Gates Industrial Corp plc Q4 FY2024 earnings call

• Gates team globally made significant progress in 2024, growing adjusted EBITDA margins by 140 basis points. - Successfully refinanced debt stack, lowered financing costs, and reduced net leverage ratio. - Allocated $175 million to share repurchases. - Core revenue performance in Q4 was consistent with expectations, but U.S. dollar strength impacted reported revenues. - Replacement channel posted growth, OEM sales decreased, personal mobility core growth increased for the first time in seven quarters. - Profitability solid with adjusted EBITDA margin expanding 30 basis points to 21.8%, driven by 130 basis points increase in gross margin to 40.4%. - Free cash flow conversion in Q4 was 168%, full year 74%. - Net leverage ratio declined to 2.2x from 2.3x at year-end 2023. - Maintained inventory levels and invested CapEx for footprint optimization. - Core sales performance by region: China and East Asia performed well, Europe and Americas had macro weakness; North America core sales declined ~3% with OEM demand lower, replacement channel mid-single digits growth; EMEA core sales fell just over 6% with OEM and industrial OEM declines; China core sales modest growth with replacement channel strength; East Asia and India 3.5% core sales growth; South America core sales mid to high single digits decline due to logistics disruptions.

Power Transmission segment generated revenues of $520 million in the quarter, a ~1% decrease on a core basis. Replacement channel was up year-over-year with automotive and some industrial replacement stabilization, while OEM demand was under pressure with industrial and automotive declines, but personal mobility returned to growth with a double-digit increase. Fluid Power segment had sales of $309 million, a ~5% decrease on a core basis. Replacement business was stable with automotive replacement high single-digit growth and industrial replacement mid-single-digit decline, while industrial OEM sales declined high teens on a core basis due to agriculture and construction demand pressure. Revenue contribution: Power Transmission ~62.7% of Q4 total revenue ($829M), Fluid Power ~37.3%.

• 2025 core revenues range: down 0.5% to up 3.5% relative to 2024, midpoint 1.5% growth with end market contribution as slight headwind. - 2025 adjusted EBITDA guidance: $735 million to $795 million, midpoint represents 50 basis point year-over-year increase in adjusted EBITDA margin. - 2025 adjusted EPS guidance: $1.36 per share to $1.52 per share. - 2025 capital expenditures to support high-return projects, free cash flow expected to exceed 90% of adjusted net income. - First quarter 2025 total revenues estimate: $805 million to $835 million, core revenues down ~1% at midpoint. - First quarter 2025 adjusted EBITDA margin expected to decrease 40 basis points to 80 basis points compared to Q1 2024, offset by enterprise initiatives and improved mix but impacted by unfavorable foreign exchange rates.

• Foreign exchange impact: budgeting about 3% headwind for 2025, greater in first half. - Demand environment: some end markets still at trough levels, while others show green shoots but uncertain recovery timeline. - End market challenges: agriculture, construction, and certain industrial sectors remain dislocated with elevated inventories.

Q: About margin levers, how are the efficiency savings phased?

A: FX impact hits harder in first half, footprint optimization savings hit in second half, material savings fairly linear.

Q: Exposure on COGS and tariff backdrop?

A: China and Canada de minimis, Mexico has large footprint, tools in place to manage tariffs via price offset.

Q: Is Personal Mobility a turn or easy comp? Key indicators?

A: Easier comp, but strong performance in EMEA and Asia, positive trend line since June 2023 inventories normalized, design wins strong.

Q: Baking in expectations for construction and Ag in 2025?

A: Still down mid-single digits vs prior year, first half still dislocated with high dealer inventories, should start getting less bad in second half 2025.

Q: FX dynamic and drop-through on bottom line?

A: Combination of translation and transactional, not repeated in 2025.

Q: Inventories in auto replacement and industrial replacement?

A: Auto replacement inventories not out of line, industrial business near destocking bottom.

Q: Customer optimism and what it takes to turn into purchasing?

A: Take customer feelings into account but look at hard data, folks optimistic about industrial policy, data centers robust, but not embedding improvements in guidance.

Q: Capital deployment shift, M&A cycle?

A: Evenly distributed between stock buybacks, debt paydown, and internal investments, still have $125M stock repurchase authorization, committed to getting gross debt below $2B, looking at M&A if highly accretive.

Q: Distributors restocking inventory?

A: More quick pass-through due to high service levels and working capital optimization.

Q: Auto aftermarket retail conversion benefit and data center liquid cooling?

A: Some benefit in Q4, ramp up in Q1, about 100-150 basis points incremental growth; in data center, engaged with broad customers, in varied stages of design and testing, well positioned.

Q: Efficiency gains and margin tailwind, operating leverage?

A: Efficiency mostly linear from material savings, some operating leverage as comps lap and volume uptick from mobility improvement.

Q: Data center TAM and competitive positioning?

A: TAM at $1.5B, commitments to liquid cooling firm, unique technologies, working on coupling design, well positioned vs competitors.

Q: China growth and tariff pre-buy?

A: Core growth in East Asia and India similar to China, not pre-buy driven.

Q: Balance sheet improvement and capital deployment aperture?

A: Balance sheet in good place, ability to reduce leverage, stock undervalued, looking at M&A if accretive