Gates Industrial Corporation plc

Ladies and gentlemen, thank you for standing by, and welcome to the Gates Industrial Q1 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the call over to your speaker today, Bill Wilkie, Head of Investor Relations. Please go ahead.

Thanks, Josh, and thanks everyone for joining us on our first quarter 2020 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to Ivo, who will be followed by our CFO, Brooks Mallard. After the market closed today, we published our first quarter results. A copy of the release is available on our website at investors.gates.com. Today's call is being webcast and is accompanied by a slide presentation. On this call, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the investor relations section of our website. Please refer now to slide two of the presentation, which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC, including our quarterly report on Form 10-Q that will be filed this week. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings call, if at all. I will now hand things over to Ivo.

Thank you, Bill. Good afternoon, and thanks for joining us today. The first quarter marked the beginning of an unprecedented environment for the global economy as governments, companies, and communities implemented strict measures to minimize the spread of the COVID-19 pandemic. Let me provide a brief overview of how we are responding to the spread of the virus before I cover the Q1 business results. In early February, as our business in China was being impacted, we've mobilized a centralized crisis response team that developed and is tactically engaged in the implementation of countermeasures across our global footprint. While we are prioritizing the health and safety of our employees and the communities around the world, in which we operate, we have also been able to maintain operational continuity in support of our global customer base. We are adhering to government mandates and guidance provided by the health authorities and have implemented remote work policies where possible. Additionally, We have enhanced protective measures in our plans to ensure we are able to safely supply our mission critical components. In particular, the methods we used in China to manage through the COVID-19 impact have informed the approach we are successfully taking in our other regions. Our in-region, for-region manufacturing strategy is supported largely by local supply chains. We have taken the necessary steps to protect our raw material supply to ensure we are able to maintain continuity, and we have not experienced any significant disruption of our service today. Before we move to slide four and jump into more detail on the quarter, I would like to take a moment to thank our global team of associates for their perseverance and dedication during these challenging times, particularly those in our manufacturing and logistics facilities whose essential jobs necessitate an on-site presence. I appreciate their commitment, which has allowed us to continue to be a trusted and reliable supplier to our customers during this challenging time for everyone. Now moving to slide four and a brief overview of our first quarter results. Q1 got off to a solid start with steady sequential improvement from where we exited 2019. Our core revenue in a quarter ultimately declined by 10%, which includes an approximate 7% negative impact from COVID-19. I would also note that we experienced significant revenue deceleration in our businesses in North America and Europe, primarily over the last two weeks in March, as stay-at-home orders took hold across numerous jurisdictions and geographies. First quarter adjusted EBITDA was $121 million, representing a margin of 17%. The margin decline was broadly in line with the expectations communicated on our Q4 earnings call and represents an improved decremental margin relative to Q4 and full year 2019. a result of the progress we have made in rightsizing the business. On a percentage basis, our adjusted earnings per share of 21 cents represented a decline similar to that in our adjusted EBITDA. Our liquidity position is strong, with over $1 billion available and no meaningful debt maturities until 2024. We also continue to expect to generate strong free cash flow in 2020, which will further strengthen our liquidity position. Moving now to our segments on slide five. Our power transmission business in Q1 was notably impacted by COVID-19 in China, where core revenue declined over 30%. In Europe, our business had modest growth, the result of growth in the automotive replacement channel. In North America, the trajectory we saw in the fourth quarter decelerated modestly in Q1, primarily a result of weakness in the last two weeks of March. Despite the uncertain business environment, we saw solid design wins activity from our global customer base in Q1. Our chain to belt initiative had design wins in intra-logistics, material handling, food processing, and health service applications. We also recently launched our next generation V-belt, representing another step in revitalizing our entire power transmission product portfolio. This new V-belt family delivers superior performance for industrial applications while eliminating chloroprene from the belt construction. We believe our focus on innovation will differentiate us in a market and will enable future growth as our end markets return to a more normal state, and we anticipate continuing to fully support our investment in innovation throughout 2020. Moving now to slide six. Fluid power core revenue represented a 10.6% decline year over year, but a mid-single-digit sequential improvement. In North America, core revenue in industrial and market remained down compared to the prior year period, primarily due to the weakness in the mobile hydraulics market, but improved notably from Q4. Fluid power business in Europe declined year over year, with core growth in the automotive end market offset by weakness in industrial end markets. In China, our fluid power segment was impacted by weakness in the construction end market, a trend that began to turn, however, with significant new orders in March. The solid pipeline of opportunities we have been building with our revitalized fluid power product portfolio resulted in Q1 being our MXP host family best revenue generating quarter since its launch. Similar to power transmission, we believe our focus on innovation differentiates us, and we expect our new products will continue to build momentum when the current COVID-19 uncertainty subsides. Slide seven. We don't plan to provide the information on this slide on quarterly basis going forward, but given the exceptional environment and regional nature of COVID-19 pandemic, we thought it would be useful to provide additional color this quarter. Beginning with China, our core revenue began the quarter with continuation of the solid growth trajectory we saw in Q4. before being significantly impacted by the measures taken to limit the spread of the virus. From a demand perspective, March appears to have been the bottom in China. We expect the general trend of improvement we saw in April to continue over the remaining two months of the present quarter. In Europe, we have proactively managed our production levels in line with demand and most of our plans have remained operational, with the exception of a brief government-mandated suspension of operations at our plant in Spain. The automotive replacement business saw a slightly lower growth rate in March, but performed well throughout the quarter before declining in April, as shelter-in-place orders took a firm hold across the EU. Our first-fit businesses experienced a notable decline in March, and subsequently April, as many of our largest customers temporarily suspended production. In North America, our business improved sequentially, but industrial and markets remained weak, as anticipated. Similar to Europe, our business was not meaningfully impacted by the effects of COVID-19 until the last two weeks of March, when larger customers began temporarily suspending production and replacement channel activity notably declined, trends that accelerated in April. I would note that in April, we experienced a significant decline in India, where our operations were temporarily shut down in line with a broad government mandate. We began the process of reopening our manufacturing facilities there on May 4th and are employing the same tactics used in China to safely bring our operations in India back online. I won't spend a lot of time on slide eight, but hopefully it illustrates some of the recent complexity involved with managing our global businesses. We have laid out a high-level timeline of when the regions we operate in began to be impacted by shelter-in-place and a rough estimate of what their path to improvement could look like on a relative basis through the second quarter. the majority of our regions began to be adversely affected by these restrictions around mid-March and are now experiencing the significant impact that hit China in February and March. Although we do not expect the rest of the world to behave exactly the same way, we view the trends of demand recovery in China as informative and potential model for what we could experience in other geographies. Of course, we are very focused on being responsive to the changes in business trends and are ready to react to those changes as they come. I will now turn the call over to our new CFO, Brooks Mallard, for some additional details on the financials.