GTES - Earnings call transcript Q2 2022 | Gates Industrial Corporation plc

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Operator

Thank you for standing by. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gates Industrial Corporation Q2 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be question-and-answer session. you. Thank Instructions] [Operator of Head Investor Waelke, Relations. Bill

begin may your conference. You

Bill Waelke

call this our briefly Jurek, Second 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.

our results. the release of the opened we today, copy market published available A website on Before investors.gates.com. our second quarter at is

a the now our website. we and by presentation. being included certain the our earnings any implied These of different risks things I'll our include webcast Investor that to slide These useful we to that that, non-GAAP and other Securities disclaim statements Private Ivo. actual call, forward-looking are historical forward-looking each call will have On to the meaning section the such update in recent matters release of With in financial in will remarks of others, the on to Litigation these Our of statements. reminder turn among described subject of most forward-looking obligation XX-K Act. could morning expressed we provides accompanied or with report this to We this SEC. and in forward-looking is those Form non-GAAP Please a presentation, Reform annual be filings over is make which financial believe are from cause results risks evaluating our slide materially refer include, the by to available statements. that within statements we measures Reconciliations our measures performance. presentation, that refer in slide Relations X in which are is

Ivo Jurek

team's very operating our today. Thank continues begin constructive our demand slide you, environment. in I'm a trends improvement for We first headwinds. generated near with last on our of I'll most call for FX are and China, book-to-bill in the of our suspension and Russia, inconsistent against lockdowns the incremental our results pleased and despite compared Good grow the with in in remaining are of which backlog the our history from business you the markets, performance, represents These quarter to of products presentation. record revenue company's COVID Bill. X in thank joining solid everyone, our morning, Underlying year. best across the quarterly quarter above one. QX

its improvement profitability trajectory of anticipated. as Our continued

taken allowing abate, positive have we inflation have us not momentum gaining pricing we be seen While in to and actions are meaningfully a the significant position. price/cost

to successfully continue navigate improved. material We Raw dynamics. has ever-changing availability operational

However, to certain inconsistent we petrochemicals across key of we product face supply lines. continue use

in prices still logistics we and container seen freight Although, have spotty. some the intra-region is port and of reliability easing congestion,

number with the external June, issues managing year comfortable these are of from impact recovery respect a We significant exiting have began a challenges, China, progresses. initiatives through as the underway and the lockdowns. the of to to mitigate business these COVID see in of our to we With impact

time in operations degradation additional Russia, we than out of and at not the continue China the base experienced specific what up of for normal initial of a lockdowns ramp pace slower we business our somewhat to towards take local However, the in activity. will their coming COVID Outside steadily but headwinds have XXXX. seen customers anticipate we We expect it will recovery levels. and this more supply

full in control through the outside outlook. headwinds We are will is our anticipate year our view experiencing more This updated our of direct balance significant of year and beyond the operating persist prior the reflected FX revised challenges expectations.

while delivering and the the execution and meet demand the margin support present the critical second sequential through of continued in growth environment operating sound, is Our business end year. the team's needs focused half revenue managing expect market is solid expansion to our our and on we customers'

X. slide to now Moving

$XXX total of industrial initiatives on by was our million growth secular are markets focused Our tailwinds. where end was growth on with by X.X%, FX core revenue led offset the headwind. a Core capitalizing X.X%

solid markets Our improvements did Mobility in business fixed and and applications; our driven that delivered Middle benefited are in by agricultural products strong where applications which increased North out activity industrial end America another our Off-Highway, East. Rounding markets, quarter Industrial drive growth top-performing of as our efficiency growth from Diversified in captured. Energy, end were

operational primarily This million quarter from EBITDA margin the well more a Second sequential raw XXX was impact the favorable of driven by per from driven pricing, associated of in higher adjusted $XXX growth operating share as offsetting representing improvement income. quarter, sequential points. representing were or availability. and Russia earnings $X.XX was negative primarily challenges of material with basis XX.X%, improvement as XX%, inefficiencies Adjusted China by

X%. in of X, decline revenue impact Moving including slide The segment. of negative the limited the to higher products of million results, Power as certain core of disproportionately much and Transmission by level segment X% its revenue availability to as compounds and a engineered China impacted our well a $XXX our this segment Russia of FX was quarter, in had segment exposure and used

market. saw end at Diversified the our followed strongest Looking Industrial in growth, the segment business the total, Mobility by

against this And are product have several As bumping we we made are initiatives the address over limitations with the investments, up. of ramping online limitations The capacity years, expect strong to them making lines. past we to the our in these targeted a result some we half in up are come progress year. growth of certain second

in We in of solid XX% FX performance negative board of revenue had X%. growth and segment, markets. quarter, end the saw growth the with double-digit all across of core impact Power a $XXX core including million Fluid Our

Automotive posted Our strongest in Replacement growth performance came our the in, in low-XXs. core which business,

in industrial complex. markets demand benefiting end to our the low-teens across similar of supportive rates saw All from mid-teens, growth the industrial

with all XX%, products at of also which to products, profitability, more over is was respect difficult environment operating well and shortages. new primarily of Russia margin of growth, our inefficiencies Power sequential China, expansion up impacted XXX raw the a exposure With targeted by perform associated replacement saw favorable the its of with support margin. but the not points. basis and includes to of Our incremental, in Transmission segment segment core continued capacity and the our of legacy to ramp Despite growth material

revenue segment of channels regions experience. in challenges. basis segments, both Power to the respectively. we and Fluid response and quarter availability actions pricing margin sequential fewer year-over-year expansion all generated and the margins points, XXX converted China we much XXX growth across inflation In as manage to in its exposure into Our strong and as material less well Russia It higher with significant

to for the expect to Brooks? in additional results. half. to contribute on our expansion We the continue color Brooks, the momentum second turn pricing and margin further now call over I'll sequential

Brooks Mallard

Thank you, Ivo.

the growth markets growth now growth growth overall initiatives material slide X and of was region COVID compared China revenue the Moving performance regional drivers North in to to supply prior Americas despite The year. represented America, with in on core Improved continued primary broad-based, from were of our and the QX. double-digit all every core revenue acceleration the EMEA from was headwinds lockdowns, end growth our substantial and revenue challenges. the breakdown and In core growth. execution X.X%, performance, our Russia in pricing

growth Our all Though channel a rates, supply XX% sales largest to Energy in volume range. perspective, QX. backlog reduction in the the From saw mid-teens additional Off-Highway did to rates and chain remain Mobility, and growth the OEM end we strong, headwinds order had in highest markets sales customers. prevent

shortages. strong a Off-Highway, than all modest with pricing X.X% core growth a in Russia in had from We automotive revenue by headwinds nearly Mobility more and performance Industrial, petroleum-based EMEA end decline Diversified growth material offset was specific industrial Our core by significant markets, in which first-fit. led double-digit offset and

was across replacement also the first-fit growth Russia, channels. and Excluding balanced

second China a and As core in quarter difficult our created call, earnings our in The demand we resulted dislocation COVID which environment strict communicated supply chain of result on lockdowns. in it both operating decline was XX%. the a for the revenue overall as of business in lockdowns last a the

movement completely down was approximately our impacted One in the severely were six goods. reduced for areas materials finished of weeks, shut surrounding by of the others while facilities production in Shanghai and

to recover. business anticipated. it we will it what in recovery we likely COVID The improve, continued steadily rate happen at July. previously while the our ease expect to began June, in started lockdowns to below slowly And As a

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

Off-Highway performance East and strong saw and another end remains quarter with we end Replacement had In Diversified core steady, America Auto our On-Highway, by all South led of Industrial. saw India, in market. We growth markets, On-Highway and solid in business demand XX%. the and Asia growth across good

focused were meet market The pleased with we're flexibility Given dynamics the and operational specific our maximizing regional remain the regional fluid, we overall. performance to our end demand. challenges, on

slide to some and X balance sheet details key and Moving flow on items. now cash

of million chain partially cash higher the and logistics VAT cash $XXX was of free investment impacted delays mitigate by by taxes reliability in regulatory Our collecting also negatively supply LTM impacted inventory, in primarily impact in challenges. working due certain capital, environment. and We're the being to flow higher temporary to receivables, changes

in items these to cash improve and all expect the half We of flow normalize of XXXX. second

XX.X% lower lower adjusted the We net QX. of was increase EBITDA. LTM by operating primarily flow on cash invested the was solid compared The had at X.X decrease end at X.X to slight times a return and with of driven by Our LTM end primarily quarter income. the year-over-year a leverage times, driven capital free

to X year slide Moving full now guidance. and our

of we to have outlook. end in our are constructive, the be end We environment key demand bottom revenue markets. coming core the to additional continues of and support increasing growth capacity range The online

well We rate we rate reflect challenges in of expected A minority FX expect lower are the tax impacts. slower are these overall to impact to the as partially now the continue logistics improvement a updating material to that for and availability remainder China, interest offset outlook of of as year. our and and

year EBITDA range share. our $X.XX $XXX per per range full We adjusted guidance million, are to reducing full $XXX and to our share year earnings to $X.XX XXXX to adjusted million

between For of QX, more sales overall in and with the similar terms quarters muted second the expect half, seasonality margins. and we looking QX

We as the adjusted resulting sales half volumes we EBITDA flow, points flow to cash investment in generation margin half in cash the in to second in the expect to improve QX. inventory of expect respect drive margins to back half. a improved higher materialize, XXX basis free good second of year sequentially to pricing range additional reduced continue the XXX in and profitability With and than

year However, anticipate availability of to supply the chain exiting we with material from minimize and inventory further disruptions levels challenges. elevated

As our updated a result, guidance accordingly. we have

neutrality the for higher potential pricing for the believe by mindful on some pleased the the impact are will With are of Ivo that, of inflation turn progress final the made margin track of energy it with price thoughts. We still I with to year. end back to we to and achieve costs, cost, although address we over

Ivo Jurek

Thanks, Brooks.

the a performance under our challenging summary wrap on and recognizing the to and efforts I conditions. Moving our perseverance takeaways. around associates like now solid key few would the X to drove whose of up world determination slide by highly macro Gates

While have in a strong the operating poor due we geopolitical the in market. and remain environment navigate chain reliability volatile of management inflation team near-term to in we to events, place supply an expect uncertain to globally,

flow on Throughout we business and initiatives, the we contributing innovation several committed which stayed engineered is are seeing. years, to focused in and our order growth solutions delivering model Our investing customers. are highly mission to to our the resilient critical, strong past

continue our to momentum pricing coming on operator With volatility market capacity strategy. growth in benefiting Q&A. ramping the are the fast-growing begin the are we our up. now well-positioned the opportunities for of back will our Whatever quarters, to experience expect mid-term advantage turn of that, deliver to advanced the anticipate solutions are call we products in and confident we take over targeted I and to process and from We we

Operator

first ahead. [Operator Instructions] of Revich question Please from The Goldman go is Jerry Sachs.

Your open. line is

Jerry Revich

Good Yes, hi. morning, everyone.

Ivo Jurek

Jerry. morning, Good

Brooks Mallard

Jerry. morning, Good

Jerry Revich

and it's your assumes wondering you in mentioned cadence know does your could guidance China. I'm about below business on tracking the you the just rate business in if is for fourth rising Thanks. year-over-year I what And lines prior sequentially. for exit point year-over-year? What of your how it's the China? put finer quarter expectations, a

Ivo Jurek

Yes.

through China we of that month the the we indicated, right have we a a shutdown mid-XXs, maybe in worse quarter, When see Clearly, was occur. as China June, Shanghai Jerry than what anticipated. significantly activities things there tough start reopening. that down pretty little Shanghai not as and we anticipate nearly of did across entered well. was we'll the business then shutdown So, and month impacting

than cadence what a However, QX have did much we we experienced May in April, June. exit and better in

in June. was So it better July progressively clearly, well come as And than significantly has better.

So we feel progressive just being just as a when have recovery. sharp be in seen really snapped realistic we back nice it as seen we of sharply. recovery, a But we the very what will XXXX have don't are that progressive that snapback China very,

perspective, flattish anticipate our we in be exiting QX that somewhere in from we China. single-digit to low the high and of QX down single-digits So probably will kind in

Jerry Revich

given like year. I than that given normal Can it different be think the just the on Appreciate and well price-cost, the might year, And it. then wondering be fourth production that EBITDA if your case But pieces you comment this would as the as color. the you that, this sounds dynamic Got moving year, seasonality. cadence please? margins expect all which of highest I'm quarter to that be

Brooks Mallard

Jerry, Hey, is Yeah. Brooks. this

that's tick I the capacity, Typically, -- bit to the But a we're additional have more pretty more to mean QX. as of sequentially to ramp going and in at we've going be I through way think it, down little the So coming do see we think the it's that's muted seasonality. even. year, look, close. we looking going given got think a pricing online we're you

the exited that's chain say compare the things if would in little of the significantly challenges bit price, we slightly to as now Pretty after I not basically year. cost, like year supply better of just margin So a and to then probably getting exit close correct. we impact that. up how you when some done XXXX, And right, shape, QX, these in repairing repair maybe and

pretty exit feel we to So we're we good about going when where year. be the

Jerry Revich

Great. Appreciate it. Thanks.

Operator

Mike Halloran Baird. ahead. is Your of go next from Please question

line Your open. is

Mike Halloran

morning, Good everyone. Hey.

Ivo Jurek

Good morning.

Mike Halloran

got So across that you've demand fine most China pressures. kind Obviously, question of of working then, the off verticals. seems last there some

capacity coming on. got You've some

like? backlog you're to working normal think at more start you So what and that point new going moving looks whatever do start your down towards

Ivo Jurek

previous Mike. seeing kind should end we we that's towards We that start Yes, to Look, of capacity in QX. incremental QX QX. in stream happening, going into we've our is coming that, and believe of down that's kind of, guidance anticipated basically coming The on now the start backlog installed, are supply now can Ukraine probably material to ramping capacity conflict has Power as significantly a chain and issues alternatives impacted availability also further of that and raw -- just We're the number in issues. working predominantly of availability on the Transmission our And Russia petrochemicals. you up. different particularly appreciate,

not something became world's that's are dealing although anything are we available the of And has so miniscule that complex. with. half completely And and the even year front whatever the there, we was evaporated things in capacity, from buying capacity more

XXXX. believe have but that seeing So start down of on a we solutions, sight should -- backlog we we alternative and we exit coming as line

Mike Halloran

you're thinking into it half acceleration just excluding end what Maybe And by cracks and puts challenges portfolio? demand. about the you looks some then year XXXX. on back sounds about in parts there's any current demand and side again, other the things, the your Russia think as like you're is emerging of of market the commentary somewhere Just trajectory to takes thoughts sign the the potential in demand of of like. there If some or as side, confident pretty the regionally China and you in listened

Ivo Jurek

Yes.

of challenge going I'm on is known a the not obviously, look, to time So right, spend lot China. it.

being Mobility said, North Europe we we is a through with supply very But fact on in we seem predominantly coming loss a trajectory us standouts excuse cognizant supply availability shape. in to that win design is but presently is reasonably than either about again, in we receiving all for everybody industrial speak. of maintain delineated anything being see And had I the in Those for revenue impact both tell nervous. Despite see still still, progressively We on the industrial America. North the is for in I we in supply Europe activities only markets as amount side, end gas Diversified growing, the issue. getting through would fact The that say situation numbers have That shape. an a not we able frankly, be to so that far, are for of opportunities it you, quite significant can are more -- us are the an being And good growth exponentially, robust But still me, incredible something any or that incredible of real Mobility of amount is have potential QX, of good to and good better. have Russia. the strength of be impacted a We and markets on as of Europe activities. demand. that America our we – backlog very is and indicated the Industrial. two out else, thinking that even I'm calls reasonably it's us. challenging, is

very try are remarks, present still see think in So also of ahead. we prepared balancing for balance situation product. And we our what's our but about a yes, level are that we with caution cautious that we with reasonably I that good demand the to

Mike Halloran

Thanks it. Ivo. Appreciate

Operator

Your ahead. Stanley. Please from next go from Pokrzywinski is Josh Morgan question

open. is line Your

Josh Pokrzywinski

guys. Hi good morning

Ivo Jurek

Good morning, Josh.

Josh Pokrzywinski

the some Ivo, of that -- these costs on like in the way, expedited are freight. temporary of kind things getting

the those of whatever you now? what progressing is If those, do then see quarters, months, add the do over you several impact over? And next to how of kind have visibility you were frame up think you all time

Brooks Mallard

would the here's frame it. way I So

the place in and and So operating the of freight there, have these ready so your multiple, There's There's to cost. say, doesn't get I are the right? variances factory but like that. go, would material things you having cost cost the

the frame of the get as through way and are it perspective can And goal progress can a math the have from and exit up got get the you first, XX% want exit we where we be XX%. kind think year end of got look going, we so, how about and we then When at But to and you how that see XX%. about we've our think margin of where to yourself you the year. year we right, When short do the year getting margins back and I'll in to the is you a And term, difference, the the you kind we that, medium-term to of that variances. out get to of to those we door. to, top volume of on get being product want by missed the where not able operating primarily it's then the additional kind to

in So, just good be get couple we've back and exit a where of as we other we very got be want to shape from year, those perspective. and back pieces, margin price/cost the then to to we'll

Josh Pokrzywinski

are giving you bottlenecks slowdown, see the guessing with Got start where it. trying that kind a of some OEM inventory about And then you guess, here -- of some broader in terms But I if their and that ecosystem the are process. sitting or the guys just sense they more those your not OEM. guys if of on in I'm point Any like, up are have being, ones do are kind kind production know what your guys any that your information to for inventory they're the are? to to of you be look of of where imminent, I would a customers stuff if operating and maybe fitting but in auto just risk doesn't that's schedule? the there? of there's you more of guys bit gauge holding don't

Ivo Jurek

certainty, have have the tell that our Yes. every products. service I through across actually our inventory that automotive you we customer we the maybe that from certainty today, can spectrum OEM of that industrial no customers Josh, that's I with – only

in very get holding If issues mean with portfolio frankly, ability are are also solid, you that with our there amount our compounds are wanted a today, current Power these the it buy that is but Power demand But up some several applications, cooling, the I to numerous commodities we take cases their a good as associated to particularly product would my Fluid availability described in actually have customers I their not like of would opening Transmission. we're remarks, lines, of be. in you a the as long in battery couple there engine of cooling that highly where our engineered particularly our we And balancing across time resins, products. we to to of and we finish use very also are them.

needs. inventory So issue about we're would everything that our OEMs customers' critical all. can that not worried is across an support to the that say I doing But presently, most we I'm at

Josh Pokrzywinski

helpful. very it, Appreciate Got it.

Operator

Jeff next Hammond Please ahead. Your is from of go question KeyBanc.

open. line Your is

Jeff Hammond

guys. morning, good Hey,

Ivo Jurek

Good morning, Jeff.

Jeff Hammond

Just FX supply the And $XX around -- out slower growth China this there's taking core wanted to versus much is little how I But much expedited dynamic unchanged. try it's either is chain? EBITDA a is How to just offsets price/cost impact? if freight, to the mix longer, spike bit million know a China? reduction, don't

Brooks Mallard

the rest look, of combination and chain improvement supply the things talked in FX and challenges, China other it's the that XX% about. has Ivo about of it slower So is

talked operational. So we of it about it different things about All about, FX. is XX% of XX% the is

Jeff Hammond

just share or all in shifts your to seeing And competitors question same are having helpfu. Josh's the any back Okay, availability just around -- kind of around you then boat? are

Ivo Jurek

that I in is Jeff, would say a industry reasonably shape. same now, Right the

extremely of Our lines the some are is just Fluid secularly Power, some we Fluid constraints. we And in have across segment do well. that not Power, obviously, performing availability some attractive facing

predominantly think, it's I So Power Transmission.

struggling see of the years. we only maybe I very is very, will both but our feel have our we but than strong, stronger that maintain activity there, in expand not couple to segments seen is designing of amount across I very think confident the that share, Jeff, note, come our would market of a capacity to particularly we online. ability, as about everybody

the good uncertainty facts pretty about, from So we the the the feel future about ignoring what holds macroeconomics. not

Jeff Hammond

Thanks, Okay. Ivo Perfect.

Ivo Jurek

Thank you.

Operator

Mitchell Julian ahead. Your of Please Barclays. go question is next from

open. is line Your

Julian Mitchell

the I just on wanted sales guide. you. to Thank morning. focus organic Good Hi.

quarter. X% growth in you half the first think I second the in did and about So,

second wondered, And how low help Just saying grow that X% price sort within that, Maybe the of QX, please? organically. was double of in will the versus digit much understand you're then half, price? us of volume sort

Brooks Mallard

Yes.

north the that, a in price driving then was our were volume of really was look, that And offset XX% So of which had the little we the all piece. QX. headwinds

had was You about, some the more the you and the us. lockdown, really China growth offset had impact that have chain supply that that you talked secular then by And organic had. full-on issues we then which Russia impacted -- some actual we

that's the number, volume little headwinds, took mean, about. give a than you all I if -- we that really talked piece more took volume about it XX% those you the and off that piece. growth the we over outstripped that And that the total would So core talked XX% bit of

Julian Mitchell

half, And then you've growth low got the -- sorry, double-digit second in guide. core

that kind volume, price of is something So of that? XX and like of two points points then

Brooks Mallard

the much second the as No, we half. we did with as first in price half, have don't

I So would it's than that. certainly say less

Julian Mitchell

dialed volume some into half there's guide. the But second Okay. growth organic growth

Brooks Mallard

I going like there to then things there's that. fees, Yes, Russia got -- mean, and that small get you got got you and kind you're normal remember, We've impact backlog got from some the and year-over-year we've reduction, then right? is. seasonality of

flattish volume we a growth flattish little to bit maybe maybe So -- on -- actually all you that then kind bit a more of price it of volume, and probably have up. being of and kind most up, little add of

Julian Mitchell

cash around my free then flow. you. and Okay second And question the thank just

million through like don't after minus half, I year-end. I the think sounds inventories the flow in free need, in $XXX $XXX going it stay So are to of like high know, second million something first. the you But cash

step-up think don't earnings huge half-on-half. is a I the having So

in that the liquidation? you'll flow think does you a Do gross is cash of that carry dramatically, coming So bring margin $XXX isn't you get liquidate you where it same? -- a inventory it when headwind. million of normally, free inventory, understand, see just companies something, big down trying to And when or do sort swing if from, inventory

Brooks Mallard

No. of XXX% that profitability I'm Well, -- that comment sure first not all, correct. improved is

the the We first are versus improved second in going see to profitability half. half

in One of really capital have we buildup going right? drive had it, things is receivables bleed But a So inventory about to collection you of have there's a off is to levels. of capital to things of seasonal that So my we a And that pretty capital. normally flow. business, remarks. the through remember these cash some there's on working four normalized the capital operating going then are reduction we in working profitability. four the and talked are improvement that improved then prepared have normal -- One that more working about that to the right? VAT and The talked drive I seasonality working

And that's so if get you add how all you up, those really there.

Julian Mitchell

comes as any it. down, lever, Got the mentioned, inventory the And fourth you does that have gross impact? margin

Brooks Mallard

No.

see much around width -- are and finished side. more I inventory reductions more raw the quite be going how I in on the hold to business going we goods to inventory been we're much not as the has think our mean, and material

through still due concerned backlog. of overly about we Remember, year. not the we're a past half work So, the we that of got lot as back

And what we can we build so efficient as as in it and build get we we're to out it terms of, be how trying the and door.

Julian Mitchell

Brooks you, Thank Perfect.

Operator

is next Your Raso ISI. question from Evercore ahead. Please David of go

is Your line open.

David Raso

revenue Good if I taking the Hi. for the the guide? total X.X% guide this. year? growth what's missed the the What questions. for drag it, currency organic, my And I is was what Thanks in So morning. now? apologize,

Brooks Mallard

a just on Hold second.

it here. grab me Let

kind at looking full the range. we're Yes, of headwind. X% to X% year, for the in So FX

David Raso

just Yes, trying I'm to Okay. figure then--

Brooks Mallard

Closer to X%, actually.

David Raso

I'm EBITDA. of you're speaking took operated of, out of second second same I of being hey, took $XX we million mean, still And it's $XX place. out actually basically, the million revs quarter it's X%, in you well pretty of figure, dynamics with to half a lot if trying or sort X.X% negative I and the guess for

Is you that -- well. So, improve in you the the worse it's nothing expected? all you that getting to sequential in is half more allowing of way It's to half, allowing clear, not second quarter, worse. a it function just Just previously relatively again, expected. the just it the the doesn't get you the improvement operated be same? It's second not you second

Brooks Mallard

I Yes. right. We're it's in half. not getting No, look the better as-- I not you mean second -- our just if guide, We're getting think we're at getting

David Raso

about basically, guide, But were in is XX out causing operated to the it pretty though. actually EBITDA that talking change XX and I'm are a in XQ decremental. okay. issues Like and revs the in the dramatic place you take

Brooks Mallard

we're but of getting to No, basis better not incremental QX, are back in So, the yes, points see -- QX. XXX well, -- going half margin better XXX we getting to versus improvement from remember, okay? we're

what from on are was the our exacerbated, China impact Now, issue raw is COVID then of supply material the definitely lockdowns to guide going shortages efficiency. operating bigger but be the the the more the our issues and and changed chain issue, bigger probably operating the reliability

of over And really fact changed what But profitability calling the the so from not that that's XXX sight let's lose guide. of bps XXX to improvement are QX. we for

David Raso

core you on bad right, the given appreciate so seems still it, the decremental that it's It's Yes. you just the the least the like at high? material to revenue is enough that organic. costing But raise getting more you change, that's is -- raised that. revenue it why guide, No, guide the get I on you're to idea, so

Brooks Mallard

so piece. too, the would right? there's that pricing Well, say a element just And not in I it's Yes. volume there,

there, more it. But I too. yes, in make to, a So, think, costing pricing it's there's element us

operational the chain these think greater are of supply issues efficiencies some impact of than anticipated. I

David Raso

asking and availability no, cost question, new a the rest to much and to at I shouldn't -- even capacity But capacity produce to part. ramp more know comes or on, the where? added the have can, how it the help with I sorry, more color polymer is is chain be with do key I of when this can additional give incremental you the it all their when little to we'll up? then supply still capacity the coming -- guess, does a they need the of we being And And us on

Ivo Jurek

Dave, So, there the of are a couple capacity. things, incremental about

to opportunity particularly to our incremental about fulfill and an of flows the and order industrial going First automotive give capacity are industrial an that's change that pipelines. and foremost, we us seeing Mobility, it's specialty several for

to in. to future, be that's coming pipeline, the is in a ultimately activities less efficient operations. going some is potentially the capacity last us an piece restructuring do in opportunity sometimes So, where also with position specialty give the Those to

we're pieces opportunity more simply growth of one you give product So, and term a kind longer capacity. you the capacity of adding that's two going going is efficiently. to other give an to One that's to over produce incremental

David Raso

just you margin the of coming on discussed, on high products that stream. very So, capacity what's given coming type

Ivo Jurek

It's that coming Yes. an capacity said-- accretive online. being margin That is

David Raso

this -- be And Can is the an older costs. might -- bit across impact whole company, inefficient a it products, revenue extra like high-margin a sense it your of sounds the adding in you quantify XX% be? thought capacity Just little what of but X%, process?

Ivo Jurek

original your polymer this. -- back that Coming question would input to the -- highly constrained or maybe plus something is that I This X% somewhere we with not about the probably minus, polymer, manufacture. the issue material not is an right probably to is supply. raw the engineered extreme think is guide in that it a that's the about number in

two not world, much account Russia came the into around escalate so capacity price for to happening. two, the taking type through of and Ukraine. the offline continues situation. how things demand Number polymer, And conflict there's and of just And in one, enough the supply traditional are it simply

an is to So, issue we are that address. trying that

address it. line to sight a have of We being able of

are things. with. seeing -- couple supply. to in in been relief some start have raw we're we engineered a two, we that solution, particularly QX, be able also not that course, we're of certainty we around a just to And other long-term material XX of depend on alternatives One, last doing counting but that's XX into of in through lots everything the position not are partnerships over really the taking qualifying world, We we have that level believe account engineering to months. We that happening should of sources,

situation we both the in position about be So, be ability side incremental realistic raw on to and ramp one material everything take to input. -- a take in just solution want our to advantage to that up to capacity the be a and to of

Operator

Deane RBC Markets. is Capital question next of from go ahead. Your Please Dray

Your line open. is

Deane Dray

Thank you. morning everyone. Good

Ivo Jurek

morning, Good Deane.

Deane Dray

produce or availability had able the we to material raw relates in with that where this of that they left you've market the it there that are of OEs can't everyone's some these have on Is question related resins? Ivo, getting Is elsewhere? boat, follow-up to where off any want left you you and that just lurch challenges too, product? just the said to same particular I some And being share in a there, Josh's supply sourcing loss to or OEs.

Ivo Jurek

in So, that used the polymer a the this is reasonably boat is because common that are impacted. is Deane, everybody same in products

they're ability not of similarly but kind they that getting It's tough raw demand So tough bit just were be the that in building we little just getting it to simply like timely of perhaps what just material. buffer, they're because need, the There's raw I OEMs fulfill is what the to, our of to all and to a to a available. think would are they -- getting if no they buffer. material interested build any it's

would kind me. that order share of notified I we loss escapes you not any of I the I apologize, we seen And nor an end -- have through not been but that So have market of certainly front -- have flow. question tell we

Deane Dray

any risk your for No, in you you addressed that, second energy factoring Ivo. plants? rationing And of any Europe, then are of question, manufacturing in

Ivo Jurek

use, at natural Deane, we alternatives pretty look in particularly gas. ability our we forward-looking the to energy about are that to

energy facilities continue So from are able that to in putting operate our in constrained a reasonably be to we environment the plans input. place to contingency

it how we alternatives. we obviously, what pragmatic about gas to think, So feel, severe half. okay, will second the do have, But will may view it time taken I and be, tell of a in having Europe

Deane Dray

guiding particular you And end Brooks the range. previous share the out there last there? of anything pushed just CapEx that's to low anything projects, can one on Is for been on

Brooks Mallard

like or pushed completed. matter It's a has nothing that. been anything just out No, of and getting done projects

Ivo Jurek

these materials, to complete would I your be some secure key similar components to to raw Deane, as equipment projects. add capital to it secure probably is ability of able to difficult that

to of out. environment it's being that get So forth. some projects these adding you a one I components. been is so know these just stretching presently the you of this are controllers have don't headaches drives And have, level and if with if of that or on lots say would uncertainty speed critical We in able so you can get of variable and capacity

produce not has when ability products, impact, also your So ability on but projects. produce to some an just to that larger your all these of of capital

Deane Dray

heard number We've that, Yes. a exactly of say Ivo. companies

that's that lower So also in understandable completely that, gets reflected CapEx.

you. color. Thank that appreciate I So

Operator

of question next Citigroup. Kaplowitz ahead. is from Your go Andy Please

line open. is Your

Andy Kaplowitz

morning Good everyone.

Ivo Jurek

Good morning, Andy.

Andy Kaplowitz

resiliency growth? Mobility Ivo, on have they've Personal that go as improve Personal talk you've could organic trajectory And consumers? end out about assuming Industrials these are those us you Diversified materially you you hold they been know investing about been concerns where enough, up, XXXX, of the for of told and be to the But to then you Mobility's can focused businesses. Gates' big do strong. as any in we expect exposure Gates you into markets they Obviously, going

Ivo Jurek

in impacted the take probably Personal markets at you two our an that line. I that right, see And chains. to business, so, may could that we meaningful. a dollars because for of just than it's $XX on gets takes it's that replace is it supply. we scales up, years such offset that soon trying -- three and not as and discussed, pretty mean quite Obviously, And could I environment. Mobility, XXXX, the represent view more can some impact are hundred million to that headwinds be or the us bigger -- opportunity particularly and of an a million think very it other and and I to demand supply had as challenged then decade the a early stage robust can electrification less we couple approach as of starting Consumer on and the maybe get up economic they that was could substantial. robust, you two as plus as Mobility just, going for backlog Personal very kind a it Mobility to in is if We Look, ramp have of mean, penetrating we Yes. with belts that business those is

operating this there. Gates a and what chain-to-belt, for have long much plays in for are focused exists We we excited assets. folks that believe all very industrial that reducing time. in COX footprint, can We for better very particularly the as about that efficiency industrial to -- happen So opportunity well Corporation bodes more are initiative, similar do very, on

we that, launches both future executing will able demand, well investments secularly vis-à-vis great in So, opportunities is within of what for although, happen and macroeconomics expansion be tell the what and of to new we you this And XXXX that new product development, I our lies this that's more for us. capacity end a into making us decade. product support focused the continue can't clearly all to in end market in be believe of control, impacted on keep

Andy Kaplowitz

the still Auto is Very mentioned XX% Replacement obviously you low And which think strong. helpful. quite growth in I range, then

of continues part can first-fit that now And smaller understanding auto auto then, that talk your about production with expectations about you talk environment. in you given So could to maybe business? your what the be still pretty seeing you're the sales, difficult

Ivo Jurek

Look, Auto Yes. Power the in our that XXs Replacement mentioned I Fluid in Andy. segment of the the business, was

engine the side, -- in cooling piece it's So have that electrification on side, the we the battery kind about of past. in the cooling spoken

us. area fast for has So that's that an very, gone very

time But they a we the day lots every to of to it heal significant making are half because very build, automotive supply you to OEMs. growth more remain that you for very that anticipate being They calls first-fit cars. what believe building much as and are don't in think will automotive cautiously negative. about On the vehicles going the chain quickly take the not negative that And supply just volume of we and been from they're very increase in opportunity on said, second didn't for I this know shortages. the look, first-fit, an very, that auto that, believe recall, is have I recover we chain first-fit, there just automotive year. We the

not happen of kind I it? traditional if there downside economy would the that so. will the upside So what say is down, significant probably to flips

will I muted impact think on you maybe see maybe auto historically. more side OEM that than the

of Unfortunately, what economy of most XXXX. most stories, -- downside potentially it's extrapolate you second business of of AR. believe very half we good. probably AR I So was and staying like upside as believe and Russia AR dramatic we two there's -- look a in that even it's in our the it's not in auto is also our may OEM, mean, the an that a not tale in kind business for

account comps are Russia of well. Russia, So perspective, the situation. you quite continues into take very from when business outside difficult comps But to do that

Andy Kaplowitz

detail. Appreciate the

Operator

Coe question ahead. next Research. Nigel from is of Your Wolfe go Please

Your line open. is

Nigel Coe

Thanks. everyone. Good morning

of sort attacked through really guess, I guide, more the gone we've it we've half So, detail. second in

the of second roughly Brooks, second the we're year. in we down -- And -- level Just down in think a question significant quite -- half see obviously, the a sales terms forecasting I for is a typically, we're this drop drop versus quite dollar quarter.

of you part -- backlog. about also that, the talked but shipment So, I'm guessing China is

backlog So given where the normal sits be that if just Brooks, number, you give maybe backlog but could versus if you've just levels a little I in would helpful. that bit of color dollar us don't know today of terms

Ivo Jurek

say the $XXX not all-time of know, is two times is was backlog I kind of reference, are because, at And over a as we you and business, during but for the book the high. a unfortunately million. it Nigel, just business, what it's ship XXXX. peak will backlog backlog

of of some of quite the coming built engine from more Personal Lots of backlog. of the in from hydraulics and them Mobility backlog lots some some is coming lines, of constrained in in and the we've backlog them cooling. a bit is So

extremely because we at that as that tell actually am you with balance will it's and demand. in I positive at an towards more the and negative. the day can So looking will as I'll incredibly be backlog I this very drops, robust, look that the underlying situation not market I now look a

Brooks Mallard

I'll half pricing of we've well thing you one versus Yes. all And significant too to tailwinds place that the first get as as in comes the put pricing going remind second is, online. the in the half are we

So a well. to going benefit as be that's

Nigel Coe

it for seeing again. if about for gas ahead going then potential higher any I price, thinking because are of a but just prices how I'm on comps, rationing, for that. And that know one or What preproduction your dollar are you, what So, there Europe on the let's just or just out don't Understand customers preparing that? there's is there? quick eventuality that, lower of Ivo, or and with see year-over-year you case potential. Is a of happens? wondering

Ivo Jurek

I see wouldn't happens. what say it's a just let's

I anxiety, of think amount that there is Nigel. a tremendous

are do we just industrial I is what think that how for what I have some we looking are And right? enacting in no are capacity. facing that we that we assets. there’s everybody on I to problem is our plants, like doing, just we larger optionality at think contingency just right have thinking now simply plans. about, fruition, and of those the will mean, eventuality that the you optionality come they operate, should are some

see were you the I and I no I the difficult channels that you ahead it answer more be if give buildup any better Certainly, to do I OEMs, carry in able could I just don't that presently. willing a to build than see potential is see inventory, in even up so, not replacement wish And very any And that, disruptions. to of but buildup. inventory buildup

Nigel Coe

Ivo. helpful. very that’s No, Thanks,

Operator

from go Jamie Please, ahead. is Credit question Cook next Suisse. of Your

is line open. Your

Jamie Cook

Hi. Good morning.

follow-up. the of said you -- in throughout and Can sales sort of know comment quick you whether you're seeing changed on July? quarter on I the commented a trends you China cadence China. that Just

snapback your better got that of noted Some peers Europe in July.

flow. we Thanks. expect basically on seeing be in clarification, sorry, to where you cash July? the do you're inventory a So what just just on as -- Julian's you exactly year? question then just exit levels the Can And

Ivo Jurek

Yes.

Russia, off of Nothing of rails. a cannot a and absent see is And in we performance China the you business Europe, QX, we kind because single better. going a it's kind So, Europe, solid mean, in look, we quo. significant actually had just tell I much I pretty more the maintain was of our didn't purview I of in also quarter, status that is absent is Europe snapping mean, I anything in good. which back decay. that digits high pretty Russia, mean, second

Jamie Cook

strength continue saying into were other July people were that in Did mentioning -- that July? Because July.

the out trend how figure post to the trying just is I'm So quarter.

Ivo Jurek

of mean, us. that, remains I say. as I for said, I think a would I kind still. think positive, quo It Jamie, it's I positive mean, very Yes. status I

to no change trajectory in So Europe.

changing is Of course, China trajectory.

what any start as inventory, there eating we in healing. goods operating baking a lower lots put will been So absent could that into could exit will we a inventory, little potentially seeing that we point we anticipate, have finished instill. our we out they haven't we inventory is what China believe shutdowns dramatic our than Again, China last at potentially exit any certainly months. XX but not we we incremental XXXX. situation change the we Again, over are in of than in start -- is there but back-end a additional bit The answer better of recovery perform China, that to

that and able effect is the of lower net raw what continues more material to we are, ability that balancing we We production of to But time. inventory a supply. to So in do secure have Demand that on exceed the not we at again, use the any hand that taking make, offline. balancing can't we WIP level. are point our this we have we been are so

Brooks Mallard

color significantly, be And down carrying fairly our elevated year-over-year levels. normally We'll we inventory on inventory still a that. Yes. be be would. won't to back just what little bit We'll we more over of normal levels but

Jamie Cook

Thank That’s helpful. you. Okay.

Brooks Mallard

Yes.

Operator

now questions over the for at no to Waelke time. call will this remarks. are turn Bill There I further closing

Bill Waelke

you, time everyone, and interest. your for Thank

you to for team Otherwise, discussion. good always, after follow-up questions any is here we or As a updating again Have the quarter. available the look forward day. third

Operator

your today's call. Thank concludes This conference participation. you for

now You disconnect. may

Gates Industrial (GTES) 6 Aug 222022 Q2 Earnings call transcript