DENVER—Gates Industrial Corp. might consider the first quarter of 2020 as a tale of two economies.
In every geographic market segment served by the global provider of power transmission and fluid power solutions—North America, South America, Europe, the Middle East, Africa, China, India and East Asia—the first quarter of 2020, which concluded March 28, started well and ended poorly, impacted by the coronavirus pandemic in the waning months.
Gates disclosed May 5 that the company saw net sales decline 11.8 percent in the first quarter of 2020, with $710.1 million versus $804.9 million in the first quarter of 2019.
This represented a core revenue decline of 10.1 percent compared to one year ago, with 7 percent of that core revenue decline "directly due to COVID-19," Gates CEO Ivo Jurek said.
"The first quarter marked the beginning of an unprecedented environment for the global economy as governments, companies and communities implemented strict measures to minimize the spread of the COVID-19 pandemic," Jurek said during a May 5 webinar on the first quarter results.
The uncertainty of the pandemic, driven by rough estimates of a timeline for a normalized economy, means the second quarter results—and likely year-end results—do not look any better.
"While we continue to operate around the world, we expect the sharp reductions in economic activity, and the uncertain timing of the recovery will have a substantial impact on our Q2 results, as well as those for the full year," Jurek said.
As a result, Gates has withdrawn its previously issued guidance for 2020 core revenue and adjusted EBITDA.
Jurek said proactive measures taken by Gates in China in February, such as a mobilized response team to design countermeasures to combat the COVID-19 pandemic, have produced models and protocols for reopening other Gates plants across the world.
The problem for Gates, and most others in the rubber industry, is that efforts put forth in Asia began much sooner than those on other continents, pushing the unknown recovery timeline for those off-Asia sites past the end of July.
So while China can serve as a barometer for the pandemic's reach and effects, much about the economic impact remains unknown, Jurek said.
"Methods used in China have informed our approach in other regions," Jurek said. "Because of this we have seen no significant disruption in service for our customers, and we have maintained a proper capacity of raw materials."
While supply has not been the problem, plummeting customer demand has been realized in industrial and automotive market end-use manufacturers.
Sales into replacement channels outperformed those into first-fit channels during the first quarter, Gates said, the latter of which were negatively impacted by temporary suspensions of production by some customers.
Jurek did note that Gates is navigating the current environment in a "strong financial position," with more than $1 billion in liquidity and no debt principal payments until 2024. The company said it expects to continue its strong free cash flow generation, reported at $16.2 million for the first quarter.
"Where appropriate, we are reducing production capacity and taking actions to reduce our controllable costs and discretionary spending," Jurek said. "Further, we have contingency plans in place for a variety of scenarios and, as this fluid situation continues to evolve, will respond accordingly. While COVID-19 is a developing situation, we believe our business is prepared for the challenges ahead and well-positioned to emerge stronger as the crisis abates."
Power transmission segment
The drop in core revenue and net sales for Gates' power transmission segment mirrored the overall numbers for Gates, as the segment saw $441.2 million in net sales in the first quarter of 2020, compared to $499.5 million in net sales in the first quarter of 2019, a drop of 11.7 percent in net sales year-over-year and a 9.8 percent decline in core revenue.
"The power transmissions business was significantly impacted by COVID-19 in China and related temporary customer shutdowns before only recently showing signs of recovery," Jurek said.