Q2 2021 Gates Industrial Corporation PLC Earnings Call
Good day, Thank you for standing by and the welcome to the Gates Industrial Corporation second quarter, 'twenty, 'twenty, 1 and earnings call.
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I would now like to hand, the conference over to Bill <unk> head of Investor Relations. Thank you. Please go ahead.
Thank you for joining us this morning on our second quarter 2021 earnings call I'll briefly cover our non-GAAP and forward looking language before passing the call over to our CEO Emil <unk>, who will be followed by Brooks Mallard our CFO.
Before the market open today, and we published our second quarter results a copy of the release is available on our website at investors thought gates Dot Com today's call is being webcast and is accompanied by a slide presentation.
On this call we will refer to certain non-GAAP financial measures and we believe are useful in evaluating our performance.
Reconciliations of historical non-GAAP financial measures are included in our earnings release and on the slide presentation, each of which is available and the Investor Relations section on our website.
Please refer now to slide 2 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 imply.
And by such forward looking statements.
Risks include among others matters that we have described and our most recent annual report on form 10-K, and and other filings we make with the SEC. We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings call if at all.
I would now like to turn the call over to Evo.
Thank you Bill good morning, all and thank you for joining us on our second quarter earnings call.
Let me begin with an overview of our performance outlined on slide 3.
I am pleased with our strong execution and a face of a challenging operational environment.
Our business continued its excellent start to the year delivering another quarter of above market growth that resulted in record quarterly revenue and profitability.
The underlying demand and order trends across both of our segments are robust and.
Our book to Bill ratio remained above 1 exiting the quarter.
The industrial end market contributed most significantly to our growth and our investments and innovation and organic initiatives are progressing nicely.
<unk> and further market share gains across our portfolio of products.
These strategic growth initiatives.
In the early stages and the pipeline of new opportunities is increasing as is the potential to continue to drive growth moving forward.
So headwinds we highlighted on our last call remain present and have created quite complex operating conditions.
Inflation persists throughout our supply chain impacting not only raw materials, but also freight.
We are not expecting the inflationary environment to ease in the near term and have been proactive in responding with broad pricing actions and maintaining a positive price cost position in Q2, and the first half of the year.
In addition to inflation.
And <unk> of certain raw materials, as well as logistics capacity and labor in certain geographies remain intact.
We have been agile and forward leaning going to great lengths to navigate these operating challenges in support of our global customers needs.
Despite these complexities the execution by our teams was outstanding and drove a strong incremental margins.
The combination of increasing profitability and free cash flow generation has allowed us to deleverage the business and <unk>.
Accelerated pace.
As a result on net leverage is presently in the range. We've previously said that's our mid term target.
This of course provides us with increased optionality, particularly as it relates to future opportunities to accelerate our growth strategy.
As a result of our performance to date and the supportive trends, we are seeing and market. We are again, raising our full year guidance, which Brooks who will provide further detail on later in the presentation.
With that let's move into more of a detail on our results.
Moving to slide 4 total revenue of $915 million came in at the top end of the guidance, we provided up 58, 7% year over year, including core growth of 51%.
This growth was broad based across segments and markets channels and regions.
We saw particularly strong performance in the diversified industrial off highway and mobility and recreation and markets.
And our automotive OEM business also recovered nicely in the quarter.
However, we continue to strategically reduce our participation in this channel, which was down approximately 10% of total company sales in the first half of the year.
Sales into replacement channels also grew significantly year over year with the most notable growth coming from industrial end markets.
From the visibility we have channel inventory levels remain low relative to the demand levels of our distribution partners I've seen.
Our second quarter adjusted EBITDA of $216 million came in above the high end of our guidance representing growth of 160% compared to the prior year and margin expansion of 920 basis points.
The margin expansion was a result of productivity initiatives continued benefits from our restructuring activities and efficiencies from higher volumes.
Despite the challenges associated with the volume growth as well as significant inflation and the availability of production inputs, we delivered a core incremental margin of approximately 40% on a year over year basis.
Strong result against the complex operating backdrop.
Our adjusted earnings per share were 42 cents in the quarter, a significant increase compared to the prior year period, driven by a substantially higher operating income.
Slide 5 and our segment highlights.
We clearly saw very strong performance across the board with core revenue growth of approximately 51% in each of our segments.
Looking back and the second quarter of 2019, which is perhaps a more meaningful from a compare perspective.
Current results reflect solid core revenue growth of 15, 7% in power transmission and 4.6% in fluid power.
Across both segments.
Above market growth has been driven primarily by new products the performance of our organic initiatives and secular trends in our end markets.
Looking at power transmission.
The diversified industrial and mobility and recreation and markets performed exceptionally well for us supported by a number of positive secular trends.
Specifically the demand for our products in the diversified industrial and market is benefiting from accelerating industrial automation trends and manufacturing facilities and warehouses and distribution centers and driven by an increasing focus on efficiency and uptime.
Our chain to belt initiative also continues to benefit from these trends with key design wins within the quarter and warehouse automation and chemical processing facilities food and beverage applications and E mobility.
We continue to see strong business performance for this initiative.
With revenue growing over 60% year over year.
In fluid power, which we believe is somewhat trailing the overall market recovery seen and power transmission.
Focus on innovation is not only delivering significant growth, but also driving key design wins across a broad range of applications, including mining agriculture, and pulp and paper to name a few.
The strong growth we are seeing in this segment is driven by accelerating adoption of our new products and we anticipate this trend continuing over the midterm.
With respect to year over year profitability.
We delivered adjusted EBITDA margin expansion of nearly 1000 basis points in our transmission and 800 basis points and fluid power.
Our current margins also reflect solid improvement over the second quarter of 2019 with power transmission and recovering earlier and benefiting from higher volumes as well as exit from some less profitable.
Business.
In summary, we.
We're seeing excellent performance and both of our segments, while managing through the complexities of the present operating environment.
Our teams are working tirelessly to support our customers and the demand they are experiencing.
With that I will turn the call over to Brooks for additional color on our results.
<unk>.
Thank you EBITDA.
Now moving on to slide 6 and the regional breakdown of our core revenue performance.
We delivered strong double digit core growth across all regions.
With emerging and developed markets being very similar performance.
And Europe, the strong growth was driven primarily by first fit channels.
Particularly for mobility and recreation off highway and automotive applications.
Sales into replacement channels also continued their strong growth trajectory with both the industrial and automotive end markets delivering mid double digit growth.
North America growth was also led by first the channels.
Particularly and mobility and recreation.
Highway and on highway applications.
All of our industrial end markets, including energy experienced solid double digit core growth.
The automotive replacement channel continued to accelerate sequentially and.
Posted high teens year over year growth.
China, having experienced the most significant impact from Covid related shutdowns and Q1 of 2020.
Began to return to more normalized year over year growth in Q2 of 2021 and.
In line with our expectations.
From an end market perspective, we experienced the most significant growth and diversified industrial and on highway applications with the automotive replacement channel also performing well.
Lastly, our businesses and South America, and East Asia, and India performed very well.
And we manage through the impact of shutdowns across India for roughly half the quarter.
We saw solid double digit core growth across all end markets and particular strength and both on highway and off highway applications as well as and automotive replacement.
Moving now to slide 7 and some additional detail on key balance sheet and cash flow items.
And the second quarter, we generated strong free cash flow despite to build and working capital for normal seasonality and the strategic procurement of raw materials.
Net leverage for the quarter improved to 3 times from 4.8 times at the end of last year's second quarter.
<unk> us and our targeted mid term range of 2 to 3 times.
We also repaid an additional $70 million on secured debt at the end of the second quarter.
And with our total debt reduction now approaching 400 million since late December all while maintaining a strong liquidity profile.
Our return on invested capital was a strong 21% representing a year over year increase of 630 basis points.
Moving now to slide 8 and starting with our updated full year outlook.
Based on the current healthy trends on our business. We are again, raising our full year guidance after a significant increase and our first quarter earnings release.
Our updated expectation is for core revenue growth and the range of 20% to 22%.
And and adjusted EBITDA margin of 22 to 222, 8%.
Our guidance includes the expectation that we will remain price cost positive on a dollar basis for the full year and reflects strong incremental margins, despite the significant inflation and challenges with material and logistics availability.
We continue to expect capex to be and the range of $90 million to $110 million.
And free cash flow conversion to be greater than 80%, resulting and further improvements to our net leverage.
For Q3, we expect revenue to be and the range of 845 million to $865 million and adjusted EBITDA to be and the range of 183 million to $196 million.
This reflects continued strong performance and a return to more typical seasonality.
The significant inflation notwithstanding our adjusted EBITDA guidance represents a year over year growth of 35%.
And margin expansion of 250 basis points at the midpoint.
We currently believe the challenges and the balance of 2021 on management.
However, the dynamic operating environment, and addition to the potential for worsening COVID-19 situations in certain regions has the potential to further affect us on.
Customers and our suppliers over the balance of the year.
With that I will turn it back over to Evo for some final thoughts.
Thank you Brooks moving now to the summary on slide 9 and a few key takeaways.
We delivered outstanding second quarter results in an environment that presented unique operational challenges.
We anticipate a strong second half of the year capitalizing on the underlying demand and favorable trends and market to try and further progress with our initiatives and new products.
We are closely monitoring supply chain bottlenecks as well as COVID-19 related challenges faced by our suppliers and customers.
While the environment remains dynamic on a number of trucks, we are executing well demonstrating strong business fundamentals and operational agility to support above market growth.
We successfully manage the large increases in volume.
<unk> supply chain, and labor complexity, and offset inflation delivering strong incremental margins.
On a multiyear effort to focus resources on more profitable higher growth industrial end markets continues with our exposure to automotive OEM applications now down to approximately 10% of company's total revenue.
Finally, our cash generation and increasing profitability has allowed us to continue to deleverage the balance sheet, providing more flexibility around opportunities to selectively accelerate growth strategies beyond organic growth targets and I'm very proud of.
Our teams and the effort they put forth globally to deliver these outstanding results and I'm excited about the opportunities. We have ahead of us as well.
With that I will now turn the call over to the operator to begin our Q&A.
Thank you.
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Your first question comes from the lineup and the Kaplowitz from Citigroup. Your line is now open.
Good morning, guys and.
Good morning, Andy.
Even so at the beginning of this year you guide to gauge potentially outperforming its end markets by mid single digits, but this quarter on power transmission, you are quite low digits above market growth and and.
Fluid power was high single digits. So can you give us a little more color on the biggest drivers on the.
Above market growth and giving you. Just said you think you are still early and ramping up your organic initiatives do you actually think gates could continue to drive above market growth at these types of rates.
Yeah, great. Thanks, and thanks for the question on day look I mean, we believe that day above market growth is being driven primarily by the investments we've been making.
And our commercial initiatives and product innovations and I've spoken about debt for a while and frankly, they are enabling us to take more share gain across both of our segments and then.
On market.
We believe that the underlying market conditions.
Also aiding.
The adoption of our new products, which.
Which supports the acceleration of.
Organic initiatives that we have highlighted on number of calls before.
Many of our many of our initiatives and new product SaaS focused primarily on applications and markets that we have described having.
Very strong secular tailwind and the value prop is there are products are key and.
And adopting those new technologies.
Poke about.
Our focus on chain to belt I spoke about the strong performance on personal mobility and I think that both of these game came very very strongly.
In Q2, and we believe they have a good runway runway for us for the future. So we know we have.
We are quite excited about the continuation of these positive trends and we believe certainly that we can very consistently continue to not only <unk>.
Form nicely and in 'twenty, 1, but over the longer term.
Be able to demonstrate consistency of growing our business kind of.
2.3% above.
Above the market as we have highlighted is on midterm.
Objected.
Thanks for that <unk>, and then can you give us a little more color on sort of puts and takes you're seeing that reflect your margin expectations going forward and it looks like youre still close to 40% Incrementals for the year and maybe a little lower than and Q3, you mentioned that you're still expecting a price inflation dollar for dollar. So how much margin dilution is that present the engine based on once you gave us last.
Quarter and then it does look like at least at the high end of your margin remained you're assuming incrementals resume more of a normalized range and Q4 and to that 40% range. So does that suggest confidence the gates should be able to delivering incremental and.
And to that 40% range and 22, even if inflation persists.
Hey, Andy this is Brooks.
So we're very pleased with our Incrementals overall, if you look at our our normalized volume Incrementals in Q2.
And a and the low to mid $40 range, So think 43% to 44% and then we had about 400 bps of incremental headwinds about half of that came from.
Increased SG&A for variable comp and different kind of customer related accounts that have really recovered.
With the increase in volume and then about half of that came from price cost and and FX.
Dilution on the overall incrementals, so even with the big volume gains and we're very pleased with the overall Incrementals. If you look at the full year.
The full year, we're going to see about 900 bips of incremental.
Incremental dilution so our core kind of normalized volume incrementals are going to be on the high 40 is almost a 50% and then you've got that 900 bps and it's kind of split evenly between FX and price and inflation and then the increased SG&A and for variable comp and sales returned to norm on some of those customer.
And.
And our customer base SG&A costs.
And logistics and so we feel really good about where our incrementals are coming in and we're kind of right and the middle of the fairway on what we said with the elevated incrementals and we feel good about 35% to 40%.
Going forward and then.
Just real quick on Q2, you have to remember we had a really elevated volume growth year over year and that also makes those.
Those incrementals a little bit tougher when you've got so much volume flow through and so and the back half of the year those normalized incrementals are a little bit closer to those elevated on numbers we've talked about.
I appreciate it Brooks.
Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is now open.
Thanks, Good morning, everyone.
Yes.
Just wanted to follow up with that last question. So when you define price cost neutrality.
And then all the inflationary aspects, including new freights and with adjusted 1 machine and aspect and it's just.
And Theres no sort of clear definitions out there so just.
That'd be helpful and then on the price equation.
Maybe just compare and contrast.
OEM pricing this is what you're saying to the channel and again and spirit. The question really is that oftentimes, there's a lag on OEM pricing. So just wondering if you're if you've seen on like that.
And.
And thanks for the question. So when we think about inflation and we think about really the overall per unit cost both for raw materials and for freight and what we don't include as we don't include labor inflation and we don't include maybe some of the inefficiencies you see and the supply chain.
And a constrained freight and things like that but.
But we just look at the cost relationship of it.
Year over year so.
Materials inflation.
Logistics rates and then we compare that to price.
What was the what was the second part of your question and again, you got it yes, and Nigel I.
I'll take the second part and Youre right.
The OEM pricing activities all of this lag a little more the distribution channel partners pricing, but we have been pretty forward leaning we've seen the inflation and we were worried about inflation, we spoke about it frankly from Q1 earnings call.
About the elevated inflation that is creeping in and we have taken pricing into the Oems as well and.
We believe debt.
We are reasonably well positioned to be able to offset it.
It has lagged.
A lagging slightly behind that channel pricing that we have done.
Great. Thank you and then you mentioned.
You touched on channel inventories.
We remain very low.
Maybe just any more color on how low is low and did they get lower during the quarter and our U.
And a position where you cant fulfill demand I E. Your partners want.
We stopped but and able to it because he got supply chain constraints and any kind of that great.
Yeah, right I think it's a great question. Thank you Nigel for 4 it look based on the point of sales data that we have and again I remind everybody that up point of day day point of sale data as most strongly.
Correlated and North America at this point and time.
Also our biggest biggest market all of the indicators that we track would suggest that the inventory levels are quite low compared to the demand levels.
On the channel partners are seeing pressure on place.
All of the commentary that comes from our customers again, and whether or not it is commentary that comes from our channel partners on distribution side or frankly, even from the Oems. They all would like to have more inventory and they all struggled to keep up with the demand patterns that they have for our products.
From there.
And customers. So I would tell you that everybody would like to have more inventory.
We are doing the best that we can to keep up I've also mentioned that we.
We did have a very strong book to bill for the second second quarter in a row, we have terrific quarter again very strong performance.
We are not a backlog business, but we.
We did build backlog and.
And that would indicate to your debt.
And that people would like to get more than we can supply.
I hate to ask 1 more question, but just on that point about building backlog and and.
Does that maybe suggest that <unk> could be stronger than normal seasonality right now on your guidance Embeds normal seasonality for <unk>, but just curious if that's a possibility.
And it's a great question look I mean I.
Thing that we need to take into an account as debt. We came in from a very strong baseline in Q2.
So record record level of revenue for us very great results.
<unk> Incrementals, we are executing on our playbook and there is more demand out there than we can fulfill but I also want to remind everybody that and there's tremendous amount of headwinds that we are still dealing with.
And particularly on our on our customer side, just as much as it is on our side. So although they like to have more products from us.
They cannot get semiconductor.
Dale.
They'll manage their bill just as much as.
As they would like to build more products out there. So yes demand is strong.
Supply chain chain Challenge is labor challenge is logistics challenges and frankly, although the 1 and move beyond Covid Covid is still here.
And it's problematic and we dealt with it in Q2 and India. It was by far worse than what we've anticipated I have highlighted debt, although our automotive first fit business that are great.
Posted great results and Q2, it was frankly, a little worse than what we've anticipated with a conservative guidance. So there's still lots of uncertainty.
And Tony kind of seasonality I believe that.
And then we've taken that into account and we have a very strong guidance for the second half of the year.
Great. Thanks, David.
Okay.
Your next question comes from the line of Deane Dray from RBC capital. Your line is now open.
Thank you and good morning, everyone.
Good morning.
1 of the positive surprises and the first half.
<unk> has been your debt leverage getting paid down faster and hitting your target really 6 months ahead of time is there an element and your capital deployment that year and can now pivot to more playing offense is this a.
M&A opportunities, what's the funnel look like and are there internal growth investments that you might be able to step up as well. Thanks.
Thank you for your question Deane, absolutely, but again I remind everybody that our priority remains deleveraging.
On balance with frankly doing doing the right things for the company over the long term and supporting them over the long term growth for our company.
We have very strong set of organic opportunities as I have highlighted.
On last past year, and a half or so and we are excited about those those opportunities and we will be prioritizing funding those projects day generally speaking and return the best investment on.
The best returns on that investment that supports dose.
Debt strengthening balance sheet.
Of course, and does create optionality to accelerate our organic strategies through M&A the pipeline of opportunities out there is pretty active however, I don't think that it will surprise you the seller expectations in general are pretty stretched and we will be very disciplined and selective in adding.
Capability to our portfolio through M&A, but those opportunities remained very strong. They are all on the table and we will be we will be very focused and very disciplined and creating long term shareholder value.
Great and then just second question and it's another 1 of these.
Positives happening fast or is this whole chain to belt conversion and maybe I was guilty of thinking this was going to be a on the horizon secular trend.
But it's really happening near term and.
And is there any and it's becoming a needle mover is can you size for us like what.
Could contribute and your mix next year, maybe on a percent.
And just to clarify does chain the chain to belt when.
Does that show up and new product introductions and is it part of your share gains calculation as well. Thanks.
Thank you for the question do you know of course.
Very excited about our chain to belt opportunities and I think couple of years when I shared with the investment community. The opportunity. We saw that said, it's a very strong opportunity for us to drive organic growth over a very long period of time, despite the fact that.
We are doing really really well and its becoming and nice addition to our revenue generation and market share gains, particularly in power transmission. We believe that it will take more time and it is a long term opportunity for growth and I think all of them.
And everybody.
Aleve debt that has added kind of.
4% to $6 billion to our Tam.
And in a very near adjacency to what we do for our customers and how we solve our problems.
We believe that it will be adding some incremental opportunity for us to deliver a strong 2022, but we will we will come back to 'twenty 2 during our.
Q4 earnings call during on normalized cycle and.
It does show Dean, indeed, diversified industrial and and personal mobility in particular, and I think that both of those are growing very nicely and performing very nicely for us So clearly great opportunity for the company.
It's <unk>.
Supporting our growth anticipation short term, but it will be and very long trajectory of of runway that we see for us to continue to execute on.
Does it just to clarify does it show up and the your calculations of new product introductions.
It does it does.
I think it was I just wanted to be sharp okay. That's all real helpful. Thank you.
Thank you for the question.
Your next question comes from the line of Mike Halloran from Baird. Your line is now open.
Hey, good morning, everyone.
Good morning, Mike.
So following up a little bit on an earlier question, obviously to bill above 1 talking about good internal momentum inventory is still low from a channel perspective.
And that bouncing out or normalization doesn't seem to be embedded in the guidance currently and maybe just some thoughts when you talk to your channel partners and when you look at your own supply chain and when do you think that starts balancing out and and normalizing a little bit and just how you think demand cadence is here and into next year.
And it's a great question and Mike look I mean.
Incredible amount of challenges that we are dealing with predominantly associated with.
Some labor availability and specific rate regions, particularly in North America, and U S and raw material supply is very very challenging whether or not it's <unk>.
And it's resins.
Precision high precision steel to name probably 2 of the most challenging.
Sources on raw materials for us.
And also look I mean.
And frankly visited the port of long beach to try to understand what's going on and there is a pretty significant congestion day as well so on occasions, where you can get the raw material you got it from.
8.2 point and be can't quite get it from.
From the courts to go source factory. So we believe that it will take some time to work itself through and we certainly believe that those challenges will remain front and center with us should.
So the second half of the year and we anticipate that.
Maybe 2022, and we should start seeing some easing on of those impediments.
Thanks for that and then follow up.
You look at the audio auto OEM exposure decent trend certainly, but you want on your way multiple times to talk about how you keep seeing that reduction here and as a percentage of total revenue.
So kind of a twofold question here, 1 does the strength that youre seeing and the broader businesses as well as and that specific segment does that give you greater optionality and the short term here to maybe be more aggressive on on reducing exposure and then secondarily is there a point, where you think that balances out and.
And how should we think about the timing around that or maybe some sort of other kind of indicated that we should look at.
Yes, Mike I think that I would like to address this.
And next time, we get and in depth next time, we get together and we provide the investment community and analyst community with an update on kind of a capital base update.
So we will address that theyre in more and in in depth and breath, but look.
We've taken a pretty strategic pivots to reduce our exposure to the <unk>.
<unk> segments of automotive, we have been executing on debt pullover over 3 years.
Since we became a public company debt exposure is down from about 15% of total company revenue during the IPO.
So about 10% now that being said we are also quite excited about some of the electrification trends that are going on we have had a number of new design wins again in the quarter.
And so.
We are not.
And that that place, but we believe that over the long term automotive first fit is going to remain kind of and the you know and maybe.
And maybe high single digits as a percent of total company revenue and.
We are pivoting towards being.
And being much more focused on continuing to execute well on our replacement side of the automotive business and.
And that's where we are making substantial investments we are building strong portfolio.
<unk>.
EV coverage.
The vio, the vehicles and operation coverage and.
So overall I think that we like where we sit and we will be measured and we continued to execute on and on the.
And desired outcome of where we said with automotive Oems.
And I appreciate the help as always thanks.
Your next question comes from the line of Jeff Hammond from Keybanc Capital. Your line is now open.
Hey, good morning, guys and good.
Good morning, Jonathan.
I just wanted to pick on.
A couple of trends.
I see 1.
Like Europe is recovering and a lot faster than North America, and and I, just wanted to kind of get a little better sense of pits.
Just a more robust recovery or more outgrowth or better supply chain dynamics and then if you can just frame how youre thinking how you see like the PT recovery versus 19 vs. The fluid power it seems like <unk>.
<unk> is running ahead and I don't know if that's just where we are and the cycle or if there's anything else to read into that.
Yes, great great set of questions, Jeff Let me try to get through all of them look we are very pleased with how our Europe business has performed.
We believe that our execution leaning forward and frankly as early as Q3 of last year and pre positioning ourselves with raw material availability and staying operating has played dividends.
And has accelerated or.
Growth there with market share gains. So we are very very pleased with debt performance going back to your second question about the SB and not growing.
S as quickly.
As power transmission and versus the 2019 comp look we view that.
And that our fluid power business is still and the Verde very early stages of recovery.
We are seeing very nice improvements in.
And recovery across the end markets, but frankly, not all of those markets recovered fully yet.
And maybe list 1 being energy as an example, which although improving it is still quite significantly below 2019 level.
That chart that we share it I think at the beginning of the year, you know that energy was about 7% or so of our total company revenue say loss.
Not de Minimis and <unk>.
So.
And from all the data that we see we are still seeing debt.
Again very early innings.
D.
Impact and the innovation is bringing to a 4 day, but we.
Everything that we see we believe that we are taking a nice amount of market share.
And markets are poised to continue to recovery and ft.
Okay, Great and then the last 1.
And I think you called out labor availability, and it's a bigger issue and the U S and I think your hope was you'd start to see some improvement there or is that starting to get any better or is that still a big problem for you.
Oh gosh, yes labor markets remain very very tight, but I don't think I think that you guys may be sick and tired of hearing it from all the reporting companies on.
We are staffing sort of best of liabilities.
Having some success and being able to do that.
Versus where we perhaps sat and.
Kind of April may of <unk>.
Past quarter.
They have undertaken very significant recruiting campaigns to fill vacant positions and.
And I think that this is going to remain as long as <unk>.
The Covid kind of assertion is front and center I think and lots of the states have already dropping some of the supplemental benefits debt out there. So we should start seeing a little bit of less of a headwind from from dose, but I think that COVID-19 COVID-19 conversation is still impacting people's willingness to come back to work, particularly on the <unk>.
Yes.
Okay I appreciate it.
Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is now open.
Yes, hi, good morning, everyone.
Morning, Jerry.
And I'm wondering if you could talk about how much.
Capacity, you folks have to ramp up production.
Into 'twenty, 2 just you'd be changes on the manufacturing footprint.
If we're looking at just your ability to ramp up and your supply chains.
Supply of your products increased 22 versus 21, assuming semiconductors and other areas are not a constraint.
And for your customers just so we can get a sense for the manufacturing footprint today versus the last cycle.
Yes, Jeremy I will stay away from 22 again, I think that we will provide a better update on on a standard cycle and end of Q4 on that.
On the Q4 earnings call.
About 22, but look.
Made pretty significant investments during the last cycle, we feel good where we sit with capacity.
So anticipate and.
Hopeful that we will see the raw material supply chain shortages kind of worked themselves through as I do.
Discussed.
Most of these are in the revenue and precision steel areas debt, that's the biggest impact on us and on our on on.
On manufacturing and both of these.
Significant components, particularly on the fluid power side, what we believed at working through this.
And second half of this year, we should hopefully start coming out of the situation on that and that would position us reasonably well.
Sure.
<unk> advantage of 'twenty 2.
Brink's 2.
2.4.
And for Us and we're very constructive on the end markets.
We really don't control some of the other raw materials debt that our customers are managing through and again I believe that all customer and some more.
In a bolt on.
And better about 2200 and.
And then they have so far and 21.
And.
Maybe to ask that.
And different way.
And it fair to say that across your footprint you are pretty much running at 2 shifts today. So if we're talking about ramping up production, we need to get.
Production out of the same shifts into next year.
Sure.
Beyond.
And Jay that we generally speaking do not comment on capacity utilization because of the complexity of various plans the locations geographies labor availability and so on so for but we're running and.
And a good place and we feel optimistic about.
About the market recovery as it progresses.
And lastly, your margin performance. This year is really impressive and a challenging environment you might essentially get to a new cycle high and just your want to recovery.
I'm wondering as you folks think about the opportunity to expand margins cycle over cycle.
How concerned are you with parts.
B.
Footprint, essentially overheating kind of like the <unk>.
And so we saw at the tail end of last cycle.
And and argue that.
We can sustain.
35% to 40% Incrementals, even as we are.
Getting to a pretty high level.
Of demand and parts of the footprint.
Many components there Jay so hopefully I can I can capture all of them, but let me start with look we have done lots of work since.
Becoming a public company in real are realigning our footprint.
And building around innovation, and frankly positioning the company to.
To being able to manage.
Decrementals on Incrementals in the ranges that we have we have discussed right. So we've spoken about the decrementals being in the 30 percentile.
Level and and the normalized incrementals kind of at a 35% to 40% and certainly we are delivering on the incremental side.
By the very significant challenges that we are dealing with and then.
Should reinforce.
On the.
And the set of opportunities that we see ahead of us and hopefully give investors a level of confidence that debt our strategy is taking hold.
I would probably stay away from.
Trying to address what's going to happen and our future is very very difficult very dynamic operating environment I think for everybody.
I think that we are well positioned our operating and commercial teams are doing an outstanding job in.
And doing everything that's possible to support our customer needs and delivering strong returns for for our shareholders. So we feel quite good about that and maybe the last piece that you have had in there.
Look we.
And while ago, we've put and mid to long term objective.
And kind of delivering debt.
The $4 billion, 24% plus EBITDA target out there and we still believe that we are on the target to be able to deliver that over.
And our mid term future and so we.
And we're quite optimistic about what we have done with the business. We are quite pleased with how our teams are executing and we.
We will continue to report as we.
We progressed true into the future.
I appreciate the discussion thanks.
And Ken.
Your next question comes on line on for Julian Mitchell from Barclays. Your line is now open.
Thanks, a lot.
And just trying to keep my questions and therefore focus.
China growth I think it was.
The high teens in Q2, often low seventy's and Q1, maybe help us understand what are you seeing across the 2 segments that right now in Q3 and.
And what youre dialing in for China growth and.
In the second half of the year.
And your overall global guidance.
And thank you Julian and good morning look our China business is performing extremely well as well and we are executing on our growth playbook.
On the industrial markets are performing well, there, particularly on highway and diversified industrial applications, which have been a very significant area of focus for for our teams data on 4 initiatives.
We continue to see very strong growth and replacement channels and both the automotive and industrial and market. So we are quite pleased with what's what's happening in China.
And.
I'll remind everybody that on the China came into Covid first and came out of the out of Covid first.
The normalization of our growth rate and China is.
It's good to see frankly, I know that.
Perhaps everybody would like to see strong numbers. Those are very strong numbers that we have printed taking into an account more normalized performance and.
For a second.
And second half.
Implied performance for China is normalized growth rates and.
And the.
High single digits to low low low double digits.
Thanks, very much and then just.
The second 1 the tax rate sort of embedded in the adjusted EPS calculation moves around a fair amount.
Maybe help us understand.
The second half adjusted tax rate, we should expect.
And any sort of medium term color on the adjusted tax rate. Please.
Okay, Hi, this is Brian so yeah, we had some favorable.
Adjustments.
In Q2.
I think thats going to lower our overall tax rate that we're thinking for the full year more to the 19% to 21% range.
And as opposed to typically we will see kind of 22% to 22% or low twenties.
For the longer term, we expect that low 20 rate to hold.
And so.
20% to 22% for the longer term, but we will see a little bit lower rate. This year based on those 1 time items.
Great. Thank you.
Your next question comes on line of Josh Bakugan speak from Morgan Stanley. Your line is now open.
Hi, Good morning, everyone and this is actually to start moving dollars on for Josh.
Thanks for taking my question. So just to go back to the inflation.
On topic can you sort of frame up the order of magnitude of price cost.
Spread and the first half and how does that sort of compare to your expectations for the second half.
So.
For the year from a price perspective, we expect to be just north of 3 and that was.
That was what it was in Q2 as well so just north of 3 now the comps get a little bit tougher as the volumes went up and the back half of 'twenty, So even though the price percentage year over year, so, saying thats more price dollars.
From a from a.
Overall kind of EBITDA perspective were slightly flat.
Maybe.
Or -10 bps.
In terms of the overall EBITDA percentage, but then as I've said before on the incremental debt is a little bit of a headwind.
For the full year, so and kind of back into the math on that.
Got it and Thats helpful. And then just my follow up so you're kind of closing.
Pretty solid top line growth this year, but then reiterated capex is.
This sort of more of a reflection of past investments and capacity or should we expect capex and kind of ramp from here. Thanks.
Okay and this is.
Brooks again, so just real.
Real quick.
We've got a lot of great investments.
So that we can make organically our organic investments are typically the highest.
And rate of return on investments that we can make it it's really just about the timing and the execution and and how much stuff you can get through the pipeline and so that's why and <unk>.
And whilst environment that $100.110 million of Capex gives us a lot of opportunity for growth Capex, a lot of opportunity for investment and it's going to drive that drive both the top line and the bottom line and so that's really all it is just kind of a normalized this is what we can get through the system.
Got it thank you so much.
Your last question comes from the line of Jamie Cook from Credit Suisse. Your line is now open.
Hi, Good morning, most of my questions have been answered I guess, just 1 the power transmission margins were quite impressive during the quarter. So just any color on.
On the sustainability of that or were there 1 time or is that sort of helped that and then over what time period do we think we can get debt fluid power margins closer to power transmission.
Good morning, Jamie.
We are quite proud of.
Execution on power transmission and again.
Sure.
Suggests that the performance has been delivered primarily on the volume growth and frankly, the innovation and new products, they're coming they're coming through and showing the results on the fluid power again.
A reasonably early and the recovery Jamie asked.
The market starts.
And going through a more full some recovery, we anticipate debt debt on margins is going to continue on a trajectory up and.
And.
Again, taking normal seasonality into account.
Thank you.
There are no further questions at this time presenters you may continue.
Alright. Thank you everyone as always for your interest and we look forward to providing you with another update in November.
This concludes today's conference call. Thank you for participating you may now disconnect.
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