Thank you for standing by and welcome to the Gates Industrial Corporation First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Rich Quaz. Please go ahead.

Good morning, and thank you for joining us on our first quarter 2024 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Yurik. We'll be followed by Brooks Malik, our CFO. Before the market opened today, we published our first quarter 2024 results. A copy of the release is available on our website at investors.gates.com. Our call this morning is being webcast, as in 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 in the slide presentation, each of which is available in the Investor Relations section of our website. Please refer to now to slide two 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 10k and then other filings we make with the sec we disclaim any obligation to update those forward-looking statements later this month we will be attending the wolf global transportation and industrials conference and the key bank industrials and basic materials conference we look forward to meeting with many of you before we start please note So, all comparisons are against the prior year period unless stated otherwise. With that out of the way, I'll now turn the call over to Ivo. Ivo?

Thank you, Rich. Good morning, everyone, and thank you for joining our call today. We'll kick off today on slide three. We generated revenues above the midpoint of our February revenue guidance and within the range we provided at our capital markets day in March. Globally, automotive continued to outperform industrial markets. Our global replacement revenues increased slightly, with automotive replacement leading the way by delivering mid-single-digit growth. Broadly speaking, order activity improved as March progressed, and our book-to-build ratio finished at a higher level in March as compared to book-to-bill for the full quarter. Our order fill rates and the associated service levels to our customers continue to trend up nicely as we continue to sharpen our operational execution on more efficient through-the-cycle performance. Our operating performance in a quarter was strong and resulted in significant margin expansion. Our adjusted EBITDA margin increased 330 basis points year-over-year to 22.7%. Our gross margin grew 210 basis points compared to the first quarter of 2023, despite encountering a volume decline in a quarter. We are making headway with our enterprise initiatives, particularly in material cost reduction and with 80-20. The higher replacement sales mix relative to last year also contributed to our gross margin expansion. In addition, our SG&A spending decreased year over year, which included higher-than-expected insurance profits. We made more progress with our balance sheet during the quarter. Our net leverage declined to 2.4 times from 2.7 times in a prior year quarter. We executed on the commitment we've made on our year-end 2023 earnings call to repay debt, reducing our outstanding term loan balance by $100 million. In addition, we used excess cash to repurchase $50 million of our shares in conjunction with Blackstone's secondary offering in February. Based on our strong profitability results in Q1, we are increasing our full-year adjusted EBITDA guidance. We experienced a good start to the year and believe we are in a solid position to generate strong operating leverage as our industrial and markets progressively start to experience an anticipated demand recovery later in the year. Brooks will provide further color on our updated 2024 guidance later in the presentation. Now, please turn slide four. First quarter total revenue was $863 million, which represented a 3.6% decrease on a core basis. The automotive end market grew modestly, driven by mid-single-digit growth in replacement. The bulk of our industrial and markets experienced revenue declines on a core basis, driven by the industrial first fifth channel, which was down double digits. Core industrial replacement revenues decreased modestly. Our book-to-bill remained above one in a quarter and expanded in March, led by an improving order cadence. I will also note that we have seen order intake greater than what we've experienced in Q1 of prior year, which signals to us a stabilizing market with pockets of specific weakness, offsetting more solid performance elsewhere. We are encouraged by this activity. Adjusted EBITDA was $196 million and yielded a margin of 22.7%. EBITDA margin expanded 330 basis points, supported by the key enterprise initiatives, as well as increased mix of replacement sales compared to the prior year period. Adjusted earnings per share was $0.31. Our operating income grew well over 30% and contributed $0.10 of adjusted EPS, which was partially offset by a higher effective tax rate in this year's quarter, as well as a mix of other items. On slide five, let's review our segment performance. In a power transmission segment, our revenues came in at $533 million, which represented a 1.7% decrease on a core basis. At the channel level, replacement grew about 2% fueled by automotive replacement, which grew mid-single digits. First-speed revenues decreased high single digits with industrial experiencing a double-digit decline and automotive growing slightly. And market performance was next-speed energy on highway, construction, and automotive realizing low to mid-single-digit core growth, which was offset by declines in personal mobility, diversified industrial, and agriculture. Of note, the magnitude of the declines in these end markets began to ease relative to previous quarters. And the diversified industrial end market in North America is showing signs of stability. Our adjusted EBITDA margin increased nicely, benefiting from contributions from our various enterprise initiatives and a higher mix of replacement sales. our fluid power segment posted revenues of 330 million dollars revenues fell about six percent with core revenues posting a just under seven percent decrease partially offset by favorable foreign currency effects of almost 100 basis points industrial first fit declined double digits driven by weaker activity in agriculture and construction automotive replacement was a bright spot growing mid to high single digits. Fluid power segment adjusted EBITDA margins improved 410 basis points fueled by stronger operating performance that was supported by the ongoing execution of our enterprise initiatives. I will now turn the call over to Brooks for additional

details on our results. Brooks. Thank you Ivo. Moving now to slide six and an overview of our core revenue performance by region most of our geographic regions outperform the enterprise core revenue results in north america core sales decreased three percent driven by weaker industrial trends industrial channel core revenues declined high single digits primarily due to a double digit decrease in first fit industrial replacement fell low single digits agriculture weakness was the most impactful to our performance, followed by personal mobility, consistent with our expectations. We now anticipate the personal mobility de-stocking to abate as we exit Q2 and anticipate steady recovery in revenue generation from the second half of 2024 onwards. Additionally, we saw relative stability in diversified industrial, where revenues were about flat with last year. Automotive increased mid-single digits with solid growth in both replacement and first fit. In EMEA, core revenues fell 8% and was most impactful to our overall company core revenue decline. Industrial first fit was down double digits, and most of the industrial end markets in the EMEA region realized decreases. Automotive replacement grew modestly and was a partial offset to the weaker industrial trend. China core revenues grew modestly and benefited from strong demand in the automotive replacement channel, which expanded in the high teens. Automotive first fit was down, while industrial grew slightly with in-market performance mix. In general, we observed overall demand showing more stability in China, although our expectations are measured in the near term. East Asia and South America posted slight declines in core revenues with automotive outperforming industrial in both regions. In general, core growth was largely consistent with our expectations. On slide seven, we show an adjusted earnings per share wall from the prior year quarter. Operating performance contributed approximately 10 cents per share and fueled the growth. The operating performance strength was partially offset by a higher-than-expected tax rate due to the booking of certain discrete tax items in the quarter and a mix of other items. The discrete tax items mostly involve changes in estimates around valuation allowances that we expect largely to be offset by other activity as the year progresses. Slide 8 provides an update on our cash flow performance and balance sheet. Our free cash flow for the first quarter was an outflow of $39 million. This result is in line with our normal seasonal performance. Our net leverage ratio declined to 2.4 times, which was 0.3 times lower than the prior year period and reflected a $100 million reduction in our term loan. During the first quarter, we received a ratings upgrade from S&P. Additionally, late last week, Moody's bumped our credit rating one notch higher to BA3. Our trailing 12-month return on invested capital increased approximately 300 basis points to 23.1%, with the increase mostly driven by our strengthening profitability. At the end of Q1, we had $50 million remaining under our existing share repurchase authorization. Shifting to our updated 2024 guidance on slide 9, we have increased our full year 2024 adjusted EBITDA guidance to a range of $745 million to $805 million. Q1's outperformance represents most of the increase. We are reiterating guidance for core revenue growth, adjusted earnings per share, capital expenditures, and free cash flow conversion. The higher adjusted EBITDA for the year is expected to be offset by a higher effective tax rate for 2024. For the second quarter, we expect revenues to be in the range of $880 million to $910 million. We expect a low single-digit decline in core growth year-over-year as we expect industrial headwinds to continue through the second quarter. We estimate our adjusted EBITDA margin will expand approximately 50 to 100 basis points compared to the prior year. On page 10, we show an updated walk relative to the midpoint of the initial adjusted earnings per share guidance we provided in February. Greater savings contribution from our enterprise initiatives are being fully offset by the higher effective tax rate, which we expect to be 200 to 300 basis points higher versus the initial expectation we outlined in February. Please note that our adjusted earnings per share guidance does not incorporate any incremental share repurchase activity. With that, I will turn it back over to Ivo.

Thank you. On slide 11, I'll summarize our key messages before we take your questions. First, I'm pleased with our solid operating performance to start 2024. Our margin performance was healthy, and we are gaining traction with our various enterprise initiatives, particularly in the areas of material cost reduction and 8020. Our material science competencies are driving process efficiencies and material savings benefits. We see signs that industrial activity is beginning to stabilize, although we expect markets like ag and construction to stay soft for the time being. Core growth in our diversified industrial and markets has flattened out over the last couple of quarters after a period of softness, and the order intake activity we saw in Q1 would suggest more stability in certain industrial markets. The improvement in March PMI is encouraging, but we need to see a continued trend before we become more constructive on the near-term volume inflection for our business. As such, we have maintained a pragmatic view of our top-line growth expectation for the Second, we are executing on our commitments we have made to our shareholders. We believe we are effectively deploying capital and continue to strengthen our balance sheet as evidenced by our two recent rating HSE upgrades. We reduced gross debt in the first quarter in parallel with repurchasing shares. We are highly focused on achieving our 2026 targets outlined at our March Capital Markets Day. As we drive margin and cash flow improvements, our strategic optionality should expand, and we intend to be opportunistic. I'll finish by expressing my appreciation to almost 15,000 Global Gates Associates for their diligence and dedication, with the particular focus on execution of our key priorities, as well as commitment to meet our customers' expectations. With that, I will now turn the call back over to the operator to begin the Q&A.

thank you we will now begin the question and answer session if you have dialed in and would like to ask a question please press star 1 on your telephone keypad to raise your hand and join the queue if you would like to withdraw your question simply press star 1 again please limit to one question and one follow-up please stand by while we compile the q a roster the first question comes from the line of Nigel Coe with Wolf Research. Your line is open.

Thanks. Good morning, everyone. So, hi, guys. Just wondering, you know, in the context of Q1 realized growth, Q2, obviously looking at down 3.5% year to year, what is the pathway here to the plus one high end for the full year? what needs to go right in the back half, and obviously, I recognize you've got easier comps. And maybe within that, just talk about what sort of price contribution we have coming through in the back half of the year.

Hey, Nigel. So for the second half of the year, you know, we're staying pretty pragmatic. You know, first of all, the comps do get easier, right, because we started to see, you know, the industrial things trough last year. And then, you know, as we said in our prepared remarks, we expect personal mobility to stabilize and start to come back. And then, you know, it's just the rest of the industrial market, you know, just starting to come back a little bit. Our automotive replacement business has been, you know, really good through the first quarter. So it's really the personal mobility stabilizing and then the industrial market starting to come back. And we just have to wait and see. You know, we've seen some stabilization. We've seen some pockets of things getting better, but then we've seen some pockets of things that really haven't turned yet.

And there's no reason to believe the auto aftermarket wouldn't, you know, kind of maintain at these levels through the year?

Not really. I mean, we anticipated this is, you know, the underlying demand trends are very strong. The order flows are very strong. The book-to-bill is very strong. So we anticipated the automotive aftermarket will continue to outperform.

Okay. My follow-on is a quick follow-on on the 2Q guide. Unless I'm doing the math wrong, I think we're looking for a slight downtick in margins from Q1 to Q2. I think usually we have Q1 margins a little bit lower than Q2. So just wondering what specific kind of dynamics we should be kind of paying attention to as we go from Q1 to Q2. Obviously, still very, very healthy levels of margin. Just wondering about that Q1 to Q2 dynamic.

Yeah, the big thing is on SG&A, you know, we had some kind of out of normal good news in Q1 related to some insurance things and some FX transactional tailwinds that we had that we don't expect to happen through the balance of the year. And then we also have a little bit of an uptick in terms of labor spending relative to SG&A, you know, when the merit increases come in and things like that. So almost all of the, you know, kind of, you know, as you'd say, I wouldn't say headwind, but, you know, the normal uptick you would expect from an EBITDA margin perspective is really related to SG&A and kind of some one-off benefits that we had in Q1.

okay that's great thank you your next question comes from the line of jeff hammond of keyback capital markets your line is now open hey good morning guys this is david tarantino on

for jeff um maybe just to start on the margin line relative to the raised outlook here seems all around the incremental self-help could you give us some more color on where specifically the sixth sense of the incremental self-help is coming from? Is this pull forward or is it you just finding more incremental opportunities versus what you initially identified?

Yeah, so I think there's, you know, if you think about Q1, you know, we did, you know, a little bit better on mix because the replacement business was a little bit better. We did a little bit better on the enterprise initiatives. You know, price, you know, we're using 80-20 as kind of the underlying, you know, underpinning infrastructure on a lot of the stuff that we do now, and that helped with price a little bit. And then productivity came in a little bit better in Q1. And then as you move through the year, you know, we expect, you know, price, you know, not to be as helpful as it was in Q1, but we expect productivity to get a little bit better as we move through the year. And a lot of that is driven by material cost productivity. You know, as Ivo said in his, you know, at the end of his comments, you know, the material science work that we're doing on material cost out is is coming to fruition and we expect that to continue through the balance of the year so you know even you know even with volumes being down you know we're able to expand our margins and so you know that's really a lot of the hard work we've done around material productivity and material cost out okay great maybe just to follow up on the

comments around the improvement and order rates in the quarter could you give some color on where you're seeing this and maybe just give some context. I mean, just relative sales were kind of at the lower end of the guy provided in March. Maybe just level set us on where you're seeing the more positive near-term trends and when you'd expect this to show through.

Yeah. So look, I would say that on the order rates, we are seeing a little bit stronger order rates in automotive replacement. We're seeing more constructive market backdrop in industrial replacement order rates, particularly in North America, as a reference to a prior year and maybe sequentially. So I'd say that those were, you know, bigger drivers. We did see some blanket orders being placed as well for, you know, some of our longer project type businesses that we anticipate to ship through the year. You know, when I take a look at, you know, of what the distributors are selling to, which kind of is a very important indicator for us. I mean, we are seeing pretty good stability in the inventory channels. So the order rates now are more in line with what we would anticipate to ship out. And that being said, it's slightly offset, but maybe a little more negative backdrop in ag and commercial construction. So I kind of try to package both of your segments of your question into one answer. Hopefully that answer

your question. Yes. Great. Thank you. The next question comes from the line of Steve Volkman

of Jefferies. Your line is open. Hi. Good morning, guys. Thanks for taking my question. I'm curious if it's possible to sort of break down the benefits of the enterprise initiatives on margin relative to the benefits that sounded like you got on mix because of the automotive aftermarket?

Yeah, so, you know, the mix impact in Q1 was about 50 basis points of gross margin expansion. And so, you know, then we had about 50 bips of inflation, I mean, deflation and favorable FX. And then the balance of it was enterprise initiatives offset by some volume headwinds.

Okay, that's helpful. And then how should we think about the rest of the year? I guess I'm struck by the fact that you sound like things are sort of improving directionally and you sound fairly optimistic but really didn't raise the rest of the year. Is there a mixed headwind as the rest of these businesses come back a little bit as the rest of the year?

Steve, I wouldn't say that there's a headwind on the mix. We're just being pragmatic about what we are forecasting for the next three quarters. It's early in the year. While we are seeing improvements, as I said, I feel it's more of a stabilizing market environment. There are some puts and takes. There are some in markets that are less constructive, like ag and commercial construction. And, you know, while the PMI had a one positive month, we really need to see a validation that that's not just a head fake, but it's a real inflection in the underlying macros. And so as the year progresses, you know, we certainly would feel, you know, that we would, you know, we would assess and re-forecast if that's warranted. But at this point in time, we just try to take a pragmatic view of the rest of the year.

Okay, understood. Thank you.

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

Yes, hi. Good morning, everyone. next quarter. Brooks, I wonder if you wouldn't mind just expanding on the deflation comment that you mentioned, the 50 basis point tailwind in the first quarter, how much of that was from improved on-time deliveries and efficiencies versus a lower freight cost? And what kind of momentum is there as the supply chain normalizes for you folks? Can you just flesh shot on what that might look like in 2Q based on the start so far. Yeah, so as I said, you know,

in Q1, it was inflation and FX, and it was probably a little bit more FX favorability than deflation. And really what we're seeing is we're seeing a little bit of an uptick on inflation relative to freight because freight costs are going up. We're seeing a little bit of deflation on utilities. So utilities are a little bit better. And then materials are, you know, a little bit up and down. Some things are better and some things are worse. But it's really, you know, it's, you know, at the end of the day, it's, you know, maybe 20 bps. And so it's really not that big of a deal. You know, we're just seeing kind of a stabilization of things across

the board. So that's helpful. And then in terms of in your conversations with your distributors, as you get ready to set expectations for pricing in 2025. Can you just talk about conceptually how are you thinking about normalized inflation going forward considering the outsized inflation we've seen over the next couple of years as you set the initial expectations on what distributors should expect in 2025?

Well, 2025 is a long way away, Jerry. So I'm not going to try to predict what's going to happen. that far out you know i can tell you you know a couple things well you know one is you know we're always going to be able to we believe get price to offset the inflationary pressures we've seen right even with the extraordinary inflation that we saw over the past three years we were able to get you know even down margin neutrality um with our pricing uh in addition you know as we continue to work through 80 20 we're going to be more strategic around some of the pricing things that we do in terms of using the 80-20 tools to do the best we can relative to pricing. And then, you know, we'll look at what's going on with materials. We'll look at what's going on with freight. We'll look at what's going on with utilities. And then we'll make that judgment when we get to 2025.

And what kind of lead time do you need to provide?

Typically two to three months.

All right.

Your next question comes from the line of Damian Karras of UBS. Your line is open.

Hey, good morning, everyone. Good morning, man. Thanks for all the thoughts on kind of the guidance and your pragmatic approach to the margins as the year progresses. I thought maybe just take a step back, ask you a little bit about potential growth drivers. Data centers is obviously very topical right now. I know you guys have mentioned you've got capabilities in this space. I was wondering if there's any, you know, numbers or thoughts you could share around activity you've been seeing and just that opportunity more generally. And I'm presuming we'd see any such activity kind of show up in your industrial first fit category.

Yeah, sure, Damien. I think as we stated during the CMD about a month ago, five weeks ago, we viewed the data center as, you know, as an emerging, you know, rather significant opportunity to drive incremental growth through the next, you know, three to four years. We have, you know, a reasonably decent portfolio to be able to participate with our electric water pumps and with our fluid conveyance products. That being said, we're also in process of launching fully refreshed fluid conveyance product that's specifically going to target the data center applications that is more tailored for what's needed in those particular hyperscale data centers. So I wouldn't anticipate that we're going to see a meaningful ramp up in 2024, but I would say that, you know, there should be an expectation that we start talking more about it in 2025 and as we go in 26, as you know, these projects are specced early and the revenue ramp up takes some time as these data centers get built out. So that's kind of how I would say, you know, you should think about it. And as to the other drivers, you know, I would certainly say that we still feel extremely constructive about our chain-to-belt initiative, and as particularly the end markets start stabilizing, particularly on the mobility side, as I said in my prepared remarks, so I think Brooks may have said that. We now anticipate that the personal mobility of these stocks should play itself out in the first half of this year. And while we don't expect any hockey stick type recovery in personal mobility space, we do believe that in the second half, the market is going to be more constructive. And then in 2025, we should start seeing really nice uptick again in our growth rates in personal mobility. Lots of projects. We're involved across a very significant number of design wins, so we are quite constructive on that. And then, as we have been demonstrating, we are doing a rather good job in the automotive replacement side of our business, and we still believe that there are some positive drivers over the midterm, and that should be constructive for us. So we do have lots of vectors to continue to drive growth in the future. But that being said, you know, I would ground everybody and we need to see we need to start seeing some stability in the underlying market environment, which we believe we should start seeing into the second half of this year.

OK, great. That makes sense. And then could you just maybe elaborate a little bit on your expectations for China? I know you said still choppy trends, but it was nice to see kind of the positive growth inflection. So, you know, what what makes you think you can't kind of just, you know, continue to grow from here and just maybe talk about what's giving you a little hesitation and expected choppiness?

Look, again, I would say a more pragmatic view of what is happening. I would say that fundamentally there are still lots of headwinds in the economy. We are growing really nicely our automotive replacement business in China, despite all of those headwinds. We start seeing that, particularly on the industrial replacement side, it's becoming less bad in China. So, you know, one could anticipate some degree of inflection into second half of the year there. You know, commercial construction is stabilizing. So, you know, I mean, you could come to conclusions that things are getting better, but they're also choppy. And I would say that our Q2 comp in China in particular is going to be challenging because there was the best quarter in China that we had last year. So while the underlying market environment may be stabilizing or is stabilizing, again, we just try to be pragmatic rather than getting way over our skis here. Thanks, guys. That's a lot.

Thanks.

Your next question comes from the line of Andy Kaplowitz of City Group. Your line is open.

Hey, guys. How are you?

Hey, Andy. How's it going?

Brooks, I just want to start out with free cash flow. You know, start out the year negative, which, you know, seasonally is not – it's kind of normal. But last year, I think you had positive free cash flow. So can you maybe discuss what happened in the quarter? I know you didn't change the outlook for the year. So should you turn to a nice cash in Q2?

Yeah, well, I mean, I think last year was more the outlier, and this year is more of a turn to normal. And so, you know, we build inventory, you know, through Q1 and Q2 because that's typically a little bit busier. And then also we had more variable comp payout in Q1 of this year. So that was a pretty significant year-over-year change, and that also impacted Q1 of this year. But I would say Q1 of this year was much more normalized than Q1 of last year.

Okay, and then Ivo, I just want to follow up on diversified industrial and personal mobility is what is driving diversified industrial stabilization? And then you kind of mentioned in a previous question, you think personal mobility gets better in the second half. What kind of run rate does it have to get to? Because I think the investor that you talked about potentially double digit growth in 25. So what's the visibility toward that sort of inflection in personal mobility?

Look, so the personal mobility was impacted over the last kind of five or six quarters, particularly by the de-stock and kind of the overbills during the COVID era. What we are starting to see now is, you know, you're starting to see some real inflection, I think, in the market demand. Look, we haven't seen, you know, order expedites in a very long time. You're now starting to see customers kind of calling you and saying, oh, please, would you please expedite this order for me? And that would give you an indication that we are kind of approaching the thruff of the, you know, inventory D stock. And if you take a look at the underlying market bill, so the end unit bills, you know, they've stabilized. So as we are looking on a foregoing basis, we believe that the channel D stock is kind of coming to an end and we should see Q2 being the bottom of it. And then, you know, because there is a more stabilizing and market demand in the personal mobility space, we believe that that will start slow and steady recovery with perhaps more normalization as we get into 2025. Now, what gives us, you know, a degree of confidence that, you know, we will start seeing some of the growth rates that we were discussing at the CMD? Look, we continue to grab quite a bit of share in conversions. They do take time to ramp up as the new equipment is being built and being offered for sale in the season that is as usual. So we actually feel quite positively that we have reached the bottom in the personal mobility in the first half of this year. Now, on the industrial replacement side, look, things are just less bad. You know, I wouldn't let you read my words as things are off to the races. But, you know, all of the indicators are pointing towards more stabilizing demand. And, you know, reasonably, you know, I mean, reasonably positive broad, you know, improvement or reduction of negative order rates that we have seen for kind of three or four quarters there in industrial replacement. So we believe that this is on a trajectory of kind of a steady recovery, very much in line with what, frankly, the industrial PMI is telling you is just getting less bad. So it will, you know, it will mirror the performance of of the indices.

Your next question comes from Julian Mitchell of Barclays. Your line is now open.

Thanks very much. Good morning. um maybe um evo just going back to your point on the sort of the broad environment in industrial because i guess at the investor day you know it felt like things were sort of getting better maybe more quickly and then maybe the tone it seems a little bit more balanced or measured today um is that a fair sort of characterization did you see any notable kind of slowdown or change in trend in the last month or two and again totally understand it's a very uneven environment we see that just less than an hour ago with the PMI going back below 50 again and also on new orders so that's just the nature of the environment but just wondered was there any particular region or market that you feel a little bit more tepid on now versus, say, the CMD?

Yeah, look, you know, one of the things that I would point out, you know, while we anticipated that the Easter holiday was coming in into March, which was a little bit earlier than it was prior years, you know, we have seen a little more choppiness at the second half of that month. And I would say that, you know, it was, you know, the weaker performance was reasonably muted. I mean, it was less than half a day of sales. If you, you know, if you kind of want to kind of scope it, what was the impact? And I would, you know, I would more associate that with the Easter coming in earlier. And then, but on the other hand, you know, I would say that some of the off-highway builds are getting weaker, and I would anticipate that that's going to continue to be a headwind into kind of the rest of the year. I don't anticipate that ag is going to be recovering. My sense is that the commercial construction equipment space is going to be somewhat challenged as well. But that probably is going to be offset by more constructive AR, more constructive IR, some recovery in personal mobility in the second half. So I wouldn't say, Julian, that anything has really changed. I would just say that March maybe came in, you know, half a day below what we've kind of anticipated that we are going to see. And again, I would probably say it's more on the back of that Easter holiday coming in a little bit earlier than prior year and probably impacting us a little more than what we've anticipated.

That's helpful. Thank you, Ivo. And then a more prosaic question maybe for Brooks around tax rate. You know, clearly that increase has sort of offset the higher EBITDA margin guide for this year. So is it sort of a 25% type tax rate in the adjusted P&L for the year? And when we think about beyond 2024, does the tax rate we should use, is that more like the sort of low 20s type range?

Yeah. So, yeah, I think for the year, you know, we've seen, you know, we have these discrete items. And as I said in my remarks, you know, largely they're going to be offset. What we are seeing, too, is a little bit of a tick up in our statutory tax rate based on the mix of income and the jurisdictions they're coming in from. And so that's a little bit of an uptick for the year. You know, I think, you know, going forward, you know, 22 to 25 percent is going to be in this range. And it's going to be impacted again, like I said, by the mix of income and where it's coming in. And then obviously, you know, there's other things going on with, you know, the pillar tax and different things like that, that may affect it a little bit here and there. But 22 to 25 is where we think we ought to be, you know, kind of for the midterm.

That's great. Thank you.

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

Hey, morning, everyone. So, I just kind of want to put all these pieces together here because a lot of markets, a lot of different trend lines. If you net it together, is the guidance more or less assuming stability and relatively normal sequentials for your overall business for the remainder of the year?

Yeah, I think that that's the right way to think about it, Mike. I think that, you know, stabilizing, you know, stabilizing demand is probably the right way to think about that with, you know, some puts and some takes, right? So of highway, maybe weaker, and some of the other segments maybe performing a little bit better, AR, you know, IR recovering. So that's a good way to think about it, puts and takes and more stability.

And then could you provide an update on the operational improvement initiatives internally? probably a little bit more geared towards how the organization and teams are accepting it and how quickly you think you can start seeing some significant benefits. I know we just had the analyst say not that long ago, so more curious about the internal momentum and how the adoption curve is going.

Yeah, I think that's a great question. Thank you for asking that, Mike. Look, we're doing better. I think that the organization is much more comfortable and much more confident in its ability to execute on the vision that we have set in the targets and on the internal expectation. I would say that if you're thinking about that, we've really not upgraded or updated our revenue guidance for the year, but at the midpoint, we have taken up our EBITDA margin guidance rather nicely, and we are forecasting that we will continue to see gross margin improvements, which will drive the EBITDA margin improvements in a lower value environment. And so we are executing quite well. We are doing probably slightly better than what we've anticipated at the beginning of the year. Some things are happening right as we've anticipated. And if you think about it, We're going to be delivering in 2024 kind of margin performance both on the EBITDA and gross level, gross margin level, kind of at historical high during an end market of volume trough. So that's providing us with a very positive setup as we enter a more constructive volume environment kind of in the 25 and 26. So, you know, we are laser-focused on executing on our 26 commitments to our shareholders. We're making good progress. And based upon where I sit today and what I see from the organizational execution, I would feel much more confident that we're going to be, you know, highly capable to deliver on that objective that we set up at the CMD.

Your next question comes from Dean Dre of RBC Capital Markets. Your line is open.

Thank you. good morning everyone morning hey maybe just want to circle back there's been a lot of discussion about like the tone of business and the stabilizing demand and so forth and you've given lots of good color there and just maybe if you can make a distinction between the demand that on after market versus first fit and just the idea it you know when you look at the slides you're down first fit industrial in both segments and also down first fit industrials north america and emea so just maybe you have to dig deeper into the individual verticals you know ag commercial construction so forth um and just saying first fit is not specific enough but just how do you reflect on the FirstFit all being down at this stage in a stabilizing environment?

I would say that the FirstFit is predominantly impacted by ag, commercial construction, and personal mobility. Those three verticals are driving, I would say, 95% of the FirstFit performance, while the replacement business is up low single digits globally, and I would say that that's driven by a very, very solid performance in AR, in the automotive replacement side, so up mid-single digits and stabilizing performance in the industrial replacement, which is down, I would say, low single digits. So you're right, you need to take a look at the puts and takes And, you know, if you recall what I stated, I believe that the off-highway is going to continue to be a headwind throughout the year. But I also believe that we can maintain strong performance in automotive replacement and that we will start seeing improving trends as we work through the year in the industrial replacement side of our business.

Great. That's helpful. And then I might have missed it, but when you talked about cadence in the quarter, how did April start off and did you, any of that Easter holiday early impact, was that recouped noticeably in April?

So the March month was not really impacted from an order intake on the Easter side of the holiday or the Easter holiday side. It was more the shipments that were more impacted in Europe, particularly Europe and North America. About, think about it again, maybe half a day of sales. So it wasn't, you know, it wasn't significant, but, you know, we kind of came a shade under what we have anticipated at the midpoint at the CMD. In April, look, we continue to see choppiness. Again, I would probably repeat myself. Commercial construction, ag, IR came in, you know, kind of as we anticipated steadily improving. not you know no hockey stick improvement ar remains solid so continuation of what we have seen so the the market environment is is choppy that's the best way to describe it you can have you know several weeks in a row that are very good and then you may have a very weak uh a week of uh of order intakes and shipments so it's pretty much uh playing itself out as you know as we are anticipating in, you know, in our forecast for Q2. Thank you.

Your next question comes from the line of David Rasso of Evercore. Your line is open.

Yeah, hi, just a couple quick cleanups. I don't think I heard a currency guide for the year. I'm just curious where your head is on currency now for the year.

Well, we don't really forecast currency, David. I mean, we just take the current rates and we use those for the balance of the year. And so, I mean, I'm not going to try to predict what's going to happen with FX. That's for sure. So that's how we look at that. So whatever the prevailing rates are, when we kind of roll up our forecast, that's what we use for the balance of the year.

I mean, given it was slightly negative in the first quarter, it was a drag. Is it just safe to assume that it's a little bit of a drag for the year? I mean, obviously.

It's a drag.

Yeah, it's a drag through the first three quarters, and then it kind of gets positive toward the end of the year. But it's a drag overall for the year, about 30 bits from the top-line perspective.

Okay. The footprint optimization, can you give us a quick update where we stand with those and which are the ones that particularly when they get across the finish line should make a difference?

Well, we have not quantified those at the CMD, as you know. We have a number of projects that are ongoing, and we will update you at a time of completion, just like we did in China with our China project last year. But, you know, I would not think about substantial benefits until the latter part of 25, early 26.

Okay. And then lastly, I think you said not just book to bill above one, but actually orders up year over year, right? I know the revenue is down, so book to bill can be above one and order is still down. But if I heard you correctly, you said your orders were actually up as a company year over year in the first quarter. Is that correct?

That's correct.

So the idea of organic being down three and a half in 2Q is, I mean, obviously I don't think of you as a long lead time company. It just goes back to your comment. Yeah, maybe the orders were up in the first quarter, but it's choppy enough. We can't count on converting up orders in 1Q into even flat organic for the quarter. I mean, is that sort of the idea, like the orders are moving around enough week to week?

It's just sort of where we are right now. I think, Dave, that's the right way to think about it. Look, you know, some of the outperformance in Q1 versus prior year has been driven by some of the longer cycle projects. You know, think oil and gas and mining that will fill in 24 over the next, you know, two to three quarters. Half of that was driven, you know, half of the outperformance was driven just simply through the shorter cycle businesses. But then you kind of see incrementally a little more weakness in ag and commercial construction. So we're just trying to balance that out. And again, I would, you know, I would restate that we believe that the end market environment is stabilizing. But we are not prepared to, you know, to declare victory and say, hey, look, there's an inflection. And we anticipate it now that will meaningfully impact our ability to deliver, you know, top-line growth above what we are envisaging at this point in time. Again, it's early. We are off to a very good start. And we believe that the backdrop is a little more positive. But we are very pleased with where we sit presently.

Well, I have you one quick one. The interest expense. I know you used your revolver a lot in 23, so that not repeating should enable, right, your interest expense to be down. But the first quarter did come in even a little lower than I thought. Can you give us some help with how you're thinking about the full year interest expense?

Yeah, I mean, it is going to be down year over year. We're thinking about $150 million interest expense, gap interest expense for the year.

Okay, helpful. Thank you so much. Thank you.

There are no further questions at this time. I will now turn the conference back to Rich Quas for closing remarks.

All right. Thank you, everyone, for joining. If you have any further questions, feel free to reach out. And otherwise, have a great rest of the week. Thank you.

Thank you. That does conclude our conference for today. Thank you all for joining. You may now disconnect.