Gates Industrial Corporation plc

At this time, I would like to welcome everyone to the Gates Industrial Corporation third quarter 2023 earnings call. Today's call is being recorded and 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 that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you. And I will now turn the conference over to Rich Quas, Vice President of Investor Relations. You may begin.

Good morning, and thank you for joining us on our third quarter 2020 free 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 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 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 our other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. During the balance of the quarter, we will be attending the Baird Global Industrial Conference in Chicago and visiting investors in California as well as internationally. 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, and thank you for joining us today. Let's begin on slide three of the presentation. Our global teams executed well, delivering strong operating results. which translated to record revenues and adjusted earnings per share for a third quarter. Core revenue performance year-over-year was consistent with our Q3 guidance midpoint, as automotive outperformed the industrial and markets. Our replacement channels posted positive growth year-over-year and largely offset declines in our first-fit channels. Regionally, EMEA and East Asia and India generated the strongest core growth. Demand in China was softer relative to our expectations when we last updated our outlook after the second quarter. Globally, our focus on replacement markets is providing top line growth support and mitigating the impact of spotty OEM demand trends. Our book-to-bill remained at one in a quarter, and we continue to make progress reducing our past year backlog and improving service levels to our global customers. Our adjusted EBITDA margin was 21.7% in a quarter, an increase of 110 basis points year-over-year, despite less favorable channel and end-market revenue mix. The expansion was fueled by a 330 basis point increase in our gross margin compared to the prior year period, partially offset by higher variable compensation costs. The supply chain environment was more stable relative to last year and benefited our performance. But several enterprise-wide initiatives involving supply chain and productivity, as well as our continued implementation of 80-20 best practices across the organization contributed to the gross margin expansion. We are pleased with the improvement to our profitability, but are not satisfied and intend to advance our various initiatives to drive incremental performance in the future. U3 free cash flow was approximately $90 million and represented about 96% conversion of our adjusted net income. Our higher margin performance coupled with stability in our trade working capital contributed to the solid outcome. Seasonally speaking, this was a strong result and sets us well to achieve our guidance of 100% plus free cash flow conversion for the year. As a reminder, the fourth quarter is typically our strongest quarter for free cash flow generation. Our net leverage ratio finished the quarter at 2.6 times, or 0.6 of a turn lower versus the prior year period. Due to the third quarter outperformance, we are raising our 2023 adjusted EBITDA guidance to a midpoint of $730 million, an increase of $5 million from our prior guidance. Also, we have raised our adjusted EPS midpoint by 4 cents compared to a previous guidance. We are reiterating our full year guidance for core sales growth and free cash flow conversion. Please move to slide four. Third quarter total revenues were $873 million with reported growth of 1.4% and core growth down just slightly year-over-year. Foreign currency changes contributed almost two percentage points to our overall growth versus the prior year period. In automotive, we experienced mid-single-digit core growth both in the replacement and first-dig channels and across almost all geographic regions. The majority of our industrial end markets experienced decline globally, although energy and on-highway were bright spots growing mid-single digits compared to the prior year period. Regionally, China industrial demand was weaker than expected. Broadly, our industrial replacement business held up better compared to our first-fit business. Our replacement business increased low single-digit year-over-year on a core basis and provided a buffer against ongoing demand choppiness in the industrial OEM markets. Adjusted EBITDA was $189 million, and adjusted EBITDA margin was 21.7%, approximately 110 basis points higher than last year's third quarter. Gross margin expanded 330 basis points year-over-year and was the driver of the improved adjusted EBITDA margin. The gross margin increase was driven by a combination of price realization, a relatively stable supply chain environment, and benefits from our enterprise-wide business initiatives. Of note, our adjusted EBITDA margin expansion included 170 basis points headwind from higher variable compensation expense. Adjusted earnings per share was 35 cents, up 13% year over year. Relative to last year, higher operating income was the most important contributor. On slide five, we show our segment performance. In a power transmission segment, we generated revenues of $536 million. and core growth of little over 1% year-over-year. Currency was favorable by approximately 150 basis points. Automotive core growth was in the mid-single-digit range, with replacement growing slightly stronger than first fit. Our global industrial markets were mixed. Energy on highway and construction revenues all increased in a low double-digit range on a core basis. However, we experienced declines in personal mobility and diversified industrial. We believe the mobility business continues to work through industry-wide inventory destocking. We anticipate this dynamic to continue through the first half of 2024. Our design win activity in a personal mobility application space remains robust and positions us to resume strong growth once the industry inventory overhang plays out. Our China industrial business was a bit softer than anticipated, declining approximately 10% versus the prior year period on a core basis. Overall, our transmission industrial replacement core revenues were more resilient than first fit, declining low single digit year over year. Despite the softening top line trends, we generated sizable margin expansion, fueled by strengthening business performance in a more normalized supply chain environment. Our fluid power segment generated revenues of $337 million, and core revenue declined about 3% year over year. Automotive core revenues increased mid-single digits, with growth relatively similar across first bid and replacement channels. Industrial revenues declined mid-single digits on a core basis. Energy and on-highway realized positive growth, but that was more than offset by year-over-year decreases in agriculture and diversified industrials. Construction also declined slightly versus Q3 2022. Fluid power segment adjusted EBITDA margins declined 70 basis points year-over-year as higher variable compensation expense more than neutralized the benefits of gross margin expansion. I will now pass the call over to Brooks for additional details on our results. Brooks.