Q3 2024 Gates Industrial Corp PLC Earnings Call
Brianna: Thank you for standing by. My name is Brianna and I will be your conference operator today. At this time, I'd like to welcome everyone to the Gates Industrial Corp. Q32024 earnings call.
Brianna: Please note that this call is being recorded. At this time, all participants are in a listen-only mode. After the speakers remarks, there will be a question and answer session. If you would like to ask a question, please press star, followed by the number one on your telephone keypad. To withdraw your question, press star one again.
Speaker Change: I will now turn the conference over to Rich Kwas VP Investor Relations. Please go ahead sir.
Rich Kwas: Greetings and thank you for joining us on our third quarter 2024 earnings call.
Rich Kwas: I'll briefly cover our non-gap and forward-looking language before passing the Call of Rador CEO Ivo Jurek. We'll be followed by Brooks Mallard, our SIEFFA.
Rich Kwas: Before the market opened today, we published our third quarter 2020 for results.
Rich Kwas: A copy of the releases available on our website at investors.gates.com.
Rich Kwas: Our call this morning is being webcast and is accompanied by a fly presentation. On this call we will refer to certain non-gap financial measures that we believe are useful in evaluating our performance.
Rich Kwas: Reconciliations of historical non-GAAP financial measures are included in our earnings release in the slide presentation, each of which is available in the investor relations section of our website.
Rich Kwas: 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.
Rich Kwas: These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements.
Rich Kwas: These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC.
Rich Kwas: We disclaim any obligation to update these forward-looking statements.
Rich Kwas: Later this quarter we will be attending the Baird Global Industrial Conference.
Rich Kwas: the UBS Global Industrials and Transportation Conference and the Goldman Sachs Industrials and Materials Conference.
Rich Kwas: We look forward to meeting with many of you.
Speaker Change: Before we start, please note all comparisons are against the prior year period unless stated otherwise. Now I'll turn the call over to Ivo.
Ivo Jurek: Thank you, Rich.
Ivo Jurek: Good morning, everyone. We'll begin on slide three. In the third quarter, our team continued to execute well and delivered solid profitability improvement while encountering soft demand in certain industrial and markets.
Ivo Jurek: We experienced about a 4% decline on a core basis, primarily driven by weaker demand in the agriculture, construction, and personal mobility and markets.
Ivo Jurek: Total replacement sales increased 1%, led by modest growth in automotive replacement, while sales to OEMs declined in the low double-digit range.
Ivo Jurek: Book to Bill, and it's slightly above 1.
Ivo Jurek: We generated a 30 basis points increase in adjusted EBITDA margins.
Ivo Jurek: The improvement was fueled by a 110 basis point increase in our gross margin. Gross margin benefited from ongoing advancement of our various enterprise initiatives, which include pricing actions and productivity.
Ivo Jurek: In addition, Channel Mix was favorable.
Ivo Jurek: These factors more than offset the impact of volume weakness during the quarter.
Ivo Jurek: Our net leverage ratio declined to 2.4 times from 2.6 times in the year-ago period, supported by a lower debt balance and improved profitability.
Ivo Jurek: We have maintained our full year 2024 adjusted EBITDA midpoint of $755 million and narrowed that range.
Speaker Change: Brooks will touch a bit more on our guidance later in the presentation.
Speaker Change: So now please turn to slide four.
Speaker Change: In the third quarter, we produced sales of $831 million, which was a 3.8% decrease on a core basis.
Speaker Change: Replacement cells go slightly.
Speaker Change: We continue to see durable demand trends in our global automotive replacement business.
Speaker Change: OEM sales decreased primarily affected by lower demand in ag, construction, and personal mobility.
Speaker Change: Our key Asian geographies and South America generated core sales growth, a bright spot in the quarter.
Speaker Change: Adjusted EBITDA was approximately $183 million, which translated to a 22% margin and an increase of approximately 30 basic points.
Speaker Change: The improvement was led by a 110 basis point increase in gross margin driven by efficiencies from our enterprise initiatives, as well as an increased mix of replacement sales, which carries higher margins compared to our fleet average.
Speaker Change: SG&A was higher due to increased spending associated with investments in our strategic initiatives and unfavorable effects.
Speaker Change: We believe we are making appropriate SG&A investments to improve the enterprise growth algorithm for the long term.
Speaker Change: Adjusted earnings per share was 33 cents, which was 8% lower versus the year prior.
Speaker Change: Operating income was approximately a 3 cents headwind, which was impacted by the lower core sales performance.
Speaker Change: We managed our operations well in the weaker sales environment.
Speaker Change: The year-over-year decline in adjusted EBITDA compared to the year-over-year decline in sales measured 16 percent.
Speaker Change: better than normal performance, aided by our execution on a company-wide enterprise initiatives. On slide five, we'll review our segment performance.
Speaker Change: In the power transmission segment, we generated sales of $513 million, which represented an approximate 3% decrease on a core basis.
Speaker Change: The replacement channel was up year over year, backed by the modest growth in automotive replacement.
Speaker Change: OEM demand stayed under pressure, with both industrial and automotive experiencing declines in the low double-digit range.
Speaker Change: Broadly, we saw declines across our end markets in power transmission.
Speaker Change: Diversified Industrial and Automotive, Benefiting from Good Replacement Activity were the most resilient end markets as both posted low single-digit decrease in core sales.
Speaker Change: Ad and construction demand remain muted.
Speaker Change: Personal mobility remained a headwind for growth, but the sales base has stabilized and inventories at the mobility manufacturers are trending lower.
Speaker Change: We expect inventory levels to normalize by year-end and believe the business is well positioned for growth in 2025.
Speaker Change: Power transmissions adjusted EBITDA margin, expanded 30 basis points.
Speaker Change: Gross margins expansion drove the increase, led by contribution from our enterprise initiatives as well as favorable channel mix, partially offset by lower volumes.
Speaker Change: In the fluid power segment, our sales were $317 million. On a core basis, sales decreased just under 5%.
Speaker Change: The replacement business grew modestly, led by automotive replacement, which grew mid-single digits.
Speaker Change: Industrial replacement core sales performance was relatively flat.
Speaker Change: Industrial OEM sales declined mid-teens on a core basis driven by continued demand pressure in ag and construction.
Speaker Change: Despite lower volumes, fluid power EBITDA margins extended 20 basis points due to the progress with our enterprise initiatives and a higher replacement sales mix.
Speaker Change: Additionally, as part of our footprint optimization initiatives announced in March at our Capital Markets Day,
Speaker Change: We have commenced projects that will predominantly impact our fluid power business and should be a nice contributor to profitability in 2025 and beyond, all else equal.
Speaker Change: I will now pass the call over to Brooks for further comments on our results. Brooks.
Brooks Mallard: Thank you, Ivo. I'll begin on slide 6 and discuss our core sales performance by region.
Brooks Mallard: are key Asian geographies and South America groups.
Brooks Mallard: But that was more than offset by demand weakness in North America and EMEA.
Brooks Mallard: In North America, core sales declined approximately 6%, driven by weaker OEM sales trends.
Brooks Mallard: Industrial OEM channel sales declined double digits, with the agriculture and construction and markets most impactful to our performance, followed by mobility.
Brooks Mallard: We also experienced weakness in automotive OEM, with sales down mid-single digits.
Brooks Mallard: North American replacement channel cells remained resilient, bolstered by low single-digit growth in automotive replacement and with flat sales performance in industrial replacement.
Brooks Mallard: In EMEA, core sales fell just over 6%.
Brooks Mallard: Overall macroeconomic pressure impacted the region's top-line performance.
Brooks Mallard: Both industrial OEM and replacement core sales fell double digits, driven by declines in energy, construction, and diversified industrial.
Brooks Mallard: Automotive OEM sales were down double digits, which was mostly offset by mid-single-digit growth in automotive replacement.
Brooks Mallard: China Core sales grew modestly and benefited from strength in the industrial and markets, which expanded double digits.
Brooks Mallard: Construction, Diversified Industrial, and Personal Mobility were significant contributors.
Brooks Mallard: The growth was partially offset by a high single-digit decline in automotive driven by OEM demand softness.
Speaker Change: Automotive replacement declined slightly.
Speaker Change: South America and East Asia and India both posted low single-digit growth in core sales.
Speaker Change: Automotive outperformed industrial in both regions with industrial OEM sales down modestly.
Speaker Change: On slide 7, we lay out the key drivers of the year-over-year change in adjusted earnings per share.
Speaker Change: Operating performance represented a $0.03 per share headwind driven by the year-over-year core sales decline.
Speaker Change: Favorable interest expense and other items, including a lower share count, offset a higher adjusted effective tax rate.
Speaker Change: Slide 8 provides an overview of our cash flow performance and balance sheet metrics for the third quarter.
Speaker Change: Our free cash flow was $88 million, which represented 101% conversion to adjusted net income.
Speaker Change: We built incremental inventory to support the new auto replacement business we announced last quarter.
Speaker Change: In addition, while industrial market activity currently remains subdued in our most important geographies, we believe we are nearing a trough.
Speaker Change: Given our short cycle demand characteristics, we are positioning the business to capitalize on a potential recovery and support superior customer service levels.
Speaker Change: Our net leverage ratio was 2.4 times at the end of the quarter, which was a 0.2 times improvement compared to last year.
Speaker Change: The combination of a lower debt balance and improved profitability contribute to the result.
Speaker Change: We are well positioned to deliver our 2026 target of one to two times net debt to adjusted EBITDA.
Speaker Change: Our trailing 12-month return on invested capital was 22.3%, a 70 basis point increase and supported by the increase in adjusted EBITDA margin.
Speaker Change: Shifting to our updated 2024 guidance on slide 9, we have increased our adjusted earnings per share guidance and narrowed our adjusted EBITDA guidance range while reiterating the midpoint.
Speaker Change: We believe our full year 2024 core growth will be in the range of minus 4% to minus 3%.
Speaker Change: which is in the lower half of our prior guidance range.
Speaker Change: We have narrowed our adjusted EBITDA guidance to a range of $745 million to $765 million.
Speaker Change: We have increased our adjusted earnings per share range to $1.33 per share to $1.37 per share, a three cent increase at the midpoint.
Speaker Change: Our guidance for capital expenditures and free cash flow conversion remains unchanged.
Speaker Change: On slide 10, we show our updated earnings per share wall for 2024.
Speaker Change: From left to right, we project about a one cent per share benefit from operating income, which is offset by higher interest expense.
Speaker Change: A lower tax rate and share count contribute three cents of adjusted earnings per share benefit.
Speaker Change: Turning to Slide 11, we wanted to provide a brief update on our Footprint Optimization Plan.
Speaker Change: Last quarter we discussed achieving 40 million dollars of annualized savings over a multi-year period with savings beginning to accrue next year.
Speaker Change: Today, we have announced three closures of subscale facilities, which are all expected to be completed by year-end.
Speaker Change: The Footprint Optimization Plan is a global initiative, and other rooftop consolidations are poised to enter the execution stage.
Speaker Change: As a reminder, we anticipate achieving 40 percent of the full savings run rate as we exit 2025 and intend to be at the full savings level on a run rate basis by the end of 2026.
Speaker Change: In aggregate, we believe the footprint optimization plan can contribute over 100 basis points to our adjusted EBITDA margin at maturity, which is at the high end of the range we communicated at our capital markets day in March.
Speaker Change: Now, I will turn it back over to Ivo for his closing remarks.
Ivo Jurek: Thank you, Brooks. On slide 12, I'll provide some key thoughts before we take your questions.
Ivo Jurek: First, our Global Gates team is executing well, and we are delivering higher profit margins in a soft demand environment.
Ivo Jurek: Our team is effectively managing the operating variables that can be controlled in a challenging environment and produced a record Q3 gross margin for Gates since we became a public company.
Ivo Jurek: In 2024, we are on track to generate over 100 basis points of adjusted EBITDA margin improvement, with our core sales on pace to decline low to mid-single digits.
Ivo Jurek: Second, we are positioned to drive meaningful returns for our shareholders over the next few years.
Ivo Jurek: since 2016 on a core basis.
Ivo Jurek: Our sales have grown at a 4% compound annual growth rate.
Ivo Jurek: We have multiple strategic growth initiatives in place, including driving a change in the way personal mobility devices are designed and built.
Ivo Jurek: developing new fluid conveyance technologies that offer more efficient cooling solutions.
Ivo Jurek: for Hyperscale Data Centers, as well as further increasing our relevance with existing customers and securing new customers in the automotive and industrial replacement channels.
Ivo Jurek: As the industrial market stabilizes, we believe we are well positioned to drive attractive core revenue growth over the midterm.
Ivo Jurek: In addition, we believe the ongoing execution of our enterprise initiatives should enable us to deliver about average incremental margins on a growth we anticipate to achieve.
Ivo Jurek: We are making incremental investments across the enterprise to position the company to deliver higher organic growth and experience more organizational efficiencies over the next decade.
Ivo Jurek: Finally, our balance sheet position continues to show steady improvement, and we anticipate having more avenues available to deploy capital over the midterm.
Ivo Jurek: We intend to be opportunistic, yet prudent in deploying our access-free cash flows.
Ivo Jurek: Before taking your questions, I want to extend my appreciation to the almost 15,000 Global Gates Associates for their hard work and determination to achieving our enterprise priorities and satisfying our customers' expectations.
Ivo Jurek: With that, I will now turn the call back over to the operators for Q&A.
Speaker Change: Thank you. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, please press star one a second time.
Speaker Change: If you have dialed in and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: We ask that you please limit yourselves to one question and one follow-up.
Speaker Change: Our first question comes from the line of Jeff Hammond with KeyBank. Please go ahead.
Speaker Change: Hey, good morning guys.
Speaker Change: Good morning, Jared.
Jeff Hammond: a great execution on the decrementals. It seems like a lot of the restructuring savings come in 2025, 2026. Maybe just talk about what you're doing in the near term to kind of mitigate the decremental headwind here in this short-term soft period.
Jeff Hammond: and I think that that's...
Speaker Change: That's what's a bit unique about this cycle than maybe in a previous cycle. We feel pretty good where we sit and we continue to execute. Our teams execute well.
Speaker Change: and, you know, we are managing to...
Speaker Change: expand our gross margins in a, you know, somewhat negative demand backdrop.
Speaker Change: Okay great and then it seems like your peers are putting up some some pretty challenging numbers in in China and Asia and and you guys kind of bucked the trend you know and so that really stood out I'm just wondering
Speaker Change: What you think you're doing there, you know, is it share gain? Is it, you know, kind of where you play that's kind of driving that, you know, that meaningful outgrowth?
Speaker Change: Yeah, Jeff, thank you. I, you know, I'm very proud of what our China team has been able to to execute
Speaker Change: You know, we've spoken for a while that, you know, we have had a pretty significant focus for in-region, for-region, so that our business is really more dependent on the local macro environment, and as demonstrated, that's not been necessarily great.
Speaker Change: It's been challenging for some time, but we did see some green shoots in the industrial and markets.
Speaker Change: in Q3.
Speaker Change: Our team has been focused on
Speaker Change: in the industrial space, just as much as in the automotive replacement side of our business. And they have executed really well.
Speaker Change: you know, while
Speaker Change: that the Chinese government is...
Speaker Change: indicating that they will deploy. We feel pretty good about where we sit. The growth has been returning and we anticipated we're going to have kind of a mid-single-digit growth rate for the full year 2024 in China.
Speaker Change: So the team has done a really good job.
Speaker Change: Okay, appreciate it.
Speaker Change: Our next question comes from Nigel Ko with Wolf Research.
Nigel Ko: Thanks. Good morning, everyone.
Nigel Ko: Thanks for the question.
Nigel Ko: So, there's a lot going on this morning, so my head's spinning. I just wanted to make sure that the message on page 11 is crystal clear. So, are you saying that, you know, by 2026, or for 2026, that you're kind of guiding towards 25.5, the high end of your...
Speaker Change: We didn't say anything about the margin target, is that the message?
Speaker Change: Yeah, so I would say at the end of 26, you know, compared to 2024, that we will be at that 40 million run rate of savings, or a little bit over 100 basis points that we had committed to on the last call as we move forward. So, you know, it'll hit incrementally as we move through 25 and 26.
Speaker Change: as we execute on the different projects, the different optimization plans. But if you look at it over a two-year period, by then is when you should see that 100-plus basis points of incremental EBITDA margin improvement.
Speaker Change: Okay, but not necessarily 25-5, that's somewhat bond dependent. Okay, I understand that.
Speaker Change: Yeah, okay, okay, and then on the 4Q...
Speaker Change: kind of build up. I think that at the midpoint, you're.
Speaker Change: seeing a slight pickup, I think maybe 1% or so on revenues at the midpoints. You know, the margin stepping down a fair amount. So we got revenues stable to slightly up, margin down, I think maybe a hundred base points plus. QEQ, so just want to understand those dynamics a little bit better.
Speaker Change: Those headwinds are higher than what we thought they would be because we're accelerating that activity in terms of shipping that business.
Speaker Change: and then also that's predominantly...
Speaker Change: happening in Q4 is where the majority of those credits are happening. So I would say, you know, year-over-year...
Speaker Change: You know, that's kind of a 75 to 80 basis points headwind from an EBITDA margin perspective. And that's a, you know, that's a one-time thing as we get, you know, the inventory in place for this new automotive replacement customers in the back half of the year.
Speaker Change: Nigel, one other question, one other comment real quick on revenue is just also for the full year think about I know you didn't ask this but just helps shape up Q4
Speaker Change: Think about close to a 1% headwind for the full year on FX. So, as you think about the core sales growth, what's implied for the fourth quarter. So, just want to make sure that everybody has that as a modeling piece.
Nigel Ko: Okay, thanks Rich. And then just a quick clarification on the share count portion of the bridge. I know you don't break out share count, but that would embed the 3Q buyback. That wouldn't have any influence from the whatever Blackstone does in the next couple months.
Speaker Change: That's correct. Yeah. Okay. Thank you. Thank you very much.
Speaker Change: Our next question comes from Damian Karas with UBS.
Damian Karas: Hey, good morning, everyone.
Damian Karas: Good day, ma'am.
Damian Karas: Brooks, you had made a comment that you believe you're nearing a trough and are starting to position for a recovery. Just curious.
Damian Karas: Maybe you could elaborate on what you're seeing and hearing that leads you to that viewpoint, and if that is in fact the case, how do you suspect that translates to growth range for the business in 2025?
Brooks Mallard: Yeah, so, you know, look it, there's been a lot, you know, so...
Brooks Mallard: and volume, you know, down volumes, particularly on the industrial side.
Brooks Mallard: And so, you know, as we've moved, you know, through the year, you know, there's a couple of things that, you know, we're really focused on, right? One is, we talked about...
Speaker Change: kind of labor availability and making sure that we have the ability to run our factories optimally. And then also making sure that we're positioning our inventory for superior customer service and then to be ready for the inflection. And so as we move through the year, we try to make sure that at some point we're going to come to the end. [inaudible]
Speaker Change: of this negative PMI, you're going to see things inflect. And so we just want to make sure that we continue to keep ourselves ready.
Speaker Change: for that inflection.
Speaker Change: and so, you know, when that comes, we don't know. We know there's certain parts of the business that we expect to inflect sooner rather than later.
Speaker Change: Industrial, we'll see when that starts to happen, but we want to make sure we're ready and prepared for the inflection to make sure we can serve the customers and take advantage of the upcycle.
Speaker Change: I see, that makes sense.
Speaker Change: And then regarding the footprint optimization, you know, are there any further details you can share around the three facilities like, you know, where they're located any particular, you know, concentration and end market or product and.
Speaker Change: What's your confidence that you can maintain market share should we see a return to growth sooner rather than later with less, you know, facility capacity out there?
Speaker Change: and remember, as we've talked about, you know, we're not...
Speaker Change: We're not taking capacity out of our operational footprint, right? We are, in fact, making sure we have the same or more operational capacity and labor availability as we move through these footprint optimization plans. That's key for us. And if you remember, Ivo and I both talked about labor availability being one of the biggest drivers.
Speaker Change: as we move through this footprint optimization plan. So we actually feel better about where we stand from a capacity perspective as we move through the cycle. And we thought through all of that as we thought about how we optimize our footprint moving forward.
Speaker Change: Understood. Thanks guys, that's a lot.
Speaker Change: Thanks. Our next question comes from Julian Mitchell with Barclays.
Julian Mitchell: yet, and when I look at the inventories to, say, trailing 12-month sales, I think they're at 21% in September, and inventories are up low double-digit year-on-year. You know, pre-COVID your inventory to sales was 15.
Speaker Change: So I just want to understand, should we expect for the medium term your inventory to sales runs at sort of 20% plus And that's the kind of sustainable Go forward rate from from here
Speaker Change: Yeah, Julian, I think it's a great, great question. Look, a couple of things. Number one, we've talked a little bit about
Speaker Change: taking incremental customers into 2025. I think Brooks talked about...
and I will put that on one side. On the other side, as these cycles inflect,
Speaker Change: Historically we have been in a position where we could not fully capitalize on some of the available business that was coming our way and and very quickly we build up substantial amount of past due backlog and so what we have you know when we take a look at the analytics on the business
and we you know we look at the same data that you very very carefully monitor
Speaker Change: The PMIs have been negative for over 24 months. While we are not calling the reversal of the PMI cycle, we believe that we are a lot closer to that inflection than perhaps we were thinking at the beginning of the year of 2024, if you recall.
And so, you know, as we think about our business, we just want to make sure that we position ourselves well. We will run with slightly elevated level of inventory into the next up cycle. We believe that that will position us well to take more market share.
Speaker Change: and we have enough initiative to our disposals to be able to deliver on the free cashflow commitments that we have committed to the analyst community and to our shareholders. So that's kind of how we are thinking about it.
Do we, you know, in Q4, is the implication that there's some kind of sort of non-inventory working cap liquidation, and that's what pushes you up towards the 90% for the full year, and you know, when we think about uses of cash going forwards,
Should we assume it's still sort of very much buyback as the focus at least for the next year given where the stock's valuation is?
Speaker Change: Yes, so if you look back at our last four, you know, Q4s
Speaker Change: From a cash conversion perspective, you know, where we are right now to deliver the 90% cash conversion commitment is right at average.
And so, you know, the business typically does...
generate a significant amount of cash because of seasonality in Q4. And as Ivo talked about, some of this inventory is going to come out as we ship some of this automotive replacement business. We're going to see some normal seasonality, cash coming in, both in terms of receivables and in terms of inventory drawdown and things like that. And so we feel pretty comfortable and confident where we are from a cash conversion perspective. From a capital allocation perspective, look, we still have to pay now some gross debt.
Speaker Change: you know, stock buybacks, you know, we still have authorization on our stock buyback. And, you know, as our stock, you know, trades higher...
Speaker Change: and our multiple looks better, the math on doing acquisitions is going to look better for us, right? And so M&A is something we're definitely going to have in the quiver as we look forward on capital allocation moving through 2025.
Julian Mitchell: But we will be very thoughtful about You know embracing the alternatives and as you said Julian stocks way too cheap
Speaker Change: based upon the financial metrics and the performance.
that we have delivered, and we believe that it's in the best of shareholders' interest to, you know, to deploy capital in buying back our shares.
Speaker Change: That's great. Thank you.
Speaker Change: Our next question comes from Dean Dre with RBC.
Thank you. Good morning, everyone.
Good morning. Good morning.
Dean Dre: Hey, just wanted to clarify on Julian's question regarding the inventories. If we look at the increase, how much of it was for this new auto replacement account, the channel fill, if you will, versus positioning ahead of demand, ensuring your fill rates and service level. So if we just, if you could separate those two.
Speaker Change: yeah I mean I you know I would say the you know the
Dean Dre: The inventory positioning
for the new business is probably in the $10 to $15 million range. And then the balance is us working through optimizing our inventory, using the 80-20 tools, thinking about when the inflection might come, what those demand signals might look like, and then how we make sure we take full advantage of the upcycle when it comes.
okay that's that's good and then can you talk about contributions from new products and any update I know it's still small but any update on the data center initiatives
Speaker Change: Yeah, sure. So we continue to track towards the 20% of new product vitality index, Dean. So we're very much on track to reach the level that we have committed.
Dean Dre: kind of in that 2000, you know, 2018-2019 time frame.
so that, you know, that's making really good progress and...
As we anticipate the inflection in personal mobility, we will continue to see a nice contribution from those sales into the NPI vitality in addition to our fluid conveyance side of our business.
I would say that maybe on the data centers, you know, in September we've announced the launch of a new data master data center cooling house that we anticipate will start shipping this quarter in Q4.
data center application, it does have better, maybe increased compactness for the application, allowing a much more efficient assembly and routing in very tight footprint in those data centers.
Dean Dre: and you know this also features
Dean Dre: very specialty compounded type materials.
Dean Dre: and downtime.
Dean Dre: through engineering and deploying our material science.
Dean Dre: from about 100 watts.
Dean Dre: up to 4 kilowatts
and we have a number of new accounts that we are working on designing with.
globally and frankly you know predominantly between North America and Asia so you know that's that's proceeding quite well again it's very early on
and why, you know, there's lots of...
lots of interest and lots of discussion about companies that are booking ton of new business. Lots of the new business is coming on the chip side and then on the infrastructure side there are some customers that have a longer cycle infrastructure type builds.
And, you know, our products are more consumable that go into these type of applications. And so we anticipated our stacking is going to be more on the latter part of that project cycle. So we're very excited about what we are doing. The opportunities are quite nice out there, and we have substantially scaled up.
the reach of the type of customers that we are dealing with both from kind of the hardware side all the way through the infrastructure side.
Speaker Change: That's a great update. Thank you.
Speaker Change: Thanks, Pete.
Our next question comes from Mike
Speaker Change: Good morning, everyone.
Mike: Morning. Two here. One, just as you think about the stressed end markets that you're seeing today, are you at the point where you're starting to see sequential stability in those markets or is there still deterioration? And I suppose more broadly, when you think about the cumulative portfolio at this point, is this just more stable at softer levels or is it more variable than that by end market if I'm just thinking about it on a sequential basis?
Speaker Change: Yeah, look, you know, the algorithm of the thesis about Gates has been that with our large presence in replacement markets, the replacement markets should give you a better stability as you move through these cycles.
And so I think that you're kind of seeing that playing itself out.
replacement market.
have been performing, you know, significantly better. I mean, replacement markets have been slightly up.
Speaker Change: on a much larger base of revenue and the first fit side of our business, which is much smaller, has been rather substantially impacted predominantly by the negative end market
Speaker Change: and I'm a professor at the University of California, San Diego, and I'm going to be talking about the new environment of highways. I think ag, commercial construction. There's a nuance on personal mobility, but it's just an overhang from a super cycle that was occurring during COVID.
has behaved much more constructively in Q3.
Speaker Change: you know while it hasn't accelerated into a growth
are performing quite well, and that's after, you know, two years of...
really nice sustained growth.
And again, we spoke, Brooke spoke a little bit earlier about the ramp up of the new account that we have in AR in North America that will be very nicely accretive in 25. And so, you know, the replacement market is doing exactly what we thought it's going to do when we brought the company public. It's providing more stability.
when we start actually getting some operational leverage on incremental revenues.
Speaker Change: As you think about the shift to M&A over the next few years here, how aggressively are you working on the cultivation today? Do you feel like you have the right team in place? And then what kind of opportunities are you seeing out there when you look at things that are either coming your way or that you're working on?
Look, we have a good team, small team, but a good team.
Our first priority was to repair our balance sheet or get our balance sheet to a point where we can start thinking about deploying excess free cash flow into incremental M&A.
while that was happening, you know, we were not inactive.
We are active out there, we are cultivating relationships.
Speaker Change: We have pipelines of opportunities where, you know, we've participated in a number of discussions.
Speaker Change: you know, at this point in time, you know, again, you know, our stock is cheap.
and I, you know, I'll probably get more rewarded by...
and generating rewards for our shareholders by buying back stock, then deploying and trying to, you know, to buy companies at much higher multiple that, you know, that is greater than where we trade.
But I think that as we re-rate and, you know, as things start to normalize, we continue to execute. We have a tremendous platform that can deliver truly a creative organic growth rate over the next, you know, three, four, five years. And so we believe that...
You know, we have low risk of ramping up, scaling up our business, we are deploying SG&A towards those opportunities. We have done a good job in balancing our capital deployment across our factories.
So we are well positioned to deliver on nice organic growth rate as the market starts to stabilize. And I don't think that that's, you know, a year out. That's probably a lot closer than that.
Speaker Change: Thank you, Bill.
Our next question comes from Jerry
Hi, this is Cleon for Jerry. Just one question for me. How has a price cost trended throughout the year as material costs have slowed and
And then, you know, how does this inform how we think about, you know, pricing for next year? Thanks.
Speaker Change: and I'm going to be talking about the the the the the the the the the the the the the the
So, you know, look, there's really two components for our pricing, you know, we have always maintained and always, I think we'll maintain, you know, we have pretty, we have pretty strong pricing power, and we'll always offset, you know, material, freight, inflation with price.
And, you know, we haven't fully deployed 8020 across all of our regions and all of our, you know, product lines yet. And so, you know, we're continuing to roll that out. And we think there's still some runway relative to the 8020 pricing and some accretion there. But, you know, we're confident.
Speaker Change: whichever way inflation goes, we'll be able to price for inflation and we'll be able to make sure we maintain our margins irrespective of how inflationary the environment is.
Thanks, I appreciate it.
Clay: Thanks, Clay.
Our next question comes from Nigel Kho with Wolf Research.
Thank you.
Nigel Kho: Oh, yeah, I've got another question. So, sorry about that. So, I just want to come back to the data center opportunity. I mean, I know it's very small right now, but...
Nigel Kho: You know, when you compare this, Parker Hanifin has sized the TAM at potentially $2 billion by 2028, and I'm just wondering if that's...
kind of the scope of the market you see as well, if there's any thoughts that would be helpful.
Yeah, Nigel, I think during our Capitalist Market Day, you know, I've talked about kind of a billion, billion and a half, so we're in a very, very similar vicinity as what Parker has outlined. They may have some other products there, but for us between, between our hoses, couplings and
and water pumps, we believe that that's a, you know, plus or minus similar number.
Okay and then just a quick one on the return to growth because it seems that you are seeing a bottom in the market and...
You know, I think any sort of reasonable view on seasonality as we go from 4Q to 1Q.
has you growing in 1Q25. I just want to make sure that's not out of whack with your thoughts.
Speaker Change: Thank you.
Well, we're not prepared to talk about 2025 quite yet, but if you were to look at normal seasonality through over the course of the last few years, one would expect, you know, you move from growth as you move from Q4 to Q1, but, you know, in our next call, you know, we'll roll out our 2025 guidance and what we're thinking about, you know, volumes and margins and everything. So, but, but, but, you know, assuming normal seasonality, you know, one would, one would think you would return to growth.
Okay, fair enough. Thanks guys.
Speaker Change: Thank you.
Speaker Change: Our next question comes from David Razzo with Evercore ISI.
David Razzo: Hi, thank you. Sorry, I've been on a lot of calls, so if this was answered, I apologize. The ag construction and personal mobility softness, is there any sign of a bottoming in those particular markets? Sort of dovetailing on the prior question about trying to think of resumption of organic growth.
David Razzo: Are those businesses a big part of that or is that something that...
Speaker Change: We don't yet
really know when the bottom is on those markets.
Yeah, Dave, good morning. Thank you for your question. I would I think I stated that a couple of minutes ago We definitely believe that personal mobility stabilizing
So while it may still be somewhat negative in Q4, the inventory, channel inventory and inventory of our customers is bottoming out and normalizing. So we anticipate that personal mobility will resume growth in 2025.
Speaker Change: I would say that ag and commercial construction is still reasonably negative.
Speaker Change: Anything on construction in particular?
No, I would say that construction is kind of similar to ag, it's reasonably negative globally.
I think that you're probably not going to see any stability into maybe latter part of next year.
And lastly, the plant closures, the facility closures. Any reason? I mean, it's easier for me to ask than you to execute. I appreciate that.
especially trying to serve customers.
any reason we can't pull forward some of the closures?
Speaker Change: Well, we did. We did. We've just announced...
Speaker Change: Sorry, we did, David. We've just announced three that we're going to, we announced them in a, you know, second half of 24, and we just stated that we will complete those closures by end of this year.
and we did say that, you know, our policy is that we will tell you when we are executing, when we are well on execution side and we have more that we anticipate to execute into 2025.
Speaker Change: and when we are ready to go and delineate exactly the impact, we will come up and we will provide an update. We have provided incremental update in our deck on page 11 and we are on track to execute those.
Speaker Change: And of what's been announced, how much are those already accounting for part of the $40 million?
Speaker Change: in full savings, just so I can get a scope of how many maybe more need to be executed to get to 40.
Yeah, look, I mean, I think, you know, as we, you know, we want to be really careful in terms of how much we roll out, you know, how much detail we give, you know, based on the timing of when things roll out, you know, we're going to stick with, look, by the end of 26, we're going to be at $40 million of incremental EBITDA margin, over 100 basis points of incremental EBITDA margin, and the split is kind of 40% 25 and 60% 26. And as we move through, as we move through things, and we start to realize savings, we'll be a little bit more, I think, discreet in terms of counting out what we've achieved versus what we have to go. But right now, you know, we're going to stick with that overview and then give you updates.
that overview as we progress through the different phases of the footprint optimization. And David that's that run rate for 25 and 26 so you know the 40% it gets you it's a number but we're that's run rate not realized savings in 25. Right.
Speaker Change: and you gave us a phenomenal presentation. Happy to answer questions, thank you.
Our next question comes from Andrew
Hey, good morning, guys.
Good morning.
received earlier in the year, so maybe you can give us more color on what's going on there overall.
Yeah, look, you know, we are starting to see some more stability, particularly in the replacement channels, so I think that, you know, people still need to repair their apparatus.
Speaker Change: of the demand disruption that we have seen over the last couple of years. So, the diversified industrial and market was basically flat year-on-year, which is the best performance we have seen in several quarters.
Speaker Change: Ivo Jurek, thank you for your time.
Look, we are very constructive on the global auto replacement business from a couple of different venues. One is that we are taking market share
which is always nicely accretive for our business. And two, you know, if you take a look at the underlying market dynamics, the car fleets continue to age.
People are driving, you know, the unemployment is very healthy.
Speaker Change: are both in the developed world as well as reasonably healthy in the developing world.
If something breaks that we manufacture, it's not nice to have. You will have to replace it. And so that gives us more...
optimistic view that that market continues to be reasonably accretive to what we do in 25.
Brooks, you've probably already talked about this, but just for my own edification that I got on late, is that I know you spoke about some startup costs last quarter as you ramped up some, you know, customer wins. Were those costs just lower than you expected in Q3? Can you flesh out what you saw?
No, I wouldn't say they're lower than Q-3. I would say probably that we've accelerated some of those, you know, lifts and shipments.
Speaker Change: Relative to the new business that we've won and so we're expecting probably more headwinds
then originally anticipated. I would say most of those headwinds are coming in Q4.
which there was an earlier question about, you know, year-over-year margin impact. And so there was like a, you know, 70 to 80 basis points margin impact year-over-year.
Speaker Change: of that accelerated...
activity with with the new replacement customer so no I mean I think you know in all in all it's it's good we're moving faster we're performing better we're getting the product on the shelf where it belongs and we're you know going to have
you know, I think a good, you know, good footprint as we move into next year.
Appreciate it, guys.
Speaker Change: Thanks, Andy.
We have no further questions at this time. I will now turn it back to Rich Kwas for any closing remarks.
Rich Kwas: Thanks everyone for participating. If you have any follow-up questions, please feel free to reach out and have a great rest of the week. Take care.
This concludes today's conference. You may now disconnect.
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