You know, we have taken a pragmatic view of 2024. We do see that some of our end markets have slowed down, so end markets like Ag, as an example, pretty well-documented set of challenges here. You know, we anticipated on-highway is going to slow down slightly. It's coming off a couple of really good years of Class 8 trucks built, so we anticipated that's going to be less, you know, less bullish in 2024 than perhaps it was in 2023.
Overall, you know, to your point, we believe that we are seeing kind of the underlying market demand matching supply, or supply matching the underlying market demand. I kind of fall in the same category as you, Julian. I don't think about what's happening today as de-stocking. I think that that's kind of played itself out, to be honest.
If it hasn't played itself out, you know, it's kind of at the, you know, ninth inning of playing itself out. I 'm also, you know, cautiously optimistic about what we could see in 2024, but we just decided that it was probably more pragmatic to take a more cautious approach to 2024, with guiding top line down 1% on core, and driving Adjusted EBITDA up 30 basis points midpoint. A pretty, you know, pretty cautious approach.
Are you sort of anticipating much difference as we go through the year? You know, the comps move around a little bit, 1-year, 2-year stacks, and so forth, but how do you think about sort of base demand firm-wide, aside from the comps?
Yeah, so we anticipate very, very slight improvement in second half. Look, overall, I think that the underlying market demand is not that bad. It's actually reasonably solid across the portfolio. You know, while you're seeing some cautious approach to it, I mean, yeah, there's lots of green shoots as well. You know, we have had terrific performance in our Latin America business over the last couple of years that remains actually quite all right. We've talked on a Q4 earnings call a couple of weeks ago that, you know, we are seeing green shoots in China.
You know, Europe is probably going to be more challenged than anywhere else, I would say, geographically, but the business actually is not, you know, not terrible, and we anticipate that while second half is going to be slightly better than the first half, you know, the difference in growth rates is predominantly on the top of, you know, more favorable comps.
One market I think people have trouble kind of figuring out trend growth or through-cycle growth is personal mobility. You know, it was a big boom, a big down. We've seen that in many industries in a way the last three years. That one's interesting because it's more nascent to a degree. W hat's your kind of assessment there? Like, have you rethought the degree of investment you want to put into it, or, yeah, any, any update on personal mobility?
Yes, so let me start with that. You know, there was a very small exposure that we had in 2018. It was less than $20 million of our revenue. By 2022, as we, you know, kind of, we exited 2022, we got the business to be 4% of our revenue. I t was, you know, it was rather substantial scale-up over a four-year period of time. W e were growing very, very rapidly in the business. You know, fast forward to 2023, you start seeing some of the de-stocking coming in in the second half of 2023.
Through 2024, we believe that the de-stocking is going to be over by mid-year of this year. W ith getting back to the stability of the underlying market-driven demand, we believe that we will be very quickly re-accelerating back to double-digit growth rate.
Now, while the de-stocking has been happening over the last, you know, 3 or 4 quarters, we've continued to win a significant amount of new programs. I think on the Q4 earnings call, I said that, you know, if you kind of dollarize it, we have seen a 20% increase in design awards 2023 over 2022. Y ou know, that projected growth rate is going to re-accelerate very quickly back to double digits.
Y ou know, we still are pretty firmly embedded in the camp that, over, you know, very near term, we should see that business to get to that $300 million-$400 million range. I t will require pretty significant re-acceleration again. W e don't anticipate that until 2025, to be honest with you.
Yeah. T hen, you know, you mentioned that sort of de-stocking largely run its course in most industries, maybe a slight improvement in demand trends in the second half. You know, in general, thinking about, you know, the slope of recovery coming out of this slowdown, you know, what are some of the factors that you're paying closest attention to? You know, it feels like it was a very quite a long volume downturn, but shallow. Y ou know, is the upturn just kind of a mirror image of that very gradual, low single-digit sort of growth?
You know, I'll use that word pragmatic. I think somebody mentioned to me how many times we've used the word pragmatic on our earnings call. T hat's exactly what we are trying to be. We are trying to look at that and look historically at what we have seen in the downturns and upturns. W hile the downturn has been reasonably shallow, to your point, it's been reasonably extended as well. I mean, lots of the volume decay has been masked by pricing.
The pricing environment was very robust, as was inflation, obviously. Y ou know, our sense is that the recovery probably is going to be reasonably normalized because of the extended nature of the downturn. Y ou know, the industrial or the manufacturing PMIs have been quite negative for a very significant amount of time.
I mean, you have to go down, what, all the way to kind of 2020? I mean, 2000? My apologies, all the way back to 2000 to kind of get the same length of industrial downturn, right? I would say that, you know, you could anticipate that the recovery should be normalized. A gain, in, in our view, that's probably not until a much later part of 2024 into 2025. Of course, I could be wrong. I f, you know, if everybody will see the recovery come earlier, Gates will as well, because there's nothing unique or peculiar about our short-cycle business.
Then in China, you know, you have a very large, you know, a large aftermarket service, a lot of different industries. You know, you've been cautious on the recovery slope there. How do you see it now? You know, it's been a year, I guess, since people were last excited about any kind of big re-acceleration. It's a sort of base case of a stable market at a fairly low level.
You know, one of the, you know, one of the nuances that, you know, you got to you know, you got to be, cognizant of when you're thinking about our business in China is that, you know, our business in China actually didn't slow that much, to be honest, right? It's predominantly driven through the translation of FX.
O ur, locally denominated revenue basis moved slightly down, but it's all off the devaluation of the Renminbi that, you know, that will give you that, that vague, in terms of, revenue, deceleration. T hat being said, you know, we, we actually are seeing almost green shoots everywhere in China. Now, we don't again, we don't anticipate that you're going to see a massive growth or re-acceleration of growth.
Our business in automotive replacement, which, you know, we have the largest market share in China in the products that we manufacture there for the automotive replacement side of our business that has been growing even over the last 12 months, actually rather substantially. That offset the deceleration on the industrial applications. A s we exited 2023, we have seen positive inflection in on-highway in China. We have started to see better behavior in terms of the commercial construction equipment.
The excavator unit builds are no longer decelerating. They're stabilized. We are starting to see a degree of stability in the diversified industrial space. I f you look at some forward indicators, you can take a look at, you know, the machine tool orders with Japanese manufacturers for Chinese customers. You know, there is a sign of inflection there as well.
My anticipation for China is that it's going to be a slow, steady recovery. We anticipate kind of a mid-single-digit growth in 2024 in China, on the back of strong performance of automotive replacement.
Got it. T hen in the U.S. market, you know, a lot of talk around stimulus and, and, and reshoring. Hard to sort of delineate how much there's really been in terms of sort of dropping through into company orders and so on. You know, what's your assessment of that? You know, you have some exposure off-highway to some of the sort of mega project aspect. Then, of course, in diversified industrial, you have some exposure, some insight on that reshoring element as well. M aybe talk about that. Like, is it visible to you, any sort of secular tailwinds like that?
You know, I think, you know, the major projects that are well documented, right? S omebody building a battery assembly plant for BEVs, you know, you see that, you know, and, you know, obviously that's good when they're building the building. It's good when they're putting equipment, you know, we have products in those projects. I wouldn't say that we have seen a massive wave of infrastructure building projects yet at this point in time. We don't really anticipate that to occur until maybe 2025, 2026.
You know, whether or not reshoring is going to be happening in a substantial way in the United States, you know, I think that that's TBD still. You know, there's lots of projects that are happening in Mexico, obviously. I mean, there's, you know, there's some puts and takes on reshoring.
You know, I think that it's good not just for Gates Corporation. It's good for many different companies that are involved in industrial and industrial automation.
Yeah. Y ou mentioned the sort of battery element, taking sort of that EV transition in, in total, you know, how are you thinking about that play out? You know, your last investor day, you gave some, you know, interesting sort of detail around ICE versus EV. You know, we'll get an update on that fairly soon, I would imagine, at the investor day coming up. A ny kind of thoughts around, yeah, that, that transition and, and what does it mean for Gates, you know, again, since you gave those that last update?
Look, I think that, our exposure to BEVs, again, whether it's light vehicles or medium to heavy-duty vehicles, is not really changed fundamentally. The content that we have described that we will be able to capture in those applications is, you know, is playing itself out as we have presented. What's also playing itself out the way that we've presented or that we have anticipated is the adoption.
I think that, you know, we have been viewed somewhat skeptically, from, you know, the earlier period of time as, you know, we forecasted that there's going to be a level, steady kind of a steady state growth rate of BEV adoption.
I think that it's embedded in a very pragmatic view that you need infrastructure, you need charging capacity, you need power generating capacity, power distribution capacity, and that's not been completely built out yet in this country, as it hasn't really been built out in Europe either. T here will be a, you know, a steady growth in adoption of those technologies. I just think that, you know, most of these forecasts were overly optimistic, and we've never really embedded them into our revenue forecast.
I 'll also, you know, remind everybody that, you know, our play is predominantly in the replacement side of that business. A s we've discussed in 2022, you have to firstly get that car park in use, and then you have to age it to be 7 to 14 or 11 years of age.
That will take a significant amount of time. We didn't anticipate that we're going to see anything meaningful until sometime around 2030. I think that I'll be proven correct with that forecast.
Got it. Y ou know, I think firm-wide, Gates's kind of headline market share versus your TAM is, you know, mid-single digits or so. You know, what are some of the areas where you're most enthused about share gains that you're making right now or areas that you're investing into to get share up the next kind of 3 or 4 years?
Yeah, look, we've outlined the large market opportunity with the Industrial Chain to Belt Initiative. We believe that that remains to be a very strong, solid runway opportunity for us, very secular in nature. We continue to make good progress. We continue to convert more industrial chains into highly engineered Gates Carbon Drive-based systems. I think, you know, you can probably sense the level of enthusiasm that I continue to have for personal mobility. I think that that opportunity, frankly, is unprecedented in nature.
There, I think that you will see greater adoption of electrified propulsion, substitute for, you know, two-cylinder ICE, dirty ICE motors that I used in some of the developing economies, like, you know, in India, Indonesia, and to a degree still in China. T hose opportunities are large.
When you put an electric machine on a two-wheeler, you will want to adopt Gates Carbon Drive. It's more efficient. It's cleaner. It's quiet. T hose opportunities remain very strong, and we see a significant amount of design wins, as I said earlier. I believe that that's going to add a pretty significant opportunity for us to drive premium growth through the cycle over the next cycle. Look, we, you know, we have an incredibly terrific automotive replacement business. We love that business.
It's a great business, and we believe that we still have good opportunity to deliver nice, steady growth both in developed countries through just fundamental blocking and tackling and taking more market share, as well as in developing economies.Y ou know, I'll put a plug in for what we have done in China.
You know, China, you know, competing in China is never easy, but we have built, you know, a number one market share position in China, in a, you know, growing market with car park that is still not in a sweet spot. Y ou know, we continue to believe that, you know, that opportunity remains to, you know, perhaps more than double our presence there in that end market. Y ou know, we have good opportunities about new, secularly driven, market penetration opportunities, as well as, we have opportunities with our existing business, legacy business that we believe we can go and execute on.
Got it. T hen, one sort of switching away from the top line, you know, enterprise initiatives, you started to talk a lot more about there are decent earnings tailwinds this year already. Any sort of sense you can give us around, and again, the investor day we'll hear much more detail, but any sense of kind of the broad levers there, maybe what's different about these initiatives versus kind of what you've been doing, you know, since Gates went public in terms of sort of typical productivity measures?
Right. Our enterprise initiatives, you know, they're going to be focused kind of on three main streams. I'm not going to front-run the investor day, but, you know, you have one stream that's going to be around 80/20. S implifying your portfolio, optimizing your pricing, optimizing the way that you price your products on the future contracts, and frankly, driving productivity across your enterprise through making that enterprise more efficient. Two, focusing on kind of a traditional productivity.
The traditional productivity over the last three to four years has kind of almost extinguished itself because it was really hard, right? You had COVID, then you had supply chain issues. You had disruptions associated with logistics. You had lack of availability of labor and so on and so forth.
We believe that, you know, reaccelerating that back and reigniting the powerful productivity motor is going to be. It's going to be very important. Y ou know, we anticipate that as we exit 2024 into 2025 and 2026, you're going to start seeing some nice productivity from that initiative. T hen, you know, what we have focused on primarily this year, and that's where kind of that seventh sense of earnings accretion comes from, is all driven around material cost reduction.
Y ou know, in a strange way, in the second half of 2022, when we were dealing with some of the most disruptive raw material supply challenges for our company that came from the availability of supply of highly engineered polymers, you know, that kind of crystallized our need to stay focused to minimize the opportunities for those disruptions to come back.
We have engineered lots of complex materials out of our supply chain, but too, in a way that gave us a jump-start opportunity to focus on driving material cost reductions out. Y ou know, when you combine that with the desire to reduce your portfolio complexity, I think that you are having a very powerful engine that is different than what we have done in terms of kind of driving kind of a raw productivity from, you know, 2018 through, you know, kind of 2019 and 2020. We believe that that represents a very powerful earnings accretion opportunity for us for the next 2-3 years.
Then I'll say the last item that, you know, we'll talk a little bit more about is complexity, our operating footprint complexity reduction, right? W e have an opportunity to drive some restructuring projects forward.
Again, we would not anticipate benefits from those until sometime into 2025 and 2026. Y ou know, we have a very powerful set of initiatives that we believe will give us an opportunity to not only control our own destiny in a, you know, even if it's a muted growth environment, we won't need that growth to be able to get to our midterm earnings targets. I t surely will make it easier when you get that growth coming back. W e believe that we can deliver a very powerful earnings accretion as we move forward without necessarily having to rely on volume growth.
When you think about the sort of operating margin entitlement, you know, once these initiatives are in the run rate of the business, I think sort of 24% plus is the existing medium-term margin goal. You know, there's some, you know, industrial business out there aiming for close to 30%.
Is there any reason Gates, once these initiatives are sort of in the rate, can't get into that kind of high 20s?
I don't think so at all, Julian. I think what, you know, we've got to get to that intermediate destination before we move on to the next journey. Y ou know, the way I when I think about this business and I look at our business, nothing, you know, is telling me that we should not have an operating model similar to ITW. Our portfolios are very similar. Y ou know, our financial returns should be very similar, like ITW's as well.
I don't think that there should be anything that prevents us to do that. We got two large off-scale, segment product lines. Both of them, we are top three market participants globally in. Everything that we make is mission-critical, highly engineered, and has a significant, powerful recurring revenue engine attached to it.
You know, we feel that nothing should really prevent you from being able to continue that journey and evolution of the firm.
In the next couple of years, you know, assuming you get back to volume growth, say next year, and you have these enterprise initiatives, is the way to think about the operating leverage sort of 35%-40% plus EI savings on costs? Y ou have 2 or 3 years of whatever extraordinary incrementals. Would you think that 40%-ish rate all-in is levels?
Well, I'll say that at least for the first four quarters, when you start having some volume growth, you should start thinking about that, 35%-40% plus 1,000-1,500 basis points. I think 45%-55% incrementals on the first kind of, you know, four full quarters. Y ou know, could that continue beyond that? You know, we'll, you know, we'll have that conversation when we are done with the first four quarters of growth.
L ook, I mean, I do believe as well that, you know, we should start seeing more accretive market conditions sooner rather than later. Y ou know, again, we want to be very pragmatic about not necessarily relying on forecasting when that's going to happen. Wait until that happens.
We will build, you know, revenues that are very similar, in terms of growth, so better than our, you know, premium industrial peer group.
You know, I think you had a sort of S&P ratings upgrade very recently. C learly there's a lot more sort of optionality now on, on the balance sheet emerging. How do you think about kind of mixed-up the portfolio for M&A versus just the valuation is so low, you get kind of supernormal returns on the buyback?
Look, I'll you know, let me start with kind of a little plug-in, right? I mean, since we became a public company in 2018, we've dealt with nothing but significant five years of calamities that were non-company-induced, right? They were macro-driven, right? F om an industrial recession that was induced by the trade war with China into pandemic, supply chain shortages, labor shortages, logistics disruptions, war in Ukraine with Russia, right? W e've operated in a very negative market environment.
We have created a firm that is higher quality, more robust, I think more predictable, a company that has demonstrated we can deliver strong free cash flows of the revenue that we generate, improved profitability, reduced some overhang with some revenue that we were less interested in. You know, we've reduced exposure to auto by 500 basis points in the period of time.
We still delivered good growth, and came out of it with a strong balance sheet. I believe that, you know, we are coming to a point where we will have all levers available to us to deploy our balance sheet. Y ou know, when I think about where our valuation is today, you know, I can generate risk-free returns buying my stock back. I can generate risk-free returns paying off some of the higher-cost debt that is still residing on our balance sheet.
I would say that that is what I will be focused on over the short term. As we exit 2024 into 2025, you know, naturally, based upon the true high-quality company that we are, we should anticipate some level of re-rating, you know, without the overhangs that may have existed there.
When that happens, we will be much more proactive on adding to our portfolio. We have a tremendous amount of capacity to do M&A. We have been looking at different companies. We have been thinking about, you know, what would make strategic sense for us as well. A t this point in time, I think it's more pragmatic to go in and continue to buy back stock and pay down debt.
Perfect. I think with that, we'll move to the sort of audience response, survey, please. T he first question, and then you can use the gray boxes to vote. Look at that. The first one is sort of, do you currently own Gates? I n general, not much.A lot of opportunity. The second question, really around sort of general bias towards Gates, at the moment. Very neutral to positive. Third question is around kind of earnings growth for Gates versus the broad industrial average, through cycle. I n general, sort of in line with peers.
Fourth question around uses of excess cash, which is starting to become a lot more relevant now for the company. I n general, buybacks, the most popular by a distance. The fifth question really around valuation, so sort of the current year PE multiple. M id-teens, mid to high-teens.
Then the last question is, you know, what's the biggest barrier to people, you know, why don't they own Gates today? O rganic growth, the biggest headwind or drawback, I suppose. G reat. Well, thanks, everyone. T hanks so much, Ivo, for being here.
Thank you. Appreciate it.
Thank you. Thanks a lot.