Gates Industrial Corporation plc

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Gates Industrial Corporation Q3 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Bill Welke, Head of Investor Relations, You may begin.

Thank you for joining us this morning on our third 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 third quarter results. A copy of the release is available on our website at investors.gates.com. Our call this morning 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'll now turn things over to Ivo.

Thank you, Bill. Good morning, and thank you for joining our third quarter earnings call. Let me begin with the overview outlined on slide three. I am pleased by the performance we delivered in the third quarter, led by another quarter of above-market growth that resulted in record third-quarter revenue and earnings. The underlying demand and other trends across both of our segments remain very supportive and were supplemented by share gains from our product innovation efforts and continued execution of our commercial initiatives. Our growth was led by our performance in the industrial and markets. which more than offset the significant near-term cutbacks in auto production that impacted our automotive OEM business. We navigated the very difficult supply chain conditions with an unwavering focus on customer service, and we undertook significant efforts to support the demand levels of our customers. That being said, demand for our products broadly exceeded our ability to satisfy all of our customers in Q3, and our book-to-bill ratio remained well above 1. Operationally, we navigated this difficult environment to deliver strong margins and record Q3 earnings. During our second quarter call, we highlighted our concerns regarding the inflation, supply chain and labor challenges in the marketplace, and our expectation that they would continue in the second half of the year. These challenges did continue with some of the headwinds worsening over the second half of Q3. While we maintain positive price cost position on a dollar basis with respect to materials, we were impacted by further escalation in logistics and distribution costs about what we anticipated. We also faced additional operational inefficiencies from production disruptions related to COVID as well as the government mandated power outages in China. These costs were magnified by some of the additional actions we took in the quarter to prioritize service levels and ensure we met our customers' most critical needs. We anticipate seeing the full impact of these cost headwinds in the fourth quarter, but view them as transitory, as we expect to offset them in the first quarter with announced pricing action that will take effect at the beginning of next year. We continue to see strong free cash flow generation and make additional progress on deleveraging the business, which further increases our flexibility around capital allocation priorities. With that, let's move into more of the detail on slide four. Total revenue of $862 million came in at the top end of the range we provided, up 21% year over year, including core growth of 19%. we saw the strongest performance in our industrial and markets across both first fit and replacement channels, with the most significant growth coming in mobility and recreation, diversified industrial and off-highway and markets. Our focus on mitigating supply chain disruptions and servicing our customers in automotive replacement resulted in depth channel growing high single digits, a nice offset to the mid single digit decline in our automotive OEM business, driven by reduced production output across the global automotive OEMs. In general, inventory levels in both of our replacement channels remain low. with many of our distribution partners having difficulty keeping up with the end user demand. Our third quarter adjusted EBITDA of $184 million represents growth of 31% compared to the prior year and margin expansion of 160 basis points. price, volume benefit, and GPS-based productivity offset inflation, SG&A investment, and the incremental costs we incurred to support above-market growth. Our execution in a quarter resulted in an incremental margin of nearly 30%, a solid result given the outlined operating challenges. Our adjusted earnings per share were 31 cents in the quarter, a 19% increase compared to the prior year period, driven by higher operating income, which more than offset higher tax expense, resulting primarily from our higher earnings. Moving now to slide five and the segment highlights. We saw strong performance in both segments compared to the third quarter results of our business in both 2020 and 2019. In both segments, our above-market growth continues to be driven primarily by new products, the performance of our organic initiatives, and positive secular trends in our end markets. Our power transmission segment had core growth of 15%, led by nearly 30% growth in industrial and market, offsetting the decline in automotive OEM. Diversified industrial and mobility and recreation saw the highest growth rates. Our industrial chain-to-belt initiative, combined with mobility and recreation, grew approximately 50% year over year. We secured key design wins in industrial robotics and semiconductor inspection equipment in Japan, textile manufacturing equipment in India, and additional warehousing and logistics applications in multiple regions, to name few. We also finalized a significant win with a leading Asian scooter manufacturer on a new electric platform that is expected to fully launch in the first part of next year, further reinforcing the momentum we are seeing in our mobility and recreation business that we expect to continue. In our fluid power segment, we saw core growth of 26%. The end market recovery trend is continuing. and we anticipate it will take further hold as we enter 2022. We continue to see benefits from our investment in innovation with Q3 sales of our new products growing over 70% year-over-year, advancing our objective to deliver 20% new product vitality over the midterm. In an environment with significant supply chain headwinds, we believe the costs we incurred to support customers have resulted in share gains, particularly of highway and energy, as well as diversified industrial applications, including forklifts and food processing equipment. On the electrification front, we recently launched our next generation e-water pump platform for hybrid electric and fully electric vehicles, which has some specific patent pending features that we believe differentiate us from the marketplace and provide a solid opportunity to expand our sizable existing water pump business. In a quarter, We also began production of thermal management hoses for battery cooling on an electric heavy-duty truck platform in Europe and are excited about the pipeline of additional opportunities we are quoting on. Our prospects with the electrification of transportation propulsion are strong, and we remain optimistic about the size of our future potential business opportunity as these technologies gain further hold in the marketplace. With respect to profitability, We delivered adjusted EBITDA margin expansion of 120 basis points in barred transmission and 270 basis points in fluid power compared to Q3 2020, with similar levels of expansion compared to Q3 2019. We expanded margin in both segments, not only while managing through the supply chain complexities and inflation, but also while investing in SG&A and innovation to build on the momentum we are seeing with our growth initiatives. With that, I'll turn the call over to Bruce for additional color on our results.