Q2 2023 Gates Industrial Corporation PLC Earnings Call

Hello, and welcome to the Gates Industrial Corporation Q2, 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 one on your telephone keypad. If you would like to withdraw your question again press star.

I'll now turn the conference over to Rich <unk>, Vice President of Investor Relations.

Go ahead.

Good morning, and thank you for joining us on our second quarter 2023 earnings call.

Briefly cover our non-GAAP and forward looking language before passing the call over to our CEO Evo Europe will be followed by Brooks Mallard our CFO .

Before the market opened today, we published our second quarter 2023 results.

Copy of the release is available on our website at.

That investors Dot gates dotcom.

Our call. This morning is being webcast and is accompanied by a slide presentation.

On this call we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.

Reconciliations of historical non-GAAP financial measures are included in our earnings release and 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.

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.

We'll be attending Investor conferences later in the third quarter, including RBC Global Industrials Conference and the Morgan Stanley Laguna Conference. We look forward to meeting with many of you with that out of the way I'll turn the call over to you Bob.

Thank you rich good morning, everyone and thank you for joining us today.

Let's begin on slide three of the presentation.

Our global team achieved solid results.

Deliver Q2 revenue and profitability above the midpoint of our guidance as well as strong free cash flow.

Our nearly 4% core revenue growth was fueled by strength in our automotive vertical across both the first fit and replacement channels.

The EMEA region led growth geographically, we had organic growth of high single digits year over year.

Our China business experienced a nice rebound year over year with car growth in the high Twenty's buffet COVID-19 impacted prior year period, However fell a little short of our expectations.

We continue to see solid demand for our products and our book to Bill remained above one exiting the quarter.

We see constructive demand trends globally from the automotive end market.

More mix picture across the industrial end markets.

We realized strong margin expansion in the second quarter compared to last year.

Hey, adjusted EBITA margin expanded 120 basis points year over year and exceeded 21%.

We delivered a high 50% EBITDA flow through on incremental revenues compared to the prior year period.

The EBITDA margin expansion was fueled by a 170 basis points increase in our gross margin.

We experienced greater operating stability and benefited from a more normalized supply chain environment relative to the prior three quarters.

Our free cash flow generation and conversion were all.

So nice highlights for the quarter.

We generated $116 million of free cash flow for the quarter, which represented 114% conversion versus adjusted net income.

A substantial increase versus the prior year period.

Working capital levels have stabilized and contributed to improved terms as our operations have continued to normalize.

For the first half of the year.

Delivered almost 90% of our adjusted net income to free cash flow.

Seasonally strong performance as the bulk of our free cash flow is usually generated in the second half of the calendar year.

Our net leverage ratio finished at two eight times a substantial decrease from the year ago period, while also returning $250 million to shareholders via our share buyback in may.

Based on our second quarter outperformance, we are increasing our adjusted EPS range to $1 18 to.

The $1.24 from a range of $1 13.

The $1 23.

The updated range includes the benefit from a lower share count following our successful share repurchase in may.

Moving to slide four.

Second quarter total revenue was $936 million, which translated to core growth of approximately 4% versus the prior year.

Changes in foreign currency were a nominal headwind year over year.

Our automotive growth was healthy across both the first fit and replacement channels.

Both channels realize double digit core revenue growth compared to Q2 2022.

The industrial end markets remain a bit choppy.

Energy construction and on highway produced solid growth year over year, which was offset by softness in agriculture diversified industrial and personal mobility.

Adjusted EBITDA was $197 million and adjusted EBITDA margin was 21, 1%, representing an expansion of 120 basis points compared with the prior year period.

Margin improved compared to the prior year period, driven by favorable price realization and less operational headwinds due to greater stability and supply chain.

And that is consistent with our expectations at the onset of the year.

As previously mentioned the year over year adjusted EBITDA margin improvement was driven by gross margin expansion.

We expect gross margin to show year over year improvement in the second half of 2023 as well.

Adjusted earnings per share was 36 cents.

Operating income contributed to the EPS growth year over year, partially offset by increased net interest expense.

Share repurchase executed in May provided approximately 1% of EPS accretion in the quarter.

On slide five let's review our segment performance.

In our power transmission segment, we posted $574 million of revenue and core growth of 7% compared to Q2 2022.

Currency was slightly more than 100 basis points of headwind.

Automotive was the highest growth end market for the segment with core growth increasing at a high teens rate year over year.

The automotive replacement and first fit channels grew at similar rates year over year.

Construction and on highway generated double digit core growth, partially mitigated by softer demand in our diversified industrial and personal mobility end markets.

Power transmission adjusted EBITDA margin increased 180 basis points year over year, and incremental EBITA margin exceeded 50% compared to Q2 2022.

Our team executed well and benefited from a less volatile operating environment.

Our fluid power segment generated revenues of $362 million.

Revenues declined slightly year over year on a core basis.

Our industrial end markets were mixed and core growth in our replacement and first fit channels, both and it's slightly down versus the prior year period.

The construction vertical was a relative outperformer boasting solid core growth year over year.

We are benefiting from growing infrastructure investments occurring in the U S and elsewhere.

With core revenue performance largely unchanged operating leverage was limited which resulted in only modest segment margin expansion compared to the prior year period.

With that I will now pass the call over to Brooks for additional details on our results.

Thank you Bo.

Please turn to slide six and I'll review, our quarter revenue performance by region.

Core growth in the second quarter was led by China and EMEA.

China core growth was 28% year over year as our business comped to the Covid induced shutdowns that occurred in last year's second quarter.

On highway and automotive end markets realized the strongest growth rates year over year with the first fit and replacement channels, both delivering significant growth.

EMEA revenues expanded 9% organically versus last year.

Automotive was the primary growth driver with core growth exceeding 20%.

Both auto replacement core growth and first fit core growth increased double digits compared to the prior year.

The industrial market performance was buried with growth in certain markets and declines in others.

In aggregate, our EMEA industrial business core revenues declined low single digits compared to last year.

And in North America, we experienced a modest revenue decline on a core basis compared to our record revenue performance last year.

The replacement and first fit channels saw similar levels of decline compared to the prior year.

End markets were mixed with positive core growth in automotive energy and construction and softness in diversified industrial agriculture and personal mobility.

These station in South America core growth rates were consistent with the company's overall top line performance.

In aggregate, we delivered good organic growth and a variable demand backdrop, underscoring our end market and channel diversity and the resilience of our business model.

On slide seven we provide an adjusted earnings per share a walk from the second quarter of 2022.

Improvement in operating income contributed approximately <unk> <unk> per share of earnings growth.

Higher net interest expense was $3 <unk> per share headwind.

Other items, including the weighted average share count reduction contributed a positive benefit of about one per share.

Okay.

Moving to slide eight we show a summary of our cash flow performance and balance sheet metrics.

Our free cash flow for the second quarter was $116 million or 114% conversion of our adjusted net income.

We benefited from margin expansion and more normalized trade working capital.

On a trailing 12 month basis, our free cash flow conversion is well above 100%.

Our net leverage ratio declined by half a turn versus one year ago to two eight times.

We ended the quarter with the lowest net leverage ratio for a second quarter in our history as a publicly traded company.

Our consistent strong cash flow generation allows us to continue to strengthen our balance sheet as we execute our balanced capital allocation strategy.

Best thing in the business paying down debt and returning capital to shareholders.

Our trailing 12 month return on invested capital increased 250 basis points year over year, driven by margin expansion and disciplined capital management.

Now please turn to slide nine to cover our updated 2023 guidance.

We have trimmed our core revenue growth expectation to a range of zero to 2% year over year.

1% to 5% previously.

At the midpoint, we expect 1% core growth for the full year compared to 3% and our prior guidance.

The adjustment largely stems from slower industrial demand trends in China, and OEM, stopping realignment and the personal mobility space.

We have maintained the midpoint of our 2023, adjusted EBITDA guidance at $725 million and narrowed our full year range modestly to $710 million at the low end and $740 million at the upper end.

We expect greater gross margin expansion driven by operational productivity and a more stabilized cost structure to offset lower expected revenues from industrial markets in the second half.

We continue to expect variable incentive compensation will be an EBITDA margin headwind in the second half of 2023 predominantly in the third quarter.

We have raised our adjusted earnings per share guidance to a range of $1 18 per share to $1 24 per share, which incorporates the benefits of maize share repurchase partially offset by higher net interest expense.

Further we have adjusted our free cash flow conversion forecast to exceed 100% for the year above our prior guidance of approximately 100% conversion.

For the third quarter, we expect revenues to be in the range of $860 million to $890 million.

Adjusted EBITDA margin is estimated to be flat compared to Q3 2022.

Improvements in gross margin.

Offset by higher SG&A expenses related to variable compensation.

With that I will turn it back over to Eva.

Thank you Brooks.

Slide 10, I'll wrap up with closing comments before taking your questions.

First we are pleased with our results and the margin progress attained in the first half of the year.

Our EBITDA margin expanded approximately 160 basis points year over year in the first half of 2023 led by improved gross margins.

We anticipate our throughput and productivity rates will improve as the operating environment continues to normalize.

We expect the benefits to built in the second half.

As such we maintained our 2023 adjusted EBITDA guidance at the midpoint and expect better margin performance for the year versus our prior expectation while in countering a slightly less favorable demand environment in the second half.

Furthermore, we are in process of consolidating our facility in China into our existing footprint.

We anticipate completing this project by the end of this calendar year.

We have a number of actions and initiatives underway now that will enhance the long term profitability of the company.

Second.

We generated a significant amount of cash in the first half and are on track to exceed 100% conversion of our adjusted net income for the year.

On a trailing four quarter basis, our free cash flow conversion stands at 135%.

Third.

Our substantial free cash flow generation is driving net leverage reduction we.

We expect to end the year with a net leverage ratio of approximately two five times, which would represent a decline from the year end 2042.

Notably, we intend to accomplish that while having returned $250 million of cash to shareholders. We are amazed share repurchase.

We plan to stay opportunistic utilizing our excess cash and firmly believe that consistent balance sheet improvement and will be accompanied by diligently returning capital to shareholders.

Before moving to your questions I want to thank the 15000 global gates associates for their commitment and dedication, especially North America team, who executed a major ERP upgrade during the quarter without any disruptions to the business.

With that I'll now turn the call back over to the operator to begin the Q&A.

That's not.

Your question. Please press star one on your telephone keypad, if you wish to remove yourself from Q simply press Star One again one moment. Please for your first question.

Your first question comes from the line of Mike Halloran of Baird. Please go ahead.

Hey, good morning, everyone.

So good morning wondering.

I just wanted to walk through kind of the the market you're seeing a little bit more stress at this point.

Maybe just talk about inventory inventory in the channel and how you think about the recovery curves as we get to the back half of the year.

Yes, good good morning, Mike.

Look.

The data I would point out that debt.

The demand is still quite a quite balance out there.

Taking first the inventory question and then I'll come back to the demand.

So the inventories are fairly balanced and the point of point of sale data still indicates.

The situation is.

<unk> is actually in a reasonably good shape with a reasonably solid underlying demand. So we are.

Fairly constructive on what's happening with your channel of course, we have anticipated in the second half some industrial destocking.

We certainly believe that that's what's going to happen, particularly associated with the choppiness that we have been seeing in the industrial industrial segment.

I would say that for for the channel Destocking, we see some destocking and applications associated with logistics and distribution and.

Fluid power applications like AG as an example.

We also feel that as the supply chain is stabilizing and lead times are shortening.

There there is going to be a resulting movements in the channel too.

Half our customers to normalize their inventories as well just as we have been doing.

And in our business.

So right now we are not seeing in a nutshell, we're not really seeing any imbalances with sales.

Us busy.

Business saw our products to fill the channel and channel partner sales out maybe a little bit long winded, but no more color in here.

And.

These are the.

What is happening with some of the end markets and some of the weakness that we have maintained.

I would say that.

Most prominently.

Prominently we are seeing.

Lower activity in <unk>.

In AG Oems, particularly on the smaller horsepower equipment.

I think that I've said, it's been reasonably well documented out there.

Yes. It is there is an OEM.

Stocking realignment and a personal mobility space.

So we are seeing some of that and again as I've said.

Some of the warehouse automation space.

That has slowed down over the last kind of two to three quarters. So thats kind of I would represent it then obviously our biggest business.

With industrial system in North America.

We are seeing some of that data.

I appreciate that and on the margin side of things good performance in the quarter.

Where the revenue came in at.

Certainly understand the cadence you laid out in the prepared remarks more static sequentially.

Puts and takes a twofold question you might have that one could you help with the mix by segment and how you think that progresses and then secondarily.

How do you think the margins will track as we exit this year would be how are you thinking about that exit rate. I know you are very positive about the ability to drive margin gains regardless of the demand environment. So maybe just a little bit of level setting and how you think that exit rate looks in the indications for next year.

Okay. Let me, let me start with the second part of the question first.

We expect gross margins to continue to improve in the back half of the year.

We called out the variable comp, especially in Q3 is going to be a headwind. So when you think about what our Q3 looks like gross margin improvement 75 to 125, Bips was being offset by the variable comp and SG&A and then in the back half of the year gross margins.

<unk> up about 150 to two basis points with SG&A.

And then on variable comp of about 100 to 125.

So that's.

That's really in line with what we thought was going to happen maybe a little bit ahead on the gross margin improvement.

And remember Q4 was our toughest quarter last year in terms of gross margin, where we saw some of the highest priced inventory flow through relative to some of the supply chain disruptions. We saw in the second half of last year.

So we expect to see gross margins continue to improve and then we expect to have gross margin opportunity as we as we move into next year.

On your mix question and let me, let me see if I can.

Let me see if my answer is yes.

This is what you are looking for so.

The the softness we're seeing in the second half is going to be a little bit of a headwind on mix.

When you look at some of the industrial softness in some of our higher margin stuff. Some of the personal mobility stuff is a higher margin higher margin business.

But overall our operating performance.

It continues to improve so we're able to offset that and still maintain our EBITDA guidance.

And even get a little flow through to earnings per share. So net net a little bit of headwind on mix in the second half of.

Better gross margin performance from an operating perspective.

So we feel pretty good about where we are from a gross margin perspective does that answer your question.

I wish it was poorly worded on my side I was by mix and then when you look at the margin progression you've laid out for <unk> and <unk>, how does that break down by segment.

Your answers Super household but.

I was looking for some while we were little we only give guidance by segment, we just lay it out in total terms.

Okay.

Thanks for that I appreciate it.

Your next question comes from the line of Andy Kaplowitz of Citigroup. Please go ahead.

Everyone.

Good morning, Andy.

Could you give us a little more color on what you're seeing by region you mentioned the <unk>.

8% growth in China, but that was a little worse than you expected and part of the reason for the lower core guidance. So could you talk about what youre seeing on the ground there and your outlook for the rest of the year and then you mentioned the difficult comparison in North America is it the personal personal mobility turned down there or anything else that sort of happened over there.

Yes, no great look on China, we had a terrific terrific quarter obviously.

No.

The second quarter performance kind of looking at what's happening out there.

Around our competitors and some of the reporting companies. So I feel that the team is executing really really well, but we've anticipated frankly speaking that China recovery is going to take.

Stronger <unk> than what we have seen in <unk>.

If anything I would say that it's slowed down a little bit further as we were exiting second quarter. So now.

We anticipate that China is going to be kind of flat to low single digits for the full year, which would imply that the recovery is not going to be as robust in the second half as well.

What we saw kind.

Kind of look at the segments I mean, obviously auto in China is very strong both on the OEM side as well as on the replacement replacement side of our franchise.

I think that we will keep some very.

Very strong numbers there.

In terms of automotive performance in industrial is little bit weaker, but again I mean it.

You take a look at some of the export data some of the industrial activity in China taxing.

In our survey.

And then that.

Certainly our performance is more in line with what.

Do you see kind of externally reported.

And on <unk>.

The question.

<unk>.

Personal mobility is more associated with just the channel channel rebalancing.

So we have seen some of the consumer weakness too low in <unk>.

Lots of equipment that has been built.

Over the last kind of 18 months and Thats, creating some short term headwinds.

In.

In the end market.

But I will say that our design activity.

It remains incredibly robust.

Our.

Pipeline of opportunities that we are converting at very high rates that set all time high.

Nearly $400 million of those opportunities in our pipeline.

A very significant number of programs that we were awarded.

In Q2, and they are very confident in our ability to continue to deliver on our mid term objectives that we've laid down for personal mobility.

And I think <unk> stated that obviously there'll be there'll be ups and downs in some of the quarterly deliveries.

In mobility, but it's very very strong future prospects for that business.

Very helpful. Evo and then head into the second half of 'twenty and into 2004, it seems like price versus cost is trending better than you thought but could you confirm that and then you mentioned a number of initiatives that you can that could enhance <unk> profitability. As you go forward. Maybe you can talk about some of these initiatives you're working on as you head into 'twenty four.

Andy It's rich did you ask about price cost in the first part of the question, yes exactly.

Yes look.

Price cost remains positive.

It was.

Quite positive in the second quarter obviously.

And then it remains.

It remains positive in second half.

I'll buy more moderating.

We are starting to see some.

Some level of deflation, but not to a <unk>.

Significant degree and we will obviously continue to price in accordance with.

The operating environment in terms of.

How inflation is going to be.

Warming in the second in the second half.

Longer term.

The project on the longer term projects, yes.

Polk and about.

Having a number of projects that we anticipate to bring to a floor in terms of more operational footprint realignment.

We are.

Long ways in executing that project in China, We anticipate will be done by the end of the year that simply.

Closing a facility in and of Shanghai area moving into.

One of our existing facilities outside of Shanghai.

Thats a good savings project and we have a number of incremental projects that as dumb as them as we are catching up.

Two our demand and as our capacity is more aligned with the underlying demand trends.

We expect that over the next 18 months, we'll be in a position to be able to execute a number of incremental projects that are going to give us the opportunity to.

To set the business to a lower breakeven point and obviously, we've spoken a number of our 80 20 initiatives that those are proceeding quite well.

We anticipate that as kind of a.

For a five year process, where we believe we can continue to deliver and derive benefits in terms of profitability.

We are reasonably confident that we can continue to expand our gross profit and <unk>.

Ultimately have that translate into a into operating earnings.

Thank you. Your next question comes from the line of Julian Mitchell of Barclays. Please go ahead.

Thanks, Good morning, maybe just wanted to sort of.

Focus on the sales guide looking out a bit so I think you'll guidance implies organic sales in the fourth quarter were down year on year, maybe low single digits.

I was just wondering if you could confirm that and then when we think about that in the context of history.

I think the only downturn I've seen since you came public was about six seven quarters long in terms of sales.

How you're sort of advising us to think about the longevity of that next downturn starting in the fourth quarter. Thank you.

So so.

Hey, Julien.

A good question. It gives me an opportunity to.

To level set.

Remember last year was when we started to see the supply chain disruptions and you really saw.

Q4, we were better than Q3 as we as some of those disruptions started to go away and we did we did better in Q4 and I had a really strong Q4 in terms of top line last year and so really you got to think about the back half of this year.

And Youre Comping, you want a pump to the whole back half of 2022, because there was just a movement between quarters that was more externally driven by some of those supply chain disruptions.

So when you look at the back half of the year you are right on the on the low single digits.

Our Q4, a little bit more headwind in Q4 from a core growth perspective in Q3, but net net we are guiding to around the 200 bps.

Impact overall in the back half of in the back half of the year and that's split pretty evenly between industrial and personal mobility and most of the industrial piece of that headwind is coming from as Hugo said earlier, a little bit lower expectations on how quickly the recovery is going to happen in China.

Recovery is still there. It's just a question of how quick and the magnitude of the recovery.

In the back half of the year, and then I'll, let <unk> answer the question on the longer longevity.

The downturn look.

No.

Every <unk>.

Every downturn.

Is slightly different I would say that we continue to fortify our performance.

I thing.

Based upon the initiatives that we have executed.

You should see more stability in automotive replacement side of our business that business is performing well there are some.

The positive trends.

As we have discussed on other calls and associated with the aging car fleet growing.

Growing car park of DH car fleet people are driving more.

Fuel is reasonably affordable so we certainly believe that as we move through whatever the.

The slow slowdown may be.

We should have a little more robust performance than perhaps we have seen in the past when you combine that with some of our organic growth initiatives.

Yes.

I wish that I had a real good crystal ball for you.

But you know.

When you look at the trend lines from some of the indices that we are on track and it was such a fine job Julian on publishing dose.

Those indices size should start reversing trend.

When they do reverse trend that also generally speaking means that.

We should start seeing some bottom towards the industrial activity.

I know I didn't give you a clear cut crystal answer but.

Maybe a little cautiously more optimistic about our ability to.

To manage through whatever is in the future out there protect profitability continued to drive our free cash flow I think that in our focus.

On both is starting to show show early benefits.

That's kind of where we sit.

That's helpful. Thank you and then maybe just.

Following up on.

A couple of smaller items.

Just any sort of revised outlook second half interest expense and the tax rate and then I think you said the capex budget has come down a bit for 'twenty three any any sort of steer on the capex budget this year.

On the <unk>.

Maybe.

On the tax rate, we should be right around 20%, 22%.

So we're trending down a little bit lower in Q2, but for the full year.

Pretty along with what we had said earlier.

From an interest expense perspective.

Our total interest is going to be up year over year.

In the high teens, and that's kind of split evenly between when you're talking about net entitlement net interest expense and Thats split pretty evenly between remember we refinance our euro term loan.

The fourth quarter of last year, and so there is the impact of those higher interest rates and then there's the impact of the higher interest rates on our U S. Dollar based terminal B and that's the other half of the impact so.

It's.

The impact in the second half I think is about.

Half what it was in the first half because you kind of roll over some of those interest rates in the Q and Q4.

Was there a third question that I got tags and I've got interest was there a third one.

And then a question.

The Capex, yes, yes, I can I can maybe answer that question Julien we don't fundamentally believe that.

Going to be dramatically, reducing our capex, it's more and.

More aligned with.

Our ability to secure some of the newer equipment.

Similar lead times fulfills subtle or extend it and we just don't believe that.

Are going to spend the full $100 million, but are we going to be within striking distance of that number. So it's not it's not an issue of reducing capex dramatically.

Thank you. Your next question comes from the line of Josh.

Zarinsky of Morgan Stanley . Please go ahead.

Hi, good morning, guys.

Good morning.

Steve I would like to maybe just approach the cycle question slightly differently.

What are you seeing on volume versus price trends and I guess, maybe.

The context of where volumes today versus say pre K endemic levels our ROIC.

We hire or we fairly close like I know, there's a decent amount of price in their side trying to level set on really just how far away from the last kind of fundamental slowdown we really are volumetric Lee.

Yes look.

<unk>.

Just on Q2 volume was modestly down for the quarter.

And.

It's an interesting question that you ask I haven't really thought it complete.

Completely.

Thoroughly but.

We are somewhat.

Lower volumes then.

Prior peak.

So fundamentally I think that you certainly have.

Automotive first fit and that is very dramatically lower globally.

That industry is coming from the from the pandemic I would say that's probably the biggest.

Most impacted industry out there.

In the rest of that is kind of it's kind of a mix. If you. If you asked me in AG has been performing quite well and I think it's slightly lower now than the rates that we have seen kind of prior year. Prior year was very very strong seen see some some of the rates.

Moderating look on the construction equipment.

That business continues to remain quite strong and ethane squared supported on.

Some of the infrastructure investments that.

Certainly we are making here in the United States as well as <unk>.

Elsewhere.

Mining and oil and gas is significantly lower in <unk>.

In.

Units and activities than prior peak, so I think it's a mixed picture Josh I don't I wouldn't I wouldn't say that there is a.

The days any specific industry that as that is peaking at this point in time I think that.

The the underlying activities have moderated over the last 12 months.

I think that.

I am cautiously optimistic that as you start seeing the trends reverse and with ISN.

PMI that that may be an indicator that things are bottoming out.

Yes that makes sense and I guess, maybe where I'm going with that on the.

On the volume versus price side is that it sounds like most of the revenue revision here is really related to ciena.

<unk> not necessarily.

Sell out phenomenon or we startup, particularly pervasive one.

And youre not having to give back price like is that a fair representation.

Otherwise like volumes, not overheated pricing sticky and will work through the normalization, but otherwise things seem pretty stable.

Yes, I think Thats fair I mean, I think that you have the phenomenon of reducing.

Lead times, obviously that.

That basically is impacting kind of normalization of what's happening in the channel.

Is there a still actually quite positive trends.

In sellout.

Of.

<unk>.

Our customer.

<unk>. So I think that's a correct assertion Josh I would say that China industrial activity is weaker and near so you see weaker volumes, there, particularly on the industrial side, but <unk>.

Again remaining very buoyant.

Nobody robust there.

I would say that Europe industrial activities kind of muted.

I will tell you. This there's definitely some volume here and of course as we said.

The channel activity.

In terms of kind of the personal mobility side of the business. So again I think.

Puts and takes it's not really.

Deceleration in pricing, it's really more of.

Realignment to what we are seeing in terms of the underlying trends again, China industrial some of the personal mobility, and then kind of puts and takes.

The rest of it is.

More in line with what we've anticipated at the onset of the year.

Thank you. Your next question comes from the line of Jeff Hammond of Keybanc. Please go ahead.

Okay.

Hey, good morning, everyone.

Good morning.

Just just clarification on the destock is it fair to say you got you saw destocking personal mobility and <unk> and then kind of the rest of it is more prospectively or.

Or was it more prevalent in <unk> I'm, just trying to understand how much happened in <unk> versus how much is to come.

Yes. So no. So Q2 was relatively muted we have a pretty good outlook in terms of what our customers more on the personal mobility side.

What they've got in inventory and things like that and it's really it's really almost entirely in the second half and it's really managing with our customers how much inventory. They have both of them are end users perspective and in their warehouses that are our product and kind of managing through the supply chain aspect of that as I.

Work through that inventory, so it's almost entirely perspective.

Okay.

And then you made a couple Europe comments, but just.

Im wondering how youre thinking about the second half for Europe , we've heard about a little Choppiness. There do you see some of this auto strength continues.

Yes, so first.

Jim Let me start with second half of 2022, Bill Gates Europe was a real standout outperformer, we had a very strong performance there so I would say that.

We have a very difficult comp in Europe in second half.

So starting with that.

Auto continues to be quite strong.

And again, we believe that the underlying trends with used vehicles, so kind of as I've outlined.

And the auto OEM business continues to trajectory improved output from the Oems So we feel reasonably.

Reasonably good shape and then most of kind of our caution. If you would is more associated with the industrial activities that continues to be choppy.

Hi.

I'm, sorry for continuing to use the word choppy, but it really is I mean, you can have a couple of months.

Less dense trend line and then you can have one or two months.

Nicely above trend line so.

There is no real straight line consistency upload down and so we remain pretty cautious about.

What we are seeing in Europe , particularly on the industrial side.

Thank you and again, if you would like to ask a question press the star followed by the number one on your telephone keypad. Your next question comes from the line of David Russell of Evercore ISI. Please go ahead hi.

Thank you one quick modeling question before my real question currency for the year, what's the updated view on currency impact for the full year.

So in the back half is going to be a favorable very low single digits.

The back half mostly in Q4, because Q4 is when it starts to roll over.

But very modestly David thinking about flat for the year flat flat for the year yields very slightly favorable.

The back half.

What I'm trying to understand how to get to the revenue for the full year.

The fourth quarter needs, probably even a little less currency helped in the third quarter. So we can talk offline the exact math.

But what I'm, just trying to understand about the fourth quarter with the organic implied down 4%.

Where do you see when it comes to the segments that impact the greatest and given that so.

Youre seeing the weakest core how does that influence our thought on pricing to start 2024. Thank you.

Yes.

Like I said earlier I think you got to think less about Q4 as a comp year over year and you got to think of it more in the back half because remember Q Q3.

Was seasonally weak in 2022 because of the supply chain headwinds.

Some of the issues, we had getting product out the door and then we started to catch up in Q4 and I believe that Q4 was a record revenue quarter for us in 2022, and so it's really not that much about the expectations for I think 2023, I think 2023, we're kind of seeing a return to normal seasonality when you look at the.

Sales when you look at the EBITDA split you look at all those things on a first half versus the second half.

Turning to normality I.

I think Q2 Q2 was more of the outlier where you just saw these disruptions. So I don't think theres anything to read into.

The kind of lower core growth number that youre seeing in Q4. This is more a function of Q4 of 22% in Q4 'twenty group.

Thank you. Your next question comes from the line of Deane Dray of RBC. Please go ahead.

Thank you and good morning, everyone.

Good morning, Hey.

I joined a little bit late.

But I wanted to circle back on the comments about lead times and now it's hard to kind of <unk>.

Homogenize across all your product lines, but if you could just highlight where you stand on lead times now versus 2019, because that's an important part of the calculus on destocking because the more of the lead times compress the more of your customers have confidence about burning off buffer inventory.

That's what we're seeing across multiple.

Industrial verticals, but just some perspective on lead times to start please.

Yes, I would say that the fluid power lead times have normalized for us Deane.

And in power transmission, we still have a reasonable amount of our portfolio, where we have extended lead times, we're still trying to work down.

Reasonably good amount of past due backlog.

That we hold.

And we don't anticipate.

All of the lead times can power transmission.

Will normalize by the time, we exit 2000.

2023 is still remain.

Nicely I guess nicely constrained across number of our power transmission lines as well. Despite the fact that we have added capacity. So it's kind of a it's a mixed picture being some some some of the line so where they need to be in some of the lines will remain reasonably constrained overlays for 'twenty four.

That's helpful. And then just as a follow up any commentary about outgrowth expectations anything you'd call out in terms of competitive dynamics because like in PT.

Competitive lead times have shrunk back and also change some of the Destocking. So just any competitive an outgrowth commentary would be helpful.

Yes look.

I will say that.

We do business continues to perform very nicely.

In terms of.

Automotive vertical both on the OEM as well as on the IR side. So we not only are keeping up we have increased our.

Nicely there.

That's paying nice dividends, so I'm not going to.

No.

Indicate that we are we are not taking market share, but as we as.

As we indicated auto came in mid teens for the quarter and so that's.

That's quite strong.

I think that <unk> is doing well, but again.

Full disclosure right last year, we were getting.

Impacted most significantly with the polymer supply in PT and so I think that the.

That we we anticipate.

Are going to be.

Somewhat favorable across a few of the lines.

Yes, I'm, just saying that.

The lead times will probably remain somewhat elevated.

On PT.

Thank you. Your next question comes from the line of Jeremy <unk>.

Please go ahead.

Yes, hi, good morning, everyone.

I'm wondering if you folks.

Yeah.

Can you talk about the impact of <unk>.

Supply chain margin.

Performance this year.

Spill.

A drag.

Pretty impressive year to date gross margins are up on down volumes and I'm just wondering is there.

Another tailwind, we should be thinking about 24 versus 23, because the supply chain is getting better but it doesn't feel like it was completely clean.

The first half of the year.

We'd love to hear your comments on that.

Yes, so so the first half of the year, we thought we saw things get progressively better.

They were better in Q1 than they were in the back half of 'twenty two they were better in Q2 than they were in Q1.

And then they are better in the back we anticipate there'll be better in the back half of 'twenty through and.

And that's where if you remember last year, we talked about some of the gross margin drag that we had.

Certainly.

In the face of a little bit of.

Core growth headwind and maybe a little mixed headwind in the second half.

The stabilization of the operating environment.

Better supply chain performance.

And then.

More normalized operational performance in the second half is what's driving our gross margin improvement. So we expect it to continue to see it get better.

In the second half of the year, hopefully returning to complete normality and then pivoting.

Gross margin expansion with the initiatives that we've talked about as we head into 2024.

Super.

Can I ask you just on your prior comment regarding returning to normal seasonality normally first quarter top line as well.

Low to mid single digits from the fourth which would I think would translate to.

The year over year organic growth, but it feels like there is going to be some tough comps just given the stocking that we had seen in the first quarter of 2003 in North America I'm wondering if you just comment on that.

On that cadence, obviously, we're not talking 24 outlook yet right.

But can you comment on the first quarter call.

It feels like Youre trying to get me to talk 2004, Gerry So I'm going to I'm going to stay away from that look I think look.

<unk>.

The topline.

It is largely developing like we thought it would in the second half but forward.

A little bit longer recovery in China.

The mobility.

I think as you know.

As you see inflation moderate youll, probably see pricing moderates, some which really wont impact gross margin. So as you kind of move through the next few quarters, you'll see that pricing moderates, but we expect to see gross margin expansion as I said before from some of our initiatives.

I am hopeful we will return to normal seasonality cadence and everything gets back to normal in 2024, but we'll have to wait and see and we will be sure to make sure we are.

Well as you know when we rollout our tone in 'twenty for guidance.

Thank you. Your next question comes from the line of Jamie Cook of Credit Suisse. Please go ahead hi, good.

Good morning, Mike.

Just one follow up obviously the cash flow projection.

As strong for the year, but I am just wondering as you look at your inventory with supply chain.

That's starting to normalize how youre thinking about the opportunity on the working capital front in terms of.

Inventory or.

Do you sort of over the longer term would keep inventory at higher levels versus history.

Supply chain in the world started to change.

We're already starting to take inventory out.

Particularly on the raw materials side and so it was as our supply chain has normalized.

We're adjusting our raw materials.

We can continue to adjust our finished goods based on customer demand.

On the lead time side, we're already seeing some.

Some improvement on the raw materials side, we would expect as again our supply chain has normalized.

Some additional improvement, but lets not forget if you look at our trailing 12 months were 135% cash conversion. So as we've rolled over some of the step up in cost and then receivables on inflation in the pumps are more normalized.

Cash generating aspect of this business is starting to flow through again, we're over 100% cash conversion for Q2.

Which I believe is a record for Q2 as well so.

So we were already seeing some favorability some improvement from an inventory perspective, we would expect to see a little bit more but then all in we expect to see cash generation continue to.

I'll turn it back to normal.

Thank you.

There are no further questions at this time I will now turn the call over to which cross for closing remarks.

Thanks, everyone for participating if you have any follow up questions. Please feel free to reach out have a great rest of the day and a great weekend.

This concludes today's conference call you may now disconnect.

Yes.

Sure.