Gates(GTES) - 2021 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Total revenue for Q1 2021 was $881 million, representing a year-over-year core growth of 21% [12] - Adjusted EBITDA for the quarter was $196 million, reflecting a growth of over 60% compared to the prior year, with a margin expansion of 530 basis points [13] - Adjusted earnings per share were $0.33, an increase of 57% year-over-year [14] Business Line Data and Key Metrics Changes - Power Transmission segment revenue grew nearly 27% year-over-year, with core growth of 23% [15] - Fluid Power segment revenue increased by 20% year-over-year, including core growth of approximately 18% [16] - Sales of new products in the Fluid Power segment increased nearly 90% year-over-year [18] Market Data and Key Metrics Changes - Strong double-digit core growth was delivered across all regions, with China and emerging markets significantly outperforming [20] - In China, diversified industrial and automotive replacement applications saw growth of approximately 100% year-over-year [20] - North America experienced solid year-over-year core growth, particularly in diversified industrial and agricultural applications [21] Company Strategy and Development Direction - The company is focused on sustainable above-market growth, leveraging innovation investments and operational execution to drive performance [7][29] - The company is committed to sustainability, as highlighted in its 2020 sustainability report, which outlines initiatives in governance, community involvement, and environmental impact [11] - The company is raising its full-year guidance for core revenue growth to 18% to 21% [25] Management's Comments on Operating Environment and Future Outlook - Management noted that economic momentum is building across most end markets, contributing to solid performance that exceeded original guidance [7] - The company is navigating challenges such as inflation, tight raw material supply, and labor market scarcity while maintaining strong operational execution [9][10] - Management expressed confidence in managing through current complexities and anticipates strong demand as economic activity improves globally [27] Other Important Information - The company expects free cash flow conversion to be greater than 80% for the year [25] - Net leverage improved to 3.8 turns from 4.3 turns at the end of 2020, with a goal of reaching 2 to 3x net leverage by the end of 2021 [24] Q&A Session Summary Question: Recent trends and order momentum - Management confirmed that positive demand trends continued into April, with strength across all regions and segments, although there are concerns regarding labor availability and automotive OEM demand [35][36] Question: North America growth dynamics - Management indicated that North America growth was strong, driven by order fulfillment capabilities rather than demand growth, and that first-fit channels are expected to outperform in Q2 [41][42] Question: Price/cost dynamics - Management discussed price increases implemented in Q1 and additional pricing strategies to offset inflationary pressures, particularly in metals and chemicals [51][54] Question: Growth in belt from chain conversion - Management highlighted significant market opportunities for alternative power transmission technologies, with ongoing design wins contributing to growth [58][60] Question: Balance sheet and M&A pipeline - Management noted a robust M&A pipeline but emphasized a disciplined approach to acquisitions, focusing on generating decent returns [70][71] Question: Operating leverage and margin expansion - Management expressed optimism about maintaining strong incremental margins, anticipating low to mid-40s incrementals for the full year [76][78] Question: Free cash flow guidance - Management reiterated confidence in achieving over 80% free cash flow conversion, driven by higher growth and effective working capital management [81][83]