Gates Industrial Corporation plc

Ladies and gentlemen, thank you for standing by and welcome to the Gates Industrial Corporation second quarter 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 this session, you will need to press star 1 on your telephone. If you would Require any further assistance, please press star zero. I'd now like to hand the conference over to your speaker today, Bill Welke. You may begin.

Thanks, Robert, and thank you, everyone, for joining us today on our second 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 second 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 filed in May of this year. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings call, if at all. With that, I'll turn the call over to Eva.

Thank you, Bill. Good afternoon, and thanks for joining us today. I hope you and your family are staying safe and healthy. As we continue to confront the pandemic globally, we recognize the enormous effort our Gates Associates put forward during the difficult second quarter. I want to thank each one of our team members for their unwavering dedication and effort during this time of great uncertainty. Throughout the quarter, we maintain our focus on complying with the recommended safety protocols and mandates around the world, to operate our facilities while adopting enhanced safety practices to protect the safety of our employees, their families, as well as the communities in which we operate. Doing so remains our top priority. Within this challenging business environment, we delivered performance that exceeded our expectations. In the face of the volume declines driven by the pandemic, we have been focused on what is under our control to mitigate the decline in margins while acting with the long-term interest of our business in mind. We have maintained operational and supply chain continuity throughout the crisis and have been a reliable partner to our customers, many of whom participate in essential industries around the world. We also continued to fund our key initiatives and did not compromise our ability to respond to improvements in our mostly short cycle end markets, which we are now seeing across all of our regions. While we do not minimize the tragic effects of this pandemic, that in many ways continues to impact the daily lives of our employees, their loved ones, and the general public, we believe the second quarter marked a turning point for our business. Based on the incremental improvements in our end markets, as well as positively trending macro data, we believe the most significant impact to our business from COVID-19 is likely behind us. As shelter-in-place requirements in different geographies were lifted, customers who had suspended operations began to recharge their supply chains and progressively resumed production. The overall increase in industrial activity, combined with an increase in personal mobility and driving levels, contributed to improving demand trends for our mission-critical components throughout the quarter. Absent any broad reimplementation of movement restrictions, we believe April represented the pandemic's most significant impact on our business. Exiting the quarter, we had returned to year-over-year growth in China, and the recovery also began to take hold in North America and Europe. We continued to make progress on our restructuring plan we announced last year, taking two further actions. In June, we announced the closure of our power transmission plant in Korea, a market that which we plan to serve from other facilities in the region. Additionally, in July, we announced our intent to establish a shared service center in Europe, which would consolidate certain functions that are currently distributed throughout the region. We anticipate completing the closure of our Korea facility this quarter and intend to complete the European project in the second half of next year. These actions represent continued optimization of our operational footprint, resulting in increased flexibility without compromising our ability to provide our customers with highest level of service. Although COVID-19 is certainly not yet under control, key macro indicators and improving levels of customer activity give us an early indication that absent significant additional ways of the virus, our business has turned a corner and is on a measured trajectory to recovery. Now moving to slide four and an overview of our second quarter results. This was a challenging quarter. Total Q2 revenue of $577 million declined 28.8% year over year, including a negative currency impact of 2.4%. Core revenue in a quarter declined by 26.4% year over year, better than the midpoint of the range we provided on our last call. This is a result of our ability to maintain operational continuity throughout the quarter in the vast majority of our global production facilities. Importantly, after bottoming in April, we saw significant improvement across the business. Our revenues progressively strengthened throughout the quarter, exiting with June core revenue down mid-teens year over year. The strength of improving business activity continued in July. For the second quarter, sales into replacement channels substantially outperformed those into the first pick channels. Second quarter adjusted EBITDA was $83 million, representing a margin of 14.4% and a decremental margin of 35%. The improved decremental margin from Q1 is primarily the result of cost reduction actions we have taken, enhanced productivity, and favorable product mix. Our adjusted earnings per share of $0.03 per share was primarily the result of lower revenues and associated earnings partially offset by lower income tax and interest expense compared to the prior year. Moving on to slide five. As a side note, we will continue to provide geographic breakdown of our revenue for the remainder of 2020. Our business is a very global one, with over half of our revenue coming from outside North America. And the regional trends we saw were largely in line with the general expectation we laid out last quarter. Across our region, extended customer shutdowns, particularly in the automotive first pitch channel, negatively affected demand for our products in a broad sense, with the most significant impact in Europe and Asia regions. Now let me move to Greater China. The stronger order trends we began to see in the end of March continued, with our business bear returning to core growth in May, followed by further acceleration in June. We saw growth in a quarter broadly across the region, with the exception of automotive first bid, which improved significantly as the quarter progressed, but remained core growth negative compared to the prior year. The construction and heavy-duty truck end markets notably outperformed other parts of the business in China. After hitting a trough in April, our business in Europe improved throughout the quarter, most notably in June when movement restrictions had largely been lifted or significantly eased. Although sales into first fit channels improved sequentially within the quarter, they were down significantly on a year-over-year basis, primarily due to the decline in automotive first fit. Our replacement channels were less impacted, with the automotive replacement channel in particular seeing nearly flat core growth performance on a year-over-year basis in June. Our business in North America performed in a similar fashion to what we experienced in Europe overall and improved sequentially after bottoming in April. Sales into replacement channels outperformed first fit, with automotive replacement showing the most significant improvement within the quarter, exiting with mid-single-digit decline. All industrial markets were down significantly. but improved during the quarter, with the most notable improvement also coming in the month of June. As to our East Asia and South America regions, those regions demonstrated slower rates of recovery in a quarter, with the largest impact coming from extended shutdowns in India. Moving now to our segment on slide six, starting with our transmission business. Cars transmission business in Q2 saw core revenue decline 23.7% on a year-over-year basis. Within this revenue decline, our China business generated a modest level of growth. While our automotive business in China improved throughout the quarter, it was a solid performance in the industrial end markets, particularly general industrial and heavy-duty trucks. that drove the growth. As to the other regions, North America was impacted the least and improved solidly throughout the quarter, driven by the larger percentage of sales directed into replacement channels, particularly automotive, agriculture, and general industrial applications. Our business in Europe showed the most significant improvement throughout the quarter, also led by the replacement channels. with our automotive replacement business rebounding in a quarter and exiting nearly flat on a year-over-year core basis in June. One of the notable effects in a quarter that we anticipate will remain for an extended period of time is an increase in demand for our belts and related components in the personal mobility applications. Although it is a relatively small piece of our overall revenue, this business has been growing significantly, a trend we expect to continue, particularly as many commuters search for alternative forms of transportation and localized recreation during this crisis and beyond. During the second quarter, we launched a number of new personal mobility products that cover a wide range of applications, from e-bike and traditional bicycles to power sport vehicles, capitalizing on what we believe are the inherent advantages of our belts versus traditional change in applications that offer positive, longer-term secular trends. Our industrial change development initiative had another strong quarter of design wins in applications, including automotive assembly plants, aggregate facilities, medical product manufacturing, and industrial dispensing equipment. We are pleased with our ability to drive a solid level of design wins as we deployed virtual sales and marketing tools to continue to engage our global customers. Let me move now to slide seven. Our fluid power core revenue represented a decline of 30.6% year over year, the result of very challenging market environment. After bottoming in April, All of our regions showed sequential improvements throughout the quarter. Similar to power transmission, our fluid power business in China returned to growth, aided by construction and market. Outside of China, North America was least impacted as a result of its exposure to the agriculture and market and automotive replacement channels. Our fluid power business in Europe saw a large decline across first-fit customers in particular, with sales into replacement channels outperforming on a relative basis. The lighter, more flexible new products we have been introducing to our customers continue to gain acceptance in the marketplace. Our pipeline of opportunities continues to grow, and we had a number of wins in a quarter with our new MXP and Pro Series hoses. Notably, we expect to see the sales of our new fluid power products grow this year, despite the negative market dynamics. Although we are exiting a very difficult quarter, we are encouraged by the more positive business outlook and momentum behind our new products. I will now turn the call over to our Chief Financial Officer, Brooks Ballard, for some additional detail on the financials. Brooks.