Gates Industrial Corporation plc

Good day. Thank you for standing, Ben. Welcome to the Gates Industrial Corporation second quarter 2021 earnings call. At this time, all participants line 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 keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Bill Belkey. Head of Investor Relations. Thank you. Please go ahead.

Thank you for joining us this morning on our second quarter 2021 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallard, our CFO. Before the market opened 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. 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 would now like to turn the call over to Ivo.

Thank you, Bill. Good morning, all, and thank you for joining us on our second quarter earnings call. Let me begin with an overview of our performance outline on slide three. I am pleased with our strong execution in the face of a challenging operational environment. Our business continued its excellent start to the year, delivering another quarter of above market growth that resulted in record quarterly revenue and profitability. The underlying demand and ordered trends across both of our segments are robust, and our book-to-bill ratio remained above one, exiting the quarter. The industrial end market contributed most significantly to our growth, and our investments in innovation and organic initiatives are progressing nicely, resulting in further market share gains across our portfolio of products. These strategic growth initiatives are in their early stages, and the pipeline of new opportunities is increasing, as is the potential to continue to drive growth moving forward. The headwinds we highlighted on our last call remain present and have created quite complex operating conditions. Inflation persists throughout our supply chain, impacting not only raw materials, but also freight. We are not expecting the inflationary environment to ease in the near term and have been proactive in responding with broad pricing action, maintaining a positive price-cost position in Q2 and the first half of the year. In addition to inflation, the availability of certain raw materials as well as logistics capacity and labor in certain geographies remain tight. We have been agile and forward-leaning going to great lengths to navigate these operating challenges in support of our global customers' needs. Despite these complexities, The execution by our team was outstanding and drove our strong incremental margins. The combination of increasing profitability and free cash flow generation has allowed us to deleverage the business at an accelerated pace. As a result, our net leverage is presently in the range we previously set as our mid-term target. This, of course, provides us with increased optionality, particularly as it relates to future opportunities to accelerate our growth strategies. As a result of our performance today and the supportive trends we are seeing in our end market, we are again raising our four-year guidance, which Brooks will provide further detail on later in the presentation. With that, let's move into more of a detail. Moving to slide four, total revenue of $915 million came in at the top end of the guidance we provided, up 58.7% year over year, including core growth of 51%. This growth was broad-based across segments and markets, channels, and regions. we saw particularly strong performance in the diversified industrial, off-highway, and mobility and recreation and markets. Our automotive OEM business also recovered nicely in a quarter. However, we continue to strategically reduce our participation in this channel, which was down to approximately 10% of total company sales in the first half of the year. Sales into replacement channels also grew significantly year over year, with the most notable growth coming from industrial and market. From the visibility we have, channel inventory levels remain low relative to the demand levels of our distribution partners I've seen. Our second quarter adjusted EBITDA of $216 million came in above the high end of our guidance, representing growth of 160% compared to the prior year and margin expansion of 920 basis points. The margin expansion was a result of productivity initiatives, continued benefits from our restructuring activities, and efficiencies from higher volumes. Despite the challenges associated with the volume growth, as well as significant inflation and the availability of production inputs, we delivered a core incremental margin of approximately 40% on a year-over-year basis, a strong result against the complex operating backdrop. Our adjusted earnings per share were 42 cents in a quarter, a significant increase compared to the prior year period, driven by our substantially higher operating income. Slide five in the segment highlights. We clearly saw very strong performance across the board with core revenue growth of approximately 51% in each of our segments. Looking back at the second quarter of 2019, which is perhaps a more meaningful from a compare perspective, our current results reflect solid core revenue growth of 15.7% in power transmission, and 4.6% in fluid power. Across both segments, above-market growth has been driven primarily by new products, the performance of our organic initiatives, and secular trends in our end markets. Looking at our transmission, the diversified industrial and mobility and recreation end markets perform exceptionally well for us. supported by a number of positive secular trends. Specifically, the demand for our products in the diversified industrial and market is benefiting from accelerating industrial automation trends in manufacturing facilities, warehouses, and distribution centers, driven by an increasing focus on efficiency and uptime. Our chain-to-belt initiative also continues to benefit from these trends, with key design wins within the quarter in warehouse automation, chemical processing facilities, food and beverage applications, and e-mobility. We continue to see strong business performance for this initiative, with revenue growing over 60% year over year. in fluid power, which we believe is somewhat trailing the overall market recovery seen in power transmission. Our focus on innovation is not only delivering significant growth, but also driving key design wins across a broad range of applications, including mining, agriculture, and pulp and paper, to name a few. The strong growth we are seeing in this segment is driven by accelerating adoption of our new products, and we anticipate this trend continuing over the mid-term. With respect to year-over-year profitability, we delivered adjusted EBITDA margin expansion of nearly 1,000 basis points in power transmission and 800 basis points in fluid power. Our current margins also reflect solid improvement over the second quarter of 2019, with our transmission recovering earlier and benefiting from higher volumes, as well as exit from some less profitable first-rate business. In summary, we are seeing excellent performance in both of our segments while managing through the complexities of the present operating environment. Our teams are working tirelessly to support our customers and the demand they are experiencing. With that, I will turn the call over to Brooks for additional color on our results. Brooks?