Gates Industrial Corporation plc

Again, my name is Savannah and I will be your conference operator for today. At this time, I would like to welcome everyone to the Gates Industrial Corporation Q1 2022 earnings call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. And 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 one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. And I would now like to turn the conference over to Bill Welke. Please go ahead.

Thank you for joining us this morning on our first quarter 2022 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 first 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 relief 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.

Thank you, Bill. Good morning. Thank you for joining us on our call today. I'll begin on slide three of the presentation. We delivered a solid start to the year with our first quarterly earnings call. the expectations we communicated on our last earnings call. While we anticipated a number of impediments as we entered the year, we managed through incremental challenges related to COVID, supply chain, and inflation in the quarter. From a top-line perspective, we largely saw a continuation of the positive underlying demand for our products and associated order trends and we delivered a record amount of revenue for Q1. Our focus on executing our initiatives in higher growth and market with exposure to secular tailwinds allowed us to substantially offset the additional challenges we encountered. The COVID-related disruptions in our facilities early in the quarter in North America and Europe and then in China in March, continued to weigh on our ability to meet the level of customer demand for our products. As a result, our backlog continued to grow, and we exited the quarter once again with book-to-bill well above 1. With respect to profitability, We delivered sequential margin improvement in line with a commentary we provided on our last earnings call. Our ongoing pricing actions offset the dollar impact of increased inflationary pressure across commodities and logistics costs. Based on our progress to date with pricing actions across the enterprise, we fully expect to achieve our goal of adjusted EBITDA margin neutrality by the end of the year. During the quarter, we continue to manage through significant inefficiencies created by COVID disruptions in our manufacturing facilities and supply chains. While the raw material availability improved in general, it still remains dynamic. Our sourcing and material science teams are working on a number of opportunities to continue to improve the flexibility of our supply of options, which should contribute to lower level of disruptions in the second half of the year. Finally, We repurchased $175 million of our shares in the first quarter under the authorization that was approved in November of last year. We are confident in the demonstrated cash generation capabilities of our business and plan to continue to be opportunistic with capital deployment options. Moving now to slide four. Our total revenue was $893 million, with core growth of over 4% on what was a previous record Q1 last year. The demand for our products remained solid, especially in our replacement channels, where core growth remained in a high single-digit range. and more than offset a modest decline in our first business. Our focused growth initiatives in the mobility and diversified industrial and market once again showed solid traction, delivering low double-digit core growth on a combined basis. I will note that our revenue generation in these end markets was impacted by some specific capacity limitations, which we are in the process of addressing to support expected customer demand and future growth. Finally, in the energy and resource end market, with exposure to oil and gas mining and renewables, had another strong quarter of mid-teens growth. on the increased level of activity in a field. Our first quarter adjusted EBITDA was $157 million, or a margin of 17.6%, in line with our expectations of modest sequential improvement from the fourth quarter, despite what turned out to be more challenging operating conditions. On balance, we executed well in a quarter. The significant operational inefficiencies stemming from COVID disruptions in the first part of the quarter were offset by a solid performance in Americas, particularly as we exited the quarter. Adjusted earnings per share of 26 cents in a quarter came in slightly better than we anticipated due to higher adjusted EBITDA and lower income tax expense. Moving now to slide five, which covers our segment-level results. Our power transmission segment has revenue of $556 million in a quarter, including core growth of 3% and negative FX impact of 4%. We saw high single-digit growth in our industrial and market, led by the mobility, diversified industrial, and off-highway applications. Our replacement channels performed well with mid-single-digit growth, more than offsetting the slight decline in first-way channels. Our first fit performance was particularly impacted by the continued weakness in production rate at European, Japanese, and Korean automotive OEMs, driven by the meaningful supply chain issues specific to those customers. On our last earnings call, we mentioned targeted capacity investments to support growth in the mobility and diversified industrial and markets. These capacity investments are underway. We expect them to ramp up throughout the second quarter and be in place to support the incremental demand we see in these end markets in the second half of the year. Furthermore, our design wins across these growth initiatives remain quite robust. Our fluid power segment has revenue of $338 million in the quarter, including core growth of 6% and negative effects impact of 1%. Growth was led by the energy, agriculture, and on-highway end markets. We have continued to see strong progress with our new products and key wins in stationary hydraulics, agriculture, mining, and construction applications. Additionally, we are making good progress in market share gains with key distributors, particularly in North America and Europe. Our investments in innovations are also paying dividends and continue to enhance our competitive market position. With respect to profitability, both segments were impacted by the operational disruptions I mentioned during my opening remarks. But based on the focused effort and dedication of our global teams, we came in better than what we originally expected. The power transmission segment was also somewhat impacted by the targeted investment in additional production capacity, which we expect will begin to deliver benefits in the second half of this year. With that, I will turn the call over to Brooks for additional color on our results. Brooks.