Q3 2021 Gates Industrial Corporation PLC Earnings Call
Good morning, My name is Chris and I'll be your conference operator today.
At this time I'd like to welcome everyone to the Gates Industrial Corporation Q3, 2021 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad twist.
To withdraw your question. Please press star one again.
Thank you.
Bill Walkie head of Investor Relations you may begin.
Thank you for joining us this morning on our third quarter 2021 earnings call I'll briefly cover our non-GAAP and forward looking language before passing the call over to our CEO Evo, Eric who will be followed by Brooks Mallard our CFO.
Before the market opened today, we published our third quarter results a copy of the release is available on our website at investors gates Dot 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 rec.
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 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'll now turn things over to Eva.
Thank you Bill good morning.
Thank you for joining our third quarter earnings call.
Let me begin with the overview outlined on slide three.
I am pleased by the performance we delivered in the third quarter led by another quarter of above market growth.
That resulted in record third quarter revenue and earnings.
The underlying demand and other trends across both of our segments remain very supportive and were supplemented by share gains from our product innovation efforts and continued execution of our commercial initiatives.
Growth was led by outperformance in the industrial end markets, which more than offset the significant near term cutbacks in auto production that impacted our automotive OEM business.
We navigated the very difficult supply chain conditions with an unwavering focus on customer service and we undertook significant efforts to support the demand levels.
Customers.
That being said demand for our products broadly exceeded our ability to satisfy all of our customers in Q3, and our book to Bill ratio remained well above one.
Operationally, we navigated this difficult environment to deliver strong margins and record Q3 earnings.
During our second quarter call, we highlighted our concerns regarding the inflation supply chain and labor challenges in the marketplace and our expectation that they would continue in the second half of the year.
These challenges did continue with some of the headwinds worsening over the second half of Q3.
While we maintained positive price cost position on a dollar basis with respect to materials, we were impacted by further escalation in logistics and distribution costs above what we anticipated.
We also faced additional operational inefficiencies from production disruptions related to Covid as well as the government mandated power outages in China.
These costs were magnified by some of the additional actions we took in the quarter to prioritize service levels and ensure we met our customers' most critical needs.
We anticipate seeing the full impact of these cost headwinds in the fourth quarter, but view them as transitory as we expect to offset them in the first quarter, we announced pricing actions that will take effect at the beginning of next year.
We continue to see strong free cash flow generation and made additional progress on deleveraging the business.
Which further increases our flexibility around capital allocation priorities.
With that let's move into more of the detail on slide four.
Total revenue of $862 million came in at the top end of the range, we provided up 21% year over year, including core growth of 19%.
We saw the strongest performance in our industrial end markets across both first fit and replacement channels.
With the most significant growth coming in the mobility and recreation diversified industrial and off highway end markets.
Our focus on mitigating supply chain disruptions and servicing our customers in automotive replacement resulted in depth channel growing high single digits, a nice offset to the mid single digit decline in our automotive OEM business driven by reduce.
Production output across the global automotive Oems.
In general inventory levels in both of our replacement channels remained low with many of our distribution partners, having difficulty keeping up with the end user demand.
Our third quarter, adjusted EBITDA of $184 million represents growth of 31% compared to the prior year and margin expansion of 160 basis points.
Price volume benefit and GPS based productivity offset inflation SG.
SG&A investment and the incremental costs, we incurred to support above market growth.
Our execution in the quarter resulted in an incremental margin of nearly 30% a solid result, given the outline operating challenges.
Our adjusted earnings per share were <unk> 31 in the quarter.
A 19% increase compared to the prior year period, driven by higher operating income, which more than offset higher tax expense, resulting primarily from our higher earnings.
Moving now to slide five and the segment highlights.
We saw strong performance in both segments compared to the third quarter results of our business in both 2020 and 2019.
In both segments are above market growth continues to be driven primarily by new products. The performance of our organic initiatives and positive secular trends in our end markets.
Our power transmission segment had core growth of 15% led by nearly 30% growth in industrial end markets offsetting the decline in automotive OEM.
Diversified industrial and mobility and recreation saw the highest growth rates.
Our industrial chain to belt initiative, combined with mobility and recreation grew approximately 50% year over year.
We secured key design wins in industrial robotics, and semiconductor inspection equipment in Japan textile manufacturing equipment in India, and additional warehousing and logistics applications in multiple regions to name a few.
We also finalized a significant win with a leading Asian scooter manufacturer on a new electric platform that is expected to fully launch in the first part of next year further reinforcing the momentum we are seeing in our mobility and recreation business that we expect to continue.
In our fluid power segment, we saw core growth of 26% the end market recovery trend is continuing.
And we anticipate it will take further hold as we enter 2022.
We continue to see benefit from our investment in innovation with Q3 sales of our new products growing over 70% year over year advancing our objective to deliver 20% new product vitality over the mid term.
In an environment with significant supply chain headwinds, we believe the costs, we incurred to support customers have resulted in share gains, particularly in off highway and energy as well as diversified industrial applications, including forklifts.
And food processing equipment.
On the electrification front, we recently launched our next generation E waterfront platform for hybrid electric and fully electric vehicles, which had some specific patent pending features that we believe differentiate us from the marketplace and provide a solid.
<unk> to expand our sizable existing water pump business.
In the quarter. We also began production of thermal management houses for battery cooling on an electric heavy duty truck platform in Europe.
And are excited about the pipeline of additional opportunities we are quoting on.
Our prospects with the electrification of transportation propulsion are strong and we remain optimistic about the size of our future potential business opportunity as these technologies gained further hold in the marketplace.
With respect to profitability, we delivered adjusted EBITA margin expansion of 120 basis points in power transmission and 270 basis points in fluid power compared to Q3 2020.
With similar levels of expansion compared to Q3 2019.
We expanded margins in both segments not only while managing through the supply chain complexities and inflation, but also while investing in SG&A and innovation to build on the momentum we are seeing with our growth initiatives.
With that I will turn the call over to Bruce for additional color on our results Brooks.
Thank you Ivo.
Now moving on to slide six and the regional breakdown of our core revenue performance.
We delivered double digit core growth in nearly all regions with developed markets outperforming.
In Europe, our strong growth came despite the significant decline in auto production.
And was led by the off highway and diversified industrial end markets.
Our replacement channels continued to show solid improvement with both industrial and automotive end markets delivering double digit growth.
Moving to North America growth was led by first fit channels, particularly in mobility and recreation diversified industrial and off highway applications.
Nearly all our industrial end markets experienced solid double digit core growth with the energy end market growing mid single digits.
Our business in China has seen as a percentage of sales into replacement channels increased meaningfully over the past several years.
Salt of the significant investment in our replacement channel presence, while deemphasizing, our auto OEM participation in line with our global strategy.
We saw the benefit of this transition in the third quarter with sales in our replacement channels posting low double digit core growth offsetting much of the decline in auto Oems.
Our total core growth in the quarter was impacted by a one week shutdown of our facilities as a result of unplanned government enacted power outages.
While the potential exists for these disruptions to continue over the short term we.
We believe the investments we've made in China over the past several years and the replacement channels and our industrial business position us well to capitalize on this large market moving forward.
Lastly, our business in South America, and East Asia, India had strong performances in the quarter.
We saw healthy double digit core growth across all end markets with particular strength in our diversified industrial and off highway applications as well as in automotive replacement.
Moving now to slide seven and some additional detail on key balance sheet and cash flow items.
We generated strong free cash flow in the quarter with cash conversion on adjusted net income of approximately 90%.
And year over year growth of 116%.
Net leverage improved to two seven times, placing us firmly in our targeted mid term range of two to three times and providing further capital allocation flexibility.
Our return on invested capital was a strong 22%.
Representing a year over year increase of 790 basis points.
Moving now to slide eight and our updated full year outlook.
We are maintaining our full year expectation for core revenue growth in the range of 20% to 22%.
With our industrial growth initiatives expected to offset further deterioration of the automotive OEM business and additional headwinds in China.
We are updating our adjusted EBITDA margin expectation to a range of 21 to 21, 5%.
Which reflects margin expansion of over 300 basis points and incremental margins in the mid 30% range.
This updated guidance includes a price cost neutral position for the year, despite additional headwinds driven by higher inflation and operational cost incurred to continue to support our customers.
It also reflects the decision to implement pricing and early Q1 of 2022 in line with our normal cadence, which gave us better visibility into the magnitude of the increase needed.
We believe inflation increased supply chain costs and labor constraints are likely to continue for the foreseeable future power.
However, the rate of increase appears to be slowing.
For the fourth quarter, we expect to see adjusted EBITDA margin dilution due to the timing of the aforementioned cost headwinds, which will be offset by our pricing actions effective in Q1 of 2022.
We expect the unfavorable impact of these higher costs in the fourth quarter to be approximately 200 to 250 basis points.
For the year, we expect capex to be approximately $100 million.
And free cash flow conversion to be greater than 80%.
With that I will turn it back over to Evo for some final thoughts.
Thank you Brooks moving now to the summary on slide nine in few key takeaways.
Yes.
Our third quarter results are strong in this challenging operating environment.
Our full year updated guidance suggests this will also be the case for the year, while navigating the present external challenges.
We expect to deliver above market revenue growth this year and a record top line performance.
We believe our investments in innovation and our growth initiatives as well as supportive trends in our diversified end market provides a solid runway for the future.
We are staying firmly focused on meeting our customers' needs and overcoming the present supply chain logistics and inflation challenges, while expecting to deliver strong earnings growth.
Our innovation efforts and key growth initiatives are focused on higher margin products, which we believe in combination with restructuring benefits and ongoing GPS based productivity initiatives provide additional margin expansion opportunity over the mid term.
Finally, our business model has continued to demonstrate substantial free cash flow generation, which we expect to continue to contribute to deleveraging the business and increasing capital allocation flexibility.
Our business is well positioned to take advantage of the secular market opportunities in core applications, we serve and our global teams are firmly focused on keeping our customers needs front and center.
I am grateful for the effort put forth by our global teams in delivering these results and looking forward to what we believe is a solid set up for 2022.
With that I will now turn the call back over to the operator to begin the Q&A.
Thank you and just as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
First question is from Mike Halloran with Baird. Your line is open.
Hey, good morning, everyone.
So can we follow up then on the positive trajectory you're talking about for 2022, obviously fourth quarter 200, 250 basis point headwind.
From all the supply chain inflation et cetera challenges out there.
You got the price increase going going in to start next year, how should we think about how that headwind starts abating are we at the point where were outpacing.
The same trajectory would have talked about a quarter or two ago on the margin side.
Early in next year or do you think it takes a little bit more time to play out.
Thank you for your question Mike look.
We have decided to take.
Pricing actions early in.
In 2021 and that put US ahead of the inflation that we saw and we were anticipating and so we are price cost neutral obviously for Q3 and.
And.
And we forecast they will be price cost neutral for the year, which I think is that.
Very strong statement right there.
We.
Being dollar for dollar cost neutral still gives you a pretty significant headwind regardless on the margins taking into an account.
How large those numbers are.
But what we saw was accelerating inflation in the second half of Q3, particularly associated with logistics and material availability in all the expediting the DNA to do to support all of our customers.
And since demand is so robust.
Yes, we wanted to do everything that was in our power to our to support our customers and we have done that.
So we waited to scope.
The size of that.
That inflation and since it was so close to announcing our standardized price increases.
In Q4, we waited to do that not to disrupt our the price books and all the issues that come with rolling forward pricing and so all in Q1, we anticipate to be again fully hall on price material economics, including the law.
<unk> takes that data that I've just discussed.
<unk>.
That being said.
Again, because those numbers are so large you still going to be facing some headwind headwinds in the first half of the year associated with with margin expansion itself, but we anticipate that 2022 is going to be a very good year. We will continue to go to two.
To price our products in line with the criticality of the components and the services that we offer to our customers.
We feel we are in a good shape to be able to deal with all of the headwinds that we have anticipated that we have expected.
So in other words on an EBITDA basis, you get a lot closer to hold and starting next year, it's just that the denominator.
Makes it difficult on the margin side.
A fair interpretation.
Yes, that's it.
Correctly right.
If.
You are going to be price cost neutral.
Youre going to get some margin dilution on the EBITDA line. They're just that's just the law of math right, but from a dollars perspective.
We're going to be.
At least neutral for 2021 and at least neutral for 2022.
That's great and then a follow up on the book to Bill commentary and the strength of the underlying demand obviously.
Strong growth really healthy underlying demand, even though you have a couple of stress points.
That hopefully should get better in the next year could you maybe talk a little bit about what the visibility looks like as we sit here and how far this backlog seems to be stretching out and you are not typically will backlog oriented business and so what is the underlying commentary say about the trajectory in the next year.
Yes, Mike.
Great question again as you said, we are not typically a backlog business but.
The order intake is very strong and decided.
Despite all the headwinds that we have seen in Q3 associated with the weak auto production in the.
The headwinds that we have seen in China.
Our book to Bill is very very solid way north of one and frankly, we are we are just struggling to be able to keep up.
With the needs of our customers taking into an account how strong their performances and so.
Our backlog our backlog has grown we've talked about building a backlog on our Q2 call that backlog continues to grow through Q3.
And.
We hope we feel that the.
The demand is very solid in the marketplace.
And you combine that with the initiatives that we have been executing on the issue really for US is not the strength of the end markets, our ability frankly to secure enough raw materials to be able to keep up with the demand that we see.
Makes sense appreciate the time thank you.
Our next question is from Nigel Coe with Wolfe Research Your line is open.
Thanks, Good morning.
Just wanted to dig a bit more into.
Into Q4 sales I mean, I think the key of the queue.
Total number is stepping down quite a bit more than we would expect so I'm just curious it says.
Some constraints on your ability to supply you mentioned <unk> in your prepared remarks that youre.
You are not able to ship.
Everything to you.
You'd want to so just curious what constraints seen on sales and then as part of that I noticed that you call. It a mid single digit decline in auto OEM, obviously, a lot better than that.
Gold production. So I'm just wondering if there's some element of catch up in the auto OEM channels.
Good morning, Nigel. Thank you for your question look I have a lot to unpack here, but I would start with the constraints that we are seeing the biggest constraints frankly associated with the availability of resins and chemical additives.
That is.
The biggest challenge that you are dealing with and then when you secure them.
Being able to position them in a facility that consumes then consume consumes dose those residence Hall additives is as the other complexity that we have dealt with taking into an account the challenges that you see with logistics.
Globally.
And the the.
The impact that you see in these various ports.
It's Jeff put tremendous amount of strain on our operating team globally.
They have managed that really really well so I'm very pleased with what we have been able to do in Q3, we anticipate excuse me.
We anticipate that these short term impediments are not going to improve in Q4, and we're just trying to be pragmatic about.
What we are seeing there in terms of the availability of these resins and additives in particular some of the other raw materials that the issues have we have been able to manage through them quite well.
But the resin.
And chemicals is probably the biggest the biggest issue now coming back to your question about automotive what I would say is that we have we had the global leaf a leader in.
In electric power steering as an example, we are we are seeing ramp up in in the right mix, we have spoken quite a bit.
Over the last couple of years about our desire to to be much more focused on the new energy applications in automotive and display.
Despite the car production decay, we have been able to.
To be in the right mix and so.
Although it is a headwind is not as big of a headwind as maybe others.
That being said our automotive replacement side of the business is performing extremely well the demand is very strong and we continue to prioritize our customers and do everything that we can to be able to service them and needs of their customers.
Great. Thank you that's great detail and then I just wonder if maybe you could dimension the price actions in January and you called out the 250 basis points of impact in <unk> are those price actions enough to offset that 250 basis points.
So the price actions that we're taking for next year, taking into account what we've seen up until the time, we calculated them and as I said before we expect to be.
Price cost neutral for 2022, and we'll get into a lot more detail than that but I will give you.
I will tell you that if we see further acceleration as we did in kind of midway through 2021, we can rollout additional price increases next year to make sure that we stay on top of this price cost dynamics and I think there's one thing that we're all pretty confident hands and that is that we can go get price as needed to all.
<unk>.
The supply chain disruptions material inflation and labor disruptions that we're seeing.
In the environment right now.
That's great I'll leave it there thank you.
Our next.
Austin is from Julian Mitchell with Barclays. Your line is open.
Hey, Good morning, this is Trish Gorman on for Julien.
On the backlog I know you guys said it began building in Q2 and Dr. Cabell remains solidly above one time and so just wondering within that backlog do you guys have any sort of repricing mechanisms or escalators.
To protect margins as is considered revenues just in light of the current cost environment.
Thank you for your question <unk>, yes.
We price upon shipment.
As Bruce just outlined we are re pricing our price book, starting early Q1, and all of our shipments that are going to go out in Q1 will be based upon new pricing through the distribution channel now obviously slow different dynamic with Doe.
Mmm.
With the Oems, we are approaching them one by one and we are raising prices.
As needed.
And as you know.
As the negotiations come to fruition saw about 64% of our revenue comes through distribution channel. So those are much more predictable.
Thank you that's very helpful. And then just maybe a quick follow up on inflation in Q3 segment saw very impressive margin expansion. So just wondering if you expect inflation to be more acute in one segment versus the other as we think about Q4 dynamics. Thanks.
No.
So both segments use basically kind of the same underlying bills of material in terms of resin and compounds and things like that.
So we don't expect to see one seeing more outsized inflation than the other.
Perfect. Thanks, so much.
Our next question is from David Raso with Evercore. Your line is open.
Hi, Thank you the decision around the pricing action.
Just mentioned.
The repricing of the backlog Jan one was that sort of the business decision, there, where obviously, it's a little uncomfortable of repricing of backlog.
But at the same time.
We ended up taking a hit in the fourth quarter by not pushing price more quickly for 'twenty. One is that some of the dynamic we should think about that obviously the channel thoughtful of repricing of backlog.
But at least you didn't push increase through October.
October then hit them again in January I was trying to get a sense of the decision why to wait.
No. So the reason we waited as our typical it typically takes about 90 days for us to push our price increase through the channel and so typically our normal pricing mechanism for the beginning of the year price increases as we will announce the price increases in October to be effective early in <unk>.
Q1, and so as we started to see.
Inflation accelerate.
Towards the end of Q3, what we decided to do was take the next six weeks or so make sure we size the price increase appropriately and then communicated at the normal times to minimize the disruption to the customer and to give them their normal time to get all of their prices updated in there.
Catalogs in their systems and things like that and so and so for US. It just made a lot of sense.
At this point in time in Q4, we're going to be a little bit upside down on price costs, but we're going to recover in Q1, and then we're going to continue.
You know our normal methodology in terms of how we.
How we get rolled price out to make sure we're able to offset the inflationary pressures we're seeing.
And given the benefits of your model, having so much replacement channel sales.
I'm curious if that was a thoughtful decision of let's make sure we know the magnitude and then price accordingly.
And I know, it's easier said than done but why are you then pricing only to offset costs.
Okay.
Remember to replacement sale I would think to be able to unless you fear some demand destruction from trying to price where you can maintain margin on price costs.
So look yes.
Silver.
I would say that at a minimum right. We always make sure that we're going to we're going to price to offset cost.
Now that doesn't mean that we're not looking at our whole portfolio.
Particularly in times of this kind of accelerating demand environment, wherein and not looking at things that are margin challenged where we may be able to do better. So what I would say is at a minimum we're always looking to be neutral on price versus cost, but we're also looking for opportunities to optimize the portfolio.
So and improve our margins as well.
Okay. That's helpful. And then I know, it's a hard question, but when we think about margins year over year, even if you pull out the 200 250 bps hit in the fourth quarter, it's still implying down year over year, and if you add that back Saddam Thats, a mix issue or something else to discuss when would you expect the margins year over year.
To return to growth does that is that a second half 'twenty to issue.
Or could it be as soon as <unk>, just trying to frame it a bit as you approach this pricing decision.
Yes, so I would say the other part of the margin equation. There is you have to remember last year, we were still going through some of the COVID-19 stops and so our SG&A in Q4. This year is higher than it was last year. Some of that is variable comp, but most of it is just a return return to the norm on.
Things like marketing programs and co op with customers and different things like that as we get back to a normal a more normal rate of sprint spend so I'd say as we roll over into 2022, and the comps get more normalized youll see that more normalized.
Margin comparisons start to come through.
Alright Thats helpful. Thank you very much.
Our next question is from Andy Kaplowitz with Citigroup. Your line is open.
Hey, good morning, guys.
Morning, Andy Good morning, Eva I think you had talked previously about expecting normalized growth in China in the high single digits to low teens in the second half of 'twenty, one and obviously you mentioned the power outages basically caused a one week shutdown for you was that mostly the difference versus your previous expectations as well as some of the auto first fit fit.
Weakness and then are you seeing or are you seeing more of a macro slowdown in China and how concerned are you about that as we go into 'twenty two.
Yes.
For the question.
Sure.
Real real briefly we believe that absent the power outages that game frankly with without really much notice we would have seen kind of the mid single digit growth.
Taking into account the auto production in China has decelerated quite substantially but as we said.
We have spanned from a strategic perspective significant amount of time and effort to build out our industrial business, there and frankly broaden our presence in replacement channels as well and that that is bearing quite a bit of fruit for us. So we see the benefits of our strategy.
And absent the power outages, we would be kind of in a mid single digit growth in Q3.
So my expectation for kind of mid to high single digit growth for China would have been intact.
Absent the power outages, there and yet I don't anticipate that those are going to go away at least until debating Olympics are over with and so we don't anticipate that it's going to get better but.
But we are very optimistic about what we have done in China about the size of our opportunity Darren and the fact that it will continue to drive nice amount of growth one.
They start stabilizing in terms of making more power available to our industrial sector.
And so hopefully, though and then fluid power growth exceeded power transmission I think for the first time since Q2 thousand 19, if im looking at this right. So I know you said that fluid power is a bit behind in power transmission its recovery because it now right to think that fluid power has caught up and may be even a stronger growth momentum.
Power transmission going forward and related to that I think you mentioned energy turned the corner up mid single digits do you see that end market accelerating moving forward.
Yes look.
My sense is that fluid power is on the trajectory that we have outlined a gradual recovery to very nice rate of return.
<unk>.
Growth.
So we clearly have demonstrated that is what is happening.
And I'll point, you to a very nice amount of growth associated with our new products. So we believe that we are taking market share from others.
As the market continues to recover.
Energy markets.
Finally turned the corner and we see acceleration there.
Also we have number of significant new innovations that we have launched over the last 12 months and we continue to alliance that we believe that we are benefiting incrementally.
In addition to that end market recovering and.
When you combine that with the government finally, passing the infrastructure Bill we actually remain quite optimistic about the potential of our business in fluid power over the midterm.
Thanks for that either.
Our next question is from Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
I'm wondering if you could just talk about how are you.
I'm wondering if you could talk about the production cadence as you folks went through the quarter.
Through October what was the period of peak disruption just from and material availability standpoint.
We look at the implied fourth quarter guidance I believe the core growth outlook implies sequentially revenues down in the high single digit range or so which is worse than normal seasonality. So maybe you could just comment on whether you saw a deterioration into.
Tober in terms of supply chain availability.
Other key inputs into the ability to produce.
Yes, Thank you Gerry political for the question so.
Remember the seasonality impact in Q4 as you mentioned you feel that it is worse than <unk>.
<unk> seasonally.
We actually had a record Q4 in 2020 I want to remind everybody of that factor. So we had a terrific Q4 last year soft comps are getting little more difficult and we're being pragmatic about the raw material shortages, Jerry we still don't see any dramatic improvements.
Getting materials should afford and we.
We just feel that.
It makes sense to to be pragmatic about getting getting materials in our factories.
No that's very clear.
Clearly, it's not as if you observe that deterioration into October I, just want to make sure. That's the case.
No we have not seen deterioration in into into October.
Okay terrific and then as we think about the.
Pricing opportunity over the over the course of 'twenty.
Mr. <unk>. It appears that we have lost your audio or are you still there.
We will move onto the next question for now which is from Jeff Hammond with Keybanc. Your line is open.
Hey, good morning, guys.
Good morning.
Just kind of keeping our service levels upper end that enabling kind of share capture just maybe speak to how you're approaching your customer about permanent share gains versus.
These temporary temporary availability driven gains.
Yes, Great question look we.
Yeah.
We've stated that we believe that in 2020 in second half of 2020, we started to take some temporary.
Share gains.
Through product availability.
We believe that we are yes, we're converting those share gains into more print them and share gains.
We have very strong performance across all of our businesses again with demand significantly exceeding our ability to supply and.
Many of our product lines, frankly, not only half.
Raw material driven capacity issues by DAP product lines.
In engine cooling and battery cooling for new electric square.
Our capacity is also limited by our planned machine capacity. So we're looking at further expansion there as we are developing frankly product that is highly differentiated and from what we believe and what we understand as best in class. So.
It is translating into very robust for demand than in a REIT chaz get against true.
The raw material shortages that.
Not only gains, but I think all of the industrials are seeing presently.
Okay, and then it doesn't sound like you want to quantify your 2022 price increase but maybe you can speak to what the magnitude is versus say a normal year or is it does it to X or three ex normal. Thanks.
Yes.
We don't want to get into sizing anything for 2022, yet because because 2022 hasnt played out right and so.
It's going to be we think we've sized it appropriately now but.
Would there be additional inflation that we have to rollout additional price increases if we do we will.
I want to stay away from sizing the price increase.
For next year.
Also to the magnitude is significantly higher than what you would normally see and we'll just leave it at that.
Okay. Thanks, guys.
Thank you.
Our next question is from Damian Karas with UBS. Your line is open.
Hey, good morning, guys.
Good morning Damian.
Good morning.
Thanks for all the color around supply chain and demand environments.
<unk>.
I was wondering if maybe you.
Could help us think a little bit about 2022, I know, obviously youre not in a position to give us guidance, but.
How should we be thinking about free cash flow and what that should look like next year and.
Could you kind of expect to continue that to naturally drive your leverage down.
Two times or would you anticipate navy start deploying capital allocations sooner rather than later.
So I'll start with the cash flow and then I'll kick it over to Evo for the capital allocation question. So from a cash flow perspective look.
<unk>.
We went out with above 80% conversion. This year, we knew we were going through the year.
We were going to be making pretty significant investment in working capital as things return to normal we're sticking with the over 80% of adjusted net income for this year as we move forward and working capital stabilizes.
Target is always going to be to be above 100% cash conversion on adjusted net income and I'll just leave it at that for now no borrowing.
And when we give guidance, we'll obviously update that but we knew we were going to be lower this year because of the investment in working capital going forward. Our target is always going to be 100% of adjusted net income I'll kick it over to Eva for the capital allocation question, Yes. Thanks Brooks.
I think that as Bruce said, we are making really good progress on deleveraging and <unk>.
Frankly, we have achieved our mid term leverage goal much sooner than we anticipated which.
Which is a great crude.
Kudos to our operating team and our commercial team and everybody have gates. So we're very delighted with that outcome.
What I typically say and.
I am going to be pretty pretty consistent in here may be boring, but consistent.
Have a terrific amount of organic growth opportunities ahead of us that we are very excited about and we will continue to prior act prioritize funding dose projects as.
As we said as we pointed out over several quarters. They are delivering terrific outsized market growth rate. So we will continue to do that our M&A pipeline is actually quite active and quite busy. So we have lots of opportunities to add bolt on acquisitions.
To our company to accelerate our growth to help us to deliver on our vision to significantly.
Capitalized on opportunities in electrification and frankly on diversified industrial end markets opportunities.
Lastly, I will say that we have a significant amount of cash on hand, then.
All of the options on a table and we are very much focused to state to state clearly.
Front and center focus on creating long term shareholder value and that means that we are considering everything that would result in our shareholders getting rewarded.
Understood. Thanks, guys I'll pass it along.
Thank you.
Our next question is from Deane Dray with RBC capital markets. Your line is open.
Thank you and good morning, everyone.
Good morning.
He covered a lot of ground here just add a couple of follow ups.
Even when you said demand exceeded your ability to ship.
Can you quantify for us what.
Revenues were.
Missed in the third quarter.
DNI.
And I think that I stated at our book to Bill ratio was significantly north of one again.
Continuation of string of quarters, where.
We have book to bill above one above one.
No.
Whats happening with our business is very very positive demand is very strong and again demand frankly across.
All of the markets end markets and across both channels, even taking into an account the demonstrating demonstrated weakness in automotive OEM.
<unk> outperformed the declines in production output there so.
We are quite optimistic about what we see with the demand.
And.
We are very well positioned into 2022, we are extremely and laser focus both on a commercial side to be able to price taking into an account and what's happening in the marketplace and we have a high degree of confidence to be able to do that again in 2022 as we have done in 2012.
One and our operating teams are doing a <unk>.
<unk> job to get raw materials position in the factories that need them demos.
Without significant manufacturing output disruptions, so thats really what we are focused on.
We feel pretty positive about how the team is operating.
Alright.
Follow up can you remind us how many price increases you put through in 'twenty, one just year to date.
And is there any thought that there might be some poll and since you are signaling. This increase in January that there would be any pull in into the fourth quarter and if that were to happen I'm not sure you'd be able to ship incrementally more but just what are the dynamics.
Thank you Dan that's a great question, we have done a couple of major price increases.
To the channel this year and we have.
We have approached and negotiated price increases with just about every OEM that we do business with in 2021 and so.
We've got multiple times to the to the market with incremental pricing now asked to pull in of demand you are absolutely right. We.
Our.
Frankly, having difficulties to be able to keep up with the present demand. We just have no capability to be able to support any pull in demand then.
We would frankly.
Do everything that we absolutely can.
Not to allow anybody to pull in demand, even if we had the capability to do so.
Got it have you had cancellations.
No we have not seen any cancellations, we have seen lots of pull outs, where the various customers because as you can imagine we are not the only company that is causing.
Some shortfall with providing.
Products to end users in particular that is that is that basically app and nature of the business today, you're going to be very flexible and you have to be able to support our customers' ever changing.
Reactions to what they can build based upon the product that they have available.
Got it and just.
You might find some comfort that we have two other companies in our coverage, who because of their business model and relationships with their distributors and Oems purposely are delaying price increases into January and we've seen this before so.
So we understand the sensitivity about price books and so forth.
Just last quick question can you clarify on chain to belt up 50% is that.
Those are sales and what is the.
Our backlog and the order book look like.
Yes. Thank you. Thank you Dana I mean I appreciate your understanding of how the business model works gain we want to make sure that we scope the right size of pricing, we want to be least disruptive with.
Price increase these increases to the channel and so that is a decision that we have made and we believe that that was the right decision to do regardless, because we haven't got a better chance of.
Going in with a price increase that is sizable enough to be able to offset the headwinds that we're dealing with presently now coming back to chain to belt Dean terrific performance again, another another quarter of very strong sales performance with our chain to belt, our backlog continues to grow and more importantly.
Our opportunities.
That we quote on a pipeline of opportunities and design wins continues to grow very nicely. So my view is that we have quantified our opportunities, particularly with our personal mobility and recreation of over last couple of quarters and what we believe we can deliver we are certainly very.
<unk> on a trajectory to be delivering kind of that quarter $1 billion of revenue in personal mobility and recreation over the next 18 plus months.
Great. Thank you.
We have no further questions at this time I will turn the call over to Mr. Welch for any closing remarks.
Yes.
Thanks, everyone again for your interest in gates as always I'm available for follow up questions. Please don't hesitate to reach out otherwise we look forward to updating everyone again at our next results announcement in February.
Ladies and.
Gentlemen. This concludes today's conference call you may now disconnect. Thank you.
Okay.
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