real have a not by Defense resins very course, enacted

resins our those seeing some we and to off. of critical adders processes little ease So are of manufacturing easing

inefficiencies global to inventories kind to inventory more of out I'll some though. the that's some bit on of as hold. inventories We see a the that for probably some of we these And are we channel there. additional items well color say in-transit that kind of Brooks of I pass quite a that it due highest the have see the level and at logistics on you that would would

Brooks Mallard

Yes.

inventory. the clearly, relative the to perspective, So opportunity for I as certainly some XXXX, in, going And that's with of a conversion then some saw, a see going headwinds in real we on the from I side, that is AR to But pricing you're lot year. won't receivable the you had GAAP versus we move that think accounts higher taxes cash cash think the us the repeat. taxes I think through

holding we've strategic transit more times in been than many doubled. have higher tried as elevated procure really as well certain in-transit as to inventories cases materials, our materials We as

you're not sure water, more have only material material trying to do so so on but on in water, then the to you're have you -- more times. material, trying you've more the on not got transit get more hand about material And because to procure because you're the

in inventory with think us cost have that help and our wash improved the cost opportunity down number. working of cash a an will get perspective, that out sort then of to From drive the the how capital. we and payables net-net we So conversion that's material increase we more

Julian Mitchell

your low a been and in good question down trends just perspective And Gates that sales a on having has you. China. follow-up large QX. I on a in presence think single Thank market very digit mid and QX, down teens then in there were

So starting see and the for any expectations growth year-on-year, core that to the quarter first us maybe guidance? China tell how you in X% out relative year maybe full X% to firm-wide

Ivo Jurek

Yes.

picture, growth We positive certainly China. a in anticipate realistic. outlook. we I great anticipate start again, positive being we And right? Julian. let core are the think are XXXX We long-term me it's in maintaining our Look, point, great, a -- bigger with

that's shutdowns in all they These seeing are are the and You coming Omicron news China. the out. the flow that have

our again, kind starting wins But addition to the in in strengthening, said, design the going go growth particular, quarters Some maybe after of business, being of China. business driven helping and also People are frankly XXXX, driving -- there again, two AR not replacement that more in little our to our out. in of in But feel up particularly of in less. we diversified China a single channel. back level, mobility that mid being by automotive activity in Olympics is said digit a consumer bit industrials, is the uncertainty that to and anticipate business little

the China. on long And we so bullish we -- are are term, over very

of be some in about have presence We mid some are talked in choppiness growth see opportunities China we And have going are we growth trends I QX, it's with the Those trends well. company. more in kind into with but as for associated done digit very growth. single the bullish that what tapping the did and building of terms to of a we believe for year

Julian Mitchell

you. Thank Great.

Operator

with is next David Evercore. Our question from Raso

Your is line open.

David Raso

to it price saying growth X, is much. on the very baked but neutral the a cost I'm to negative if implied X Maybe up sense revenue is guide you're but you maybe there's on margin. a margins Thank X. a But drag volume currency, year-over-year the in the call any when to cost X Hi. trying flat price little margin. to the is see I get because in,

So explain it. about is, leverage. and about then a forth. is little some there's operating maybe But which the and think getting solely pricing top trying revenue comments top the It's opportunities neutral, most to no some so would of supply what I'm is of is the mostly line better it margin --

the just that built I'm this to So trying volume on figure would you'd out, And leverage into do a any have little better guide you year? operating volume. thus, for have think growth we

Brooks Mallard

Yes.

it, our of with is let talk and I'll part out volume said, kind stuff spread between start price. into baked guide. financial about I the commercial then we've the really me let volume it. Ivo of of So part Like never There and

I'll say that it and at that. leave So

leverage think target of We first the XXXX two we of to 'XX. there. think tough, right? issues the some still company's are side, half things to neutral our work in of that first the some operating part XXXX what the the we're got get price and is headwinds through pretty versus in of the quarters around I have Having of side, and the margin on had significant year be do that, around Omicron the And to working nature. to cost while is on you said operating in comps history best of

headwinds margin operational But half will kind progress of we've as significant, we to When got this as well get kind work year. fall as half because you're just the right? with I through the the operating the the operating we first through a they're the headwind. that's production first of of these of headwinds volume absenteeism, new year, the headwind in of so dealing to level through cost a we And the get think through the the year, and of as and overall work better half year second of incrementals

through And price intact. really incrementals are think we headwinds, incrementals, what of which and our through of think not some in feel are incrementals. just these our work deliver still We XX% issues we we'll to these work long-term still be, we'll So solid confident still operational we as to going that. cost XX%

Ivo Jurek

So, David, maybe --

David Raso

make I'm -- just sure

Ivo Jurek

Yes.

David Raso

that. I appreciate

Sorry, go ahead.

Brooks Mallard

those our we're then going an incrementals. normal work [indiscernible] from all are Price reasons perspective, it's right? EBITDA a as an headwind, well. listed, But cost, now so which little I to also to first percent margin efficiency from than from a in the lower For bit half operating margin through have things those

Ivo Jurek

and underlying very a and said, So, just let activity to the me back kind -- right, demand David, the couple come more to of what order things Brooke add again, flow is strong.

of being than demand. mode greater significantly the We have been our demand in

in issues, year, kicking better, freight of the availability compound certainly significant QX. the half Now as material, for weakness is labor when and volume being expect I've that you the we're first just to what as realistic we well. that going some about capacity seeing and investments in We mentioned are up the with incremental gets start that be

is globe up around to abilities. the this best certainly of of our probably of to support I'm be So converting we the the will getting underlying But and we ever to very our some catching see have with step labor associates to have seen proud up operationally start also the all-in a perspective. the and most should And we backlog and been be that that expect orders. able challenging operating the environment from that and position material I that strength healthier start how our in we anticipate we customers

David Raso

I appreciate quarter the up last pricing on that. do follow let's it actions toward thing, discussed end. the not that My we right at length year

has and be the customers' and when you magnitude? that point start particularly and in you getting increase. the it bit substantial of the you visibility X comes expect it the pricing to the of Let's it handling if sense the a the at it, that what magnitude Jan any have accepting they're and end it a expected but feedback into of get how the sale, timing obviously to of will that What been timing

Ivo Jurek

call the they have purchase. that is increases have see brought heads substantial discussed release. earnings in everything the we call. what we Certainly Look, that We've channel their partners. level done with that say, across that they on Nobody you that pretty scratching doing worked of inflation that? we on and said why are QX We exactly on our

gone the globe. We have across

needed. the believe be happens to if inflation Presently, these for to ramping was the that we many continues them that inflation. through will X, year trajectory with on And customer. has be January worked any get year or effective we are through it have it a have region such being price realistic about more as not anticipate in scoped progresses. diluted. inflation any pricing take a But we touched quarter, way the very that the we of QX, been that and if margin not And situation will we have and in what We

Brooks Mallard

place. said. a Yes. good with really, working value-added job Ivo And think, in teams let got me strong teams. commercial our I do We've add pricing They to what

that And as so right cover the bring pricing we're in we And through inflation, level make constantly that that that we bring to know profitability make all addition products value making we where the we and sure back making we're sure also go value work -- line and we this pricing we we're table. at sure using we're the for by frankly look to getting the quite market. and opportunity product that to the everything

those but lot fronts. do been our our that's job. value-added a great working teams it's pricing And effort. a on and work [ph] a they're great all And teams. There's a very commercial the with job tough of do upfront on, with so They communicative going customers

David Raso

normalized the One be mentioned XXs within be should to back getting your to tax modeling What low quick clarification, here? level. we a Tax the sorry. rate rate, and you guidance is

Brooks Mallard

XX% to XX%.

David Raso

or And nothing makes cadence, the just XX sense that's sort moment. quarter unique of the at a there's

Brooks Mallard

Yes.

David Raso

Okay, the it. I terrific. Thanks so appreciate much time. for

Ivo Jurek

you. Thank

Operator

next question with from Citigroup. Our Kaplowitz is Andy

open. line Your is

Andy Kaplowitz

guys. morning, Hi. Good

Ivo Jurek

morning. Good

Brooks Mallard

morning, Good Andy.

Andy Kaplowitz

Ivo, to new last seemed high you’re your growth positioning time single positioned mid at product market and being toward Gates industrial deliver to markets have talked and accelerate. think outperformance about this index I digit year vitality you

You've products new in the Fluid got to chain these that years. in introduced over of last you belt couple Power

the growth think about you in do X% of X% the context market gave 'XX? outgrowth how So to for guidance you organic

Ivo Jurek

us into take we be a be just what with associated very But shortages, what outgrowth work demand, are through position the market is particularly underlying outgrowth. we the issues would to resins seeing I we once was shortfall. with more raw we in the think the that in are very material constructive material and that raw use we well the a as to of lot market Omicron deliver again, demand, labor being the situation. if Andy, in account robust the I positioning underlying terms a as realistic in associated

Andy Kaplowitz

said digit on Got guidance? in how baked us markets more it. 'XX And about you color I then what's maybe give low auto some your replacement think you to China auto pretty could replacement OE into auto not for know and based double was auto offset more a more think growth you. skeptical QX, said you I in you're decline more around which OE, than And big OE. I know

as You for could But climbed back replacement see an guys? 'XX. in given slow, get part the we extended cycle quickly production global car continues you so to older,

Ivo Jurek

we six And But to as that across auto like the in to the replacement QX for absolutely kind impacted Look, replacement been the quarters. and QX growth 'XX. has labor auto that material to continued deal low absolutely last over raw in terrific comps continue to believe else, and challenges We us we've with well deliver Yes. in supply nice entire of mid it terrific by very is digits going enterprise. also everything just XXXX. is grow single business

care market, extending. the better the life well through, those need those underlying we and we the if of market. out, the to that that in lifecycle extend work that The on And very you more I vehicles. think take vehicle So life, more Andy, you we is the believe on capitalize pointed strength you

underlying believe that production. OEMs' skeptical OEMs, in positive the ability the about trend we automotive very are AR. ramp is we more up Vis-à-vis So to

very been XXXX. in have skeptical We

being think that we overly as I were negative. viewed

production OEM I carmakers' it is as us on QX view than in become And worse ability business of have with got global demand. what lining before see I ramp to the recovery their outlier, need puts an little get our think we to be flat that auto bit we and anticipated. up that kind keep but XXXX. a I underlying the that may more constructive that

Andy Kaplowitz

kind that just to OE for Ivo, Is of clarify. guide your Is And, flat? 'XX? auto in what's

Ivo Jurek

up, low single It very Andy. may be digits

Andy Kaplowitz

you. Thank

Ivo Jurek

Thank you.

Operator

is Our Jeff Capital KeyBanc Markets. Hammond next from question with

open. Your is line

Jeff Hammond

guys. morning, Good Hi.

Ivo Jurek

Good morning, Jeff.

Jeff Hammond

seeing guess you bit most been is little in better you're it and steel availability. hearing I where but maybe still? inflation still price speak acute some seems we've maybe those resin, Can what on a to and just are inputs acute like like availability challenges

Ivo Jurek

Yes.

I -- in well, I that I material was So -- availability see that material That they green would availability say would say some QX. raw say peaked on tough. starting Jeff. was raw would really are to shoots as we

pretty better. We're in facilities. on I more polymer issue but constrained in additives. being certainly reduced the impacted vaccination that in constrained see across would to that operating facilities those QX There types say or number available starting additives low maybe the some And through for still not the of quite board. really highly Also, our or rates is are bit the in material getting are little facilities We that significantly are of for much The amount the QX, are biggest we are additives -- consumption highly that may resins have reasonably production of break a Omicron is us QX. significantly.

we we our the works will more So capacity, much better with be of I way And really beginning situation. to I'm second maybe hoping combined but QX, in and constructive be as that little incremental that think QX is the get through, into would should about Omicron a QX, half. in say additions we the as

Brooks Mallard

inflation on still people the lot for even XXXX, price year beginning add increases prices that the Remember, throughout the of of suppliers. a to want they're though -- through raising been question. have I roll

though you XXXX. move even price inflation, you're so through to have as that elevated there's And in you more see still an going

Jeff Hammond

Okay. underlying order bit of what's overall kind versus Is maybe seeing environment? like And slowing. where versus of been deceleration because order a then you're pretty order-- any just only true struggling versus supply healthy the market on some little constraints on China it I'm kind the a

Ivo Jurek

is but predominantly Jeff. some still of driven Yes, Year Chinese and seen a and the weakness QX in in associated start seeing the New said, for of external little the mid on Julian's you QX, question, China comps. see digit we’re anticipate we there. that be, as frankly, that I we And anticipate more that Olympics weakness second positive by bit the we will I that placing But And Omicron also of that quarter. been degree China. they single on manageable seeing also as the think the I where should has would say region, improve a in to have cases core issues restrictions where only year, with exit government we that we

China well see as in So positive we on some certainly outcome 'XX.

Brooks Mallard

would that. say I just

Jeff Hammond

Okay. Thanks, guys.

Operator

our Bill any concludes I'll Waelke turn remarks. the closing call session. to question-and-answer over back for This

Bill Waelke

Thanks, Chris.

we mention planned March for to Investor York. X our Day, now New afternoon is Before in want disconnect, the which briefly upcoming just of

rest a please attending information you've If in interested day. the contact Thank and interest in-person, your any not and at received us for in you are investorrelations@gates.com. Gates have good of

Operator

for this participating. today's concludes gentlemen, webcast. and call and Ladies Thank conference you

disconnect. now may You

Gates Industrial (GTES) 7 Feb 222021 Q4 Earnings call transcript