Gates notches $3.55 billion in '22 sales, expresses ‘cautious optimism' for 2023

DENVER—Gates Corp. CEO Ivo Jurek is aware of the headwinds facing the company's power transmission and fluid power segments entering 2023 and said he is pleased with the overall financial results exiting 2022.

"We are pleased with the progress our teams made in 2022 order conversion and believe supply chain challenges will normalize as 2023 evolves," Jurek said during a Feb. 9 earnings call. "In general, we saw stable demand trends with improvements in our order fill rates.

"While we are not completely past supply chain challenges, we are encouraged by the stability the market demonstrated in the fourth quarter."

Gates, which manufactures power transmission belts and fluid power products for the automotive replacement (31 percent), industrial off-highway (21 percent) and diversified industrial (20 percent) markets, among others, saw 2022 net sales jump 2.3 percent to about $3.55 billion, over 2021 net sales of $3.47 billion.

Core revenue growth came in at a higher rate at 7.6 percent over 2021 year-end financials, according to Gates.

"From a channel perspective, core revenue growth was similar for the replacement and first-fit channels," Jurek said.

Year-end EBITDA was $680.6 million for 2022 (a 19.1-percent margin) against $735.8 million (a 21.2-percent margin) for 2021.

Regionally, Gates was led by South America with a 21-percent jump in net sales over 2021; North America, with an 11-percent increase in net sales; and EMEA, with a 9-percent increase in net sales.

East Asia and India were up 5 percent as a combined region in 2022 over 2021, while China dropped 13 percent in net sales for 2022 over 2021.

"All markets experienced top-line expansion with the exception of China," Jurek said. "But demand strength in North America and EMEA more than compensated for China weakness.

"And order trends and material availability were more favorable than expected exiting the year."

For the fourth quarter of 2022, Gates' revenue increased 16 percent year-over-year to $893 million. Adjusted EBITDA was $166 million (an 18.6 percent margin), according to the fourth quarter results released by Gates.

Most end markets in the fourth quarter grew by double-digits year-over-year, led by personal mobility, energy and off-highway.

Foreign currencies provided headwinds of about 6.5 percent in the last quarter of 2022, Jurek said.

"We delivered strong performance resulting in mid-teens core revenue growth and solid margin expansion year-over-year, supported by an improving supply chain environment," he said. "The availability of highly engineered polymers improved as the fourth quarter progressed."

Jurek noted that demand trends "were resilient" and were able to help trim Gates' "aged" backlog.

"Further, we generated significant free cash flow and reduced our net leverage ratio sequentially," he said.

As is typically the case, Gates was led in 2022 by its power transmission segment, which saw net sales of $2.17 billion in 2022 (up 4.8 percent over 2021).

Fluid power saw net sales of $1.38 billion in 2022 (up 12.6 percent over 2021).

"Our innovative efforts continue to pay dividends, especially in the fluid power space," Jurek said.

Fourth quarter 2022 net sales came in at $552.6 million for power transmission (an 18.4 percent adjusted EBITDA margin) and $340.7 million for fluid power (an 18.8 percent adjusted EBITDA margin).

"All of this was aided by improvements in raw material supply," said Brooks Mallard, Gates vice president and CFO. "In aggregate, we were pleased with the growth trends in our fundamentals."

Mallard added that the company remains confident in improving its balance sheet in 2023.

"We expect customers to rebalance inventory levels in the later part of this year," Mallard said during the earnings call.

While Gates officials say they expect revenue to remain flat in the first quarter of 2023 (between $880 million and $910 million) due to headwinds from the suspension of the company's Russian business and the impact of COVID protocols in China, the remainder of the year looks promising, Jurek said.

"We do expect some further stabilization of the supply chain we saw coming out of 2022," he said.

Core revenue growth is expected to be between 1 and 5 percent in 2023, with adjusted EBITDA at between $700 million and $750 million in 2023.

Capital expenditures this year are expected to be about $100 million, Mallard said, as the company looks to improve its efficiency in operations.

And Gates will continue to focus on personal mobility, attempting to maintain the market in the double-digit growth space.

"We are encouraged by the recent supply chain dynamics and enter 2023 with cautious optimism," Jurek said. "We are highly focused on margin improvement and free cash flow conversion. Additionally, we continue to make investments in products and verticals that are accretive to our long-term growth and margin aspirations."