Q1 2025 Gates Industrial Corp PLC Earnings Call
Thank you for standing by my name is Greg and I will be your conference operator today at this time I would like to welcome everyone to today's Gates Industrial Corporation Q1, 2025 earnings call. All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad once again star one and.
Rich: And if you like withdraw your question Press Star one again, thank you I would now like to turn the call over to rich <unk>, Vice President of Investor Relations Rich.
Speaker Change: Greetings and thank you for joining us on our first quarter 2025 earnings call I'll briefly cover our non-GAAP and forward looking language.
Evo Europe: We're passing the call over to our CEO Evo Europe will be followed by Brooks Mallard our CFO.
Speaker Change: Before the market opened today, we published our first quarter 2025 results.
Speaker Change: A copy of the release is available on our website at investors <unk> Dot com.
Speaker Change: Our call. This morning is being webcast and is 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 reconciliations of historical non-GAAP financial measures are included in our earnings release and slide presentation, each of which is available in the Investor Relations section of our website.
Speaker Change: Please refer now to slide two of the presentation, which provides a reminder that our remarks include forward looking statements within the meaning of the private Securities Litigation Reform Act. These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward looking statements.
These risks include among others matters that we have described in our most recent annual report on Form 10-K, and other filings we make with the SEC, we disclaim any obligation to update these forward looking statements.
Speaker Change: We will be attending the global transportation and Industrials conference and Keybanc Industrials and basic materials Conference next month and look forward to meeting many of you before we start. Please note all comparisons are against the prior year period, unless stated otherwise now I will turn the call over to Eva.
Eva: Thank you rich good morning, everyone and thank you for joining our call today.
Eva: Let's start on slide three of the presentation.
Eva: Our first quarter sales outpaced our initial guidance supported by positive core sales growth of one 4%.
Eva: With both volume and price contributing.
Eva: Our replacement channel sales grew mid single digits.
Eva: Then by a high single digit growth in automotive replacement.
Eva: At the end market level ongoing softness in the agriculture, and construction markets and weakness in energy were more than offset by strong growth in personal mobility and.
Eva: Mid single digit growth in our automotive end market all in.
Eva: Our adjusted EBIDTA margin exceeded 22% and our gross margin expanded to 48, 7%.
Eva: We continue to advance our various enterprise initiatives, which are primarily focused on gross margin improvement.
Eva: Our net leverage finished at two three times at quarter end and decreased slightly year over year.
Eva: Free cash flow performance was consistent with normal seasonality.
Eva: Our balance sheet is in solid shape.
Eva: We purchased $13 million of our shares during the quarter and have over $100 million remaining under our existing authorization.
Eva: We are maintaining our initial 2025 financial guidance.
Eva: We have implemented actions to mitigate the relevant tariff impact on our business based on current tariff rates with price increases being the predominant tool.
Eva: Our existing in region for region operational structure limits the present tariff regime exposure and we anticipate offsetting the estimated tariff impact to price implementation and various operational initiatives.
Brooks: Brooks will provide more detail on our exposure in a few minutes.
Brooks: Since the U S presidential administration's announcement on tariffs on April 2nd we have not observed a noticeable change in customer demand or behavior.
Brooks: That said.
Brooks: There is more uncertainty in the market now relative to the start of the year and we continue to exercise.
Brooks: The dose of pragmatism in our forward planning.
Brooks: We are managing costs more closely and we are prepared to take additional actions as needed.
Brooks: Manufacturing footprint is largely in region for region, which we believe is an advantage relative to our competition.
Brooks: Furthermore, since 2022, we have worked extensively to optimize our sourcing and logistics networks.
Brooks: We are well positioned to continue to deliver further optimization.
Brooks: The current tariff policies take additional Holt.
Brooks: Our seasoned management team has experienced multiple economic cycles as well as previous supply chain dislocations.
Brooks: I'm confident in our team's ability to effectively manage our business as we enter this period of increased uncertainty.
Brooks: Please turn to slide four.
Brooks: First quarter total sales were $848 million, which translated to core growth of one 4% and was slightly better than our guidance.
Brooks: Total revenues were down just under 2% inclusive of unfavourable foreign currency effects.
Brooks: Our automotive growth was healthy.
Brooks: Ported either replacement channel growing high single digits on a core basis, which more than offset weakness in automotive OEM.
Brooks: Industrial end market demand generally remains soft although core revenue decreases were less of a headwind relative to prior quarters.
Brooks: Personal mobility continue to recover and contributed nicely with more than 30% growth.
Brooks: This was offset by continued soft demand in the agriculture, and construction end markets, which decreased in the mid single digits.
Brooks: We experienced greater stability in the industrial replacement channel with core sales performance about even with the prior year period.
Brooks: Book to Bill finished just above one for the quarter.
Brooks: In general business activity, followed our normal seasonality.
Brooks: And we did not observe material pre buy activity during the quarter.
Brooks: Adjusted EBITDA was $187 million and represented a margin rate of 22, 1% a decrease of 60 basis points.
Brooks: The year over year margin performance was in line with the midpoint of our guidance.
Brooks: We had a non recurring profit benefit primarily related to insurance proceeds in the prior year period that added approximately 100 basis points to last year's margin performance.
Brooks: Gross margin measured 47% and we exceeded the 40% threshold for gross margin for the fourth consecutive quarter.
Brooks: Adjusted earnings per share was 36%.
Brooks: An increase of approximately 6%.
Brooks: Underlying operating performance was positive.
Brooks: Offset by the nonrecurring favorable items from last year discussed earlier.
Brooks: Unfavorable foreign exchange.
Brooks: Lower interest expense and lower share count combined contributed about <unk> <unk> to adjusted earnings per share.
Brooks: On slide five we will review our segment highlights.
Brooks: In the power transmission segment, we generated revenues of $527 million in the quarter, which translated to approximately 2% increase on a core basis.
Brooks: The replacement channel was up year over year led by mid single digit growth in automotive replacement.
Brooks: Overall, our transmission OEM sales were slightly down.
Brooks: Even by a high single digit decrease in automotive OEM sales.
Brooks: Industrial OEM sales benefited from double digit growth in personal mobility.
Brooks: Demand was muted across the balance of industrial end markets in power transmission.
Brooks: In the fluid power segment, our sales were $320 million.
Brooks: On a core basis sales were approximately flat.
Brooks: Demand in the replacement business was healthy.
Brooks: Ported by automotive replacement, which grew mid teens.
Brooks: Industrial replacement stabilized with sales of approximately flat.
Brooks: Industrial OEM sales declined low double digits on a core basis.
Brooks: With respect to profitability.
Brooks: Both segments were impacted by foreign currency headwinds as well as the incremental SG&A expenses related to investments in system improvements, we referenced on our last earnings call.
Brooks: The power transmission segment, partially offset these headwinds with benefits from strengthening recovery in personal mobility.
Brooks: Our fluid power segment experienced greater margin pressure due to ongoing demand softness in the agriculture and construction end markets.
Brooks: I will now pass the call over to Brooks for further comments on our results.
Brooks: Thank you.
Brooks: I'll begin on slide six and review our core sales performance by region.
Brooks: North America returned to growth in the quarter, while China and East Asia continued to experience positive core sales growth consistent with the trend experienced during the second half of last year.
Brooks: EMEA and South America, both declined year over year.
Brooks: In North America core sales grew low single digits, driven by mid teens growth in automotive replacement.
Brooks: The underlying demand in the channel remains constructive.
Brooks: They're supported by incremental revenue from inventory load in with a new channel partner.
Brooks: Personal mobility core sales also increased double digits.
Brooks: This growth was partially offset by lower OEM demand.
Brooks: Industrial OEM channel sales decreased low teens.
Brooks: In EMEA core sales fell just under 1%.
Brooks: OEM sales were approximately flat with automotive weakness offset by growth in industrial.
Brooks: Industrial OEM sales were supported by a recovery in personal mobility.
Brooks: Replacement sales were mixed with automotive replacement core growth in the low single digits and industrial replacement down mid single digits.
Brooks: The energy end market continued to be a headwind within the region's results.
Brooks: China core sales expanded three 5% with broad based growth.
Brooks: Industrial end markets grew mid single digits with diverse of all industrial being a significant contributor.
Brooks: OEM sales grew low single digits with industrial growth offset by weakness in automotive.
Brooks: The replacement channel grew mid single digits supported by growth in both industrial and automotive.
Brooks: East Asia, and India posted approximately 5% growth in core sales.
Brooks: Automotive replacement diversified industrial and personal mobility were the major contributors.
Brooks: South America core sales declined low single digits.
Brooks: On slide seven we lay out the key drivers of our year over year change in adjusted earnings per share.
Brooks: Operating performance contributed approximately <unk> <unk> per share driven by gross margin expansion.
Brooks: The operating performance was offset by unfavorable foreign currency and a <unk> <unk> per share headwind from the nonrecurring favorable items realized in the prior year period.
Brooks: Lower interest expense, a lower share count and higher other income collectively contributed <unk> <unk> per share.
Brooks: Slide eight has an update on our cash flow performance and balance sheet.
Brooks: Our free cash flow for the first quarter was an outflow of $19 million, which is in line with our normal seasonal performance.
Brooks: As we mentioned on last quarters call. We have increased our capex investments this year to support key footprint optimization and system enhancement projects.
Brooks: Our net leverage ratio declined to two three times, which was a 0.1 times improvement relative to the prior year period.
Brooks: We repurchased $13 million of our shares in Q1 and have over $100 million remaining under our existing authorization.
Brooks: Our trailing 12 month return on invested capital was 22, 5%.
Brooks: Modest decline compared to the prior year.
Brooks: Our capital spending has increased to support projects that we anticipate will contribute to future expansion of our return on invested capital.
Brooks: Turning to our 2025 guidance on slide nine we are reiterating our full year 2025 guidance, which includes core revenues to be in the range of down <unk>, 5% to up three 5% relative to 2024.
Brooks: Adjusted EBITDA is forecasted to be in the range of $735 million to $795 million and adjusted earnings per share is estimated to be in the range of $1 36 per share to $1 52 per share.
Brooks: These ranges incorporate the anticipated incremental impact of all enacted tariffs, which al will cover in more detail in a moment.
Brooks: Additionally, we still anticipate capital expenditures of approximately $140 million and free cash flow conversion to exceed 90% of our adjusted net income.
Brooks: For the second quarter, we estimate total revenues to be in the range of $845 million to $885 million.
Brooks: In core revenues to be approximately flat at the midpoint.
Brooks: For the second quarter, we expect our adjusted EBITDA margin to decrease in a range of 10 basis points to 60 basis points compared to Q2 of 2024.
Brooks: Recall that we had a nonrecurring real estate gain in last year's second quarter that contributed approximately 80 basis points to last year's adjusted EBITDA margin.
Brooks: On slide 10, let's discuss our tariff exposure based on the current landscape and the associated mitigation actions we are implementing.
Based on all enacted tariffs as of April 29, we estimate our exposure is approximately $50 million for 2025.
Brooks: At the regional level North America represents about $35 million of the tariff cost and our exposure in China is approximately $15 million.
Brooks: The impact in other geographies, including the EU is estimated to be immaterial.
Brooks: We intend to offset the majority of our estimated tariff impact with price actions.
Brooks: We communicated price increases to our channel partners in early April and expect price realization to match the timing of the incoming tariff cost.
Brooks: Furthermore, we are employing various operational initiatives to mitigate potential margin erosion from the enacted tariffs.
Brooks: Okay.
Brooks: Assuming the state of play as of today, we intend to fully offset the incremental tariff impact estimated to be incurred this year and anticipate no meaningful impact to our adjusted EBITDA for the full year.
Evo Europe: I will now turn the call back over to Evo.
Evo Europe: Thank you Brooks.
Evo Europe: On slide 11, I'll summarize before we take your questions.
Evo Europe: First we are pleased with the start to the year.
Evo Europe: Core growth was slightly positive in our <unk>.
Evo Europe: Underlying operating performance was rather strong when considering the nonrecurring positive items from last year's first quarter and the headwind caused by foreign exchange.
Evo Europe: Our gross margins continue to increase.
Evo Europe: Second customer demand so far in the second quarter has been consistent with our initial guidance.
Evo Europe: However, we acknowledge there are potential risks to demand as the existing tariff regime becomes further entrenched.
Evo Europe: As such we are tightening our focus on our compressible cost structure, such as SG&A and other spending.
Evo Europe: We have action plans to prepare to implement should demand trends soften relative to our expectations.
Evo Europe: Third I would like to reemphasize that our team is seasoned and has been through periods of business uncertainty in recent times.
Evo Europe: Our global teams are working closely together to fully mitigate the tariff dollar cost impact.
Evo Europe: Additionally, we continue to progress our enterprise initiatives, which we believe will structurally improve our cost base for the long term and help mitigate tariff headwinds in the short term.
Evo Europe: Lastly, I want to accentuate that our balance sheet is in a strong position.
Evo Europe: And we have significant capacity to deploy capital.
Evo Europe: We have over $100 million remaining under our existing share repurchase authorization and plan to be opportunistic deploying capital.
Evo Europe: Before taking your questions.
Evo Europe: Want to extend my gratitude to more than 14000 global gates associates for their dedication and focus on execution to our customers expectation and resiliency, especially during the spirit of macroeconomics and geopolitical uncertainty.
Evo Europe: With that I'll now turn the call back over to the operator for Q&A.
Thank you so much and at this time I would like to remind everyone that in order to ask a question press star and the number one on your telephone keypad. Once again star one and enables the interest of time, we ask that you. Please limit your questions to one primary question and one follow up thank you.
Evo Europe: We will pause just a moment to compile the Q&A roster.
Speaker Change: And it looks like our first question today comes from the line of Michael Halloran with Baird. Michael. Please go ahead.
Evo Europe: Hey, Thank you good morning, everyone.
Speaker Change: Hey, Mike Good morning, Michael.
Speaker Change: So just.
Speaker Change: On the tariff side of things, obviously very clear messaging that on a dollar basis, you'll be offsetting the tariff impact maybe just talk about how that cadence and works out as you look through the remainder of the year is there any mismatch as you think about it in Q3 Q.
Speaker Change: Fully catch up by the fourth quarter kind of how does that dynamic play out and then secondarily. If you could add just how you feel about your competitive positioning all else equal.
Speaker Change: From a global footprint perspective.
Speaker Change: Hey, Michael I'll take the first part I'll, let me take the second part so.
Speaker Change: From a from a dollars perspective, we expect.
Speaker Change: Not to be negative in any quarter, we expect second quarter to be minimal impact I know.
Speaker Change: We expect third and fourth quarter to be matched pretty pretty.
Speaker Change: Closely and so very immaterial impact from a dollars perspective, we do expect about a 25 bps EBITA margin dilution for the year because it's dollar for dollar.
Speaker Change: But but no, but zero dollar impact and no real kind of quarter to quarter impact this is going to be material. So.
Speaker Change: I'll, let Dave handle the second part there let me.
Speaker Change: China, maybe additional clarity I'm sure that is going to be a ton of quest.
Speaker Change: Questions around the tariffs, but maybe put a pin into it but we anticipate that about 75% to 80% of that $50 million.
Speaker Change: <unk> be offset with price. So we got about 20% to 25% that we anticipate to offset through operational initiatives and supply chain realignment.
Speaker Change: I'll remind you that we have done lots of supply chain realignment then.
Speaker Change: We are Reconfiguring post Ukraine, Russia conflicts.
We feel that we are reasonably well positioned to be able to to drive that forward.
Speaker Change: As to the competitive positioning look.
Speaker Change: We have done a lot since frankly since Blackstone bought the company.
Speaker Change: 10 years ago.
Speaker Change: Started to position the organization for in region for region.
Speaker Change: Manufacturing.
Speaker Change: So as to see and so we have been doing quite a bit let me remind you that in 17 18 19.
Speaker Change: Ill put a bunch of monuments and the ground 10.
Speaker Change: Our rebuilt our operational capacities.
Speaker Change: We are well.
Speaker Change: Well positioned and I feel that today.
Speaker Change: One of the better footprints to be able to deal with the disruptions that we're seeing.
Speaker Change: Were brought by this tariff regimes.
Speaker Change: I think that we have competitively well positioned I know that we are all focusing on some of the impediments and there are impediments that we will need to operate through that being said, we do also see dawn of new opportunities out there, particularly.
Speaker Change: In United States, because we are well positioned.
Speaker Change: While we are pragmatic in our approach and we are focusing on operational cadence.
Speaker Change: And offsets too.
Speaker Change: What we see today to this regime, we all saw being very agile in focusing on new opportunities in the marketplace.
Speaker Change: No that makes a lot of sense I appreciate that and then a follow up just maybe where you know an update on where we stand on the internal initiatives progress.
Speaker Change: Tying it to the current trends.
Speaker Change: I'm, assuming the dynamics that are happening on the tariffs I don't impact your ability to push forward with the internal initiatives, but is there an opportunity to pull that forward, even more if demand softens and maybe how does how does that.
Speaker Change: Correspond or internet interrelate to the tariffs.
Speaker Change: Remediation actions you are taking.
Speaker Change: Yes, I think there's a lot to unpack in that.
Speaker Change: In.
Speaker Change: The short question I think Mike.
Speaker Change: Let me say that this.
Speaker Change: Vis vis initiatives, Steve corporate <unk>.
Speaker Change: <unk> 'twenty driven activities, we have had.
Speaker Change: Solid execution and I would say in general we are little bit ahead of our schedule.
Speaker Change: Frankly filters in and the gross margin performance again, another quarter of north of 40.
Speaker Change: 40% gross margin. So we are well on track to deliver on what we've what we've committed to to our shareholders again, we haven't done a ton of work.
Speaker Change: On.
Speaker Change: Material cost out.
Speaker Change: A huge opportunity you saw big progress last year, we continue on that trajectory in 2025, and we feel reasonably confident that we're going to see another year of <unk>.
Speaker Change: <unk> performance here.
Speaker Change: The underlying productivity.
Speaker Change: And price additive to what we are doing so that that all is helping out to offset these headwinds that we're seeing right now.
Speaker Change: And we'll have the footprint optimization that we have discussed that is going to build on its progress as we continue to progress through the year and remember.
Speaker Change: It really is a little more complex, it's not as hey look we have a window. So we're going to pull some things forward. We have a schedule of delivery of new equipment that were installing that generally speaking is fixed under fixed lead times and Thats really is kind of the gating item on your ability to to pull anything forward, but that being.
Speaker Change: <unk> other things Theyre under control that we can manage through as we see more of these impediments being layer it Dan.
Speaker Change: We can manage compressible cost days dialup compressible costs across the company.
Speaker Change: And we have.
Speaker Change: We are tremendously focused on managing dose controlling dose.
Speaker Change: And being very cognizant of that.
Speaker Change: We want to ensure that we protect our underlying operate operating margins. So I know, it's a long winded answer, but hopefully I have captured the essence of what would your question was.
You did thanks, Steve I appreciate it guys.
Speaker Change: Thanks, Mike.
Speaker Change: And our next question comes from the line of Julian Mitchell with Barclays. Julian. Please go ahead.
Julian Mitchell: Hi, good morning.
Julian Mitchell: Maybe just wanted to start with the demand question. So you've given sort of very good color on the geographic sort of trends, maybe just thinking about the end markets for a second.
Julian Mitchell: You gave a good update on the end market expectations.
Julian Mitchell: Globally on the prior call.
Speaker Change: Just wondering how those have moved around since then I suppose in particular sort of interested in the perspective on.
Speaker Change: Personal mobility, where it looks like the strongest start to the year and the full year guide implied.
Speaker Change: And also any help you could give us on what's happening in the <unk>.
Speaker Change: Also world at the moment and not just demand, but kind of how it youll products into auto OE brackets at in terms of tariff classifications.
Julian Mitchell: Good morning, Julien again, a lot to unpack. So hopefully you don't mind, a long winded answer here, but.
Julian Mitchell: Let me try to hit on all of these points.
Julian Mitchell: Well we.
Julian Mitchell: Let's just kind of.
Julian Mitchell: Ground ourselves up as the year started.
Julian Mitchell: We did not expect any meaningful recovery in the first half and it was for a number of different reasons nothing to do with Darius obviously, but we just we're waiting for the pmi's to recover and we thought that we have pretty well bracketed and much slower.
Julian Mitchell: Recovery.
Julian Mitchell: In the first half and I think that the general.
Julian Mitchell: Underlying demand is frankly, not playing significantly differently than what we have anticipated.
Julian Mitchell: Yes, there are some incremental headwinds now that I think everybody's getting more concerned than.
Julian Mitchell: We'll obviously manage dose.
Julian Mitchell: <unk> came a little bit better than what we expected in Q2 is looking very much in line with what our expectations are these are the you know.
Julian Mitchell: Order rates exit order rates from Q1, and frankly order rates that we have seen.
Julian Mitchell: Throughout April month to date, so I feel that we are reasonably well positioned to support what we have just shared with with.
Julian Mitchell: You all.
Julian Mitchell: All of this anticipated now starting to hit on some of the end markets. What we've always anticipated that auto builds would be down we felt when we were coming into the year, we felt that.
Julian Mitchell: All the forecasts that were being done by the third party well a little bit too optimistic.
Julian Mitchell: And.
Julian Mitchell: We were much more negative on auto builds when when the year started.
Julian Mitchell: Auto Bill, it's got a little worse, obviously, particularly exiting.
Julian Mitchell: Exiting Q1 into Q into Q2.
Julian Mitchell: But it's more around the edges, our sense was that the out of balance globally will be down around mid single digits. What we are seeing now is more down high single digits I would not be surprised if for the year at least for the next couple of.
Julian Mitchell: Quarters, we see auto builds being down kind of around the 10% 10% range.
Julian Mitchell: Year on year and.
Julian Mitchell: We've kind of bracketed that in in our forecast.
Julian Mitchell: Inversely, what we do see.
Julian Mitchell: And frankly, when it became IPO that was kind of the pretext of our thesis.
Julian Mitchell: We see the other replacement market being quite robust and when you take a look at even the reporting channel partners that we've had.
Julian Mitchell: So far.
Julian Mitchell: The market is not that bad.
Julian Mitchell: They they've reported positive store comps and we've reported rather robust.
Julian Mitchell: Outperformance with high single digits, but I would remind you that that's predominantly on the back of the market share gains that we have we have had last year. So both of these additives by the underlying.
Julian Mitchell: Our market is rather.
Julian Mitchell: Okay, and if you take into account the aging car fleet.
Julian Mitchell: Employment is still rather.
Julian Mitchell: People still they are going to probably cut slides, but they will still want to go visit grandma and in our family and so instead of taking a plane that will drive a little bit longer. So all of that bodes well for ADR and we anticipate that thats going to be accretive for the year.
Julian Mitchell: Here.
Julian Mitchell: If I think NRG energy.
Julian Mitchell: We had a muted outlook in energy get a little bit a little bit weaker.
Julian Mitchell: When you take into an account.
Julian Mitchell: <unk> deceleration in price of oil.
Julian Mitchell: And what I think is anticipated slowdown in the global economy. So they've got around the edges weaker off highway we felt that that was going to be kind of neutral.
Julian Mitchell: There is maybe down mid single digits saw slightly worse than what we have anticipated.
Julian Mitchell: Construction and that came in about what we've anticipated again, I'll remind everybody that our construction and agriculture was rather negative in particularly in the second half of last year.
Julian Mitchell: The machine boats were down.
Julian Mitchell: Between 20 and 30% in the second half.
Julian Mitchell: So.
Julian Mitchell: That not being as bad, but still being negative is what they've anticipated you can.
Julian Mitchell: Could you could anticipate that get slightly worse, but I think thats taking into an account how negative the.
Julian Mitchell: Highway AG and construction equipment performed last year my sense is that it's going to be more around the edges negative not dramatically more negative. So that I think is kind of okay and the diversified industrial diversified industrial hung in there that came about flattish for the quarter.
Julian Mitchell: And we anticipate that that's going to hang in there, but again I'll remind everybody. It was about a negative four 7% to eight quarters.
Julian Mitchell: In 2423, so the inventories are very lean in the channel and I think channel partners actually outperforming a little bit better than some of the orders that we see and we have seen so we have seen.
Julian Mitchell: The incoming orders being slightly under what our channel partners.
Julian Mitchell: Consuming so I feel that that end market is around the edges as we've anticipated.
Julian Mitchell: And maybe leaning more slightly positive and then the last piece is personal mobility that came very robust and I know that maybe the first question is going to be pre buys we did not see any pre buys from our channel partners. We have plenty of capacity we have.
Julian Mitchell: Predominantly in region for region.
Julian Mitchell: In that end market at the biggest growth that we have seen came out of Europe and Asia for consumption in Europe and Asia.
Julian Mitchell: We did not necessarily feel that there was any pre buy associated with that so I know I've given you a long winded answer, but I wanted to make sure that I fully encompass in my answer the essence of your question.
Julian Mitchell: That's super helpful. Thanks, very much Evo in just one very brief follow up.
Julian Mitchell: The.
Julian Mitchell: The sort of the auto sector and also parts has a lot of unique things going on on the tariff front and how things are classified or exempted and so on.
Julian Mitchell: Maybe just help us understand your own it's a small part of the company now high single digit share of sales, but your own auto OE business.
Julian Mitchell: Within the U S.
Julian Mitchell: Those sort of classified.
Julian Mitchell: Within what we see going on with the.
Julian Mitchell: Broader also companies in terms of tariff movements or it's sort of different to them.
Julian Mitchell: Yes.
Julian Mitchell: I apologize I forgot that part of the <unk>.
Julian Mitchell: Question Julien.
Julian Mitchell: That is that is not that big of a concern for us for the Oes, because if I take a look at what we do out of our plants in Mexico for the other Oes day pickup in Mexico. So we are really not responsible for whatever the tariffs situation would be and most.
Julian Mitchell: Everything that we do in Mexico, and in Canada for other components <unk> compliant as well so that that's not that critical and we really don't export anything from the U S to Europe as an example, and I think that you saw it on that tariff summer.
Julian Mitchell: Summary that we have had in the slide deck that.
Julian Mitchell: We know we have de Minimis exposure in Europe as an example to any tariff saw the arrow components are.
Julian Mitchell: Very very neutral for us <unk>.
Julian Mitchell: Great. Thank you.
Julian Mitchell: Okay.
Julian Mitchell: Alright, Thank you Julien.
Julian Mitchell: Our next question comes from the line of Jeffrey Hammond with Keybanc capital markets Jefferies. Please go ahead.
Jeffrey Hammond: Hey, good morning, guys.
Speaker Change: Good morning, Jonathan.
Speaker Change: Just on the core growth unchanged I just wanted to understand some of the moving pieces there.
Speaker Change: One kind of.
Speaker Change: What's the magnitude of the price increases that you've announced what incremental pricing do you have in the guide and then FX I think it was 253 point headwind in $34 million on EBITDA, just how are you thinking about that.
Speaker Change: And then I guess, the offset would be would be lower volume.
Speaker Change: Right. So let me, let me kind of walk through that so.
Our presentation, we talked about offsetting the $50 million of tariff impact was 75% to 80%.
Speaker Change: Pricing and then.
Speaker Change: We now think.
Speaker Change: What we were thinking that the other $10 million is going to be offset with operational improvements and supply chain changes and things like that so we didn't change our guide.
Speaker Change: From a core growth perspective, so that $40 million kind of comes out of volume well when you think about it over the balance of the year and that's kind of what <unk> was talking about earlier in some of the weaker OEM.
Speaker Change: Particularly around automotive sector, and then also the industrial sector. So that's kind of the offset there right I think from an FX perspective.
Speaker Change: We're seeing about 100 bps less of a headwind.
Speaker Change: And then we initially thought.
Speaker Change: And that filters through the EBITDA kind of in a in a normal fashion so not as much headwind as we're as we were thinking.
Speaker Change: From an FX perspective, and we based that on the.
Speaker Change: And end of March end of Q1 rates and those move around quite a bit and so those all those will flex through the year and there'll be.
Speaker Change: We will update those impacts those things move around but they've moved around quite a bit.
Since the end of the year.
Speaker Change: Through now.
Speaker Change: We will continue to update those depending on what FX.
Speaker Change: With the prevailing FX rates or so.
Speaker Change: Okay.
Speaker Change: Okay and then just just a follow up can you just quantify your your manufacturing base in Mexico, and then anything you can do.
Speaker Change: Just to kind of inch up that that U S. MCA compliant is closer to 100%. Thanks.
Speaker Change: Yeah, So look I think.
Speaker Change: The things that we could do in the U S. MCA compliance is probably more around our manufacturing base in the U S. We have some flexibility in terms of where we manufacture things.
Speaker Change: We have capacity that we've added not just in Mexico, but also in the U S and new machinery and equipment and things like that and so.
Speaker Change: So depending on the tariff somewhere we're sourcing from and things like that.
Speaker Change: Our.
Speaker Change: Our biggest kind of flex, where we can offset with tariffs and as always its always going to be a cost.
Speaker Change: Cost versus the tariff costs and internal costs versus the tariff cost has really takes advantage of our U S footprint, which is still pretty substantive.
Speaker Change: In terms of manufacturing and so that's really what we're looking at when we talk about the future.
Speaker Change: $10 million of offset.
Speaker Change: Sourcing and operational perspective, that's what we're talking about you know can we do more stuff in the U S. That's less impacted by tariffs and things of that nature. So.
Speaker Change: So thats going to be the biggest thing, we can do to offset or to kind of bump up the U S MCA for clients as well.
Jeffrey Hammond: And Jeff I would add that you know.
Jeffrey Hammond: The ESN CA noncompliance is really diminished.
Jeffrey Hammond: Around the edges for us I mean, it's almost.
Jeffrey Hammond: Immaterial nature.
Speaker Change: And what's the what's the mix of your manufacturing base in Mexico.
Jeffrey Hammond: In Mexico, we manufacture.
Jeffrey Hammond: Every product that we manufacture in the U S. So we have full footprint product transmission, we have a full footprint for fluid power.
Jeffrey Hammond: And so we can manufacture at just about everything in Mexico that we can manufacture in the U S. With the exception of mobility products mobility products, we can only manufacture out of United States.
Speaker Change: Okay. Thank you.
Jeffrey Hammond: Okay.
Jeffrey Hammond: Thanks, Jeff.
Jeffrey Hammond: And our next question comes from the line.
Speaker Change: Nigel Coe with Wolfe Research Nigel Please go ahead.
Speaker Change: Thanks, Good morning, guys, great color on the tariffs morning. So.
Speaker Change: Sounds like about two points of price coming through in the back half of the year.
Speaker Change: But is the plan to contract those price increases in the U S. So therefore, we're looking at maybe I don't know, 45% price increase in the U S.
Speaker Change: Are you going to spread the love across the whole portfolio.
Speaker Change: So that's the first part of the question and then the second part would be.
Speaker Change: Do you have material our materials don't work that you do have larger competitors that don't have the same sort of local for local manufacturing footprint. So.
Speaker Change: Importantly, <unk> and China imported more from China into the U S.
Speaker Change: Less U S MCA compliance in Mexico, just wondering if there's any competitive differentiation here.
Speaker Change: Yeah. So I'll take the first part of your question so look.
Speaker Change: The pricing is really based on its not as regionally based as it is it is more what can we do to offset the sourcing.
Speaker Change: Where we source from a where we make stuff from and kind of what's the net impact that needs to be passed along right and so.
Speaker Change: I'd say probably.
Speaker Change: A little bit more pricing maybe in the U S.
Speaker Change: But really that's based on just your ability to.
Speaker Change: So rhonda reconfigure your supply chain reconfigure your manufacturing base, and then kind of the net impact of the tariff versus the increased costs right. So we're going to have pricing.
Speaker Change: All over the world, where we're impacted by tariffs, but that's largely going to be based on.
Speaker Change: Both the supply chain aspect of it and the manufacturing.
Speaker Change: Aspect of it so.
Speaker Change: Hopefully that answers that part of the question.
Speaker Change: <unk>.
Speaker Change: On the competitive positioning Nigel I would say that we are probably best positioned from a manufacturing footprint again as you saw from a quantification on the tariffs I mean for us.
Speaker Change: While I don't want to diminish $35 million of tariff impact.
Speaker Change: On about one one and $1 six $1 7 billion.
Speaker Change: North America base of revenue, it's really not that substantial and it just gives you an indication that.
Speaker Change: We had a full capability to do everything in region for region.
We predominantly are dealing with more of a raw material supply.
Speaker Change: That impacts that number not necessary imports of finished goods into the U S and so.
Speaker Change: Most of our competitors are foreign competitors.
Speaker Change: Many of them or some of them have some limited capabilities to do either some limited assembly or they have capability to build some of these products, but we have very few competitors and say maybe parker in fluid power I would say probably.
Speaker Change: Somebody that comes to mind that that has a very similar footprint two gates, but outside of that I think.
Speaker Change: Everybody else is in the less favorable position than 10 Gates Corporation in may be parka in fluid power and power transmission side.
Speaker Change: Simply have the biggest footprint and we are well positioned to be able to deal with this and we will continue to lean towards taking advantage of competitive positioning.
Speaker Change: Great and then my follow up question is just changing gears a little bit.
Speaker Change: I know liquid cooling.
Speaker Change: Very small business today, but.
Speaker Change: Good potential so it does sound like that value chain has turned the crank in the gear. So just wondering if youre seeing that in any any color there.
Speaker Change: Yeah, well, thank you for asking the question actually.
Speaker Change: We've kind of alluded it from them from the update today not for us.
Speaker Change: Any other reasons other than.
Speaker Change: We understand that there are some other more pressing issues.
Speaker Change: Look we continue to have a coca growing.
Speaker Change: We continue to have a really good growing engagement with a very significant number of new customers from server manufacturers system integrators, all the way to kind of the data center operators and Hyperscale are so we feel pretty good at what's happening.
Speaker Change: Various stages of testing.
Speaker Change: And validation of our products in these applications as we speak.
Speaker Change: I just have a couple of.
Speaker Change: Reviews on our E water pump that goes into data centers.
Speaker Change: Rather than a significant number of opportunities that we are.
In a position to capitalize on and we are rushing sample builds.
And validation of those samples and frankly interestingly enough. It it's not just in the U S, but it's in Asia as well.
Speaker Change: Rather a nice step up in.
Speaker Change: And significant interest for our water pump.
Speaker Change: Particularly particularly in Taiwan and in China.
Speaker Change: As these companies, particularly on the GSM side are ramping up build out of <unk>.
Speaker Change: More advanced.
Speaker Change: White boxes and branded boxes in the server side. So so that's really exciting we are in kind of final stages with a hyper scaler in validation of of.
Speaker Change: Of assemblies that have a very unique value proposition.
Speaker Change: We have not seen any slowdown frankly in interest if anything has been.
Speaker Change: Rather nice step up in the set of opportunities on which we are quoting or delivering samples.
Speaker Change: Quite confident that not too distant future, we're going to be talking about business that is going to be ramping up rather than on opportunities that we are quoting or we're engaged in validation testing.
Speaker Change: That's great. Thank you.
Nigel Coe: Thanks Nigel.
Speaker Change: And our next question comes from the line of Dan Dray with RBC capital markets. Please go ahead.
Dan Dray: Thank you and good morning, everyone.
Speaker Change: Hey, good morning Deane.
Speaker Change: Hey, maybe we could talk about the channel your channel partners.
Speaker Change: Inventory in the channel sell in sell through I appreciated that you called out early in your prepared remarks that you did not benefit from any sort of pre buy I trust that was in reference to the channel partner activity, but just what's your assessment.
Speaker Change: How are.
Speaker Change: You think they react during the course of tariff mitigation.
Speaker Change: Yes. Thank you. Thank you for the question look we have not.
Speaker Change: Any meaningful change in behavior through the end of April.
Speaker Change: This channel partners I think one of the.
Speaker Change: One of the pragmatic issue is that as these folks are buying millions of Skus as you can imagine and I think it would be rather difficult for them to.
Speaker Change: Pull demand forward.
Speaker Change: Maybe they will do something on some critical components, but.
Speaker Change: The availability.
Speaker Change: All of our products on a short cycle is in our case is very good our service rates are very good in <unk>.
Speaker Change: And the cost of our products in App in our in our system is frankly still de Minimis. Despite the fact that we we offer mission critical support and application. So we have not really seen.
Speaker Change: Any meaningful.
Speaker Change: Pull forward when I take a look at the sales end versus sales out statistic.
Speaker Change: Our major channel partners, we have been very much in balance with sales out and I would say, maybe even around the edges.
Speaker Change: We are under selling into the channel versus what it what we are seeing with our channel partner channel partners sales out so that would tell me that.
Speaker Change: From the data that I see that has not been any meaningful change in behavior that being said look we are super short cycle company and we.
Speaker Change: If things change we will see we will see then change.
Speaker Change: But I have characterized that.
Speaker Change: Through April.
Speaker Change: We feel reasonably good about where we where we sit.
Speaker Change: The demand is very much in line with our expectation both from our original assumptions as we were coming into the year as well as with how we have quantified the second quarter guidance today.
Speaker Change: Great any line of sight on new channel partners, you might be adding in what's the update on status on the latest one that you added.
Speaker Change: While the latest one we have.
Speaker Change: Fully ramping up we should be completely ramped up with that channel partner within this quarter and so from the second half of the year, it's going to be more run rated state of business.
Speaker Change: There are still some other opportunities for other.
Speaker Change: Other product lines that we can secure that we are working on.
Speaker Change: Yes.
Speaker Change: Im not in a position to be talking about any other incremental channel partners, but again as I said.
Nigel Coe: As a part of my answer to Nigel I think that we will have incremental opportunities.
Nigel Coe: We'll let you know as we are capturing those opportunities into the future.
Nigel Coe: Thank you.
Nigel Coe: Thanks, Dan Thank you sorry for that.
Speaker Change: And our next question comes from the line of Chris Snyder with Morgan Stanley Chris. Please go ahead.
Chris Snyder: Thank you.
Chris Snyder: Follow up on the commentary around potential pre buy and I know it.
Chris Snyder: Hard to always know exactly what's happening but I.
Chris Snyder: And I guess, what gives the company confidence that there wasn't any pull forward in Q1 and I ask because it's the first quarter of positive organic growth in a couple of years.
Speaker Change: Would you guys attribute that that improvement in growth just to.
Chris Snyder: I know the new customer wins in the quarter. Thanks.
Chris Snyder: Yes, Chris. Thank you good morning, and thank you for your for your question.
Chris Snyder: Look.
Chris Snyder: I will come back to my answer that I, just provided to Dean I can only look at the data that is available to me and the data would indicate that actually we were probably around the edges.
Chris Snyder: A little bit behind with receiving orders and selling into the channel taking into an account the sales out by channel partners.
Chris Snyder: In the U S. We actually have a reasonably good visibility to that because.
Chris Snyder: Most of our large customers a public company is going to be we have good agreements with them. So we receive.
Chris Snyder: Weekly and monthly data on their sales out into the end market in that data would indicate that we are very much in balance and inventories have not built out we've talked about inventories in the channel coming out over the last eight quarters or so so.
Chris Snyder: Absent of that.
Chris Snyder: The data would indicate that channel sales were balanced and there was no pre buy the second part of your question Hey, what costs do.
Chris Snyder: The second the second part of your question associated with Whats what has driven that positive core growth well look first of all I think we were reasonably pragmatic coming in into the.
Chris Snyder: Into the year, we really didn't anticipate that it's going to be a super jazzed up year, we thought it's going to be muted muted end market environment.
Chris Snyder: I think I have delineated two excruciating detail what is happening in the end markets to Julians question.
Chris Snyder: We see behavior, that's more in line with what we've anticipated and we have had better performance out of mobility mobility had seven negative quarter to quarter sub growth that add that inventory is depleted.
Chris Snyder: And we have delivered a very strong growth in mobility and then the second part of Wi positive growth is.
Chris Snyder: We have taken market share we've discussed last year.
We continue to see very constructive.
Chris Snyder: And market behavior in automotive replacement not just here in the U S, but in Europe as well as in China.
Chris Snyder: And both of those all of the all three of these regions have continued to grow our business in <unk> is growing nicely in India now as well so we.
Chris Snyder: Have done just slightly better, but I would tell you I am not high fives that we have delivered 1% core growth, we really would like to see much more robot robust growth, but that that's.
Chris Snyder: That is going to be challenging taking into an account the present economic macro.
Chris Snyder: Thank you I really appreciate the thoughtful response I guess.
Chris Snyder: Maybe following up.
Speaker Change: Are we right to assume that the price increase that you guys are pushing through is more of a Q3 event.
Speaker Change: Q2 program any color on that is helpful. Thank you.
Speaker Change: Yes from a from an implementation perspective, but as of Q2 of them from a realization perspective.
Speaker Change: It really doesn't impact Q2, it starts to impact Q3, and it's in it's really.
Speaker Change: Well matched with how the.
Speaker Change: So how the cost of the tariffs are going to come in right.
Speaker Change: We're sitting on about a quarter of inventory in and that will flush through in Q2.
Speaker Change: We.
Speaker Change: <unk> implemented all the price increases we've talked to all of our channel partners.
Speaker Change: Understand what's coming.
Speaker Change: That'll that'll start to come.
Speaker Change: And in Q3 as well so like we said in the prepared remarks, the tariff impact is a relatively de minimis event in Q2, and we'll really see that in the back half of the year.
Speaker Change: The both the cost impact of the price impact and then most of the dilution impact we'll see in the back half of the year the EBITDA dilution.
Speaker Change: Thank you I appreciate that.
Speaker Change: Thanks, Scott Thanks, guys.
Speaker Change: And our next question comes from the line of Andy Kaplowitz with Citigroup. Andy. Please go ahead.
Jose: Hey, good morning, everyone. This is actually Jose on branding.
Speaker Change: How are you.
Speaker Change: Good.
Speaker Change: So maybe to start you kind of touched on 80 20 in an earlier question, but putting in here could you give us an update on how the implementation has been progressing and if youre planning to accelerate that in 2025% to offset the potential margin dilution from tariffs you've talked in the past North America gets fully on board with the front end and you're making progress on the back.
Speaker Change: And there is still plenty of runway in Europe, which could help you offset some of the weakness in that region. So any color here would be helpful.
Speaker Change: Look <unk> is becoming a central part of our operating business model and kind of operating DNA and.
Speaker Change: We're making good progress.
Speaker Change: We are making measured progress in <unk> 'twenty.
Speaker Change: Again, I'll reiterate what you said.
Speaker Change: North America goods.
Speaker Change: Good progress with front end, we are now starting to address the back end in the operations. We feel we got tons of opportunity is there and it's really quite actually is quite interesting is super powerful in the operations, where we deploy in specific cells yossi rather substantial jump in productivity will be.
Speaker Change: We will be pretty focused in driving it across.
Speaker Change: Our factories in North American footprint than we anticipated we will start.
Speaker Change: Pulling.
Speaker Change: 2020 into the backend in Europe as well.
Speaker Change: We view that as certainly a lever that will be accretive to us to deal with the macroeconomic challenges.
Speaker Change: I'm not I'm not going to be sitting here and telling you that we're going to do better.
Speaker Change: Are we going to do worse I think that we are laser focused as management team is super focused on dealing with the impediments that ahead of US we are all pretty solid sober about it we know that things change and they change every day. This has been one of the most difficult and most challenging.
Speaker Change: <unk>.
Speaker Change: Seven to eight weeks that we have had since the announcement on April 2nd our management team is working Super hard all of our employees across the company are laser focused on dealing with this.
Speaker Change: We are fully committed and fully onboard to drive the best result for our shareholders.
Speaker Change: For our customers and for all of our stakeholders across the company.
Okay.
Speaker Change: Thank you and then maybe maybe a quick one in terms of capital deployment you guys finished the quarter with a net leverage of 2.3, and you've talked about being able to reduce your leverage by half a turn in the year just based on your cash conversion, which would put you within your wanted to leverage target.
Speaker Change: You've talked a lot about the organic investment in the share repurchases remaining in focus but I'm. Just curious if you could talk about what youre seeing in the M&A environment.
Speaker Change: Yes look great question.
Speaker Change: I would remain consistent.
Speaker Change: Consistent with my answer.
Speaker Change: Our stock is super cheap, we will continue to be opportunistic and utilization of our $100 million plus authorization that we have outstanding.
Speaker Change: So I think that.
Speaker Change: We'll certainly we certainly anticipate to lean into that lever.
Speaker Change: We in general.
Speaker Change: <unk> delivered very strong free cash flow generation in the second half of the year. So we certainly see an opportunity to continue to delever and come close to our metrics that we have committed to our shareholders.
Speaker Change: We see.
Speaker Change: Really nice set of opportunities to do M&A, but before we would be doing any transactions.
Speaker Change: Got to make sure that.
Dave will be accretive to our long term strategy.
Speaker Change: We will certainly be cognizant of the fact that.
Speaker Change: Any potential transaction would have to.
Speaker Change: Deliver double digit ROIC by year three.
Speaker Change: It is non negotiable from our end.
Speaker Change: And while we see opportunities out there and there's some really nice assets that are available.
Speaker Change: Are going to be very disciplined.
Speaker Change: We have a great company, we have terrific strategy I think we are executing on a trajectory that we have committed and.
Speaker Change: We are not under any pressure to be.
Speaker Change: Doing any deals that would potentially derail what we have envisaged here, yes, let me, let me add to that.
Speaker Change: Last year, we did a lot of really really good work in fact, probably.
Speaker Change: I would say best in class worked around our balance sheet and our debt structure. You know we don't have any.
Speaker Change: Big principal payments due until 2029.
Speaker Change: We've locked in a pretty favorable interest rate structure.
Speaker Change: In terms of what our fixed versus variable as well.
Speaker Change: We're confident in our cash flow our ability to generate cash flow now with the stock trading is today.
Speaker Change: We still have over $100 million of authorization on share buyback.
Speaker Change: In the short run here given the given what's going on in the economy, that's probably where we'll lean into here.
Speaker Change: Here over the short term.
Speaker Change: We're confident in our ability to delever, we've done it over over time.
Speaker Change: And so the opportunity set for US right now is theres, probably more on the share buybacks.
Speaker Change: Thanks per ton guidance.
Speaker Change: Thank you.
Speaker Change: And that does conclude our Q&A session. Today, So I will now turn the call back over to rich <unk> for closing comments rich.
Rich: Yeah, Thanks, Craig and thanks, everyone for joining today, if you have any follow up questions. Please feel free to reach out and have a great rest of the week take care.
Rich: Okay.
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