All right. Good afternoon, everyone, and welcome to the 2024 Gates Capital Markets Day. I'm Rich Kwas, Vice President of Investor Relations. I wanna thank everyone for attending in person, and thank you to those of you accessing the live webcast. We know it's a busy time of the year and appreciate the time you're investing with us. We believe this will be an effective and efficient use of your time. Before we start, I must remind you that we will refer to certain non-GAAP financial measures. Reconciliations of historical non-GAAP financial measures are included in the presentation. Also, our remarks will include forward-looking statements, which are subject to risks that could cause actual results to be materially different from those conveyed by such forward-looking statements. These risks include matters described in our recent Annual Report, filed with the SEC and the accompanying slides.
Turning to Page 3 here, here's the agenda. One note, we have included a 10-minute break after Ralitza's presentation on 80/20 . That should occur sometime around 2:30 P.M. We've also set aside time after Ivo's closing remarks for questions- and- answers. Lastly, we will have refreshments available after we finish today. We hope many of you have a few minutes to join us. And with that out of the way, I'll turn it over to our CEO, Ivo Jurek.
Well, good afternoon, and thank you for joining us today. Certainly, for those watching the webcast, we really appreciate your time that you are dedicating to this presentation, and it's always great to be back at this venue here in, on New York Stock Exchange. We are very excited to share the opportunities we have in front of us that we believe will allow Gates to deliver significant shareholder value over the next 2-3 years. As Rich mentioned, we have the key members of our senior management here to present and answer your questions. Let me begin on Slide 5 here. First, we expect to continue to outgrow our market in a summary of the key messages for today.
Our business is the beneficiary of favorable secular trends in our material science-based innovation, as well as geographic expansion opportunities should drive growth at 2x the global industrial production over the midterm. We are committed to growing revenues between 3%-5% on core basis through the industrial cycles. Tom will get further into details on our growth opportunities later in the presentation. But secondly, we have embarked on a multiple enterprise initiatives that we expect will deliver meaningful structural margin improvement over the next 24-36 months. At the midpoint of our 2026 adjusted EBITDA margin commitment is 24.5%. Brooks will discuss how we plan to get there later on today. Thirdly, in the intermediate term, we expect to use our free cash flow to further improve our balance sheet and opportunistically repurchase our shares.
Longer- term, we are confident we will be in a position to consummate acquisitions. However, I want to stress that our top priority in the near- term is reducing our net leverage below 2x. We believe our strategy and discipline focus on execution can create significant returns for our investors over the next couple of years. Lastly, we are reiterating our 2024 guidance and believe we are on pace to outperform the Q1 consensus adjusted EBITDA margin expectation. Brooks will address Q1 trends and provide more color in his section today. On Page 6, a quick review of our business. Our business generated almost $3.6 billion of revenue and just shy of $750 million of adjusted EBITDA in 2023. Our strong financial profile is supported by almost 15,000 global associates.
We have broad coverage globally and are well diversified. Almost 2/3 of our revenue come from replacement markets. Our products typically serve in harsh and hazardous applications, support mission-critical functions, and in general, require replacement on a regular basis. We are a market leader in both of our product segment and possess an estimated top three share in the served markets. On Page 7. Page 7 offers a brief refresher on Power Transmission segment. Power Transmission represents about 60% of our total company's revenue, and it's the company's heritage. We engineer and manufacture belts and related components that power drives in demanding applications across a wide range of end markets. We have a number one global market position with a significant presence in replacement channels and growth engines in place for the long- term.
Page 8 provides a brief snapshot on our Flo, Fluid Power segment. Our Fluid Power business supplies hydraulics and fluid conveyance products across a wide range of applications and end markets. We possess a highly engineered product portfolio that supports harsh applications across a variety of end markets. We have a top three market position globally and have an opportunity to further increase our presence in developing markets and across applications with positive secular trends. Both of our segments feature common threads such as natural replacement cycles and end-market diversity. We believe our innovation and broad distribution capabilities put us in a strong position to deliver attractive growth over the mid-term. Turning now to Page 9 , we promote a culture of innovation, collaboration, and caring. Our employees come to work every day with focus on delivering superior value to our customers.
We strive to serve our customers with differentiated technology to solve complex problems in mission-critical applications while providing a world-class service. Our teams work well together and accept each other, always focused on making the right decision and being responsible stewards of the environment. In 2023, we released our 5th Annual Sustainability Report. Recently, we were also recognized by Newsweek for the second year in a row as one of America's Greatest Workplaces for Diversity. On the next page, Page 10, we provide a quick overview of our strategy. We strive to deliver above-market growth, and you will hear more about our recent track record here shortly. We focus on delivering margin expansion and work to maintain a robust funnel of projects and initiatives to sustain a consistent level of performance.
Finally, we invest in the business for the long- term and deploy excess cash to reward our shareholders and reduce our financial leverage. Longer- term, we plan to be active with acquisitions. Turning now to Page 11 and description of how we operate. Our customers are at the center of what we do as a company and what drives our business. We have frequent and open communications with our customer base, which allows us to gain a good insight into what problems we should solve, how best to facilitate the development of new products that will drive solving the impediments that our customers are experiencing and deliver differentiated service. Our capabilities in material science enable us to develop unique product innovations.
Further, we deliver value by managing a broad portfolio of products and sustaining a regular cadence of enhancements while ensuring that we are delivering adequate value to our customer base. None of what we need to do is accomplished without our people. We are highly focused on attracting and retaining the best talent and providing opportunities to our strongest performers. I, along with the rest of Executive Management team, understand the importance of maintaining a deep bench, and collectively, we make the necessary investments in our people, financial and otherwise, to support our organizational goals in short, medium, and long- term. So moving now to Page 12. Gates Industrial Corporation has a long history of success and performance. Our company was founded 113 years ago by Charles C. Gates, and his vision and foresight yielded several innovations during the first half of the 20th century.
Innovation has remained at the forefront of what the company does, even as the company's ownership has evolved over the years. Our market-leading, leading material science capabilities and product innovation have always underpinned, underpinned the value proposition to our customers. Blackstone, who remains our largest shareholder, has been a great steward of our business and supported our entire management team over the last decade as we have strengthened the business and our product portfolio. Over our long history, the business has demonstrated solid resiliency and success through multiple economic cycles and geopolitical events. We believe that this resiliency positions us well into the next 100+ years. On Slide 13, we look at recent history and what we have accomplished, which may surprise some of you. Since 2019, we, along with much of the industrial universe, have experienced unanticipated disruptions and macro uncertainties.
Through a choppy period of time, we have been able to deliver above-market core revenue growth. The chart on the left illustrates our core growth index at 100, starting in 2019. Between 2019 and 2023, we have delivered nearly 5% compound annual core revenue growth, which outpaced the industrial peer set we benchmark our performance against by approximately 100 basis points. Our focused growth area in Personal Mobility, Diversified Industrials, and Auto Replacement have been key drivers of our growth. Importantly, our growth rate includes approximately 100 basis points of growth headwind from our strategic decision to be more selective participant in the automotive first-fit business. Our Growth Initiatives delivered solid results, making what we believe is a strong, compelling growth record. On Page 14, we illustrate how we drive economic and shareholder value, starting with the top left and moving clockwise.
We strive to generate top-tier operating performance consistent with premium industrial peer set. Second, our growth algorithm is solid. As I've outlined on the previous page, we have outperformed our peer set on core growth basis in the most recent four-year period of time, and we intend to sustain that that record moving forward. Third, we have several enterprise initiatives underway that we believe will enable to increase our gross margin and should volumes not recover in a meaningful way over the next couple of years. Lastly, we are in an incrementally stronger position to deploy capital to what we anticipate will drive significant benefit to our shareholders. On Page 15, here we outline our financial targets through 2026. We are comfortable with our growth drivers and the 4% core growth midpoint we have outlined.
It is consistent with our historical record for outperforming global industrial production by 2x. Our adjusted EBITDA margin range is anticipated to be in the range of 23.5%-25.5%, and it represents a healthy year-over-year incremental margin performance supported by operating leverage on organic revenue growth and the benefits from our enterprise initiatives. The midpoint of our adjusted EPS range implies mid-teens CAGR through 2026, driven by a mix of organic growth, margin expansion, and capital deployment. We expect free cash flow conversion of 100% and mid-20s ROIC and 1x-2x net leverage ratio, which is about a full turn reduction from our year-end 2023, using the midpoint.
We believe we are entering a period where we can deliver above-average earnings growth and will have a meaningful amount of capital to deploy while also maintaining responsible financial leverage. On Page 16, we show a holistic view of our enterprise initiatives. Growth and innovation are at the core of what we do. We have exposure to solid secular growth trends and leverage our material science expertise, as well as our significant focus on revitalizing our product portfolio with and new innovative products to deliver solutions to our customers while improving the ease of doing business through digital tools. We are using 80/20 principles to lower complexity within our organization to drive operating improvements, higher customer service levels, and direct our focus on what truly matters.
Finally, we have embarked on a key self-help initiatives that we expect will allow us to increase our margins, even if industrial volume growth is muted, and we anticipate to drive solid returns going forward. Turning to our growth opportunities outlined at a high level on Page 17, we believe Gates is well-positioned to support key emerging trends in the global economy. Automation, Transportation, and Infrastructure are experiencing increased investment to support changing demand trends fueled by consumer and business preferences and/or regional regulatory environment. Many of you in the audience are highly knowledgeable about the need for scaled-up use of automation across a wide breadth of industrial applications, whether to optimize logistics and distribution of goods activities, increase efficiencies to drive productivity across industrial manufacturing complex globally, or simply to offset challenging workforce demographics.
Gates is well-positioned to support this trend by working with machine builders and end users to design in our highly engineered belt drive systems that offer greater gains in productivity, efficiency, and ease of use. On the Transportation side, we believe electrification of mobility will continue over time, and we will and we can support our customers with any propulsion strategy they choose. In either way, we can play a stronger role. We continue to be very constructive on our opportunities in a two-wheeler space, and we work with our teams. They are doing a great job in converting these devices away from chain. While we have seen some challenges post-pandemic in this end market, we anticipate to see a nice re-acceleration of growth as we move into the next year.
The global light vehicle park continues to age, and we are well-positioned to capitalize further on a positive trend in developed markets, as well as in markets that are still emerging. Finally, there is a renewed focus and investment in infrastructure, and we are participating across wide spectrum of applications, from extraction of raw material to support the new energy revolution, to localization of manufacturing capabilities and support of enhancing supply chain resiliencies, to keeping data centers cool as a part of accelerating investments in artificial intelligence and the overall digitization of economies. We play a role and are targeting growing our exposure further into these trends as we move forward. Tom Pitstick will highlight some of the traction we are experiencing in this section a little later on in this presentation.
On Page 18, our customers are at the center of what we do, and we strive to be a differentiated partner. We support the need of both original equipment manufacturers as well as our channel partners, which requires a significant amount of operating flexibility. Our focus on innovation allows us to deliver unique solutions to our customers in a timely manner. Development of unique and differentiated new products not only allows us to maintain our premier market position, but it also offers the opportunities to enter new markets where our products compete against non-traditional competitors, such as what we demonstrate with our chain to belt initiative. In addition, our high replacement mix requires investment in inventory and a focus on efficient fulfillment process.
As such, it is a critical factor for us to be able to satisfy a wide variety of SKUs and order sizes in short periods of time. On the lower right of this page, you see that as a specific example, we typically target to satisfy 95% of orders within 72 hours of receipt in our North America automotive replacement business. So optimizing our footprint and staying in close proximity to our customer base is highly desirable. On the next page, while we are a global company with a strong market leadership position, we still see meaningful opportunity to increase our business and share in number of geographic markets. We have a strong presence in EMEA and have been growing there nicely. Yet we see a solid set of opportunities to increase our penetration of replacement and markets in industrial and automotive.
In addition, we believe our personal mobility business in Europe remains in a strong position to capitalize on a growing demand for electrified two-wheelers. Our operations in India and Latin America are well positioned to support expected investments in infrastructure and ag. As these investments move forward through the rest of this decade, we expect they will offer further runway for us to deliver above-market growth. One of the aspects that we believe is underappreciated about Gates is our material science-based innovation capability. On Page 20, we highlight why we think it is so important. Polymer mixing and compounding is a critical production process capability that allows us to bring a significant amount of, amount of value add to the overall manufacturing of our products. We source engineer polymers and develop unique compounds that forge new products and solutions for our customers.
We continuously re-engineer our formulations to create new mixes that drive enhanced resistance and durability and can support new demanding applications. Our conversion process provides significant value add and is one of the reasons we realize attractive gross margins. Dr. Maass will offer additional insight on this topic in his section of the presentation. Over the last year, I've spent time describing the deployment of our 80/20 processes here at Gates. We are using 80/20 to reduce complexity and increase efficiency across the entire enterprise. The practice has enabled us to more effectively manage our product offering and contributed to an increase in customer service levels in certain areas of our business to date. The benefits feed down to our manufacturing and fulfillment capabilities.
We are making good progress with our 80/20 journey, and Ralitza will discuss the state of its revolution and evolution at Gates later in her section of the presentation. Moving now on to Page 22. So how are we anticipating to deliver above margin, above average incremental margins to meet our mid-term profitability targets outlined today? Well, there are three key initiatives that we expect will contribute significantly to realize our margin expansion targets. First, we believe material cost reduction is the nearest, best opportunity for margin expansion. We got a solid jump on this process with the need to protect the supply of polymers over the last year or so, and are leaning very heavily on our material science expertise to accelerate it.
Operational excellence reflects our productivity initiatives across the manufacturing and distribution chain, and we anticipate that we will see a re-acceleration of productivity across our global operations through redeployment of standardized processes and tools. Footprint optimization reflects a mix of internal investments and rooftop consolidation and has a longer tail to achieve. We have a good set of projects that we believe will be nicely accretive through 2026. Brooks will go further into details about what we are doing behind each of these work streams later in his presentation. But the bottom line is, most of what we do is within our control over the next 24-36 months. So turning to Page 23 and looking at expanding margins differently. Here we outline the key drivers of our anticipated gross margin expansion over the next 2-3 years.
As I have highlighted, the material cost savings is the nearest and the best opportunity. Sourcing initiatives, coupled with increased use of alternative materials, are important potential areas of savings for us. Operational excellence represents the return of more normalized levels of productivity across our manufacturing footprint and our ability to capture incremental efficiencies after the last few years of operating volatility and inefficiencies. Footprint optimization incorporates some fixed asset reductions, but is really focused on making sure we can flex up and down to varying demand trends in locations where we have an ability to benefit from availability of skilled labor pools. Again, Brooks will cover all of these initiatives in more detail later on in the presentation. We believe our shareholder value proposition is very compelling. I am now on Page 24.
In our view, we are positioned to outgrow industrial production by 2x through the cycle by executing on our targeted growth areas as well as share gain opportunities. We believe our margin expansion potential is outsized. We typically deliver 35%-40% of incremental margin on core revenue growth. We believe our enterprise initiatives will enable us to meaningfully add to that profit conversion as volume increases. Anticipated margin improvement, coupled with our relatively low working capital intensity model, should provide with added financial firepower to reduce our financial leverage and return capital to our shareholders. We believe this approach is most effective strategy we can employ to increase our earnings and equity multiple as we deliver superior returns for our shareholders. For the next 12-18 months, we are committed to reducing our net leverage ratio below 2x.
As we get closer to the level, we anticipate that M&A can play a meaningful role and serve as another lever to supplement our enterprise growth optionality. Turning next to Page 25. In conjunction with our operations effort, we are highly focused on improving our balance sheet. Over the last three and a half years, we have demonstrated our ability to reduce debt meaningfully and return capital to shareholders. We finished 2023 with a net leverage ratio of 2.3x , and we believe we are well on our way to getting our net leverage to a range of 1x-2x by 2026, which is where the bulk of our industrial peer group resides. We expect that this ability to reduce leverage will create more strategic optionality for our enterprise.
Turning now to Page 26 and speaking of our industrial peers we compare ourselves against. Our business generates strong cash flows and premium gross margins. Our gross margins are, in general, greater than a significant number of these high-quality peers. On the left side of this slide, we look at the subset of our industrial peers and compare our gross margins and valuation. While we are generating gross margins anywhere between 150-700 basis points higher in this subset, our valuation is 4-6 multiple points lower. We have a strong franchise that we anticipate will continue to evolve, improve the overall profitability further through our enterprise initiatives, and continue to fuel further gross margin expansion. We believe gross margins are one of key indicators of the quality of the company.
On the right side of this page, you will see that our free cash flow yield is the second highest in this group, underpinning the attractive valuation of our equity and what we believe is an attractive entry point into our stock, while our valuation is still undemanding. On Page 27 is our management team. We have a seasoned group that include a nice mix of tenured Gates leaders, mixed with a new talent. Since we went public, we have managed through various challenges and proven our resiliency, which I believe sets us up well for success in the future. I will sum up Page 28 by saying we believe Gates is a compelling investment opportunity at an attractive entry point. Our experience over the last few years has enabled us to strengthen the business for the long- term.
Our Material Science capabilities and our Innovation Engine are key differentiators in what we do and help support our ability to outgrow industrial production. We believe the bulk of our margin expansion potential is within our control. Lastly, we are creating optionality to drive incremental shareholder returns for both the mid and the long- term. Now, we will start with a review of our enterprise initiatives. I'll turn it over to our President of Asia Pacific Region and Global Strategy, Tom Pitstick.
Well, see, thanks, Ivo, and good afternoon, everyone. Good to see so many, familiar faces, and glad to be back, in New York with you all. To begin with, I'd like to share a few key points, some of which Ivo touched on as well. First of all, as Ivo highlighted, we believe that virtually all of our end markets are supported by key secular trends. Our organic growth has been outperforming industrial production, driven by our underlying end market focus and our targeted growth initiatives, both of which we believe will help us to continue to build upon that track record. Our products and the, and the critical functions they serve put us right in the middle of these macro trends, and the natural replacement cycles of our products provide a strong aftermarket opportunity for us as well.
This growth focus is built upon our Eco-Innovation system that Tom will talk about a little bit later this afternoon. So moving to Slide 32, this graphic illustrates how we look at our growth model. It starts with the broad underlying market, which we think is generally represented by industrial production. Then through our strategic planning process, and by applying the principles of 80/20 to our end markets, we are focusing on areas of the broader industrial economy that we believe are supported by strong secular trends. Then we leverage the Eco-Innovation process that our teams use to develop new products and enter new markets, and again, we use 80/20 principles here to help us identify programs and market opportunities that give us the biggest payback on our innovation and capital investments.
Next, we amplify our commercial and go-to-market strategies in these key markets through the use of innovative digital tools, apps, and digital marketing capabilities to drive incremental business through our demand funnel. So when you put this all together, we expect to continue to outgrow IP by 2x through the cycle, by continuing to execute upon and refine these three areas. Moving to Slide 33. So we believe our approach is working, as the chart that Ivo showed earlier on the left demonstrates. Our organic growth has outperformed not only the peer group mean, but also industrial production by more than 2x. And this is despite the fact that we've been selectively participating in our automotive OEM segment. The right side of the chart shows select areas where our growth has particularly stood out.
So in our personal mobility business, we've been growing at north of 20% since 2019, and I'll talk a little bit more about our market penetration opportunities there in a, in a few slides. In emerging, auto replacement markets such as Latin America, we've been growing consistently at low double-digit rates with more opportunity ahead. In places like India, where there are solid tailwinds from infrastructure build-out and where we have a strong operating presence, we've been growing at high single digits as that economy continues to build out. Again, our track record of delivering solid organic growth over the past cycle gives us confidence that we can continue it over the mid-term. And moving to the next slide, Slide 34.
We've shared quite a bit about our end market exposure with you over the past few years and how we think about our growth opportunities in each of these areas. But I also want to link these end markets to the macro themes we've been highlighting throughout the day. Our Diversified Industrial segment and the applications in that space directly support the broader themes around automation that we're seeing across just about every industry. Our automotive on-highway and personal mobility markets tie directly to the macro trends and themes around the movement of goods and people around the world. And our off-highway ag construction, as well as energy and resources end markets, tie nicely into the trends that support continued infrastructure build-out in emerging markets and the renewal of infrastructure in more mature economies.
It's not just about the construction of infrastructure, it's also the energy and natural resources required to build that infrastructure, from mining raw materials, through to transporting them, through to converting them, and then ultimately building new roads, factories, facilities. Our products are critical across that spectrum. All of these markets are served by our, our products, which are highly engineered, leveraging the latest in materials, process technologies, and product design to deliver differentiated performance. They are mission-critical to the applications that they're a part of, and they have natural replacement cycles, which creates strong aftermarket opportunity for us across nearly every end market that we participate in. All right, as I mentioned earlier, part of our above-market growth story is selecting and pursuing markets that are inherently supported by these macro trends. That's step one.
Then we seek to drive growth above the underlying markets through focused initiatives that I'll talk about in the coming slides. We're doing this in very large markets that total up to about $70 billion of opportunity, and where, as Ivo pointed out, we're already a leading participant. This gives us ample runway to take share, as well as to drive conversions from other technologies to our Innovative Solutions. All right, moving to Slide 36. So in our diversified industrial end market, let's take a deeper look.
This market is strongly supported by the broad trends around automation, whether it's addressing the challenges that the industrial complex has faced around labor availability in many geographies, the increased demand for e-commerce and complexity of fulfillment networks, or the overall drive to improve the efficiency and sustainability of our customers' operations, our products play a role. As I mentioned, through our 80/20 market focus efforts, we seek to identify submarkets that have particularly strong secular trends behind them and direct our Commercial and Innovation efforts accordingly. General Manufacturing, Warehousing Automation, and solutions for food and beverage are each good examples of end markets we believe will continue to outgrow the broader industrial economy and are also markets where we believe our solutions have a strong value proposition. Chain to belt is a big part of our story here.
Speaking of chain to belt, Slide 37 is just one example of many I could share about how belt drives are improving industrial operations versus the legacy chain technology they are replacing. In this example, we have an automotive customer who has multiple painting operations, where the conveyors that move vehicles down the line have historically been driven by chains. These chains require a significant amount of maintenance and get clogged with paint in a relatively short time. As a result, they need to be replaced quite often, roughly every three months, resulting in downtime, restart costs, and general disruptions to the flow of our customer's operations. So we worked with this customer on a pilot project to replace their chain drives with our high-performance industrial Poly Chain belts, which are strong, durable, washable, and don't get clogged with paint.
The pilot proved a number of benefits, such as not having to replace the chains, doing very limited maintenance, and experiencing no meaningful downtime. The customer is in the process of rolling these conversions out across their fleets of lines and factories. Again, it's penetration of applications like this, where our products bring meaningful benefits to our customers' operations, that we believe gives us significant opportunity to continue to outgrow the base markets. All right, moving to Slide 38. So while you've heard us tout the benefits of belt drives for being clean, quiet, low maintenance, efficient, and durable, there are also a number of benefits associated with sustainability. While we always knew belt drives are a more sustainable solution than chains, we hadn't quantified it.
So we hired a company called Anthesis, who does this for a living, to provide a third-party life cycle assessment for us. Anthesis used a variety of external data to come up with a life cycle CO2 equivalent emissions of a typical chain drive and a comparable belt drive. They used well-publicized sources to quantify the CO2 footprint of, say, the steel used in a belt or steel used in a chain or a sprocket, and the polymers used in a belt. They looked at the carbon footprint associated with getting the upstream raw materials out of the ground, processing them, transporting them, and converting them into chains, belts, or sprockets.
They also calculated the difference between the technologies in operation, including the CO2 impact of the oil used to lubricate the chains, and then ultimately the impact of replacing and disposing of these products at the end of their life. As you can see here, the CO2 benefit of moving from chain drives to belt drives is a dramatic 90% reduction, and the impact is across really every phase of the life cycle of the products, from sourcing of the raw materials all the way to their disposal at end of life. While this may not be the primary reason someone designs in or converts a chain drive today, we believe the sustainability benefits of our products will ultimately become an increasingly important part of the decision process for selecting them. All right, let's move to another great example of chain to belt conversion and personal mobility.
So this market is also supported by a number of strong macro trends. Bikes, scooters, motorcycles, and power sports are increasingly electrifying, at much faster rates than we're seeing for other transportation markets. As we've said before, it's simply easier to electrify a bike and support that with battery capacity or charging infrastructure than it is to do so for other forms of transportation. These smaller personal vehicles are themselves more efficient and more accessible to customers, especially in emerging economies and congested urban areas. We have what I believe is the industry-leading portfolio of products for these markets, belts, and the associated metal products, and we've been building this portfolio for several decades in motorcycles, and in 2022, we celebrated our 15th Anniversary in the Bike market.
We expect these global markets to grow at low single- digit over the cycle, but for Gates, this is a penetration story where we are targeting submarkets such as electrified vehicles and that are growing at much faster rates, and we're driving significant penetration through the innovations we're bringing to market, our go-to-market approach, and frankly, because of the inherent value propositions of belts versus alternatives. All right, here's a bit more detail on the market. So overall, this is a very large market with roughly 190 million two-wheel vehicles produced every year across the planet. The bike portion of the market has declined over the past few years, driven by the overbuy coming out of COVID, as well as the more recent destocking.
Having said that, the industry is expected to return to low single-digit growth rates and get back to roughly flat over the cycle. The Motorcycle, Scooter, and Power Sports segment have continued to grow at LSD rates in both bike and these other applications. In both of these application areas, we expect the electrified portions of the market to grow significantly above the base market. For eBikes, that's MSD and about 2x the overall market. We're also seeing some nice tailwinds from new shifting technologies, new motor technologies that are supporting the adoption of chain or adoption of belt in these key bike markets. For the non-bike electrified applications, we're seeing mid-teens growth led by Asia, but with strong growth across all regions.
So when you combine our product portfolio, an experienced team of sales and application engineers, industry-first design tools, and manufacturing footprint near all of the major mobility centers around the world, we're very well positioned in these markets. All right, Slide 41. Slide 41 shows some of the things we're doing to continue to drive growth in these markets. So on the innovation front, we continue to build out our portfolio with products such as Moto X5, which is targeted at light-duty e-scooter applications, or G-Force Workhorse, targeted at utility and work vehicles that are helping us to penetrate new segments. On the bike side, we continue to build out our portfolio of sprockets and other metal components so that Bike Engineers have everything they need to design in a Gates belt drive.
We are continuously identifying and going after new market segments, from leisure bikes all the way through to last mile delivery vehicles, amongst others. Sitting here today, but looking at the right side of the chart, we have a pipeline of about $300 million of opportunities. Last year, we won $100 million of new program wins, and despite all of this success, we're still a very low market share player, compared to chain in the market. So lots of opportunity to take share and grow. Given all this and the recovery we're expecting in the bike market, we envision returning to double-digit growth from 2025 onwards. All right, moving to Automotive Replacement. Automotive Replacement is another large and attractive end market for us.
These markets are supported by trends such as continued car park growth, increasing vehicle complexity, and a significant portion of or a significant population of aged vehicles in every region. For our product categories across power transmission and thermal management, we are a global leader with extensive car park coverage and provide innovative solutions to the market, such as kits. We see opportunity in every slice of the vehicle aftermarket, whether it's in emerging markets, mature markets, or adjacencies like the heavy-duty aftermarkets. A little more on the market data here. So there are over 1.6 billion vehicles in operation globally, growing at LSD rates in mature markets and MSD rates in emerging markets. New cars everywhere are less affordable, pushing people to keep investing in their old vehicles, and the average age of vehicles in most markets is increasing.
In the U.S., it was 13.6 years last year. That's up from a little under 12 in 2019. We believe we are well positioned to outgrow the base market, given our strong brand, especially established channel partner network, presence in every region, and the investments we continue to make in our product portfolio. So this is a This slide shows a little bit more data that supports why we think we have an opportunity to continue to grow in this automotive replacement market. So if you look at the emerging market in an emerging market country like India, the car park size is still relatively small at just 60 million vehicles, but it's growing at mid-single-digit rates, and we're continuing to build out our product coverage for that market.
Today, we have 47% market coverage for the product lines that we manufacture and sell globally, and expect to drive this towards levels more in line with our other markets over the mid-term. We have a strong local team, strong local operating presence, and are executing the playbook that has made us successful in other markets around the world. If you look at markets like North America and EMEA, they also have very large and aging car parks, 480 million vehicles across EMEA and 286 million just in the U.S. So the chart on the right shows our average revenue per vehicle on the road.
In places like India, the combination of a higher growth market, our accelerating product coverage, continued channel build-out, give us the opportunity to drive that metric at double-digit rates over the next few years. But even in more mature markets like EMEA, we have opportunities to drive growth through expanding our channel coverage, adding products to our product lines, as well as by accelerating growth in regional submarkets such as the Middle East and Africa, where the car park is a similar size to India, at about 65 million vehicles. So in summary, we see opportunity in the replacement markets for continued growth, continued share gain across all of our geographies, both emerging and mature. All right, moving to Slide 45.
So regarding propulsion technologies, we believe we covered this in a great amount of depth at the Capital Markets Day back in 2022, so I won't go into too much detail here. But we did want to highlight that we do have content for hydrogen-powered vehicles as well, whether they're hydrogen combustion vehicles or fuel cell-driven electric vehicles. Our PT and Thermal Management Solutions are relevant. While these hydrogen applications are still nascent, we'll be there and ready when these markets are ready and become more meaningful. So the key point of this slide is that we believe we are a strong player in the solutions that are used across all propulsion platforms and expect to have a strong future, irrespective of the mix or the pace of adoption. All right, Slide 46.
Moving to the macro trends behind infrastructure that support our off-highway energy and resource businesses and markets, whether it's upstream, where raw materials are obtained, or downstream, where they're used to build out infrastructure, our products are there to make it happen. Hydraulic hoses and V-belts are used extensively in construction equipment. We provide specialty hoses and frac spreads and Thermal Management Solutions across the mobile and stationary equipment used in a number of industries. Overall, we expect these markets will grow mid- to- single- digits over the cycle, and we intend to continue to deliver new, differentiated products in these markets in support of our growth objectives. All right, speaking of innovation, as I mentioned, our focus on innovation is at the core of our market penetration strategies.
In 2016 and 2017, when we start, first started formulating our growth strategies, our vitality rates were in the low single-digit rates. Since then, we've established our Eco-Innovation process and have launched over 60 new product platforms across the portfolio. These efforts are driving our overall vitality up into the high teens, approaching our 20%+ targets in the mid-term. On the lower, lower right side of the chart, I've highlighted a, a couple of key growth areas for us. Chain- to-B elt, the chain to belt area is growing at 20% vitality or, or running at 20% vitality. Personal mobility is over 60%. Our AR business is at about 20%, and our wire braid hydraulic portfolio is running at 30%.
So I hope this reinforces that we're investing and driving focus around our key growth initiatives and making good progress towards our vitality goals. I've been pretty close to this in my time at Gates, and I'm quite proud of what our teams have been able to deliver, and Tom will talk about this a little bit more later as well. So this is an interesting story as well. So I think at the 2022 Capital Markets Day, we talked quite a bit about the new water pump technology we had developed, as well as the capabilities around electronics and software to make that happen. So since then, we've worked on taking this core technology and determining and finding out other areas where it might be applicable.
One of those areas is, has been around data center Thermal Management. You may have seen last week that we introduced a partnership with a company called CoolIT. They're a leader in providing liquid-cooled solutions into the data center space. They're bringing their system engineering and market expertise. We're bringing our understanding of Thermal Management and Thermal Management Solutions, and they're also quite interested in our in-region, for-region manufacturing footprint to help support their growth aspirations. We're also working on applications of this technology in the mobility space, as well as other industrial applications, where either robust pumping and/or having a small, powerful, efficient motor bring value to the application. Anyway, this is an exciting example of how we're leveraging innovation to expand the applications we serve.
All right, I think those of you that have been to past Capital Markets Days have also seen our GC20 crimper. The penetration of that solution is going quite well. In both of our market segments, we're using these digital tools to make it easier for our customers to use our products and to help our marketing, application engineering, and commercial teams be more productive when it comes to generating incremental demand. The first example here are GC20, which we've talked about quite a bit, is fully launched, and our field-deployed units in operation are continuing to grow at double-digit rates. This is a great platform that is delivering on its promise of digitizing the hose coupling crimp process, making it easier to assemble a high-quality product in the field with relatively inexperienced operators.
So eCrimp in the middle is an app that we upgraded and relaunched about a year ago, that's designed to provide a similar experience for users of legacy crimpers that aren't digitally enabled already. Users of the app can identify and select the right hose and coupling combination for their application, as well as the crimper they have in their shop, and the app will provide the settings and guide them through the process of making a high-quality crimp. So we've had over 10,000 unique users of eCrimp over the past six months, and over 13,000 mobile sessions just in February alone through these tools, so they're being used extensively. In addition to all the end-user benefits these solutions provide, they are also giving us greater visibility into how, when, and where our products are being used, and specifically, which products are being used.
All of this is leading to very interesting insights for our teams. So as an example, over the past 12 months, we've passed 36,000 insights to our commercial teams from data generated through the GC20 crimpers. Examples of actual insights might be a change in the frequency of crimping, which might say a customer is doing more or doing less or situations where a customer might be using a legacy product, where we have a new product that it could be substituted with. All very powerful insights that are helping our commercial teams drive demand. All right. Similarly, we have a set of digital tools targeted at our PT and mobility businesses as well, called Design Power. We recently upgraded and relaunched this platform as well, bringing in significant feature upgrades to make it easier for our customers to configure and design their own PT drives.
Our registered users of this software platform are up 4x from early 2023, and 85% of these users are new to Gates. So not in our CRM system, not customers that we were currently aware of. So a really powerful demand driver for the business. Last year, we also launched a mobile phone version of this tool that allows you to do drive designs on the phone in your pocket, using the computing power of that phone, features like LiDAR, the flash, and the camera, to help size drives in the field. And we're finding a lot of field use of that tool as well. These platforms also provide insights that are very valuable on what products are being used and what drives are being designed around the world.
Users of Design Power are designing roughly 20,000 drives a month globally, just per month. And through data gathered and analyzed from these activities, we've shared another 30,000 insights with our commercial teams over the past 12 months as well. In summary, we believe these innovative tools are first and foremost, helping our customers be more successful. But the insights we are generating for our teams are also an important part of how we expect to deliver on our growth initiatives going forward across both our Fluid Power and Power Transmission segments. Okay, with that, let me wrap up quickly with a summary of a few key points. First of all, we participate in a large $70 billion market consisting of attractive end markets and strong secular trends behind those end markets.
We have demonstrated our ability to outperform the base industrial market and peer group mean, averaging 4.8% CAGR since 2019. Our products play critical roles across a wide range of applications in the markets we serve, and the natural replacement cycles of our products support strong aftermarket opportunities. The innovation efforts across our product portfolio have driven our vitality up to high teens, well on our way to our 20%+ targets, and our digital tools are supporting our customers and providing valuable insights to our teams globally. With all of this, we're confident that we'll continue to execute our initiatives, penetrate our large markets, and grow over the midterm. So with that, thank you for your time. I'll now hand it over to Ralitza, who's going to share with you what we're doing in 80/20. Ralitza?
Thank you, Tom. Hello, everybody. My name is Ralitza Arefin, and I am the Vice President of Global Strategy and Marketing. There we go. So, today, I'm very excited to talk to you about the 80/20 complexity reduction program at Gates and how this enterprise initiative is delivering value. There are four key areas that I will address today. 80/20 principles are essential to how we run the business. Our activities are gaining momentum globally. 80/20 is anticipated to be a consistent margin driver as it matures. And finally, 80/20 drives growth through prioritization of initiatives and investments. On Slide 54, a quick reminder of our 80/20 methodology. In our 80/20 playbook, we follow four principles that are not only the pillars of the 80/20 program, but also permeate across all of our enterprise initiatives.
First, we segment to understand the critical few versus the many, or as I will refer to them later, the A's versus the B's. This segmentation allows us to treat each category differently. Next, we simplify and eliminate the waste or non-value-add activities, driving profitability expansion. Then, we allocate resources towards the critical few items. Finally, we prioritize investment towards the meaningful growth opportunities that are aligned with our Enterprise Initiatives. We work cross-functionally and place intentional focus across three work streams, including product simplification, customer support optimization, and value pricing. The last piece to our 80/20 playbook are the self-service analytics tools. For example, our Quick Quad Builder allows us to segment a region, a market, or a product line within seconds. This enables us to identify opportunities, monitor progress, and see outcomes of our efforts easily.
On Page 55, I have a little bit more insight into how we are approaching the segment principle of 80/20. We segment customers and products into 4 quads, shown on this page, and apply a common set of strategies to each quad. That allows us to maximize the value of each quad. In the red Quad number 1, we focus on optimizing outcomes with customers, like best-in-class service levels, logistics simplification, and operational efficiency. In Quads 2 and 3, we look to shift customers to quad 1 when possible, and if not possible, then we use value pricing models to recoup the incremental cost resulting from the operational inefficiencies associated with that business. Quad 4 is where most of the waste resides, and we evaluate each opportunity there to ensure that it is indeed what we need to do.
If we choose to do it, we get adequately compensated for the significant effort. This segmentation approach allows us to focus our resources on what drives the highest value and growth for the business. On Page 56, we have outlined our 80/20 journey. We kicked off in early 2017 with internal priorities, leveraging Eco-Innovation and Consolidating Product Constructions. In 2021, we scaled up 80/20 externally with our pilot in our North America replacement business. In 2023, we broadened the scope to include more regions and businesses in North America, EMEA, and Asia. We also deployed tools and dashboards to embed the 80/20 principles into our daily culture of continuous improvement and across our enterprise initiatives. We are targeting to reach program maturity next year with organization-wide adoption and certified practitioners. On Page 27.
57, you will see a few illustrations highlighting key outcomes of the North American replacement pilot. In our product work stream, we eliminated waste from non-productive items. Upon our segmentation of the portfolio, we identified redundant B items that were significantly more costly to produce and maintain in inventory. We redirected sales to A items where possible, optimizing manufacturing and reducing working capital. In our Customer Work Stream, we simplified logistics and handling across the supply chain by implementing a minimum order value for non-emergency orders. This greatly reduced the number of small orders while improving our service levels through the distribution centers. And finally, we are supporting growth by applying value pricing through our differentiated quoting models. By following the segment principle of 80/20, we are quoting in line with the operational efforts required for A's versus B's.
Moving on to Page 58, where I have a few illustrations with actual specific results from our North America Replacement Pilot. As we eliminated non-productive items, our sales per active SKU increased by 8%, further leading to improved service levels. As we implemented a minimum order value for non-emergency orders, our average order size increased by 40%, leading to freight savings and operational efficiencies. And finally, as we removed slow-moving inventory B items from the warehouse, we cleared 16% of our unique stocking locations, making room for faster-moving, higher-velocity Quad 1 items. Additionally, this pilot strengthened our internal capabilities and set the stage for a company-wide disciplined process, driving tangible results across the business. Moving to Slide 59, here is how 80/20 enables significant runway for growth through two lenses: internal and external.
Internally, through our Eco-Innovation process, we focus on back-end innovations, like consolidating product constructions, streamlining materials, and simplifying processes. Tom Moss will cover this in more detail later in the presentation. In addition, we leverage standardization, systems, and tools to reduce complexity, which enables us to be more efficient and agile. Externally, we focus on customer-facing front-end complexity reduction initiatives that optimize our product offering, enhance the customer experience with digital tools, and leverage value pricing to get compensated for the work associated with long-tail products. We use the 80/20 framework to guide our resource investment decisions and support customer and product growth initiatives. The benefits of our 80/20 program include service level improvements resulting from planning and manufacturing fewer products and constructions, margin expansion resulting from manufacturing optimization and value pricing, and working capital reduction due to less inventory carried.
Combined, these outcomes allow the business to realize improved profitability while redirecting resources to focus on the growth opportunities that Tom Pitstick outlined earlier. 80/20 is a disciplined and data-driven approach that improves efficiency and enables significant runway for growth. In summary, we have made significant progress deploying 80/20. The key takeaways that I will leave you with today are: 80/20 principles are essential to how we run the business; our activities are gaining momentum globally; 80/20 is anticipated to be a consistent margin driver as it matures; and finally, we use 80/20 to drive growth across the enterprise. Thank you for your time today. We will now take a 10-minute break, and we'll come back.
Okay, why don't we get started? We're gonna go into the next section with Tom Moss, who runs our Innovation Effort at Gates, and I'm gonna turn it over to Tom.
Okay. Thanks, Richard. My name is Tom Moss. Do I have any slides? Back up. It didn't work. There we go. All right, now it's got it. Okay, so my name is Tom Moss. I'm the Senior Vice President of Innovation for Gates. For my presentation today, I'll be discussing several key areas. The first of these is the Eco-Innovation program. This constitutes three core expertise areas that we that enable us to be efficient and effective in our strategic initiatives. The second area entails the benefits to enhance our operational efficiency and to strengthen our supply chain through material science development and understanding. The third focus area enables new generations of engineered materials and polymers that continue to advance our product directions. Finally, we have a full funnel of new product developments in both our PT and FP segments.
These will continue to drive vitality and growth for the coming years. Let me first reiterate the importance of the Gates Eco-Innovation system to you. We consider these to be three core capabilities that we have developed to work in concert with each other. They're foundational to us. As individual strengths, these are expected, and they're beneficial. When they work as a team, we realize significantly more and faster advantages. The first of these is our Materials Science and Engineering teams. It's at the top of the circle for a reason. It's something we do very well. The innovation that comes through our Materials Science Investments drives our product development goals through enabling new polymers and adding benefits to existing polymers. It drives our sustainability and stewardship goals by reducing our environmental impact on our customers and our neighbors.
Finally, it works to ensure the consistent supply of products to our customers through the evolution of global changes. The sustainability to our customers in each of our business segments is a tremendous advantage. The second area is process engineering. These groups work with and within the factories to ensure that we drive improvements and engineering of our manufacturing operations, working with them to make them better, less expensive, and faster. We realize benefits and increase productivity of operation and the lowest possible conversion costs. The final area within Eco-Innovation is product engineering. These are the groups that stitch together the innovations from materials science and from process engineering. They use these innovations to position our products ahead of market trends, all while capitalizing on the developments to create a line of highly differentiated products. There are several key benefits of this approach to Eco-Innovation.
One is to enable revenue growth through new product introductions and enhancements, bringing improved product functionality to current customers and drawing in new applications and new customers. Our investments in Eco-Innovation make improvements to our manufacturing efficiency using novel techniques. For example, deep learning AI models and simulation-based process optimizations. Finally, we realize flexibility and resiliency of our material supply chains. All right. In exploring how Eco-Innovation ultimately results in revenue growth, we can look at an example that is aligned to one of our four strategic initiatives. I wanna highlight the application of electric vehicle thermal management. With the continued growth of EV vehicles, we have examined how we can provide solutions to the problem of temperature management of the battery and of the passenger space. Let's walk through what this means.
The first step starts with recognizing the market and determining the product and product needs for the applications. Our product line management groups define the application to target. We then work to identify opportunities in which we will prioritize and can participate for the highest value to the company. For example, we can look at electric water pumps for application to commercial and passenger BEVs, battery electric vehicles. As we've defined the goals, the development begins using our internal expertise. In this example, we utilize significant numerical and simulation techniques, such as computational fluid dynamics, finite element analysis, and magnetic flux analysis. As a result of these comprehensive approaches, we deliver solutions to meet the market needs. In this example, we redesigned and built upon an initial technology used for mechanical water pumps, and we commercialized this as the E-Water Pump family.
Whenever we can build on our existing technologies, it speeds the time to market while controlling the investment necessary to get to market. That's a great success, but what are the benefits? First, we have a highly modular and scalable set of components that are used to build the water pump. Very significantly, and because these technologies share a common lineage, a portion of the components are shared with other commercialized water pumps, minimizing the number of part SKUs to build and support the product families. Our product development brings competitive advantages and stands out to the customer with improvements such as leak-proofing and cooling density of the product. Lastly, this allows for us to easily scale up to novel applications, some of which Tom covered within his presentation.
Another example that we can examine on how Eco-Innovation continues to enable our revenue growth is through our advancements in Materials Science. One of our strategic directions is to continue to grow our automotive replacement business, which has been very important to us for many years now. We've developed a number of specialized and engineered polymers for the application requirements. The new polymers are part of the next generation of product technology families. Looking beyond just the materials science of the application requirements, we're also realizing added benefit of consolidation of our product families and build specifications, and a reduced number of SKUs, driving the 80/20 approach. The technologies we develop are applicable to an increased number of existing automotive vehicles on the road, and that enables market growth using common products.
Further, within the AR space, the strength of the materials has extended our portfolio of thermal management hose products, which we manufacture from rubber compounds, thermoplastic materials, and co-extruded material systems. Our Material Science Technology is allowing us to adapt advanced polymers to new applications and build constructions. We can develop the next generation of belts for performance and for sustainability and the environment, while protecting the technology through IP strategies. Finally, as we consider our history of development, we look for opportunities to revitalize our legacy technology solutions into new applications. For example, the growth of belt-driven mobility vehicles has been built on automotive technology and applications.
As Ralitza has previously spoken in this presentation about the importance of the 80/20 approach to our product families for operational and for capital efficiencies, one of the ways we can drive to enable the 80/20 approach is through the thoughtful design of our products. An example of this is within our wire braid hydraulic hose families. We market and sell these products as the MXT and MXG product lines. The impact from implementing the new technologies is that we reduce the number of unique constructions by more than half, benefiting our customers because they need to maintain fewer SKUs across their application ranges. We reduce the number of individual build specs by 60%, and we transform 80% of our volume into 80% of our SKUs.
This simplification has the multiplier effect that results from increasing operational efficiencies due to reduced manufacturing changeovers and equipment setups within the factory. Our wire braid hydraulic product vitality is now greater than 30%, with the added customer and sustainability benefits of products that are lighter weight and more flexible, all with a significant reduction in the materials used for their construction. This is all achieved while reusing the existing installed equipment base. Now, let's examine how the Eco-Innovation system helps to build business resiliency for one of the core Gates product lines. V-belts have been a part of the Gates product family since the start of the company in the early 1900s... An easy question is: how much innovation can be developed to build on a technology that's now over 100 years old?
We approach this using the same methods as we've been describing within the Eco-Innovation system. First, our Materials Science. We've moved to engineered polymer families that are more sustainable and have a reduced environmental impact. We've ensured that all material components are available in all regions of the world. This reduces the requirement to ship polymers and other compound components across regions. Finally, we've selected materials that can function at higher and lower temperatures than the previous polymers. These new material systems open new markets. By increasing the temperature range of the product, we can now move into application spaces like glass manufacturing and high-power agricultural applications, where the belt will experience a temperature above which the previous legacy polymers would have been damaged.
Our process engineering group has enabled the ability to reuse our fixed assets in factories, so the next generation of V-belts does not require capital investments. This process technology we've built, whether it's materials or products, is protected by patents. Finally, the product engineering group enables an increase in the performance of our belts by a factor of 10. Factor of 10 compared to legacy products. By designing the product for a broad range of applications with an increased temperature range, we can consolidate 3 of our legacy product families into a single product, continuing the drive of the 80/20 approach. Finally, we've evolved an approach to product flexibility, where we can engineer the balance between performance and price within a single product family and without any significant redesigns. Let's talk a bit more about business resiliency.
The last several years, we've seen a number of changes in our global supply chains for both vendors and logistics. We've prioritized the need to be agile and to increase the flexibility to respond to changes while maintaining a continuity of supply. Several initiatives have resulted from this approach. One is to broaden the number of qualified suppliers of our raw materials. Our focus has been in-region, for-region suppliers to reduce working capital and shipping requirements. Second is to reengineer our materials wherever possible to maintain equivalence when the business needs require changes in supply. This reengineering of materials ensures an optimized approach based on availability, cost, and quality of suppliers. Finally, we've used our material science to develop strategies to substitute raw materials into our product families. These changes drive a cost optimization strategy while maintaining the product performance.
An outcome of this strategy, this overall approach, we have a supply chain that is broader and has the ability to respond to future changes as a part of our culture. In effect, we learned how to make lemonade out of lemons. Page 69. Within the product design realm, the Eco-Innovation approach, we apply across a broad range of applications, and these are intended to support the strategic growth opportunities that Tom highlighted within his presentation. The first is C2B, converting chain applications to belt drive systems. We've approached the product family around a broad, tiered range of application use, offering solutions into the mass market and moving into the premium and the ultra-performance markets. Enabling C2B conversions remains a significant strategic initiative. One of the core technologies that we continue to actively resource is novel approaches to sprockets.
They are a parallel utilization of sprocket innovation within the mobility and the industrial application space. Part of the conversion to C2B is reducing the drive system to cost proximity with chain applications, to allow the full complement of advantages of belt drives to be realized for customers, such as oil-free maintenance, lower weight, and higher drive efficiencies. The evolution to belt drive systems offers opportunities for new materials and processes that are not afforded to chains. Our new materials, processes, and product technologies are a part of opening more markets for belt conversion by reducing the barrier to entry. The E-Water Pump is an excellent example of how we look to expand previous products and legacy applications to new markets. The ability to build off existing technology platforms and optimize them for new applications is significant to us from a timing perspective.
Battery electric vehicles are one application example with long-term growth projections. Finally, we provided industry leadership in carbon-reinforced belts, and we continue to look for increased opportunities for more applications into new markets. We've invested in internal technology and manufacturing of carbon cords, and those investments continue to be beneficial to us and our ability to accelerate growth. Considering the five-year vitality index back in 2017, we're in the low- single- digits as a company. We're now in the high teens at the end of 2023. With plans to continue to revitalize the full portfolio of product families, we anticipate we'll be able to achieve the mid-term vitality target of greater than 20% with the active pipeline of developments to realize the goal.
We continue to use patent protection on our technologies extensively to ensure that innovations that we bring to market are exclusive to Gates and not adopted by competitors. Okay, a few key takeaways I'd like you to leave this presentation with. The first is the importance of Eco-Innovation to us. The combination of material science, process engineering, and product engineering creates a relationship to bring the best products at the best price for the best applications. It allows us to be agile in development and revolutionary in applications. Our approaches to operational efficiency and the resilience of our supply chain have enabled us through our investments in Material Science and Engineering. We continue to see the benefits of the investments in materials, and we continue to push the boundaries of what is possible. Our next generation of materials is driving our next generation of new product introductions.
We have more options for engineered polymer systems available now in more locations of the world because of our intentional investments and resourcing. All these points have driven a funnel for our future new product innovations that will continue to drive the vitality of the company and support the growth moving into the next 100 years. Thank you. I'll now turn this over to Brooks to discuss our operational initiatives.
Hey, good afternoon, everyone. It's great to see everyone in person. It's been an eventful couple of years since our last Investor Day presentation. Today I'm gonna communicate an attractive operational and financial improvement story that can be a differentiator for our equity valuation over the next 2-3 years. Let's kick it off with a review of our key messages around operational initiatives. First, we have multiple levers that could boost margin performance over the next 24-36 months. Within that, material cost reduction represents the biggest opportunity for us, with operational excellence initiatives and footprint optimization programs also supporting the margin enhancement potential. As Ivo went over with our enterprise initiatives, the key message here is we expect to improve gross margins to approximately 42% by 2026.
As I mentioned, material cost reduction represents our most significant area to drive margin improvement. In addition, we are intently focused on operational excellence, which drives productivity savings. Our manufacturing activities include a high level of value-add processes. By focusing on continuous improvement in these processes, we have the opportunity to drive efficiencies in labor and overhead in our factories. As we move through the next couple of years, we anticipate footprint optimization projects will contribute more to savings as well as increased capacity utilization. Turning now to page 74, we share more thoughts on our material cost reduction opportunities. We lump these opportunities into three buckets: strategic sourcing, value add, value engineering, or VAVE, and Material Science Innovation. In strategic sourcing, supplier development and reverse auctions are two areas that are already delivering savings for us.
In Value Add, Value Engineering, through insourcing some of our key components, we have been able to drive both cost and inventory reduction. In material science innovation, we are developing alternative materials, not only for lower cost, but to strengthen our supply chain and protect us from the kind of disruptions we saw in 2022. In aggregate, we believe these but three buckets can contribute 175-225 basis points of Adjusted EBITDA margin through 2026. On page 75, we outline our key priorities behind driving operational excellence throughout the organization. As we have dealt with freight and material disruptions in our supply chain going back to 2022, this has impacted our ability to drive core productivity in our facilities.
We feel we now have a nice runway in the midterm to accelerate our efforts to make up for those headwinds. We are focused on three areas: production efficiency, plant productivity, and supply chain optimization. Production efficiency represents the cost of producing our products. So things like reducing scrap, increasing freight efficiencies, as well as, decreasing overhead items like utilities and energy costs are key here. We have had several good projects on energy savings, like lighting and alternative energy, that have helped offset some of the inflationary pressures we have seen over the past few years. Plant productivity is a great opportunity for us in the post-COVID era. Labor availability and the supply chain have both stabilized, and we expect to get back to a normal cadence on driving core productivity.
Lastly, supply chain optimization reflects our efforts to enhance our distribution efficiencies and labor management. In Aggregate, we believe this is worth 50 basis points of adjusted EBITDA margin improvement through 2026. Importantly, our target is net of estimated inflation of 75-100 basis points. On Page 76, let's address footprint optimization. Think of this as an initiative pairing rooftop consolidation opportunities and improving capacity utilization within our existing base of operations. Consistent with our prior communication, we strive to maximize our in-region, for-region production. One important learning over the past couple of years is how this can help us alleviate some of the supply chain disruptions we have dealt with. In addition, we have opportunities to enhance our labor flexibility, which we believe will enable us to drive higher incremental margins during periods of growth.
While this initiative is expected to drive savings over the mid-term, it is more back-end weighted as we work through the projects and the benefits are realized. So, the key takeaways here, as I've outlined earlier, we have multiple internal enterprise organizational initiatives that are intended to drive margin improvement through 2026. Most importantly, as these are internal, we do not really need to see a significant volume increase to drive most of these savings. Further, these savings should result in gross margin expansion and help drive us towards our 42%+ gross margin goal. So now we'll move into the financial update, and as I'm the Chief Financial Officer, I will also give that update here today. So starting on Page 79 on the key messages.
First, we believe we have strong growth opportunities fueled by our exposure to secular trends and our innovation capabilities. Secondly, our margin expansion opportunity is largely within our span of control. Third, higher margins and a stronger balance sheet should lead to higher equity value. And fourth, our strengthening balance sheet should enhance our capital allocation optionality in the coming years. So let me recap 2023 real quick. It transpired largely as we thought it would, with an improved operating environment but lower volumes. The key takeaway is we were able to increase our gross margins and adjusted EBITDA margins even as we were dealing with a softer demand environment. In addition, we returned to generating over 100% cash conversion and in fact, exceeded our target by delivering approximately 110% free cash conversion to adjusted net income in 2023.
From a capital allocation perspective, we reduced our net leverage ratio by 0.5 turns and returned $250 million to shareholders via share repurchases. On Page 81, we outline our 2026 margin target and how we anticipate getting there. The key message here is our internal enterprise initiatives are expected to deliver most of the improvement. Our operating leverage contribution assumes that our core growth approximates mid-single- digits in 2025 and 2026. Of note, our margin forecast includes offsetting labor and overhead inflation with core productivity, as well as incremental investments in SG&A and R&D. Page 82 demonstrates our recent track record for free cash flow. We generated almost the same free cash flow conversion over the last three years as the industrial peer group we follow. In 2023, we nicely outperformed the peer set.
This business generates free cash flow year in and year out. On the right side of the page, you can see our free cash flow targets and key assumptions through 2026. Looking at the assumptions, you can see we are planning to reduce our working capital intensity. We exited 2023 with working capital approximating 27% of our revenues. We will be able to stay within our normal capital spending targets even as we execute our enterprise initiatives. Lastly, we do not expect significant incremental cash restructuring. We do, we do not expect to spend a significant incremental cash on restructuring. On Page 83, let's review our balance sheet, which is strong and improving. Since the end of 2020, we have reduced our net leverage ratio by approximately two turns.
On the right, you can see our capital structure as of the end of the year of 2023. At the end of February, we paid down $100 million of our March 2027 term loan, meeting the commitment we outlined on our fourth quarter 2023 earnings call to pay down gross debt. Also, as you may know, we recently received a credit ratings upgrade from S&P. The cash-generating quality of this business is expected to allow us to reduce leverage by approximately half-turn per year, all else equal. On the next page, here is a recent history of our capital allocation through the end of last year. We have taken a balanced approach, spending roughly the same on debt paydown and share repurchases. Shifting to Page 85, we remain focused on reducing our net leverage ratio to less than two by 2026.
The mix of margin improvement and converting those incremental dollars to cash are expected to drive the progress. We will remain disciplined on capital allocation, with debt reduction and share repurchases representing the best alternatives in the near- term. Longer- term, we believe acquisitions are a potential use of cash since we participate in large, fragmented end markets. On the next page, we show how our stock liquidity has significantly increased over the past year. Blackstone's ownership has declined by more than half since March of 2023, and our trading volume, as illustrated by the gray columns, has grown measurably, a distinct positive for the investment community. The dotted line depicts the trend in our 30-day trading volume. On Page 87, we provide a brief update on our 2024 guidance.
As Ivo mentioned earlier, we are reiterating our full- year 2024 guidance, which was originally provided on February 8th . However, we are updating our Q1 expectations. Relative to guidance provided on February 8th, we anticipate Q1 total revenues to be in the range of $860 million-$875 million. The midpoint is approximately in line with our current consensus. Within that, our core growth is better than we initially thought and expect it to decline approximately 3% year-over-year at the midpoint, versus our initial guidance of a 5% decrease year-over-year. The improvement, however, is largely being offset by foreign exchange headwinds compared to our original forecast. We are raising our expected adjusted EBITDA margin range for the first quarter to 21%-21.5%.
The updated estimate is 100-150 basis points higher than the midpoint of our original Q1 2024 adjusted EBITDA margin guidance. On Page 88, we outline our walk to 2026 adjusted earnings per share. Core revenue growth is estimated to add $0.50 of adjusted earnings per share at the midpoint. Approximately $0.70 is forecasted to come from a combination of enterprise initiatives and capital deployment at the midpoints. The contributions are partially offset by $0.45 per share of headwind from SG&A investments and a higher effective tax rate. Overall, we expect to achieve solidly over $2 of earnings per share by 2026 at the midpoint. On Page 88, we provide a summary of our 2026 targets. We have not assumed any acquisitions on this forecast and no change in interest rates relative to current levels.
So lastly, to summarize, we believe we are well positioned to drive meaningful earnings growth and lower financial leverage over the next 2-3 years. Further, most of this improvement is internal and within our span of control. With that, I'll turn it back over to Ivo for some closing comments.
All right. Thank you, Brooks, and I'll take us home here. You have heard lots of details this afternoon on our strategy, the key priorities, and our midterm objectives to drive further improvements to our enterprise globally. We are a seasoned enterprise with leading market position in an attractive markets, where we deliver highly engineered, mission-critical components in demanding applications. We have a number of secular tailwinds that enable sustainable above-market growth, where our innovation is key enabler of our growth. We believe that we have positioned this business to deliver robust margin expansion through our key enterprise initiatives, most of which are within our control. Finally, a track record of performance aligns as well with our premium industrial peers, while we are creating optionality to drive incremental shareholder returns over the mid-term and the long- term.
Thank you for your time today and attention, and we will be opening it up to a Q&A. Rich?
Okay, so Brooks and Tom are gonna join Ivo up on stage here and do a Q&A session. Myself and Lily LaHart, who's in the back over here, we have the microphone, so we'll be toggling. We have about 30 minutes or so, so open forum, and we'll try to get to as many of you as possible. So just give us a moment.
Thanks. So one short-term and one longer-term question. So obviously, good news on the 1Q update, Brooks. But, you know, March still some ways to go. I mean, March is a very important month for industrial companies. I'm just wondering, you know. You know, are you seeing a significant improvement in order rates to give you the confidence to raise your guidance, you know, at this part of the month?
Yeah. So I think we've seen better core growth, as I said. I think some of the stickiness of our enterprise initiatives is coming in better than we thought, which is helping drive gross margin. And I think, you know, the continued work we're doing around 80/20 and things like that is all, you know, kind of stacking up. You know, as we came off of 2023, you know, really strong margin performance in Q4. You know, typically, there's a little bit of a cost headwind in Q1. At the beginning of the year, we've been able to offset that and do even better.
You know, all in all, I'd say what we're seeing is the stickiness of our enterprise initiatives are really coming through, and we're able to continue to build on that in driving our margin expansion, which is really the story that we've told here today, right?
And then on the margin bridge to 2026, you indicated that a lot of that is volume independent. So is it fair to say that the gross margin components are locked and loaded based on the initiatives in place, and then the SG&A productivity might be, you know, the area of risk?
Yeah. Well, I would say that, you know, the reason we give ranges is because, you know, more volume can typically help you with some of your enterprise initiatives around productivity and things like that. And so, you know, at the kind of lower end is- would probably be more with a lower volume scenario versus a higher volume scenario, right? That's why you give ranges for both sales and, and EBITDA margins. I mean, EBITDA margins, yeah. But I think the point is that the, the gross margin improvement that we see in front of us, you know, is almost entirely within our span of control. And so it's really about us executing over the next two or three years to drive that margin expansion. So I hope that answered your question, Nigel. Yep, good.
Thank you. Good afternoon. Really interesting margin targets. I'm wondering, based on how quickly we've seen the returns from 80/20 in North America, are you thinking about the cadence as back half 2024, 2025, more so than 2026? It feels like based on what you described, you know, these could be actually front burner type opportunities. Can you just comment on that, please?
Yeah. So, look, you know, we feel that we have a long run rate on 80/20. I mean, we don't necessarily think about it, that it's 24/25 or 25/26. We really believe that this is, you know, almost a decade that we can go in and continue to drive those improvements, and it, it's really a way of how we operate this business. So there are some quick hits, and I think that we are starting to see some of those quick hits to show up in our P&L. But you know, we are very optimistic about being able to have a long-term opportunity to drive that productivity through our enterprise.
Okay. In terms of the capital deployment, part of the opportunity, you know, as we get closer to 26, can you just spend a minute on what type of business would fit within the portfolio? How similar is it to the type of acquisitions we've seen you folks do historically?
Yeah. So look, we are participating in a very large, highly fragmented market. We will be very disciplined. We are going to stay focused on ensuring that firstly, we will deliver the balance sheet. We think that that's very, very important. We have committed that to our shareholders, and, you know, we are well on our way to be able to, to do that. The opportunities in M&A, we are looking for companies, and, you know, there are many businesses out there. You know, because we are not conducting M&A doesn't mean that we are not active in pipeline development and looking at different opportunities. We are always looking for companies that are similar to Gates. So high, high percentage of our revenue coming from replacement channels, need to have a reoccurring revenue theme, products that are mission-critical, highly engineered.
They're essential in the function that they support. Those are businesses that we like, and we believe that those are businesses that we will spend our capital in the future of acquiring.
Hey, Mike Halloran with Baird. Hi, everyone. So two questions here. First, just on the growth profile over the next few years. You know, obviously, our guidance is set this year, you know, 2025, 2026, the growth rate is higher, right? Probably closer to 5%-6%. Should we be anchoring more on the 2x global IP growth on an annualized basis, kind of that 5%-6% in a normal environment, more than the 4%-5%? I mean, sorry, 3%-5%, that's the guidance itself. In other words, like, if you take the components of what you're talking to-
IP plus a little bit of price, plus the seculars, plus the internal stuff, and it seems to be towards the high end, if above, if you get a more normal IP environment.
Yeah, Mike, you know, we always target a range.
Mm-hmm.
Obviously, it's not a straight line up ever. You know, there's choppiness in everything that you do, but we certainly believe that we have plenty of opportunities. We have lots of secular drivers that are very, very positive, from, you know, electrification to the new opportunities that we, you know, be highlighting in the data centers to industrial chain to belt, mobility chain to belt. So we believe that, you know, we are very well positioned to continue to deliver, you know, nicely above the Industrial Production Index. And, obviously, you know, we'll target driving growth as much as, as it's plausible and it's sustainable for our, for our enterprise. So, we're very, you know, we're very positive and constructive on the, on the future.
Okay, and the second one on the innovation side, just a couple. One, how do you prioritize the capital dollars internally? What's the process? And then secondarily, could you just give some context to how the speed to market has changed over the implementation period of this program?
Yeah. So priorities today, you know, again, I will kind of use the 80/20, you know, moniker in here. That's been critical in us setting the priorities, where we want to invest, where are the biggest opportunities for us, where we can drive the biggest value. And, you know, that's how we are delivering focus on innovation and frankly, in revitalization of our product portfolio. You know, we've seen that as we are putting more new products into the market share, into the marketplace, our customers are becoming much more comfortable with us to be able to do that. Again, remember, you know, these products are hard to innovate, they are hard to revitalize. They are certified products. They are mission critical. People want to make sure that they are not taking any risk.
But we have done a really good job over the last 4 or 5 years in developing, particularly in the hydraulic space, which is so uber, you know, sensitive to certifications. And we have had a very good track record of developing and bringing those innovations to the marketplace. So companies are now starting to get more comfortable with us, that, you know, they can, they can take a chance, and they know that we will do the right thing. They know that we have done all the work that's required to bring a new product to the marketplace. And, and, you know, they like the innovations because there are significant benefits from environmental footprint reduction benefits to better efficiency, lower cost of operations, lower total or overall ownership. So I think that that bodes well for us to be able to continue to accelerate the pace of adoption.
Hi, quick question. This 2025 and 2026, the re-acceleration of organic sales, if that was not to materialize, what are some of the incremental levers you could pull? Is it the SG&A and R&D investments can be pulled back a little bit? Is there an incremental plan around, optimization of the factories? Just trying to get a sense, just in case the volumes don't come back to where you're guiding, what are the levers to pull? Thank you.
Yeah, look, I think, you know, we're always planning for, you know, doing different scenario planning for, you know, different things that may happen, right? I don't know that we did COVID necessarily, but now we have that in our arsenal, so in case it ever happens again. But, you know, when we look at the different scenarios, those things that you just mentioned, whether it's additional, you know, restructuring opportunities, whether it's additional SG&A reduction opportunities, different things like that, those are always part of the scenario planning that we do, all those levers that we could pull.
So, I would say, you know, the answer to your question is yes, because we do, you know, multiple planning scenarios around, you know, lower volume expectations, medium-term volume expectations, and quite frankly, higher-term volume expectations, which can in and of itself be a little bit tougher to plan for as you're, you know, trying to plan materials and production and capacity and things like that. So we have to do all three of those. And in all three of those, we have different levers we can pull to make sure we achieve our targets.
Okay.
Yes, it's Deane Dray with RBC. I've got a question for Tom and a question for Ivo. So for Tom, I really like that example you gave on the chain to belt. It was really compelling in terms of the application. It wasn't this the farm silo example that you used to use. This one was real tangible. When you talk about the replacement of the chain, which was every three months, they had.. How do you go about value-based pricing? Maybe just give us some insight on that. And do you get full value for that, or is there any incentive to kind of fuel the acceptance by giving a more attractive price just to kinda accelerate the adoption? So that's your question while you're mulling that one over.
For Ivo, just to follow up on the M&A question, just to ask a really blunt question, your expertise and your market share is all built around market leading, number one share in belts and hoses. How much, and you gave a quick recitation of your criteria, are you really looking at other products outside of that domain? And maybe what percent of your funnel is that outside of belts and hoses? So-
Those are the two questions. Thanks. Ivo wants to answer first.
Look, Deane, I think that you're right. I mean, we, you know, we're number 1, number 2, number 3 around the world on everything that we do, and we like that position. We earned the right to be in that position, and we do a lots of work to protect our position. So but we also feel like we have opportunities to consolidate that market. So there are opportunities to scale up and, you know, and be much bigger and maybe have a broader product portfolio in the core segments that we operate today.
I would say that it's probably more likely first step before we go out and we start, you know, in trying to take on the journey of putting a third or fourth leg into our portfolio.
All right. I think, yeah, for the value pricing, so yes, we try to, but I think as we get into these applications, they're so diverse. There's so many of them. As we start to learn more about the customer's needs and pain points, I think we've become smarter about maybe value pricing for future ones. But at the end of the day, a lot of our customers can just go to a distributor and get our products as well. So there's, in some ways, they kind of know what the price points are. But you know, we had broader value around just the products themselves through the design tools, through some of the, you know, energy efficiency calculators we've provided to customers.
You know, the story on sustainability I went through, we're starting to present that more and more to customers as sort of add-on value that they can receive from our solutions in the field. But to answer your original question, yes, we attempt to value price, but we don't always fully understand all the value until we really get into the applications.
Good afternoon, Jeff Hammond with KeyBanc. Just a couple on your OpEx and sourcing. First, you know, I think you had a buffer for inflation, and I'm just wondering if you think you can push price enough to cover inflation and maybe keep more of that OpEx savings. Then second on kind of the sourcing and alternative materials, if we look back at the high-performance polymer issue, if we were to have that, say, a year from now, do you think the actions you've taken kind of prevent you from having the same, you know, situation you had last time? Thanks.
Yeah. I'll, I'll take the OpEx, and I'll let Ivo answer the other one. Look, you know, we've always been, I think, pretty, pretty transparent in terms of our pricing, you know, methodology. You know, we, we want to make sure that we can always offset material cost inflation, and we want to make sure we can always offset freight. You know, we added utilities in there because, as you saw, some of the steep ramp in some of the utility costs. But we also have a core philosophy around, you know, being able to drive productivity year in and year out to help, not just offset inflation, but to drive margin improvement. And that's just really kind of a core philosophy for the company.
But we're going to continue to drive pricing, both in terms of offsetting inflationary pressures and in terms of value pricing around what we do with 80/20. So we think pricing is going to be a lever, you know, that's always going to be additive for us, right, as we move forward in the business. I mean, we, you know, we make a tremendous number of SKUs. You know, our products are mission-critical, right? We were able to really generate a significant amount of price when we were going through all these inflationary pressures, and we were at EBITDA margin neutral numbers on price. And so price will always be a big part of what drives the margins and drives the business in this company. So I hope that answered that part of your question.
And Jeff, maybe on the polymers, right? So it's been, it's been a really tough five years. We have spoken, highlighting the issues, post, Russia invading Ukraine because, that has taken a very substantial amount of the, raw material processing capability offline globally. And so, you know, we had to scramble and, and kind of figure our way around that, and I, I would say that we've done a fantastic job. We have been impacted maybe three or four quarters, but we've really resolved it nicely. But I, I wouldn't say that that's where it started.
You know, it's been, you know, something that we have been dealing with since the onset of the pandemic, where a significant amount of the additives and the chemicals that we use to process polymers or engineer more customized solutions have been either sequestered through the Defense Production Act that was enacted on the onset of the pandemic. But we managed it really well. The big issue for us was when the large capacity came offline in Ukraine and Russia. That's when those issues came out. But again, we've been able to deploy our scientists and material process engineers, and we've done a really good job. And guess what?
As Tom said, you know, we're making lemonade out of lemons because that gave us a really nice jump start to be able to start driving material efficiency improvements and, you know, get up one of our key initiatives moving forward out of the enterprise initiatives.
Andy Kaplowitz with Citigroup. Maybe just a little bit more on the markets. Like, I think, Tom, you mentioned personal mobility returning to double-digit growth in 2025. Could you give us more color into the conviction around that? And then, is any of the better. Maybe this is for Brooks. Any of the better expected organic growth in Q1 more from inventory destocking sort of ending in, like, core markets like diversified industrials or something else going on?
Let me start with the mobility and market in particular. I mentioned in my prepared remarks, the $300 million pipeline and the roughly $100 million of program wins last year. Those numbers are both up versus prior year and up versus prior year.
So there continues to be momentum in how we're building out the market opportunity. You know, the other market segments around electrification of bikes and motorcycles and scooters continue to grow at much higher rates than the market average that I mentioned. So you kinda, you combine that with our current leadership position in many of these markets as well, and it just the momentum is coming, and we're confident in our ability to get back to that double-digit growth. Yeah, there was a pause this year in double-digit growth, given the destocking in the channel that we've talked about. But yeah, a lot of confidence in the mobility market coming back.
Yeah, and I would say on Q1, that just a little bit more positive on the replacement side of the business, right? I think we kinda had pretty good visibility to what's going on in OEM and first fit, but a little bit more positive on the replacement side, which is really what's driving the uptick in core growth, you know, for our guidance.
I just want to ask Ivo, like, you put up the comps up there, you know, which is helpful to see the valuation discount. You know, one obvious difference, obviously, is that you guys are more focused on automotive. So, like, when you think about Deane's question around capital allocation, do you channel more into industrial going forward, you know? And like, how does the company think about exposure now, you know, 5, 6 years after the IPO?
Yeah, I think it's a great question, Andy. First of all, let me start with, we love our automotive business. It's a very good business, it's very profitable. We are top dog in, you know, a really large market space. We generate good profit, we generate tremendous amount of free cash flow out of that, so we love that business. We play a role today, tomorrow, and 100 years from now, we will play a role. So business that, you know, is really good for our shareholders and our company. That being said, we do think that the industrial complex is much, much larger. We have a tremendous amount of opportunity, and, you know, it'd be very, you know, pragmatic to think that when we go after acquisitions, they're gonna be much more focused on industrial end markets than than not.
Thanks. Julian Mitchell at Barclays. Maybe a first question around the 80/20 element. You know, you talked about ITW perhaps is viewed as kind of the the dean of of 80/20 promulgation in industrials. But one thing they've done is a lot of pruning, and so I guess, you know, how do we think about that pruning aspect for Gates? You know, is it relevant when you're thinking about the SKU count or some kind of revenue headwind it could entail?
Yeah, that's a great question, Julian. And I would, you know, I would start with, while we didn't call it 80/20, we started to embrace that process some time back. And, you know, if you, again, look back from our IPO to today, we have pruned, you know, about 500 basis points of revenue from our portfolio, and we deployed what we call the selective participation in automotive OEM market space. And that was our way of, you know, pruning some of that revenue that we didn't quite feel that was generating appropriate level of returns. So I think that we have very much, you know, we've very much begun to adapt that process early on, we just didn't call it formally that.
You know, we just believe that there's, you know, there's lots of brand attachment to what ITW has done with 80/20, and it's a good process, and we formalized how we go after it, rather than going more ad hoc, do it more formally. You know, that's kind of how, you know, how we thought about just taking some of that revenue off. Now, you know, there's always an opportunity to look more at, you know, some of the tail. While ITW didn't necessarily do just the tail, they did a rather substantial chunks to their portfolio. We don't feel that we need to do that. We have a very focused portfolio.
We have a portfolio that generates lots of profitability, and so for us, it's really optimizing where our products are positioned and who we service, and how we provide that service. So I think it's more about, you know, core about how to operate that, rather than just go in and say, "We need to chop more of our business off.
Great. And then just a follow-up on the material cost aspect. Yeah, that, that's half of the margin expansion coming from material cost. You talked about some learnings, some prior issues, but I was curious if there was a way of quantifying kind of how much saving have you already generated there? Because, again, it's a big, you know, 200 basis points over 3 years is a lot. Is there any way to say kind of how much you've done the last year or two, and is there any element to it that's tied to more R&D spending? You know, if you're trying to get that materials science expertise up inside Gates to sort of maximize the sourcing opportunity.
Yeah, look, I, I'll stay away from the, quantifying how much more. I, I mean, how much we have done. I mean, I think you have seen a really nice bump in, gross margins last year, while volumes were really muted. So certainly part of our productivity improvements were, you know, partially driven by some, some of the savings. It's a big number, but, you know, material represents about 80% of our COGS, and so we, you know, we feel we have a huge opportunity. Yes, we will be investing more in material science. We're anticipating to put, a new footprint, in India, again, with hiring more material sciences- scientists there to help us to continue to accelerate, our capabilities. That definitely needs to be supported. You also need to build more testing capabilities that, that are under Tom's control here.
So we are, you know, we are making that investment, not just in, in SG&A, but also in capital. Those are capital assets that are very important in being able to effectively deploy those new configurations of products.
Other questions?
Couple questions on cash. Working capital is 25%-27% of sales in the target. Just wondering what the opportunity might be over time. Do you think that can come down lower? I think some of the best-in-class companies are, you know, below that level. And then maybe just talk about the cash taxes. Cash taxes running above the GAAP taxes, what work needs to be done to optimize that cash tax rate?
Yep. So yeah, look, I think you know when we think about the you know the 80/20 principles and how you apply those to the business, I think you know absolutely working capital is an area where that's going to help drive improvement, right? And so yes, we think we can improve. I mean, our year-ending number was 27%. Our target numbers are lower, and 80/20 is a big piece of that, right? In terms of how much stuff do you inventory, where do you inventory it, different things like that. So we are definitely focused on driving working capital improvement. And then on your second question on taxes.
So, look, you know, over the past three years, you know, we've had a GAAP tax rate that's been extraordinarily low, and that was affected by, you know, some different uncertain tax provisions that came back into the P&L and different things like that. And so we expect our, our, you know, effective tax rate going forward, you know, to be in, in this low 20s range, and on average, we expect cash taxes, you know, to be 100-200 basis points higher than that. And that's, that's just gonna be kind of the normal run rate. And, you know, we do. You know, I think we've got a great, you know, or, you know, organization, tax organization.
They've done a lot of great work around, you know, doing some tax structures and tax planning, which, you know, kind of keep us, you know, keep us from getting too much of a headwind there. So, but from a total perspective, right, low 20s, as we said, on the GAAP taxes, maybe 100-200 basis points higher on cash tax. Okay?
Any other questions?
Thank you. Can you talk about the pricing part of the equation? So if we're in the scenario where organic growth is on the lower end of the outlook, to what extent would you have interest and look to drive pricing to get the margin outcome that you outlined?
Yeah. So look, I think, as we worked through a lot of the inflationary pressures we saw over the past 2-3 years, you know, we were able to go out and command price where we needed to command price across the entire portfolio. I think we're in a position now, where we're gonna be more targeted and we're gonna be, I think, use the 80/20 tools to help drive, you know, what we want to do on pricing. I think the other opportunity set for us as we move forward, and this doesn't necessarily kind of fall into your pricing definition, you know, according to Hoyle, but as we think we're gonna be able to quote more effectively as we move forward, right?
So, you know, we think we're gonna be able to quote, you know, the B items more effectively, get, get our margin up front on those, as opposed to having to reprice them later as you do the analytics and things like that. So I think there's really 2, you know, opportunities that we're, you know. And we're always gonna, you know, try to optimize what we do with price. But there's clearly the 80/20 analytics that we're gonna do and how you, how do you value price. And then, as we've talked about value pricing, I think Deane brought this up, you know, how do you use that knowledge to price the best you can up front, right? And get, and get things right the first time, you know, from an A versus B perspective.
Thank you.
Other questions? Okay, well-
We got one more.
Hi, thank you, and I apologize for a bit of a myopic question when it's a capital markets day for the last question, so I apologize. But the first quarter now being -3% organic. Previously, we had first quarter down 5%, rest of the year positive organic to get to the full- year. Now, with this -3% in the first quarter, do we still expect the rest of the year to be positive, and when would you expect positive organic?
You want me to take it?
Yeah, go ahead.
I'll start. Well, look, I'm gonna fall back into this kind of position. Look, we're pleased that the headwinds in Q1 weren't as much as we thought they would be. You know, having said that, you know, we need to see how the quarter turns out. We need to see how everybody rolls everything out. We need to look at some of the external indices and some of the external data analytics that we look at before we'd make a determination about the rest of the year. What I will say is it's better than we had anticipated. It's not, you know, miles and miles better, but it's better enough to be a little bit more optimistic.
But we're not gonna know until we're able to roll all the data up, and then we'll come back with a more, you know, fulsome, you know, explanation and guidance, you know, when we have our Q1 earnings call.
Okay, I think that's it. We are. Oh, we got one more. What we got?
It's a very quick one. I'm just actually curious, 'cause you're not—you said you're not spending a lot on restructuring. You know, there's not a lot of incremental spend in the program. So how are you able to do that with the ramp-up? You know, there's not incremental spend.
Yeah, what, what, what I said, not materially incremental. We spend money on restructuring every year, right? Every year, we have targeted restructuring. You know, sometimes it's, you know, restructuring in operations, sometimes it's more restructuring on your, your, SG&A spend or, or different things like that. So we have, we have we, we spend restructuring dollars every single year. And what I'm saying is, it's just not gonna be a lot of incremental over what our normal, cash restructuring is, right? Might it be a little bit more? Yes, it certainly might, but it's just not gonna be materially incremental.
Any last ones I missed? Okay. Well, thank you everyone for attending. Thank you to everyone who participated on the webcast. We are gonna move into the foyer here for some refreshments. So for those of you staying here, feel free to join us. And to those of you on the webcast, thank you for joining, and look forward to speaking to you soon. Thank you.