Gates Industrial Corporation plc

Thank you for standing by. At this time, I would like to welcome everyone to the Gates Industrial Corporation Q4 2022 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Rich Quaz, Vice President of Investor Relations, you may begin your conference.

Good morning, and thank you for joining us on our fourth quarter and full year 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 fourth quarter 2022 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. We'll be attending several investor conferences over the next month, including the Citi Global Industrial Tech and Mobility Conference, the Barclays Select Industrial Conference, and the Evercore ISI Industrial Conference. We look forward to meeting with many of you. With that out of the way, I'll turn the call over to Ivo.

Thank you, Rich. Good morning, everyone, and thank you for joining our call today. I would also like to take this opportunity and welcome Rich to our team. He, as you know, has taken the lead position in investor relations here at Gates. He's a seasoned professional, with many years of experience on the sell side, as well as in-house. With that, let's start on slide three of the presentation. Our global teams delivered mid-team score growth in the fourth quarter. Underlying demand was stronger than expected in North America and EMEA, especially during the second half of the quarter, and more than offset the COVID-induced slowdown in China. Growth was relatively consistent across our channels. Importantly, our conversion of orders improved as supply chain inefficiencies eased in the latter part of the quarter, particularly in Europe. We exited the year in a more balanced position with supply meeting the underlying demand. The weaker dollar exchange rate at year end and better fill rates of aged orders in Europe benefited revenues by approximately 250 basis points year over year and contributed to the elevated sequential revenue growth. We are pleased with the progress our teams have made to enhance order conversion and believe activity should be more normalized as 2023 evolves. Our profitability in the quarter improved nicely versus prior year and the resulting margin expansion was consistent with the guidance provided in November. While volume growth contributed to margin performance, we incurred incremental costs to convert past due orders, which modestly impacted the profit flow. Our global commercial teams continue to price effectively to preserve margin neutrality. Our improved performance helped generate a 34% incremental margin. Free cash generation was very strong in a quarter as anticipated. Free cash flow to adjusted net income was well in excess of 300% and benefited from the outline margin improvement as well as higher working capital terms driven by inventory reductions. We are intently focused on increasing our working capital efficiency and boosting our free cash flow conversion as supply chain conditions moderate.