• Total Revenue: $863 million, a 3.6% decrease on a core basis.

• Adjusted EBITDA: $196 million, with a margin of 22.7%.

• Adjusted Earnings Per Share (EPS): $0.31.

• Gross Margin: Increased by 210 basis points compared to Q1 2023.

• Net Leverage: Declined to 2.4x from 2.7x year-over-year.

• Debt Repayment: Reduced outstanding term loan balance by $100 million.

• Share Repurchase: $50 million in conjunction with Blackstone secondary offering.

• Free Cash Flow: Outflow of $39 million, aligned with seasonal performance.

• Book-to-Bill Ratio: Remained above 1, expanded in March.

• Automotive End Market: Mid-single-digit growth in replacement sales.

• Industrial End Markets: Revenue declines on a core basis, particularly in First Fit channels.

• 2024 Adjusted EBITDA Guidance: Increased to a range of $745 million to $805 million.

• Q2 Revenue Forecast: Expected between $880 million to $910 million.

• Warning! GuruFocus has detected 6 Warning Signs with LTH.

Release Date: May 01, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Gates Industrial Corp PLC reported strong operating performance with significant margin expansion, including a 330 basis point increase in adjusted EBITDA margin year-over-year.

• The company achieved revenue growth in the automotive end market, driven by mid-single-digit growth in automotive replacement.

• Gates Industrial Corp PLC successfully reduced its net leverage to 2.4x from 2.7x in the prior year quarter, demonstrating effective debt management.

• The company is making progress with enterprise initiatives, particularly in material cost reduction and operational efficiency, contributing to gross margin growth.

• Gates Industrial Corp PLC increased its full-year adjusted EBITDA guidance based on strong profitability results in Q1, indicating confidence in continued financial performance improvement.

Negative Points

• Total revenue for the first quarter was $863 million, representing a 3.6% decrease on a core basis, indicating challenges in certain market segments.

• The industrial First Fit channel experienced a double-digit decline, reflecting ongoing weakness in specific industrial markets.

• Core industrial replacement revenues decreased modestly, suggesting some softness in demand in this segment.

• The company noted that the agricultural and construction sectors might remain soft, potentially impacting future performance in these markets.

• Despite overall strong performance, there were regional challenges, such as an 8% core revenue decline in the EMEA region, driven by significant decreases in Industrial First Fit.

Q & A Highlights

Q: In the context of Q1 realized growth, Q2 is looking at down 3.5% year-over-year. What is the pathway here to the plus 1 high end for the full year? What needs to go right in the back half? A: (L. Brooks Mallard, Executive VP & CFO) For the second half of the year, we're staying pragmatic. The comps do get easier as industrial trends troughed out last year. We expect personal mobility to stabilize and start to come back, along with a slight recovery in the rest of the industrial market. Our automotive replacement business has been strong, and we just need to see some stabilization and slight recovery in the industrial market.

Q: Is there no reason to believe the auto aftermarket wouldn't maintain at these levels through the year? A: (Ivo Jurek, CEO & Director) There's no reason to think otherwise. The underlying demand trends are very strong, the order flows are very strong, and the book-to-bill is very strong. We anticipate that the automotive aftermarket will continue to outperform.

Q: On the margin line relative to the raised outlook here seems all around the incremental self-help. Could you give us some more color on where specifically that $0.06 of the incremental self-help is coming from? A: (L. Brooks Mallard, Executive VP & CFO) In Q1, we did a little better on mix because the replacement business was a bit better. We also did better on enterprise initiatives. Price, we're using 80/20 as the underlying infrastructure on a lot of what we do now, and that helped with price a bit. Productivity came in a little better in Q1, and as we move through the year, we expect productivity to get a bit better, driven by material cost productivity.

Q: Could you elaborate a little on your expectations for China? A: (Ivo Jurek, CEO & Director) Fundamentally, there are still lots of headwinds in the Chinese economy. We are growing nicely in our automotive replacement business in China despite those headwinds. We start seeing that particularly in the industrial replacement side, it's becoming less bad. One could anticipate some degree of inflection into the second half of the year there.

Q: Can you provide an update on the operational improvement initiatives internally? A: (Ivo Jurek, CEO & Director) We're doing better, and the organization is more comfortable and confident in its ability to execute on the vision and targets. We're delivering margin performance at historical highs during an end market volume drop, providing a positive setup as we enter a more constructive volume environment in '25 and '26. We are laser-focused on executing our commitments and feel confident in our ability to deliver.

Q: What is driving diversified industrial stabilization, and what kind of run rate does personal mobility have to get to? A: (Ivo Jurek, CEO & Director) Personal mobility was impacted by destock and overbuilds during the COVID era. We are seeing real inflection in the market demand now. As for diversified industrial, things are just less bad. We're seeing a reduction of negative order rates and believe this is on a trajectory of steady recovery, very much in line with what the industrial PMI is indicating.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.