Great. Good afternoon, everyone. Welcome to the Fireside Chat with Gates Corporation. I'm Jerry Revich from Goldman Sachs, and I'm delighted to have with us from Gates Ivo Jurek, Chief Executive Officer. Ivo, thank you so much for joining us today. Nice to see you. Thanks, Jerry. It's truly great to be here with you as well. Good to see you again, and welcome everyone on joining us on this call today. Thank you, Ivo, for making time for us. Really strong results for you folks just a day or two ago. I am wondering if you could talk about, as you folks enter this recovery, how do your strategic priorities stack up heading into this cycle compared to what strategy looked like two to three years ago? Really great question, Jerry. Thank you. Look, maybe I start going back to 2018 when we went public. Look, we knew that this business still needed to be improved. I spoke about it during the IPO. There was an additional opportunity to rationalize our footprint, revitalize our product portfolio, improve the efficiency of our SG&A. Frankly, we knew that we needed to reduce the amount of debt leverage that we were carrying post-IPO. If I go fast forward into 2019, a ton of challenges in 2019 induced by the China trade war. We ran into 2020 and the pandemic. Look, we never stopped really improving our business, and we continued to make investments, particularly into our growth initiatives. During that time, we have also strategically started to reposition our portfolio of business. We have taken about $100 million of automotive OEM business out by selectively taking programs that were primarily focused on hybrid vehicles or full EVs. We have offset this reduction of automotive OEM presence with investments in our industrial markets through programs such as chain-to-belt initiatives that I have talked about quite a bit over the last couple of years. We have put strong emphasis on industrial and markets in particular. We felt that there are some substantial secular tailwinds that we can capitalize on when we take into account not just the internal focus, but also we start seeing the sustainability focus that was coming into it. This focus on innovation, broader product revitalization, and the new strategy has resulted, frankly, in above-market growth over the midterm. We have also paid down over $300 million of debt at the end of 2020. Frankly, now we expect our leverage to be in the range of two to three times, as I discussed on the call yesterday, by the end of 2021. This clearly opens up additional opportunities for us for strategic M&A. In a nutshell, quite a journey since 2018, but I think we remain focused on our initiatives, and now we can introduce the strategic M&A into it as well. Ivo, part of what's really interesting about the business is you folks are putting up really strong margins this year. It was nice to hear on the conference call and addressing Ashok's question that you were looking for really strong operating leverage next year as well. Can you just talk about the operating leverage that you expect over the course of the recovery? I think what we've seen out of other companies and for your business, even in 2018, once demand really ramps up, it's tougher to deliver continued margin expansion because labor productivity becomes tougher, and you face other challenges as the cycle wears on. Can you just talk about your ability to manage those headwinds in this cycle and how much visibility do you have on the ability to deliver the types of incredible margins you spoke about on the earnings call? Yeah, Jerry, you are spot on. It always becomes more difficult, but I think that with repositioning our business, becoming more productive, giving ourselves the opportunity to be in regions where we can find labor and make the labor more productive, the revitalization of our product portfolio, we certainly believe that our long-term incremental margins on incremental revenues should be in the 35%-40%. We are quite confident with our ability to deliver those types of leverage numbers on incremental revenue beyond 2021. Can you expand on that point in terms of ramping up your footprint in areas where there is more readily available supply of labor? Can you just talk about the difference in the footprint today versus three years ago? Yeah. Look, we have made a great deal of progress with restructuring. We've talked about restructuring basically since we came up from the IPO. We have focused predominantly on North America. We've focused on Korea, and we've focused on Europe. We have built out three large facilities, one in Mexico, one in Poland, and one in China. We have increased our size and presence in China. It was done for two reasons. Number one, we wanted to have a greater ability to support our in-region, four-region strategy, which we have accomplished with that investment. By the way, getting into areas like Mexico and Poland where people still, there's a very large available pool of employees, potential employees that you can go and hire that are eager to get good quality, well-paying jobs like we are providing. Frankly, that's given us the ability, frankly, to get that access to labor, which is much more difficult in places like the United States. I think today, again, we are all dealing with that as well as Western Europe. Not that easy either. The transformation, that footprint transformation, has given us the opportunity and put us in a position to be able to be much better off than we were in 2018. Ivo, based on the performance that you folks are delivering this year, you're not that far off from your analysts' day target of 24% EBITDA margins at a sales level that's lower than what you had contemplated it would take to get there. Can you talk about what has gone better than planned? As you had mentioned, restructuring was always in the plan. It feels like based on the margin performance, things are tracking ahead of the long-term targets. We'd love to get your views on what elements of the plan have been surprising upside. Yeah. Jerry, thanks for the question. I think this is a great question. I know that you participate on all of our earnings calls since the IPO. I think during the depths of the recessions, we have been asked many times, "Hey, what about your midterm vision of that $4 billion of revenue and 24% EBITDA? Do you believe that you can deliver it? Or what is the status of those?" Right? For a long period of time, I says, "Look, we are not decommitting." One of the reasons that we are not decommitting is because we had the line of sight on our organic initiatives, and we put a very significant amount of work and effort into those. Certainly, those are now starting to layer into our results, as you've outlined, I think, a terrific set of results that we have demonstrated yesterday. We have had terrific results in Q4 of last year as well, starting to demonstrate the outperformance and the market share gains that we believe we are now taking away from our main competitors that are kind of in that low single-digit level. That is quite substantial. When you layer on top of that the fact that we are in the very early stages of the market recovery, we have a very constructive view on the overall macroeconomic backdrop. Look, our balance sheet is in very good shape. We line of sight to that midterm target of two to three times leverage that I've outlined a couple of minutes ago. I believe that that gives us optionality to go through M&A on the top of that organic set of great initiatives that we have. On the margin side, our ongoing restructuring, product and process innovation, and our Gates production system deployment is positioning us truly in an excellent position to expand our margins over the midterm toward that 24% target. If I can remind everybody, our midpoint of our EBITDA guide for this year has been raised by 90 basis points to about 22.7%. I think we feel pretty good about where we sit. I just think that we have a great backdrop from both macroeconomics as well as from our initiatives that give us the opportunity to or give us the confidence that we can get back on track and meet or exceed those midterm objectives that we laid out in 2019. Ivo, can we expand on the M&A part of the conversation? What types of businesses would be a good fit for you? How does the pipeline look? What sort of sizes of businesses are you comfortable with? Yeah. Jerry, look, we have a great deal of interest in broadening our strategic positioning. We participate in a very large marketplace that is highly fragmented. We see lots of opportunity for further market consolidation. We do not have just an interest in market consolidation. Our interest is to strategically advance our key priorities, which is continue to scale up in faster-growing economies. Those economies, as we discussed, are some of the Eastern European economies, Asia, Latin America. I think those are great places to be and/or add technology to our portfolio. We see that there is a great deal of transformation that is happening with propulsion and electrification of passenger cars as well as heavy-duty truck. We think that there are opportunities out there to add to our portfolio of continuing to leverage and build out on that opportunity that we believe is out there for us for many, many decades to come. In terms of how active the portfolio is now, how much of your time do you personally spend evaluating M&A? Or is this something that you're going to look at once you work leverage lower over the course of this year? Yeah. Look, we have a small team that is dedicated to M&A, our business development team. We have a number of folks in that organization. We have never really stopped developing the opportunities and the relationships with potential target companies out there. That continues to happen. I spend a good amount of time every month on reviewing those targets, going through the industrial logic, and looking at the opportunities that are out there. I would also say, Jerry, look, the valuations are pretty frothy, to say the least. We want to make sure that when we do a deal, we do not dilute our financial performance and that we have a good line of sight to generate strong returns for our shareholders and for Gates as well. We are going to be pretty disciplined. We have a terrific, terrific set of organic opportunities ahead of us. We are not stuck for growth. We will continue to deliver nice growth above market. We feel that M&A gives us the opportunity to further accelerate that growth rate, and we'll do what makes sense for our company and for our shareholders. Just to shift gears a little bit here, you recently released your sustainability report. I'm wondering if you could talk about what environmentally friendly investment opportunities do you see for Gates or Gates products? Where's the most attractive green ROI, if you will, for you folks? Yeah. Great question, Jerry. I want to point out that because we have released the update to our environmental or the ESG report, it is not just a, "Hey, look, Gates is just getting on board with this very important direction." I mean, we have been working on environmental responsibility and governance and social responsibility for, frankly, ever since I joined the company. As a part of what we are trying to accomplish at Gates, we have coined a term internally that we call eco-innovation, which is an intersection of material science, process engineering, and product engineering. Frankly, it is a very integrated approach to innovation that we have taken and to new product development where we are trying to achieve kind of, if you would think about it, three things. One is to drive differentiated performance. That is differentiated performance for our customers and to help them meet their sustainability goals through the use of our products. Belt drives are a good example of that. They are clean, quiet, and generally much more efficient than the alternative technologies that we are trying to replace. On newer fluid power products, those products are lighter in weight than the products that we are traditionally replacing and we have traditionally built, which improve energy efficiency, fuel economy, if you would. On customer product side also, it improves customers' ability to assemble them in their operations. It dramatically improves the ergonomic factors associated with the employee satisfaction side. Two, we are trying to reduce our environmental footprint for our products. An example in here may be the more environmentally friendly ethylene elastomer materials. That is what we do to make newer belts. It is a new compounding method that we have developed. That method, frankly, is eliminating chlorinated compounds. The last, or third, if you would, is to improve our processes. That gives us, in general, an ability with our new products to be more efficient to make. In essence, we consume less energy, we consume less water, we generate less waste that we send to a landfill, and so on and so forth. It is kind of a holistic approach to environmental movements that, frankly, we are very proud of, and we are making great progress across the corporation. One element of your opportunity set is within electric vehicles. In the past, you've spoken about your content opportunity being about 20% higher in electric vehicle platforms versus internal combustion engines. I'm wondering if you could talk about your aftermarket parts strategy related to EVs. How is the stocking of your EV parts going at your major partners? Can you talk about how that distribution channel is developing? Yeah. Sure. I think it's a great question. Let me maybe take it first to kind of what the content opportunity is, and I'll come back to what we are doing on the aftermarket components. Right? Jerry, you're right. In the very early stages, when we were starting to get involved, we kind of said, "Hey, look, we got maybe a 20% improved content opportunity." I got to tell you, we really undershot that and underestimated what actually that content opportunity was as we got more in-depth into build-out of that portfolio. Let me give you a couple of examples. If you take a look, as an example, in the thermal management system on an ICE versus an electric vehicle, there's a huge difference there. On ICE platform, you might have a mechanical water pump that we are manufacturing today that may sell for kind of $18-$15, depending upon the size and the vehicle. That same water pump on an electric vehicle—by the way, that electric vehicle now may have two or three of those water pumps—will range in selling price of kind of $30-$130 simply because of the power output that's required. By the way, those water pumps are all electric, so they need to function on demand, not just always on or always off. You also have on ICE maybe $20, maybe $25 in average of thermal management hoses. That is a big product portfolio component for us. Versus on EV, that content is kind of $110 to maybe $230. That is simply because that hose that may be 1 meter long in an ICE vehicle now has multiple branches. It is ran across the entire platform because that platform is the content of a battery, and that battery needs to be cooled. You also need to cool that inverter, and you need to cool the motors. That complexity grows dramatically. The size of that cooling mechanism grows dramatically. That ultimately is driving a substantial content improvement for us as well. I think that, as you can probably agree, we have significantly undershot that original estimate of maybe 20% improvement in content. That being said, in the aftermarket, yes, we continue to build out our catalog of parts for EV platforms. We today have the content for over 25 vehicles. It is still very early on, as there's very few EV vehicles that are being in the traditional sweet spot. Remember, that sweet spot is kind of 7-12 years for Gates for the replacement channel. Now, if you combine that with the fact that there's about 1.4 billion vehicles on the road today, less than 1% of those vehicles are EVs. Again, if I go back to that sweet spot, that 7-12-year-old EVs, less than 0.1% of that car part is in those aged EVs. We got some time where it's going to play out. We are getting ready. We are building that coverage. We are very excited about it. It will take time before it becomes a meaningful part of our playbook. Again, we are ready, and we're going to be number one market shareholder just like we are today with traditional technologies. Evo, are you stocking with the same partners that you're stocking on the ICE components, NAPA, etc.? Are you able to essentially leverage your relationship to push those products through that channel? Absolutely. Jerry, they are frankly spending quite a bit of their own time to figure out how will that ultimately impact their business. They want to be the same market leaders as these propulsions evolve. We are spending time. We are focusing on how can we help them. We are trying to all collectively figure out what is the best means to get these devices, these products into the marketplace, into the end user's hands to help them repair. Even though that H car park is very small, help those customers to get the products that they need. We believe, again, that we have time. We believe it is going to take some time to evolve. Both of our largest channel partners are certainly focused on that. They also want to be the leaders in the transition as it occurs. On the conventional ICE products, you folks have benefited from lots of platform fragmentation. With all your range of SKUs, how are you seeing that fragmentation playing out in the EV world? Is it a similar dynamic where you have a broad range of architectures and parts that are beneficial for you folks? Sure. I think that technology is still evolving. I can give you a couple of examples. Right? I mean, if you take a look at the original Model S and you take a look at Model 3 Tesla as an example, very dramatic evolution of the battery cooling and the inverter cooling technologies. I think that we are in the very early stages of getting through what is the most efficient method to actually cool these batteries and these inverters and these motors. My anticipation, Jerry, is that that will continue to evolve. Just like what you have seen with the combustion engines, there will be a fragmentation. There will be different topologies that folks want to do. I think that ultimately you will see similar type dynamics occur on EVs where it's all about power output per cubic centimeter or cubic decimeter of space. That will require all of these parts to come together and continue to evolve as the temperatures rise. You still have the same impediments associated with NVH, so heat and vibration and all of these noise attributes that are very destructive to products that we manufacture. We are looking at a range of technologies and developing, most importantly, organically developing a differentiated set of technologies that we believe will position us to be a market leader in water pumps, electric water pumps, and in battery cooling. In terms of the replacement cycle, can you talk about how that compares for belts versus electric water pumps and cooling systems? Anything we should keep in mind about the cadence once EVs become a greater part of the field population? Yeah. Look, our sense is that it's way too early to be able to have any reasonable sample size of how this is going to play out in terms of replacement rates. I have a couple of points. Okay? First and foremost, we manufacture products that age. If you take a look at engine cooling today in an ICE vehicle, the products that we manufacture just age. They do not die because there is too much pressure. They do not need to be replaced because somebody broke through that hose. They, generally speaking, need to get replaced because they age. That impacts your ability to cool. Since we are using similar type engineered chemistries, we know that those chemistries are going to age as well. We know that the vibration does not go away. Vibration is kind of a killer of components. We anticipate that a car is a car. The replacement rates will be somewhat similar. Now, if you take a look at water pumps as an example, electric water pumps, they have more duty cycles. You have more duty cycles. You will, generally speaking, probably run similar replacement rates that you see on water pumps today, maybe even higher replacement rates. If we take a look at something that is maybe more similar to a full EV, say a platform such as Toyota Prius, that has a reasonably good population out there that has been on the road for a substantial amount of time. Some of the bigger, more frequently repaired items are the electric water pumps that drive the cooling for that hybrid inverter. We believe that that's probably a good indicator of what we will see in the future with the type of components that are deployed or they are similar or identical components that get deployed on full electrics. Ivo, your strategy on internal combustion engines from an automotive first standpoint is to only focus on hybrid or high-value-added application. What's your strategy like in EV? Is the first market any more attractive to you for EVs than for ICE vehicles? Yeah. Look, we are participating on EVs. We believe that our investors want the assurance that we can be a market participant into the future. We continue to win new business. Whether or not it is on passenger cars, I think a quarter ago on an earnings call, I spoke about a couple of platforms that we won on highway industrial applications, heavy-duty trucks. We have a big participant there. The content on heavy-duty trucks is even bigger than the content that I have described for passenger vehicle. We will do a strong demonstration platforms with the OEMs. Jerry, again, our overall philosophy has been that in the long term, we are the replacement company. We will continue to function in that manner as long as we demonstrate to the external world that we have the technology and that we have the capability to not only compete but provide the most effective solutions on the electric platforms. It is going to be a balance. In terms of the off-highway opportunities, obviously much earlier in that product life cycle. Can you talk about what are your opportunities if we are looking at electric, let's say, scissor lift instead of a diesel? What is the content for you folks compared to the hydraulic systems that you would sell for those applications now? Yeah. I would say that our primary focus today has been on the on-highway applications. I think that those companies and those applications are much further along than I think any of the off-highway applications. From where I sit, the content on the on-highway applications are about $600 for us, $600-$700 per platform, which is about 3 or 4x of what it is on the diesel type application on highway. We continue to build out that portfolio. We work with customers. We'll talk more, I think, about that set of applications in our next earnings call. We are very constructive on the on-highway. As the off-highway technologies continue to develop, we will be there with products that support that as well. Evo, if we just shift gears to talk about your distribution, obviously that's where your business is really differentiated based on the ability to service, call it 370,000 plus SKUs within a day or two. Can you talk about how your distribution footprint has evolved over the course of the pandemic? Can you talk about how your logistics systems have evolved? Any increases in online order rates and efficiency gains exiting the pandemic? Yeah. Look, so it's kind of a combination of questions, both just on the physical distribution centers and maybe a little bit of a digital in here. Let me try to tackle both of them on two different attributes. Look, when I take a look at our physical presence with kind of a brick-and-mortar distribution, we have a very robust network. We are globally deployed. We have strong locations. They make sense relative to our manufacturing footprint and, frankly, our customer locations. I think that we are in very good shape. When I take a look at what are some opportunities for us, I think that we have opportunities, frankly, to advance our distribution in developing economies. I take a look at Africa. I take a look at Asia. I take a look at India. Those are opportunities that we believe we can continue to grow further. We continue to build out our channel presence. People first, locations second, products third. The innovation that we've put in place gives us the opportunity not only to solidify our presence in the developed economies but also in the developing economies. I feel that we are in good shape. Now, when I think about digital, on the digital side, we've made quite a bit of progress because, frankly, Jerry, we were not as contemporary as I would have liked to be coming into the IPO. We knew that we wanted to do that. I spoke a little bit about that during that IPO process. If I take a look at what we have done, and most of that work has been done latter part of 2019 and throughout the pandemic-induced 2020, late last year, we have launched something that we call Gates Connect. GatesConnect.com is a self-service portal for our existing channel partners and OEMs. They can place orders. They can check the order status. It facilitates an ease of doing business with us. We have spent kind of a ton of money and resources on doing kind of rudimentary things, if you would. We have upgraded our EDI tools. We have added a whole bunch of capability in our product configurators, price, and quoting tools so we can do that faster, design tools that make it easier for our customers to take our products and design them into their applications. We have globalized our CRM platforms. We've just tried to make ourselves more contemporary as a business and an easier business to do with. Now, how does that impact our kind of e-commerce platforms? Look, we have digitized our catalogs. So not only to make it more customer-friendly and give them the opportunity to have content at their fingerprints, but coming back to ESG, eliminate all the paper. I mean, it is very wasteful to print all of these paper catalogs. Most importantly, when you print a paper catalog, it's already obsolete. Right? That platform is now feeding our website. That website is feeding our e-commerce platform that is our own internal platform as well as our customer's platform. We're focused on developing a content for all of our products, kind of 360-degree photography, greater application content, and infographics that drive much more clearly articulated value proposition. When you take a look at it, we are making big investments into digital front-end. We believe that we are positioning ourselves not only to take advantage of the shift from maybe simply a brick-and-mortar model and take advantage of that e-channel shift, but frankly, make it much easier for our brick-and-mortar channel partners to enable their own digital aspirations that they have. I can tell you that all are investing heavily in becoming much more digitally enabled as well. We spend quite a bit of time. I think we have a very focused effort. I think that we are well-positioned to be able to capitalize on that shift. In terms of the proportion of your orders today that are shipped digitally or processed digitally without direct human contact, is that a meaningful part of the business today? It's about 20% of our business, Jerry, and it is growing very rapidly. We like to enable ourselves that way because there's nothing more inefficient than actually getting people talking to each other on a telephone when they are trying to figure out what they should buy. If you can drive more of your customers to that digitally enabled process, it not only becomes more efficient, but it also becomes much more accurate and much more satisfying. I think that that continues to drive stickiness to our company. In terms of processing cost savings to you folks, does it move the needle in terms of total overhead costs? Obviously, it's more efficient, but is it to the point where it's contributing to margins? Jerry, we do not look at it that way. The way that we look at the efficiency is by going in and reinvesting the savings into inside sales, into front-end to drive things like chain-to-belt and more design engineers. Rather than continue to grow the pie of SG&A and R&D, create efficiencies that you can then reinvest in your business. Yeah. Very interesting. That is all the time that we have today. Ivo, really appreciate you making time for us. Nice visiting with you. Thank you very much, everyone, for joining us. Thank you, Jerry.