Gates Industrial Corporation PLC (GTES) 2024 Q2 法說會逐字稿

Thank you for standing by. And welcome to the Gates Industrial Corporation second quarter 2024 earnings conference call. (Operator Instructions) I'd now like to turn the call over to Rich Kwas, Vice President, Investor Relations. You may begin.

Good morning, and thank you for joining us on our second quarter 2024r 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 2024 results. A copy of the release is available on our website at investors.gates.com. Our call this morning 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. Later this quarter, we will be attending the Jefferies Industrial Conference and Morgan Stanley's 12th Annual Laguna Company Conference. We look forward to meeting with many of you.

Before we start, please note all comparisons are against the prior year period unless otherwise, unless stated otherwise. Also, please note that we have recast our adjusted EPS figures for 2023 and year to date 2024, using a normalized adjusted effective tax rate.

Historically, many nonrecurring individual items have influenced our tax effective tax rate. To minimize quarterly volatility and better reflect our core operations if chosen to remove discrete items from our adjusted effective tax rate and recast historical earnings provide an apples to apples comparison. We believe this approach will be beneficial to our investors and analysts, and please see the appendix for more information.

So with that, all out of the way, I'll turn it over to Iva.

Thank you, Rich. Good morning, everyone. We'll start on slide 3. Today we reported solid Q2 results delivered through focused execution by our entire team of Global Gates Associates. In the second quarter, we saw our revenues moderate 4% from the prior year on a core basis. First Fit sales decreased more than anticipated, reflecting the present underlying business conditions.

As we anticipated, demand in our industrial end markets remained somewhat soft. However, we experienced incremental demand weakness in Agriculture and in Construction applications. Replacement revenues grew 1% with Automotive outpacing industrial book-to-bill and it's slightly below 1. We delivered a solid increase in our adjusted EBITDA margin while managing through a softer volume environment.

Our adjusted EBITDA margin grew by 170 basis points. Strong gross margin expansion underpinned the improvement. Gross margin benefited from favorable channel mix compared to the prior year period as well as continued progress with our enterprise initiatives.

Our net leverage ratio declined to 2.3 times, a [1.5 times] turn reduction relative to last year's second quarter. During the quarter, we refinanced our term loans and unsecured bonds at attractive rates and extended our earliest maturity to the end of the decade.

We are trimming our guidance due to the extended softness in our industrial First Fit markets, particularly Off-Highway. Our updated revenue guidance is consistent with our historical seasonality. Brooks will provide more color and comments about our updated assumptions later in the presentation.

Of note, last week, our Board of Directors authorized a new $250 million share repurchase authorization that expires at the end of calendar 2025. The authorization provides us with an efficient tool to return capital to our shareholders opportunistically.

Please turn to slide 4. In the second quarter, we posted revenue of $886 million, a 4% decrease. On a core basis, replacement revenues grew slightly and outperformed first aid revenues. Industrial end markets primarily drove the decline in First Fit. At the end market level, Construction and Agriculture were most impactful to the industrial First Fit revenue performance.

Adjusted EBITDA was $202 million and represented a margin rate of 22.8%, an increase of 170 basis points. The increase was fueled by a 270 basis points increase in gross margin. The execution of our enterprise initiatives continue to deliver improved operating performance. In addition, the higher mix of replacement revenues, which generally carries above average margin relative to our corporate average, supported the increase in gross margin.

We also benefited from inventory build related to our anticipation for gradually improving demand trends in the second half as well as to support product line expansion with a new and existing customer. Adjusted earnings per share was $0.36, which represented a 6% increase. Higher operating income and lower share count drove the growth.

On slide 5 we will review our segment performance. In the Power Transmission segment, our revenues were $542 million, which translated to 3.5% decrease on a core basis, the replacement channel grew 1% with Industrial Replacement growing modestly and Automotive Replacement being about flat. First Fit revenues decreased double digits, impacted by a mid-teens decrease in Industrial First Fit.

Automotive First Fit was also down due to softer production trends in international markets. The majority of our end markets in Power Transmission decreased low to mid-single digits. Personal Mobility revenues continue to decline, although the rate of change is starting to moderate. Energy and On-highway revenues posted growth led by solid expansion in our developed geographies.

With regards to top line opportunities, during the quarter, we secured an agreement to extend our market presence with a national replacement channel partner that we anticipate will begin to meaningfully ramp early next year. The new business broadens our market reach for our mission critical products.

Power Transmission's adjusted EBITDA margin expanded 210 basis points. Margin improvement was led by contributions from our enterprise initiatives as well as favorable channel mix, partially offset by lower volume.

Our Fluid Power segment generated revenues of $344 million. Core revenues decreased 5%. Industrial First Fit declined mid-teens, driven by weaker activity in Agriculture and Construction. Industrial Replacement sales declined at about the same rate as the overall segment.

Automotive Replacement was a partial offset increasing low double digits. Similar to Power Transmission, we have reached an agreement to extend our partnership with one of our largest replacement channel partners to drive product conversions to Gates mission critical components in an important US geography. This is an exciting opportunity that broadens our ability to more efficiently serve our customers.

Additionally, in the data center space, we are now specified with multiple customers and are in discussions with several servers and chip manufacturers to support their application needs.

I will now turn the call over to Brooks for additional comments on the quarter. Brooks?

Thank you, Ivo. Let's turn to slide 6, which shows our core revenue performance by region. In North America, core revenues declined approximately 4%. Industrial channel core revenues fell high single digits primarily due to a double digit decrease in First Fit. North American Industrial Replacement revenues increased slightly. Within industrial the Agriculture and Construction markets were our softest end markets, while Personal Mobility was down double digits.

Energy and Commercial On-highway increased modestly. Automotive grew low single digits with replacement revenue growth slightly stronger than First Fit.

In EMEA, core revenues fell about 7%, slower demand trends in the industrial markets weighed on the region's core top-line performance, both industrial First Fit and replacement core revenues fell double digits. Core revenues and Automotive were about flat with Automotive Replacement growth offsetting a decline in First Fit.

China core revenues decreased modestly. Automotive experienced a decrease driven by our First Fit applications. Automotive Replacement increased low single digits. Our Industrial revenues increased modestly supported by solid growth in our replacement channel.

In South America, core revenues decreased slightly with meaningful declines in the industrial First Fit markets, largely neutralized by growth and replacement channels. East Asia grew slightly with Automotive growth more than offsetting an overall decline in the industrial market.

On slide 7, we lay out the key drivers of the year-over-year change in adjusted earnings per share. Operating performance contributed approximately $0.01 of growth and a lower share count represented another $0.01 of growth. Higher taxes were offset by lower interest expense.

Slide 8 has an update on our cash flow performance and balance sheet. Our free cash flow for the second quarter was $67 million, which represented free cash flow conversion of 70%. Our trade working capital in dollars increased slightly relative to last year's second quarter, primarily due to inventory build to support the new business at our channel partners Ivo highlighted earlier and to protect the service levels for our existing customer base.

We intend to reduce our inventories in the second half of the year in line with our normal seasonality. Our net leverage ratio finished at 2.3 times, which is [1.5 times] turn lower in the second quarter of 2023. During the second quarter of 2024, we refinanced our term loans and unsecured bonds at an attractive blended rate, it lowers our annualized interest expense.

In addition, our nearest debt maturity is now 2029. Our trailing 12 months return on invested capital expanded approximately 250 basis points to 23.1% and was primarily fuel a higher margin. We believe our balance sheet is in solid shape and we intend to remain opportunistic for returning capital to shareholders.

Shifting now to our updated 2024 guidance on slide 9, where we have trimmed our 2024 guidance we have lowered core revenue expectations to a range of minus 4%to minus 2% from our prior range of minus 3% to plus 1%. at the midpoint, we now expect our core revenues to be down about 3% compared to a midpoint down 1% previously.

The majority of our markets outperformed as we had anticipated heading into the second half of the year. Our industrial First Fit demand trends have gotten softer in certain areas, most notably in Agriculture and Construction. In addition, while it's a relatively small end market for us, Automotive OEM production trends have softened recently.

We are now seeing more extended levels of summer shutdowns on the Automotive OEMs. We are reducing our adjusted EBITDA guidance to a range of $740 million to $770 million. The $755 million midpoint is $20 million lower than our prior guidance, with a headwind from lower volume and foreign exchange being partially offset by execution on our enterprise initiatives.

Our adjusted earnings per range is now $1.29 per share to $1.35 per share and incorporates our new tax methodology. Our guidance for capital expenditures and free cash flow conversion remains unchanged. For the third quarter, we expect revenues to be in the range of $825 million to $855 million. At the midpoint, we anticipate core revenues to decrease approximately 2% year-over-year. We estimate adjusted EBITDA margin to decrease about 40 basis points year over year at the midpoint.

On slide 10, we walk from our prior adjusted earnings per share guidance to our updated from left to right, we project about a $0.03 impact from lower operating income with the unfavorable impact of lower sales volumes, partially offset by enterprise initiatives. The costs associated with accelerated new business conversions is approximately $0.02 per share.

We expect incremental growth and profitability from this investment It began in Q1 of 2025. Unfavorable FX approximates about a $0.02 per share headwind. Lower Interest expense, higher tax and other items now to about $0.03 of adjusted earnings per share benefit.

With that, I will turn it over to Ivo for some summary comments.

Thank you, Brooks. On slide 11, I will summarize our key messages before we take your questions. First, I'm pleased with our operating performance in the first half of 2024 year to date, we have increased our adjusted EBITDA margin by 250 basis points year over year, while encountering a 4% decrease in core growth.

We are making good progress with our enterprise initiatives, particularly in the area of material cost reduction. Our heightened focus over the last couple of years on our resident material science capabilities has paid nice dividends for us.

We fortified our supply chain capabilities and reduce exposure to single sourced highly engineered polymers. Also, we accelerated our ability to drive material savings through reengineering of critical materials and components and expect more savings to come. Now we are benefiting from our engineering focus in terms of developing new product lines that enable us to enter exciting secular growth markets

from driving a change in the way personal mobility devices are designed and built for developing new fluid conveyance technologies that offer more efficient cooling solutions for hyperscale data centers. Our focus is on opportunities to accelerate our organic growth. While we are managing through the present macro environment

given how industrial demand has unfolded this year, we have decided to pull forward our footprint optimization plans outlined during our Capital Markets Day and initiate a number of these projects in 2024. We anticipate the annualized savings associated with the actions will approximate $40 million. We had about 40% of the run rate realized by the end of 2025.

And the balance of the savings achieved by year end 2026. We intend to share more specifics on the programs, execution plan and impact on the business on next quarter's call. We believe these actions will improve our manufacturing and logistics efficiencies long term and enhance our ability to flex our operations to demand changes.

In our view, the enterprise initiatives underway and investments being made should position the company to generate stronger profitability from an already solid level when the next industrial upturn takes hold.

Second, our optionality to enhance shareholder value continues to build our net leverage ratio in the low 2S and tracking to the 2 times level by year end. We recently extended our debt maturities and lowered our annualized financing costs. We remain highly focused on balance sheet improvements which should enable us to more actively pursue inorganic growth initiatives over the midterm.

Last week, our Board of Directors approved a new $250 million share repurchase authorization, which replaces the $50 million left under our prior authorization. At our current valuation, we believe opportunistically deploying capital towards our shares is an attractive use of our excess capital.

Before taking your questions. I want to convey my gratitude to the almost 15,000 Global Gates associates for their commitment and dedication through achieving our business priorities and making our customers' expectations.

With that I will now turn the call back over to the operator for Q&A.

Thank you. We will now begin the question and answer session.

(Operator Instructions)

Mike Halloran, Baird.

Good morning, everyone.

Good morning.

So just some thoughts on the end markets where you're seeing some pressure. Maybe just talk through what you saw through the quarter if you're seeing stabilization, I mean, levels at lower levels here and maybe the outlook from your perspective on when you start normalizing some of those end markets.

Yeah. Thank you for your question, Mike. Look, I mean, I think that the end markets have been developing more or less in line with how we have envisaged that it's going to play out. And as you may recall, we were reasonably muted about our expectations for any type of industrial recovery. But as we went through the quarter, what we have seen is that particular in the Off-Highway applications in the Industrial First Fit business, again, I would say expressed by predominantly Ag and some commercial Construction applications.

We have seen deceleration that kind of crept in towards the latter part of May and remained in June. And I'll note that it remains weak in July as well. And that would be probably the most notable change that we have seen. I'd say that some of the auto OEMs have been layering in some reductions in car builds. And again, if I comment on July, I'd say that they have extended their summer shutdowns to be a little bit longer than we have seen maybe over the last four or five years.

And so, those would be probably the most notable changes that we have seen. And frankly, I do not anticipate that this is going to reverse in second half. And that's why we've taken the proactive step and reflect what we believe is going to be the underlying environment, particularly in the Industrial First Fit .

Now, what's changed maybe from prior assumptions? Again, I would say that pretty much as we anticipated, Mobility we think has bottomed out in Q2. While we still anticipate that we're going to see negative core growth into second half, it's the underlying market conditions are improving.

We think the destocking has played itself out and we should start seeing reacceleration of growth into 2025. So, that again is playing out the way we anticipated. And maybe China Industrial Replacement performance was around the edges a little bit better than what we've anticipated, but that's not really a massive amount of revenue that had the opportunity to offset how we think about the market.

Great, It's really helpful. And then on the margin line, if you look at the commentary from the third quarter margins down a little bit year over year, I'm guessing that has everything to do with the demand environment and you're still very confident in the changes and the normalization you're seeing on the internal efforts.

So maybe as you look to the third quarter and the back part of the year. You can talk a little bit about confidence in that trends and what you're seeing internally and if there's any change in how you're thinking about some of those internal things in the short term?

Yes. Thanks for your question, Mike. No, I think -- look, I think we're really -- we feel good about our enterprise initiatives and how they're driving improvement on the gross margin line. I mean, we expect some headwind on EBITDA margins from SG&A just because of kind of flattish or on lower volumes. But we expect to be able to maintain kind of our gross margin outlook even with lower volumes.

And you know, as we take out a little bit of inventory and we look at some of the conversion costs that we talked about for some of the new business wins, we expect the enterprise initiatives to be able to offset that as we go through Q3 and Q4 so the enterprise initiatives are working on the material line on material savings plan, especially we're doing well. And so we feel good about where we stand from a gross margin perspective, in the second half of the year.

So no change in the internal confidence and the change initiatives that you're driving currently and this is just demand related? Correct?

That is correct. And I would actually say, Mike, that we're doing really well with our enterprise initiatives, as you could see in the gross margin and EBITDA margin performance. And I saw as the market start, I mean, yes, underlying market trends start to recover.

We feel like we have a we have we're starting from an incredibly strong position better than we have ever been historically. And I feel there's a high degree of confidence that, yes, taking into account, again, we've been over 40% gross margin on really negative market backdrop in Q2. So I feel quite well that added we are incredibly well positioned to deliver on (inaudible) we've committed at the CMD recently

Makes sense. Appreciate it. Thank you.

Jeff Hammond, KeyBanc Capital Markets.

Hey, good morning, guys.

Good morning, Jeff.

Hey, maybe you could just unpack the wins you talked about with a major partner in each segment. Is that the same partnership? And just how is it getting broadened out and how much of an impact if it's material, do you see it impacting '25? I think you said?

Yeah, absolutely. Thank you for your question. Jeff, I would say that that on the Fluid Power side, that is with one of our largest existing customers. We are just broadening out where we serve and how we serve them. And it's signed one of a large critical geographies that up if we're going to become a prime supplier to them

On the Power Transmission, that's actually a new customer acquisition that we historically did not do business with them. And as this ramps up kind of over the next 18 months, it's going to be a reasonably material that will be -- we anticipate that it will add 100 basis points to 150 basis points of revenue to Gates Corporation.

So it's up to meaningful and meaningful design wins, and we felt that it was worthwhile to go and pull forward some of the activities and get them into Q4 so that we can start seeing the benefits from '25 onward.

Okay. That's great news. And then I think you said you're seeing some forward weakness on First Fit Auto. Maybe just speak to the replacement trend and if you think there's any offsets as maybe people defer new purchases?

Yeah. Look, I mean, we just see more extended shutdowns. So I'm not going to be calling for what was the production output is going to be on the auto OEM side on forward basis that has been more or less planed weighted. We've anticipated. We just did not see that they are going to take an extended shutdown in July. As to the replacement side of our business, you know, the market dynamics are very, very positive there. The car, the car fleet is getting older around the globe. It's growing at kind of that low single digit rate, people still have a high degree of employment, so they are driving a large amount of miles.

So the underlying market dynamics just even without the attributes associated with lower purchasing of new vehicles, very, very positive. And we believe that we are well positioned to continue to execute well in AR. And as you saw us a great driver of our growth over the last four, five, six quarters, and we anticipate that it's going to continue well into the future.

Okay. Appreciate the time.

Nigel Coe, Wolfe Research.

Thanks. Good morning, everyone

Good morning.

Morning. So when you think about -- obviously you're still more or less within your previous range, albeit at the low end. But when you think about where we were in April versus where we are now what would you say is the biggest delta in your thinking? Obviously auto production, Auto First Fit is some is clearly weaker than it was, but Off-Highway -- would you say Off-Highway the biggest move here, obviously much broader than that?

Yeah. Look, I think -- thank you for the question, Nigel. I would say that that the biggest issue that we have seen was with the Off-Highway demand, particularly in Ag. I mean, Ag has weakened materially more than what we anticipated, but we were not very constructive on Ag already in our original guidance. But what we are seeing is we have seen, again extended shutdowns of plans, significant reduction in builds of new equipment by the Ag OEs.

And, we just felt we needed to reflect that in our guidance on forward guidance because it reasonably I mean, it's a reasonably good amount of production that's come out. Outside of that was we didn't really anticipate it is going to be a V-shape recovery in kind of General Industrial. We just we just were anticipating more lengthening out of demand.

I think that that's kind of around the edges look, what is happening there? I mean, it's choppy. There's some puts-and-takes, but overall, I would say is the Off-Highway incrementally worse. And I would say that you know, some of the extended shutdown of the Auto OEMs in July that we have seen. We just did not really anticipate that that's going to be rather of the percent and what we have embedded in our original guide.

So overall, while we are taking our revenue down, we are still anticipating kind of at the mid-point that even with reasonably kind of a low mid-single digit drop in volume year on year for the full year, we are still anticipating at the midpoint to grow our earnings side, adjusted EBITDA by 100 basis points. And that's kind of second year in a row that we are managing to do that on the back of very strong execution of our enterprise initiatives and our drive to It demonstrates the earnings power of this business has.

Great. That's great color. Thanks, Ivo. And then we've seen it certainly looks like replacement demands across the portfolio in industrial auto, et cetera, is holding up really well. So I just want make sure that there's no changes in conditions that you've seen there. And then maybe pricing as well. Are we seeing any pockets of price weakness developing with some of this incrementally weaker outlook?

Look at the rest of the business is more or less performing, very much in line with what we anticipated. And again, I'll remind everybody, we did not really anticipate a second half recovery. Just it did not anticipate it will be decelerating. And so absent of the industrial OE applications. It is playing itself out more or less how we have anticipated in our original guidance. And I'll let Brooks answer the pricing question.

So from inflation perspective, it's a little bit of a mixed bag material. It was pretty pretty flattish from an inflation perspective, a little bit better in utilities, a little bit worse on freight. Labor kind of sticky, but between our normal pricing actions and then the additional 80/20 work that we've done in terms of your strategic pricing and optimize pricing, we don't see -- we see the pricing environment remain stable to slightly constructive as we move forward. So we don't see any headwinds from that.

Okay. That's great. Thank you.

Julian Mitchell, Barclays.

Hi, good morning. Yes, I realize the '24 guidance adjustments. We can see that clearly from the likes of Ag, Co and so forth. But I wondered more for 2025. What's your perspective either on the sort of the slope of recovery we should expect in some of these weaker areas like auto First Fit, Off-Highway, First Fit or General Industrial?

And I guess one reason I'm asking is you've pulled forward this $40 million odd savings product and a chunk of those savings $20 million -- that maybe $15 million to $20 million or so coming next year. Is that reflecting the fact that you don't assume a sharp cyclical recovery is likely as you look across the business into next year?

Yes. Look, I'm not going to get to the specific of '25. I mean, clearly, we have we are having some lack of clarity even on some of the shorter trends that are happening. But the way that I think about it, Julian, as we have seen reasonably extended deceleration in manufacturing activity over the past couple of years. I mean, that's been a pretty prolonged when we all look at the PMI rates the manufacturing PMI rates, they have been quite extended 18, 20 months range, which is highly unusual.

And if you kind of think about that, you would anticipate that you are at or near the bottom of the cycle and why not, you know, it's clearly here to predict what's going to happen and these are the industrial activity. We do believe that we have probably somewhere near bottoming out.

My anticipation on the industrial first fit, particularly on Ag side is that you will see some degree of more prolonged weakness. And frankly, we have had a number of restructuring programs on the books ready to be executed and we are taking the opportunity to do that right now.

We have represented, I think, a pretty good outline of the structural opportunities that we believe exist for us vis-a-vis footprint optimization at the Capital Market Day update. And we clearly had that playbook ready to go and pull forward. And that's what we are doing presently in. We're not taking really capacity out. We're just optimizing how we will service our customers, strive to get to locations that have a better access to direct labor, optimize our efficiency of distribution and deliver rather meaningful improvement to our operating profitability when these projects execute.

That's helpful. Thank you. And then just maybe my follow up. One is just wanted to drill a little bit down into that margin element again, EBITDA margins, I think you guided down about 100 basis points year on year in the back half after it, 200 basis points-plus increase in the first and the revenue trajectory year on year doesn't look that different.

So is there something in -- I mentioned SG&A investments, but just wondered if there's anything else moving around in terms of mix or price cost dynamics, maybe something tied to that sort of free cash conversion, I think in the teens in the first half, what's the confidence in the step-up to get to 90% for the year?

So yes. Let me unpack the first one first. There's kind of three elements. I think in the margins. One is FX. FX has been a bigger headwind as we move through Q2 and it's now a bigger headwind in the back half of 2024 than we had anticipated. And then I think the other two pieces that we had already talked about is one we are going to draw down some inventory in the second half of the year, we had built up some in anticipation of some new business wins and also to make sure we can take care of our customers and now we're going to make sure we align our inventories.

As we exit the year, that's obviously going to weigh on production that's going weigh on our fixed cost absorption and things like that. And then the third part is the new business win conversions. I mean, that's a cost. There's a merchandising cost. There's an inventory change out costs and there's going to be a headwind year over year as well.

So those are the three elements really. On the SG&A side, it's really more of just a volume versus and SG&A perspective. I don't think SG&A is going to be that different year over year, there's going to be less volume. So it can be it's going to weigh on the margins a little bit from a percentage perspective

From a cash conversion, we're actually not that far off when you look at 70% conversion in Q2. Historically speaking, we have really strong cash conversion last year, right? Historically speaking, that's not that far off between kind of the seasonality of some of the cash flows coming in, particularly with the higher sales in the first half and collecting the cash on that in the second half. And then the inventory drawdown that I talked about, we feel confident that we'll be able to deliver that 90% cash conversion in the second half.

Thanks so much

Deane Dray, RBC Capital Markets.

Thank you good morning, everyone.

Good morning, Deane.

Hey, Ivo. I might have missed this. I joined a little bit late, but can you just talk through the thought process of moving of the pull forward of the repositioning restructuring actions. That's typically a good sign to -- if you have the plan, go ahead and start to implement it. And in your answer to it the 80/20, provide any of the insights in terms of what changes that you'll be making?

Thanks for the question, Deane. Yes. So look, we've represented during the March Capital Market Day that we have a good, solid plan that we are ready to execute and we just feel we have two attribute. Number one, we are ready to go and pull in or pull forward in all the optimization activities. And so we are doing that and those programs are ready to be executed and ready to be put in place.

And we are putting them in place as we speak. We are really pulling those activities forward by about two quarters. So it's not like we have pulled it forward by a couple of years or anything like that. Some of these programs are longer term, reasonably complex projects in time. We are ordering equipment and doing things of that nature. So that will that's kind of the attribute it necessitating the completion of this project kind of by 2026. So we have from the advantage when we are in a good we're in a good place.

On the 80/20 question. I mean, we look at the 80/20 more as a kind of a separate set of programs that are giving us the opportunity to optimize how we how we think about manufacturing scheduling and optimizing output within the plants. And I think what that's doing for us, it's giving us also an opportunity to become significantly more efficient as we move forward.

So those are kind of complementary processes, not necessarily one leading the other than just a couple complementary in nature, and we're executing both.

Good to hear. And then just a couple updates. I know it's still a small piece of the business. Anything new on the data center front on the water pumps and any new developments on chain-to-belt?

Yeah, thank you. On the data centers, look, this is really quite an interesting I mean, space from our vantage point. First of all very, very early on lots of changes. People are still trying to figure out what is the most efficient technology to deliver cooling to these very, very expensive apparatus that is being deployed in this environment.

And presently, we are actually in process of launching some really interesting new fluid conveyance technology that specifically targets this application but also lead itself to be deployed across pretty broad set of other industrial fluid conveyance applications. It is very exciting what we are able to do The specific actions there are rather difficult, right? You have to be metal free.

You have to be halogen free in your construction, which is not a trivial set of things to accomplish in the space that we participate. We've been able to develop a new technology that is based on engineering new polymers that give us the opportunity to eliminate nitriles and deliver real differentiation in this space. So, it's quite exciting.

We are presently working with significant number of server manufacturers and chip makers to get specified in the space as their preferred partners. We have very close coordination with our partner in CoolIT. We are extending our abilities to offer other solutions beyond the cooling pumps. And we have been able to get specified with a large manufacturer that we anticipate we will be ramping up some incremental volume towards the latter part of this year and early into next year.

So, lots happening. A lot is changing there. We are right in the middle of dealing with the major players in cooling. I think that our solution is targeting very efficient and good price point entry in the marketplace. But we also believe that this is going to be a game that's going to be played over several years as these folks are truly understanding the extent of the power, how to remove the power from this service and these chips, and how to protect that equipment.

So, very, very exciting stuff. Coming back to the second part of your question, I'll start with Personal Mobility in particular. Personal Mobility has been impacted by pretty significant destock. Put that aside for a second, that plays itself out.

And as I indicated in my prepared remarks, that is playing itself out the way that we anticipated, and then we believe that kind of on the onset of 2025 we will start seeing reacceleration of our growth. We continue to get very strong print position with the manufacturers of these various two-wheel applications scooters.

It's electrified or non-electrified, we're getting very strong print position across the bike market segment, both with electrified application and non-electrified application. We're now starting to penetrate more broadly in North America, starting to enter more mid-price bikes.

And that's really exciting for us. So, we have a very high degree of confidence that that business is going to start reaccelerating and continue to deliver the growth that we've anticipated kind of from 2025 onwards. So, that's a really nice secular opportunity for us as well. And then on the Industrial side, we are doing really well with robotics in Asia, with some food processing equipment in Asia.

And we continue to work on broader set of conversions in United States. And we are making some investments in the front end. We believe that it is critical for us to be a real major player with the MOEMs, both in the US and in Europe.

And that investment is being made us as we speak. So, very positive developments on our end. Some of them, again, will play themselves out kind of over that 2025 onwards. But we have a very good set of confidence that this is an opportunity. Both of these opportunities are kind of opportunities for them 10 to 20 years.

So great update. Thank you.

Andy Kaplowitz, Citigroup.

Good morning, everyone.

Good morning Andy.

Good morning Andy.

Ivo, can you give us a little more color into what you're seeing by region and specifically, China? China shifted back to year over year decline, I think you said led by First Fit, but you mentioned the double digit improvement in Industrial Replacement. So can you help us make sense of what's going on over there? Does Industrial Replacement picking up tell you that First Fit can't be far behind?

Yeah, so thank you for your question, Andy. And look, I mean, I think I also said in my prepared remarks that China remains choppy. I mean, it's an it's still really interesting to see how uneven the environment it is. And frankly, it's not just in China, it's globally, right? I mean, you have seen really kind of nice rebound in March into April and then you see some of the trends to reverse themselves. So it's a very, very on even an almost less predictable type behavior.

But specifically to China, that's what's happening it's reasonably uneven AFFO was down reasonably well for us in China in Q2. And the forecasted production in the Auto space from China is still reasonably negative high single digits down for the second half. So we anticipate that's kind of the way it's going to play itself out, maybe around the edges could be could be a little bit worse than that.

But for us, we did see a rebound in Industrial Replacement side of our business, not necessarily enough to offset the diversify -- the Construction side and Ag in China. While those are reasonably small overall industrial was kind of less positive I guess then would you anticipate by the replacement side of the business is doing quite well.

Our AR in China is still doing well. The market dynamics are quite positive and we don't really see it as a trajectory of change in AR for our business in China. So China is probably not going to be the massive engine of growth and it has been historically. I mean, the economy has mature and there will be some cycles that everybody else is seeing in United States start figuring out what they want to do to stimulate that economy, things be on better footing at some time in the future.

Ivo, I wanted to follow up on your comments that maybe we're sort of bouncing along the bottom in terms of Industrial. Maybe you could talk about inventories in the Greater Industrial channels and what your channel partners are saying?

I'm sure you would say that Ag and Construction probably still doesn't look great in terms of inventory. But what about the other industrial markets, what are you seeing there in terms of channel inventories and conversations?

Andy, you gave me your answer that. That's exactly what I would say. Look, I mean, I think we believe that the Ag and Commercial Construction inventories are going to be probably somewhat impacted, taking into account the slowdown that you see but the rest of the inventories we believe are it's pretty pretty reasonable. We don't really anticipate and even continue to see any further destock and taking into account that these markets have been bouncing around the bottom for an extended period of time, and folks have been reasonably proactive in destocking for an extended period of time. So absent the Ag in particular, we think that inventories are well-positioned.

Appreciate the color.

Jerry Revich, Goldman Sachs.

Hi, guys. It's [Clay] on for Jerry. Just one quick one for me -- and apologies if I missed it. But on the previously outlined new 2% benefit from material cost reductions, how much of that have we've been able to realize so far? What's the time line to realizing those benefits moving forward? Thanks.

I don't believe that we have clarified what exactly is the extent in terms of percent of improvement. I'll just say that we continue to execute well on material cost savings, and we don't anticipate any changes to our ability to have to go and continue, you know as we move into the future.

Thanks. I'll pass it on.

That concludes our question and answer session. I will now turn the call back over to Rich Kwas for closing remarks.

Thanks, everybody, for participating. If you have any follow-up questions, feel free to reach out. Have a great day.

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