Everybody, excited for the next presentation. One of the stronger stocks here to date. A little strong rally Everybody, excited for the next presentation. One of the stronger stocks here to date. A little strong rally Everybody, excited for the next presentation. One of the stronger stocks here to date. A little strong rally in, some of the, some of the small caps to start the year. Let's see if that can continue. Maybe your feedback will, provide some stimulus for that. Sitting next to me, as you all probably know, CFO of Gates, Brooks Mallard. Long history with Gates, you know, you know where all the bodies are buried and all that good stuff. So thank you for taking the time. I appreciate it. Pleasure to be here. Richard Kwas, Vice President, Investor Relations. Great to have you here. Thank you. how long at Gates now? coming up on three months. You're a veteran. Okay. Three months. I don't know as many bodies. I don't have the. Thank you. All the intel on the bodies buried, buried, but I'm learning. You're learning. I'm glad you're here. Appreciate it. With that, again, feel free, raise your hand, we ask questions. No prepared remarks. I'm gonna launch right into some bigger, you know, secular trends. Obviously, when people think of onshoring, the factories that are coming to the U.S., you would think maybe we're going more belt and chain. Maybe try to weave in how you view your content story on if we're getting more factories in Mexico and more factories in the U.S., how should we think about your exposure to that from a factory perspective? Yeah. Well. The chain to belt in particular. Yeah. That, that. Yeah. Growth theme. Yeah. There's really gonna be two growth vectors for us, to the extent that onshoring becomes a thing. One is certainly chain to belt, right? Diversified industrial is one of our bigger growth initiatives that we have in the company. You know, we're a relatively small part of a big universe, in terms of chain and drives and belts and drives and things like that. We think we can continue to increase our market share there, you know, for many years. To the extent that new rooftops go up and/or existing factories get refurbished and new equipment comes in, we're gonna participate in that and participate in that in an accelerated way, with our chain to belt initiative. There's gonna be a lot of belts going in there and a lot of drives that go with belts and things that we spec in. I think the other part of that is to the extent that there are new rooftops going up and there's construction equipment and, you know, heavy-duty, you know, truck equipment and things like that, you know, we have a nice footprint there as well, particularly in our fluid power business. To the extent that there's more heavy-duty truck, more construction equipment that is fueling the onshoring, we will participate in that as well. There's two nice growth vectors for us in both parts of our business. Terrific. China. Subtly over 10% of sales. Not, not an immaterial player. Obviously, it's a little bit higher when China is stronger. I'm asking most companies today, PMI 53. Does it feel like 53? If it doesn't yet, what are the, the tells for you that this recovery maybe has some legitimacy versus some recent? Yeah. So look, you know, we had a view of China, you know, when we gave our guidance, and that view really hasn't changed. You know, Q1's gonna be tough, as the recovery from COVID and Q4 continues. But then we think the rest of the year is gonna be very, you know, gonna be pretty constructive. So we think, you know, overall, the growth is gonna be, you know, mid-single digits for the year, probably high single digits and negative growth in Q1. So we think the rest of the year is gonna be pretty constructive. Q1's a little bit tougher comp 'cause last year they didn't have the COVID, and this year they've got the COVID coming into the quarter. After that, the comps get a little bit easier too. When you have the comps getting easier, you do not have the COVID stuff, and then you get the recovery starting to work in there, we think the rest of the year looks pretty good. For you, your largest exposure is Auto OE? Yeah. Auto OE. We have a nice automotive replacement business there as well. Yeah. and then I think some of the, you know, certainly as those two recover, that's gonna help us. Our lunch speaker, our firm's China strategist was speaking to, it's gonna be consumption. That's gonna be the biggest. Mm-hmm. Part of the recovery in China. Hopefully that speaks well to your auto. Yeah. Auto potential. Yeah. I think that and miles driven, as you know, it starts to open up again. Opening up again. People start to drive more miles, that'll open up the aftermarket again. It is fair to say given you're a little early and you're trying to penetrate into North America, obviously you're hugely aftermarket. Yeah. North America. China's a little more balanced. Yeah. Because of where you are in the. Agreed. Evolution right now. 100%. Financial leverage. I think the midterm target of, of 2022 was 1.5 net debt to EBITDA. Mm-hmm. Right? The leverage obviously this year ended up closer at 2.8. Mm-hmm. The timing for that 1.5, how important is it to still, are we still targeting that 1.5 with a certain timeframe, or is it, you know, obviously the working capital, the cash flow. Mm-hmm. The things that did not quite go as maybe anybody would plan the last couple of years pandemic-wise, but how should we think about the determination to get that leverage down? Yeah. You know, look, I think there's two really good ways for us to deploy capital in the short term, right? We talked about paying down debt. You know, interest rates are high. We wanna take our gross debt down. That improves earnings. It improves cash flow. You know, it helps the business. In addition, you know, the way that we can pay our debt down with some of our term loans, it actually provides us flexibility as we move out, you know, into the midterm or longer term where we want wanting to do some meaningful lemonade. Okay? Having said that, we wanna be opportunistic as well, you know, with our ability to buy stock back. You know, we participated in a meaningful way in Q1 of 2022 where we bought a significant amount of shares from our major shareholder. We wanna be opportunistic, if and flexible and nimble, if that opportunity presents itself to be able to participate in that as well. We think both those are gonna really enhance shareholders' value, you know, whether we're increasing our earnings per share and increasing our cash flow or, you know, whether we're, you know, accreting earnings per share by buying back stock. We think both those are great kinda really low-risk options. We generate a ton of cash. You know, the past couple of years with the inflation and the working capital management have been a little bit tougher, but we feel like a lot of that's in the rearview mirror, and we ought to be generating a lot of cash as we move forward. Okay. You're majority owner, maybe coming to market, you wanna be there to support that deal. Right. We did that Q1 of 2022, and that's again, that's a good way to return value to shareholders. The personal mobility. Mm-hmm. The personal mobility opportunity seems to be particularly large, but it's interesting the two-wheeler market gets the greatest opportunity the way you think about it. Can you take us through that a little bit more, what you're seeing on two-wheel versus the other opportunities within personal mobility? Mm-hmm. If there is any skew at all in profitability between the pieces of, of, personal mobility. Yeah. Let's start with the profitability side first. You know, we really have a compelling technology with the belt and the carbon cord and the strength of it and how it works, particularly as you migrate to electrification. That's really the key. The more electrified, you know, that whole space becomes, you know, we're in pole position there to continue to grow with the market, right? You know, the two-wheeler really becomes, you know, bike, e-bike, scooter, motorcycle, you know, all these different applications that are becoming more and more electric and thus, you know, needing the belt drive, the belt and then the metals that go with the belt drive, and that's just a much better solution. The way that we're thinking about it is, you know, even if the, you know, the mobility market, you know, remains relatively flat in terms of the number of units that are built, it's gonna move more and more toward electrification, and we're gonna take more and more market share as it becomes more electric. That's kinda how we're thinking about it over the next three to five years. I think you're roughly $200 million? Yeah. $200 million. Of that $200 million. Mm-hmm. Personal mobility business today, what is the mix when it comes to motorcycles versus bicycles? We're just trying to, I'm trying to get a sense of. Yeah. I mean, it's, it's, I think it's, it's almost, it's mostly e-bike, bike, scooter. Okay. With a little bit of motorcycle, but the application goes across all the, you know, it's the application goes across all those different, all those different products. When we hear of a five, actually, I've lost track of the date, the $500 million target for. Yeah. Personal mobility. Mm-hmm. What is the timeframe on that? Is that sort of a? That's a midterm timeframe. Time. Kinda. Maybe that's right over there. Three years. So three. So three. The middle of the. The middle of the decade. Right. So 2025. The jump from $200 million to $500 million. Right. First, how would you describe at $500 million, let's say. Mm-hmm. The profitability of personal mobility. Mm-hmm. Versus company average? Mm-hmm. What are the biggest drivers from the $200 million to $500 million particularly? Are there any particular geographies? Is it like in India with a bunch of two-wheelers? Mm-hmm. Is it more classic developed world, electrified? Yeah. Look, I think it's really ubiquitous across all geographies 'cause, you know, you're seeing these e-bikes and scooters and things. They're popping up everywhere. When you just walk around the city, you can. Yeah. You know, see people waiting to ride in them, driving them, everywhere. We feel like it's gonna continue to be above fleet average because we've got the preferred technology. We continue to, you know, come up with new material science, new products, you know, with new, you know, specific applications, you know, based on what the end user need is. We think the profitability is, you know, gonna continue to be above fleet average, and it's gonna continue to accrete margins for the company as it goes from $200 million to $500 million. Really, you know, you're not talking about a huge increase in terms of market share. You're talking about going, you know, maybe from very low single digits, maybe 1% to kinda 4-5%. Yeah. That gets you there. Okay. Actually, that would get you significantly above $500 million where you'd get that kinda market share level, so. Yeah. I mean, for a company your size, an extra $300 million at. Mm-hmm. Above company margins is not immaterial, so. No. Agree. When it comes to the when I first really got involved with the stock and hearing all the, the negative EV thoughts and the idea of the timing belt going away, right? Obviously, you're dominant in that timing belt. The idea of the EV water pump just to manage the heat. Mm-hmm. Issues around EVs. Can you give us a better sense of where we are in getting maybe more aggressive, and we wanna build more of our own pumps. Mm-hmm. Instead of private label? Like, just where are we in that evolution? I know there's been a little, all right. You wanna, we can win a couple OE businesses if you want. We'll show it. You want a business model that's still be aftermarket-centric, right? Mm-hmm. You can give us a little update on how you're viewing. Why do you feel the need to maybe just show the world you can win some OE platforms? Second, can you keep the content, if not even higher, than traditional? Because I'm gonna replace a belt. Mm-hmm. That's going away with the timing of the engine. I'm gonna get the water pump business. Right. Yeah. And it's, you know, it's not just the water pump. It's all the cooling that go, the cooling, The fluid power, that. The power that goes throughout the, actually, the entire car 'cause the architecture is through all the inverters and not all the batteries and the inverters. It's through the entire car. There are still a few belts for. Yeah. Maybe some ancillary. Right. Like the, the electronics, steering. Mm-hmm. There is still. The water pump's a big. Electronic brake. Dollar content. Yeah. Where like, I'll trade a belt for. Right. Water pump, especially just pure revenue. Yeah. Yeah. Look, you know, we've been developing, you know, electric water pumps, you know, for the past, you know, several years, the technology. For us, it's really around, you know, making sure that as the vehicle's in operation, it gets into the right sweet spot for us, which is kind of 7-14 years old. When a vehicle gets 7-14 years old, that's when it's in the sweet spot for the replacement cycle, right? You know, we constantly look at vehicles in operation, models in operation, and when those are gonna kind of hit that sweet spot so that we're ready with the products. They've been tested. We've got the industrialization done, and we can start to supply our business partners with those products, whether it's the FP products, in terms of the fluid power tubing and things like that, or whether it's the electric water pumps. We are looking at both those together. The patience to wait for. Mm-hmm. The EV market aftermarket, which that's some years down the road. Mm-hmm. Should we look at this as like, we're ready for when it comes, but we're not gonna dive into low-margin OE business, but to make sure you're there to win the eventual EV aftermarket, what, what's the strategic play? Is it it's gonna be the same channels that we sell to right now, belts, it's just making sure we get the shelf space, we get the mind share that you dominate right now for the, you know, the belts for auto. Yeah. I think no. I think that's exactly right. Look, you know, we make this point a lot, right? You know, as a percentage of sales, North America is our lowest Automotive OE business, and it's our biggest automotive replacement business, right? We know how to do this. This is our business model. You know, we're constantly looking at updating our product portfolio to make sure we can service all of our partners out there, and make sure they have the right parts on the shelf to be able to sell through their different stores and distributor networks. We're constantly looking at that and making sure that we're gonna be in the sweet spot when the time comes and the demand is there. I will say this too. You know, we've also, even though we've participated somewhat in the Auto OE market in terms of, you know, the electrification of vehicles, we've also participated on the heavy-duty truck side. You know, electric water pumps, fluid power, things like that, you know, we've had some nice business wins on that side of the business as well. At this stage, the scale is still you're mostly private labeling at this stage. Yeah. You don't, yeah. That makes sense. The book to bill staying above one. Mm-hmm. I mean, should we assume that's sort of where we are right now? I mean, we're still running because I think you said like we're starting at the year book to bill above one. Yeah. Is that something that you would argue most of your markets are still more the gating factor is supply than demand? Because when you go through some of your end market guides, you know, there's a couple flat in there, right? Mm-hmm. Some people say you hope Auto OE is not, not just flat, but mobility, right? Yeah. I mean, I'm just kinda getting a sense of book to bill's above one, but are there some markets where it's, you know, we said book to bill in aggregate above one. Mm-hmm. Somewhere below. I'm just getting a sense. Yeah. I mean, we don't. Nuanced. Yeah. We do not really comment on the book to bill by market. What I will say is a couple things, right? I mean, there is a seasonal element to the business. You do tend to see, you know, orders and sales pick up through the first half of the year. It is not uncommon to see that book to bill moving in that direction. You know, we are still trying to normalize and stabilize the supply chain, right? We are still trying to get, you know, all the materials we need. You know, we, you know, we're getting all, you know, most of the materials we need now, but getting them positioned, getting them into the factory, you know, making sure that we've got the, you know, the people and the right parts scheduled and, you know, kind of all those ancillary things that we said were a headwind from a profitability perspective in the back half of 2022. Just getting all those aligned is gonna help us, you know, kinda satisfy customer demand, you know, as we move forward. I think the last thing too is, you know, we've been pretty upfront with, look, you know, we think that, you know, things have, you know, they were constructive as we moved through Q4. We talked about them being constructive in January. We do think, you know, as we get more toward the back half of the year. There is a. You know, things are gonna moderate some, right? I mean, people are gonna get more confident in the supply chain. Maybe they take their lead times down. Maybe you see some different things happening. You are gonna see things moderate in the back half of the year. Easy for an analyst to say you have to execute it and call the customer. Mm-hmm. I must admit, I was a little disappointed in the aftermarket position that you have and the work we do in the channel that you're like Kleenex. You're not even, I mean, it's Gates, it's a Gates hose. It's not even just a tissue paper. It's. Mm-hmm. You're the brand. That's who you put. The inability to push price earlier. Mm-hmm. Not saying lessons learned, but in hindsight, why were you not able, willing, with that market position in an aftermarket application that was. Mm-hmm. To not go, "Look, guys, we need it now. I'm not gonna wait till January. I don't care if it's November 1st. We're gonna do it now. Yeah. Just so I understand the business model a little bit because when I hear that much aftermarket with that dominant a position. Mm-hmm. I was impressed. Yeah. I think there was a couple things, right? I mean, I think there was a rate of acceleration, of some of the inflation. Yeah. particularly on the freight side, which really came through kind of quicker, maybe than anticipated. You know, look, we have long-standing relationships with these customers. You know, we typically give 60 - 90 days of notice. That is not only as a courtesy, but it is, you know, for them to get prices up on their shelves, for them to get the prices into their system, you know, whether it is the books or, you know, the computer systems, the ordering systems, the EDIs, all these kind of things. You are talking about tens and tens of thousands of SKUs. It is no small task. You know, we knew we were going to take a small bit of short-term pain, but we also knew that, you know, we would come out the other end of it and be where we wanted to be. As we exited 2022, you know, our stated goal was to be at EBITDA margin neutrality. That's how we ended 2022. We feel pretty good about where we are from a price versus cost perspective. We feel confident as we move forward, we're gonna be in good shape. Given Auto, aftermarket's something like 30%+ of the company's revenues, the channel inventory there today versus historical, just so we get some sense of supply chains loosened, more expensive to carry, work in process. Mm-hmm. For them to bring quote back to normal. Mm-hmm. For simple exercise, if Auto MRO stayed flat. Mm-hmm. How much destock is there to get that channel back to normal? Is it 10%, 5%, 20%? No. I'm just trying to get the magnitude. I look, I would not hesitate, I mean, I hesitate to put a guess on that because what we are seeing right now is basically inventories and point of sale and shipment numbers, you know, fairly equal. Okay. I see a lot of, you know, it's not in a situation where we feel like, you know. When it falls above 5%. Yeah. Where there's a big disconnect, you know, between what's in the channel, what's being shipped, and what's going out the door, so. That said, then your second-half guidance, though, is predicated on that gap widening. Yeah. It's like, well, we're just making that logical assumption as the supply chain loosens. You're just gonna see that gap widen. Yeah. I mean, you're gonna see, you know, as lead times shorten, right, as, you know, backlogs, you know, come down some. Yeah. That just naturally kinda shrinks the inventory. You're gonna just see some kinda natural progression of that as lead times shorten. I don't know how good your data is with through the channel to really know like, "Oh, I know exactly the inventory we have. Yeah. Of the end markets that seem to be most, there's very little destock gonna happen there, even as supply chain loosens versus. Yeah. That's an area that. Mm-hmm. There's, you loosen that supply chain, these guys are taking it down 20%. Mm-hmm. Can you give us a little color between your end markets? Which ones feel like, yeah, they were really carrying some excess inventory because of the work in process, supply chain? Yeah. I mean, I guess, you know, look, I would say that probably on the distributor, on the distribution side of the business, and we've talked about this before, is, you know, the industrial business has been a little bit more choppy, right? And I think that's reflective of kind of what's going on in the supply chain and them trying to make sure that they get as much product as they can. And I would say, you know, maybe not quite as choppy on the automotive replacement. And then if you look at our, if you look at our guide for next year and kinda what we think's going on with the end markets, it kinda plays out that way. Kinda stable, low digits for the automotive replacement. On the industrial side, a little bit more headwind as things normalize. That is kinda the way I would portray it. For the Auto OE being flat, how much of that is China off to a slow start in January? You know, auto for you, OE China is not material. Yeah. In general, can you take us around the globe a little bit on do you are you really looking at Auto OE flat in North America? Yeah. I mean, I think what we're thinking on, on Auto OE is, look, you know, you look over the past, you know, two, you know, two or three years, and, you know, people have thought that, oh, the supply chain's gonna normalize. This is gonna be okay. That's gonna be okay. I think we're trying to take a pragmatic view of it. Supply chain's still not completely fixed. Interest rates are higher. Is the consumer gonna feel it? Is that gonna make them a little bit less reluctant to go out and buy, you know, buy a new car maybe or, or lease a new car because they're paying more money for something else? We are just trying to take a pragmatic view of how this inflation works its way through the economy. Yeah. I mean, there's gonna be a theme here at some point where it's like, who benefits from a loosening supply chain? Mm-hmm. Which are the companies that go, "Hey, I can destock them"? Mm-hmm. You're a little bit at risk given the MRO business, but then on the OE side, that's obviously upside. I was just trying to get a interplay between those. Yeah. The third party, those forecasters have not called the supply chain inefficiency the last two or three years. Yeah. So. It's one of those where. Has forecasting been off the last couple years? There's not a lot of upside to. No. Yeah. Project a lot of growth when the last two or three years we've been expecting. Right. You know, a lot more growth. Remember, you know, the Automotive OE part of our business was 8% in 2022. It is not a huge, meaningful part of our business. I mean, it is still an important part of our business, but it is not a huge, meaningful part of the business. You know, what flat or up, I mean. Yeah. I think I was just trying to figure if you're a little bit at risk of supply chain loosening. Mm-hmm. Your customers can destock you. Mm-hmm. You've sort of put that in your guise. Yeah. Yeah. I'm just trying to figure out what's maybe that subtle offset of like, "Oh, that is more than I want to do. I think the offsets for us is, you know, we're gonna continue to have these growth initiatives where we're gonna outgrow the market and outgrow, you know, maybe some of the supply chain loosening. We talked about it. You know, it's chain to belt, it's mobility. And then on the fluid power side, it's all the new products we put in place and, you know, the new material science, new technologies that have really helped elevate the margin on that over the past few quarters to being almost equal to, The facilities you build in FP subtly has been like these couple years now, but. Yeah. Starting to get them filled up. Yeah. The margin profile of those factories versus what they, let's say, replaced. Mm-hmm. How, what's the margin profile just as those new products, and can you remind us what's being built in those factories? Yeah. So it's really a hose, right? And so there's different kinds of hoses. Spiral hose. There's also couplings that we make. We make components for couplings, and then we assemble the couplings, and then we take those and assemble them into hose assemblies, right? And so really, you know, what we've done is we've, you know, we've done a couple of things. We've made the business a little bit less complex under the skin, you know, with the products that we make. And then we've also improved the material science, improved the construction and the flexibility, and what they can do. And then we've kind of reindustrialized, invested some capital, so we're a little bit more efficient in how we make all these different products. So it's a better margin profile than the stuff that we had before. Now, we had to lay out some capital. We had to spend some cash. We took a little bit of a beating for that back in 2018, but it looks pretty good now, so. You answer this question as you'd like, but of your guidance. Mm-hmm. Metrics, which are the ones that you feel most comfortable with and which ones you knew when you did the guide a little, a little more challenging? Just. For 2023? For 2023? Yeah. 2023? Yeah. Just what you're ready to provide. I mean, look, I think for us, you know, the ones that are always, you know, a little bit more challenging are the ones that are a little bit more outside your control. That is really the top line. You know, 'cause really, you know, you kind of look forward and say, "Okay. Here's what we think's gonna happen." Then, you know, there could be existential events, good or bad. You know, people could start feeling much better about the economy, and all of a sudden, you know, the top line guide comes up and you feel a little bit better about things. From a cash flow perspective, from a margin perspective, you know, the things that we think we can control as we look forward, you know, we feel really comfortable about that. It's kind of the outside the four walls of, of Gates stuff. It's always a little bit. The idea of the destock in the second half of the year. Yeah. Ver-very logical. Mm-hmm. Have you seen customers suggest their supply chains are loosening enough to, to say, "Hey, we're gonna slow it down"? Like, how much is it theory versus a practice? Yeah. I mean, we have not seen, I mean, it is still too early, I think, to call anything on that, right? Okay. Yeah. I think you're still, you know, you're still kind of waiting to see what happens with the supply chain, right? Okay. You have not had the phone ringing a few times going, "Hey, we're. Not me personally. No. Okay. Any questions for Gates? I appreciate you taking the time. Yeah. Obviously, the stocks had a nice bounce the first couple months of the year. I think people got a little more comfortable with some of the names that had a little more financial leverage. Mm-hmm. Obviously, I think the deleveraging's pretty important. Hopefully, the supply chains treat you well. Strike that balance. I do not know if too much, but at the same time, I know you've had some supply issues yourself, so I appreciate it. All right. Thank you so much for taking the time. Thanks for having me. I appreciate it. I appreciate it. Thanks very much. Thank you.