Gates Industrial Corporation plc

Thank you for standing by. My name is Kayla Baker, and I will be the conference operator today. At this time, I would like to welcome everyone to the Gates Industrial Corporation first quarter 2023 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 and the number one. I would now like to turn the call over to Vice President of Investor Relations, Rich Quas.

Good morning, and thank you for joining us on our first quarter 2023 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 Maller, our CFO. Before the market opened today, we published our first quarter 2023 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 sections 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 will be attending several investor conferences over the next month, including the Goldman Sachs Industrials and Materials Conference, the Wolf Global Transportation and Industrials Conference, and the KeyBank Industrials and Basic Materials Conference. We look forward to meeting with many of you. With that out of the way, I'll turn the call over to Eva.

Thank you, Rich. Good morning, everyone, and thank you for joining our call today. Let's start on slide three of the presentation. Our global teams delivered another solid quarter, and we posted Q1 revenues above the midpoint of our guidance in an operating environment that remains challenging, and while managing through a cybersecurity attack on the enterprise. As previously disclosed in an 8K filed in February, our company experienced a cybersecurity incident in early February, which led to a temporary shutdown of most of our operations globally. Our operating and corporate teams worked diligently and tirelessly to restart nearly all of our operations progressively over the course of 10 days. I am proud of the resiliency and successful response to such challenging circumstances. Our Q1 results have been adjusted for costs incurred during the period associated with the incident, and Brooks will outline these in more detail later in a call. We estimate the cybersecurity event impacted our revenue growth rate by approximately 150 basis points in a quarter. The incident primarily disrupted our ability to support North American and European replacement demand, which is book and ship business. We estimate North America experienced approximately two-thirds of the sales dislocation, and we do not contemplate recovery of this volume in the current quarter. Moving on to our results, our core growth was relatively balanced across the first fit and replacement channels. Geographically, our EMEA region registered another strong quarter of core growth supported by healthy OEM demand. China regional performance continued to recover as the quarter progressed after the most recent impact from COVID and modestly outpaced our initial expectations. We saw solid automotive replacement demand despite the disruptions to our output and service levels caused by the cybersecurity event. Vehicles in operation in the car park age both continue to increase in our major geographies, which should support steady demand dynamics for our business in the mid-term. Supply chain and logistics headwinds continue to slowly ease and our global teams remain diligently focused on satisfying customer demand. Our profitability in a quarter expanded meaningfully compared to the prior year. Our business teams executed well and our price-cost position was more favorable when compared to last year's first quarter. Overall, the supply chain is slowly improving and benefiting our operational performance. Our adjusted EBITDA margin rate was slightly ahead of our Q1 guidance midpoint, including the estimated $5 million expense impact from the cybersecurity incident during the quarter. Notably, we produced positive free cash flow this quarter. Our working capital use was well below last year's first quarter. We made progress normalizing our inventory position, which experienced a sizable decrease on a year-over-year basis. We have multiple initiatives underway to improve our inventory turns while also driving improvements to our service levels for our customers. When coupled with easing supply chain impediments, we believe that further progress will be made as the year evolves. We are encouraged by the strong seasonal start to our cash flow. Underscoring our commitment to driving shareholder value, we announced today that our Board of Directors has approved a $250 million share repurchase authorization. that expires in October 2024. The authorization provides us with added flexibility to enhance shareholder returns, and we intend to use it opportunistically. Please turn to slide four. First quarter total revenue was $898 million, and translated to core growth of 4% versus the prior year. Foreign currencies were a 350 basis points headwind year over year. As outlined, we estimate the cybersecurity incident represented approximately a 150 basis points headwind to our growth rate. We realized solid growth in most of our end markets led by a double digit growth in energy and personal mobility. than high single-digit expansion in off-highway. Diversified industrial growth moderated from recent quarterly trends. Adjusted EBITDA was $175 million, which yielded a 19.4% adjusted EBITDA margin, an increase of 180 basis points year-over-year. Our price-cost position was better relative to a year-ago quarter when commodity and energy inflation accelerated due to the Russia-Ukraine conflict. Gross margins increased year-over-year, helped by a better supply chain dynamics. Adjusted earnings per share was 25 cents. Our operating income was up materially year-over-year and contributed a 6 cents per share of earnings. The year-over-year comparison was affected by a higher effective tax rate and increased interest expense. On slide five, I'll review our segment level highlights. In the power transmission segment, we generated revenue of approximately $548 million in the first quarter, resulting in core growth slightly above 3%. FX was a 450 basis points year over year headwind. The segment experienced the strongest top line performance in energy, construction, and personal mobility. All these end markets experienced double digit core growth, which helped offset weaker demand in China. Diversified industrial revenues decreased mid to high single digits on a core basis in North America. where we saw the most impact from the cybersecurity incident. While China was our weakest region in a quarter, primarily as a result of the COVID pandemic disruptions, it came in ahead of our expectations and strengthened as we exited the quarter. Polymer supply availability continues to normalize, and we are obtaining sufficient supply to support customer demand. We had strong design wins in the quarter, particularly in personal mobility, which should support continued above-market growth on a go-forward basis. Our adjusted EBITDA margin showed nice recovery year-over-year, helped by a balanced price-cost position and improving supply chain. Our fluid power segment recorded revenues of $350 million with core growth of approximately 5% year-over-year, partially offset by 170 basis points negative pressure from currency. The energy, construction, and other replacement markets were the best growth areas in the quarter. We booked meaningful wins in agriculture and construction that will begin production in the second half of 2023. Fluid power segment EBITDA margin improved 160 basis points year-over-year, benefiting from a more stable operating environment compared to the prior year. I will now turn the call over to Brooks for additional details on our results.