Gates Industrial Corporation plc

Hello and welcome to the Gates Industrial Corporation Q4 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. And if you would like to ask a question during this time, simply press star one on your telephone keypad. I will now turn the call over to Rich Quas, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us on our fourth 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. We'll be followed by Brooks Mallett, our CFO. Before the market opened today, we published our fourth quarter 2023 results. A copy of the release is available on our website at investors.gates.com. Our call this morning is being webcast as 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've described in our most recent annual report on Form 10-K and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. Before I turn it over to Ivo, we are hosting a Capital Markets Day on the afternoon of March 11th at the New York Stock Exchange. Instructions to RSVP will be sent next week, and we hope many of you can join us for an informative session. I'll now turn the call over to Ivo to review our results. Ivo?

Thank you, Rich. Good morning, everyone, and thank you for joining us today. Let's begin on slide three of the presentation and review what we accomplished in 2023. I'm proud of what our Gates Global teams achieved. Our team demonstrated resilience and fortitude through an uncertain macro environment and delivered strong margin expansion and cash conversion for the full year. Our global teams worked diligently to service our customers and returned fill rates to pre-COVID performance levels, progressively meeting our customers' expectations across most of our product portfolio. Our team's collective execution enabled us to deliver a 180 basis points year-over-year expansion in adjusted EBITDA margin. Importantly, the improvement was fueled by stronger commercial and operational execution, resulting in a 290 basis points increase in our gross margins. We believe this outcome demonstrates the resilience and quality of the business as well as our team's ability to manage through a challenging environment. The full-year profitability increase was an important driver of our nearly 20% growth in adjusted EPS. Furthermore, our free cash flow conversion measured 110% and helped drive a half 8-turn reduction in our net leverage ratio year-over-year while we returned $250 million of capital to shareholders via share repurchases in 2023. Our company-wide focused execution allowed us to surpass most of our initial financial guidance metrics for the year. We are in the relatively early stages of executing on our organically focused enterprise initiatives that we anticipate will be delivering performance benefits and enhancing shareholder returns over a multi-year horizon. Over an extended timeframe, our business has demonstrated an ability to deliver strong profitability and cash flow generation. We are now focused on elevating the enterprise growth and enhancing profitability while staying focused on improving shareholder returns. I look forward to sharing more details on these topics at our upcoming Capital Markets Day. Turning to slide four and our fourth quarter highlights, top line performance was about as expected. The demand environment remained choppy in the fourth quarter, and our end markets followed on recent trends as automotive outplaced industrial. Recall, we faced a difficult growth comparison from the year-ago period, where we were able to accelerate the conversion of past year backlog, creating a bit of an anomaly in seasonality. Broadly speaking, our business demand has returned to normal seasonality, which in our view is a positive development. Our book-to-bill ratio in a quarter remained above 1. On the profitability front, we recorded strong adjusted EBITDA dollars and delivered a significant year-over-year margin increase. We've generated $186 million of adjusted EBITDA. which translated to an adjusted EBITDA margin of 21.5% and represented a year-over-year expansion of 290 basis points. The increase in adjusted EBITDA margin was fueled by 440 basis points improvement in gross margins. The gross margin improvement was supported by benefits from our enterprise initiatives, particularly in our supply chain. Our performance was strong, considering that values were down year over year and revenue mix was less favorable. Our fourth quarter free cash flow was approximately $165 million, which was 158% conversion of our adjusted net income. Improved profitability and working capital management were the primary drivers behind the results. Our trade working capital as a percentage of sales decreased year over year, benefiting from improved cash collections as well as a normalized operating environment. The strong free cash flow performance helped us to lower our net debt to adjusted EBITDA ratio to 2.3 times, a half return reduction compared to the prior year period. We continue to make solid progress towards achieving a target net leverage goal of under two times. Moving to slide five. Fourth quarter total revenues were $863 million, down a little less than 5% year-over-year on a core basis against the backdrop of the prior year's Q4 seasonality anomaly driven by an accelerated recovery in certain product lines in a prior year. Total revenues were down about 3% year-over-year, inclusive of favorable foreign currency effects. Automotive increased low single digits on a core basis. The majority of our industrial and markets realized year-over-year declines globally, while energy and on-highway continued to post positive core growth versus the prior year period. At the channel level, demand in industrial first-fit declined double digits, impacted by softness in North America, EMEA, and South America. In China, industrial first-fit core revenue grew double-digit year-over-year after experiencing general weakness over the past few quarters. Global industrial replacement channel core revenues declined low single digits versus the prior year period on normalization of lead times and associated channel inventories. Adjusted EBITDA was $186 million, and adjusted EBITDA margin was 21.5%. Gross margin exceeded 39% in the fourth quarter. The year-over-year gross margin expansion was partially offset by higher SG&A spending. Overall, we are pleased with the improvement in profitability made in 2023 as we continue to advance our enterprise initiatives. Adjusted earnings per share was $0.39, up 56% year-over-year. Relative to last year, higher operating income contributed $0.07 a share, augmented by lower interest and tax expense, and reduced share count. On slide six, let's review our segment results. In a power transmission segment, we generated revenues of $533 million. Core revenues were down about 5% year-over-year against the prior year comp backdrop. Currency contributed about 100 basis points of growth to our revenues. In automotive, core revenue growth was in the low single digits, with first fit and replacement generating similar growth. Industrial and markets were mixed. Energy and construction both grew in the mid to high single digit range, and on highway grew low single digits compared to Q4 2022. The growth was more than offset by decrease in diversified industrial, agriculture, and anticipated weakness in personal mobility. Personal mobility market continues to work through access inventory, and we expect a couple more quarters of weakness before growth reaccelerates. Our design win activity in this space increased about 20% in 2023 over prior year, and we are optimistic about delivering on our anticipated midterm growth prospects. Core growth in China industrial business was about flat, an improvement relative to last quarter. Global industrial replacement revenues stayed resilient in this segment, declining low single digits year-over-year and faring better than the first mid-market. The segment operating performance was strong and margin increased significantly year-over-year. Additionally, our enterprise initiatives are yielding benefits, including supply chain efficiencies, as well as initial commercial traction from the first phase of 80-20. Our fluid power segment produced revenues of $331 million. On a core basis, revenues fell about 5% year-over-year. Foreign currency contributed almost 2 percentage points of growth to our year-over-year performance. Automotive core revenues decreased low single digits compared to Q4 2022. Industrial end markets experienced a mid-single-digit decline. Modest growth in energy was more than neutralized by softness in other end markets, most notably agriculture and diversified industrial. Relative to segments' overall core performance, industrial replacement outperformed while industrial first fit was a bit weaker. Fluid power segment adjusted EBITDA margin increased 190 basis points versus the prior year on the heels of cost management and benefits from our enterprise initiatives. We remain focused on footprint optimization within the fluid power segment. We are in process of completing projects in South America and India that further expand our in-region, four-region manufacturing strategy. We anticipate these projects will result in lower fulfillment costs and increased throughput of our high-velocity hydraulics and industrial hose product lines. We'll share more details about the enterprise footprint optimization strategy in March at our Capital Markets Day. I will now pass the call over to Brooks for further comments on our results.