Gates Industrial Corporation plc

Ladies and gentlemen, thank you for standing by and welcome to the Gates Industrial Corporation Q3 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 time, you will need to press star then one on your telephone. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your first speaker today, Mr. Bill Volke. Please go ahead.

Thanks, Amy. And thank you, everyone, for joining us today on our third 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 Brooks Mallard, our CFO. Before the market opened today, we published our third 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 first quarter 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 will hand things over to Eva.

Thank you, Bill. Good morning and thank you for joining us this morning on our third quarter earnings call. As we continue to deal with the COVID-19 pandemic, I hope you and your families are staying safe and healthy, and our thoughts are with those who have been affected. The safety of our employees and surrounding communities remains our top priority and continues to guide our operating strategy. We have also taken a pragmatic approach across our operating footprint to continue to support the demand from our global customer base, and all of our facilities are operational today. For this commitment to keeping each other safe while continuing to support our customers, I would like to take the opportunity and recognize our Gates associates and thank each one of our team members for the commitment and dedication during these challenges of the past several months. As has been the case in previous downturns, we believe our replacement-oriented business is again demonstrating its resilience. The momentum we carried into the third quarter continued, with performance coming in well above anticipated levels. The overall business activity across our diversified end markets continued to trend positively, resulting in demand improving throughout the quarter. Although we have seen a broad-based improvement across geographies and markets, this has been particularly evident in our automotive replacement channel, which returned to growth on a global basis in Q3. In addition to the age of the car park, we believe this business is seeing some tailwinds related to increased vehicle ownership and and a preference by the general public to elect personal mobility over public transport options. We anticipate this trend will continue over the midterm. We are seeing the benefits of actions we took in 2019 to right-size the business, and the flexible posture we have maintained has served us well as we have been highly responsive to improvements in demand. Through productivity initiatives under the Gates production system, our plants are operating more efficiently, and the investments we've made over the past few years in our footprint have provided us greater access to lower cost and more flexible labor. These factors contributed to our gross margin expansion during the quarter, despite the lower revenue base. Innovation remains a high priority for us at Gates, and we see an increased contribution to revenues from the products we have launched over the past 18 months. Throughout the pandemic, we have been focused on what we can control in the short term while investing in the long-term interest of the business. We are well positioned to continue to manage through the pandemic and to capitalize on a post-COVID recovery. Now moving to slide four and an overview of our third quarter results. Total Q3 revenue of $712 million declined 4.6% year over year, including a negative currency impact of 100 basis points. Core revenue in a quarter declined by 3.6% year-over-year, better than the updated range we provided in September, and representing 23% sequential improvement from Q2. We saw nice improvement across the business, with revenues continuing to strengthen throughout the quarter. Similar to prior downturns, our replacement channel demonstrated its resiliency. Most notably, our automotive replacement channel performed quite well and delivered solid core growth in Europe, China, and North America. Our sales into industrial and markets, although they improved throughout the quarter, are recovering at a more measured pace. Third quarter adjusted EBITDA was $140 million, representing year-over-year margin expansion of 30 basis points to 19.7%. The resulting decremental margin of 14% was primarily driven by 190 basis points of gross margin improvement year-on-year, achieved largely through operational productivity. Our Q3 adjusted net earnings per share were $0.26, an increase of 18% compared to the prior year period, with slightly lower operating income being offset by an income tax benefit, resulting from changes in expectations regarding potential realization of certain tax carry-forwards. Now, moving on to slide five, where you see the geographic breakdown of revenues. As a reminder, we plan to provide this quarterly breakdown just for the remainder of 2020. Our global business generates over half of its revenue from international market, and in the third quarter, we saw demand for our products improve substantially across all of our regions. In China, which was our best performing region, the revenue growth we saw in Q2 accelerated in Q3 led a strong performance in the industrial first fit and automotive replacement channels. We remain optimistic about market conditions there and our prospects to continued growth. Our business in Europe showed the greatest sequential acceleration, returning to core growth in a quarter. In Europe, our growth was driven by the automotive replacement and industrial first fit channels. While the automotive first fit business remained in negative core growth territory for the quarter, it did return to growth in the month of September. Moving on to North America, our revenues there continue to recover nicely, displaying significant sequential acceleration in Q3. The improvement was once again led by the growth in the automotive replacement channel. Our industrial end markets continue to recover throughout the quarter, but at a slower rate. Lastly, let me comment on our business in East Asia and India. While we did see a significant sequential improvement in business activity, it is demonstrating the slowest rate of recovery year over year. This is predominantly driven by slower reopening of the economies there, although I would note that we saw a nice progressive acceleration throughout the quarter, with September being the best month we have seen in a while. Moving on to the segments on slide six. Our power transmission business accelerated over 23% from Q2 and came in roughly flat on year-on-year basis in Q3. Overall, our power transmission segment is demonstrating a high level of resilience, a function of its broad global presence across a wide range of applications. Our total sales into replacement channels returned to year-over-year growth, led by the automotive replacement channel, where the increased end-user demand is underpinned by favorable market dynamics. Total sales into industrial end markets, which serve new production as well as large installed base of critical equipment, also returned to year-over-year growth. led by the agriculture and general industrial end markets. Spending a little time on the initiative side, we continue to see nice progress in converting industrial chain drives to our belt drives, as well as upgrading legacy belt drives. One recent example came at a major southern United States airport where we are converting the drives on the baggage conveying systems from chains to belts in order to reduce maintenance costs and noise pollution while improving operational uptime. Once we are in a facility like this one, It is not unusual for us to find additional opportunities for our products to improve equipment efficiency. At this same site, we are leveraging the Gates energy efficiency calculators in our suite of proprietary design tools to show the expected savings in electricity costs by converting drives in the existing high-capacity HVAC units to our patented carbon fiber-reinforced synchronous belts. Based on the number of air handling units, we estimate this airport will save over $200,000 per year in energy costs alone before taking into account the savings from reduced maintenance costs. We are using this recent win to reinforce the efficiency benefits of our belts at similar HVAC projects at a variety of end-user operators, such as airports, university, universities, hospitals, and office parks, amongst other areas, as part of our broader chain-to-belt initiative. Now moving to slide seven, fluid power core revenue represented a decline of 9.3% year-over-year and sequential improvement of over 21% from Q2. Our new manufacturing plants are serving us well in the improved and market environment, operating more efficiently and allowing us to be more flexible in responding to the increases in demand we have seen. Similar to power transmission, our fluid power sales into the automotive replacement channel demonstrated their resilience and posted solid year-over-year growth in a quarter. Our sales into all industrial end markets also showed significant sequential improvement. This was most evident in a first-bit channel as OE customers increased production to meet end market demand. The sequential acceleration was most pronounced in the construction and general industrial and markets. Now looking at our fluid power initiatives, we've made additional headway with sales of our new products both in the U.S. and internationally, with September being our best month today in terms of new product revenues. A recent design enabled by these new products was a large injection molding equipment OEM in Asia that was looking for hydraulic hoses that are easier to route through tight spaces in machines. This is a fairly common requirement in stationary applications. So our pipeline of opportunities for these new products in both segments continues to grow. We remain optimistic that this momentum will continue. particularly in more favorable market environment. I will now turn the call over to our CFO, Brooks Mallard, for some additional details on the financials. Brooks.