Q1 2024 Gates Industrial Corp PLC Earnings Call
[music].
Thank you for standing by and welcome to the Gates Industrial Corporation first quarter 'twenty 'twenty four earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to add.
A question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star. One again. Thank you I would now like to turn the call over to Rich Quass. Please go ahead.
Okay.
Speaker Change: Sorry, it seems that they were having some technical difficulty.
Richard Michael Kwas: At this time please remain on the line, while we address the situation. Your line will be placed on music hold until the collar, we see them. Thank you.
Speaker Change: [music].
Operator: Thank you for standing by, and welcome to the Gates Industrial Corporation first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
Richard Michael Kwas: Thank you for standing by and welcome to the Gates Industrial Corporation first quarter 'twenty 'twenty four earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number.
Speaker Change: One on your telephone keypad, if he would like to withdraw your question Press Star. One again. Thank you I would now like to turn the call over to rich quash. Please go ahead.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Rich Kwas. Please go ahead. Sorry, it seems that we're having some technical difficulties at this time.
Richard Michael Kwas: Good morning, and thank you for joining us on our first quarter 2024 earnings call.
Operator: Please remain on the line while we address the situation. Your line will be placed on music hold until the call resumes. Thank you. Thank you for standing by, and welcome to the Gates Industrial Corporation first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
Richard Michael Kwas: I'll briefly cover our non-GAAP and forward looking language before passing the call over to our CEO Evo Europe.
Richard Michael Kwas: It will be followed by Brooks Mallard our CFO.
Speaker Change: Before the market opened today, we published our first quarter 2024 results.
Richard Michael Kwas: A copy of the release is available on our website at investors <unk> com.
Speaker Change: Our call. This morning is being webcast and accompanied by a slide presentation.
Speaker Change: On this call we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.
Speaker Change: Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation.
Speaker Change: Each of which is available in the Investor Relations section of our website.
Speaker Change: Please refer to <unk> now to slide two of the presentation.
Speaker Change: Which provides a reminder that our remarks will include forward looking statements.
Speaker Change: Within the meaning of the private Securities Litigation Reform Act. These forward looking statements are subject to risks.
Speaker Change: That could cause actual results to be materially different from those expressed in or implied by such forward looking statements.
Speaker Change: These risks include among others matters that we have described in our most recent annual report on Form 10-K.
Speaker Change: In other filings, we make with the S. E T. We disclaim any obligation to update those forward looking statements.
Speaker Change: Later this month, we will be attending the Wolf Global transportation and Industrials conference and the Keybanc Industrials and basic materials conference. We look forward to meeting with many of you.
Speaker Change: Before we start please.
Speaker Change: Please note.
Speaker Change: All comparisons are against the prior year period unless stated otherwise.
Speaker Change: With that out of the way.
Evo Europe: I'll now turn the call over to Evo Evo.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Rich Kwas. Please go ahead.
Evo: Thank you rich.
Evo: Good morning, everyone and thank you for joining our call today.
Richard Michael Kwas: Good morning, and thank you for joining us on our first quarter 2024 earnings call. 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 Mallard, our CFO. Before the market opened today, we published our first quarter 2024 results. A copy of the release is available on our website at Investors.gates.com.
Evo: We will kick off today on slide three.
Richard Michael Kwas: Our call this morning is being webcast as an 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 in the slide presentation, each of which is available in the investor relations section of our website. Please refer now to slide 2 of the presentation, which provides a reminder that our remarks will include forward-looking statements, within the meaning of the Private Securities Litigation Reform Act.
Evo Evo: We generated revenues above the midpoint of our February revenue guidance and within the range. We provided at our capital markets day in March.
Richard Michael Kwas: These forward-looking statements are subject to risk, which could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent report on Form 10-K and then other filings we make with the SEC. We disclaim any obligation to update those forward-looking statements.
Evo: Globally automotive continued to outperform industrial end markets.
Richard Michael Kwas: Later this month, we will be attending the Wolf Global Transportation and Industrials Conference and the Key Bank Industrials and Basic Materials Conference. We look forward to meeting with many of you. Before we start, please note all comparisons are against the prior year period, unless stated otherwise. With that out of the way, I'll now turn the call over to Ivo.
Evo: Our global replacement revenues increased slightly with automotive replacement, leading the way by delivering mid single digit growth.
Ivo Jurek: Thank you, Rich. Good morning, everyone.
Evo: Broadly speaking order activity improved as March progressed.
Ivo Jurek: And thank you for joining us on our call today. We'll kick off today on slide three. We generated revenues above the midpoint of our February revenue guidance and within the range we provided at our capital markets day in March. Globally, the automotive industry continues to outperform industrial and market sectors. Our global replacement revenues increased slightly, with automotive replacement leading the way by delivering mid-single-digit growth. Broadly speaking, order activity improved as March progressed, and our book-to-bill ratio finished at a higher level in March as compared to the full quarter. Our order fill rates and the associated service levels to our customers continue to trend up nicely. As we continue to sharpen our operational execution on more efficient pseudo cycle performance,
Evo: Book to Bill ratio finished at a higher level in March as compared to book to Bill for the full quarter.
Evo: Our order fill rates and the associated service levels to our customers continued to trend up nicely as we continue to sharpen our operational execution.
Evo: On more efficient through the cycle performance.
Ivo Jurek: Our operating performance in the quarter was strong and resulted in significant margin expansion. Our adjusted EBITDA margin increased 330 basis points year over year to 22.7%. Gross margin grew 210 basis points compared to the first quarter of 2023, despite encountering a volume decline in the quarter. We are making headway with our enterprise initiatives, particularly in material cost reduction and with 8020. The higher replacement sales made relative to last year also contributed to our gross margin expansion.
Evo: Our operating performance in the quarter was strong and resulted in significant margin expansion.
Evo: Our adjusted EBITDA margin increased 330 basis points year over year to 22, 7%.
Evo: Our gross margin grew 210 basis points compared to the first quarter of 2023, despite encountering as volume declined in the quarter.
Evo: We are making headway with our enterprise initiatives, particularly in material cost reduction and with 80 20.
Evo: The higher replacement sales mix relative to last year also contributed to our gross margin expansion.
Ivo Jurek: In addition, our SG&A spending decreased year-over-year, which included higher-than-expected insurance costs. We made more progress with our balance sheet during the quarter. Our net leverage declined to 2.4 times from 2.7 times in the prior year quarter. We executed on the commitment we made on our year and 2023 earnings call to repay debt, reducing our outstanding term loan balance by $100 million. In addition, we used excess cash to repurchase $50 million of our shares in conjunction with Blackstone's secondary offering in February.
Evo: In addition, our SG&A spending decreased year over year, which included higher than expected insurance proceeds.
Evo: We made more progress with our balance sheet during the quarter.
Evo: Our net leverage declined to two four times from two seven times in the prior year quarter.
Evo: We executed on the commitment we've made on our year end 2023 earnings call to repay debt, reducing our outstanding term loan balance by $100 million.
Evo: In addition, we used excess cash to repurchase $50 million of all shares in conjunction with Blackstone secondary offering in February.
Ivo Jurek: Based on our strong profitability results in Q1, we are increasing our full year adjusted EBITDA guidance. We experienced a good start to the year and believe we are in a solid position to generate strong operating leverage as our industry and markets progressively start to experience an anticipated demand recovery later in the year. Brooks will provide further color on our updated 2024 guidance later in the presentation. Now please turn the slide forward.
Evo: Based on our strong profitability across the both the results in Q1, we are increasing our full year adjusted EBITDA guidance.
Evo: We experienced a good start to the year and believe we are in a solid position to generate strong operating leverage.
Evo: Industrial end markets progressively start to experience anticipated demand recovery later in the year.
Evo: Brooks will provide further color on our updated 2024 guidance later in the presentation.
Brooks Mallard: Now please turn to slide four.
Ivo Jurek: First quarter total revenue was $863 million, which represented a 3.6% decrease on a core basis. The automotive end market grew modestly, driven by mid single-digit growth in replacement. The bulk of our industrial end markets experienced revenue declines on a core basis, driven by the industrial first fifth channel, which was down double digits; core industrial replacement revenues decreased modestly. Our book to bill remained above one in the quarter and expanded in March, led by an improving order cadence.
Brooks Mallard: First quarter total revenue was $863 million, which represented a three 6% decrease on a core basis.
Brooks Mallard: The automotive end market grew modestly driven by mid single digit growth in replacement.
Brooks Mallard: The bulk of our industrial end markets experienced revenue declines on a core basis, driven by the industrial first fit channel, which was down double digits.
Evo: Core industrial replacement revenues decreased modestly.
Evo: Our book to Bill remained about one in the quarter and expanded in March led by an improving cadence.
Ivo Jurek: I will also note that we have seen order intake greater than what we experienced in Q1 of the previous year, which signals to us a stabilizing market with pockets of specific weakness, offsetting more solid performance elsewhere. We are encouraged by this activity.
Evo: I will also note that we have seen order intake greater than what we've experienced in Q1 of prior year, which signals to us the stabilizing market with pockets of specific weakness.
Evo: Setting more solid performance elsewhere.
Evo: We are encouraged by this activity.
Unknown Attendee: Adjusted EBITDA was $196 million and yielded a margin of 22.7%. The EBITDA margin expanded 330 basis points, supported by the key enterprise initiatives, as well as an increased mix of replacement sales compared to the prior year period. Adjusted earnings per share was $0.31. Our operating income grew well over 30% and contributed 10 cents of adjusted EPS, which was partially offset by a higher effective tax rate in this year's quarter, as well as a mix of other items.
Evo: Adjusted EBITDA was $196 million and yielded a margin of 22, 7%.
Evo: EBITDA margin expanded 330 basis points supported by the key enterprise initiatives as well as increased mix of replacement sales compared to the prior year period.
Evo: Adjusted earnings per share was 31 cents.
Evo: Our operating income grew well over 30% and contributed <unk> <unk> of adjusted EPS, which was partially offset by a higher effective tax rate in this year's quarter as well as mix of other items.
Unknown Attendee: On slide five, let's review our segment performance. In the power transmission segment, our revenues came in at $533 million, which represented a 1.7% decrease on a core basis. At the channel level, replacement grew about 2% fueled by automotive replacement, which grew mid-single digit. First speed revenues decreased by high single digits with industrial experiencing a double digit decline and automotive growing slightly, and market performance was mixed with energy on highway construction and automotive realizing low to mid single digit core growth which was offset by declines in personal mobility, diversified industrial, and agriculture.
Evo: On slide five let's review our segment performance.
Evo: In our power transmission segment, our revenues came in at $533 million, which represented a one 7% decrease on a core basis.
Evo: At the channel level.
Evo: Placement grew about 2% fueled by automotive replacement, which grew mid single digits.
Evo: Firstly revenues decreased high single digits with industrial experiencing a double digit decline in automotive growing slightly.
Evo: End market performance was mixed breed energy on highway construction and automotive realizing low to mid single digit core growth, which was offset by declines in personal mobility diversified industrial and agriculture.
Unknown Attendee: Of note, the magnitude of the declines in these end markets began to ease relative to previous quarters, and the diversified industrial end market in North America is showing signs of stability. Our adjusted EBITDA margin increased nicely, benefiting from contributions from our various enterprise initiatives and a higher mix of replacement sales. Our Fluid Power Segment posted revenues of $330 million; revenues fell about 6%, with core revenues posting a just under 7% decrease, partially offset by favorable foreign currency effects of almost 100%.
Evo: Of note the magnitude of the declines in these end markets began to ease relative to previous quarters and the diversified industrial end market in North America is showing signs of stability.
Evo: Our adjusted EBITDA margin increased nicely benefiting from contributions from our various enterprise initiatives and a higher mix of replacement sales.
Evo: Our fluid power segment posted revenues of $330 million revenues fell about 6% with core revenues posting a just under 7% decrease partially offset by favorable foreign currency effects up almost 100 basis points.
Unknown Attendee: Industrial first declined double digits driven by weaker activity in agriculture and construction. Automotive replacement was a bright spot, growing mid to high single digits. Fluid Power Segment Adjusted EBITDA Margins Improved 410 Basis Points Fueled by Stronger Operating Performance that was supported by the ongoing execution of our Enterprise Initiative. I will now turn the call over to Brooks for additional details on our results. Thank you.
Evo: Industrial first fit declined double digits, driven by weaker activity in agriculture and construction.
Evo: Automotive replacement was a bright spot growing mid to high single digits.
Evo: Fluid power segment, adjusted EBITDA margins improved 410 basis points.
Evo: By stronger operating performance that was supported by the ongoing execution of our enterprise initiatives.
Evo: I will now turn the call over to Brooks for additional details on our results.
Evo: <unk>.
Unknown Attendee: Moving now to slide 6 and an overview of our core revenue performance by region. Most of our geographic regions outperform the Enterprise Core Revenue Results. In North America, core sales decreased 3%, driven by a weaker industrial trend. Industrial Channel Core Revenues declined high single digits primarily due to a double digit decrease in 1st Feb. Industrial replacement fell low single digits. Agriculture weakness was the most impactful to our performance, followed by personal mobility, consistent with our expectations. We now anticipate the personal mobility stockpile to abate as we exit Q2 and anticipate steady recovery and revenue generation from the second half of 2024 onward.
Brooks Mallard: Thank you Lisa.
Unknown Attendee: Moving now to slide six and an overview of our core revenue performance by region.
Unknown Attendee: Most of our geographic regions outperformed the enterprise core revenue results.
Unknown Attendee: In North America core sales decreased 3% driven by weaker industrial trends.
Unknown Attendee: Industrial channel core revenues declined high single digits, primarily due to a double digit decrease in first fit.
Unknown Attendee: Industrial is a place that fell low single digits.
Unknown Attendee: Agriculture weakness was the most impactful to our performance followed by personal mobility consistent with our expectations.
Unknown Attendee: We now anticipate the personal mobility destocking to abate as we exit Q2, and anticipate steady recovery in revenue generation from the second half of 2024 onwards.
Unknown Attendee: Additionally, we saw relative stability in diversified industrial, where revenues were about flat with last year. Automotive increased mid-single digits with solid growth in both replacement and first fit. In EMEA, core revenues fell 8% and were most impactful to our overall company core revenue decline. Industrial first split was down double digits, and most of the industrial end markets in the EMEA region realized decreases.
Unknown Attendee: Additionally, we saw relative stability in diversified industrial where revenues were about flat with last year.
Unknown Attendee: Automotive increased mid single digits with solid growth in both replacement and first fit.
Unknown Attendee: In EMEA core revenues fell 8% and was most impactful to our overall company core revenue decline.
Unknown Attendee: Industrial first fit was down double digits and most of the industrial end markets in the EMEA region realized decreases.
Unknown Attendee: Automotive replacement grew modestly and was a partial offset to the weaker industrial trend. China Core revenues grew modestly and benefited from strong demand in the automotive replacement channel, which expanded in the high teens. Automotive first fit was down, while industrial grew slightly within the market performance mix. In general, we observed overall demand showing more stability in China, although our expectations are measured in the near term. East Asia and South America hosted slight declines in core revenues, with automotive outperforming industrial in both regions.
Unknown Attendee: Automotive replacement grew modestly and was a partial offset to the weaker industrial trends.
Unknown Attendee: China core revenues grew modestly and benefited from strong demand in the automotive replacement channel, which expanded in the high teens.
Unknown Attendee: Automotive first fit was down while industrial grew slightly with end market performance mix.
Unknown Attendee: In general we observed overall demand showing more stability in China, although our expectations are measured in the near term.
Unknown Attendee: East Asia, and South America posted slight declines in core revenues with automotive outperforming industrial in both regions.
Unknown Attendee: In general, core growth was largely consistent with our expectations. On slide seven, we show an adjusted earnings per share wall from the prior year quarter. Operating performance contributed approximately $0.10 per share and fueled the growth. However, the operating performance strength was partially offset by a higher than expected tax rate due to the booking of certain discrete tax items in the quarter and a mix of other items. The discrete tax items mostly involve changes and estimates around valuation allowances that we expect largely to be offset by other activity as the year progresses.
Unknown Attendee: In general core growth was largely consistent with our expectations.
Unknown Attendee: On slide seven we show an adjusted earnings per share walk from the prior year quarter.
Unknown Attendee: Operating performance contributed approximately <unk> 10 per share and fueled the growth.
Unknown Attendee: The operating performance strength was partially offset by a higher than expected tax rate due to the booking of certain discrete tax items in the quarter and a mix of other items.
Unknown Attendee: The discrete tax items, mostly involve changes in estimates around valuation allowances that we expect largely to be offset by other activity as the year progresses.
Unknown Attendee: Slide 8 provides an update on our cash flow performance and balance sheet. Our free cash flow for the first quarter was an outflow of $39 million, which result is in line with our normal seasonal performance. Our net leverage ratio declined to 2.4 times, which was 0.3 times lower than the prior year period and reflected a $100 million reduction in our term loan.
Unknown Attendee: Slide eight provides an update on our cash flow performance and balance sheet.
Unknown Attendee: Our free cash flow for the first quarter was an outflow of $39 million.
Unknown Attendee: This result is in line with our normal seasonal performance.
Unknown Attendee: Our net leverage ratio declined to two four times, which was 0.3 times lower than the prior year period and reflected a $100 million reduction in our term loan.
Unknown Attendee: During the first quarter, we received a ratings upgrade from S&P. Additionally, late last week, Moody's bumped our credit rating one notch higher to BA3. Our trailing 12-month return on invested capital increased approximately 300 basis points to 23.1%, with the increase mostly driven by our strengthening profitability. At the end of Q1, we had $50 million remaining under our existing share repurchase authorization.
Unknown Attendee: During the first quarter, we received a ratings upgrade from S&P.
Unknown Attendee: Additionally, late last week, Moody's <unk> credit rating, one notch higher too.
Unknown Attendee: Three.
Unknown Attendee: Our trailing 12 month return on invested capital increased approximately 300 basis points to 23, 1%.
Unknown Attendee: With the increase mostly driven by our strengthening profitability.
Unknown Attendee: At the end of Q1, we had $50 million remaining under our existing share repurchase authorization.
Unknown Attendee: Moving to our updated 2024 guidance on slide nine, we have increased our full year 2024 adjusted EBITDA guidance to a range of $745 million to $805 million. Q1's outperformance represents most of the increase. We are reiterating guidance for core revenue growth, adjusted earnings per share, capital expenditures, and free cash flow conversion. The higher adjusted EBITDA for the year is expected to be offset by a higher effective tax rate for 2024. For the second quarter, we expect revenues to be in the range of $880 million to $910 million.
Unknown Attendee: Shifting to our updated 2024 guidance on slide nine.
Unknown Attendee: We have increased our full year 2024, adjusted EBITDA guidance to a range of $745 million to $805 million.
Unknown Attendee: Q1's outperformance represents most of the increase.
Unknown Attendee: We are reiterating guidance for core revenue growth adjusted earnings per share capital expenditures and free cash flow conversion.
Unknown Attendee: The higher adjusted EBITDA for the year is expected to be offset by a higher effective tax rate for 2024.
Unknown Attendee: For the second quarter, we expect revenues to be in the range of $880 million to $910 million.
Unknown Attendee: We expect a low single-digit decline in core growth year over year, as we expect industrial headwinds to continue through the second quarter. We estimate our adjusted EBITDA margin will expand approximately 50 to 100 basis points compared to the prior year. On page 10, we show an updated walk relative to the midpoint of the initial adjusted earnings per share guidance we provided in February. Greater savings contribution from our enterprise initiatives is being fully offset by the higher effective tax, which we expect to be 200 to 300 basis points higher versus the initial expectation we outlined in February. Please note that our adjusted earnings per share guidance does not incorporate any incremental share repurchase activity. With that, I will turn it back over to Ivo.
Unknown Attendee: We expect a low single digit decline in core growth year over year, as we expect industrial headwinds to continue through the second quarter.
Unknown Attendee: We estimate our adjusted EBITDA margin will expand approximately 50 to 100 basis points compared to the prior year.
Unknown Attendee: On page 10, we show an updated work relative to the midpoint.
Unknown Attendee: The initial adjusted earnings per share guidance, we provided in February.
Unknown Attendee: Greater savings contribution from our enterprise initiatives are being fully offset by the higher effective tax rate, which we expect to be 200 to 300 basis points higher versus the initial expectation we outlined in February.
Unknown Attendee: Please note that our adjusted earnings per share guidance does not incorporate any incremental share repurchase activity.
Unknown Attendee: With that I will turn it back over to Evo.
Ivo Jurek: Thank you. On slide 11, I'll summarize our key messages before we take your questions. First, I'm pleased with our solid operating performance to start 2024. Our margin performance was healthy, and we are gaining traction with our various enterprise initiatives, particularly in the areas of material cost reduction and 80-20. Material science competencies are driving process efficiencies and material savings.
Evo: Thank you.
Evo: On slide 11 summarize our key messages before we take your questions first.
Evo: I am pleased with our solid operating performance to start 2024.
Evo: Our margin performance was healthy and we are gaining traction with our various enterprise initiatives, particularly in the areas of material cost reduction in 2020.
Evo: Our material science competencies are driving process efficiencies and material savings benefits.
Ivo Jurek: We see signs that industrial activity is beginning to stabilize, although we expect markets like agriculture and construction to stay soft for the time being. Core growth in our diversified industrial and consumer markets flattened out over the last couple of quarters after a period of soft, and the order intake activity we saw in Q1 would suggest more stability in certain industrial markets. The improvements in March PMI are encouraging, but we need to see a continued trend before we become more constructive on the near-term volume inflection for our business.
Evo: We see signs that industrial activity is beginning to stabilize although we expect markets like AG and construction to stay soft put time be.
Evo: Core growth in our diversified industrial end markets was flatten is flatten out over the last couple of quarters after a period of softness.
Evo: The order intake activity, we saw in Q1 would suggest more stability in certain industrial markets.
Evo: The improvements in March PMI is encouraging, but we need to see a continued trend before we become more constructive on the near term volume inflection for our business.
Ivo Jurek: As such, we have maintained a pragmatic view of our top line growth expectation for the year. Second, we are executing on our commitments we have made to our shareholders. We believe we are effectively deploying capital and continue to strengthen our balance sheet, as evidenced by our two recent ratings HSEF. We reduced gross debt in the first quarter in parallel with repurchasing shares. We are highly focused on achieving our 2026 targets outlined at our March Capital Markets Day.
Evo: As such we have maintained a pragmatic view of our topline growth expectation for the year.
Evo: Second we are executing on our commitments we have made to our shareholders. We believe we are effectively deploying capital and continue to strengthen our balance sheet as evidenced by our two recent rating agency upgrades.
Evo: We reduced gross debt in the first quarter in parallel with the purchasing shares.
Evo: We are highly focused on achieving our 2026 targets outlined at our March capital markets day.
Ivo Jurek: As we drive margin and cash flow improvements, our strategic optionality should expand, and we intend to be opportunistic. I'll finish by expressing my appreciation to almost 15,000 Global Gates Associates for their diligence and dedication, with a particular focus on the execution of our key priorities, as well as our commitment to meet our customers' expectations. With that, I will now turn the call back over to the operator to begin the Q&A.
Evo: As we drive margin and cash flow improvements are strategic optionality should expand and we intend to be opportunistic.
Evo: I'll finish by expressing my appreciation to almost 15000 global gates associates for their diligence and dedication with a particular focus on execution of our key priorities as well as commitment to meet our customers' expectations.
Speaker Change: With that I will now turn the call back over to the operator to begin the Q&A.
Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Please limit your questions to one and one follow-up. Please stand by while we compile the Q&A roster. The first question comes from the line of Nigel Coe with Wolf Research. Your line is open.
Speaker Change: Thank you.
Speaker Change: We'll now begin the question and answer session.
Speaker Change: If you have dialed in and I would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question simply press Star one again.
Speaker Change: Please limit to one question and one follow up please.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: The first question comes from the line of Nigel Coe with Wolfe Research. Your line is open.
Nigel Edward Coe: Oh, thanks. Thanks. Good morning, everyone. Great. So, hi guys. I'm just wondering, you know, in the context of Q1 realized growth and Q2, obviously looking at down three and a half percent year-to-year, what is the pathway here to the plus one high end for the full year? What needs to go right in the back half? And, obviously, I recognize you've got easier comps. And maybe within that, just talk about what sort of price contribution we have come in with in the back half of the year.
Nigel Edward Coe: Oh thanks.
Nigel Edward Coe: Thanks, Good morning, everyone.
Nigel Edward Coe: Alright.
Nigel Edward Coe: Yeah, Hi, guys just wondering you know.
Nigel Edward Coe: And in context of Q Q1 realized growth Q2, obviously, you're looking at down three 5% year over year, what is the pathway here to the plus one high end for the full year what needs to go right in the back half and.
Nigel Edward Coe: Obviously, I recognize you've got easier comps.
Nigel Edward Coe: And maybe within that just talk about what sort of price contribution we have coming through in the back half of the year.
Ivo Jurek: Hey Nigel, so for the second half of the year, you know, we're staying pretty pragmatic. You know, first of all, the competition does do get easier, right, because we started to see, you know, the industrial things through last year. And then, you know, as we said in our prepared remarks, we expect personal mobility to stabilize and start to come back. And then, you know, it's just the rest of the industrial market, you know, just starting to come back a little bit.
Speaker Change: Hey, Nigel so for the second half of the year.
Speaker Change: Staying pretty pragmatic.
Nigel Edward Coe: First of all the comps do get easier right, because we started to see the industrial things trough last year.
Nigel: And then as we said in our prepared remarks, we expect.
Nigel Edward Coe: Personal mobility to stabilize and start to come back and then it's just the rest of the industrial market just starting to come back a little bit our automotive replacement business has been really good through the first quarter. So it's really the personal mobility stabilizing and then the industrial market is starting to come back and and.
Ivo Jurek: Our automotive replacement business has been, you know, really good through the first quarter. So it's really the personal mobility stabilizing, and then the industrial market starting to come back. And, and we just have to wait and see. We've seen some stabilization, we've seen some pockets of things getting better, but then we've seen some pockets of things that really haven't turned yet.
Nigel: We'll just have to wait and say we've seen some stabilization we are seeing some pockets of things getting better, but then we've seen some pockets of things that.
Nigel: Well they haven't turned yet.
Ivo Jurek: And there's no reason to believe the auto market wouldn't, you know, kind of maintain these levels through the year.
Nigel: And there's no reason to believe the auto aftermarket wouldnt.
Nigel: Kind of maintained at these levels through the year.
Nigel Edward Coe: Not really. We anticipated this because, you know, the underlying demand trends are very strong. The order flows are very strong, the book to bill is very strong. So we anticipated the automotive aftermarket will continue to outperform.
Nigel: No not really I mean, we anticipated. This is the underlying demand trends are very strong. The order flows a very strong book to Bill is very strong so we anticipate MTS.
Nigel: I don't want your aftermarket mill, we will continue to outperform.
Unknown Attendee: Okay, my follow-on is a quick follow-on on the 2Q guide. Unless I'm doing the math wrong, I think we're looking for a slight downtick in margins from Q1 to Q2. I think we usually have Q1 margins a little bit lower than Q2, so I was wondering what specific kind of dynamics we should be kind of paying attention to as we go from Q1 to Q2. Obviously, still very, very healthy levels of margin, just wondering about that Q1 to Q2 dynamics.
Speaker Change: Okay. My follow on is quick quick follow on on the <unk> guidance unless I'm doing the math wrong I think we're looking for a slight downtick in margins from Q1 to Q2.
Speaker Change: Usually we have.
Speaker Change: Q1 margins, a little bit lower than Q2. So just wondering what specific kind of dynamics, we should be kind of pay attention to as we go from Q1 Q2, although still very very healthy levels of margin just wondering about that Q1 to Q2 dynamic.
Unknown Attendee: Yeah, the big thing is SG&A; we had some kind of out of the normal good news in Q1 related to some insurance things and some FX transactional tailwinds that we had that we don't expect to see through the balance of the year. And then we also have a little bit of an uptick in terms of labor spending relative to SG&A when merit increases come in and things like that.
Speaker Change: Yes, the big thing is on SG&A, we had some.
Speaker Change: Some kind of out of out of normal.
Speaker Change: Good news in Q1 related to some insurance things and some FX transactional.
Speaker Change: The tailwind that we had that we don't expect to.
Speaker Change: Well have to happen through the balance of the year and then we also have a little bit of uptick in terms of.
Speaker Change: Labor spending.
Speaker Change: Relative to SG&A women's the merit increases come in and things like that so almost all of the.
Unknown Attendee: So, almost all of the, you know, kind of, you know, as you'd say, I wouldn't say headwind, but, you know, the normal uptick you would expect from an EBITDA margin perspective is really related to SG&A and kind of some one-off benefits that we had in Q1. (Inaudible)
Speaker Change: Kind of.
Speaker Change: I'd say I wouldn't say headwind, but the normal uptick you would expect from an EBITDA margin perspective is really related to SG&A and kind of some one one off benefits that we had in Q1.
Nigel Edward Coe: Okay, that's great. Thank you.
Speaker Change: Okay. That's great. Thank you.
Speaker Change: Okay.
Jeffrey David Hammond: Your next question comes from the line of Jeff Hammond of Keeback Capital Markets. Your line is now open.
Speaker Change: Your next question comes from the line of Jeff Hammond.
Jeffrey David Hammond: <unk> Keybanc capital markets. Your line is now open.
David Michael Raso: Hey, good morning, guys. This is David Tarantino on for Jeff.
Jeffrey David Hammond: Hey, Good morning, guys. This is David Tarantino answer Jeff.
Unknown Attendee: Um, maybe just to start on the margin line relative to the raised outlook here seems all around incremental self-help. Could you give us some more color on where specifically the sixth sense of incremental self-help is coming from? Is this a pull forward, or is it you just finding more incremental opportunities versus what you initially identified?
David Michael Raso: Maybe just to start on the <unk>.
Jeffrey David Hammond: Margin line relative to the raised outlook here seems all around the incremental self help could you give us some more color on where specifically that 6%.
David Michael Raso: Incremental self help is coming from is this pull forward or is it you're just finding more incremental opportunities versus what you initially identified.
Unknown Attendee: Yeah, so I think there's, you know, if you think about Q1, we did, you know, a little bit better on mix because the replacement business was a little bit better. We did, you know, a little bit better on the enterprise initiatives, price, you know, we're using 8020 as kind of the underlying, you know, underpinning infrastructure on a lot of the stuff that we do now. And that helped with the price a little bit.
Speaker Change: Yes, so I think there is.
Speaker Change: If you think about Q1, we did a little bit better on mix because the replacement business was a little bit better we did a little bit better on the enterprise initiatives.
Speaker Change: Rice.
Speaker Change: We're using 80 20 is kind of the underlying underpinning infrastructure on a lot of the stuff that we do now and that helped with price a little bit and then productivity came in a little bit better in Q1, and then as you move through the year, we expect price not to be as helpful. As it was in Q1, but we expect productivity to get a little bit better.
Unknown Attendee: And then productivity came in a little bit better in Q1. And then, as you move through the year, you know, we expect price, you know, not to be as helpful as it was in Q1. But we expect productivity to get a little bit better as we move through the year, and a lot of that is driven by material cost productivity. You know, as Ivo said in his, you know, at the end of his comments, the material science work that we're doing on material cost out is coming to fruition, and we expect that to continue through the balance of the year.
Speaker Change: As we move through the year and a lot of that is driven by material cost productivity as Eva said and as at.
Speaker Change: At the end of his comments the materials science work that we're doing on material cost out is coming to fruition and we expect that to continue through the balance of the year.
Speaker Change: Even even with volumes being down we're able to expand our margins and so that's really a lot of the hard work, we've done around material productivity and material cost out.
Unknown Attendee: So, you know, even with volumes being down, we're able to expand our margins. And so, you know, that's really a lot of the hard work we've done around material productivity and material costs.
David Michael Raso: Okay, great. Maybe I just want to follow up on the comments around the improvement in order rates in the quarter. Could you give some color on where you're seeing this? And maybe just give some context? I mean, just relative sales were kind of at the lower end of the guide provided in March. Maybe just level set us on where you're seeing the more positive near-term trends and when you'd expect this to show through.
Speaker Change: Okay, Great and maybe just to follow up on the comments around the improvement in order rates in the quarter could you give some color on where youre seeing there and maybe just give some context.
Speaker Change: Just relative sales were kind of at the lower end of the guidance provided in March maybe just level set us on where youre seeing more positive near term trend and when you would expect this to show through.
Ivo Jurek: Yeah, so look, I would say that on the order rates, we are seeing a little bit stronger order rates in the automotive replacement business, and we're seeing a more constructive market backdrop in the industrial replacement order rates, particularly in North America, as a reference to a prior year and maybe sequentially. So I'd say that those were, you know, bigger drivers; we did see some blanket orders being placed as well. For you know, some of our longer, longer project type businesses that we anticipate to ship through the year.
Speaker Change: Yes, so look I.
Speaker Change: I would say that on the order rates.
Speaker Change: We are seeing little bit stronger order rates in automotive replacement, we are seeing a more constructive market backdrop in industrial replacement order rates, particularly in North America.
Speaker Change: As a reference to <unk>.
Speaker Change: Prior year, and maybe sequentially. So I would say that those were a bigger drivers we did see some blanket orders being placed as well for some of our longer longer project type businesses that we anticipate to ship to.
Ivo Jurek: You know, when I take a look at what the distributors are selling through, which is kind of a very important indicator for us, I mean, we're seeing pretty good stability in the inventory channels. So the order rates are now more in line with what we would anticipate to ship out. And that being said, it's slightly offset by, but maybe a little more negative backdrop in ag and commercial construction. So I kind of tried to package all, you know, your both of your segments of your question into one answer, hopefully that answers your question.
Speaker Change: The year.
Speaker Change: When I take a look at what the distributors are selling through.
Speaker Change: Which kind of is a very important indicator for us I mean, we are seeing pretty good stability in.
Speaker Change: In the inventory channels.
Speaker Change: The order rates now are more in line with what we.
Speaker Change: We would anticipate two to shape out and that being said, it's slightly offset by maybe a little more negative backdrop in AG and commercial construction, so I've kind of attractive package.
Speaker Change: Both of your segments of your question into into one answer hopefully that answer your question.
David Michael Raso: Yes. Great. Thank you.
Speaker Change: Yes, great. Thank you.
Stephen Edward Volkmann: The next question comes from the line of Steve Volkman of Jeffries. Your line is open.
Speaker Change: The next question comes from the line of Steve Volkmann of Jeffries. Your line is open.
Stephen Edward Volkmann: Hi, good morning, guys. Thanks for taking my question. I'm curious if it's possible to sort of break down the benefits of the enterprise initiatives on margin relative to the benefits that it sounded like you got on mix because of the automotive aftermarket.
Steve Volkmann: Hi, Good morning, guys. Thanks for taking my question I'm curious, if it's possible to sort of break down the benefits of the enterprise initiatives on margin relative to the benefits. It sounded like you got a mix because of the automotive aftermarket.
Unknown Attendee: Yeah, so, you know, the mix, the mixed impact in Q1 was about 50 basis points of gross margin expansion. And so, you know, then we had about 50 bps of inflation, I mean, deflation, and favorable effects. And then the balance of it was enterprise initiatives offset by some volume headwinds.
Speaker Change: Yes, so the mix the mix impact in Q1 was about 50 basis points of gross margin expansion and so.
Speaker Change: Then we had about 50 bps of inflation.
Speaker Change: So I mean deflation and favorable FX and then the balance of it.
Speaker Change: Was enterprise initiatives offset by some volume headwinds.
Unknown Attendee: Okay, that's helpful. And then how should we think about the rest of the year? I guess I'm struck by the fact that you sound like things are sort of improving directionally, and you sound fairly optimistic, but you really didn't raise the rest of the year. Is there a mixed headwind as the rest of these businesses come back a little bit during the rest of the year?
Speaker Change: Got it Okay. That's helpful. And then how should we think about the rest of the year.
Speaker Change: I'm struck by the fact that you it sounds like things are sort of improving directionally and you sound fairly optimistic but really didn't raise the rest of the year is there a mix headwind as the rest of these businesses come back a little bit as the rest of the year.
Stephen Edward Volkmann: Steve, I wouldn't say that there's a headwind on the mix. We're just being pragmatic about what we, you know, what we are forecasting for the next three quarters early in the year while we are seeing improvements. As I said, I feel it's more of a stabilizing market environment; there are some puts and takes, there are some markets that are less constructive, like agriculture and commercial construction. And, you know, while the PMI will add one positive month, we really need to see validation that that's not just a head fake, but it's a real inflection in the underlying macros.
Speaker Change: Steve I wouldn't say that there's a headwind on the mix are we just being pragmatic about what we.
Speaker Change: What we are forecasting for the next three quarters. It's early in the year, while we are seeing improvements as I said I feel it's more of that.
Speaker Change: Stabilizing market environment. There are some puts and takes there some end markets that are less constructive like AG and commercial construction.
Speaker Change: And while the PMI will add one positive month, we really need to see a validation.
Speaker Change: Not just a head fake but its at its source.
Speaker Change: Real inflection in the underlying.
Stephen Edward Volkmann: And so as the year progresses, you know, we certainly would feel that we would, you know, we would assess and reforecast if that's warranted. But at this point in time, we just try to take a pragmatic view of the rest of the year. Okay.
Speaker Change: Macros and so as the year progresses, we certainly would feel.
Speaker Change: Debbie.
Speaker Change: SaaS and re forecast if that's warranted, but at this point in time, we just trying to take a pragmatic view of the rest of the year.
Stephen Edward Volkmann: Okay, I understand. Thank you.
Speaker Change: Okay I understood. Thank you.
Speaker Change: Okay.
Jerry David Revich: Your next question comes from the line of Jerry Revich of Goldman Sachs. Your line is now open.
Speaker Change: Your next question comes from the line of Jerry Revich of Goldman Sachs. Your line is now open.
Jerry David Revich: Yes, hi. Good morning, everyone.
Unknown Attendee: Nice quarter. Brooks, I'm wondering if you would mind just expanding on the deflation comment that you mentioned, the 50 basis point tailwind in the first quarter, how much of that was from improved on-time deliveries and efficiencies versus lower freight costs? And, you know, what kind of momentum is there as the supply chain normalizes? For you folks, can you just flesh out what that might look like in 2Q based on the start so far?
Jerry David Revich: Yes, hi, good morning, everyone nice quarter.
Jerry David Revich: Good morning.
Jerry David Revich: Wonder if you wouldn't mind, just expanding on deflation comment that you mentioned, the 50 basis point tailwind in the first quarter.
Jerry David Revich: How much of that was from improved on time deliveries and efficiencies versus the lower freight costs.
Speaker Change: Momentum is there as the supply chain normalizes.
Jerry David Revich: For you folks can just flesh out on what that might look like.
Jerry David Revich: <unk> based on the start so far.
Unknown Attendee: So, as I said, you know, in Q1, it was inflation and FX, and it was probably a little bit more favorable FX favorability than deflation. And really, what we're seeing is we're seeing a little bit of an uptick in inflation relative to freight, because freight costs are going up. We're seeing a little bit of deflation on utilities, so utilities are a little bit cheaper. And then materials are, you know, a little bit up and down.
Jerry David Revich: Yes, so as I said in Q1, it was inflation and FX and it was probably a little bit more FX favorability than than deflation and really what we're seeing is we're seeing a little bit of an uptick on inflation relative to freight because freight costs are going up we're seeing a little bit of deflation.
Jerry David Revich: When on utilities.
Jerry David Revich: So utilities are a little bit better and then materials are a little bit up and down some things are better and some things are worse, but it's really.
Unknown Attendee: Some things are better, and some things are worse. But it's really, you know, at the end of the day, it's, you know, maybe 20 bps. And so it's really not that big of a deal. You know, we're just seeing kind of a stabilization of things across the board.
Jerry David Revich: At the end of the day, it's maybe 20 bps and so it's really not that big of a deal. We're just seeing kind of a stabilization of things across the board.
Jerry David Revich: So.
Jerry David Revich: That's helpful. And then, in terms of your conversations with your distributors, as you get ready to set expectations for pricing in 2025, can you just talk about conceptually how you are thinking about normalized inflation going forward, considering the outsized inflation we've seen over the next couple of years, as you set the initial expectations for what distributors should expect in 2025?
Speaker Change: That's helpful and then in terms of in your conversations with your distributors as yet.
Speaker Change: Ready to set expectations for pricing in 2025 can you just talk about conceptually how are you thinking about normalized inflation going forward considering.
Speaker Change: The outsized inflation, we've seen over the next couple of years as you said the initial expectations on what distributor should expect in 'twenty five.
Unknown Attendee: Well, 2025 is a long way off, Jerry, so I'm not going to try to predict what's going to happen that far out. But I can tell you a couple of things.
Jerry David Revich: Yes.
Jerry David Revich:
Speaker Change: Well 2020, fives, a long way away, Jerry so I'm not going to try to predict what's going to happen that far out I can tell you you know a couple of things. One is we're always going to be able to we believe get price to offset the inflationary pressures, we've seen right even with the extraordinary inflation that we saw over the past three years.
Unknown Attendee: One is we're always going to be able to, we believe, get prices to offset the inflationary pressures we've seen. Even with the extraordinary inflation that we saw over the past three years, we were able to get even margin neutrality with our pricing. In addition, as we continue to work through 8020, we're going to be more strategic about some of the pricing things that we do in terms of using the 8020 tools to do the best we can relative to pricing. And then we'll look at what's going on with materials, we'll look at what's going on with freight, we'll look at what's going on with utilities, and then we'll make that judgment when we get to
Speaker Change: We were able to get EBITDA margin neutrality.
Speaker Change: With our pricing. In addition, as we continue to work through 80 20, we're going to be more strategic around some of the pricing things that we do.
Speaker Change: In terms of using the 80 20 tools to.
Speaker Change: To do the best we can.
Speaker Change: Relative to pricing and then you know we'll look at what's going on with materials. We will look at what's going on with freight we'll look at what's going on with utilities and then we'll make that judgment when we get to 2025.
Jerry David Revich: And what kind of lead time do you need to provide? Typically, two to three months.
Speaker Change: And what kind of lead time do you need to provide.
Speaker Change: Typically two to three months.
Speaker Change: Alright Super Thank you.
Jerry David Revich: Super. Thank you.
Speaker Change: Thanks.
Damian Karas: Your next question comes from the line of Damian Karas of UBS. Your line is open.
Speaker Change: Your next question comes from the line of Damian Karas of UBS. Your line is open.
Damian Karas: Hey, good morning, everyone.
Damian Karas: Good morning, Dan.
Damian Karas: Okay.
Damian Karas: Thanks for all the.
Damian Karas: Thoughts on.
Dan: Kind of the guidance and your pragmatic approach to the margins as the year progresses.
Damian Karas: Thanks for all the thoughts on kind of guidance and your pragmatic approach to the margins as the year progresses. I thought maybe just take a step back, ask you a little bit about potential growth drivers; data centers are obviously very topical right now. I know you guys have mentioned you've got capabilities in this space. I was wondering if there are any, you know, numbers or thoughts you could share around the activity you've been seeing and just that opportunity more generally. And I'm presuming we'd see any such activity kind of show up in your industrial first fit category.
Dan: Tom maybe just take a step back ask you a little bit about.
Dan: Potential growth drivers.
Damian Karas: Data centers is obviously very topical right now I know you guys have mentioned <unk> got capabilities in the space I was wondering if there's any.
Damian Karas: Numbers are thoughts you could share around activity you've been seeing in just that opportunity more generally and I'm presuming, we see any such activity kind of show up in your industrial first fit category.
Ivo Jurek: Yeah, sure, sure, Damian. I think, as we stated during the CMD, about a month ago, five weeks ago, we view the data center as, you know, as an emerging, you know, rather significant opportunity to drive incremental growth. Through the next, you know, three to four years, we have a reasonably decent portfolio to be able to participate with our electric water pumps and with our fluid conveyance products. That being said, we are also in the process of launching a fully refreshed fluid conveyance product that's specifically going to target the data center applications that are more tailored for what's needed in those particular hyperscale data centers.
Speaker Change: Yes, sure Damian I think as we as we stated during the CMT, but a month ago was five weeks ago, We view of the data center asset as an emerging in a rather significant opportunity to drive incremental growth.
Speaker Change: So the next three to four years, we have reasonably.
Speaker Change: A reasonably decent portfolio to be able to participate with our.
Damian Karas: Electric water pumps, and with our fluid conveyance products that being said, we also in process of launching fully refreshed fluid conveyance product, that's specifically going to target.
Damian Karas: The data center applications that.
Ivo Jurek: So I wouldn't anticipate that we're going to see any meaningful ramp-up in 2024. But I would say that, you know, there should be an expectation that we start talking more about it in 2025. And as we go in 2026, as you know, this project starts early, and the revenue ramp-up takes some time as these data centers get built out. So that's kind of how I would say, you know, you should think about it.
Damian Karas: There is more tailored for whats needed in those particular hyperscale data centers, so I wouldn't anticipate it youre going to see any meaningful ramp up.
Damian Karas: In two.
Damian Karas: 2024.
Damian Karas: I'd say that.
Damian Karas: It should be an expectation that would be start talking more about it in 'twenty five and as we go into 'twenty say access as you know these projects start spect early in and the revenue ramp up takes some time as these data centers get built out.
Damian Karas: That's kind of how I would say you should you should think about it and as to the other drivers.
Damian Karas: Good.
Speaker Change: Certainly say that.
Damian Karas: And as to the other drivers, you know, I would, you know, certainly say that we still feel extremely constructive about our chain to belt initiative. And as the end market starts stabilizing, particularly on the mobility side, as I said in my prepared remarks, so I think Brooks may have said that we now anticipate that the personal mobility stock should play itself out in the first half of this year. And while we don't expect any hockey stick-type recovery in the personal mobility space, we do believe that in the second half, the market is going to be more constructive, and then in 2025, we should start seeing a really nice uptick again in our growth rates for personal mobility.
Speaker Change: We still feel extremely constructive about our chain to belt initiative and as particularly the end market starts stabilizing.
Speaker Change: Particularly on the mobility side as I said in my prepared remarks, I think Brooks may have said that we now anticipated.
Damian Karas: Personal mobility destock should play it's allowed in the first half of this year and while we don't expect any hockey stick type rig.
Damian Karas: The recovery in personal mobility space, we do believe that in the second half the market is going to be more constructive.
Ivo Jurek: Lots of projects; we're involved in a very significant number of design wins. So we are quite, we are quite constructive in that. And then, as you know, as we have been demonstrating, we are doing a rather good job in the automotive replacement side of our business. And, you know, we still believe that there are some positive drivers in the midterm, and that should be constructive for us. So we do have lots of vectors to continue to drive growth in the future. But that being said, you know, I would ground everybody. We need to start seeing some stability in the underlying market environment, which we believe we should start seeing in the second half of this year.
Damian Karas: And then in 2025, we should start seeing really nice uptake again in our growth rates in personal mobility and lots of projects we are involved across.
Damian Karas: A very significant number of.
Damian Karas: Okay, great. That makes sense.
Damian Karas: Design wins. So we are quite we are quite constructive on that and then as you know as we have been demonstrating we are.
Damian Karas: Doing really good job in the automotive replacement side of our business.
Damian Karas: Still believe that there are some positive drivers over the mid term and that should be constructive for us. So we do have lots of factors to continue to drive growth in the future, but that being said.
Damian Karas: Ground, everybody and we need to see we need to start seeing some stability in the underlying market environment, which we believe we should start seeing into the second half of this year.
Speaker Change: Okay, great that makes sense and then could you just maybe elaborate a little bit on your expectations for China and I know you said.
Ivo Jurek: And then could you just maybe elaborate a little bit on your expectations for China? I know you said there were still choppy trends, but it was nice to see kind of the positive growth inflection. So you know, what makes you think you can't kind of just, you know, continue to grow from here? And just maybe talk about what's giving you a little hesitation and expected choppiness. Thanks.
Damian Karas: Still choppy trends.
Speaker Change: But it was nice to see kind of.
Speaker Change: The positive growth inflection so.
Speaker Change: What.
Speaker Change: What makes you think you can kind of just.
Speaker Change: Yes.
Speaker Change: Continue to grow from here and just maybe talk about.
Speaker Change: What's giving you a little hesitation and unexpected choppiness.
Ivo Jurek: Okay, you know, I would say a more pragmatic view of what is happening. I would say that fundamentally there are still lots of headwinds in that economy. But we are growing really nicely in our automotive replacement business in China despite all those headwinds. We are starting to see that, you know, particularly on the industrial replacement side, it's becoming less bad in China. So, you know, one could anticipate some degree of inflection into the second half of the year there.
Speaker Change: I would say more pragmatic view of what is happening in I would say that fundamentally they are still a lots of headwinds in that economy.
Speaker Change: We are growing really nicely, our automotive replacement business in China, Despite all of those headwinds.
Speaker Change: We start seeing that particularly on the industrial replacement side, it's becoming a less bad in China.
Speaker Change: No one could anticipate some degree of inflection into second half of the year there.
Ivo Jurek: You know, commercial construction is stabilizing. So, you know, I mean, you could come to conclusions that things are getting better, but they're also choppy. And I would say that our Q2 comp in China, in particular, is going to be challenging because it was the best quarter in China that we had last year. So while the underlying market environment may be stabilizing or is stabilizing, again, we just try to be pragmatic rather than get way over our skis.
Speaker Change: Commercial construction is stabilizing so.
Speaker Change: You could counter conclusions that things are getting better, but they also choppy and I would say that our Q2 comp in China in particular is going to be challenging because there was the best quarter in China.
Speaker Change: We had last year, so while the underlying market environment may be stabilizing is stabilizing again, we just try to be pragmatic rather than getting way over our skis here.
Speaker Change: Okay.
Speaker Change: Thanks, guys best of luck.
Speaker Change: Thanks.
Andrew Alec Kaplowitz: Your next question comes from the line of Andy Kaplowitz of Citigroup. Your line is open.
Speaker Change: Your next question comes from the line of Andy Kaplowitz of Citigroup. Your line is open.
Andrew Alec Kaplowitz: Hey, guys how are you.
Andrew Alec Kaplowitz: Andy, how's it going?
Andrew Alec Kaplowitz: Hey, How's it going good Brooks I, just wanted to start out with free cash flow.
Unknown Attendee: Good. Brooks, I just want to start out with free cash flow. You know, started out the year negative, which seasonally is not, it's kind of normal. But last year, I think you had positive free cash flow. So can you maybe discuss what happened in the quarter? I know you didn't change the outlook for the year. So should you turn to nice cash in Q2?
Andrew Alec Kaplowitz: It started out the year, yet negative, which seasonally is not is kind of normal but last year. I think you had positive free cash flow. So can you maybe discuss what happened in the quarter I know you didn't change the outlook for the year. So should you turned to a nice cash in Q2.
Unknown Attendee: Yeah, well, I mean, last year was more of an outlier, and this year is more of a turn back to normal. And so, you know, we build inventory through Q1 and Q2, because that's typically a little bit busier. And also, we had more variable comp payout in Q1 of this year, so that was a pretty significant year-over-year change, and that also impacted Q1 of this year. But I would say Q1 of this year was much more normalized than Q1 of last year.
Speaker Change: Yes, well I mean I.
Speaker Change: I think last year was more of the outlier in this year as more of a return to normal and so we build inventory through.
Speaker Change: Through Q1, and Q2, because that's typically a little bit busier.
Speaker Change: And then also we had more variable comp pay out in Q1 of this year. So that was a <unk>.
Speaker Change: Pretty significant.
Speaker Change: Year over year change and that also impacted.
Speaker Change: Q1 of this year, but I would say Q1 of this year was much more normalized than thank you one of last year.
Ivo Jurek: Okay, and then Ivo, I just want to follow up on Diversified Industrial and Personal Mobility. What is driving diversified industrial stabilization?
Speaker Change: Okay, and then I just wanted to follow up on diversified industrial personal mobility is what is driving diversified industrial stabilization and then you kind of mentioned in a previous question you think personal mobility gets better in the second half will kind of run rate does it have to get to because I think at the Investor day, you talked about potentially.
Ivo Jurek: And then you kind of mentioned in a previous question that you think personal mobility gets better in the second half. What kind of run rate does it have to get to? Because I think at investor day, you talked about potentially double-digit growth in 25. So what's the visibility toward that sort of inflection in personal mobility? Look, so personal mobility
Speaker Change: <unk> digit growth in 'twenty five so so what's the visibility toward that sort of an inflection in personal mobility.
Ivo Jurek: Look, personal mobility has been impacted over the last kind of five or six quarters, particularly by the D stock and kind of the overbills during the COVID era. What we are starting to see now is, you know, you're starting to see some real inflection, I think, in market demand. Look, we haven't seen, you know, order expedites in a very long time; you're now starting to see customers kind of calling you and saying, Oh, please, would you please expedite this order for me?
Speaker Change: Look so the personal mobility was impacted over the last kind of follow six quarters, particularly by the Destocking kind of overbuilt during the Covid era, what we're starting to see now is yes.
Speaker Change: Turning to see some real inflection I think in the market demand.
Speaker Change: We haven't seen.
Speaker Change: Either expedites in a very long time, you are now starting to see customers kind of calling you and saying Oh. Please could you. Please expedite this order for me and then we'll give you an indication that we are kind of approaching the swap of the.
Ivo Jurek: And that will give you an indication that we're kind of approaching the end of inventory D stock. And if you take a look at the underlying market bill, so the end unit builds, you know, they stabilize. So as we are looking on a foregoing basis, we believe that the channel D stock is kind of coming to an end, and we should see Q2 being the bottom of it.
Speaker Change: Inventory destock and if you take a look at the underlying market. So the end unit builds.
Speaker Change: Stabilize.
Speaker Change: As we are looking on a forward going basis, we believe that the.
Speaker Change: The channel Destock is kind of coming to an end and we should see Q2 being the bottom of it and then because they've said.
Ivo Jurek: And then, you know, because there is more stabilizing market demand in the personal mobility space, we believe that that will start a slow and steady recovery, with perhaps more normalization, as we get into 2025. Now, that gives us a degree of confidence that, you know, we will start seeing some of the growth rates that we were discussing at the CMD. Look, we continue to grab quite a bit of share in conversions; they do take time to ramp up as the new equipment is being built and being offered for sale in the season that that is usual.
Speaker Change: And more stabilizing end market demand in the personal mobility space, we believe that that will start slow and steady recovery with perhaps more normalization as we get into 2025 now what gives us.
Speaker Change: A degree of confidence that we will start seeing some of the growth rates that we were discussing at CMT.
Speaker Change: We continue to grab quite a bit of share in conversions, they do take time to ramp up.
Speaker Change: As the new equipment is being built and being <unk>.
Speaker Change: Being offered for sale in the season that.
Ivo Jurek: So we actually feel quite positively that we have reached the bottom in personal mobility in the first half of this year. Now on the industrial replacement side, look, things are just less bad. You know, I wouldn't, you know, I wouldn't let you read my words as things are off to the races.
Speaker Change: That is as usual so we actually feel quite quite positively that we have reached the bottom in the personal mobility in the first half of this year now.
Speaker Change: Now on the industrial replacement side look thanks suggest less bad I wouldnt.
Speaker Change: I wouldn't let you read my awards as banks after the races.
Ivo Jurek: But you know, all of the indications, all the indicators are pointing towards more stabilizing demand, reasonably positive, broad, you know, improvement, or reduction of negative, negative order rates that we have seen for kind of three or four quarters there in industrial replacement. So we believe that this is on a trajectory of kind of a steady recovery, very much in line with what, frankly, the industrial PMI is telling you is just getting less bad. So it will, you know; it will mirror the performance of the industry.
Speaker Change: All of the indications all the indicators are pointing towards more stabilizing demand.
Speaker Change: Reasonably.
Speaker Change: I mean, a reasonably positive broad.
Speaker Change: No.
Speaker Change: Improvement.
Speaker Change: Or reduction of negatives.
Speaker Change: Negative order rates that we have seen.
Speaker Change: Kind of three or four quarters there in industrial replacement. So we believe that this is on a trajectory of kind of a steady recovery.
Speaker Change: Very much in line with what frankly the index PMI is telling you is just getting less bad so it will it will mirror the performance of the indices.
Speaker Change: Sure.
Julian C.H. Mitchell: Your next question comes from Julian Mitchell of Barclays. Your line is now open.
Speaker Change: Your next question comes from Julian Mitchell of Barclays. Your line is now open.
Julian C.H. Mitchell: Thanks very much. Good morning. Maybe, Ivo, just going back to your point on the sort of the broad environment in industrial because, you know, at investor day, it felt like things were sort of getting better, maybe more quickly, and then maybe the tone, it seems a little bit more balanced or measured today. Is that a fair sort of characterization?
Julian C.H. Mitchell: Thanks, very much good morning.
Julian C.H. Mitchell: Maybe even just getting back to your point on the sort of the broad main environment.
Julian C.H. Mitchell: And industrial so I guess at the Investor day. It felt like things were sort of getting better maybe more quickly and then maybe the tone seems a little bit more.
Julian C.H. Mitchell: Balanced store measured today.
Julian C.H. Mitchell: Is that a fair characterization did you see any notable kind.
Ivo Jurek: Did you see any notable kind of slowdown or change in trend in the last month or two? And again, I totally understand it's a very uneven environment. We see that just less than an hour ago with the PMI going back below 50 again and also on new orders. So that's just the nature of the environment. But I just wondered, was there any particular region or market that you feel more tepid about now versus the CMD?
Speaker Change: Kind of slowdown will change in trend in the last month or two.
Speaker Change: And again totally understand its a very uneven environment, we see that just less than an hour ago with the PMI going back below.
Speaker Change: <unk> again and also on new orders. So that's just the nature of the environment, but just wondered.
Speaker Change: Was there any particular region or market that you feel more tepid on now versus say at the CMT.
Ivo Jurek: Yeah, look, you know, one of the things that I would point out, you know, while we anticipated that the Easter holiday was coming in into March, which was a little bit earlier than it was in previous years, we have seen a little more choppiness in the second half of that month. And I would say that, you know, the weaker performance was reasonably muted. I mean, it was less than half a day of sales.
Speaker Change: Yes look.
Speaker Change: One of the things that I would point out.
Speaker Change: While we while we anticipated that the Easter holiday was coming in into March which was a little bit earlier than it was prior years.
Speaker Change: We have seen a little more choppiness said, the second half of that of that month, and I would say that it was.
Speaker Change: The the weaker performance was reasonably muted I mean, it was less than half a day of sales. If you. If you kind of what kind of scope. It what was the impact and I would add I would more associate that with the Easter coming in earlier and then but on the other hand I would say.
Ivo Jurek: If you, you know, if you kind of want to kind of scope it, what was the impact? And I would, you know, I would associate that more with Easter coming earlier. And then, on the other hand, you know, I would say that some of the off-highway builds are getting weaker, and I would anticipate that that's going to continue to be a headwind into kind of the rest of the year.
Speaker Change: I'd add.
Speaker Change: Some of the.
Speaker Change: Highway bills are getting weaker.
Speaker Change: And I would anticipate that that's going to continue to be.
Speaker Change: A headwind.
Speaker Change: Into kind of the rest of the year I don't anticipate that AG is going to be recovering in my sense is that the commercial commercial construction equipment space is going to be somewhat challenged as well but that debt.
Ivo Jurek: I don't anticipate that agriculture is going to be recovering. You know, my sense is that the commercial construction equipment space is going to be somewhat challenged as well. But that, you know, that probably is going to be offset by more constructive RA, more constructive IR, you know, some recovery in personal mobility in the second half. So I wouldn't say, Julian, that, you know, anything has really changed. I would just say that March maybe came in, you know, half a day below what we've kind of anticipated that we are going to see. And again, I would probably say it's more on the back of that Easter holiday coming in a little bit earlier than the previous year and probably impacting us a little more than we've anticipated.
Julian C.H. Mitchell: That's helpful. Thank you, Ivo.
Speaker Change: Probably this.
Speaker Change: Is going to be offset by more constructive a more constructive IR.
Speaker Change: <unk>.
Speaker Change: Recovery in personal mobility in the second half so I won't say Julian that.
Speaker Change: Anything has really changed I would just say that March maybe came in in a half a day below what we've kind of anticipated that we are going to see and again I would probably say it's more on the back of <unk>.
Speaker Change: Is that Easter holiday coming in little bit earlier than the prior year, and probably impacting us a little more than what we've anticipated.
Unknown Attendee: And then a more prosaic question, maybe for Brooks around tax rate, you know, clearly, that increase has sort of offset the higher EBITDA margin guide for this year. So is it sort of a 25% tax rate in the adjusted P&L for the year? And when we think about beyond 2024, does the tax rate we should use, is that more like the sort of low 20s type range?
Speaker Change: That's helpful. Thank you Evo and then a more prosaic question Ivy for Brooks around tax rate clearly that increase to sort of offset the higher EBITDA margin guide for this year.
Ivy: So is it sort of a 25% type tax rate.
Speaker Change: In the adjusted P&L for the year and when we think about beyond 2024.
Speaker Change: Does the tax rate, we should use is that more like the sort of low twenty's type range.
Unknown Attendee: Yeah, so yeah, I think for the year, you know, we've seen, you know, we have these discrete items. And as I said in my remarks, largely, they're going to be offset. But what we are seeing, too, is a little bit of a tick up in our statutory tax rate based on the mix of income and the jurisdictions that are coming in from. And so that's, that's a little bit of an uptick for the year.
Ivy: Yeah. So yeah I think for the year, we have seen we have these discrete items.
Speaker Change: As I said in my remarks.
Speaker Change: Largely they're going to be offset what we are seeing too is a little bit of a tick up in our statutory tax rate based on the mix of income in the jurisdictions that are coming in from and so that's a little bit of an uptick for the year I think going forward, 22% to 25% is going to be in this range.
Speaker Change: <unk> and its going to be impacted again like I said by the mix of income and where it's coming in and then obviously, there's other things going on with the pillar tags and different things like that that may affect that a little bit here and there, but 'twenty two to 'twenty five.
Unknown Attendee: You know, I think, going forward, 22 to 25% is going to be in this range. And it's going to be impacted, again, like I said, by the mix of income and where it's coming from. And then obviously, you know, there's other things going on with, you know, the pillar tax and different things like that that may affect it a little bit here and there. But 22 to 25 is where we think we ought to be, you know, kind of for the midterm.
Unknown Attendee: Is is where we think we ought to be kind of for the midterm.
Julian C.H. Mitchell: That's great. Thank you.
Speaker Change: That's great. Thank you.
Julian C.H. Mitchell: Okay.
Michael Patrick Halloran: Your next question comes from the line of Mike Halloran.
Speaker Change: Your next question comes from the line of Mike Halloran of Baird. Your line is now open.
Speaker Change: Hey morning, everyone.
Michael Patrick Halloran: So I just kind of want to put all these pieces together here because a lot of markets have a lot of different trend lines. If you net them all together,
Michael Patrick Halloran: So Brian just kind of want to put.
Michael Patrick Halloran: All of these pieces together here.
Michael Patrick Halloran: A lot of markets a lot of different trend lines.
Michael Patrick Halloran: If you net it together is the guidance more or less assuming stability and relatively normal sequential for your overall business for the remainder of the year.
Ivo Jurek: Yeah, I think that that's the right way to think about it, Mike. I think that, you know, stabilizing, you know, stabilizing demand is probably the right way to think about that with, you know, some puts and some takes, right. So, for highway, maybe weaker, and some some of the other segments may be performing a little bit better ARM, you know, IR recovering. So that's a good way to think about it, puts and takes and more.
Brian: Yes, I think that that's the right way to think about it Mike I think that.
Brian: Stabilizing.
Brian: Stabilizing demand is probably the right way to think about that with some puts and some takes right. So of highway maybe weaker and some some of the other segments, maybe performing a little bit better.
Brian: You know are recovering.
Brian: That's a good way to think about it puts and takes and more stability.
Ivo Jurek: And then could you provide an update on the operational improvement initiatives internally? Probably a little bit more geared towards how the organization and teams are accepting them and how quickly you think you can start seeing some significant benefits. I know we just had analyst day not that long ago, so I'm more curious about the internal momentum and how the adoption curve is going. Yeah, I think that's a great question.
Brian: And then could you provide an update on the operational improvement initiatives are internally, probably a little bit more geared towards how the organization and teams are accepting it and how quickly you think you can start seeing some significant benefits for I know, we just had the analyst day not that long ago. So more more curious about the <unk>.
Brian: Internal woman in how the adoption curve is going.
Ivo Jurek: Look, we're doing better. I think that the organization is much more comfortable and much more confident in its ability to execute on the vision that we have set and the targets and on the internal, on the internal expectations. I would say that, you know, if you're thinking about that, right, we've really not upgraded or updated our revenue guidance for the year.
Ivo Jurek: Yeah, I think that's a great question. Thank you for asking that, Mike.
Speaker Change: Yeah, I think it's a great question. Thank you for asking to add Mike.
Speaker Change: Look we're doing better I think that the organization is much more comfortable and much more confident in its ability to execute on our vision that we have said in the target cell on the internal on the internal expectation I would say that.
Ivo Jurek: If youre thinking about that right, we are really not upgraded our updated our.
Ivo Jurek: But at the midpoint, we have, you know, taken up our EBITDA margin guidance rather nicely, and we are forecasting that we will continue to see gross margin improvements, which will drive EBITDA margin improvements in a lower value environment. And so, you know, we are executing quite well; we are doing probably slightly better than what we anticipated at the beginning of the year. Some things are, you know, happening, you know, right as we anticipated.
Brian: Our revenue guidance for the year, but at the midpoint we have.
Brian: Taken up our EBITA margin guidance, rather nicely and we are forecasting that we will continue to see gross margin improvements, which will drive the EBITA margin improvements in a lower volume environment and so we are executing quite well we are doing probably slightly.
Ivo Jurek: Other than what we've anticipated at the beginning of the year some things happen.
Ivo Jurek: Happening right as we've anticipated then.
Ivo Jurek: And, you know, if you think about it, we're going to be delivering in 2024 kind of margin performance, both on the EBITDA and gross level, gross margin level, kind of at a historical high during an end market volume trough. So that's providing us with a very positive setup as we enter a more constructive volume environment, kind of in the 25 and 26. So, you know, we are laser focused on executing on our 26 commitments to our shareholders.
Brian: If you think about it we're going to be delivering in 2024.
Brian: Kind of margin performance, both on the EBITDA and gross level gross margin level kind of at historical high.
Stephen Edward Volkmann: Gearing and end market volume trough, so that's providing us with a very positive setup as we enter a more constructive volume environment kind of in the 25 and 26.
Ivo Jurek: We are laser focused on executing on our 26 commitments to our shareholders. We are making good progress and based upon where I sit today and what I see from the organizational execution I would feel much more confident that we're going to be.
Ivo Jurek: We're making good progress. And based upon where I sit today and what I see from the organizational execution, I would feel much more confident that we're going to be, you know, highly capable of delivering on that objective that we set up at C&A.
Ivo Jurek: Highly capable to deliver on that objective that we set up at the CMT.
Ivo Jurek: Yeah.
Deane Michael Dray: Your next question comes from Dean Dray of RBC Capital Markets. Your line is open.
Brian: Your next question comes from Deane Dray of RBC capital markets. Your line is open.
Deane Michael Dray: Thank you. Good morning, everyone.
Deane Michael Dray: Thank you and good morning, everyone.
Deane Michael Dray: Hey, maybe just want to circle back. There's been a lot of discussion about the tone of business and stabilizing demand and so forth, and you've given lots of good color there.
Deane Michael Dray: Good morning.
Deane Michael Dray: Hey, maybe just wanted to circle back Theres been a lot of discussion about like the tone of business and the stabilizing demand and so forth when you've given lots of good color there.
Speaker Change: And just.
Deane Michael Dray: If you could make a distinction between the demand.
Ivo Jurek: And just maybe if you could make a distinction between the demand for aftermarket versus first fit. And just the idea is, you know, when you look at the slides, you're down first fit industrial in both segments, and also down First Fit, Industrials, North America, and EMEA. So maybe you have to dig deeper into the individual verticals, you know, agriculture, commercial construction, so forth, and just saying First Fit is not specific enough, but just how do you reflect on First Fit all being down at this stage in a stabilizing environment?
Deane Michael Dray: On after market versus first fit and just the idea.
Deane Michael Dray: When you look at the slides you're down first fit industrial in both segments and also down.
Ivo Jurek: First fit industrials, North America and EMEA. So just maybe you have to dig deeper into the individual verticals.
Deane Michael Dray: AG commercial construction and so forth.
Deane Michael Dray: And just saying first fit is not specific enough, but just how do you reflect on the first fit all being down at this stage in an a and a stabilizing environment.
Ivo Jurek: I would say that the first fit is predominantly impacted by agriculture, commercial construction, and personal mobility. Those three verticals are driving, I would say, 95% of the first fit performance, while the replacement business is up below single digits globally. And I would say that that's driven by a very, very solid performance in AR on the automotive replacement side, so up mid single digits and stabilizing performance in the industrial replacement, which is down, I would say, low single digits.
Speaker Change: Yes, I would say that the first thing is predominantly impacted by ACA commercial construction in personal mobility.
Ivo Jurek: <unk> three vertical subscribing.
Deane Michael Dray: I would say 95% of D first fit performance, while the replacement business is up low single digits.
Deane Michael Dray: Globally.
Ivo Jurek: And I would say that that's driven by a very very solid performance in <unk>.
Deane Michael Dray: In AI in the automotive replacement side, so up mid single digits.
Deane Michael Dray: Stabilizing performance in the industrial replacement, which is down I would say low single digits. So you are right you need to take a look at the puts and takes.
Ivo Jurek: So you're right; you need to take a look at the puts and takes. And if you recall what I stated, I believe that the old highway is going to continue to be a headwind throughout the year. But I also believe that we can maintain strong performance in automotive replacement and that we will start seeing improving trends as we work through the year in the industrial replacement side.
Ivo Jurek: And.
Deane Michael Dray: If you recall, what I stated I believe that.
Deane Michael Dray: The off highway is going to continue to be a headwind throughout the year, but I also believe that we can maintain strong performance in automotive replacement and that we will start seeing improving trends as we work through the year.
Deane Michael Dray: In the industrial replacement side of our business.
Deane Michael Dray: Great, that's helpful. And then I might have missed it, but when you talked about cadence in the quarter, how did April start off? And did any of that Easter holiday early impact you? Was that recouped noticeably in April?
Speaker Change: Great. That's helpful and then I might have missed it but when you talked about cadence in the quarter. How did April started off and did you any of that Easter holiday.
Speaker Change: Early impact was that recouped noticeably in April.
Ivo Jurek: So in March, the March month was not really impacted from an order intake perspective on the Easter side of the holiday or the Easter holiday side. It was more the shipments that were more impacted in Europe, particularly Europe and North America, about, think about it again, maybe half a day of sales. So it wasn't, you know, it wasn't significant.
Deane Michael Dray: So.
Deane Michael Dray: In March the.
Speaker Change: The March month was not really impacted from an order intake.
Speaker Change: On the eastern side of the holiday or the Easter holiday side.
Ivo Jurek: It was more of the shipments that were more impacted in Europe, particularly in Europe, and North America about think about it again, maybe half a day of sales. So it wasn't it wasn't significant but we kind of came a shade under what we have anticipated at the midpoint.
Ivo Jurek: But, you know, we kind of came up short under what we had anticipated at the midpoint at the CMD. And April, look, we continue to see choppiness. Again, I would probably repeat myself, commercial construction, ag, IR came in kind of as we anticipated, steadily improving. Not, you know, no hockey stick improvement. AR remains solid.
Speaker Change: The CMV.
Ivo Jurek: April look we continue to see.
Ivo Jurek: Choppiness again, I'll, probably repeat myself.
Speaker Change: Moshe construction egg.
Ivo Jurek: IR came in kind of as we anticipated steadily improving.
Ivo Jurek: No hockey stick improvement.
Ivo Jurek: So, continuation of what we have seen. So, the market environment is choppy. That's the best way to describe it. You can have, you know, several weeks in a row that are very good, and then you may have a very weak week of order intakes and shipments. So it's pretty much playing itself out as we are anticipating in our forecast for Q2.
Speaker Change: Remains solid saw continuation of what we have seen.
Speaker Change: The market environment is choppy, that's the best way to describe it you can have several weeks in eroded.
Speaker Change: Good and then you may have a very weak.
Speaker Change: Weak order intakes and shipments so it's pretty much playing itself out us.
Ivo Jurek: As we are anticipating.
Speaker Change: Our forecast for Q2.
Speaker Change: Thank you.
David Michael Raso: Your next question comes from the line of David Raso of Evercore. Your line is open.
Ivo Jurek: Your next question comes from the line of David Raso of Evercore. Your line is open.
David Michael Raso: Yeah, hi, just a couple quick cleanups. I don't think I heard a currency guide for the year. I'm just curious where your head is on currency now.
David Michael Raso: Yeah, Hi, just a couple of quick cleanups I don't think I heard a currency guide for the year I'm, just curious where your head is on currency now for the year well.
Unknown Attendee: Well, we don't really forecast currency, David, we, I mean, we just take the current rates and we use those for the balance of the year. And so, I'm not going to try to predict what's going to happen with FX. That's for sure. So, that's how we look at it. So whatever the prevailing rates are when we kind of put together, roll up our forecast, you know, that's what we use for the balance of the year.
David Michael Raso: Well, we don't really forecast currency.
Unknown Attendee: Just take the current rates and we use those for the balance of the year and so I'm not going to try to predict what's going to happen with FX. That's for sure. So that's how we that's how we look at that so whatever the prevailing rates are when we kind of put roll up our forecast that's what we use for the balance of the year.
David Michael Raso: I mean, given that it was slightly negative in the first quarter as a drag, is it just safe to assume that it's a little bit of a drag? It's a, yeah, it's a giant.
I mean, given it was slightly negative in the first quarter was a drag is it.
Speaker Change: Safe to assume that's a little bit of a drag for the year.
Speaker Change: It could drag.
David Michael Raso: Yeah, it's a drag on the first three quarters and then it kind of gets positive toward the end of the year, but it's a drag overall for the year, about 30 percent from the top line perspective. The Footprint Optimization, update where we stand with those and which are the ones that will when they get across the finish line.
Speaker Change: Yes, it's a drag to the first three quarters and then it kind of gets positive toward the end of the year, but it is a drag overall for the year about 30 bps.
David Michael Raso: From a top line perspective.
David Michael Raso: Okay.
Speaker Change: Footprint optimization could you give us a quick update where we stand with those and which are the ones that particularly when they get across the finish line should make a difference.
Ivo Jurek: Well, we we, you know, we have not quantified those at the CMD, as you know, we have a number of projects that are ongoing, and we will, you know, we will update you at a time of completion, just like we did in China with our China project last year. But you know, I would not think about substantial benefits until the latter part of 25, early 20.
Speaker Change: Well.
Speaker Change: We we have not quantified dose of the CMT as you know we have number of projects that are ongoing and we will we will update you at that.
Speaker Change: At the time of completion, just like we did in China with our China project last year, but I would.
Ivo Jurek: Not think about substantial benefits until latter part of 'twenty five early 'twenty six.
David Michael Raso: And then lastly, I think you said not just book to bill above but actually orders up and down. You said your orders are actually up as a company year over year in the first quarter. Is that correct? Yes, it is.
Speaker Change: Okay, and then lastly, I think you said not just book to Bill above one, but actually orders up year over year right out of the revenues down So book to bill can be above one in the quarter is still down but.
Speaker Change: If I heard you correctly, you said your orders were actually up as a company year over year in the first quarter is that correct.
Speaker Change: That's correct.
Ivo Jurek: So the idea of organic being down three and a half and two Q is, I mean, obviously I don't think of you as a long lead time company, goes back, comment. Yeah, maybe the orders were up in the first quarter, but it's choppy enough that we can't count on uporders in one queue into even flat organic for the quarter. I think they did that.
Speaker Change: So the idea of organic being down three and a half into Q.
Speaker Change: I mean, obviously I don't think of you as a long lead time company that just goes back to your comment yes, maybe the orders were up in the first quarter, but it's choppy enough, we can't count on converting up orders on <unk> into even flat organic for the quarter. I mean is that sort of the idea like the orders are moving around the rough week to week.
Speaker Change: It just sort of where I think David.
David Michael Raso: Yeah, Dave, I think that that's the right way to think about it. Look, you know, some of the outperformance in Q1 versus the prior year has been driven by some of the longer cycle projects, you know, think oil and gas and mining, that will fill in 24 over the next, you know, two to three quarters. Half of that was driven, you know, half of the outperformance was driven just simply through the shorter cycle businesses.
David Michael Raso: Yes, Dave I think that that's the right way to think about it look.
David Michael Raso: Some of the outperformance in Q1 versus prior year has been driven by some of the longer.
Speaker Change: Longer cycle projects, I think oil and gas and mining that will fill.
David Michael Raso: In 24 over the next two to three quarters half of that was driven off of the outperformance was driven just simply true actually the shorter cycle businesses, but then you kind of see incrementally a little more weakness in AG and commercial construction. So we are just trying to balance.
David Michael Raso: But then you kind of see a little more weakness in ag and commercial construction. So we're just trying to balance that out. And again, I would, you know, I would restate that we believe that the end market environment is stabilizing, but we are not prepared to, you know, declare victory and say, Hey, look, there's an inflection. And we anticipate now that it will meaningfully impact our ability to deliver, you know, top line growth above what we are envisaging at this point in time.
David Michael Raso: That out and again I would.
Speaker Change: Restate that we believed that the end market environment is stabilizing but we are not prepared to declare a victory and say hey look there is an inflection and we anticipated now that wil.
Speaker Change: <unk> meaningfully impact our ability to deliver.
David Michael Raso: Topline growth above what we are envisaging at this point in time again, it's early we're off to a very good start and we believe that the backdrop is more positive, but we are very pleased with where we sit presently.
David Michael Raso: Again, it's early, but we are off to a very good start, and we believe that the backdrop is a little more positive. But we are very pleased with where we sit presently. Well, I have one quick one. I know you used your revolver a lot. Unknown Speaker, Unknown Speaker, But the first quarter did come in even a little lower than I thought. Some help with how you're thinking about the full year.
Speaker Change: Well I have one quick one the interest expense I know you you used your revolver a lot in 'twenty three so that not repeating should should enable right your interest expense to be down.
Speaker Change: But the first quarter did come in and have been a little lower than I thought can you give us some help with how you're thinking about the full year interest expense.
David Michael Raso: Yeah, I mean, it is going to be down year over year. We're thinking about $150 million in interest expense, the gap interest expense for the year.
Speaker Change: Yes. It is.
Speaker Change: Going to be down year.
Speaker Change: Year over year, we're thinking about $150 million interest expense GAAP interest expense for the year.
Unknown Attendee: helpful. Thank you so much.
Speaker Change: Okay helpful. Thank you so much.
Speaker Change: Thank you.
Richard Michael Kwas: There are no further questions at this time. I will now turn the conference back to Rich Kwas for closing remarks.
Unknown Attendee: There are no further questions at this time I will now turn the conference back to rich <unk> for closing remarks.
Richard Michael Kwas: Alright, thank you everyone for joining us. If you have any further questions, feel free to reach out, and otherwise, have a great rest of the week.
Richard Michael Kwas: Alright. Thank you everyone for joining if you have any further questions feel free to reach out and otherwise have a great rest of the week. Thank you.
Operator: Thank you. That does conclude our conference for today. Thank you all for joining us. You may now disconnect.
Speaker Change: Thank you that does conclude our conference for today. Thank you all for joining you may now disconnect.
Operator: Okay.
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