Q4 2023 Gates Industrial Corp PLC Earnings Call
Hello, and welcome to the Gates Industrial Corporation Q4, 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 and if you would like to ask a question. During this time simply press star one on your telephone keypad.
Operator: Hello, and welcome to the Gates Industrial Corporation Q4 2023 earnings call. All lines have been placed on mute to prevent any background noise.
Operator: After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question during this time, simply press star 1 on your telephone keypad. I will now turn the call over to Rich Kwas, Vice President of Investor Relations. Please go ahead.
I will now turn the call over to rich class.
Vice President Investor Relations. Please go ahead.
Rich Kwas: Good morning, and thank you for joining us for our fourth quarter 2023 earnings. I'll briefly cover our non gap and forward looking language before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallett, our CFO. At the market open today, we published our fourth quarter 2023 results. A copy of the release is available on our website at investors.gates.com.
Good morning, and thank you for joining us on our fourth quarter 2023 earnings call.
I'll briefly cover our non-GAAP and forward looking language before passing the call over to our CEO Evo Europe.
He will be followed by Brooks Mallard our CFO.
Before the market opened today, we published our fourth quarter 2023 results.
A copy of the release is available on our website at investors Dot <unk> Dot com.
Rich Kwas: Our call this morning is being webcast as accompanied by a slide presentation. On this call, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the investor relations section of our website. Please refer now to slide two of the presentation, which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to 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've described in our most recent annual report on Form 10-K and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements.
Our call. This morning is being webcast is accompanied by a slide presentation.
On this call we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.
Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website.
Please refer now to slide two of the presentation, which provides a reminder that our remarks will include forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to 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've described in our most recent annual report on Form 10-K.
And the other filings we make with the SEC.
We disclaim any obligation to update these forward looking statements.
Rich Kwas: Before I turn it over to Ivo, we are hosting a Capital Markets Day on the afternoon of March 11th at the New York Stock Exchange. Instructions to RSVP will be sent next week, and we hope many of you can join us for an informative session. I'll now turn the call over to Ivo to review our results.
Before I turn it over to Evo, we are hosting a capital markets day on the afternoon of March 11 at the New York Stock Exchange.
Instructions to RSVP will be sent next week and we hope many of you can join us for an informative session.
I'll now turn the call over to Evo to review our results Evo.
Ivo Jurek: Thank you, Rich. Good morning, everyone. And thank you for joining us today. Let's begin on slide three of the presentation and review what we accomplished in 2023. I'm proud of what our Gates global teams achieved. Our team demonstrated resilience and fortitude through an uncertain macro environment and delivered strong margin expansion and cash conversion for the full year. Our global teams work diligently to service our customers and return fill rates to pre-COVID performance levels, gradually meeting our customers' expectations across most of our product portfolio. Our team's collective execution enabled us to deliver a 180 basis points year-over-year expansion in adjusted EBITDA margins. Importantly, the improvement was fueled by stronger commercial and operational execution, resulting in a 290 basis points increase in our gross margin. We believe this outcome demonstrates the resilience and quality of our business as well as our team's ability to manage through a challenging environment. The full year profitability increase was an important driver of our nearly 20% growth in adjusted ETI.
Thank you rich and good morning, everyone and thank you for joining us today.
Let's begin on slide three of the presentation and review what we accomplished in 2023.
I am proud of what our gates global teams achieved.
Our team demonstrated resilience and fortitude.
Uncertain macro environment and delivered strong margin expansion and cash conversion for the full year.
Our global teams work diligently to service our customers and returned fill rates to pre COVID-19 performance levels progressively meeting our customers' expectations across most of our product portfolio.
Our team's collective execution enabled us to deliver a 180 basis points year over year expansion in adjusted EBITDA margin.
Importantly, the improvement was fueled by stronger commercial and operational execution, resulting in a 290 basis points increase in our gross margins.
We believe this outcome demonstrates the resilience and quality of the business as well as our team's ability to manage through a challenging environment.
The full year profitability increase was an important driver of our nearly 20% growth in adjusted EPS.
Furthermore, our free cash flow conversion measured 110% and helped drive a half a turn reduction in our net leverage ratio year over year, while we returned $250 million of capital to shareholders via share repurchases in.
Ivo Jurek: Furthermore, our free cash flow conversion measured 110% and helped drive a half a turn reduction in our net leverage ratio year-over-year, while we returned $250 million of capital to shareholders via share repurchases in 2023. Our company-wide focused execution allowed us to surpass most of our initial financial guidance metrics for the year. We are in the relatively early stages of executing on our organically focused enterprise initiatives that we anticipate will be delivering performance benefits and enhancing shareholder returns over a multi-year horizon. Furthermore, over an extended time frame, our business has demonstrated an ability to deliver strong profitability and cash flow generation. We are now focused on accelerating enterprise growth and enhancing profitability while staying focused on improving shareholder returns. I look forward to sharing more details on these topics at our upcoming Capital Markets Day. Turning to slide four in our fourth quarter highlights,
2023.
Our companywide focused execution allowed us to surpass most of our initial financial guidance metrics for the year.
We are in the relatively early stages of executing on our organically focused enterprise initiatives that we anticipate will be delivering performance benefits and enhancing shareholder returns over a multiyear horizon.
Over an extended timeframe our business has demonstrated an ability to deliver strong profitability and cash flow generation.
We are now focused on elevating the enterprise growth and enhancing profitability, while staying focused on improving shareholder returns.
Forward to sharing more details on these topics at our upcoming capital markets day.
Turning to slide four and our fourth quarter highlights.
Ivo Jurek: Top-line performance was about as expected. The demand environment remained choppy in the fourth quarter, and our end markets followed recent trends as automotive outplaced industrial. Recall, we faced a difficult growth comparison from a year ago, where we were able to accelerate the conversion of past year backlog, creating a bit of an anomaly in seasonality. However, broadly speaking, business demand has returned to normal seasonality, which in our view is a positive development. Our book-to-bill ratio in a quarter remained above 1, on a craftability basis.
<unk> performance was about as expected the demand environment remained choppy in the fourth quarter and our end markets followed on recent trends as automotive Outplace industrial.
Recall, we faced a difficult growth comparison from a year ago period, while we were able to accelerate the conversion of past due backlog, creating a bit of an anomaly in seasonality.
Broadly speaking our business demand has returned to normal seasonality, which in our view is a positive development.
Book to Bill ratio in the quarter remained above one.
On the profitability front.
Ivo Jurek: We recorded strong adjusted EBITDA dollars and delivered a significant year-over-year margin increase. We generated $186 million of adjusted EBITDA, which translated to an adjusted EBITDA margin of 21.5% and represented a year-over-year expansion of 290 basis points. The increase in adjusted EBITDA margin was fueled by a 440 basis points improvement in gross margin. Gross Margin Improvement was supported by benefits from our enterprise initiatives, particularly in our supply chain. Our performance was strong considering that volumes were down year-over-year and our revenue mix was less favorable. Our fourth-quarter free cash flow was approximately $165 million, which was 158% conversion of our adjusted netting. Improved profitability and working capital management were the primary drivers behind the results.
We recorded strong adjusted EBITDA dollars and delivered a significant year over year margin increase.
We've generated $186 million of adjusted EBITDA, which translated to an adjusted EBITDA margin of 21, 5% and represented a year over year expansion of 290 basis points.
The increase in adjusted EBITDA margin was fueled by 440 basis points improvement in gross margins.
The gross margin improvement was supported by benefits from our enterprise initiatives, particularly in our supply chain.
Our performance was strong considering that volumes were down year over year and revenue mix was less favorable.
Our fourth quarter free cash flow was approximately $165 million, which was 158% conversion of our adjusted net income.
Improved profitability and working capital management were the primary drivers behind the results.
Ivo Jurek: Our trade working capital as a percentage of sales decreased year over year, benefiting from improved cash collections as well as a normalized operating environment. The strong free cash flow performance helped us to lower our net depth to adjusted EBITDA ratio to 2.3 times, a half a turn reduction compared to the prior year period. We continue to make solid progress towards achieving our target net leverage goal of under two times. Moving to slide five.
Our trade working capital as a percentage of sales decreased year over year benefiting from improved cash collections as well as a normalized operating environment.
The strong free cash flow performance helped us to lower our net debt to adjusted EBITDA ratio to two three times, a half a turn reduction compared to the prior year period.
We continue to make solid progress towards achieving our target net leverage goal of under two times.
Moving to slide five.
Fourth quarter total revenues were $863 million down a little less than 5% year over year on a core basis against the backdrop of the prior year's Q4 seasonality anomaly driven by an accelerated recovery in certain product lines in the prior year.
Ivo Jurek: Fourth quarter total revenues were $863 million, down a little less than 5% year-over-year on a core basis against the backdrop of the prior year's Q4 seasonality anomaly driven by an accelerated recovery in certain product lines in the prior year. Total revenues were down about 3% year-over-year, inclusive of favorable foreign currency facts; automotive increased low single digits on a core basis; the majority of our industrial and markets realized year-over-year declines globally, while energy and on highway continue to post positive core growth versus the prior year period. At the channel level, demand in industrial first declined double digits, impacted by softness in North America, EMEA, and South America. In China, industrial first-fit core revenue grew double-digit year-over-year after experiencing general weakness over the past few quarters. Global industrial replacement channel core revenues declined below single digits versus the prior year period on normalization of lead times and associated channel inventory. Adjusted EBITDA was $186 million, and the adjusted EBITDA margin was $186 million. 21.5 percent
Total revenues were down about 3% year over year inclusive of favorable foreign currency effects.
Automotive increased low single digits on a core basis.
The majority of our industrial end markets realized year over year declines globally.
While energy and on highway continued to post positive core growth versus the prior year period.
At the channel level demand in industrial first fit declined double digits impacted by softness in North America, EMEA and South America.
In China Industrial first fit core revenue grew double digit year over year after experiencing general weakness over the past few quarters.
Global industrial replacement channel core revenues declined low single digits versus the prior year period on normalization of lead times and associated channel inventories.
Adjusted EBITDA was $186 million and adjusted EBITDA margin was 21, 5%.
Ivo Jurek: Gross margin exceeded 39% in the fourth quarter. The year-over-year gross margin expansion was sparsely offset by higher SG&A. Overall, we are pleased with the improvement in profitability made in 2023 as we continue to advance our enterprise initiatives. Adjusted earnings per share was 39 cents, up 56% year over year.
Gross margin exceeded 39% in the fourth quarter.
The year over year gross margin expansion was partially offset by higher SG&A spending.
Overall, we are pleased with the improvement in profitability made in 2023, as we continued to advance our enterprise initiatives.
Adjusted earnings per share was 39 cents.
Up 56% year over year.
Ivo Jurek: Relative to last year, higher operating income contributed $0.07 a share, augmented by lower interest and tax expense and a reduced share price. On slide six, let's review our segment results. In the power transmission segment, we generated revenues of 533 million dollars. Core revenues were down about 5% year-over-year against the prior year comeback. Currency contributed about 100 basis points of growth to our revenue, automotive core revenue growth was in the low single digits, first step and replacement generating similar growth, industrial and markets were mixed, energy and construction both grew in the mid to high single digit range, and on highway grew low compared to Q4 2022. The growth was more than offset by a decrease in diversified industrial and agricultural output and anticipated weakness in personal mobility.
Relative to last year higher operating income contributed seven a share augmented by lower interest and tax expense and reduced share count.
On slide six let's review our segment results.
In our power transmission segment, we generated revenues of $533 million.
Core revenues were down about 5% year over year against the prior year comp backdrop.
Currency contributed about 100 basis points of growth to our revenues.
In automotive core revenue growth was in the low single digits with first fit and replacement generating similar growth.
Industrial end markets were mixed.
Energy and construction both grew in the mid to high single digit range and on highway grew low single digits compared to Q4 2022.
The growth was more than offset by a decrease in diversified industrial agriculture and anticipated weakness in personal mobility.
Ivo Jurek: The personal mobility market continues to work through access inventory, and we expect a couple more quarters of weakness before growth reaccelerates. Our design win activity in this space increased about 20% in 2023 over the prior year, and we are optimistic about delivering on our anticipated midterm growth process. Poor growth in China's industrial business was about flat and an improvement relative to last quarter.
Personal mobility market continues to work through excess inventory and we expect a couple more quarters of weakness before growth Reaccelerate.
Our design win activity in this space increased about 20% in 2023 over prior year and we are optimistic about delivering on our anticipated mid term growth prospects.
Core growth in China industrial business was about flat an improvement relative to last quarter.
Ivo Jurek: Global Industrial Replacement Revenues stay resilient in this segment, declining low single digits year over year and faring better than the first quarter, with segment operating performance strong and margin increasing significantly year over year. Additionally, our enterprise initiatives are yielding benefits, including supply chain efficiencies, as well as initial commercial traction from the first phase of ADP. Our fluid power segment produced revenues of $331 million; on a core base, revenues fell about 5% year over year; foreign currency contributed almost two percentage points of growth to our year-over-year performance. Automotive core revenues decreased by low single digits compared to Q4 2022; industrial and markets experienced a mid single digit decline. However, modest growth in energy was more than neutralized by softness in other end markets, most notably agriculture and diversified industries.
Global industrial replacement revenues stayed resilient in this segment declining low single digits year over year, and faring better than the first fit market.
The segment operating performance was strong and margin increased significantly year over year.
Additionally, our enterprise initiatives are yielding benefits, including supply chain efficiencies as well as initial commercial traction from the first phase of 80 20.
Our fluid power segment produced revenues of $331 million.
On a core basis revenues fell about 5% year over year.
Foreign currency contributed almost two percentage points of growth to our year over year performance.
Automotive core revenues decreased low single digits compared to Q4 2022.
Industrial end markets experienced a mid single digit decline.
Modest growth in energy was more than neutralized by softness in other end markets, most notably agriculture and diversified industrial.
Relative to segments overall core performance industrial replacement outperformed while industrial first fit was fitbit weaker.
Ivo Jurek: Relative to the segment's overall core performance, industrial replacement outperformed, while industrial first pit was a bit weaker. Fluid power segment adjusted EBITDA margin increased 190 basis points versus the prior year on the heels of cost management and benefits from our enterprise initiatives. We remain focused on footprint optimization within the fluid power segment.
Fluid power segment, adjusted EBITDA margin increased 190 basis points versus the prior year on the heels of cost management and benefits from our enterprise initiatives.
We remained focused on footprint optimization within the fluid power segment.
Ivo Jurek: We are in the process of completing projects in South America and India that further expand our in-region, for-region manufacturing strategy. We anticipate these projects will result in lower fulfillment costs and increased throughput of our high-velocity hydraulics and industrial-house products. We'll share more details about the enterprise footprint optimization strategy in March at Al Capita, www.globalonenessproject.org I'll now pass the call over to Brooks for further comments on our website. Thank you, Ivo.
We're in process of completing projects in South America, and India that further extend our in region for region manufacturing strategy.
We anticipate these projects will result in lower fulfillment cost and increased throughput of our high velocity hydraulics and industrial hose product lines.
We will share more details about the enterprise footprint optimization strategy in March at our capital markets day.
I will now pass the call over to Brooks for further comments on our results.
Brooks Thank you though.
Jeff Hammond: I'll begin on slide seven and discuss our core revenue performance by region, starting with a brief overview. Regionally, we experienced mid-single-digit declines in North America and EMEA, the two regions most impacted by the highlighted difficult year-over-year comparison. While down slightly versus the prior year, our China business exceeded our revised expectations. We achieved positive core growth in South America. In North America, we experienced similar year-over-year percentage declines in automotive and industrial. Trends in EMEA were more divergent, with high single-digit growth in automotive countered by an approximately 20% year-over-year decrease in industrial growth. In both North America and EMEA, the replacement channels performed better than first fit. However, Chinese core revenues declined slightly year over year.
I'll begin on slide seven and discuss our core revenue performance by region, starting with a brief overview.
Regionally, we experienced mid single digit declines in North America, and EMEA. The two regions most impacted by the highlighted difficult year over year comparisons.
While down slightly versus prior year, our China business exceeded our revised expectations.
We realized positive core growth in South America.
In North America, we experienced similar year over year percentage declines in automotive and industrial.
Trends in EMEA, where more divergence with high single digit growth in automotive countered by an approximately 20% year over year decrease in industrial.
In both North America, and EMEA, the replacement channels performed better than first fit.
China core revenues declined slightly year over year.
Jeff Hammond: Automotive increased mid-single digits and on-highway revenues expanded over 40% versus the prior year period, augmented by a favorable comparison. Diversified Industrial remains soft, declining in the high teens compared to last year's fourth. In general, we started to experience more demand stability in China as we exited the year. South America grew mid-single digits, benefiting from relative strength in automotive, energy, and on the highway, while East Asia's revenues were relatively flat with the prior year on a core basis.
Automotive increased mid single digits and on highway revenues expanded over 40% versus the prior year period augmented by a favorable comparison.
Diversified industrial remains soft declining high teens compared to last year's fourth quarter.
In general we started to experience more demand stability in China as we exited the year.
South America grew mid single digits benefiting from relative strength in automotive energy and on highway while East Asia revenues were relatively flat with the prior year on a core basis.
Jeff Hammond: Shifting to slide 8, we show the adjusted earnings per share bridge to last year's fourth quarter. Of note, this quarter's adjusted earnings per share was a fourth quarter high for the company. Relative to last year, stronger operating performance contributed approximately $0.07 in earnings per share. Lower tax and interest expense for modest tail. The contribution from others primarily reflects the benefit of a reduced share. Moving to slide nine and cash flow results and our balance, our free cash flow for the fourth quarter was $165 million, or 158% of adjusted net income.
Shifting to slide eight we show the adjusted earnings per share bridge to last year's fourth quarter.
Of note. This quarter's adjusted earnings per share was a fourth quarter high for the company.
Relative to last year stronger operating performance contributed approximately <unk> <unk> in earnings per share.
Lower tax and interest expense were modest tailwind.
The contribution from other primarily reflects the benefit of a reduced share count.
Okay.
Moving to slide nine and cash flow results and our balance sheet.
Our free cash flow for the fourth quarter was $165 million or 158% conversion of adjusted net income.
Jeff Hammond: Q4 was our highest free cash flow quarter for 2023, consistent with normal seasonality. Strong market performance and effective management of trade working capital supported the robust conversion. We delivered 110% free cash flow conversion on adjusted net income in 2023, underscoring the strong cash generating capabilities of the business. Our net leverage ratio declined to 2.3 times from 2.8 times in Q4 of 2022.
Q4 was our highest free cash flow quarter for 2023, consistent with normal seasonality.
Strong margin performance and effective management of trade working capital supported the robust conversion.
We delivered 110% free cash flow conversion on adjusted net income in 2023, underscoring the strong cash generating capabilities of the business.
Our net leverage ratio declined to two three times from two eight times in Q4 of 2022.
We have authorized a new stock repurchase plan of up to $100 million.
Jeff Hammond: We have authorized a new stock purchase plan of up to $100 million. Given our strong cash position at the end of 2023, we intend to pay down a portion of our debt by the end of the first quarter. As our cash generation builds this year, we will look to apply it to further debt pay. Our trailing 12 month return on invested capital increased 300 basis points year over year to 23%, our highest level since the end of 2018. We continue to make progress toward achieving our midterm goal of 25%.
Given our strong cash position at the end of 2023, we intend to pay down a portion of our debt by the end of the first quarter.
As our cash generation builds this year, we will look to apply it to further debt paydown.
Our trailing 12 month return on invested capital increased 300 basis points year over year to 23% our highest level since the end of 2018.
We continue to make progress toward achieving our mid term goal of 25%.
Moving now to slide 10, and our full year 2020 guidance and views on the first quarter.
Jeff Hammond: Moving now to slide 10 and our full year 2024 guidance and views on the first quarter. For 2024, we are initiating guidance for core revenues to be in the range of down 3% to up 1% relative to 2023. Within that framework, we have factored in lower rates of pricing as inflation abates.
For 2024, we are initiating guidance for core revenues to be in the range of down 3% to up 1% relative to 2023.
Within that framework, we have factored in lower rates of pricing as inflation abates.
Jeff Hammond: A slower first half demand environment and improving trends in the second half. However, there are pockets of inventory destocking and demand softness that we expect to impact our 2024 core growth. Looking at our end market revenue exposure, we expect about half of our end markets to be down year over year in 2024. We anticipate demand trends to improve in the second half, but I've taken a pragmatic view as we begin the year. Our initial 2024 adjusted EBITDA guidance is in the range of $725 million to $785 million. At the midpoint, this guidance implies about a 30 basis point year-over-year increase in adjusted EBITDA margin. Our adjusted earnings per share guidance is in the range of $1.28 per share to $1.43 per share.
Slower first half demand environment, and improving terms in the second half.
There are pockets of inventory destocking and demand softness that we expect to impact our 2024 core growth.
Looking at our end market revenue exposure, we expect about half of our end markets to be down year over year in 2024.
We anticipate demand trends to improve in the second half, but I've taken a pragmatic view as we begin the year.
Our initial 2024 adjusted EBITDA guidance is in the range of $725 million to $785 million.
At the midpoint this guidance implies about a 30 basis point year over year increase in adjusted EBITDA margin.
Our adjusted earnings per share guidance is in the range of $1 28 per share to $1 43 per share.
Jeff Hammond: We anticipate our free cash flow to exceed 90% of our adjusted net income in 2024 after we deliver 110% conversion in 2023. For the first quarter, we anticipate total revenues to be in the range of $840 million to $880 million and core revenues to be down about 5% year over year at the midpoint; foreign currency is estimated to be a slight tailwind in Q1. For the first quarter, we expect our adjusted even margin to increase in the range of 40 basis points to 80 basis points compared to Q1 of 2023. On slide 11, we show a year-over-year walk to our adjusted 2024 earnings per share mentality. We expect the impact from that slight core revenue decline and headwind from non-operating items will be fully offset by benefits from our enterprise initiative. With that, I will turn it back over to Ivo. Thanks, Brooke.
We anticipate our free cash flow to exceed 90% of our adjusted net income in 2024. After we delivered 110% conversion in 2023.
For the first quarter, we anticipate total revenues to be in the range of $840 million to $880 million in core revenues to be down about 5% year over year at the midpoint.
Foreign currency is estimated to be a slight tailwind in Q1.
For the first quarter, we expect our adjusted EBITDA margin to increase in the range of 40 basis points to 80 basis points compared to Q1 of 2023.
On slide 11, we show our year over year wall to our adjusted 2024 earnings per share midpoint.
We expect the impact from that slight core revenue decline and headwind from non operating items will be fully offset by benefits from our enterprise initiatives.
With that I will turn it back over to Evo.
Thanks Brooks.
Ivo Jurek: On slide 12, I will offer a brief summary before taking your question. We had a strong finish to 2023, and I'm proud of our team for their perseverance and ability to perform in an uneven economic environment. We were able to deliver a nice margin improvement while encountering choppy demand conditions, benefiting from a mix of internal initiatives and the normalization of the underlying operating environment. In a substantial way, our operations have returned to pre-COVID levels.
On slide 12, I will offer a brief summary before taking your questions.
We had a strong finish to 2023 and I'm proud of our team for their perseverance and ability to perform in an uneven economic environment.
We were able to deliver a nice margin improvement while in countering choppy demand conditions.
Benefiting from a mix of internal initiatives and the normalization of the underlying operating environment.
In a substantial way our operations have returned to pre COVID-19 levels.
Ivo Jurek: In 2023, our team was able to showcase the underlying strength of our business model, which we intend to build upon moving forward. As we enter 2024, we are mindful of the underlying macro risks, but we believe there are many opportunities as well. We are taking a pragmatic approach to 2024, viewing the front half of the year as being more challenging due to the normalization of business conditions, followed by a gradually improving business environment in the second half. However, we cannot control the timing of improvement in broad-based business.
In 2023, our team was able to showcase the underlying strength of our business model, which we intend to build upon moving forward.
As we enter 2024, we are mindful of the underlying macro risks, but we believe there are many opportunities as well.
We are taking a pragmatic approach to 2020 for viewing the front half of the year as being more challenging due to normalization of business conditions.
Road, a gradually improving business environment in second half.
While we cannot control the timing of improvement in broad base business activity. We are firmly in control of improving our business operations for the long term.
Ivo Jurek: We are firmly in control of improving our business operations for the long term. As such, we continue to build momentum on our enterprise initiatives in the areas of productivity, footprint optimization, and AD20. Moreover, we are thoughtful about making further investments in our business. As the business environment evolves, our priority is to stay close to our customers at the commercial front end, as well as maintain tight operational proximity to optimize service levels and fill rates for our comprehensive portfolio of highly engineered mission critical products. We are making investments in innovation, material science, and process engineering to improve the competitive position of our portfolio while equipping our people with better analytics and empowering them to ramp up the execution of our goals. We are focused on being good stewards for all of our stakeholders, investors, the communities we operate in, and our employees. On that note, most recently, Newsweek recognized Gates as one of America's greatest workplaces for diversity for the second year in a row.
As such we continue to build momentum of our enterprise initiatives in the areas of productivity footprint optimization and 80 20.
Moreover, we are thoughtful about making further investments in our business.
As the business environment evolves, our priority is to stay close to our customers at a commercial front end as well as maintain tight operational proximity to optimize service levels and fill rates of our comprehensive portfolio of highly engineered mission critical products.
We are making investments in innovation material science and process engineering to improve the competitive position of our portfolio, while equipping our people with better analytics and empowering them to ramp up the execution of our growth initiatives.
We are focused on being good stewards for all of our stakeholders.
<unk> the communities, we operate in and our employees.
On that note most recently Newsweek recognize gates as one of Americas greatest workplaces for diversity for the second year in a row.
Before I take your questions I would like to extend my gratitude to the nearly 15000 engaged employees globally for their hard work and accomplishments in 2023.
Ivo Jurek: Before I take your questions, I would like to extend my gratitude to the nearly 15,000 Gates employees globally for their hard work and accomplishments in 2020. And finally, as a reminder, our upcoming Capitalist Market Day is scheduled for March 11th in New York, where we look forward to sharing more about our enterprise initiatives and business priorities. With that, I'll turn the call back to the operator to begin the Q&A. Thank you. If you have a question, please press star one on your telephone keypad.
And finally as a reminder, our upcoming capital market day is scheduled for March 11th in New York, where we look forward to sharing more about our enterprise initiatives and business priorities.
With that I'll turn the call back to the operator to begin the Q&A.
Thank you if you have a question. Please press star one on your telephone keypad, we ask that you. Please limit yourself to one question and one follow up question. Thank you.
Operator: We ask that you please limit yourself to one question and one follow-up question. Thank you. Your first question comes from the line of Nigel Coe with Wolf Research. Your line is open. Thanks. Good morning, everyone.
Your first question comes from the line of Nigel Coe with Wolfe Research. Your line is open.
Thanks, Good morning, everyone.
Good morning.
Nigel Edward Coe: Really, really good. Really good. Margin execution and catch. Congratulations on, um, maybe, maybe just fill in the gaps. I think Brooks, you mentioned half of the end markets are expected to be down. So I'd be curious, you know, where you're seeing the down-end market, and then any thoughts on sort of the impact of inventory adjustments during the quarter, you know, the sell-in versus sell-out. Yeah, good morning, Nigel. Let me take a look at it.
A really good really good execution and cash flow production. So congratulations on that.
Maybe maybe just filling the gaps I think Brooks you mentioned half of the end markets as.
I expect to be down in 2004, so I'd be curious why you're seeing the down end markets and then any any thoughts on sort of the impact of inventory adjustments during the quarter the sell in versus sell a dynamic.
Yes, good morning, Nigel Let me take this look I think we have put in the appendix a view.
Ivo Jurek: Look, I think we have put in the appendix a view of the anticipated 2024 and market conditions. And, you know, we feel kind of predominantly, we see predominantly that the industrial on highway and the industrial off highway will be more challenged in 24 than it was in 23. Obviously, agriculture has been challenged for a while.
The anticipated 2024 end markets.
Conditions.
We feel kind of predominantly receive predominantly that the industrial on highway and industrial off highway will be more challenged in 'twenty four than it was in 'twenty. Three obviously AIG has been challenged for a while internationally in the second half of the year in the U S as well as managed.
Ivo Jurek: Internationally, in the second half of the year in the US as well, we've managed to do quite well, but we anticipated in 24 acts going to remain weak globally. You know, on highway had a terrific, terrific run for a couple of years, and it's, it's more or less just normalizing in terms of demand. But we are seeing some strength in China on the highway as well, and that has been, you know, quite negative for a while.
Through quite well, but we anticipate that in 2004 <unk> is going to remain weak globally.
On highway.
Terrific terrific run up a couple of years.
It's more or less just normalizing in terms of demand, but we are seeing some strength in China in on highway as well and that has been.
Quite negative for a while so some puts and takes in there and then on diversified industrial diversified industrial has been quite weak I mean, we're not it is logistics and distribution automation to kind of discrete automation.
Ivo Jurek: So some puts and takes in there. And then on diversified industrial, diversified industry has been quite weak. I mean, you know, we're not at this logistics and distribution automation to kind of discrete automation.
Ivo Jurek: It's been quite choppy over the last year, and we certainly don't anticipate that improving until sometime into the back half of the year. So we've taken a reasonably muted view of that at the market. Yeah, but there are some positives as well.
It's been quite choppy over the last year, and we certainly don't anticipate that improving until sometimes into the back half of the year. So we've taken a reasonably muted.
View of that end market, yes, but there are some some positives as well I mean, the automotive replacement market and market remains quite robust the market dynamics are quite strong.
Ivo Jurek: I mean, the automotive replacement market and the overall market remains quite robust. The market dynamics are quite strong. The age car park continues to grow. The age of car parks in China continues to grow.
H car Park continues to grow aged car Parc in China continues to grow.
Ivo Jurek: So you know, the underlying demand drivers remain positive, and then obviously, energy and resources, so oil and gas mining, and such. We remain quite optimistic about, you know, the underlying conditions of the market on, maybe the last known personal mobility. The underlying market is actually reasonably okay. You know, you still see a very significant amount of new design wins coming to the forefront, particularly in some developing economies; you start seeing electrification of real personal mobility get stronger. And we have had a very strong number of design wins.
The underlying.
Demand drivers remained remain positive and then obviously energy and resources.
And gas mining and such.
We remain.
Quite optimistic about it.
The underlying the underlying conditions of the market.
Maybe on the last night in personal mobility.
The underlying market factory.
Reasonably okay.
Do you.
Still see a very significant amount of new design wins coming to the forefront, particularly ask.
And somewhat developing economies you start seeing electrification of who we are personal mobility.
Get stronger and we have we have.
<unk> had very strong amount of design wins, but the underlying largest the broadest exposure that we have presently is in the bank market and that has been dealing with post COVID-19.
Ivo Jurek: But the underlying largest, I mean, the broadest exposure that we have presently is in the bike market, and that has been dealing with the post COVID, you know, kind of overhang of inventory. And that we believe is going to work itself out as well, kind of at the front end of the year. And sometimes, as you're exiting, kind of, you know, other parts of Q2, maybe in the middle of Q3, we believe that we should start seeing that overhang start dissipating, and the market should start growing for us as well. So puts and takes, you know, not a fantastic backdrop, but we are managing through quite well. And we believe that we are well positioned to deliver what would be presented in our guidance for 2020. Thanks Ivo, that's great. And then I guess my follow-up question is, you know, on the margin bridge on slide 11, the 7 cents from enterprises, uh... and you provided a little bit of color in terms of uh... some of the uh... some of the cost initiatives. I was just wondering if maybe you could just build that out.
Kind of an overhang of inventory and that we believe is going to work itself out as well kind of in the front end of the year and sometimes as you are exiting kind of.
Later parts of Q2, maybe in the Middle of Q3, we believe that we should start seeing that overhang to start dissipating and then market should start growing for us as well so puts and takes.
<unk>.
Not a fantastic backdrop, but we are managing through quite well and we believe that.
That we are well positioned to deliver what would be represented in our guidance for 2024.
That's great.
And then I guess my follow up question is on the margin bridge on slide 11, the <unk> from enterprise initiatives.
And you provided a little bit of color in terms of some of the some of the cost initiatives. I was just wondering if maybe you can just build that out in terms of.
Jeff Hammond: In terms of what's driving that $0.07 and any sort of cost to achieve that. Yeah, and hey, Nigel, this is Brooks. This is being driven, you know, entirely by gross margin improvement, right? And so if you remember, well, I'm going to give you a little history. You know, we talked about, you know, since COVID, the challenges related to, you know, the polymers and the resins and getting those, and those were challenging because, you know, there were governments that were trying to get their hands on them for different reasons. And, and then there were, you know, other people that were getting out of the business and stuff like that.
Kind of what was driving that seven.
And any sort of cost to achieve that we should think boswell.
Yes, Hey.
Hey, Nigel this is Brooks.
This is being driven entirely by gross margin improvement right and so if you remember right. So I'm going to give a little history.
We talked about since Covid, we've talked about the challenges related to the polymers and the resins.
And getting those and those were challenged because governments that we're trying to get their hands on them for different reasons.
And then there are other people that we're getting out of the business and stuff like that so it's a little bit of a challenge.
Jeff Hammond: So it was a little bit of a challenge in terms of getting some of the raw materials that we needed. And that cost us some operational efficiencies and some gross margin headwinds. And as we've worked through those, and we've stacked the enterprise initiatives on top of them, we've really seen our gross margins progressively come back through 2023, quite in line with what our expectations were. And so if you think about, you know, 20, if you think about the fourth quarter, the normalization piece was probably about 250 bps of gross margin tailwind. We probably had between volume and mix a couple 100 basis points of gross margin headwind.
In terms of getting some of the raw materials.
That we needed and that caused us some operational efficiencies and some gross margin headwinds.
And as we've worked through those and we've stacked the enterprise initiatives on top of them, we've really seen our gross margins progressively come back through 2023 quite in line with with what our expectations were and so if you think about 'twenty.
If you think about the fourth quarter. The normalization piece was probably about 250 bps of gross margin.
We probably had between volume and mix a couple of hundred basis points.
The gross margin headwind and then the balance which is about 400 basis points really comes from our enterprise initiatives around productivity material cost outbreak cost out 80, 20, and some of the strategic pricing stuff that we've done and so just a combination of things that have happened over the course of two.
Jeff Hammond: And then the balance, which is about 400 basis points, really comes from our enterprise initiatives around productivity, you know, material cost out, freight cost out, 80-20, and some of the strategic pricing stuff that we've done. And so just a combination of things that have happened over the course of 2023 that have helped drive those gross margins in the direction that we want to. Your next question comes from the line of Julian Mitchell with Barclays Capital. Your line is open. Hi, good morning.
123 that have helped drive those gross margins.
And the direction that we want to.
Okay.
Your next question comes from the line of Julian Mitchell with Barclays Capital. Your line is open.
Hi, good morning.
Maybe just wanted to.
Julian Mitchell: Maybe I just wanted to look at the seasonality. So you've got some commentary on slide 10 about the half and so on. So I just wondered any sense of how much of the EBITDA or the earnings we should expect in the first half as a proportion of the year, and sort of related to that perhaps, more muted price assumptions, which is, you know, very understandable. So just within the core sales guide, what is the price tailwind versus last year? So, you know, first questions first. I mean, typically, you know, from an EBITDA perspective, you know, from a sales perspective, we're a little bit more front-end loaded. It tends to be kind of $51.49 from a seasonality perspective, first half versus second half, and then EBITDA is more $50.50, historically speaking.
Look at the seasonality. So you got some commentary on slide 10 about half and so on so I just wondered any sense of kind of how much of the EBIT dollar or the earnings we should expect in the first half as a proportion of the year.
And sort of related to that perhaps.
I think you had mentioned.
More muted price assumptions, which is very understandable. So just within the core sales guide what is the price tailwind versus last year.
Yeah. So first question first I mean, typically from an EBITDA perspective.
From a sales perspective, we're a little bit more front end loaded it tends to be kind of $51 49 from a from a seasonality perspective first half versus second half and then EBITDA.
Jeff Hammond: Those numbers kind of hold in terms of the comparison. I mean, we think from a sales perspective, it's going to be more of a $50.50 split, so a little bit more back-end loaded because we do expect things to get progressively better throughout the year. And then from an EBITDA perspective, maybe kind of a $49.51 split, which follows kind of the $50.50 split that I just talked about on the sales side. So not meaningfully divergent from what we see historically, but there is a little bit of a follow-on pattern where we're going to see a little bit more sales in the second half than we would normally expect to see from a seasonality perspective. From a price perspective, you know, inflation-based pricing is really rolling over as inflation normalizes on materials, and you actually start to see a little bit of deflation on the freight side.
There's more.
50 50.
Historically speaking.
Those numbers kind of hold in terms of the comparison I mean, we think from a from a sales perspective.
Going to be more of a 50 50 split so a little bit more backend loaded because we do expect things to get progressively better throughout the year and then from an EBITDA perspective, maybe kind of a 49 51 split.
Which follows kind of the 50 50.
We just that I've just talked about on the sales side, so not meaningfully not meaningfully diverged from what we see historically, but there is a little bit of a follow on pattern, where we're going to see a little bit more sales in the second half than we would normally expect to see from a seasonality perspective.
From a price perspective.
Look the kind of the inflation based pricing is really rolling over is as inflation normalizes, all materials and you're actually starting to see a little bit of deflation on the freight side.
Jeff Hammond: You know, so we expect, you know, low single-digit pricing as we move through 2024. You know, having said that, a lot of the work that we've done around 8020 is really around value pricing and strategic pricing in terms of our high velocity items versus our low velocity items. And so, you know, we'll continue to look at opportunities to drive, you know, margin improvement by, you know, value pricing, you know, all the different SKUs that we make. Remember, we make hundreds of thousands of SKUs throughout our network, and we still will look at that as a lever to drive margin enhancement as we move through 2024, but it's definitely going to be muted compared to what the last kind of eight to Thanks very much.
So we expect low single digit pricing as we move through 2024, having said that.
A lot of the work that we've done around 80, 20 is really around value pricing and strategic pricing in terms of our high velocity items versus our low velocity items and so we will continue to look at opportunities to drive margin improvement by value pricing.
All of the different Skus that we make remember we make hundreds of thousands of skus.
Throughout our network and we still will look at that as a lever to two.
Margin enhancement as we move through 2024, but it's definitely going to be muted compared to what the last kind of eight to 10 quarters ago.
Thanks, very much and then just my follow up around the margin year on year.
Jeff Hammond: And then just my follow-up around the margin year on year. So you've got I think it's up, you know, 60 bps at the midpoint in the first quarter up, I think similar-ish for the year as a whole in your guidance, uh... so just wondering if you get that better volume leverage through the year as the destocking fades and so forth, you know, why wouldn't we see the margin? Expansion accelerates or increases as you go through the year as well.
So I think it's up 60 bps at the midpoint in first quarter I think similar ish for the year as a whole in your guidance.
So just wondering if you get that better.
Volume leverage through the year most of the Destocking phase and so forth.
We see the margin.
Expansion accelerate.
Increase as you go through the year as well.
Jeff Hammond: Well, you know, look, we've taken a pragmatic view of volumes for 2024, right? And we've seen, you know, as we've talked about, volumes decline in the back half of the year. We've got these different models that kind of tell us what we think is going to happen in terms of volumes. And, and so we've taken a pragmatic view of that. Look, if volumes accelerate, if things get better, you know, we expect to be able to stack that margin fall through on top of the enterprise initiatives, right? The enterprise initiatives we're working on are largely, you know, volume agnostic.
Alright, well ill look we've taken a pragmatic view of volumes for.
For 2024, right I mean, we've seen.
As we've talked about the volumes decline in the back half of the year. We've got these different models.
Tell us what we think is going to happen in terms of volumes and.
And so we've taken a pragmatic view of that look if if volumes accelerate if things get better we expect to be able to stack that that margin fall through on top of the enterprise initiatives throughout the enterprise initiatives. We're working on are largely volume agnostic. So we feel pretty good about that.
Jeff Hammond: So we feel pretty good about that. And so, you know, the business will inflect, you know, and it will drive additional gross margin, additional profitability as volume comes back. Your next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open. Thank you. Good morning, everyone. Good morning, Dane.
And so.
<unk>.
The business will inflect.
We will drive additional gross margin additional profitability as volume comes back.
Your next question comes from the line of DN Dray with RBC capital markets. Your line is open.
Thank you and good morning, everyone.
Good morning.
Deane Dray: Hey, maybe we can start with China. You know, this quarter, there's been such a mixed range of performance in the country. Everyone seems to want to paint it with the same brush, but it really depends on what end markets you're exposed to. And as long as it's not real estate, you all have definitely shown the best sequential improvement in China. And to kind of take us through that, what did you see?
Hey, maybe we can start with China.
This quarter there has been such a mixed range of performance in the country, everyone seems to want to paint it with the same brush, but it really depends on what end markets you're exposed to.
And as long as it's not real estate, but you.
You all have definitely shown the best sequential improvement in China and.
So kind of take us through that what did you see.
Ivo Jurek: It was still down modestly, but just some color there on how you think it plays out over the near. Yeah, thank you, Dean. Look, you know, we've, we're pretty well connected in China. We have a great business in China, and we like our business in China. And we're optimistic about it for the long term. We, you know, we have, you know, we have seen a gradual recovery in 23. And we certainly are not forecasting that it's gonna go from a gradual recovery to boom times.
It was still down modestly, but just some color there on how you think it plays out over the near term.
Yes, Thank you Dan look.
We are pretty well connected in China, we have a great business in China, and we like our business in China, and we are optimistic about it for the long term.
We we have.
We have seen a gradual recovery in 'twenty three and we certainly are not forecasting that it's going to go from a gradual recovery as to boom times. So we are quite.
Ivo Jurek: So we're quite sober about what we anticipate is going to happen there, and I think that the continuation of the gradual improvement is probably right. The car business is doing really well, whether or not it is OE or auto replacement or auto replacement franchise, it is terrific in China and continues to deliver really nice growth rates for us, even, you know, even with the challenges that you have seen that we still, you know, deliver kind of a mid single-digit growth in, in Q4 and for the year. So that remains quite robust. We are starting to see steady recovery on the highway, which has been very much challenged in since 23.
Sober about what we anticipate is going to happen there and I think that the continuation of the gradual improvement is is probably right.
Auto is doing really well there.
It is OE auto replacement auto replacement franchises terrific in China and continues to deliver really nice grew.
The growth rate for us Stephen even with the challenges that you have seen that we still delivered kind of mid single digit growth in in Q4 and for the year. So that remains quite robust we are starting to see.
Steady recovery in on highway, which has been very much challenged in 'twenty three construction equipment is stabilizing after two really terrible years.
Ivo Jurek: Construction equipment is stabilizing after two really terrible years of excavator output in China, and, you know, diversified industrially stabilizing. So again, some puts and takes, you know, the auto industry doing well, and, you know, we anticipate that we're going to continue to see a slow and steady performance out of our team in China, which is a great thing. Yeah, that's great to see.
Sure.
Sure.
Excavator output in China.
And diversified industrial is stabilizing so again, some puts and takes are doing well and we anticipate it.
We're going to continue to see a.
Slow and steady performance out of our team in China, which is a great fee.
Yes, that's great to see and then second question just it's a broader question regarding capex and you've demonstrated the ability consistent really.
Ivo Jurek: And then the second question, just it's a broader question regarding CapEx. And you've demonstrated the ability to consistently generate strong free cash flow, you've done the debt paydown. And you're making some more CapEx investments here. And I know you're going to talk more about it at analyst day, but just broadly at a high level, this enterprise footprint optimization project, just as you just kind of share with us some of the key input. When you look at where and how you may deploy resources for these facilities, you know, is there an IRR analysis for each project?
Strong free cash flow you've done the debt pay down.
And you're making some more capex investments here and I know youre going to talk more about it at the analyst day, but just broadly.
At a high level. This enterprise footprint optimization project, just as you just kind of share with us some of the key inputs. When you look at where and how you may deploy our resources for these facilities.
Is there an IRR analysis on each project what are kind of the inputs that you have and the assumptions that youre, making again I know you're going to it's going to be more detail at the analyst day, but just broadly if you could share some of that thinking here. This morning.
Ivo Jurek: What are the kinds of inputs that you have and the assumptions that you're making? Again, I know there will be more detail at the analyst day, but just broadly, if you could share some of that thinking here this morning. Yeah, absolutely.
Ivo Jurek: Look, you know, our guidance for 2020 for CAPEX is still very much within the framework of what we guide for the long term, which is two to 3% of revenue. So, you know, we're not anticipating that we're going to be breaking through the ceiling of our investments. We are very much focused on ensuring that while we are investing in NPI and our material science, we're also investing in manufacturing, process engineering, and equipment that gives us the biggest opportunity to leverage driving productivity forward. So, as you said, IRRs are obviously very important on any project that we do. And generally speaking, these IRRs are in excess of 30%. So those are really good projects.
Yes, absolutely.
Our guidance for our 2020 for Capex is still very much within the frame of what we.
What what we guide for the long term, which is 2% to 3% of revenue. So we are we're not anti.
Anticipating that we're going to be breaking through the ceiling.
<unk> of our investments.
We are very much focused on ensuring that.
While we are investing in NPI and our material science. We are also investing in.
Manufacturing process engineering and equipment that gives us the biggest opportunity to leverage driving productivity forward. So as you said irr's, obviously, a very important on any project that we do and generally speaking these irr's are in excess of.
Of 30%. So those are really good projects that when we talk about optimization of footprint that I have highlighted in the prepared remarks is that.
Ivo Jurek: Now, when we talk about the optimization of the footprint that I have highlighted in the prepared remarks, well, there's that, you know, great set of opportunities that we have ahead of us in India. We are very bullish on what is happening in India, the infrastructure builds that are happening there, and the demand that we see for heavy duty equipment, which is very positive. And so we believe that in the midterm, we want to be ready to ensure that we capitalize on the India opportunity, just like we have done in China. You know, Brazil, in a similar vein, has a very unique set of operating dynamics, you get high tariffs, and the opportunities that we see there are quite robust, and we feel that being close to our customers with local manufacturing is the right thing to do. So those are kind of maybe a couple projects that we've highlighted out there.
Great set of opportunities that we have ahead of us in India.
Very bullish on what is happening in India.
The infrastructure build outs that are happening in there and the demand that we see for heavy duty equipment, which is very positive and so we believe that over the midterm, we want to be ready to ensure that we capitalize on the India opportunity just like we have done in China.
Brazil and similar.
In similar vein.
It has very unique set of operating dynamics, you've got high tariffs and the opportunities that we see there are quite robust and we feel that being close proximity to our customers who had local.
Factoring is the right thing is the right thing to dose those are kind of maybe a couple of projects that Dave highlighted out there, but I would say more broadly we want to be very pragmatic about making sure that we stay contemporary with our manufacturing processes and we can leverage the NPI and then ultimately position ourselves.
Ivo Jurek: But I would say more broadly that we want to be very pragmatic about making sure that we stay contemporary with our manufacturing processes, and we can leverage the NPI and then ultimately position ourselves in a situation where we can accelerate our organic growth, which, as you know, has not been insignificant. We have delivered organic growth very much in line with the high multiple premium industrial peer set.
<unk>.
Situations, where we can accelerate our organic growth, which as you know has not been insignificant we have delivered organic growth very much in line with the high multiple premium industrial peer set.
Jeff Hammond: And the one thing I'll add to that, if you remember, I've said this multiple times before, even as we're working on some of these enterprise initiatives and these bigger footprint optimization projects, they still fall well within the 2% to 3% guidance that we give on CapEx every year. So, we don't feel the need to ramp up CapEx to an abnormal level in any given year. We can handle all these investments and all these enterprise initiatives well within the framework of what our capital spending is on a year-on-year basis. Your next question comes from Andy Kaplowitz with Citigroup. Your line is open. Hey, good morning, everyone.
The one thing I'll add to that is if you remember I've said this multiple times before.
Even as we're working on some of these enterprise initiatives in these bigger footprint optimization projects, they still fall well within the 2% to 3% guidance that we gave on Capex every year. So we don't feel the need to ramp up capex too.
And abnormal level in any given year, we can handle all of these investments in all of these enterprise.
Enterprise initiatives well within the framework work of what our capital spending is in a euro year on year basis.
Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.
Hey, good morning, everyone.
Good morning, joining me.
Andrew Kaplowitz: Morning. You or Brooks, I just wanted to flush out the enterprise initiatives a little bit more in terms of how they ramp up in 24. They're kind of linear.
Brooks I just wanted to flush out the enterprise initiatives, a little bit more in terms of how they ramp up in 2000 and for the kind of linear and then you know you. Obviously just talked about factory optimization, you've talked about 80, 20 and productivity is it kind of equally split and when we look at that seven.
Jeff Hammond: And then you know, you've obviously just talked about factory optimization, you've talked about 8020 and productivity. Is it kind of equally split when we look at that seven cents? And do you have even more of an impact as you go into 25? Yeah, so, yeah, so let me be a little bit careful here and, you know, because there's a lot of moving parts here. First of all, in 2024, I think our enterprise initiatives will definitely lean more toward the material cost side than some of the more factory productivity side. And we'll be working through the footprint optimizations, and I think those are definitely more 25, 26, you know, type things. And so we definitely lean more towards the material saving side. The, the, factory productivity in a down volume environment is tough, right? I mean, it's a tough nut to crack.
Do you have even more of an impact as you go into 'twenty five for instance in 'twenty four.
Yeah. So so yes, so let me I want to be.
A little bit careful here because.
So theres a lot of moving parts here.
First of all.
In 2024, I think our enterprise initiatives will definitely lean more towards the material cost outside than some of the.
More factory productivity side, and we'll be working through the footprint optimizations and I think those are definitely more 'twenty five 'twenty six.
Type things and so we definitely leaned more towards the materials saving side.
The factory productivity in a down volume environment is tough right I mean, it's a tough nut to crack we're going to get some but as volume comes back that's when the factory productivity will really start to stack up and then the 80 20 work, we're going to do in terms of strategic pricing and in terms of going out.
Jeff Hammond: We're going to get some, but as volume comes back, that's when the factory productivity will really start to stack up. And then the 8020 work we're going to do in terms of strategic pricing and in terms of, you know, going out and driving better value demand from our end customers is going to be a big driver as well. So, I would say, you know, kind of the summary, the summary of that is definitely more weighted toward material costs in 2024 on the enterprise initiative side.
And driving better value demand.
From our end customers.
It is going to be a big driver as well so I would say kind of the summary, the summary of that is definitely more weighted toward material costs in 2024 on the enterprise initiatives.
Jeff Hammond: And in 25, you know, you should start seeing some benefits from some of the footprint optimization that we'll be talking more about. Obviously, you know, we again, as Brooke said, have lots of moving pieces on the footprint optimization, notification of employees, and so on, so forth. But we have, you know, a number of terrific projects that, you know, that are quite, that we are quite bullish about. And, you know, we anticipate that 25 should be a beneficiary of the restructuring there. Very helpful guys.
And then 25, you should start seeing some benefits from some of the footprint optimization that we will be talking more about obviously.
Again as Brook said lots of moving pieces on the footprint optimization notification of employees and so on so forth.
Number of.
Terrific projects.
There'll be a quiet.
We are quite bullish about in.
We anticipate that 25 should be a beneficiary of.
Half the restructuring there.
Very helpful guys, and then I just wanted to go back to the seasonality question again.
Like if I look at historically Q1 is almost always up decently sequentially versus Q4.
Andrew Kaplowitz: And then I just want to go back to the seasonality question again, because, like, if I look at history, Q1 is almost always up decently sequentially versus Q4. You know, at the midpoint, you guys have a kind of flattish, I think, you know, global auto production is supposed to be down in Q1 versus Q4. But you guys, as you know, are not big in first for that anymore. Is there anything else sort of going on?
At the midpoint you guys you guys have a kind of flattish I think global auto production is supposed to be down in Q1 versus Q4, but you guys are as you know are not taken first fit anymore is there anything else going on or is it just sort of this pragmatic view around destocking in Q1 and are you already mentioned that keeps you where your guidance is for Q1.
Yeah, well I mean, I think there's a there's a nuance here as you move from Q4 to Q1, we have a we're taking a pragmatic view on volume. So we have volumes down and thats, partially offset by FX, because FX is a little bit of a tailwind as we move from Q4 to Q1, and so it's really more of a pragmatic.
Jeff Hammond: Or is it just sort of this pragmatic view around destocking Q1, you know, that you already mentioned, that keeps you where you're going? Yeah, well, I mean, I think there's a nuance here, as you move from Q4 to Q1, we have a, you know, we're taking a pragmatic view on volume. So we have volumes down.
A view based on how we think.
The demand environment is going to play out through the first half of 2024.
So that's that's really the best visibility we have right now.
Terms of what's going to go on with demand.
Yes, and Andy I would also probably.
Jeff Hammond: And that's partially offset by FX, because FX is a little bit of a tailwind as we move from Q4 to Q1. And so it's really more of a pragmatic view based on how we think the, you know, the demand environment is going to play out through the first half of 2024. And so that's, you know, that's really the best visibility we have right now in terms of what's going to go on with demand. Yeah, and Andy, I would also, you know, probably suggest that people start thinking about it as soon as the operations have recovered and normalized.
Suggest that people start thinking about as the operations have.
To recover to normalized and again as I said on the call on the prepared prepared remarks, we are pretty much back to pre COVID-19 level of operational.
<unk>.
Our customers are taking advantage of the fact that we are much more predictable in how we are fulfill demand our lead times have been normalizing and.
We want to ensure that our service service levels remain high and.
And that just gives everybody an opportunity to really just order more in line with what the underlying demand is and thats kind of how you should think about it.
Your next question Sorry. Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.
Ivo Jurek: And again, as I said on the call, in the prepared remarks, we are pretty much back to the pre-COVID level of operational cadence. You know, customers are taking advantage of the fact that we are much more predictable and how we fulfill demand. Lead times have been, you know, normalizing.
Yes, hi, good morning, everyone.
Good morning.
If you could just talk about a little bit more on the capital deployment plan for this year.
Obviously your stock buyback over $100 million isn't that works, but can you expand on that because you're set to generate pretty significant free cash flow and with EBITDA growing leverage just naturally coming down.
Ivo Jurek: And, you know, we want to ensure that our service levels remain high. And that, you know, that just gives everybody an opportunity to really just order more in line with what the underlying demand is. And that's kind of how you should think about it. Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open. Yes, hi. Good morning, everyone.
Would love to hear more Brooks, if you don't mind.
Yes, so look we.
As you just said.
I'll take the words out of your mouth, but you just said we generate substantial free cash flow.
Our year end and year out right and so.
Jerry Revich: I'm wondering if you could just talk about a little bit more on the capital deployment plan for this year, you know, obviously, a stock buyback of 100 million is in the works, but can you expand on that? www.thevenusproject.com. Yeah, so look, we, as you just said, I'll take the words out of your mouth, as you just said, we generate substantial free cash flow, year in and year out, right And so, you know, we are going to continue to pull the levers that move us toward our medium-term goal of one and a half times leverage, which means we're going to continue to pay down debt.
Sure.
We are going to continue to.
Pull the levers that move us toward our medium term goal of one five times Levered right, which means we're going to continue to pay down debt and that's that's going to be our primary vector for capital deployment here in the short to medium term, having said that because we generate a substantial amount of cash flow, we want to make sure that we have all out.
The news open to us in terms of deploying capital to reward our shareholders and so we took out the.
The stock repurchase authorization for $100 million.
And we'll use that also as a vector to help reward shareholders here.
Jeff Hammond: And that's, that's going to be our primary vector for capital deployment, you know, here in the short to medium term. You know, having said that, you know, because we generate a substantial amount of cash flow, we want to make sure that we have, you know, all avenues open to us in terms of deploying capital to reward our shareholders. And so, you know, we took out the shut the stock repurchase authorization for 100 million.
Through the short and medium term, but I would say, we're still we're still primarily focused on debt reduction debt reduction profitability improvement as a way to improve to get to our medium term leverage target of one five turns but we want to make sure that we have.
All avenues available to us.
In terms of capital deployment.
Okay, and Brooks I Didnt hear you mentioned M&A within that context, how attractive is it today versus the bolt on M&A as we saw you folks do in the last cycle.
Jeff Hammond: And, you know, we'll use that also as a vector to help reward shareholders through the short and medium term, but I would say we're still primarily focused on debt reduction, debt reduction, and profitability improvement as a way to improve to get to our medium-term leverage target of one and a half turns. But we want to make sure that we have, you know, all avenues available to us in terms of capital deployment. And Brooks, I didn't hear you mention M&A within that context. How attractive is it today versus, you know, the bolt-on M&As we saw?
Yeah look I mean, we always look at opportunities, but we.
We feel that presently kind of in 2023, we've made some commitments about getting our balance sheet to be very much in line with what our premium industrial peer group looks like there are significant benefits in lower interest expense and.
That can generate more free cash flow in our stock is selling expensive that we believe that that's the best way of deployed capital and so those would be the two levers in the short term and I think that.
Ivo Jurek: http://TheBusinessProfessor.com Yeah, look, I mean, you know, we always look at opportunities, but we feel that presently, kind of in 2023, we've made some commitments about getting our balance sheet to be very much in line with what our premium industrial peer group looks like. There are significant benefits to a lower interest expense. And that can, you know, generate more free cash flow. And, you know, our stock is so inexpensive that we believe that that's the best way of deploying capital. And so those would be the two levers in the short term.
None of that should be surprising to what would.
Would we have signal and communicated to the markets over the last kind of 12 months, we will stay true to that and some great opportunities.
And we feel that.
We would be able to generate very substantial return some.
Going out to the market and doing some M&A.
We generate enough cash to be able to do that and our leverage is coming down pretty dramatically as we said we had.
In a very good shape to be able to now start thinking about all three of these avenues.
Potential capital deployment, right and I would say to that as we.
<unk> solid debt Paydown as our primary.
Jeff Hammond: And I think that, you know, none of that should be surprising to what we have signaled and communicated to the markets over the last kind of 12 months. So we'll stay true to that. And, you know, some great opportunities appear, and we feel that we would be able to generate very substantial returns by going out to the markets and doing some M&A. You know, we generate enough cash to be able to do that. And our leverage is coming down pretty dramatically, as we said. So we're in very good shape to be able to now start thinking about all three of these avenues of potential capital deployment. Right?
Lever to get to one five turns that also leaves us maximum flexibility in terms of dry gunpowder to do whatever.
To deploy capital in whatever way is going to best reward our shareholders.
Your next question comes from the line of David Raso with Evercore ISI. Your line is open.
Hi, Thank you very much I'm, sorry, if I missed this but I'm still trying to make sure I understand the cadence of the organic sales year over year.
So the down one for the year is that.
If I could sort of maybe play this out it looks like its a down five in the first quarter second quarter. The idea of you know down three in the back half of the year is up to I'm, just trying to get a sense of the cadence.
David Michael Raso: And I would say, too, that as we focus on debt paydown as our primary lever to get to one and a half turns, that also leaves us maximum flexibility in terms of dry gunpowder to do whatever, you know, to deploy capital in whatever way is going to best reward our shareholders. Your next question comes from David Raso with Evercore ISI. Your line is open. Hi, thank you very much. Sorry if I missed this, but I'll, I'm not sure I understand, www.larryweaver.com. So the down one for the year is that...
For my first question.
Yes, so look.
We're not going to we're not forecasting the second call second quarter quite yet.
I would say if you look at we expect there to be a progression of things getting better throughout the year.
So you know.
We've given our first quarter guidance second quarter does it come and minus three minus two.
It remains to be seen how quickly things in flat, we think we've taken a pragmatic view from a volume perspective.
And so if things get better faster that's good for us margins margins will improve faster and things will get better, but we think we've taken a pragmatic view in and we will continue to update as we as we move through the year.
Jeff Hammond: So it looks like it's a down five. This quarter is the second quarter, and the idea of, you know, down, and the back half of the year is up too. I'm just trying to get, Yeah, so look, you know, we're not going to, we're not forecasting the second quarter quite yet. But I would say, you know, if you look at it, we expect there to be a progression of things getting better through, you know, throughout the year. And so, you know, we've given our first quarter guidance, you know, second quarter, does it come in minus three, minus two, you know, you know, it remains to be seen how quickly things inflect. We think we've taken a pragmatic view from a volume perspective.
But to be clear, though the second half of the year do you expect the return to growth to be in the third or fourth quarter, because I'm thinking about the personal mobility comment earlier that that destock continues beyond the first half. So I'm just trying to level set when do we think we return to growth and then the follow up if you can give us some sense between.
The business segments.
Which one do you think it will be kind of above the company got in which one blows just trying to get a sense of perspective on the business segments and the cadence.
Yes, David we anticipate modest growth in the second half.
As we have outlined in our prepared remarks, I mean, its natural taking into an account.
Where we are guiding Q1.
And I'll leave it at that and I did state that we anticipated a personal mobility should start recovering in the second half of the year after about.
Jeff Hammond: And so, you know, if things get better faster, that's good for us. Margin, you know, will improve faster, and things will get better. But we think we've taken a pragmatic view and will continue to update it as we move through the year. But to be clear, though, the second half, www.globalonenessproject.org growth, I'm thinking about the personal mobility comment earlier that that D-stock..., www.larryweaver.com Charlie Lovell said, and then the follow-up, if you can give us some sense, above the company guy to which one below it's just trying, Yeah, David, we anticipate modest growth in the second half. As we have outlined in our prepared remarks, I mean, it's natural taking into account where we are guiding Q1, and I'll, you know, I'll leave it at that. And I did state that we anticipate that personal mobility should start recovering in the second half of the year after about four or five quarters of rather significant inventory of the stock.
Four or five quarters saw rather significant inventory destock.
So.
That's really where I would probably leave it with you and we've provided you with a framework.
And market performance and that's probably.
Good amount of style.
Outlines that should give you an ability to take a look and develop your model.
Your next question comes from the line of Jeff Hammond with Keybanc. Your line is open.
Hey, good morning, everyone.
Good morning, Joe.
Hey.
EMEA was one of your better growth markets. It seems like there's maybe some broadening weakness there just speak to how youre thinking about Europe into end of 'twenty four.
Yeah, So Europe.
The anticipation Jeff is that AG is going to continue remained weak is this.
Construction end market.
Either remains kind of flattish to plus <unk>.
LSD.
Diversified industrial still reasonably negative core growth.
Jeff Hammond: So, you know, that's really where I would probably leave it with you, and we've provided you with a framework for the end market performance, and that's probably, you know, a good amount of outline that should give you an ability to take a look and develop your model. Your next question comes from the line of Jeff Hammond with KeyBank. Your line is open. Hey, good morning, everyone. Good morning.
And all of the news flow from places like Germany, and Italy is not necessarily terrific.
Who am I to predict that it's going to get dramatically better short term. So we anticipated that is going to remain.
What we can maybe as the second half progressive start getting less bad.
And on highway we anticipate it's going to be down versus 23, So Europe.
Jeff Hammond: Hey, EMEA was one of your better growth markets. Seems like, you know, there's maybe some broadening weakness there. Just speak to how you're thinking about Europe into into 24.
Zhang is dealing with more fundamental slowdown than perhaps any other region that.
Ivo Jurek: Yeah, so Europe, the anticipation, Jeff, is that ag is going to continue to remain weak as this construction and market either remains kind of flattish to plus LSD, diversified industrial still, you know, reasonably negative core growth. And, you know, all the news flow from places like Germany and Italy is not necessarily terrific.
That we participate in.
Okay, and then I would say supercomputing saw some of your hoses on some some liquid cooling applications.
Certainly an area of.
Strengthening conversation just wondering if you can speak to that opportunity I'm not sure. If it's a rounding error if something we should get excited about thanks.
So if I get excited about every opportunity and you're sitting in my chair every opportunity that is a great opportunity.
Ivo Jurek: So who am I to predict that it's going to get dramatically better in the short term? So we anticipated that it's going to remain somewhat weak and maybe as the second half progresses start getting less bad. And on highway, we anticipate it is going to be down versus 23.
But.
We will speak actually a little bit more about the hyper.
Hyperscale data centers center liquid cooling and dose we actually have a couple of really interesting technologies that I will share more about.
Both on the electric water pumps side.
That helps to provide.
Ivo Jurek: So Europe, I think is dealing with a more fundamental slowdown than perhaps any other region that we participate in. Okay, and then I was at Supercompute and saw some of your hoses on some liquid cooling applications and certainly an area of, you know, strength in conversation. Just wondering if you can speak to that opportunity. I'm not sure if it's a rounding error or if it's something we should get excited about. Thanks
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Cooling and on leak free applications.
Sure.
For conveyance of the of the fluids that caused these data centers.
Yes, we actually excited about it.
I'm not prepared to size the opportunity for you at this point in time, it's early stages, but.
We are excited that we have.
Ivo Jurek: Jeff, I get excited about every opportunity. When you sit in my chair, every opportunity is a great opportunity. But, you know, we will speak a little bit more about the hyperscale of data centers and the liquid cooling in those. We actually have a couple of really interesting technologies that I will share more about, both on the electric water pump side that helps to provide efficient cooling and on leak-free applications for the conveyance of the fluid that cools these data centers.
We have lots of the actually have lots of really interesting technologies that are being adopted and what I kind of termed the new the new economy. So from Hyperscale to broad based electrification and industrial automation, So we'll share more.
On.
On March 11th in New York.
Your next question comes from the line of Mike Halloran with Baird. Your line is open.
Good morning, everyone a.
Couple of questions here.
Ivo Jurek: So, yeah, we're actually excited about it. You know, I'm not prepared to size the opportunity for you at this point in time. It's early stages, but, you know, we are excited that we have lots of really interesting technologies that are being applied in what I kind of termed the new economy. So from hyperscale to broad-based electrification and industrial automation.
First on the <unk>.
Just on the guide one last time here I look at this the normal sequential <unk> and it kind of gets you to the middle part of the range normal sequential doesn't necessarily imply anything better from here from an end market perspective. So.
You commented on gradual improvement in the back half of the year I'm just kind of curious what that means from your perspective, and if that's even really required at the midpoint of the range versus just kind of floated along at current levels.
Yes, Jeff I think that.
Say that certainly the back half of the year.
Ivo Jurek: So we'll share more on March 11th in New York. Your next question comes from the line of Mike Halloran with Baird. Your line is open. Good morning, everyone.
Significantly easier comps as well right. So that's going to be part of it to be to be quite.
Mike P. Halloran: A couple questions here, first on the guide. Just on the guide one last time here, I look at this normal sequentials, and it kind of gets you to the middle part of the range. However, normal sequentials doesn't necessarily imply anything better from here from an end market perspective. You've commented on gradual improvement in the back half of the year. I'm just kind of curious what that means from your perspective and if that's even really required to hit the midpoint of the range versus just kind of floating along it currently.
Quite Frank.
And we.
We kind of feel that.
Q1 is frankly continuation of what we have seen in Q4.
In terms of the demand dynamics.
And then just.
Steady steady normalization.
Of demand as.
Inventories have normalized.
The underlying purchases are very much aligned to the underlying demand for the products and the applications that we service is really it doesn't.
Ivo Jurek: Yeah, Jeff, I think that, you know, I would say that certainly the back half of the year has significantly easier comps as well, right? So that's going to be part of it to be quite, you know, quite frank. And, you know, we kind of feel that, you know, Q1 is frankly a continuation of what we saw in Q4 in terms of the demand dynamics. And then, you know, just, you know, steady, you know, steady normalization of demand as inventories have normalized as the, you know, underlying purchases are very much aligned to the underlying demand for the products in the applications that we service. So it really doesn't, you know, again, we've been very pragmatic, but we don't believe that, you know, we require any significant improvement in the end markets to be able to deliver the guidance.
Again, we're being very pragmatic, but we don't believe that.
We require any significant improvement in the end markets too.
To be able to deliver the guidance and again its an early guidance. That's why we are quite forefront for right about.
Making sure that we have put a pragmatic view of what we believed the world's economy is going to do.
And then on the M&A side of things.
How developed is that pipeline at this point you've been out of the market forbid focused on other areas of capital usage and certainly understand your comments about how we would expense of your stock is and that makes it a priority.
But if the opportunity comes up.
Ivo Jurek: And again, it's early guidance. That's why, you know, we are quite forefront and for right about making sure that we have put forward a pragmatic view of what we believe the world's economy is going to do. And then on the M&A side of things, how developed is that pipeline at this point? You know, you've been out of the market for a bit focused on other areas of capital usage. I certainly understand your comments about how expensive your stock is, and that makes it a priority. But if the opportunity comes up, you know how invested or how committed we are to be able to identify and go after some of those areas. Yeah, look, we, you know, because we don't necessarily talk about it front and center, doesn't mean that we, you know, we don't develop a strong pipeline; we're a good pipeline of opportunities. But again, you know, the issue is that our stock is so undervalued. And, you know, we just believe that that is just, it's just tough to compete with generating strong returns on deploying that capital.
How invested or how you're in the market are you on the M&A side to be able to identify and go after some of those areas.
Yeah look.
Because we've done necessarily talk about it.
Front and center doesn't mean that we don't develop strong pipeline very good pipeline of opportunities, but again.
The issue is that our stock is undervalued and we just believe that that is just it's just tough to compete with generating strong returns on deploying that capital and we believe that it's in the best interest of our shareholders to go further reduce our debt.
And.
Opportunistically deploy capital to share buybacks, and that's going to put the company in the strongest and very full.
Forward leaning footings as the time move for silver next kind of 456 quarters youre going to be in a situation, where you can start thinking about.
Ivo Jurek: And we believe that it's in the best interest of our shareholders to go further reduce our debt and, you know, opportunistically deploy capital through share buybacks. And that's going to put the company on the strongest and very forward leaning footings as time moves forward. So the next, you know, kind of four or five, six quarters, you're going to be in a situation where you can start thinking about maybe better, bigger deals, if that's what you ultimately want to do, you know, getting the stock and valuation normalized because, again, I certainly feel that the stock is quite undervalued.
Maybe better bigger deals if thats, what you ultimately want to do.
Getting the stock and valuation normalized because again.
I certainly feel that the stock is quite undervalued and we've got to we've got to do everything that we can too.
To take advantage of that.
There are no further questions at this time I will turn the call to rich <unk> for closing remarks.
Thank you everyone for participating today, if you have any follow up questions. Please feel free to contact me, thanks and have a great day.
This concludes today's conference call. We thank you for joining you may now disconnect your lines.
Okay.
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Jeff Hammond: And, you know, we've got to do everything that we can to take advantage of, There are no further questions at this time. I will turn the call over to Rich Kwas for closing remarks. Thank you everyone for participating today. If you have any follow-up questions, please feel free to contact me. Thanks, and have a great day. This concludes today's conference call. We thank you for joining. You may now disconnect your line.
Yes.
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Okay.
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Yes.