Good day. Thank you for standing by. And welcome to the Gates Industrial Corporation Second Quarter 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Bill Waelke, Head of Investor Relations. Thank you. Please go ahead.

Thank you for joining us this morning on our second quarter 2021 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallard, our CFO. Before the market opened today, we published our second quarter results. A copy of the release is available on our website at investors.gates.com. Today's call is being webcast and is 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. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings call, if at all. I would now like to turn the call over to Ivo.

Thank you, Bill. Good morning all, and thank you for joining us on our second quarter earnings call. Let me begin with an overview of our performance outlined on Slide 3. I am pleased with our strong execution in the face of a challenging operational environment. Our business continued its excellent start to the year, delivering another quarter of above-market growth that resulted in record quarterly revenue and profitability. The underlying demand and order trends across both of our segments are robust and our book-to-bill ratio remained above 1% exiting the quarter. The industrial end market contributed most significantly to our growth. And our investments in innovation and organic initiatives are progressing nicely, resulting in further market share gains across our portfolio of products. These strategic growth initiatives are in their early stages and the pipeline of new opportunities is increasing as is the potential to continue to drive growth moving forward. The headwinds we highlighted on our last call remain present and have created quite complex operating conditions. Inflation persists throughout our supply chain, impacting not only raw materials but also freight. We are not expecting the inflationary environment to ease in the near term and have been proactive in responding with broad pricing actions, maintaining a positive price/cost position in Q2 and the first half of the year. In addition to inflation, the availability of certain raw materials, as well as logistics capacity and labor in certain geographies remain tight. We have been agile and forward-leaning going to great lengths to navigate these operating challenges in support of our global customers' needs. Despite these complexities, the execution by our team was outstanding and drove our strong incremental margins. The combination of increasing profitability and free cash flow generation has allowed us to deleverage the business at an accelerated pace. As a result, our net leverage is presently in the range we previously said as our midterm target. This, of course, provides us with increased optionality, particularly as it relates to future opportunities to accelerate our growth strategies. As a result of our performance to date and the supportive trends we are seeing in our end markets, we are again raising our full-year guidance, which Brooks will provide further detail on later in the presentation. With that, let's move into more detail. Moving to Slide 4. Total revenue of $915 million came in at the top end of the guidance we provided, up 58.7% year-over-year including core growth of 51%. This growth was broad-based across segments, end markets, channels, and regions. We saw particularly strong performance in the diversified industrial, off-highway, and mobility and recreation end markets. Our automotive OEM business also recovered nicely in the quarter. However, we continue to strategically reduce our participation in this channel which was down to approximately 10% of total company sales in the first half of the year. Sales into replacement channels also grew significantly year-over-year with the most notable growth coming from industrial end markets. From the visibility we have, channel inventory levels remain low relative to the demand levels of our distribution partners as seen. Our second quarter adjusted EBITDA of $216 million came in above the high end of our guidance, representing growth of 160% compared to the prior year and margin expansion of 920 basis points. The margin expansion was a result of productivity initiatives, continued benefits from our restructuring activities, and efficiencies from higher volumes. Despite the challenges associated with the volume growth as well as significant inflation and the availability of production inputs, we delivered a core incremental margin of approximately 40% on a year-over-year basis, a strong result against the complex operating backdrop. Our adjusted earnings per share were $0.42 in the quarter, a significant increase compared to the prior year period, driven by our substantially higher operating income. Slide 5 and the segment highlights. We clearly saw very strong performance across the board, with core revenue growth of approximately 51% in each of our segments. Looking back at the second quarter of 2019, which is perhaps more meaningful from a comparison perspective, our current results reflect solid core revenue growth of 15.7% in Power Transmission and 4.6% in Fluid Power. Across both segments, our above-market growth has been driven primarily by new products, the performance of our organic initiatives and secular trends in our end markets. Looking at Power Transmission. The diversified industrial and mobility and recreation end markets performed exceptionally well for us, supported by a number of positive secure trends. Specifically, the demand for our products in the diversified industrial end markets is benefiting from accelerating industrial automation trends in manufacturing facilities, warehouses, and distribution centers, driven by an increasing focus on efficiency and uptime. Our chain-to-belt initiative also continues to benefit from this trend with key design wins within the quarter in warehouse automation, chemical processing facilities, food and beverage applications, and e-mobility. We continue to see strong business performance for this initiative with revenue growing over 60% year-over-year. In Fluid Power, which we believe is somewhat trailing the overall market recovery seen in Power Transmission, our focus on innovation is not only delivering significant growth but also driving key design wins across a broad range of applications, including mining, agriculture, and pulp and paper to name a few. The strong growth we are seeing in this segment is driven by accelerating adoption of our new products, and we anticipate this trend continuing over the mid-term. With respect to year-over-year profitability, we delivered adjusted EBITDA margin expansion of nearly 1,000 basis points in Power Transmission and 800 basis points in Fluid Power. Our current margin also reflects solid improvement over the second quarter of 2019 with Power Transmission recovering earlier and benefiting from higher volumes, as well as exit from some less profitable first-fit business. In summary, we are seeing excellent performance in both of our segments while managing through the complexities of the present operating environment. Our teams are working tirelessly to support our customers and the demand they are experiencing. With that, I will turn the call over to Brooks for additional color on our results.

Thank you, Ivo. Now moving on to Slide 6 and the regional breakdown of our core revenue performance. We delivered strong double-digit core growth across all regions with emerging and developed markets seeing very similar performance. In Europe, the strong growth was driven primarily by first-fit channels, particularly from mobility and recreation, off-highway, and automotive applications. Sales into replacement channels also continued their strong growth trajectory with both industrial and automotive end markets delivering mid-double-digit growth. North America growth was also led by first-fit channels, particularly in mobility and recreation, off-highway, and on-highway applications. All of our industrial end markets, including energy, experienced solid double-digit core growth. The automotive replacement channel continued to accelerate sequentially and posted high teens year-over-year growth. China, having experienced the most significant impact from COVID-related shutdowns in Q1 of 2020, began to return to a more normalized year-over-year growth in Q2 of 2021, in line with our expectations. From an end-market perspective, we experienced the most significant growth in diversified industrial and on-highway applications with the automotive replacement channel also performing well. Lastly, our businesses in South America and East Asia and India performed very well, while we manage through the impact of shutdowns across India for roughly half the quarter. We saw solid double-digit core growth across all end markets, in particular strength in both on-highway and off-highway applications as well as in automotive replacement. Moving now to Slide 7 and some additional detail on key balance sheet and cash flow items. In the second quarter, we generated strong free cash flow despite the build in working capital from normal seasonality and the strategic procurement of raw materials. Net leverage for the quarter improved to 3 times from 4.8 times at the end of last year's second quarter, placing us in our targeted midterm range of 2 times to 3 times. We also repaid an additional $70 million of secured debt at the end of the second quarter with our total debt reduction now approaching $400 million since late December, all while maintaining a strong liquidity profile. Our return on invested capital was a strong 21%, representing a year-over-year increase of 630 basis points. Moving now to Slide 8 and starting with our updated full-year outlook. Based on the current healthy trends in our business, we are again raising our full-year guidance after a significant increase in our first quarter earnings release. Our updated expectation is for core revenue growth in the range of 20% to 22% and an adjusted EBITDA margin of 22.2% to 22.8%. Our guidance includes the expectation that we will remain price-cost positive on a dollar basis for the full year and reflect strong incremental margins despite the significant inflation and challenges with material and logistics availability. We continue to expect CapEx to be in the range of $90 million to $110 million and free cash flow conversion to be greater than 80%, resulting in further improvements to our net leverage. For Q3, we expect revenue to be in the range of $845 million to $865 million and adjusted EBITDA to be in the range of $183 million to $196 million. This reflects continued strong performance and a return to more typical seasonality. The significant inflation, notwithstanding our adjusted EBITDA guidance, represents year-over-year growth of 35% and margin expansion of 250 basis points at the midpoint. We currently believe the challenges in the balance of 2021 are manageable. However, the dynamic operating environment, in addition to the potential for worsening COVID situations in certain regions, has the potential to further affect us, our customers, and our suppliers over the balance of the year. With that, I will turn it back over to Ivo for some final thoughts.

Thank you, Brooks. Moving now to the summary on Slide 9 and a few key takeaways. We delivered outstanding second quarter results in an environment that presented unique operational challenges. We anticipate a strong second half of the year, capitalizing on the underlying demand and favorable trends in our end markets to drive further progress with our initiatives and new products. We are closely monitoring supply chain bottlenecks, as well as COVID-related challenges faced by our suppliers and customers. While the environment remains dynamic on a number of fronts, we are executing well, demonstrating strong business fundamentals and operational agility to support above-market growth. We successfully managed the large increases in volume, navigated supply chain and labor complexity and offset inflation, delivering strong incremental margins. Our multi-year effort to focus resources on more profitable, higher-growth industrial end markets continues with our exposure to automotive OEM applications, now down to approximately 10% of the company's total revenue. Finally, our cash generation and increasing profitability has allowed us to continue to deleverage the balance sheet, providing more flexibility around opportunities to selectively accelerate our growth strategies beyond our organic growth targets. I am very proud of our teams and the effort they put forth globally to deliver these outstanding results, and I'm excited about the opportunities we have ahead of us as well. With that, I will now turn the call over to the operator to begin our Q&A.

Your first question comes from the line of Andy Kaplowitz from Citigroup.

Ivo, so at the beginning of this year, you guided to Gates potentially outperforming its end markets by mid-single digits. But this quarter in Power Transmission, you recorded low digits above market growth and Fluid Power was high single digits. So can you give us a little more color on the base drivers of the above-market growth? And given you just said you think you are still early in ramping up your organic initiatives, do you actually think Gates could continue to drive above-market growth at these types of rates?

I mean, we believe that the above-market growth is being driven primarily by the investments we have been making in our commercial initiatives, product innovations, and I've spoken about that for a while. And frankly, they are enabling us to take more share gain across both of our segments and end markets. We believe that the underlying market conditions are also aiding the adoption of our new products, which supports the acceleration of our organic initiatives that we have highlighted a number of calls before. Many of our initiatives and new products are focused primarily on applications and end markets that we have described having very strong secular tailwinds. The value proposition is there, our products are key in adopting those new technologies. I spoke about our focus on chain-to-belt. I spoke about the strong performance on personal mobility. And I think that both of these came very, very strongly in Q2 and we believe they have a good runway for the future. So we're quite excited about the continuation of these positive trends. And we believe certainly that we can very consistently continue to not only outperform nicely in '21, but over the longer term be able to demonstrate consistency of growing our business kind of 2% to 3% above the market as we have highlighted as our midterm objective.

And then can you give us a little more color to the puts and takes you're seeing reflect your margin expectations going forward? It looks like you're still close to 40% incrementals for the year and maybe a little lower than that in Q3. You mentioned that you're still expecting the price inflation dollar for dollar. So how much margin dilution is that versus the 200 basis points you gave us last quarter? And then it does look like at least at the high end of your margin range you're assuming incrementals resume more of a normalized range in Q4 into that 40% range. So does that suggest confidence that Gates should be able to deliver incrementals into that 40% range in '22 even if inflation persists?

So we're very pleased with our incrementals overall. If you look at our normalized volume incrementals in Q2, we're kind of in the low to mid-40s range. So I think 43% to 44%. And then we had about 400 bps of incremental headwinds, about half of that came from increased SG&A for variable comp and different kind of customer-related accounts that have really recovered with the increase in volume. And then about half of that came from price-cost and then FX dilution on the overall incrementals. So even with the big volume gain, we were very pleased with the overall incrementals. If you look at the full year, the full year, we're going to see about 900 bps incremental dilution. So our core kind of normalized volume incrementals are going to be in the high 40s, almost 50% and then you got that 900 bps and it's kind of split evenly between FX, price and inflation and then the increased SG&A for variable comp and kind of return to norm on some of those customer-based SG&A costs and logistics. And so we feel really good about where our incrementals are coming in. We're kind of right in the middle of the fairway on what we said with the elevated incrementals and we feel good about 35% to 40% going forward. And then just real quick on Q2, you have to remember we had really elevated volume growth year-over-year. And that also makes those incrementals a little bit tougher when you got so much volume flowing through. And so in the back half of the year, those normalized incrementals are a little bit closer to those elevated numbers we talked about.

Your next question comes from the line of Nigel Coe from Wolfe Research.

I wanted to follow up on the last question. When you refer to price/cost neutrality, do you include all inflation factors like freight, or is it just about raw materials? There seems to be no clear definition available. That clarity would be helpful. Additionally, could you compare OEM pricing with what you're observing in the channel? The original intention of the question is to understand if there’s a lag in OEM pricing, as that is often the case.

So when we think about inflation, we think about really the overall per unit cost both for raw materials and for freight. Now what we don't include is we don't include labor inflation and we don't include maybe some of the inefficiencies you see in the supply chain with constrained freight and things like that. But we just look at the cost relationship of it year-over-year. So materials, logistics rates and then we compare that to price. What was the second part of your question again?

And you're right, the OEM pricing activities always lag a little more than the distribution channel partners pricing but we've been pretty forward-leaning. We've seen the inflation and we were worried about the inflation. We spoke about it, frankly, from the Q1 earnings call about the elevated inflation that is creeping in and we have taken pricing into the OEMs as well. And we believe that we are reasonably well positioned to be able to offset it, albeit it is lagging slightly behind the channel pricing that we have done.

Ivo, you mentioned that channel inventories are very low. Could you provide more details on how low they are? Did they decrease further during the quarter? Are you in a situation where you cannot meet demand, meaning your partners are looking to restock but facing supply chain constraints? Any additional information would be appreciated.

Based on the point of sales data we have, I want to emphasize that our data is most strongly correlated in North America, which is also our largest market. All the indicators we track suggest that inventory levels are quite low compared to the demand levels our channel partners are currently experiencing. Feedback from our customers, including our distribution channel partners and even the OEMs, indicates a strong desire for more inventory as they struggle to keep up with the demand patterns for our products from their customers. Everyone wishes to have more inventory, and we are doing our best to keep pace. I also want to highlight that we recorded a very strong book-to-bill ratio for the second consecutive quarter, showcasing our robust performance. While we are not typically a backlog business, we have built some backlog, suggesting that demand exceeds what we can currently supply.

I hate to ask one more question, but just on that point about building backlog, and does that maybe suggest that Q3 could be stronger than normal seasonality? I mean right now, your guidance embeds normal seasonality for Q3, but just curious if that's a possibility?

I mean, I think that what we need to take into account is that we came in from a very strong baseline in Q2, the record level of revenue for us, very great results with strong incrementals. We are executing on our playbook and there is more demand out there than we can fulfill. But I also want to remind everybody that there's a tremendous amount of headwinds that we are still dealing with, and it's particularly on our customer side just as much as it is on our side. So although they like to have more products from us, if they cannot get semiconductors, I mean they'll manage their bills just as much as they would like to build more products out there. So yes, demand is strong, supply chain challenges, labor challenges, logistics challenges. And frankly, although we want to move beyond COVID, COVID is still here. It's problematic. And we dealt with it in Q2 in India. It was by far worse than what we've anticipated. I've highlighted that although our automotive first-fit business posted a great result in Q2, it was frankly a little worse than what we've anticipated with our conservative guidance. So there's still lots of uncertainty. Taking into account the seasonality, I believe that we have taken that into account and we have a very strong guidance for the second half of the year.

Your next question comes from the line of Deane Dray from RBC Capital.

One of the positive surprises in the first half has been your debt leverage getting paid down faster and hitting your target really six months ahead of time. Is there an element in your capital deployment that you can now pivot to more playing offense? Is this M&A opportunities? What's the funnel look like? And are there internal growth investments that you might be able to step up as well?

Absolutely. However, I want to emphasize that our priority is to reduce leverage while doing what is best for the company in the long run and ensuring sustained growth. We have a strong set of organic opportunities that I've mentioned over the past year and a half, and we are enthusiastic about pursuing them. We will prioritize funding these projects as they generally provide the best returns on investment, which strengthens our balance sheet and allows us the flexibility to enhance our organic strategies through mergers and acquisitions. The market for potential opportunities is quite active, but seller expectations tend to be high. We will be disciplined and selective in expanding our portfolio through M&A, but these opportunities are still valid. We are committed to being focused and disciplined in creating long-term value for our shareholders.

And then for my second question, there's a positive development that's occurring more quickly than expected regarding the chain to belt conversion. I initially thought this would be a long-term trend, but it’s actually happening in the near term and is becoming a significant factor. Can you provide an estimate of what it could contribute to your mix next year, perhaps in percentage terms? Additionally, does the success of the chain-to-belt transition factor into your new product introductions and share gains calculations?

Of course, we are very excited about our chain-to-belt opportunities. And I think a couple of years ago when I shared with the investment community the opportunity, we felt that it's a very strong opportunity for us to drive organic growth over a very long period of time. Despite the fact that we are doing really, really well, and it's becoming a nice addition to our revenue generation and market share gains, particularly in Power Transmission, we believe that it will take more time and it is a long-term opportunity for growth. And I'll remind everybody, we believe that that has added kind of $4 billion to $6 billion to our total addressable market (TAM) in a very near adjacency to what we do for our customers and how we solve our problems. We believe that it will be adding some incremental opportunity for us to deliver strong 2022, but we will come back to '22 during our Q4 earnings call during our normalized cycle. And it does show in the diversified industrial and in personal mobility, in particular, and I think that both of those are very nicely and performing very nicely for us. So clearly, great opportunity for the company. It's supporting our growth anticipation short term, but it will be a very long history of runway that we see for us to continue to execute on.

Just to clarify, does it show up in your calculations of new product introductions?

It does, Dean.

Your next question comes from the line of Mike Halloran from Baird.

So following up a little bit on an earlier question. Obviously, still above 1, talking about good internal momentum. Inventory is still low from a channel perspective. That bouncing out or normalization doesn't seem to be embedded in guidance currently. Maybe just some thoughts when you talk to your channel partners or you look at your own supply chain, when do you think that starts balancing out and normalizing a little bit, and just how you think demand cadence is here and into next year?

There are still significant challenges we are facing, mainly related to labor availability in certain areas, especially in North America and the US. The supply of raw materials is very difficult, particularly with resins and high-precision steel being two of our most challenging sources. I recently visited the Port of Long Beach to better understand the situation, and there is considerable congestion there too. Even when we manage to secure raw materials, transporting them from the port to our manufacturing facilities remains a hurdle. We expect these issues to continue impacting us throughout the second half of the year, but we believe that by 2022, we should start to see some alleviation of these obstacles.

And then a follow-up. You look at the auto OEM exposure, decent trends certainly but went out of your way multiple times to talk about how you keep seeing that reduction here as a percent of total revenue. So kind of a twofold question here. One, does the strength that you're seeing in the broader businesses as well as in that specific segment, does that give you greater optionality in the short term here to maybe be more aggressive on reducing exposure? And then secondarily, is there a point where you think that balances out? And how should we think about the timing around that, or maybe some sort of other kind of indicator that we should look at?

Mike, I would like to discuss this in more detail during our next meeting when we provide an update to the investment and analyst community regarding our capital base. We have strategically shifted to lower our exposure to the automotive OEM segments over the past three years since going public, reducing it from about 15% of total company revenue at the IPO to roughly 10% now. We are also excited about the electrification trends in this space and have secured several new design wins this quarter. While we believe that automotive first-fit will likely remain in the high single digits as a percentage of total revenue, we are focusing more on the replacement side of the automotive business, where we are making significant investments. We are building a robust portfolio for electric vehicle coverage and vehicles-in-operation. Overall, we feel positive about our position and will be strategic in our execution concerning automotive OEMs.

Your next question comes from the line of Jeff Hammond from KeyBanc Capital.

I wanted to highlight a couple of trends I’ve noticed. First, it appears that Europe is recovering much more quickly than North America. I’d like to understand whether this is due to a stronger recovery, increased growth, or improved supply chain conditions. Additionally, could you discuss your perspective on the PT recovery compared to 2019 versus the Fluid Power sector? It seems like PT is performing better, and I’m curious if that’s just a reflection of our current position in the cycle or if there’s something else to consider.

We are very pleased with the performance of our business in Europe. Our proactive approach, started as early as the third quarter of last year, in securing raw material availability and maintaining operations has paid off and accelerated our growth there, resulting in market share gains. We are very satisfied with this performance. Regarding your second question about Fluid Power not growing as quickly as Power Transmission compared to 2019, we believe our Fluid Power business is still in the early stages of recovery. We are observing significant improvements across the end markets, but not all of these markets have fully recovered yet. For instance, the energy sector, while improving, remains well below 2019 levels. Based on the data we have, we believe we are still in the early stages of seeing the impact that innovation is bringing. From what we can tell, we are gaining a good share of the market, and we expect the Fluid Power markets to continue their recovery.

And then the last one, I think you called out labor availability as a bigger issue in the US, and I think your hope was you'd start to see some improvement there. Is that starting to get any better or is that still a big problem for you?

Labor markets remain extremely tight, and while you may be tired of hearing it from various companies, we are doing our best to staff appropriately and have seen some success compared to April and May of the previous quarter. We have launched significant recruiting campaigns to fill our open positions. I anticipate this situation will continue, especially as the COVID discussion stays relevant, and numerous states are beginning some of the supplemental benefits available. We should see a slight reduction in the challenges posed by this. However, the ongoing COVID conversation still affects people's willingness to return to work, particularly in the US.

Your next question comes from the line of Jerry Revich from Goldman Sachs.

Ivo, I'm wondering if you can talk about how much capacity you folks have to ramp up production into '22. Obviously, big changes in the manufacturing footprint. If we're looking at just your ability to ramp up in your supply chain, how much could supply of your products increase in '22 versus '21, assuming semiconductors and other areas are not a constraint for your customers, just so we can get a sense for the manufacturing footprint today versus the last cycle?

Jerry, I will avoid discussing 2022 at this time. We plan to give a more comprehensive update on our standard cycle at the end of the fourth quarter during the earnings call. We've made substantial investments during the last cycle and feel positive about our current capacity. We also expect that the raw material supply chain shortages will gradually improve. As I mentioned earlier, the main issues are in resin and precision steel, which significantly affect our manufacturing. These materials are crucial, especially for our Fluid Power segment. We believe that by the second half of this year, we should begin to see improvements in this regard, positioning us well for the opportunities that 2022 might present. We remain optimistic about the end market, but we do not have control over some of the raw materials that our customers are dealing with. Overall, I think customers are feeling more positive about 2022 compared to their sentiments in 2021.

And maybe to ask that in a different way. Is it fair to say that across your footprint, you're pretty much running at two shifts today? So if we're talking about ramping up production, we need to get more production out of the same shifts into next year or beyond?

Jerry, you know that we, generally speaking, do not comment on our capacity utilization because of the complexity of various plants, the locations, geographies, labor availability, and so on and so forth. But we're running in a good place and we feel optimistic about the market recovery as it progresses.

And lastly, your margin performance this year is really impressive in a challenging environment, you might essentially get to a new cycle time and just year one of recovery. I'm wondering, as you folks think about the opportunity to expand margins cycle over cycle, how concerned are you with parts of the footprint essentially overheating kind of like the overruns that we saw at the tail end of the last cycle? How confident are you that we can sustain being 35% to 40% incrementals even as we're getting to a pretty high level of demand in parts of the footprint?

Thank you for the kind words, Jerry. I'll do my best to address all of them. We have accomplished a lot since going public, particularly in realigning our strategy, focusing on innovation, and positioning the company to effectively manage both decrementals and incrementals as we've discussed. We've indicated that the decrementals are around the 30 percentile mark, while normalized incrementals are between 35% and 40%. We’re successfully delivering on the incremental side despite facing significant challenges. This reinforces the opportunities ahead and hopefully provides investors with confidence in our strategy. It’s difficult to predict the future given the dynamic operational environment we all face, but I believe we are well positioned. Our operating and commercial teams are performing exceptionally well to support our customers and deliver strong returns for shareholders. We're pleased with our progress. Some time ago, we set a mid to long-term goal of achieving a $4 billion and over 24% EBITDA target. We still believe we are on track to reach that in the midterm, and we’re optimistic about our business's performance. We are happy with how our teams are executing and will keep everyone updated as we move forward.

Your next question comes from the line of Julian Mitchell from Barclays.

So maybe just trying to keep my questions a little focused. China growth, I think, was the high teens in Q2 after low 70s in Q1. Maybe help us understand what are you seeing across the two segments there right now in Q3? And what you're dialing in for China growth in the second half of the year within your overall global guidance?

Our China business is performing extremely well as well and we are executing on our growth playbook. The industrial markets are performing well there, particularly on highway and diversified industrial applications, which have been a very significant area of focus for our teams there and for our initiatives. We continue to see very strong growth in replacement channels in both the automotive and industrial end markets. So we're quite pleased with what's happening in China. And I'll remind everybody that China came into COVID first and came out of COVID first. So the normalization of our growth rate in China is, it's good to say, frankly. I know that perhaps everybody would like to see strong numbers, those are very strong numbers that we have printed taking into account more normalized performance. And for our second-half implied performance for China is normalized growth rates in the high single digits to low double digits.

And then just a second one, the tax rate sort of embedded in the adjusted EPS calculation moves around a fair amount. Maybe help us understand what's the second-half adjusted tax rate we should expect and any sort of medium-term color on that adjusted tax rate, please?

So we had some favorable adjustments in Q2. I think that's going to lower our overall tax rate that we're thinking for the full year more to the 19% to 21% range as opposed to typically we'll see kind of 22% to low 20s. For the longer term, we expect that low 20% rate to hold. So 20% to 22% for the longer term. But we will see a little bit lower rate this year based on those one-time items.

Your next question comes from the line of Josh Pokrzywinski from Morgan Stanley.

This is actually Gustavo Gonzalez on for Josh. So just to go back to the inflation topic, can you sort of frame up the order of magnitude of price cost spread in the first half? And how does that sort of compare to your expectations for the second half?

So for the year, from a price perspective, we expect to be just north of 3%, and that was what it was in Q2 as well, so just north of 3%. Now the comps get a little bit tougher as the volumes went up in the back half of '20, so even though the price percentage year-over-year to saying it's more price dollars. From an overall kind of EBITDA perspective, we're slightly flat, maybe plus or minus 10 basis points in terms of the overall EBITDA percentage. But then as I said before on the incremental side that is a little bit of a headwind for the full year. So you can kind of back into the math on that.

And then just one last follow-up. So you're kind of posting pretty solid top-line growth this year but then reiterated CapEx. Is this sort of more of a reflection of past investments in capacity or should we expect CapEx to kind of ramp from here?

So just real quick. We've got a lot of great investments that we can make organically. Our organic investments are typically the highest rate of return investments that we can make. It's really just about the timing and the execution and how much stuff you can get through the pipeline. And so that's why in a normalized environment that $100 million, $110 million of CapEx gives us a lot of opportunity for growth CapEx, a lot of opportunity for investment that's going to drive both the top line and the bottom line. And so that's really all it is. It's just kind of a normalized. This is what we can get through the same.

Your last question comes from the line of Jamie Cook from Crédit Suisse.

Most of my questions have been answered. I guess just one, the Power Transmission margins were quite impressive during the quarter. So just any color on the sustainability of that or were there on-timers that sort of help that? And then over what time period do we think we can get Fluid Power margins closer to Power Transmission?

We're quite proud of the execution on Power Transmission. And again, I would suggest that the performance was being deliberate primarily on the volume growth and frankly, the innovation and new products that are coming through and showing sort of the results. On the Fluid Power, again, we're reasonably early in the recovery, Jamie. As the market starts going through more fulsome recovery, we anticipate that our margin is going to continue trajectory up and again, taking normal seasonality into account.

There are no further questions at this time. Presenters you may continue.

All right. Thank you everyone as always for your interest. And we look forward to providing you with another update in November.

This concludes today's conference call. Thank you for participating. You may now disconnect.