Hello and welcome to the Gates Industrial Corporation Q4 2023 Earnings Call. All lines are muted to avoid background noise. After the speakers' comments, we will have a question-and-answer session. I will now hand the call over to Rich Kwas, Vice President of Investor Relations. Please proceed.

Good morning, and thank you for joining us on our fourth quarter 2023 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 fourth quarter 2023 results. A copy of the release is available on our website at investors.gates.com. Our call this morning is being webcast, 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've described in our most recent annual report on Form 10-K and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. Before I turn it over to Ivo, we are hosting a Capital Markets Day on the afternoon of March 11 at the New York Stock Exchange. Instructions to RSVP will be sent next week, and we hope many of you can join us for an informative session. I'll now turn the call over to Ivo to review our results.

Thank you, Rich. Good morning, everyone, and thank you for joining us today. Let's begin on Slide 3 of the presentation and review what we accomplished in 2023. I'm proud of what our Gates global teams achieved. Our team demonstrated resilience and fortitude through an uncertain macro environment and delivered strong margin expansion and cash conversion for the full year. Our global teams worked diligently to service our customers and returned fill rates to pre-COVID performance levels, progressively meeting our customers' expectations across most of our product portfolio. Our team's collective execution enabled us to deliver a 180 basis point year-over-year expansion in adjusted EBITDA margin. Importantly, the improvement was fueled by a stronger commercial and operational execution, resulting in a 290 basis point increase in our gross margins. We believe this outcome demonstrates the resilience and quality of the business, as well as our team's ability to manage through a challenging environment. The full year profitability increase was an important driver of our nearly 20% growth in adjusted EPS. Furthermore, our free cash flow conversion measured 110% and helped drive a 0.5 turn reduction in our net leverage ratio year-over-year while we returned $250 million of capital to shareholders via share repurchases in 2023. Our company-wide focused execution allowed us to surpass most of our initial financial guidance metrics for the year. We are in the relatively early stages of executing on our organically focused enterprise initiatives that we anticipate will be delivering performance benefits and enhancing shareholder returns over a multiyear horizon. Over an extended time frame, our business has demonstrated an ability to deliver strong profitability and cash flow generation. We are now focused on elevating enterprise growth and enhancing profitability while staying focused on improving shareholder returns. I look forward to sharing more details on these topics at our upcoming Capital Markets Day. Turning to Slide 4 and our fourth quarter highlights. Top line performance was about as expected. The demand environment remained choppy in the fourth quarter, and our end markets followed on recent trends as automotive outplaced industrial. Recall, we faced a difficult growth comparison from the year-ago period, where we were able to accelerate the conversion of past-due backlog, creating a bit of an anomaly in seasonality. Broadly speaking, our business demand has returned to normal seasonality, which, in our view, is a positive development. Our book-to-bill ratio in the quarter remained above 1. On the profitability front, we recorded strong adjusted EBITDA dollars and delivered a significant year-over-year margin increase. We've generated $186 million of adjusted EBITDA, which translated to an adjusted EBITDA margin of 21.5% and represented a year-over-year expansion of 290 basis points. The increase in adjusted EBITDA margin was fueled by a 440 basis point improvement in gross margins. The gross margin improvement was supported by benefits from our enterprise initiatives, particularly in our supply chain. Our performance was strong, considering that volumes were down year-over-year and revenue mix was less favorable. Our fourth quarter free cash flow was approximately $165 million, which was 158% conversion of our adjusted net income. Improved profitability and working capital management were the primary drivers behind the results. Our trade working capital as a percentage of sales decreased year-over-year, benefiting from improved cash collections as well as a normalized operating environment. The strong free cash flow performance helped us to lower our net debt to adjusted EBITDA ratio to 2.3 times, a 0.5 turn reduction compared to the prior year period. We continue to make solid progress towards achieving our target net leverage goal of under 2 times. Moving to Slide 5. Fourth quarter total revenues were $863 million, down a little less than 5% year-over-year on a core basis against the backdrop of the prior year's Q4 seasonality anomaly driven by an accelerated recovery in certain product lines in the prior year. Total revenues were down about 3% year-over-year, inclusive of favorable foreign currency effects. Automotive increased low single digits on a core basis. The majority of our industrial end markets realized year-over-year declines globally, while energy and On-Highway continued to post positive core growth versus the prior year period. At the channel level, demand in industrial first-fit declined double digits, impacted by softness in North America, EMEA and South America. In China, Industrial First Fit core revenue grew double digits year-over-year after experiencing general weakness over the past few quarters. Global industrial replacement channel core revenues declined low single digits versus the prior year period on normalization of lead times and associated channel inventories. Adjusted EBITDA was $186 million, and adjusted EBITDA margin was 21.5%. Gross margin exceeded 39% in the fourth quarter. The year-over-year gross margin expansion was partially offset by higher SG&A spending. Overall, we are pleased with the improvement in profitability made in 2023 as we continue to advance our enterprise initiatives. Adjusted earnings per share was $0.39, up 56% year-over-year. Relative to last year, higher operating income contributed $0.07 a share augmented by lower interest and tax expense and reduced share count. On Slide 6, let's review our segment results. In the Power Transmission segment, we generated revenues of $533 million. Core revenues were down about 5% year-over-year against the prior year comp backdrop. Currency contributed about 100 basis points of growth to our revenues. In Automotive, core revenue growth was in the low-single digits with first-fit and replacement generating similar growth. Industrial end markets were mixed. Energy and construction both grew in the mid- to high-single-digit range. And On-Highway grew low single digits compared to Q4 2022. The growth was more than offset by a decrease in diversified industrial, agriculture and anticipated weakness in personal mobility. The Personal Mobility market continues to work through excess inventory, and we expect a couple more quarters of weakness before growth reaccelerates. Our design win activity in this space increased about 20% in 2023 over the prior year, and we are optimistic about delivering on our anticipated midterm growth prospects. Core growth in China industrial business was about flat, an improvement relative to last quarter. Global industrial replacement revenues stayed resilient in this segment, declining low single digits year-over-year and faring better than the first-fit market. The segment operating performance was strong and margins increased significantly year-over-year. Additionally, our enterprise initiatives are yielding benefits, including supply chain efficiencies as well as initial commercial traction from the first phase of 80/20. Our Fluid Power segment produced revenues of $331 million. On a core basis, revenues fell about 5% year-over-year. Foreign currency contributed almost 2 percentage points of growth to our year-over-year performance. Automotive core revenues decreased low single digits compared to Q4 2022. Industrial end markets experienced a mid-single-digit decline. Modest growth in energy was more than neutralized by softness in other end markets, most notably agriculture and diversified industrial. Relative to segment's overall core performance, industrial replacement outperformed, while industrial first-fit was a bit weaker. Fluid Power segment adjusted EBITDA margin increased 190 basis points versus the prior year on the heels of cost management and benefits from our enterprise initiatives. We remain focused on footprint optimization within the Fluid Power segment. We are in the process of completing projects in South America and India that further expand our in-region-for-region manufacturing strategy. We anticipate these projects will result in lower fulfillment costs and increased throughput of our high-velocity hydraulics and industrial hose product lines. We'll share more details about the enterprise footprint optimization strategy in March at our Capital Markets Day. I will now pass the call over to Brooks for further comments on our results.

Thank you, Ivo. I'll begin on Slide 7 and discuss our core revenue performance by region, starting with a brief overview. Regionally, we experienced mid-single digit declines in North America and EMEA, the two regions most impacted by the highlighted difficult year-over-year comparisons. While down slightly versus the prior year, our China business exceeded our revised expectations. We realized positive core growth in South America. In North America, we experienced similar year-over-year percentage declines in automotive and industrial. Trends in EMEA were more divergent with high-single-digit growth in automotive countered by an approximately 20% year-over-year decrease in industrial. In both North America and EMEA, the replacement channels performed better than first-fit. China core revenues declined slightly year-over-year. Automotive increased mid-single digits and On-Highway revenues expanded over 40% versus the prior year period, augmented by a favorable comparison. Diversified Industrial remains solid, declining high teens compared to last year's fourth quarter. In general, we started to experience more demand stability in China as we exited the year. South America grew mid-single digits, benefiting from relative strength in automotive, energy and on-highway, while East Asia's revenues were relatively flat with the prior year on a core basis. Shifting to Slide 8, we show the adjusted earnings per share bridge to last year's fourth quarter. Of note, this quarter's adjusted earnings per share was a fourth quarter high for the company. Relative to last year, stronger operating performance contributed approximately $0.07 in earnings per share. Lower tax and interest expense were modest tailwinds. The contribution from other primarily reflects the benefit of a reduced share count. Moving to Slide 9 and cash flow results and our balance sheet. Our free cash flow for the fourth quarter was $165 million, or 158% conversion of adjusted net income. Q4 was our highest free cash flow quarter for 2023 consistent with normal seasonality. Strong margin performance and effective management of trade working capital supported the robust conversion. We delivered 110% free cash flow conversion on adjusted net income in 2023, underscoring the strong cash-generating capabilities of the business. Our net leverage ratio declined to 2.3 times from 2.8 times in Q4 of 2022. We have authorized a new stock repurchase plan of up to $100 million. Given our strong cash position at the end of 2023, we intend to pay down a portion of our debt by the end of the first quarter. As our cash generation builds this year, we will look to apply it to further debt payment. Our trailing 12-month return on invested capital increased 300 basis points year-over-year to 23%, our highest level since the end of 2018. We continue to make progress toward achieving our midterm goal of 25%. Moving now to Slide 10 and our full year 2024 guidance and views on the first quarter. For 2024, we are initiating guidance for core revenues to be in the range of down 3% to up 1% relative to 2023. Within that framework, we have factored in lower rates of pricing as inflation abates, a slower first half demand environment, and improving trends in the second half. There are pockets of inventory destocking and demand softness that we expect to impact our 2024 core growth. Looking at our end market revenue exposure, we expect about half of our end markets to be down year-over-year in 2024. We anticipate demand trends to improve in the second half, but have taken a pragmatic view as we begin the year. Our initial 2024 adjusted EBITDA guidance is in the range of $725 million to $785 million. At the midpoint, this guidance implies about a 30 basis point year-over-year increase in adjusted EBITDA margin. Our adjusted earnings per share guidance is in the range of $1.28 per share to $1.43 per share. We anticipate our free cash flow to exceed 90% of our adjusted net income in 2024 after we delivered 110% conversion in 2023. For the first quarter, we anticipate total revenues to be in the range of $840 million to $880 million and core revenues to be down about 5% year-over-year at the midpoint. Foreign currency is estimated to be a slight tailwind in Q1. For the first quarter, we expect our adjusted EBITDA margin to increase in the range of 40 basis points to 80 basis points compared to Q1 of 2023.

On Slide 11, we show a year-over-year walk to our adjusted 2024 earnings per share midpoint. We expect the impact from that slight core revenue decline and headwind from non-operating items will be fully offset by benefits from our enterprise initiatives. With that, I will turn it back over to Ivo. Thanks, Brooks. On Slide 12, I will offer a brief summary before taking your questions. We had a strong finish to 2023 and I'm proud of our team for their perseverance and ability to perform in an uneven economic environment. We were able to deliver a nice margin improvement while encountering choppy demand conditions, benefiting from a mix of internal initiatives and the normalization of the underlying operating environment. In a substantial way, our operations have returned to pre-COVID levels. In 2023, our team was able to showcase the underlying strength of our business model, which we intend to build upon moving forward. As we enter 2024, we are mindful of the underlying macro risks, but we believe there are many opportunities as well. We are taking a pragmatic approach to 2024, viewing the front half of the year as being more challenging due to normalization of business conditions, followed by a gradually improving business environment in the second half. While we cannot control the timing of improvement in broad-based business activity, we are firmly in control of improving our business operations for the long term. As such, we continue to build momentum of our enterprise initiatives in the areas of productivity, footprint optimization, and 80/20. Moreover, we are thoughtful about making further investments in our business. As the business environment evolves, our priority is to stay close to our customers at the commercial front end as well as maintain tight operational proximity to optimize service levels and fill rates of our comprehensive portfolio of highly engineered mission-critical products. We are making investments in innovation, material science, and process engineering to improve the competitive position of our portfolio while equipping our people with better analytics and empowering them to ramp up the execution of our growth initiatives. We are focused on being good stewards for all of our stakeholders: investors, the communities we operate in, and our employees. On that note, most recently Newsweek recognized Gates as one of America's greatest workplaces for diversity for the second year in a row. Before I take your questions, I would like to extend my gratitude to the nearly 15,000 Gates employees globally for their hard work and accomplishments in 2023. And finally, as a reminder, our upcoming Capital Markets Day is scheduled for March 11 in New York, where we look forward to sharing more about our enterprise initiatives and business priorities. With that, I'll turn the call back to the operator to begin the Q&A.

Thank you. Your first question comes from the line of Nigel Coe with Wolfe Research. Your line is open.

Thanks. Good morning, everyone. Really good margin execution and cash flow production, so congratulations on that. Maybe just fill in the gaps. I think Brooks, you mentioned half of the end markets expected to be down in '24. So I'd be curious why you're seeing the down end markets. And then any thoughts on sort of the impact of inventory adjustments during the quarter, the sell-in versus sell-out dynamic?

Good morning, Nigel. Let me address that. We included a look at the expected market conditions for 2024 in the appendix. We believe that the industrial On-Highway and Off-Highway sectors will face more challenges in 2024 compared to 2023. Agriculture has been struggling for some time globally, particularly in the second half of the year in the U.S. While we've managed to navigate this fairly well, we expect continued weakness in 2024. On-Highway has performed well over the past couple of years and is now normalizing in terms of demand. However, we are seeing some positive signs in China for On-Highway, which has been a negative area for a while. In the diversified industrial sector, we have observed considerable weakness across logistics and distribution automation as well as discrete automation, which has been quite inconsistent over the past year. We do not foresee improvements in this market until later in the year. Nevertheless, there are some positives; the automotive replacement market remains strong, with positive market dynamics and a growing population of aged vehicles, particularly in China. Additionally, we are optimistic about the energy and resources sectors like oil and gas and mining. Regarding Personal Mobility, the underlying market is reasonably stable, and we are seeing a significant number of new design wins, especially as electrification gains traction in developing economies. We have experienced robust design wins, but our broadest exposure is still in the bike market, which is currently dealing with excess inventory from post-COVID. We anticipate that this inventory overhang will begin to lessen early in the year and that we will see market growth again by the middle of Q3. There are ups and downs, and while the backdrop isn't ideal, we are managing well and believe we are positioned to meet our guidance for 2024.

Thanks, Ivo. That's great. And then, I guess my follow-up question is on the margin bridge on Slide 11, the $0.07 from enterprise initiatives. And you provided a little bit of color in terms of some of the cost initiatives. I just wondered if maybe you could just build that out in terms of kind of what's driving that $0.07 and any sort of cost to achieve that we should think of as well.

Yes, this is Brooks. The improvement is entirely due to enhanced gross margins. To give you some background, since the onset of COVID, we faced challenges in sourcing polymers and resins due to government regulations and some companies exiting the market. This resulted in difficulties obtaining the necessary raw materials, impacting our operational efficiencies and contributing to gross margin pressures. However, as we navigated these issues and implemented our enterprise initiatives, we saw our gross margins gradually recover throughout 2023, aligning with our expectations. In the fourth quarter, we estimated about 250 basis points of gross margin benefit from normalization. We encountered a couple of hundred basis points of headwinds due to volume and mix, while around 400 basis points of the improvement originated from our enterprise initiatives focused on productivity, material and freight cost reductions, and strategic pricing. Overall, a combination of factors throughout 2023 contributed to the positive direction of our gross margins.

Your next question comes from the line of Julian Mitchell with Barclays Capital. Your line is open.

Hi. Good morning. Maybe just wanted to look at the seasonality. So you've got some commentary on Slide 10 about the half and so on. So I just wondered if you have any sense of kind of how much of the EBITDA or the earnings we should expect in the first half as a proportion of the year? And sort of related to that, perhaps, I think you'd mentioned more muted price assumptions, which is very understandable. So just within the core sales guidance, what is the price tailwind versus last year?

Yeah. So first question first. I mean, typically, from an EBITDA perspective, from a sales perspective, we're a little bit more front-end loaded. It tends to be kind of a 51-49 from a seasonality perspective in the first half versus second half. And then EBITDA is more 50-50 historically speaking. Those numbers kind of hold in terms of the comparison. I mean, we think from a sales perspective, it's going to be more of a 50-50 split. So a little bit more back-end loaded because we do expect things to get progressively better throughout the year. And then from an EBITDA perspective, maybe kind of a 49-51 split, which follows kind of the 50-50 that we just talked about on the sales side. So not meaningfully divergent from what we see historically, but there is a little bit of a follow-on pattern where we're going to see a little bit more sales in the second half than we would normally expect to see from a seasonality perspective. From a price perspective, look, the kind of the inflation-based pricing is really rolling over as inflation normalizes on materials, and you actually start to see a little bit of deflation on the freight side. So we expect low single-digit pricing as we move through 2024. Having said that, a lot of the work that we've done around 80/20 is really about value pricing and strategic pricing in terms of our high-velocity items versus our low-velocity items. And so we'll continue to look at opportunities to drive margin improvement by value pricing across all the different SKUs we produce. Remember, we make hundreds of thousands of SKUs throughout our network. And we still will look at that as a lever to drive margin enhancement as we move through 2024, but it's definitely going to be muted compared to what the last eight to ten quarters have been.

Thank you very much. I wanted to follow up on the year-on-year margin. It seems to be up 60 basis points at the midpoint in the first quarter and is expected to be similar for the entire year according to your guidance. With the anticipated better volume leverage as destocking diminishes, I am curious as to why we wouldn't observe an acceleration in margin expansion as the year progresses.

Well, look, we've taken a pragmatic view of volumes for 2024, right? I mean, we've seen as we talked about, the volumes decline in the back half of the year, we've got these different models that kind of tell us what we think is going to happen in terms of volumes. And so we've taken a pragmatic view of that. Look, if volumes accelerate, if things get better, we expect to be able to stack that margin fallout on top of the enterprise initiatives, right? The enterprise initiatives we're working on are largely volume agnostic. So we feel pretty good about that. And so the business will inflect and drive additional gross margin and profitability as volume comes back.

Your next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open.

Thank you. Good morning, everyone.

Good morning, Deane.

Hey. Maybe we can start with China. This quarter, there's been such a mixed range of performance in the country. Everyone seems to want to paint it with the same brush, but it really depends on what end markets you're exposed to and as long because it's not real estate, but you all have definitely shown the best sequential improvement in China. And can you take us through that? What did you see it was still down modestly, but just some color there on how you think it plays out over the near term?

Yeah. Thank you, Deane. Look, we're pretty well connected in China. We have a great business in China, and we like our business in China, and we are optimistic about it for the long term. We have seen a gradual recovery in '23, and we certainly are not forecasting that it's going to go from a gradual recovery to boom times. So we are quite sober about what we anticipate is going to happen there. That said, we expect the continuation of that gradual improvement. Auto is doing really well, whether it is original equipment or auto replacement franchises. It's terrific in China and continues to deliver a nice growth rate for us even with the challenges that you have seen there. We are still delivering kind of a mid-single-digit growth in Q4 and for the year. So that remains quite robust. We are beginning to see a steady recovery in On-Highway, which has faced many challenges in '23. Construction equipment is stabilizing after two really poor years of excavator output in China, and diversified industrial is stabilizing. So again, some positive aspects in the auto market and we anticipate that we're going to continue to see slow and steady performance out of our team in China, which is a great theme.

That's great to see. I have a broader question regarding CapEx. You've shown a consistent ability to generate strong free cash flow, reduced debt, and are making additional CapEx investments. I understand you'll discuss this further at the Analyst Day, but at a high level, can you share your thoughts on the enterprise footprint optimization project? Specifically, what are the key inputs you consider when deciding where and how to allocate resources for these facilities? Is there an IRR analysis for each project? What inputs and assumptions are you working with? I know you'll provide more details later, but any insights you can share now would be appreciated.

Yeah. Absolutely. Look, our guidance for 2024 CapEx is still very much within the frame of what we guide for the long-term, which is 2% to 3% of revenue. So we're not anticipating that we're going to be breaking through the ceiling of our investments. We are very much focused on ensuring that while we are investing in New Product Introductions and our material science, we're also investing in manufacturing process engineering and equipment that gives us the biggest opportunity to leverage driving productivity forward. So as you said, IRRs obviously, are very important on any project that we do. And generally speaking, these IRRs are in excess of 30%. So those are very good projects. When we talk about optimization of the footprint that I have highlighted in the prepared remarks, it's a great set of opportunities ahead of us in India. We are very bullish on what is happening in India, the infrastructure builds occurring there, and the demands we see for heavy-duty equipment which is very positive. We believe that, over the midterm, we want to be ready to ensure that we capitalize on the Indian opportunity just as we have in China. Brazil has a very unique set of operating dynamics, with high tariffs, and the opportunities we see there are quite robust. We feel that being in close proximity to our customers with local manufacturing is the right approach. Those are a couple of projects that we've highlighted out there. But I would say more broadly, we want to be very pragmatic about ensuring that we stay contemporary with our manufacturing processes, leverage the New Product Introductions, and position ourselves for organic growth which has been significant. We have delivered organic growth aligned with the high multiple premium industrial peer set.

Yeah. The one thing I'll add to that is if you remember, I've said this multiple times before, even as we're working on some of these enterprise initiatives and these bigger footprint optimization projects, they still fall well within the 2% to 3% guidance that we give on CapEx every year. So we don't feel the need to ramp up CapEx to an abnormal level in any given year; we can handle all these investments along with the enterprise initiatives well within the framework of our capital spending on a year-on-year basis.

Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.

Hey. Good morning, everyone.

Good morning.

Good morning.

Brooks, I just wanted to flush out the enterprise initiatives a little bit more in terms of how they ramp up in '24. Are they kind of linear? And then you obviously just talked about factory optimization. You've talked about 80/20 in productivity. Is it kind of equally split when we look at that $0.07? And do you have even more of an impact as you go into '25, for instance, than '24?

Yes. I want to be a little careful here because there's a lot of moving parts. First of all, in 2024, I think our enterprise initiatives will definitely lean more toward the material cost reductions than some of the more factory productivity side. And we'll be working through the footprint optimizations. I think those are definitely more seen in 2025 and 2026. So we definitely lean more towards the material savings side in 2024 than factory productivity in a down volume environment, which is tough to manage. We're going to get some, but as volume comes back, that's when the factory productivity will start stacking up. The 80/20 work we're going to do in strategic pricing and driving better value demand from our end customers is a big driver as well. I would say kind of the summary of that is definitely more weighted toward material cost initiatives in 2024 on the enterprise initiative side.

And in '25, you should start seeing some benefits from some of the footprint optimization that we'll be talking more about. As Brooks said, lots of moving pieces on the footprint optimization, notification of employees and so on and so forth with a number of terrific projects that we are quite bullish about. We anticipate that '25 should be a beneficiary of restructuring there.

Very helpful, guys. And then I just want to go back to the seasonality question again. For like if I look at historically, Q1 is almost always a decently sequentially versus Q4. At the midpoint, you guys have a kind of flat outlook, I think global auto production is supposed to be down in Q1 versus Q4, but you guys, as you know, are not big in first-fit anymore. Is there anything else sort of going on or is it just sort of this pragmatic view around destocking Q1, that you already mentioned that keeps you where your guidance is for Q1?

Yeah. Well, I mean, I think there's a nuance here as you move from Q4 to Q1. We are taking a pragmatic view on volume. So we have volumes down, and that's partially offset by FX, because FX is a little bit of a tailwind as we move from Q4 to Q1. And so it's really more of a pragmatic view based on how we think the demand environment is going to play out to the first half of 2024. And so that's really the best visibility we have right now in terms of what's going to go on with demand.

And Andy, I would also probably suggest that people start thinking about as the operations have recovered to normalize. And again, as I said on the call, in the prepared remarks, we are pretty much back to pre-COVID levels of operational cadence. Our customers are taking advantage of the fact that we are much more predictable in how we fulfill demand. Lead times have been normalizing. We want to ensure that our service levels remain high and that just gives everybody an opportunity to really order more in line with the underlying demand. And that's how you should consider it.

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

Yes. Hi. Good morning, everyone. I'm wondering if you could just talk about a little bit more on the capital deployment plan for this year. Obviously, a stock buyback over $100 million is in the works. But can you expand on that because you're set to generate pretty significant free cash flow and with EBITDA growing, leverage just naturally coming down. Would love to hear more Brooks, if you don't mind.

We have consistently generated substantial free cash flow each year. Our primary focus will be on reducing debt to reach our medium-term target of 1.5 times leverage. This will be our main strategy for capital deployment in the near to medium term. Additionally, we want to keep all options open for capital deployment to reward our shareholders. We've authorized a stock repurchase program of $100 million, which will also help us reward shareholders in the coming months. However, our primary emphasis remains on debt reduction. Improving profitability and reducing debt are key to achieving our medium-term leverage goal. Nevertheless, we aim to have a variety of strategies available for deploying capital.

And Brooks, I didn't hear you mention M&A within that context. How attractive is it today versus the bolt-on M&As we saw you folks do in the last cycle? Yeah. Look, I mean we always look at opportunities, but we feel that presently, kind of in 2023, we've made some commitments about getting our balance sheet to be very much in line with what our premium industrial peer group looks like. There are significant benefits in a lower interest expense, and that can generate more free cash flow. Our stock is so inexpensive that we believe that that's the best way of deploying capital. So those would be the two levers in the short term. If some great opportunities appear, we feel that we would be able to generate very substantial returns by going out into the markets and conducting M&A, we generate enough cash to do that. Our leverage is coming down dramatically as we said, so we are in very good shape to think about all three of these avenues of potential capital deployment.

Right. And I would say, too, that as we focus on debt paydown as our primary lever to get to 1.5 turns, that also leaves us maximum flexibility in terms of dry gunpowder to do whatever is necessary to deploy capital in the way that will best reward our shareholders.

Your next question comes from the line of David Raso with Evercore ISI. Your line is open.

Hi. Thank you very much. Sorry if I missed this, but I'm trying to grasp the trend of organic sales year-over-year. It appears sales are down in the first quarter; is the idea that the second quarter will be down 3%, followed by a 2% increase in the second half? I'm just seeking clarity on the sales progression for my first question.

Sure. We are not providing a forecast for the second quarter at this time. However, we anticipate that things will gradually improve throughout the year. We have already shared our guidance for the first quarter, and we expect the second quarter to be down by 3% or 2%. The speed of recovery is still uncertain. We have taken a practical approach regarding volume, and if conditions improve more quickly, that will benefit us. Margins will enhance more rapidly, leading to overall improvement. We believe our approach is practical, and we will continue to provide updates as the year progresses.

But to be clear, though, the second half of the year, do you expect the return to growth to be in the third or fourth quarter? Because I’m thinking about the personal mobility comment earlier that, that destock continues beyond the first half I'm just trying to level set when do we think we return to growth? And then the follow-up, if you can give us some sense between the business segments, which one do you think will be kind of above the company guide and which one below? I was just trying to get a sense of perspective on the business segments and the cadence. Thank you.

Yeah, David. We anticipate a modest growth in the second half, as we have outlined in our prepared remarks; I mean, it's natural taking into account where we are guiding Q1. And I did state that we anticipate that the personal mobility should start recovering in the second half of the year after about four or five quarters of rather significant inventory destock. So that's really where I would probably leave it with you. And we've provided you with a framework on the end market performance, and that should give you a good outline to develop a model.

Your next question comes from the line of Jeff Hammond with KeyBanc. Your line is open.

Hey. Good morning, everyone.

Good morning.

EMEA was one of your better growth markets. It seems like there's maybe some broadening weakness there. Just speak to how you're thinking about Europe into '24?

Yeah. So Europe, the anticipation, Jeff, is that agriculture is going to continue to remain weak as the construction end market. Other remains kind of flattish to low single digits. Diversified Industrial still has reasonable negative core growth and all the news flow from places like Germany and Italy is not necessarily terrific. So who am I to predict that it's going to get dramatically better short term? So we anticipate that, that's going to remain somewhat weak and, maybe as the second half progresses, it will start getting less bad. We anticipate that On-Highway will be down versus 23%. So Europe, I think, is dealing with more fundamental slowdowns than perhaps any other region that we participate in.

Okay. And then I was at super compute and saw some of your houses on some liquid cooling applications. And certainly an area of strength and conversation. Just wondering if you can speak to that opportunity. I'm not sure if it's a rounding error or if it's something we should get excited about.

If I get excited about every opportunity, when you sit in my chair, every opportunity is a great opportunity. But we will speak actually a little more about hyperscale data centers and the liquid cooling in due course. We actually have a couple of really interesting technologies that I will share more about both on the electric water pump side that helps to provide efficient cooling and on leak-free applications for conveyance of the fluids that cool these data centers. So yeah, we're actually excited about it. I'm not prepared to size the opportunity for you at this point in time. It's early stages, but we're excited that we have lots of really interesting technologies that are being adopted in what I kind of term the new economy from hyperscale to broad-based electrification and industrial automation. So we'll share more on March 11 in New York.

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

Good morning, everyone. I have a couple of questions. First, regarding the guidance one last time. When I look at normal sequences, it brings you to the midpoint of the range. However, normal sequences do not necessarily indicate anything better from an end market perspective. You mentioned a gradual improvement in the latter half of the year. I'm curious about what that means from your viewpoint and whether that is actually needed to reach the midpoint of the range or if we can just maintain current levels.

I believe that the second half of the year will have easier comparisons, which will play a role in our performance. We see Q1 as a continuation of the demand dynamics observed in Q4, with a steady normalization of demand as inventories have adjusted. Our purchases are closely aligned with the actual demand for our products and applications. We're being practical and do not think we need significant improvements in the end markets to achieve our guidance. However, it's early guidance, so we want to maintain a realistic outlook on the global economy.

And then on the M&A side of things, how developed is that pipeline at this point? You've been out of the market for a bit focused on other areas of capital usage. Certainly, understand your comments about how inexpensive your stock is and that makes it a priority. But if the opportunity comes up, how invested or how in the market are you on the M&A side to be able to identify and go after some of those areas?

Yeah. Look, because we don't necessarily talk about it front and center, doesn't mean that we don't develop a strong pipeline. We have a good pipeline of opportunities, but again, the issue is that our stock is undervalued. We believe that it's just tough to compete with generating strong returns on deploying that capital, and we believe that it's in the best interest of our shareholders to further reduce our debt and opportunistically deploy capital through share buybacks. That's going to put the company in the strongest and most forward-leaning position as time moves forward over the next four, five, six quarters, you're going to be in a situation where we can start thinking about bigger deals, if that's what you ultimately want to do, getting the stock and valuation to normalize because, again, I feel the stock is quite undervalued. We need to do everything that we can to take advantage of that.

There are no further questions at this time. I will turn the call to Rich Kwas for closing remarks.

Thank you, everyone, for participating today. If you have any follow-up questions, please feel free to contact me. Thanks, and have a great day.

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.