Gates Corp. ‘on strong footing' entering 2022

DENVER—Despite market headwinds of flat automotive OEM sales, absenteeism (labor market challenges), logistical hurdles, inflation and record backlogs, strong core performances were recorded in the industrial power transmission and fluid power segments for Gates Corp. in 2021.

The result? Full-year net sales in 2021 were $3.5 billion for the component and systems manufacturer that serves the auto and an array of industrial and off-highway spaces, an increase of 24.4 percent over 2020's overall sales of $2.8 billion.

Net income in 2021 was $297.1 million for Gates, or $1.00 per diluted share, compared to net income attributable to shareholders of $79.4 million, or 27 cents per diluted share, in 2020.

Full-year 2021 adjusted EBITDA was $735.8 million, or 21.2 percent of net sales, compared to $506.6 million, or 18.1 percent of net sales, in the prior year.

The company unveiled its fourth-quarter 2021 and year-end 2021 financial results, along with a 2022 outlook, in a Feb. 7 press release and a call with stock analysts.

"Our investments in materials science, innovation and our targeted growth initiatives demonstrated solid progress, and we are accelerating the shift of our revenue toward higher-growth end markets, particularly those with clear, secular tailwinds," said Gates CEO Ivo Jurek. "Our business is on strong footing and we believe the investments we have made provide a foundation for substantial opportunity moving forward."

For the fourth quarter of 2021, net sales were $815.6 million, a 2.7-percent increase over the same period in 2020, which saw $794.2 million in net sales.

Net income in the fourth quarter of 2021 came in at $62.7 million, or 21 cents per diluted share, compared to net income attributable to shareholders of $24.3 million, or $0.08 per diluted share, in the 2020 quarter.

Fourth-quarter adjusted EBITDA was $139.6 million, or 17.1 percent of net sales for the last quarter.

Core revenue in Gates' power transmission (belting) and fluid power (hydraulic hose) segments increased 21.7 percent in 2021 over 2020, "driven by broad strength across end markets and regions," the company's chief financial officer said Feb. 7.

Within these segments, mobility and recreation markets and industrial applications saw the greatest growth, followed closely by sales to replacement channels and first-fit channels, both of which are projected to remain strong in 2022, according to Gates.

"Both (segments) saw exceptional core growth in 2021," Jurek said. "Our power transmission segment had core growth of over 20 percent for the year, led by high 20s growth in industrial end markets."

Additionally, Jurek noted that the company saw more than 90 percent growth in mobility and recreation.

"The strong industrial end-market growth in the quarter offset the decline in automotive OEM," he said. "Our long-term strategy to reposition our portfolio of business continues to progress well."

Net sales in 2021 in the power transmission segment increased by 23.1 percent over 2020, with $2.2 billion in net sales compared to $1.8 billion the prior year.

Of note in the power transmission segment, Gates announced a partnership in the fourth quarter of 2021 with Taiwan-based Gogoro, a "rising electric scooter manufacturer in Asia."

According to Gates, Gogoro is pioneering a smart, rechargeable battery-drive system that uses Gates' quiet carbon drive belts.

"We also secured an additional key win with a leading electric vehicle manufacturer on a new platform, further reinforcing our solid position as these end markets move toward electrification," Jurek said. "Overall, in power transmission, our pipeline of opportunities is growing, conversion in order rates is increasing and backlog has continued to build."

Gates continues to build its order book in the fluid power segment as well, "securing key wins with new products in stationary hydraulics, forklift and construction applications in particular," Jurek said.

"We are also making nice progress with respect to innovation, and recently launched a further expansion of our differentiated hydraulic product line opening up additional new market opportunities for the company," he said.

Full-year 2021 fluid power net sales came in at $1.26 billion, an increase of 26.7 percent compared to net sales of $993 million in the prior year. Jurek said growth in this segment was driven by diversified industrial, off-highway and on-highway product performance.

With the supply chain challenges, global absenteeism and poor raw material availability continuing in 2022, Gates has established a record backlog.

The company will look to make progress on these back orders—surprisingly few of which are being canceled by customers, Gates said—in the first two quarters of this year.

"We should start making some progress on eating into the backlog," Jurek said on the Feb. 7 conference call. "And as you know, we have a book-and-ship business, so we don't like to have a highly elevated backlog.

"Coming back to the question about backlog cancellation, we really have not seen any ... at this point in time. And frankly, all the conversations that I am having with customers are more associated with 'we would like to get more product'—not 'we are anticipating canceling our order.' "

Jurek said Gates was hit hard by raw material supply problems, a trend that is "frankly exacerbating the issues that we are dealing with (otherwise)."

"So it's really not completely driven by our installed capacity," Jurek said. "It's really been exacerbated by polymers, chemical additives, some steel and aluminum from various baselines. And so that backlog increased by about $70 million in the second half of the year."

Gates anticipates the raw material supply situation will improve, and the biggest obstacle the firm is facing to begin this year is an old refrain: COVID-19, and now the omicron variant.

"Obviously omicron has been hitting factories quite hard," Jurek said. "And the level of absenteeism has been pretty tough to overcome. So in a long-winded way, the backlog is high ... but we are very optimistic that things will get a little bit better. And when they do, we will be able to catch up to demand."

The auto market's litany of struggles is lengthy, but Gates is optimistic about a partial recovery.

"We have been reasonably realistic about that business recovering," Jurek said. "We didn't really believe that it was going to recover in the second half (of 2021). And it really didn't. Then it got a little bit worse.

"And what I would say is that we are going back to those automotive OEM accounts ... and telling them, we really can't supply (them) even at their reduced level of demand, predominantly driven by the polymer supply issues in the highly precision-engineered belts that go into that end market.

"We certainly don't believe that it's going to be as rosy as maybe some of those forecasts that are coming out."

Even so, as was evident in the bottom line in net sales and profits for Gates in 2021, the struggling automotive market was offset somewhat by strength on the industrial side for Gates.

And the outlook for 2022 remains positive, Gates officials said.

Europe saw 30-percent growth in 2021, North America saw single-digit growth and Asia "was in line with expectations for the quarter."

Moving forward, core revenue is estimated to grow between 5 and 9 percent in 2022, with adjusted EBITDA expected in the range of $755 million to $805 million for the full year.

"As a result, we ... have entered 2022 well-positioned to deliver another year of profitable growth and value for all of our stakeholders," Jurek said.