Gates Industrial Corporation plc

Thank you for standing by and welcome to the Gates Industrial Corporation second quarter 2024 earnings conference 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 the star one. Thank you. I'd now like to turn the call over to Rich Quast, Vice President, Investor Relations. You may begin.

Good morning, and thank you for joining us on our second quarter 2024 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 second quarter 2024 results. 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 risk 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. Later this quarter, we will be attending the Jeffries Industrial Conference and Morgan Stanley's 12th Annual Laguna Conference. We look forward to meeting with many of you. Before we start, please note all comparisons are against the prior year period unless otherwise unless stated otherwise also please note that we have recast our adjusted eps figures for 2023 and year-to-date 2024 using a normalized adjusted effective tax rate historically many non-recurring individual items have influenced our tax effective tax rate to minimize quarterly volatility and better reflect our core operations we've chosen to remove discrete items from our adjusted effective tax rate and recast historical earnings to provide an apples to apples comparison. We believe this approach will be beneficial to our investors and analysts. And please see the appendix for more information. So with that all out of the way, I'll turn it over to Ivo.

Thank you, Rich. Good morning, everyone. We'll start on slide three. Today, we reported solid Q2 results. delivered through focused execution by our entire team of global Gates associates. In the second quarter, we saw our revenues moderate 4% from the prior year on a core basis. First fit sales decreased more than anticipated, reflecting the present underlying business conditions. As we anticipated, demand in our industrial and markets remained somewhat soft. However, we experienced incremental demand weakness in agriculture and construction applications. Replacement revenues grew 1% with automotive outpacing industrial. Book-to-bill ended slightly below 1. We delivered a solid increase in our adjusted EBITDA margin while managing through a softer volume environment. Our adjusted EBITDA margin grew by 170 basis points. Strong gross margin expansion underpinned the improvement. Gross margin benefited from favorable channel mix compared to the prior year period, as well as continued progress with our enterprise initiatives. Our net leverage ratio declined to 2.3 times, a one-half turn reduction relative to last year's second quarter. During the quarter, we refinanced our term loans and unsecured bonds at attractive rates and extended our earliest maturity to the end of the decade. We are trimming our guidance due to the extended softness in our industrial first-rate markets, particularly old highways. Our updated revenue guidance is consistent with our historical seasonality. Brooks will provide more color and comments about our updated assumptions later in the presentation. Of note, last week our board of directors authorized a new $250 million share repurchase authorization that expires at the end of calendar 2025. The authorization provides us with an efficient tool to return capital to our shareholders opportunistically. Please turn to slide four. In the second quarter, we posted revenue of $886 million, a 4% decrease on a core basis. Replacement revenues grew slightly and outperformed first state revenues. The industrial end markets primarily drove the decline in first fit. At the end market level, construction and agriculture were most impactful to the industrial first fit revenue performance. Adjusted EBITDA was $202 million and represented a margin rate of 22.8%, an increase of 170 basis points. The increase was fueled by a 270 basis points increase in gross margin. The execution of our enterprise initiatives continued to deliver improved operating performance. In addition, the higher mix of replacement revenues, which generally carries above average margin relative to our corporate average, supported the increase in gross margin. We also benefited from inventory build related to our anticipation for gradually improving demand trends in the second half, as well as to support product line expansion with a new and existing customer. Adjusted earnings per share was 36 cents, which represented a 6% increase. Higher operating income and lower share counts drove the growth. On slide five, we will review our segment performance. In the power transmission segment, our revenues were $542 million, which translated to 3.5% decrease on a core basis. The replacement channel grew 1%, with industrial replacement growing modestly and automotive replacement being about flat. First fit revenues decreased double digits, impacted by a mid-teens decrease in industrial first fit. Automotive first fit was also down due to softer production trends in international markets. The majority of our end markets in power transmission decreased low to mid-single digits. Personal mobility revenues continued to decline, although the rate of change is starting to moderate. energy, and on-highway revenues posted growth, led by solid expansion in our developed geographies. With regards to top-line opportunities, during the quarter, we secured an agreement to extend our market presence with a national replacement channel partner that we anticipate will begin to meaningfully ramp early next year. The new business broadens our market reach for our mission-critical products. Power transmission's adjusted EBITDA margin expanded to 110 basis points. The margin improvement was led by contributions from our enterprise initiatives as well as favorable channel mix partially offset by lower volumes. Our fluid power segment generated revenues of $344 million. Poor revenues decreased 5%. Industrial first-fit declined mid-teens, driven by weaker activity in agriculture and construction. Industrial replacement sales declined at about the same rate as the overall segment. Automotive replacement was a partial offset, increasing low double digits. Similar to power transmission, we have reached an agreement to extend our partnership with one of our largest replacement channel partners to drive product conversions to Gates mission-critical components in an important US geography. This is an exciting opportunity that broadens our ability to more efficiently serve our customers. Additionally, in a data center space, we are now specified with multiple customers and are in discussions with several servers and chip manufacturers to support their application needs. I will now turn the call over to Brooks for additional comments on the quarter. Brooks.