Q1 2023 Gates Industrial Corporation plc Earnings Call
Thank you for standing by my name is Kayla Baker, and I will be conference operator today at.
At this time I would like to welcome everyone to the Gates Industrial Corporation first quarter 2023 earnings call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd 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 star and the number one.
I'd now like to turn the call over to Vice President of Investor Relations Rich class.
Good morning, and thank you for joining us on our first quarter 2023 earnings call I'll briefly cover our non-GAAP and forward looking language before passing the call over to our CEO of Europe will be followed by Brooks Mallard our CFO .
Before the market opened today, we published our first quarter 2023 results.
A copy of the release is available on our website at investors Dot gauge dot com.
Call. This morning is being webcast and 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 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 then other filings we make with the SEC.
We disclaim any obligation to update these forward looking statements.
You will be attending several investor conferences over the next month, including the Goldman Sachs Industrials and materials conference the Wolf Global Transportation, and Industrials conference and the Keybanc Industrials and basic materials conference. We look forward to meeting with many of you with add out of the way I'll turn the call over to Eva.
Thank you rich good morning, everyone and thank you for joining our call today.
Let's start on slide three of the presentation.
Our global teams delivered another solid quarter, and we posted Q1 revenues above the midpoint of our guidance in an operating environment that remains challenging and while managing to a cyber security attack on the enterprise.
As previously disclosed in an 8-K filed in February our company experienced the cyber security incident in early February which youll add to a temporary shutdown of most of our operations globally.
Our operating and corporate teams worked diligently and tirelessly to restart nearly all of our operations progressively over the course of 10 days.
I am proud of the resiliency and successful response to such challenging circumstances.
Our Q1 results have been adjusted for costs incurred during the period associated with the incident and Brooks will outline. These in more detail later in the call.
We estimate the cyber security event impacted our revenue growth rate by approximately 150 basis points in the quarter.
The incident, primarily disrupted.
To support North American and European replacement demand, which is book and ship business.
We estimate North America experienced approximately two thirds of the sales dislocation and we do not contemplate the recovery of this volume in the current quarter.
Moving onto our results.
Core growth was relatively balanced across the first fit and replacement channels.
Geographically, our EMEA region registered another strong quarter of core growth.
We did buy healthy OEM demand.
China Regional performance continue to recover as the quarter progressed after the most recent impact from Covid and modestly outpaced our initial expectations.
We saw solid automotive replacement demand despite the disruptions to our output and service levels caused by the cyber security event.
Vehicles in operation in the car Park H, both continued to increase in our major geographies, which should support steady demand dynamics for our business in the mid term.
Supply chain and logistics headwinds continued to slowly ease and our global teams remain diligently focused on satisfying customer demand.
Profitability in the quarter expanded meaningfully compared to the prior year.
Our business teams executed well and our price cost position was more favorable when compared to last year's first quarter.
Overall, the supply chain is slowly improving and benefiting our operational performance.
Overall, the supply chain is slowly improving and benefiting our operational performance.
Our adjusted EBITDA margin rate was slightly ahead of our Q1 guidance midpoint, including the estimated $5 million expense impact from the cyber security incident during the quarter.
Notably we produced positive free cash flow this quarter.
Working capital use was well below last year's first quarter.
We made progress normalizing, our inventory position, which experienced a sizable decrease on a year over year basis.
We have multiple initiatives underway to improve our inventory turns while also driving improvements to our service levels for our customers.
When coupled with easing supply chain impediments, we believe that further progress will be made as the year evolves.
We are encouraged by the strong seasonal start for our cash flow.
Underscoring our commitment to driving shareholder value.
Ounce today that our board of directors has approved a $250 million share repurchase authorization that expires in October 2024.
The authorization provides us with added flexibility to enhance shareholder returns and we intend to use it opportunistically.
Please turn to slide four.
First quarter total revenue was $898 million and translated to core growth of 4% versus the prior year.
Foreign currencies were a 350 basis points headwind year over year.
As outlined we estimate the cyber security incident represented approximately a 150 basis points headwind to our growth rate.
We realized solid growth in most of our end markets led by a double digit growth in energy and personal mobility and high single digit expansion in off highway.
Diversified industrial growth moderated from recent quarterly trends.
Adjusted EBITDA was 175 million, which yielded a 19, 4% adjusted EBITDA margin.
An increase of 180 basis points year over year.
Our price cost position was better relative to a year ago quarter, when commodity and energy inflation accelerated due to the Russia, Ukraine conflict.
Gross margins increased year over year helped by a better supply chain dynamics.
Adjusted earnings per share was 25.
Operating income was up materially year over year and contributed a six cents per share of earnings.
The year over year comparison was affected by a higher effective tax rate and increased interest expense.
On slide five I'll review our segment level highlights.
In our power transmission segment, we generated revenue of approximately $548 million in the first quarter, resulting in core growth slightly above 3%.
FX was a 450 basis points year over year headwind.
The segment experienced the strongest top line performance in energy construction and personal mobility.
All of these end markets experienced double digit core growth, which helped to offset weaker demand in China.
Diversified industrial revenues decreased mid to high single digits on a core basis in North America, where we saw the most impact from the cyber security incident.
While China was our weakest region in the quarter, primarily as a result of the Covid pandemic disruptions. It came in ahead of our expectations and strengthened as we exited the quarter.
Polymer supply availability continues to normalize and we outstanding sufficient supply to support customer demand.
We have strong design wins in the quarter, particularly in personal mobility, which should support continued above market growth on a go forward basis.
Our adjusted EBITDA margin showed nice recovery year over year helped by a balanced price cost position and improving supply chain.
Our fluid power segment recorded revenues of $350 million with core growth of approximately 5% year over year, partially offset by 170 basis points negative pressure from currency.
The energy construction and auto replacement markets, where the best growth areas in the quarter.
We booked meaningful wins in agriculture, and construction that will begin production in the second half of 2023.
Fluid power segment, EBITA margin improved 160 basis points year over year benefiting from a more stable operating environment compared to the prior year.
I will now turn the call over to Brooks to additional details on our results.
Thank you Eva.
Moving now to slide six and an overview of our core revenue performance by region.
Similar to fourth quarter 2022, EMEA was the standout region growing revenues, 10% on a constant currency basis.
Personal mobility and energy were the strongest end markets, both growing well above 20%.
Off highway you expanded at a mid teens pace.
Overall, our industrial end markets core growth versus prior year was in the high teens.
First fit sales experienced moderately stronger growth than replacement in EMEA.
North America revenues increased low single digits year over year on an organic basis.
Off highway and automotive generated solid growth in the quarter, while diversified industrial moderated compared to last year.
Auto replacement was a distinct bright spot in China growing double digits.
The relaxation of Covid restrictions in the country has fueled miles driven and an increase in garage visits driving higher demand.
East Asia, and South America, both generated high single digit core growth year over year with solid contributions across most end markets.
Overall, it was a good start to the year and demonstrated the resiliency and dedication of the organization.
On slide seven we provide an adjusted earnings per share of wallet from last year's first quarter.
Operating performance contributed approximately six cents per share and includes a little over <unk> <unk> per share of expense add back related to the cyber security incident.
Primarily reflects lost manufacturing production in addition to incremental SG&A costs, a higher effective tax rate drove a six earnings per share headwind, while higher interest expense was $3 <unk> earnings per share drag compared to the prior year.
The other bucket includes the benefit of a reduced share count and lower minority interest versus the prior year.
Lastly, we recorded a $10 7 million pre tax charge or eight $5 million after tax related to a customer bankruptcy filing.
The charge was added back in our adjusted EBITDA and adjusted earnings per share reconciliations.
Slide eight has an update on our cash flow performance and balance sheet.
Our free cash flow for the quarter was $38 million.
Relative to the prior year period, working capital outflow was significantly lower benefiting from a slowly stabilizing operating environment and improved inventory management.
Our inventory turns increased modestly year over year.
Our net leverage declined both year over year and sequentially.
At the end of the first quarter, our net leverage ratio was two seven times compared to three two times last year.
We ended the quarter with the lowest net leverage ratio for a first quarter in our history as a publicly traded company.
We remain highly focused on driving incremental improvements to our balance sheet and we will be opportunistic with regards to taking actions to strengthen our position.
As Eva mentioned earlier, the board approved a new $250 million share repurchase authorization, which enables us to be efficient and optimizing our capital allocation options as we deploy excess cash.
Shifting to 2023 guidance on slide nine.
We are reiterating our full year 2023 guidance, which includes 1% to 5% core revenue growth.
Adjusted EBITDA in the range of $700 million to $750 million.
And adjusted earnings per share of $1 13.
Two $1 23.
Also we still anticipate capital expenditures of approximately $100 million.
And free cash flow conversion of 100%.
Please note that our guidance ranges do not incorporate any potential share repurchases.
For the second quarter, we expect revenues to be in the range of $915 million to $945 million.
We expect low single digit core growth year over year inclusive of meaningful growth in China as the business comps against the Covid related shutdown that occurred during last year's second quarter.
We estimate our adjusted EBITDA margin will expand approximately 50 to 100 basis points compared to the prior year.
With that I will turn it back over to Evo.
Thank you Brooks.
On slide 10, I'll summarize a couple of key messages before taking your questions.
<unk>.
I am pleased with the start to our year.
Our results came in above the midpoint of our guidance, while navigating through a cyber security incident.
The operating environment continues to heal and our operating initiatives are gaining traction.
Both of which contributed to attractive margin expansion year over year.
Additionally, we are intensely focused on our customer service metrics as the operating environment normalizes.
Second we continued to make good progress improving our balance sheet and enhancing our ability to return capital to shareholders.
We delivered positive free cash flow in the first quarter, a very strong performance when considering a normal seasonality usually results in an outflow.
We are intensely focused on converting 100% of our adjusted net income to free cash flow in 2023 and in the midterm.
On a trailing four quarter basis through March our free cash flow conversion has measured 105%, which highlights our cash flow generation capabilities.
Our net leverage ratio decreased by half a turn year over year and fell slightly from the fourth quarter level.
Based on the strong cash flow performance, and our business and improving balance sheet.
Our board of Directors recently approved a $250 million share repurchase authorization that will enable us to opportunistically return capital to shareholders.
The authorization provides us another tool to deliver attractive returns to our shareholder base.
I'll finish by extending my deep appreciation to the 15000 global gates associates for their perseverance and dedication.
With that I'll now turn the call back over to the operator to begin the Q&A.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
And our first question comes from the line of Deane Dray with RBC capital markets. Your line is open.
Good morning, everyone.
Good morning, Good morning, Hey, just to put some closure on.
Malware incident.
When you say youre not going to.
Recoup the volume so is that just it was it share loss during that period, just why was.
Why is there that expectation that you don't get it back or is it in future quarters.
Yes, Hi, David.
A lot of our business is book and ship and so there was this period of time, where we were.
Where we couldnt take some orders and that progressively got better as we went through the incident and so our view is during that time, we couldnt take orders.
Probably aren't going to get those orders back and so that piece of it. We just don't think is going to come back to us because it's primarily that book and ship business.
Like the order your bucket within.
Sure, but within 48 to 72 hours.
Got it alright, so thats helpful. And then second question is can you give us a sense of the inventory.
Sorry in the channel how distributors are positioning any destocking going on anything there would be helpful. Thanks.
The business is it's fairly balanced.
Based on the point of day at point of sale data that we continue to to very carefully look at under related indicators, we believe that.
Inventories are consistent with the underlying demand is still in a channel.
As you can imagine we are also being very very cautious and very mindful of the market.
You May may do in the near term future I will say that we did see some choppiness in the industrial <unk>.
Demand.
As I stated in my prepared remarks.
Then I would say is more isolated to kind of logistics and distribution and markets that have weakened some.
Somewhat.
But in general the inventory positions.
Main in a reasonably good shape then.
As we have also indicated we started to take.
Nice chunks of our finished goods inventory down.
Yes.
That's real helpful and just lastly, it's not a question just a comment.
Very impressive on free cash flow this quarter. Thanks.
Thank you. Thank you.
The next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.
Morning, everyone.
Good morning.
<unk> on your last earnings call you mentioned the availability of highly engineered polymers is improving and it seems like you said that again in today's presentation. It seems like it did help your margin performance in power transmission.
The significantly higher margin on lower sales so with the understanding that maybe Q1 was your easiest comparison in terms of supply chain headwind would you expect that more positive performance to continue especially in PT or are you just being conservative in terms of your supply chain expectations.
Yes, Thank you Andy.
<unk> been pretty consistent and maybe.
Very open about our struggles with where the farmers supply and availability and <unk>.
We're making really good we're making really good progress we have secured adequate amount of resins.
Debt.
What's the big had a particularly in Q3 of last year, So while Q1.
Last year was probably the easiest.
It's predominantly driven by buying.
By inflation.
This brought invited conflict.
And Russia in particular.
Obviously some of the other issues that we have all seen.
End of 'twenty.
That the polymer based.
Will it be easier in Q3 than it was in Q1.
I feel that we.
What we need and we should progressively.
Be able to continue to drive our margins up as we have guided.
In <unk>.
Prepared remarks.
And then Eva Brooks can you just give us a little more color into what happened with the customer bankruptcy and I think it would be a good time to ask you about how tighter credit conditions are impacting your customers and our markets.
That you would expect this to be relatively isolated incident.
Yes, so I mean look there's not a lot to say the customer.
Toward the end of January filed for bankruptcy proceedings, Let me go through the process as we learn more information.
At some point it became.
Prudent for us to go ahead and.
On both a credit reserve.
For for that particular customer and we do think it's an isolated incident we have.
Good methodology in terms of how we track.
The credit worthiness of our customers and how we look at bad debt and different things like that this one was a particularly big automotive supplier.
And so it was.
Happened fairly quickly.
But we have a good process in place, where we manage our both our customers' creditworthiness and looking at our receivables and managing our bad debt. So we feel pretty good about where we are.
I appreciate the color guys.
And our next question comes from the line of Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Maybe just to try and drill into the sales outlook a bit more.
Just wanted in the in the first quarter, the sort of price versus volume spread within sales.
When you think about volumes for the balance of the year.
Volume growth.
Anything to call out sort of on a quarterly basis or seasonal basis.
And then are we still thinking sort of three ish points of three.
Three to four points of price tailwind for the year.
Yes, Julian good morning, Yes, I think youre thinking about it correctly look I mean in Q1 again to restate right I mean, we had full quarter of Russia.
And then in a calm and then obviously we had we had COVID-19 impact in China in Q Q1 of this year.
Based upon what we see the order intake pricing and the underlying performance of the market. We believe that our outlook remains pretty prudent.
As we have.
As we have described in our guidance.
Okay.
Thanks, very much and then sort of the price tailwind eases gradually or narrows gradually through the year is that the way to think about price and sales.
Yes, I think thats, the exact way to think about it.
It will it will.
Yes.
As inflation.
The rate of inflation starts to decrease I don't think were seeing deflation certainly yet, but the rate of the rate of increase in inflation starts to slow that will trickle through the price cost relationship and one that will slowly go down overall over the course of the year quarter by quarter.
Yes.
Thanks, very much and then just on the.
The balance sheet usage.
Encouraging to see the free cash improving a lot.
In the first quarter.
Maybe just talk us through sort of is the aspiration here to try and get the sort of the free float if you like or change the structure of the shareholder base to a degree at gates. The appeal of that versus kind of M&A because I'm sure. He is chomping at the bit to get some M&A done.
Okay, and then maybe just how are we thinking about that sort of even distribution between the two or just given the valuation of the stock hit that has to be a sort of a buyback is a much higher return.
Hey look.
I think.
Sure.
First of all on where.
We're really pleased with our cash conversion in Q1.
As we continue to drive improved profitability as well as the supply chain Optimizes, we feel good about our cash conversion for the year and thats going to give us.
Significant amount of cash to deploy right.
All cash Optionality perspective, or a capital deployment perspective, and so look we've got a midterm target.
Getting our leverage down to one and one and a half terms that's going to come through a combination of all.
Both gross debt Paydown and improved profitability and it's probably split pretty evenly. So we will continue to drive that leverage down both ways.
We want to remain.
Flexible.
So that if an opportunity comes up for us too.
To do some stock repurchases I mean, thats going to be nicely accretive for the company. We want to have that Optionality and then we also want to make sure that we.
We have M&A in front of us because all of those are good options we continue to.
Look at our pipeline of M&A opportunities, we continue to make sure. We keep those in front of us in case, something becomes actionable, but in terms of debt pay down or stock buyback those are both great capital deployment.
Opportunities and I'll say further.
We're not going to let the cash sit on our balance sheet.
So in the short run if we have more opportunities to pay debt down reduced cash interest.
<unk> earnings per share then we will do that and as we continue to generate cash we will look at other options.
Great. Thank you.
And your next question comes from the line of Joshua <unk> with Morgan Stanley . Your line is open.
Hey, good morning, guys.
Good morning, Josh.
Just wondering as you guys look out across a pretty big ill call. It Mega project funnel out there that some folks in the broader industrial orbit Youre seeing are you seeing an uptick in either.
The OE business or folks in distribution you are trying to prep for those things are new design wins or anything I guess that would just give gain access to the higher capex spending that we're seeing now and probably.
Yes further momentum into 'twenty four.
Yes, I think that the.
Maybe I'll point out to the prepared remarks, we will be judged.
<unk> talked about.
Some nice wins in <unk>.
Construction in off highway.
Equipment that we believe we will start production with the second half of this year. So I would say that in a similar.
Some of some of our participation biggest participation is going to be more on the infrastructure build out.
As a first stage and then as a second stage as we start looking more out to the industrial automation and the equipment. It actually is going into those facilities, we have a ton of.
Kind of products that they are a component of the.
In production equipment.
Did that products get used to so they actually reasonably confident that we're going to have a good participation. As these projects go from an early stage to more latent stage.
Development.
And this could provide.
Nice.
Fit for our revenue generation kind of in the 24.
And beyond that timeframe. So it definitely is something that we look forward to participating on.
Outside of that I wouldn't say that.
We see.
We don't have like an electrical equipment. So we don't we don't participate in the early stage of that build out of those mega projects.
Got it.
That's helpful.
And then I guess, if I just think about the balance sheet. You gave some helpful color already but what's the level at which you feel like it's sort of inefficient to continue to pay down debt do we do we see a lot more sense of urgency.
Yes.
Two times.
Or where do you guys kind of want that to land before you really get more aggressive.
Yes, well look I think I think that depends on the environment clearly.
We're in a higher interest rate environment right now and you have to look at our our complete that picture in terms of how much of it is fixed versus how much of it is variable in terms of what the what the paybacks are and we've said before we want to get down to below $2 billion of gross debt. So that will still leaves us out.
Our ways to go in terms of paying that down, but we want to be balanced to and so we want to look at what's best for the shareholders.
Certainly as we as we pay down debt and improve profitability to get closer to our goal.
Down more of the high cost debt buying back stock might be a little bit more.
A little bit more attractive for the shareholders and then on the M&A side.
Our Eva.
Yes look I mean, I will start with we really like our product portfolio and how we participate in the end markets, where we participate dissipate. We believe that we have a very strong.
Set of opportunities ahead of us to nicely continue to grow our enterprise and do it at.
Strong type.
Type of margins that we can we can deliver.
But that being said, we don't feel any pressure to do M&A. We one we want to continue to demonstrate that.
This business is a strong opportunity to have that.
Frankly, a bulletproof balance sheet.
And that is our primary focus and when opportunities arise there are lots of companies out there that we believe.
He would benefit or they would benefit from combination with with gates and when the opportunities arise at the right valuation we will be on a on a standby to look at some of those potential transactions.
Great.
Talking to makeup.
Thank you.
And the next question comes from the line of Mike Halloran with Baird. Your line is open.
Hey, good morning, everyone.
So.
So maybe some thoughts on first the demand side again, just how you're thinking about backlog backlog normalization through the year and these are you know certainly heard your response, Josh first question I think.
How some of these larger projects located in cadence and project wins with cadence through the year, but any any nuance by end market from an underlying demand perspective positive or negative.
Youre thinking about it as we look at the back half of the year from a trend perspective.
Yeah, No I think that's very very good question, Mike. So look I mean book to Bill remained above one let me start with that.
Taking into account, what we've gone through with the cyber incident, which frankly was.
In a very challenging period of time for forum for our teams here.
Our H backlog and our backlog remains way too elevated.
And frankly, we do not anticipate that we are going to be able to start reducing it in a meaningful way until second half of the year.
Maybe additional color is more available and I think I said it.
Couple of moments ago, we do see some choppiness, particularly in the in the industrial replacement business.
It remains in line with our expectations, particularly as the supply chain normalizes in.
So lead times overall started normally normalizing normalizing already.
Believe that you're going to see a little bit of that choppiness, but.
Again book to Bill above one in the inventory levels in the channel remained very very.
Solid.
Present level of demand and so we do think that.
The business should continue to evolve around.
How we have viewed.
Viewed the year at the beginning of the start of this year, which is.
Probably some slowdown in second half.
Particularly driven and driven around some of the credit constraints.
Late in the cycle and so on and so forth. So.
We feel pretty good with with what we see.
Maybe give you a little more color in here.
Demand was very solid.
Global auto up kind of for energy are very strong.
Hi high teens underlying market demand is staying very strong of highway very solid at plus eight.
Obviously, we've talked about personal mobility is still and in high teens.
So the only kind of the only choppiness there'll be athene was more indeed diversified industrials and it was down kind of mid single digit level. So all in.
Pretty good pretty solid and.
Kind of what we anticipated, but we are being very cautious and we are being mindful of the underlying macroeconomic stats that we're operating in.
Very helpful. And then follow up when you think about the the optimization program you announced a couple of quarters back just to just an update on how things are progressing on that side.
Yes look I mean.
Gross margin is up quite nicely, obviously flowing through operating margin and very good leverage on incremental revenues. So that's.
That was pretty solid and I would say that we were predominantly hung up in the first quarter.
Buy less.
Less negative supply chain situation and so prime prime wheel of Prime pump is getting is getting pumped up and.
We think that we have we are in a good place to continue to drive improvements that we have described then we certainly believe that over the next couple of years. The gross margins should go up very nicely.
On debt.
At the underlying improvements should filter through to profitability as we have highlighted last last earnings call.
Thank you Bill appreciate it.
Thank you.
And our next question comes from the line of Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning.
Congrats on a nice quarter.
Just I mean, most of the questions have been asked I guess I would just say.
Assuming that the macro does deteriorate can you talk to some of the changes in.
In your business model, either from a cost side or you know.
And market focus how your business performs in a potential downturn this cycle versus previous ones.
And any actions you're contemplating outright now in the event that things do deteriorate. Thank you.
Good morning, Jami. Thanks. Thank you for the question look I.
I will start with Ed I think there'll be a lot more cognizant of.
Of the macros.
Maybe I think somebody told me that I have maybe been too negative.
About the underlying market conditions, but.
But we're just trying to be pragmatic and so as I said earlier, we started to we started too.
Take down our inventories levels quite nicely.
So we are positioning ourselves to be in a situation, where while we want to have the flexibility and we absolutely laser focused on servicing our customers more effectively we also don't want to be caught up with significant amount of inventory in a potential.
Scenario, where the macros filtered through the underlying demand. So I would say that's probably changed number one may be firmed up.
From the previous cycle change number two I think we have a lot more balanced portfolio, where we believe that.
Some of our end markets should have a pretty strong dynamics even in slowdown.
The macroeconomic environment, our automotive replacement business is in very good shape.
And we believe that that should provide a nice cushion for us.
We have we've done lots of work with the change of our portfolio I mean, obviously, we have taken our automotive OEM exposure down by nearly 50%.
Since we have game.
And become a public company so we believe that.
There should be less exposure to cyclical out of market.
And we have fundamentally improved our footprint, where we have the capability to flex.
Just a little more effectively maybe than we have been able to do.
In the past down cycle, and lastly, we still have a ton of restructuring projects on the docket that we haven't really spoken about a lot since we set.
Sometimes late last year that we are in planning stages of executing those and we will be coming out mid year, and providing an incremental update on opportunities that we see with.
We are driving putting ourselves to a position to lower our breakeven point.
Great. Thanks, I appreciate it.
Yes.
Again, if you would like to ask a question press the star and the number one on your telephone keypad. Our next question comes from the line of Jerry <unk> with Goldman Sachs. You may begin.
Hi, This is clay on for Jerry just one quick one from me Seth.
Second quarter EBITDA is that our EBITDA margins are typically the high point for the year.
Looking at normal seasonality would you expect any deviation from this.
In the second half of this.
Thank you.
Yes no.
Look I think.
Overall.
Q2 tends to be our peak.
Our peak year I do think when you look back at 'twenty. Two there are some choppiness in terms of.
When we started to see the Russia, Ukraine impact come through.
If you remember Q3 and Q4, we had the supply chain disruptions.
Last year.
And then.
And then we expect the supply chain to get progressively better. So when you look at our.
Kind of thinking a bit more first half versus second half and we expect a pretty even split when you think about gross margin improvement.
The year pretty even from the first half to the second half we do expect to have more variable comp in the second half of 2023. So that's when you look at it year over year perspective, that's going to be a headwind from a comp perspective, but I would think of it that way in terms of the first of all versus second half.
Thanks.
No.
And the next question comes from the line of Jeff Hammond with Keybanc. Your line is open.
Hey, guys.
Just on.
I guess any any changes within how youre thinking about fluid power versus PT growth and just confirm I jumped on a little late.
Where all the cyber security.
Revenue shortfall hit.
Yes, good morning, Jeff.
We believe that we still have a little more opportunity for recovery in power transmission power transmission was more impacted in the second half of last year.
<unk>.
Vis vis the polymer shortages as we have discussed we think that.
The opportunity remains there too.
To continue to perform.
<unk> in the second half.
And.
On your first question.
Most of our.
Cyber security impact was realized in North America and Europe .
And two thirds of about $15 million that we have sort of highlighted.
Were impacted.
In the North America business predominantly in the replacement side of our business.
Okay.
Okay and then.
This kind of industrial replacement Choppiness can we chalk that all up to destock or is there.
Certain end markets or pockets that feels like some real demand weakness.
Yes, I think I said it earlier Jeff.
Logistics and distribution equipment has been weaker.
That's that's very notable.
But.
I would also say that the cyber security impact.
Touch North America, and Europe in particular, so we don't really see a lots of destocking at this point in time.
We feel pretty good about the inventory in our channel being nicely balanced.
Outside of that.
It may be that that warehousing equipment side of the business I would say that the rest of it remains steady.
Clearly robust.
Okay. Thanks, a lot.
Thank you.
And there are no further questions at this time rich glass I will turn the call back over to you.
Okay. Thank you everyone for joining our first quarter conference call. If you have any follow up questions feel free to reach out to myself. Thanks again have a great day.
And this concludes today's conference call you may now disconnect.
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