Gates Industrial Corporation plc

Hello and welcome to the Gates Industrial Corporation Q2 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 1 on your telephone keypad. If you would like to withdraw your question, again press star 1. I will now turn the conference over to Rich Quas, Vice President of Investor Relations. Go ahead.

Good morning, and thank you for joining us on our second 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 second 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 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. 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 investor conferences later in the third quarter, including the RBC Global Industrials Conference and the Morgan Stanley Laguna 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 us today. Let's begin on slide three of the presentation. Our global teams achieved solid results. We delivered Q2 revenue and profitability above the midpoint of our guidance, as well as strong free cash flow. Our nearly 4% core revenue growth was fueled by strength in our automotive vertical across both. to first fit and replacement channels. The EMEA region led growth geographically with organic growth of high single digits year over year. Our China business experienced a nice rebound year over year with core growth in the high 20s of a COVID impacted prior year period. However, fell a little short of our expectations. We continue to see solid demand for our products and our book to build remain above one exiting the quarter. We see constructive demand trends globally from the automotive end market and somewhat more mixed picture across the industrial end markets. We realized strong margin expansion in the second quarter compared to last year. Adjusted EBITDA margin expanded 120 basis points year-over-year and exceeded 21%. We delivered a high 50% EBITDA flow-through on incremental revenues compared to the prior year period. The EBITDA margin expansion was fueled by a 170 basis points increase in our gross margin. We experienced greater operating stability and benefited from a more normalized supply chain environment relative to the prior three quarters. Our free cash flow generation and conversion were also nice highlights for the quarter. We generated $116 million of free cash flow for the quarter, which represented 114% conversion versus adjusted net income. a substantial increase versus the prior year period. Working capital levels have stabilized and contributed to improved terms as our operations have continued to normalize. For the first half of the year, we delivered almost 90% of our adjusted net income to free cash flows. Seasonally, strong performance as the bulk of our free cash flow is usually generated in the second half of the calendar year. Our net leverage ratio finished at 2.8 times, a substantial decrease from the year-ago period, while also returning $250 million to shareholders via our share buyback in May. Based on our second quarter outperformance, we are increasing our adjusted EPS range to $1.18 to $1.24 from a range of $1.13 to $1.23. The updated range includes the benefit from a lower share count following our successful share repurchase in May. Moving to slide four. Second quarter total revenue was $936 million, which translated to core growth of approximately 4% versus the prior year. Changes in foreign currency were a nominal headwind year-over-year. Our automotive growth was healthy across both the first bid and replacement channels. Both channels realize double-digit core revenue growth compared to Q2 2022. The industrial end markets remain a bit choppy. Energy, construction, and on-highway produce solid growth year-over-year, which was offset by softness in agriculture, diversified industrial, and personal mobility. Adjusted EBITDA was $197 million, and adjusted EBITDA margin was 21.1%, representing an expansion of 120 basis points compared with the prior year period. Our margin improved compared to the prior year period, driven by favorable price visualization and less operational headwinds due to greater stability in supply chain, a trend that is consistent with our expectations at the onset of the year. As previously mentioned, the year-over-year adjusted EBITDA margin improvement was driven by gross margin expansion. We expect gross margin to show year-over-year improvement in the second half of 2023 as well. Adjusted earnings per share was 36 cents. Higher operating income contributed to the EPS growth year-over-year, partially offset by increased net interest expense. The share repurchase was executed in May, provided approximately one cent of EPS equation in a quarter. On slide five, let's review our segment performance. In the power transmission segment, we posted $574 million of revenue and core growth of 7% compared to Q2 2022. Currency was slightly more than 100 basis points of headwind. Automotive was the highest growth and market for the segment, with core growth increasing at a high teams rate year over year. The automotive replacement and first-fit channels grew at similar rates year-over-year. Construction and on-highway generated double-digit core growth partially mitigated by softer demand in our diversified industrial and personal mobility end markets. Power transmission's adjusted EBITDA margin increased 180 basis points year-over-year. An incremental EBITDA margin exceeded 50% compared to Q2 2022. Our team executed well and benefited from a less volatile operating environment. Our fluid power segment generated revenues of $362 million. Revenues declined slightly year over year on a core basis. Our industrial and markets were mixed, and core growth in our replacement and first pitch channels both ended slightly down versus the prior year period. The construction vertical was a relative outperformer, boasting solid core growth year over year. We are benefiting from growing infrastructure investments occurring in the U.S. and elsewhere. With core revenue performance largely unchanged, Operating leverage was limited, which resulted in only modest segment margin expansion compared to the prior year period. With that, I will now pass the call over to Brooks for additional details on our results.