Hi everyone, thanks for joining us. My name is Mike Howard, and we're pleased to welcome the Gates team with us to our conference. We've been running the session the last couple of years together, and they've always been super informative and helpful. Your people, Jurek is going to be—who is the CEO of the company—is going to be running us through some prepared remarks here, giving a nice little overview of the company, and then we're going to follow that up with a Q&A session. If you have any questions, standard protocol, use the portal, and all of those questions will get funneled to my inbox, or just fire me an email at mhoward@rwberry, and I'll make sure those questions get weaved into the course of our conversation. Ivo, with that, floor is yours.
Thank you, Mike. Delighted to be here with you, and really excited to tell you a little more about the company. Let me move to our slide two, which is our disclosure and reminding everybody that our remarks include some forward-looking statements within the meanings of the Private Securities Litigation Reform Act that are covered by safe harbor disclaimers. With that out of the way, let me dive in. On page three, just a few facts and figures on the company. Roughly two-thirds of our business go into replacement channels, where a broad portfolio of highly engineered products is very important to our customers. Frankly, it is very difficult to replicate. We also have a very nice geographic mix that you can see on the slide, and our brand is widely recognized as a trusted brand across the globe.
We have built out a very comprehensive global channel presence, both of which would be very difficult to replicate by others. That, frankly, is our moat of our business. On product segments, that is slide four. I could go on for quite a while here on this slide, but you can see that we operate two product line segments: power transmission, which is about $2.2 billion in LTM revenues, and fluid power, which is about $1.2 billion. Both of them are of nice scale. We are global leaders of both of these product line segments, and about 80% of our revenues are coming from top three market positions for the company. Both segments participate in a very large addressable market that we size to be over $65 billion across a wide range of end markets, applications, and geographically.
We believe these large diversified markets provide significant runway for organic and inorganic growth, which takes me straight to slide five. From the end markets perspective, here you see the breakdown of our year-to-date revenue by major end market, many of which have very positive secular tailwinds. Let me start with automotive replacement end market, where there are very strong underlying fundamentals globally from historical vehicle production and increasing age of the car fleet. We have an opportunity to continue building on our long-standing leadership position in developed markets, and we see a significant opportunity to continue to accelerate growth in emerging markets that I've spoken about in the past, particularly in places like China and India. We have also made significant progress strategically decreasing our automotive OEM business, with a target for it to be no more than 10% of total company's revenue.
Having said that, we have a real opportunity here within this business to shift our mix towards electric vehicle platforms to capitalize on the rapid growth in EV production, as well as increasing penetration of EVs in the aftermarket over future time. The diversified industrial market includes a number of end markets such as general industrial, warehousing, logistics, pharmaceutical and healthcare manufacturing, food and beverage, robotics, and many others. We see a tremendous opportunity with these white spaces for us to grow, capitalizing on secular tailwinds such as e-commerce, industrial automation, and an overall push to improve sustainability and efficiency across these wide-ranging set of applications. Finally, our mobility and recreation business, also referred to as micromobility, has been experiencing 20% plus annual growth over the past several years.
These applications also are poised to benefit from ongoing electrification of propulsion, representing a substantial market opportunity to deliver a sustained level of growth for us. On slide six, we just outlined our total targeted growth model. With the secular tailwinds that I have discussed in the underlying business, let's talk a little bit about the growth model on slide six. We have covered our $65 billion market, highly fragmented, and the secular tailwinds that we are seeing presently. That is the base off which we expect to grow. We are targeting about 2%-3% above this market growth from our organic initiatives. We have been demonstrating nicely more of greater growth than that recently. We have an attractive and active M&A pipeline, and we will be very disciplined with these opportunities to supplement our organic growth.
Putting it all together, we believe that we are well-positioned to deliver on our stated objective to grow 5%-8% above the market through the cycle. On slide seven, we have highlighted some of our key growth opportunities. We are seeing a rapid acceleration towards electrification in mobility and recreation, with estimates that over 30% of these applications will be electrified by 2030. Our belt-drive solutions offer very compelling and differentiated performance here. They are clean, quiet, lightweight, energy efficient, and reliable, all of which are very important in these applications. Just to frame the opportunity, there is typically more power transmission content here for us on an e-bike or an e-scooter, as an example, than on an internal combustion engine passenger vehicle today. Within our diversified industrial market, our chain-to-belt initiative is focused on converting applications that use industrial chains to Gates belt drives.
Precision motion control is where we are focusing on industrial automation, robotics, warehousing, logistics, and light manufacturing. In fluid power, the revitalization of our product portfolio is well underway, delivering above-market growth at higher margins. With respect to electrification, we have a significant opportunity from a content perspective in both passenger vehicles and heavy-duty trucks, and have secured a number of design wins across these applications. The EV opportunity for Gates is actually driven by the increase in content, all of which comes from products we manufacture today. As we move from ICE to full electric, we gain quite a bit of critical thermal management content, including electric water pumps and more expensive hose systems, resulting in a total of about $300 per vehicle. Moving on to slide eight with our investment highlights. We have transformed Gates over the past few years, building off a company's strong foundation.
The investments we have made in our growth initiatives and product portfolio are not only supporting our above-market growth, but are also leading to improvements in profitability, as well as driving sustainability for us and for our customers. Our cash flow profile is quite strong and has enabled deleveraging, which has been one of our top priorities most recently. The improved net leverage position also provides us more flexibility around the range of capital allocation options. With that, I'll send it back to Mike for Q&A.
That was great, Ivo. Thanks for that. Again, as a reminder, if you do have any questions, ping me, and I'll make sure that they get included into the presentation here or into the Q&A session, excuse me. Maybe we start on the slide you had up a couple ago where you pointed out three of the opportunities where there are really secularly enhanced pieces. First, maybe talk a little bit about how that success and penetration has gone when you're having these conversations about the various pieces.
Yeah. Look, let me start with some of these areas, like maybe personal mobility is a good one, right? We are seeing very significant progress with our growth initiatives there, and we are continuing to deliver a really nice rate of growth. One of the things that we are benefiting from is that as these applications are electrifying, particularly in the micromobility space, there is a lot more torque that is being applied on this equipment, and folks are very interested in extending the range of these devices. That is where we come in. Our solution offers a lot more torque management, and it is more efficient than a chain drive. We almost have kind of an unfair advantage in here. That is really what is driving these very substantial growth rates. If you think about it, Mike, folks are very interested in quiet operation.
If you put an industrial chain on, if you put a chain on that drive, you kind of hear that rattle like you hear with a normal motorcycle. That noise goes completely away with our very quiet solution. We are very bullish on micromobility. We think that over the midterm, so midterm, we classify kind of between today and 2023. We believe that we framed it as this should be a $250 million growth opportunity for us, and we are very much on a trajectory to be able to deliver that. Now, if I go back to my Q3, I framed that we grew our chain-to-belt revenues year on year by 50% plus. That just speaks volume to what's happening with not only that personal mobility, which that includes the number, but also what's happening in industrial applications.
Over the last couple of quarters, I have quantified some of the very attractive market segments where we are actually winning, like most recently, semiconductor inspection equipment in Japan, textile manufacturing equipment in India, warehousing, lifting equipment in Japan. We are starting to see a really nice penetration in new equipment builds just as much and in our ability to convert that brownfield. We are doing really well. We are very bullish on what is happening there.
Do you think that this is an iterative improvement or iterative adoption curve, or do you think it's iterative until a point where you maybe see a tipping point of some kind with the client base where you just see a little bit more of an aggressive adoption curve? I'd just be curious on how you see that playing out.
Yeah. You know, Mike, I think that we are starting to have the scale step in our favor, to be honest with you. There are very pragmatic issues that everybody's dealing with. First of all, we all in the industry want to be more socially and environmentally conscious. This solution offers you a very inexpensive opportunity to improve your metrics vis-à-vis energy consumption. You almost get that benefit for free. You get a health and safety benefit for free, which is also important when you're running an industrial facility. Ultimately, you get the benefit that you are after the most, which is improved productivity because you don't have to service that chain drive as frequently. You don't have to service that belt drive as frequently as you have to service the chain drive.
I think that we are slowly starting to inch up to where the end users are much more cognizant about the benefits that we are offering. I believe that over the next couple of years, we will start seeing a real tailwind as this becomes a much more well-understood opportunity for those end users to benefit from these solutions.
No, that makes sense. Let's talk a little bit then about the demand curve as we sit here today. That demand curve is murkier given some of the supply chain access, etc. When you think about sustainability of the underlying demand trends as we sit here today, maybe just a conversation on that point, because you're getting push-outs, you're not a backlog business, and you have a lot of backlog. Is there a point at which you can get demand destruction that materializes as these seams keep pushing out? I would just love a high-level conversation about how you think about sustainability. I will ask some questions around the edges and obviously dovetail into supply chain, logistics, pricing, and all that stuff.
Great. Awesome. Look, I think that there's probably all four corners around the debate about the durability of the demand. From everything that I see today, the demand is very, very robust, especially for products that, frankly, our customers, even when they try to buy from somebody else, they always come back to us and say, "Look, we can't source it from anybody else. Your product is the most reliable, and I don't have to worry when I buy product from you." I am really not too worried about somebody being able to go somewhere else. If you come back to the fundamentals, right? The fundamentals, starting with maybe automotive OEM business, the automotive OEM business is the most impacted business today. I mean, the carmakers globally, they just can't produce vehicles because they have numerous supply chain shortages.
Everybody's talking about semiconductors, but after semiconductors, there's probably 17 more commodities that they're going to struggle with. I believe that that demand is going to continue to get pushed up further and further in recovery. That's not such a bad thing, completely honestly speaking, because I don't believe that the buyers are going to go away and they're going to disappear. People want their new car, and when they're going to be able to buy it is when the car is going to be available. Putting that aside, I think that that demand is going to be coming back sometimes in the future. When you think about industrial automation or diversified industrial markets, those are very robust globally. People are trying to automate more. People are trying to reduce their demand on direct labor. That is the best way to get there.
Did we see a peak of that? I don't think so. I think that we are actually in very early stages of that massive secular move to eliminate as much direct labor as you possibly can. I feel really good about that. Automotive replacement market, look, until you figure out how you can build cars to meet the market demand, people are going to keep their older cars, and they're going to have to service them more. People are driving lots of miles. The vehicle miles driven are not getting any less. They are at or above 2019 or 2018 pre-pandemic. That is a positive. The cars are aging. That is positive for us because that means that they all need to get serviced. I think that the durability of that is reasonably good.
If you go in and you take a look at places like off-road and on-road, off-highway and on-highway demand, right? The off-highway, look, that bill that just passed on infrastructure, I think that that's going to extend whatever your sensor's durability or the length of that recovery is going to be, maybe for many years, maybe for half a decade. That is really good stuff. I am not very worried, to be honest, about demand or about the durability of that demand. I am much more concerned about our ability to get raw materials to support our customers with their underlying demand.
Might as well use that as a transition point. We can always come back to demand. I think one of the misnomers about the recent quarter was the pricing dynamics versus the inflation dynamics versus all the other real pressure points that I think are a little bit more substantial from a margin hit perspective. Maybe you could just have a high-level conversation to level-set folks on how you're thinking about what those pressures are and what truly impacted the portfolio, and then we'll drive off that.
Yeah, I think great question. Look, from my vantage point, year to date, 2021, we have done a terrific job. It is a record year for the company, record year of demand, record year of output, and record year of profitability. Including the midpoints of our guidance for Q4, that fact will remain across all of these points that I have just made. I believe I feel really good about where we sit and what we have been able to accomplish in 2021. That being said, I've spoken about some of the pressures that we are dealing with in the most recent quarter that we are in presently, Q4. The biggest issues, I think the biggest misnomer is that the inflation has gotten ahead of us, and we have not been able to price for it.
I don't think that that's a really correct representation of what is happening in the marketplace. We have gone a number of times to the market in 2021 to raise prices, and we are in a really good shape vis-à-vis material inflation. When I think about why we have lowered our guide, we have lowered our guide because of the movements of raw materials. We are starting to see real pinch points in material availability. Frankly, we are resorting to a significant amount of air freight of large quantities of raw materials across geographic regions to be able to operate our plants, protect the output, and protect our customer service. That's what's driving the pressure in Q4. That being said, we have announced new pricing. We believe that we have pricing for this inflation.
If that's not enough, the announced round of pricing that's taking effect early in January, we will do more. We are not really concerned about our ability to get price during these times.
Yeah, because it certainly seems like you have constructive pricing power through the vast majority of your channels. Some of the OE customers are probably a little bit more challenging, but they see the pressures. Net, when you get to the front part of next year, purely on a typical price-cost equation, you feel pretty good about what that net spread would look like. Is that fair?
That's absolutely fair. I think, Mike, let's be clear that offsetting inflation dollar for dollar does not make us winners. That just covers the absolute economics. We are leaning forward to do a little better than that. We obviously are not going to quantify how soon we are going to be able to get enough price in place to offset inflation at a margin level as well. We are being pretty proactive on managing price.
Yeah. I think what most investors want to see is, yes, obviously, people fixate on the margin levels. It is going to be more the EBITDA dollars and how those track and how much of a drag some of these exogenous almost, right? I mean, it is not too often where you have massive amounts of air freight costs for your type of business that roll in, and that is a significantly higher expense, right? Is the thought then you take the fourth quarter run rate, and as you track into next year, that run rate should get better because of the pricing side, but then also how you are going about attacking logistics network? Are there other things that are going to soften the ability from just an EBITDA dollars to see maybe a little bit better launch rate than what the fourth quarter guide implies?
Yeah. Look, pricing is going to be playing a major role early in Q1 of 2022. The pricing is going to ramp up as we progress to Q1 for both the channel as well as the OEMs. Now, Q1, we anticipate we're going to see the biggest drag on margin expansion. We anticipate that as the pricing moves forward, we also have other tools in our tool chest, which is engineering some of these exotic resins out of our construction. You haven't seen us moving towards reducing our SG&A spend. We're actually doubling down on being able to continue to capitalize on the market opportunities that we have, but also deploy those tools to be able to help ourselves more of a self-help perspective.
Many times we talk about restructuring. This time, we are going to be talking about self-help vis-à-vis engineering some of these resins out. Obviously, we have a ton of raw material on the water. As that starts getting through the ports, we anticipate that the situation starts getting less bad. Again, I am using the words less bad, not better, but we believe that the combination of price, self-help, and the port situation getting somewhat more constructive is going to alleviate some of the pressure, particularly as we exit the first half of 2022. We anticipate that come second half 2022, we should start seeing normalization of our margin performance. We are quite bullish about 2022. We have some short-term challenges, but we believe that we have actions in place that will give us the opportunity to deliver another year of outstanding performance.
That makes a lot of sense. What about some of the end markets that are not performing quite as well right now? What would the outlook be on those? I mean, talked a little bit about some of the strength of the existing markets and how there is sustainability of what is already decent. Some of the auto OE, as an example, or some of these others. How do you think those track into next year and signs of recovery?
Yeah. Look, we were very negative on auto OE full year. Ultimately, I wasn't negative enough. In Q3, I think it got a little bit worse. Is it going to get better from here on? I believe that things are going to start getting better as you enter 2022. I don't anticipate the situation getting better in Q4. There may be a carmaker or two that are a little bit better. There'll be a carmaker or two that's going to be worse. On aggregate, I think that the situation is not great presently. In 2022, I think that they'll start making slow progress, but I just don't believe that it's going to be off to the races in 2022. I believe that it's going to take them full 2022 to work through the challenges that they are dealing with.
That being said, that's quite all right, Mike, because as I reported in my Q3, the global car production was down 17%, and our automotive OEM revenue was down mid-single digits. Even with this market, we have outperformed, and it's a result of our shift towards the new energy applications. I think we are benefiting from that. It is a headwind, but I believe that we can manage through this situation without further significant erosion of demand.
Great. Last question here. Balance sheet tracking towards the right spot. I know you guys are working to start building out that muscle. Never really lost it, but putting a little bit more effort on a front foot to look at what kind of strategic acquisitions might make sense. How are you thinking about that process, timing, what that pipeline of actionability might look like sitting here?
Yeah. Look, a little bit of a commercial, right? I mean, we did get to our midterm target much earlier than we anticipated. The team is executing quite well. We feel very good about our balance sheet presently. We're generating a significant amount of Free Cash Flow. We have an organization in place that has been exercising development of the pipelines. We have a very active, very attractive bolt-on acquisition M&A pipeline. We have been very disciplined in ensuring that if there are assets that we want to add to our company, we will add those assets while being able to deliver very high rates of return. That's the challenge presently. There are things out there that we believe that we can bring forward. There are other things that we can do to create longer-term shareholder value.
The cash is not burning a hole in my pocket, but it is not out of the question that we could start thinking about potentially stock buybacks and items such as that. We are in a good place. We will stay disciplined, and we will make sure that we do the right things to create long-term shareholder value.
Ivo, thank you so much. That was great as always. Session one coming up next, Teledyne. Session two, Republic Services. Session three, Pactiv Evergreen. Session four, Albemarle Corporation. Session five, Materion Corp. Session six, Titan Machinery. Session seven, Honeywell. Thanks a lot, Ivo. That was great. Really candid. We appreciate the thoughts.
Thank you, Mike. See you soon.
See you soon.