iTeos Therapeutics Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 12 speakers on the call.

Operator

Thank you for standing by. My name is Kayla Baker, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gates Industrial Corporation First Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Star and the number one. I would now like to turn the call over to Vice President of Investor Relations, Rich Kwas.

Speaker 1

Good morning, and thank you for joining us on our Q1 2023 earnings call. I'll briefly cover our non GAAP and forward looking language before passing the call over to our CEO, Ivo Urich, will be followed by Brooks Mallard, our CFO. Before the market opened today, we published our Q1 2023 results. A copy of the release is available on our website at investors. Gates.com.

Speaker 1

Our call this morning is being webcast as in accompanied by a slide presentation. On this call, we will refer to certain non GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website. Please refer now to Slide 2 of the presentation, which provides a reminder that our remarks will include forward looking statements within the meaning of the Private Securities Litigation Reform Act. These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward looking statements.

Speaker 1

These risks include, among others, matters that we have described in our most recent annual report on Form 10 ks and in other filings we make with the SEC. We disclaim any obligation to update these forward looking statements. We will be attending several investor conferences over the next month, including the Goldman Sachs Industrials and Materials Conference, the Wolfe Global Transportation and Industrials Conference and the KeyBanc Industrials and Basic Materials Conference. We look forward to meeting with many of you. With that out of the way, I'll turn the call over to Eva.

Speaker 2

Thank you, Rich. Good morning, everyone, and thank you for joining our call today. Let's start on Slide 3 of the presentation. Our global teams delivered another solid quarter and we posted Q1 revenues Above the midpoint of our guidance in an operating environment that remains challenging and while managing through a cybersecurity attack on the enterprise. As previously disclosed in an 8 ks filed in February, our company experienced The cybersecurity incident in early February, which led to a temporary shutdown of most of our operations globally.

Speaker 2

Our operating and corporate teams work diligently and tirelessly to restart Nearly all of our operations progressively over the course of 10 days. I am proud of the resiliency and successful response to such challenging circumstances. Our Q1 results have been adjusted for costs incurred during the period associated with the incident, and Brooks will outline these in more detail later in the call. We estimate the cybersecurity event impacted our revenue growth rate by approximately 150 basis points in the quarter. The incident primarily disrupted Our ability to support North American and European replacement demand, which is book and ship business.

Speaker 2

We estimate North America experienced approximately 2 thirds of the sales dislocation, and we do not contemplate recovery of this volume in the current quarter. Moving on to our results. Our core growth was relatively balanced across the first fit and replacement channels. Geographically, our EMEA region registered another strong quarter of core growth supported by healthy OEM demand. China regional performance continue to recover as the quarter progressed after the most recent impact from COVID and modestly outpaced our initial expectations.

Speaker 2

We saw solid automotive replacement demand despite the disruptions To our output and service levels caused by the cyber security event. Vehicles in operation in the car park age both continue to increase in our major geographies, which should support steady demand dynamics for our business in the mid term. Supply chain and logistics headwinds continue to slowly ease and our global teams remain diligently focused on satisfying customer demand. Our profitability in the quarter expanded meaningfully compared to the prior year. Our business teams executed well and our price cost position was more favorable when compared to last year's Q1.

Speaker 2

Overall, the supply chain is slowly improving and benefiting our operational performance. Our adjusted EBITDA margin rate was slightly ahead of our Q1 guidance midpoint, including the estimated $5,000,000 expense impact from the cybersecurity incident Notably, we produced positive free cash flow this quarter. Our working capital use was well below last Q1. We made progress normalizing our inventory position, which experienced a sizable decrease on a year over year basis. We have multiple initiatives underway to improve our inventory turns, while also driving improvements to our service levels When coupled with easing supply chain impediments, we believe that further progress will be made as the year evolves.

Speaker 2

We are encouraged by the strong seasonal start to our cash flow. Underscoring our commitment to driving shareholder value, we announced today that our Board of Directors has approved at $250,000,000 share repurchase authorization that expires in October 2024. The authorization provides us with added flexibility to enhance shareholder returns and we intend to use it opportunistically. Please turn to Slide 4. 1st quarter total revenue was $898,000,000 And translated to core growth of 4% versus the prior year.

Speaker 2

Foreign currencies were a 3 50 basis points headwind year over year. As outlined, we estimate The cybersecurity incident represented approximately a 150 basis points headwind to our growth rate. We realized solid growth in most of our end markets led by double digit growth in energy and personal mobility and High Single Digit Expansion in Off Highway. Diversified Industrial Growth moderated from recent quarterly trends. Adjusted EBITDA was $175,000,000 which yielded a 19.4% adjusted EBITDA margin, an increase of 180 basis points year over year.

Speaker 2

Our price Cost position was better relative to a year ago quarter when commodity and energy inflation accelerated due to the Russia Ukraine conflict. Gross margins increased year over year, helped by a better supply chain dynamics. Adjusted earnings per share was $0.25 Our operating income was up materially year over year and contributed a $0.06 per share of earnings. The year over year comparison was affected by higher effective tax rate and increased interest expense. On Slide 5, I'll review our segment level highlights.

Speaker 2

In the Power Transmission segment, We generated revenue of approximately $548,000,000 in the Q1 resulting in core growth slightly above 3%. FX was a 4 50 basis points year over year headwind. The segment experienced the strongest top line Performance in Energy, Construction and Personal Mobility. All these end markets experienced double digit core growth, which helped offset weaker demand in China. Diversified industrial revenues decreased mid to high single digits on a core basis in North America, where we saw the most impact from the cybersecurity incident.

Speaker 2

While China was our weakest region in the quarter, primarily as a result of the COVID pandemic disruptions, It came in ahead of our expectations and strengthened as we exited the quarter. Polymer supply availability continues to normalize and we are obtaining sufficient supply to support customer demand. We had strong design wins in the quarter, particularly in personal mobility, which should support continued above market growth on a go forward basis. Our adjusted EBITDA margin showed nice recovery year over year, helped by a balanced price cost position and improving supply chain. Our Fluid Power segment Recorded revenues of $350,000,000 with core growth of approximately 5% year over year, partially offset by 170 basis points negative pressure from currency.

Speaker 2

The energy, construction and auto replacement markets were the best growth areas in the quarter. We booked meaningful wins in agriculture and construction that will begin production in the second half of twenty twenty three. Fluid Power segment EBITDA margin improved 160 basis points year over year benefiting from a more stable operating environment compared to the prior year. I will now turn the call over to Brooks for additional details on our results.

Speaker 3

Thank you, Ivo. Moving now to Slide 6 and an overview of our core revenue performance by region. Similar to Q4 2022, EMEA was the standout region, growing revenues 10% on a constant currency basis. Personal Mobility and Energy were the strongest end markets, both growing well above 20%. Off Highway expanded at a mid teens pace.

Speaker 3

Overall, our industrial end markets core growth versus prior year was in the high teens. 1st fit sales experienced moderately stronger growth than replacement in EMEA. North America revenues increased low single digits year over year on an organic basis. Off Highway And automotive generated solid growth in the quarter, while diversified industrial moderated compared to last year. China declined mid single digits, but activity strengthened in the last half of the quarter and modestly exceeded our initial expectations.

Speaker 3

Auto replacement was a distinct bright spot in China, growing double digits. The relaxation of COVID restrictions in the country has fueled miles driven and an increase in garage visits driving higher demand. East Asia and South America both generated high single digit core growth year over year with solid contributions across most end markets. Overall, it was a good start to the year and demonstrated the resiliency and dedication of the organization. On slide 7, we provide an adjusted earnings per share walk from last year's Q1.

Speaker 3

Operating performance contributed approximately $0.06 per share and includes a little over $0.01 per share of expense add back related to the cybersecurity incident. The adjustment primarily reflects lost manufacturing production in addition to incremental SG and A costs. A higher effective tax rate drove a $0.06 earnings per share headwind, while higher interest expense was a $0.03 earnings per share drag compared to the prior year. The other bucket includes the benefit of a reduced share count and lower minority interest versus the prior year. Lastly, we recorded a $10,700,000 pre tax charge EBITDA and adjusted earnings per share reconciliations.

Speaker 3

Slide 8 has an update on our cash flow performance and balance sheet. Our free cash flow for the quarter was $38,000,000 Relative to the prior year period, working capital outflow was significantly lower, benefiting from a slowly stabilizing operating environment and improved inventory management. Our inventory turns increased modestly year over year. Our net leverage declined both year over year and sequentially. At the end of the Q1, our net leverage ratio was 2.7 times compared to 3.2 times last year.

Speaker 3

We ended the quarter with the lowest net leverage ratio for a Q1 in our history as a publicly traded company. We remain highly focused on driving incremental improvements to our balance sheet and will be opportunistic with regards to taking actions to strengthen our position. As Ivo mentioned earlier, the Board approved a new $250,000,000 share repurchase authorization, which enables us to be efficient in optimizing our capital allocation options as we deploy excess cash. Shifting to 2023 guidance on Slide 9. We are reiterating our full year 2023 guidance, which includes 1% to 5% core revenue growth, adjusted EBITDA in the range of $700,000,000 to $750,000,000 and adjusted earnings per share of $1.13 to 1 $0.23 Also, we still anticipate capital expenditures of approximately $100,000,000 and free cash flow conversion of 100%.

Speaker 3

Please note that our guidance ranges do not incorporate any potential share repurchases. For the Q2, we expect revenues to be in the range of $915,000,000 to $945,000,000 We expect low single digit core growth year over year inclusive of meaningful growth in China as the business comps against the COVID related shutdown that occurred during last year's Q2. We estimate our adjusted EBITDA margin will expand approximately 50 basis points to 100 basis points compared to the prior year. With that, I will turn it back over to Ivo.

Speaker 2

Thank you, Brooks. On Slide 10, I'll summarize a couple of key messages before taking your questions. First, I am pleased with the start to our year. Our results came in above the midpoint of our guidance while navigating through a cyber security incident. The operating environment continues to heal and our operating initiatives are gaining traction, both of which contributed to attractive margin expansion year over year.

Speaker 2

Additionally, we are intensely focused on our customer service metrics as the operating environment normalizes. 2nd, we continue to make good progress improving our balance sheet and enhancing our ability to return capital to shareholders. We delivered positive free cash flow in the Q1, A very strong performance when considering our normal seasonality usually results in an outflow. We are intently focused on converting 100 percent of our adjusted net income to free cash flow in 2023 and in the midterm. On trailing 4 quarter basis through March, our free cash flow conversion has measured 105%, which highlights our cash flow generation capabilities.

Speaker 2

Our net leverage ratio decreased by 0.5 turn year over year and fell slightly from the 4th quarter level. Based on the strong cash flow performance in our business and improving balance sheet, our Board of Directors We approved a $250,000,000 share repurchase authorization that will enable us to opportunistically return capital to shareholders. The authorization provides us with another tool to deliver attractive returns to our shareholder base. I'll finish by extending my deep appreciation to the 15,000 Global Gates associates for their perseverance and dedication. With that, I'll now turn the call back over to the operator to begin the Q and A.

Operator

And our first question comes from the line of Deane Dray with RBC Capital Markets. Your line is open.

Speaker 4

Thank you. Good morning, everyone.

Speaker 2

Good morning. Good morning.

Speaker 4

Hey, just to put some closure on the malware incident. When you say you're not going to recoup the volume, so was that just It was a share loss during that period. Just why was why is there that expectation that you don't get it back or is it in future quarters?

Speaker 3

Hi, Dean. A lot of our business is book and ship. And so there was this period of time Where we couldn't take some orders and that progressively got better as we went through the incident. And so our view is during that time we couldn't take orders. We probably aren't going to get those orders back.

Speaker 3

And so that piece of it, we just don't think is going to come back to us because it's primarily that book and ship business Where you take the order, you book it within I mean, ship it within 48 to 72 hours.

Speaker 4

Got it. All right. So that's helpful. And then second question is, Give us a sense of the inventory in the channel, how distributors are positioning, any destocking going on, anything there would be helpful. Thanks.

Speaker 2

It's the business is fairly balanced. Based on the point of sale data that we continue to very carefully look at and the related indicators, we believe that The inventories are consistent with the underlying demand still in a channel. But as you can imagine, we are So being very, very cautious and very mindful of what the market May do in the near term future. I'll say that we did see some choppiness in the industrial demand, As I stated in my prepared remarks and that I would say is more isolated to kind of logistics and distribution End markets that have weakened somewhat, but in general, the inventory positions Remain in a reasonably good shape. And as we have also indicated, we started to take nice chunks of our finished goods inventory down.

Speaker 4

That's real helpful. And just lastly, it's not a question, just a comment that's very impressive on free cash flow this quarter. Thanks.

Speaker 2

Thank you. Thank you.

Operator

And the next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open. Good morning, everyone.

Speaker 3

Good morning, Nate.

Speaker 5

Yvon, on your last earnings call, you mentioned the availability of highly engineered polymers is And it seems like you said that again in today's presentation. It seems like it did help your margin performance in Power Transmission, Given significantly higher margin and lower sales. So with the understanding that maybe Q1 was your easiest comparison in terms of supply chain headwind, Would you expect that more positive performance to continue, especially in PT? Or are you just being conservative in terms of your supply chain expectations? Yes.

Speaker 2

Thank you, Andy. I mean, I've been pretty consistent and maybe very open about our struggles With the polymer supply and availability and so look, we're making really good progress. We have secured adequate amount of resins that was a big headache, particularly in Q3 Of last year. So while Q1 of last year was probably the easiest comp, but predominantly driven By inflation and that was brought in by that conflict in Russia in particular and Obviously, some of the other issues that we have all seen in the end of 2020. We think that the polymer based comp Will be easier in Q3 than it was in Q1.

Speaker 2

I feel that we have what we need and we should progressively Be able to continue to drive our margins up as we have guided in our prepared remarks.

Speaker 5

And then Eva of Brooks, can you just give us a little more color into what happened with the customer bankruptcy? And I think it would be a good time to ask you about How tighter credit conditions are impacting your customers and or markets and that you would expect this to be a relatively isolated incident?

Speaker 3

Yes. So I mean, look, there's not a lot to say. The customer, toward the end of January, filed for bankruptcy Proceedings that have been going through the process as we learn more information. At some point, it became prudent for us to go ahead And book a credit reserve for that particular customer. And we do think it's an isolated incident.

Speaker 3

We have a Again, good methodology in terms of how we track the creditworthiness of our customers and how we look at bad debt and different things like that. This one was a particularly Big automotive supplier and so it was it happened fairly quickly. But we have a good process in place where we manage our both our customers' creditworthiness and looking at our Receivables and managing our bad debt. So we feel pretty good about where we are.

Speaker 2

Appreciate the color, guys.

Operator

And the next question comes from the line of Julian Mitchell with Barclays. Your line is open.

Speaker 6

Hi, good morning. Maybe just to try and drill into the sales outlook A bit more. Just wondered in the Q1, the sort of price versus volume spread within sales. And When you think about volumes for the balance of the year, volume growth, anything to call out Sort of on a quarterly basis or seasonal basis, and are we still thinking it's sort of 3 ish points of 3 to 4 points of price tailwind for the year.

Speaker 2

Julian, good morning. Yes, I think you are thinking about it correctly. Look, I mean in Q1, again to restate, right, I mean we had full quarter of Russia and then in a comp. And then obviously, we had COVID impact in China in Q1 of this year. So Based upon what we see, the order intake, pricing and the underlying performance of the market, We believe that our outlook remains pretty prudent as we have described in our guidance.

Speaker 2

Thanks very much.

Speaker 6

And the sort of the price tailwind eases Gradually or narrows gradually through the year. Is that the way to think about price in sales?

Speaker 3

Yes. I think that's the exact way to Think about it. It will as inflation the rate of inflation It starts to decrease. I don't think we're seeing deflation certainly yet, but the rate of increase in inflation starts to slow. That will trickle through the price cost relationship and then that will slowly go down over the course of the year quarter by quarter.

Speaker 6

Thanks very much. And then just on the balance sheet usage, it's encouraging to see the free cash improving a lot In the Q1, so you do have much more optionality sort of looking ahead on cash usage. Maybe just talk us through sort of The aspiration here to try and get the sort of the free float, if you like, or change The structure of the shareholder base to a degree at Gates, the appeal of that versus kind of M and A, because I'm sure you're Chomping at the bit to get some M and A done. Maybe just how are we thinking about that Sort of even distribution between the 2 or just given the valuation of the stock, there has to be a sort of a buyback is a much higher return.

Speaker 3

Hey, look, I think, first of all, We're really pleased with our cash conversion in Q1. As we continue to drive improved profitability as the supply chain optimizes, We feel good about our cash conversion for the year and that's going to give us a significant amount of cash to deploy right from a cash optionality perspective or a capital deployment perspective. And so look, we've got a midterm target of getting Our leverage down to 1 and 1.5 terms, that's going to come through a combination of both gross debt pay down and improved profitability, And it's probably split pretty evenly. So we'll continue to drive that leverage down both ways. We want to remain Flexible, so that if an opportunity comes up for us to do some stock repurchases, I mean that's going to be nicely accretive for the company.

Speaker 3

We want to have that optionality. And then we also want to make sure that We have M and A in front of us because all those are good options. We continue to look at our pipeline of M and A opportunities. We continue to make sure we keep those in front of us in case something becomes actionable. But in terms of debt pay down or stock buyback, those are both great Capital deployment opportunities.

Speaker 3

And I'll say further, we're not going to let the cash sit on our balance sheet. And so in the short run, if we have more opportunities to pay debt down, reduce cash interest, help improve earnings per share, Then we'll do that. And as we continue to generate cash, we'll look at other options.

Speaker 6

Great. Thank you.

Operator

And your next question comes from the line of Joshua Pokrzywinski with Morgan Stanley. Your line is open.

Speaker 7

Hey, good morning, guys.

Speaker 2

Good morning, Chuck.

Speaker 7

Ivo, just wondering as you guys look out across pretty big, I'll call it mega project funnel out there that some folks in the broader industrial orbit are seeing. Are you seeing an uptick in either The OE business or folks in distribution who are trying to prep for those things or new design wins or anything, I guess that would just give Gates access to the higher CapEx spending that we're seeing now and probably get further momentum into 2024.

Speaker 2

Yes. I think that maybe I'll point out to the prepared remarks a little bit, Josh, too. I mean, we've talked about some nice wins in Construction and off highway equipment that we believe we will start production with in the second half of this year. So I would say that some of our participation biggest participation is going to be more in the infrastructure build out as a first stage. And then as a second stage, as you start looking more out to the industrial automation, the equipment that actually is going into those facilities, We have a ton of products that are components of the in production equipment that our products get used to.

Speaker 2

So We're actually reasonably confident that we're going to have a good participation as these projects go from an early stage to more latent stage of development. And so this could provide a nice benefit for our revenue generation kind of in the 2024 and beyond that timeframe. So definitely something that we look forward to participating Outside of that, I wouldn't say that we see we don't have like an electrical equipment, so we don't participate in the Early stage of that build out of those mega projects.

Speaker 7

Got it. That's helpful. And then I guess if I just Think about the balance sheet and you gave some helpful color already, but what's the level at which you feel like it's Yes, sort of inefficient to continue to pay down debt. Do we see a lot more sense of urgency At two times or where do you guys kind of want that to land before you really get more aggressive?

Speaker 3

Yes. Well, look, I think that depends on the environment. I mean, clearly, we're in a higher interest rate environment right now and you have to look at our That picture in terms of how much of it is fixed versus how much of it is variable in terms of what the paybacks are. And we've said before, we want to get down to below $2,000,000,000 of gross debt. So that still leaves us a ways to go in terms of paying that down.

Speaker 3

But we want to be balanced too. And so we want to look at what's best for the shareholders. Certainly as we pay down debt and improve profitability, get closer To our goal, pay down more of the high cost debt, buying back stock maybe a little bit more attractive for the shareholders. And then on the M and A side, EVO?

Speaker 2

Yes. Look, I mean, I will start with we really like our product portfolio And how we participate in the end markets where we participate. We believe that we have a very strong set of opportunities ahead of us To nicely continue to grow our enterprise and do it at very strong Type of margins that we can deliver. But that being said, we don't feel any pressure to do M and A. We want to continue to demonstrate that this business has a strong opportunity to have a frankly a bulletproof balance sheet And that is our primary focus.

Speaker 2

And when opportunities arise, there are lots of companies out there that we believe We would benefit or they would benefit from combination with Gates. And when the opportunities arise at the right valuations, We'll be on a standby to look at some of those potential transactions.

Speaker 7

Great. Best of luck in the meantime.

Speaker 2

Thank you.

Operator

And the next question comes from the line of Mike Halloran with Baird. Your line is open.

Speaker 2

Good morning, everyone. Good morning, everyone.

Speaker 8

Good morning. So maybe some thoughts on, first the demand side again, just How are you thinking about backlog, backlog normalization through the year? And is there I certainly heard your response to Josh's first question, I think, About how some of these larger projects will cadence and project wins will cadence in through the year, but any nuance by end market from an underlying demand perspective, positive or negative That you're thinking about as we look at the back half of the year from a trend perspective?

Speaker 2

Yes. No, I think that's a very good question, Sure. Mike. So look, I mean, our book to bill remain above 1. Let me start with that.

Speaker 2

Taking into account What we've gone through with the cyber incident, which frankly was very challenging period of time for our teams here, Our age backlog and our backlog remains way too elevated. And frankly, we do not anticipate that we're going to be able to start Reducing it in a meaningful way until second half of the year. Maybe additional color is more of, hey, look, And I think I said it a couple of moments ago, we do see some choppiness particularly in the industrial replacement business, But it remains in line with our expectations, particularly if the supply chain normalizes and The lead times overall start normalizing already. We believe that you're going to see a little bit of that choppiness. But Again, book to bill above 1, the inventory levels in the channel remain very, very Solid with the present level of demand.

Speaker 2

And so we do think that the business should continue to evolve Around how we have viewed the year at the beginning of at the start of this year, which is Probably some slowdown in second half, particularly driven around some of the credit constraints and Late in the cycle and so on and so forth. So we feel pretty good with what we see. I mean, I'll maybe give you a little more color in here. Auto demand was very solid. Global auto up kind of 4, energy up very strong, High teens.

Speaker 2

Underlying market demand staying very strong. Off highway, very solid at plus 8. Obviously, we talked about personal mobility still in high teens. And so the only kind of the only Choppiness that we have seen was more in the diversified industrials and it was down kind of mid single digit level. So all in Pretty good, pretty solid and kind of what we anticipated, but we are being very cautious and we are being mindful of the underlying macroeconomics that we are all operating in.

Speaker 8

Very helpful. And then follow-up, When you think about the optimization programs you announced a couple of quarters back, just an update on how things are progressing on that side?

Speaker 2

Yes. Look, I mean, our gross margin is up quite nicely, obviously flowing through operating margin, very good The leverage on incremental revenues, so that was pretty solid. And I would say that we were predominantly up in the first quarter By less negative supply chain situation. And so our prime wheel or prime pump It's getting pumped up and we think that we have been in a good place to continue to drive improvements That we have described and we certainly believe that over the next couple of years, the gross margin should go up very nicely And that the underlying improvement should filter through the profitability as we have highlighted on the last earnings call.

Speaker 8

Thanks, Ivo. Appreciate it.

Speaker 2

Thank you.

Operator

And the next question comes from the line of Jamie Cook with Credit Suisse. Your line is open.

Speaker 9

Hi, good morning, and congrats on a nice quarter. I guess just I mean most of the questions have been asked. I guess I would just say assuming that The macro does deteriorate. Can you talk to some of the changes, in your business model either from a cost side or End market focus, how your business performs in a potential downturn this cycle versus previous ones and any actions you're contemplating right now in the event that things do deteriorate. Thank you.

Speaker 2

Good morning, Jamie. Thank you for the question. Look, I would start with that. I think that we are a lot more cognizant of the macros. We have been maybe I think somebody told me that I have maybe been too negative about the underlying market conditions.

Speaker 2

We're just trying to be pragmatic. And so as I said earlier, we started to take down our inventories levels quite nicely. So we are positioning ourselves to be in a situation where while we want to have a flexibility and we absolutely laser focused on servicing our customers More effectively, we also don't want to be caught up with significant amount of inventory in a potential scenario where the macro is filtered through the underlying demand. So I would say that's probably Change number 1 maybe from the previous cycle. Change number 2, I think we have a lot more balanced portfolio Where we believe that some of our end markets should have a pretty strong dynamics Even in slowdown of the macroeconomic environment, so automotive replacement business is in a very good shape And we believe that should provide a nice cushion for us.

Speaker 2

We have done lots of work with the change of our portfolio. I mean, Obviously, we have taken our automotive OEM exposure down by nearly 50% Since we've became and become a public company, so we believe that there should be a less exposure to a cyclical auto market. And we have fundamentally improved our footprint where we have a capability to flex I must feel a little more effectively maybe than we have been able to do in a past down cycle. And lastly, We still have a ton of restructuring projects on the docket that we haven't really spoken about a lot since we said Sometimes late last year that we are in planning stages of executing those and we will be coming out mid year and providing an incremental update on Opportunities that we see with driving putting ourselves to a position to lower our breakeven point.

Speaker 9

Great. Thanks. I appreciate it.

Operator

Star and the number one on your telephone keypad. Our next question comes from the line of Jerry Rettig with Goldman Sachs. You may begin.

Speaker 10

Hi. This is Clay on for Jerry. Just one quick one for me. 2nd quarter EBITDA is our EBITDA margins are typically the high point for the year Looking at normal seasonality, would you expect any deviation from this in the second half or just thank you.

Speaker 3

Yes. No, look, I think overall Q2 tends to be our peak year. I do think when you look back at 2022, there is some choppiness in terms of when we started to see the Russia, Ukraine impact Come through, if you remember Q3 and Q4, we had the supply chain disruptions last year. And then we expect the supply chain to get progressively better. So when you look at our we're kind of thinking of it more first half versus second half.

Speaker 3

And we expect a pretty even split When you think about gross margin improvement through the year, pretty even from the first half to the second half. We do expect to have more variable comp in the second half of twenty twenty three. So that's going to when you look at a year over year perspective, that's Headwind from a comp perspective, but I would think of it that way in terms of

Speaker 8

the first half versus the second half.

Speaker 2

Thanks.

Speaker 3

Yes.

Operator

And the next question comes from the line of Jeff Hammond with KeyBanc. Your line is open.

Speaker 11

Hey, guys. Just on, I guess, any changes within how you're thinking about Fluid Power versus PT growth? And just Confirm, I jumped on a little late, where all the cybersecurity revenue shortfall hit?

Speaker 2

Yes. Good morning, Jeff. We believe that we still have a little more opportunity for recovering parts transmission. Parts transmission was more impacted in second Half of last year visavis the polymer shortages that we have discussed. So we think that the Trinity remains there to continue to perform nicely in the second half.

Speaker 2

And on your first question, most of our cyber Security impact was realized in North America and Europe and 2 thirds of about $15,000,000 that we have highlighted We're impacted in the North America business predominantly in the replacement side of our business.

Speaker 11

Okay. And then, this kind of industrial replacement choppiness, can we chalk that all up to destock? Or is there Some certain end markets or pockets that feels like some real demand weakness. Yes.

Speaker 2

I think I said it earlier, Jeff, logistics and distribution equipment has been weaker. I mean, I think that that's pretty notable. But I would also say that the cybersecurity impact touched North America and Europe in particular. So we don't really see a lot of destocking at this point in time. We feel pretty good about Our channel being nicely balanced and outside of that maybe That warehousing equipment side of the business, I would say that the rest of it remains pretty robust.

Speaker 2

Okay. Thanks a lot, Yvo. Thank you.

Operator

And there are no further questions at this time. Rich Wass, I'll turn the call back over to you.

Speaker 1

Thank you everyone for joining our Q1 conference call. If you have any follow-up questions, feel free to reach out to myself. Thanks again. Have a great day.

Operator

And this concludes today's conference call. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
iTeos Therapeutics Q1 2023
00:00 / 00:00
Remove Ads