Gates gains with record Q2 sales

Denver, Colorado – Gates Industrial Corp. PLC reported net sales up with a quarterly record in its second quarter 2018 results ending 30 June.

Net sales reached $875.1 million for the quarter, which the firm said is a company record, compared to net sales of $769.1 million during the same period in 2017. For the six-month period, net sales increased 15% to $1.73 billion.

"We continue to execute on our growth initiatives and see strong demand environment across many end markets we serve," CEO Ivo Jurek said during a conference call.

The quarter's net sales results include 6.7%core revenue growth, with increased volumes across both segments as Gates experienced strong demand in industrial end markets, according to the report.

That demand was led by markets for construction, agriculture and heavy duty trucks, Jurek said. Gates also had solid demand in the automotive market, driven by its aftermarket presence, which grew high single digits globally and was strong in both developed and emerging markets.

Those emerging markets, particularly China, contributed to the growth rate, according to the report.

Net sales also increased 4.9% from recent acquisitions and 2.1% from foreign currency effects. Gates also benefited from double-digit core revenue growth overall in emerging economies in both the replacement and first-fit channels, Jurek said.

Net income for the quarter was $92.6 million, up from $8 million for the same period in 2017. For the year so far, net income increased to $122 million from $34.3 million.

Gates saw continued raw material inflation for the quarter, but the inflationary impacts were more than offset with price, manufacturing initiatives and procurement actions, said David Naemura, Gates chief financial officer.

"Our approach to pricing is to price for inflation, and we believe we are well-positioned to do that with our strong brand and replacement channel presence," Naemura said. "We believe that we remain on track to be price material positive for the year."

Although Gates expects inflation to increase in the second half, it has implemented pricing actions in the first half of the year in anticipation, and should be able to continue to respond to market conditions, Naemura said.

The company's cash flow for the last 12-month period reflects the higher spend on the Fluid Power segment capacity expansion, which was most significant in the first half of the year, Naemura said. The prior year also reflects a non-recurring tax refund of about $40 million.

By segment, Power Transmission returned net sales of $550 million for the quarter, an increase of 7.6%. Year-to-date, net sales for the segment were $1.1 billion, up by 10%. The change reflects strong core revenue growth of 5% and a 2.6% benefit from foreign currency effects, according to the report. Gates grew revenue across all of its end markets, with particular strength in the construction and heavy duty truck end markets, Jurek said. The firm saw increased demand across nearly all of its end markets and geographies during the quarter for the segment.

The company's Power Transmission segment generated core growth of 7% in faster growth economies and more than 9% growth in China alone, Jurek said. Growth in emerging markets outpaced growth in developed regions, with the highest global growth in Brazil and China, according to the report.

Gates continued to advance its chain-to-belt initiative during the quarter. The company is targeting a focused set of end markets and applications that represent "a significant market opportunity," Jurek said. The segment also had "key wins" in the lumber, food and beverage, packaging and personal mobility applications.

For the Fluid Power segment, net sales increased by 26% to $326 million, also increasing by 25.6% to $632 million for the first six months. Sales reflected core revenue growth of 10.1%, incremental net sales from recent acquisitions of 14.7% and favorable foreign currency effects of 1.2%. That growth was driven by strong demand in industrial end markets, particularly in mobile hydraulic applications. Gates also saw significant strength in emerging markets during the quarter, it said.

"We are executing well on our growth initiatives," Jurek said. "Industrial end-market demand remains healthy and our Fluid Power acquisitions are contributing well to our growth."

The segment's premium hydraulics line, the largest within Fluid Power, had mid-teen core revenue growth in the quarter driven by solid demand in industrial end markets such as mobile applications, Jurek said.

The strong demand in hydraulics encouraged Gates to fully utilize its capacity for the products, and it built a significant amount of hydraulics backlog in the first quarter, Jurek said.

In the second quarter, that backlog remains relatively unchanged. The first increase in the company's hydraulics capacity began to come online in China, and the remainder is expected to come online in the third and fourth quarters as scheduled.

New plants in Mexico and Poland also remain on schedule, though incremental startup costs will add some cost in the second half, he said. The total impact of the startup costs was about $1 million for the second quarter and is expected to be about $4 million to $6 million in the second half of the year.

Recent acquisitions, including Turkey-based manufacturer of molded and branched hoses Rapro, are progressing well, Jurek said. Rapro, which Gates acquired in April, is returning early stage benefits as the Gates operating system is implemented in the manufacturing facility.

Gates continued to invest in the business during the second quarter as part of its organic growth initiatives, including investments in commercial capabilities, new product development and incremental manufacturing capacity, Jurek said.

"Building on the company's commitment to product development and material science, we recently announced the global launch of our MXT premium hydraulics hose family for both the first-fit and replacement markets," he said.

The hose has lighter weight, better flexibility and improved ease of use, he said.