Gates Industrial at J.P. Morgan Conference: Navigating Market Challenges

On Wednesday, 12 March 2025, Gates Industrial Corporation (NYSE: GTES) presented at the J.P. Morgan Industrials Conference 2025. Led by CFO Brooks Mallard, the company laid out its strategic roadmap, highlighting both opportunities and challenges. While confident in its internal initiatives and growth potential, Gates acknowledged hurdles in industrial and agricultural markets.

Key Takeaways

• Gates aims for a 24.5% EBITDA margin by 2026 through cost reductions and productivity improvements.
• The company plans to focus on stock buybacks and debt reduction, viewing its stock as undervalued.
• Growth opportunities are identified in automotive replacement, mobility, and data center cooling markets.
• Gates is leveraging its manufacturing footprint to mitigate tariff impacts.

Financial Results

• Gates is targeting a 24.5% EBITDA margin by 2026, driven by internal initiatives.
• Material cost reductions are planned over three phases, with significant savings expected by 2026.
• Footprint optimization in North America is projected to save $40 million annually by 2026.

Operational Updates

• The company is focused on expanding its automotive replacement and mobility businesses.
• Gates is capitalizing on the growing global car park and electrification trends in mobility.
• The industrial chain-to-belt initiative targets a $7 billion market, aiming for energy efficiency gains.

Future Outlook

• Gates sees potential growth in the data center cooling market, partnering with Cool IT.
• The company plans to continue stock buybacks, believing its stock is undervalued.
• Debt reduction remains a priority, with a target to bring gross debt below $2 billion.

Q&A Highlights

• Mallard emphasized the company’s ability to pass tariff-related costs to customers.
• Gates is analyzing the impact of USMCA and potential clawbacks on its operations.
• The company maintains a balanced approach to capital allocation, focusing on shareholder value.

For a detailed understanding, readers are encouraged to refer to the full transcript below.

Full transcript - J.P. Morgan Industrials Conference 2025:

Operator: Okay.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: Hi. I’m Shigusa Katoku. I’m a multi industry analyst here at JPMorgan. Today, I’m really excited to have with me Brooks Mallard, Executive Vice President, Chief Financial Officer as well as Rich Kwas, Head of IR of Gates. So thank you so much for being here today.

Operator: Thank you for having us.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: So maybe I just wanted to start off with maybe the near term trends. Like just if you can tell us what you’re seeing in terms of demand trends. As you said yesterday, there was some softness around auto E, aftermarket and consumers, but just curious to see if you’re seeing any caution from customers given tariffs or just general macro uncertainty?

Operator: Yes. Well, look, I think when we went in and gave our guidance for 2024, we took a very pragmatic view of what we thought was going on. And I think at the beginning, a lot of people were pushing back and saying, well, don’t you see an inflection coming or something like that? And we ended up being pretty close to the mark. We came in better on profitability and EBITDA, a little bit lower on sales given the macro backdrop.

I think heading into this year, it’s not too dissimilar, right? I think we have certain areas of the business that we’re seeing green shoots and we see potential for growth. And then there’s other areas of the business, which we think are going to take a little bit longer. So I can go let me go through those one by one because I think it’s important and pertinent to your question. The automotive replacement business is the strength of the business.

It was good in 2024. We’ve won some business in 2025 that’s going to in North America, that’s going to grow the business 100 to 150 basis points from a core growth perspective overall. The global car park or how many vehicles are in operation is growing. It’s also aging. People are keeping their cars longer.

They’re repairing them more often with more frequency because they’re keeping them longer, which is good for our business. Our business in total is about 36% automotive replacement, and we have about 9% exposure to automotive OEM. And so higher interest rates and I think kind of more consumer uncertainty is probably not great for the automotive OEM business, but it’s good for our automotive replacement business. So we expect that to continue to be we expect that to continue to have positive core growth. The mobility business, which we’ve grown from pretty nascent to a pretty significant part of the business, has been going through about a year and a half of inventory correction coming out of COVID, where the retailers as well as our channel partners and manufacturers had built up a significant amount of inventory.

We believe that inventory correction is largely passed. We returned to core growth in Q4 of twenty twenty four. We expect there to be continued core growth in the mobility business in 2025. So we think that’s going to be a strength of the business. Diversified industrial, we went to kind of flattish in Q4 of twenty twenty four.

That’s largely going to be on the back of manufacturing activity, investment in industrial automation, investment in warehousing, food processing, different manufacturing verticals. That one’s, I think, tough to call, right? I mean, I think we’ve seen some fits and starts, but we haven’t really seen a return to volume growth and a return to kind of a cycle inflection, which everyone’s waiting for. And we did not build that into our guidance as we thought about 2024. And so we didn’t really think build that into our Q1 guidance either.

And then I think you’ve got like ag, construction, which you’re still going to continue to try to find the bottom. I think it’s going to be less bad than it was in 2024, but there’s still some inventory correction, still some, I think, demand generation kind of at the end user level, which we have to wait and see on. So we have certain parts of the business that we think are going to pivot or continue to show growth in 2025, other parts of the business that are not. That’s why we have our guidance set. I think midpoint was 1.5% of core growth, which is kind of a mix of market, some exhibiting some good core growth and others still trolling along the bottom.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: Thanks. That’s super helpful. And then you have broad geographic exposure. So maybe like if you could go around the world and talk about what you’re seeing outside The U. S.

And like China and Europe.

Operator: Yes. So in Q4, we saw some green shoots in China and in East Asia and India. I think some optimism around industrial activity in China, which drove some of the growth. I think and so we have we’re hopeful that that continues, right? And that’s generally can be a leading indicator that you’re going to see some pickup in industrial and in manufacturing activity.

EMEA continues to be a struggle. We think they’re going to continue to struggle through 2025 as they try to find their way and especially with the new environment. I think if there’s a silver lining to kind of how the past couple of months have transpired, I think there’s certainly some hope out there that you’re going to see a renewed industrial renaissance maybe in Europe and some industrial activity, I think, which would certainly be helpful, right, overall. North America, I think North America, we’re kind of wait and see. I mean, I think on the one hand, it’s naive to think that there’s not going to be some repercussion to the overall economy relative to the trade policies and the tariff activity that is going to impact the economy somewhat.

Kind of back to our business, a large part of our business is nondiscretionary in nature. You have to have our parts to run an automobile or a combine harvester or an e bike or whatever that device may be. And so we I think we remain pretty confident in terms of the guidance that we gave, both for Q1 and for the full year. But I do think that we’re going to have to take a wait and see in terms of what happens with North America.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: Thanks. That’s a good segue. So just shifting to tariff exposure, if you can maybe help frame your exposure to tariffs as well as raw materials, steel, copper, aluminum. And how will you approach pricing and how comfortable are you to offset this?

Operator: Yes. So let me start with the pricing element. When we went through the big material inflation pressures back in ’twenty one, ’twenty two, ’twenty three, we had hundreds of millions of dollars of material inflation. And we had several things driving that, supply shortages coming out of COVID, Ukraine Russia war, which has some dislocation on suppliers, and then just overall, I think, supply chain uncertainty. And we were able to pass those price increases along at EBITDA margin neutral levels, right?

And so we were able to keep ourselves whole. Two thirds of our business is through distribution. And so we’re efficient and effective at passing those price increases through. We do a good job of communicating with the customer and letting them understand what the underlying drivers are. And in general, distribution will pick up those price increases and they’ll pass them along.

While we’re a global business, we’re very much an in region, four region business. And so North America is mostly made in North America for North America, EMEA the same way, China the same way, East Asia and India the same way. So the big question for us is the imports from Mexico to The U. S, right? We’re kind of de minimis in our exposure to Canada, kind of de minimis in our exposure to China and those imports coming in.

So we’re currently under kind of going through an analysis in terms of what’s covered under the USMCA, kind of how clawbacks are going to be handled in terms of do you make something in The U. S, send it to Mexico for some value added activity or assembly activity and then it comes back to The U. S. We’re currently kind of formulating all that information and building that into our pricing strategy kind of coming up here on the at the March. I think April 2 is kind of D Day for that, for getting all those price increases through.

A couple of things. First of all, we do have still a pretty significant manufacturing footprint in The U. S. So we are able to flex our manufacturing capacity and capability to kind of find the more most efficient kind of tariff, I guess, tariff methodology in terms of how we’re going to deal with these tariffs, right? And so we’re working through that at the current time.

And then I think, again, back to my original point, most of our exposure here is through the distribution side of the business. A lot of our OEMs will tend to pick up at the factory, so they’re the importer of record. And so the tariff really kind of becomes more their issue than our issue. And so most of our exposure is going to be through the distribution business, which again is a little bit easier to pass those price increases on. And not only from a they’ll take the price and pass it on to their customer, but also just from a mechanics perspective, we’re very good at taking taking those prices, allocating them across all of our SKUs and then passing that price through to their system so they can update their prices on the shelf.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: Thanks. That’s helpful. And then you mentioned too about like just remembering back in the post COVID inflationary period, you were pretty nimble with pricing, pricing like on a quarterly basis. You maintained price cost margin neutrality. But any thoughts on what your approach is this time around?

Operator: Yes. Look, I think it’s I think there’s a lot more moving parts here in terms of what’s in and what’s out and how quickly things can change. I think previously in the material inflation era, it was more, I think we were more certain that we were going to see price increases over the near to medium, I’m sorry, cost increases over the near to medium term and they were going to be sticky. I think it’s anybody get anybody’s guess how sticky this is going to be. Our current approach is we’re really taking the administration kind of at their word, which is you should see this as a one time kind of economic reset and adjust your business accordingly.

And then after that, it’s done. So that’s kind of how we’re looking at it. So and I think it’s going to be a little bit tougher on this one, maybe to maintain EBITDA margin neutrality. We’re certain we’re going to get EBITDA dollars neutrality, but the EBITDA margin neutrality is probably going to be a little bit tougher putt. So we’ll have to work through all the specifics of it and see.

The other thing is from an implementation perspective, it takes about a quarter for cost to work their way through our system in North America. So from the time that the tariffs are enacted to the time that we actually see them roll through our P and L, will be about ninety days. And we can get a price increase usually through our system and through our customers’ distributor partners systems in about sixty days. So we feel pretty confident that in terms of being able to match price versus cost as these tariffs roll through that we can match them up real time and make sure that we stay whole from an EBITDA dollars perspective.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: Okay. That’s super helpful. And then just one last thing on this topic. Did you see any impact of tariff pre buy from customers in the fourth quarter? And then conversely, have you pre bought inventory to get ahead of tariffs?

Operator: No. We really we haven’t seen any impact. And we’ve as part of and I’m sure we’ll get into this later, as part of our material cost reduction initiative that came about as a result of all the cost increases and the supply chain dislocation that was related to COVID and then the aftermath of that. We’ve really expanded our supplier base. And so we’ve got good optionality in terms of in region sourcing and also out of region sourcing.

So we’ve really, I think, made our supply chain much more stable and much more capable of absorbing these kinds of exogenous events that can come about from time to time. So we while we know that there’s going to be some increases related to incoming raw material costs, whether it’s resins that may be coming from Mexico or wherever they may be coming from or aluminum and steel. We’ve got those into our calculations around pricing and what we need to roll out to our customers and to our distributor partners to ensure that we’re whole again from an EBITDA dollars perspective.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: And then just curious to hear like overall what’s your take on what’s going on out there under the current administration? There’s some a lot of near term noise, but are you kind of getting ready to dust off your playbook and cut costs and CapEx? Are you more inclined to still keep your foot on the gas because you have faith that this will ultimately be like a business friendly administration?

Operator: Yes. So look, I think things are dynamic, right? And so I don’t think you want to flip one way or the other too quickly. The initiatives that we put in place that have driven our gross margin and EBITDA margin expansion over the past six quarters are the same ones that are going to drive us to our medium term goal of 24.5% EBITDA. Those plans have been in place for a while.

The economics of those don’t really change given the broader backdrop. And so, look, we’ve got great internal investment opportunities. We’re going to actually our capital spending is actually going to be up in ’twenty five and ’twenty six to support these initiatives to drive gross margin and EBITDA margin expansion. And we have just a number of really great internal projects we’re working on. They’re going to drive material cost out, footprint optimization projects, system enhancement projects.

And so we’re going to continue to invest in the business. We believe that we’ve got a base of business in our replacement business that will remain strong, that will underpin the business. And look, we’ve been able to expand margins in a down volume environment, again, over the past six quarters. So we feel confident in our internal initiatives, our manufacturing initiatives that we’re working on. We’ll be able to continue to drive margin expansion and hit our medium term goal.

Now the timing may take a little bit longer if the cycle inflection doesn’t come and you don’t see increased industrial activity, increased manufacturing activity, particularly in The U. S. But we still feel confident in our medium term goals of 24.5% EBITDA just with the internal initiatives we have going.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: And just continuing on that point on margins. So you’ve always had a 24% plus target. But just if you could elaborate more on what gives you confidence to achieve this 24.5% by 2026 this time around? Just your progress on the material cost reduction, footprint optimization and productivity eightytwenty. Maybe like if you can touch on what are what year is a more low hanging fruit versus it’s more like back end weighted?

Operator: Right. So the well, I’ll start with the material cost reduction project. And so we kicked that off in 2023, and that was a combination of things, kind of, there was a supplier development negotiation, cost reduction element, which was the first part of the savings that we got mostly in 2024, and that’s what drove a lot of our margin expansion in 2024. Then at the same time, our material science team was looking at the new cost paradigm that we were looking at coming out of the inflationary period. And we were doing a lot of work on reformulating compounds and mixes and things that went into our product so that we could drive a lower cost base, but as good as or even sometimes better than previous performance.

And so lower cost, same specification, same capability from a product perspective. And I would say that’s kind of the next tranche of savings that we expect to get in 2025. And then there was a third one where we were working on our technology and our investment in mixing and compounding and kind of how we do our internal kind of special sauce in terms of how we make things. And so there’s some capital equipment that we had to invest in, some different things with a little bit longer lead time, and that’s really more of a twenty twenty six savings. And so when you look at what we targeted to save, it’s actually pretty evenly distributed over three years with different lead times in terms of driving the savings.

But we feel comfortable and confident in what obviously, 2024, we delivered what we think is kind of outstanding performance in terms of gross margin expansion in a down volume environment. We feel comfortable where we are in 2025 with driving those savings. And then as we get these the new equipment and new technology in place, we think that’s going to drive the 2026 savings as well. From a footprint optimization perspective, that’s really a combination of being more efficient with our cost footprint, primarily in North America, but there’s some global element to it as well. So there’s certainly a labor savings part of it.

There’s a fixed cost savings part of it. And that’s what really goes into the $40,000,000 number that we said we would be at as we exited 2026, ’40 million dollars of annualized savings as we exit 2026. But there’s also a part of it that’s really around labor availability. And we found that through the cycle, we’ve struggled in some areas to be able to flex our labor up and down through the cycle. And so in some of those areas, we’ve had to move so that we could access labor and be able to keep our customers happy in the up cycle when orders are really trending up, but then be able to flex our costs down through the down cycle and maintain profitability and in the down cycle and then kind of reset our profitability and re index it to a higher level.

And so that’s really the footprint optimization piece. And that’s over 100 basis points of EBITDA margin improvement, again, as we exit 2026. And then the third piece of it is kind of the ongoing work we’re doing around eightytwenty and plant productivity, pricing, back end supply chain optimization, plant scheduling optimization, and that’s really using the eightytwenty tools to really make the business simpler and easier to run, right? And that’s probably the smallest piece of it and probably the most volume dependent piece of it, right? Because to get I mean, you get to a certain point where you’ve got three years of negative PMI, and you need that cycle inflection to get the plant productivity piece out because you need some volume to flow through.

And so those are the three big pieces. And I would say the vast majority, 80 plus percent of that savings is all really internal cycle agnostic and really about the execution of our team in terms of delivering that savings. And so that’s why we feel confident about it.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: Yes. So on that point, so you’ve been clear that to achieve your margin targets, you don’t need like a meaningful cyclical recovery. But I think your margin bridge, it assumes some volume growth. So what are the visible areas of volume growth that you see even if the macro remains muted?

Operator: Yes. Look, I think one of the exciting things and one of the things that people or I should say investors that we meet with often say, well, why has your stock completely rerated yet, right? And so we went through the Blackstone exit. We went through getting our leverage down. And so we really kind of achieved all those goals in terms of positioning the company the way we want to.

But we’re I think we’re still, I think, undervalued, right, undervalued as a company, right? And so remind me again the second part of the question.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: So what are some visible areas of growth that you see even at the macro?

Operator: So I was getting to the growth area. So one of the reasons, one of the things that people often say to us is, well, you know, the business hasn’t necessarily grown, right? But if you look here at our growth and profitability versus our peer group, we’re kind of in the middle of our peer group from a growth perspective if you look on the left hand side at 3%. And we actually have a 50 basis points headwind as we have deemphasized the automotive OEM business. And when we went public in 2018, our automotive OEM was 14% of the overall business.

And today, it’s 9%, right? So we’ve decreased that business 5%, yet we’ve still grown 3% over this period, right? And if you look at our gross margins, we’re right in the middle of the pack, but we exited 2024 at about a 40% gross margin, right? And if you look at our EBITDA margin, again, kind of in the middle of the pack, but we exited 2024 at over 22%. So we’re 22.3% EBITDA margins for 2024.

So we’re moving everything in the right direction. Yet we still feel like, if you go to the next slide, we still feel like we’re not getting a fair valuation, right? We’re trading at a significant discount from the peer group we’re at, the peer group we compare ourselves to even giving our growth, our growth numbers and our gross margin numbers and our EBITDA margin numbers. And so I think what’s exciting, you talk about growth going forward is we have several things that we think are going to help us outgrow the market in the future. I think number one is our base business of the automotive replacement business has got a growing market and we think we can continue to take share around the globe, okay?

So the car park, which is about 2,000,000,000 vehicles globally, is getting bigger and it’s getting older, right? And so that is a good outcome for our automotive replacement business. I think the second big growth and so that’s kind of a major growth underlying on 36% of the business, a major growth vector that’s going to push 36% of the business. The next part of the business, if you think, is going to grow nicely over the short to medium term is the mobility business. And so the mobility business was growing kind of at really big numbers going through COVID.

And then we went through this inventory correction over the past year and a half, and now we’ve inflected back to core growth in Q4 of twenty twenty four. And so when you look at the channel inventory, which is back to normalized levels and you look at the underlying demand and you look at the programs that we’ve won that we know we’re specked in on over the course of the next couple of years, we feel very confident that we’re going to grow the mobility business significantly faster than the market. And there’s really kind of there’s two things going on that’s helping us grow, right? One is kind of the continued electrification of the mobility market. So things are continuing to move to electrical drive versus internal combustion drive, which lends itself to a Gates belt drive system.

It’s a better application for that particular or it’s a better product for that particular application. I would say the second thing is, as we continue to work on the material science part of it, we continue to get to closer to parity with chain. Belt becomes the natural option. It’s quieter, it’s smoother, it’s more power efficient. And so the as we’ve grown this mobility business, it started out at the high end and now we’re making good penetration on the medium end.

And this is a big global market that we think we’ve got over the course of the next five plus years a lot of market share to gain. So a growing market and we’re going to take market share because belts are going to replace chain. Along those same lines, we have the industrial chain to belt initiative that we’re working on. And again, the industrial chain market is a $7,000,000,000 market. And we’re a very low single digit player in that market today.

And we think over the course, I mean, this is one that’s going to last many, many years. We’re going to continue to displace chain with belt drives. Belt drives are more energy efficient. They don’t require lubrication. They have better uptime characteristics.

And as we’ve continued to develop products, we’ve continued to close the gap on the initial cost base of belt versus chain. And the more that we close that gap, the more that we get the machine OEMs, the machinery OEMs to specify us in the original equipment specification, the more we’re going to grow that business. And I think the last one is, and this is one that’s I know it’s a buzzword on everybody’s lives right now, is around data centers. And so we’ve made hydraulic hose and we’ve got applications in supercomputers today, right, that we’ve had for several years. As data centers are moving toward liquid cooling, we have the hose capability in a lot of different material formats, in halogen free, in other metallic free hoses, kind of more basic hoses.

So we have a lot of different specification on the hose that cools data centers. In addition, we have a partnership with a company called Cool IT, where one of the applications we develop for the electric vehicle market, which is an electronic water pump in a very small, confined space with very large pumping capacity, we’ve now taken that and we’re developing that application for data centers so that you can place the pumping apparatus along with the hose and the couplings that you need. And we kind of have that whole system that we can supply data centers and we can scale it based on what their need is, right? And so is it one inch diameter, is it two inch diameter? We can scale the electronic water pump to go with the hose to provide the cooling for the data center.

And look, this is one that’s very nascent in kind of the order generation and the specification and different things like that. And we’re more at the back end of the build out there. So we don’t expect anything in that in 2025, but we do expect some growth from data centers in 2026. And that’s about a $1,500,000,000 market, right? And we feel like we should have a pretty fair share of that as well.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: Great. And then maybe shifting to the portfolio. Do you like your current channel, geographic and end market mix? So you’ve lowered your auto exposure and group personal mobility over time, but are there any areas that you can add or reduce exposure to to shift more towards high margin, high growth, low cyclicality?

Operator: No, I mean, I think we really like our portfolio as it stands, right? I mean, I think we continue to be able to develop new products and new applications automotive replacement business is acting now and has acted over the past couple of years really with the characteristics that’s exhibited for many years before that, before kind of the original trade war in 2019 and then COVID and then material inflation and then Russia Ukraine war and displacement for location and different things like that or displacement of supply chain and things like that. And so it’s really been the stable business, the ability to grow market share, expanding car park. And look, we have replacement products for internal combustion engines, for hybrid vehicles, for electric vehicles. We supply all of those replacement parts, right?

And so, as the electric vehicle becomes a larger part of the car park, we’re well positioned. We actually have more content on electric vehicle than we do on an internal combustion vehicle. And so we’re well positioned to supply those replacement parts as well. And the fluid we’ve spent a lot of time and effort kind of recapitalizing the Fluid Power business. We built three new facilities.

We came out with a lot of new products. We drove costs out of that product line. And now it’s really kind of on a par level with the power transmission business, whereas it used to be lagged behind from a profitability perspective. So now we have really two, what we think are strong, synergistic product lines and fluid power and power transmission. A lot of them go through the same channel.

They have a lot of the same material characteristics. And we think we can build on that with different applications and ways to grow this business organically over the long term.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: And then on capital deployment, I think your near term priorities are paying down debt and buying back stock. But how will you balance those two? And then you’re close to your targeted leverage, but when can we expect you to be more active on the M and A front?

Operator: Yes. So look, a couple of things on that, right? So we still think the stock is undervalued, and we’ve kind of shown the data that we think proves that out. And so for us, we want to continue to buy back stock. We think that’s a good use of our shareholder money and a good use from a capital allocation perspective.

We still want to get our gross debt down below $2,000,000,000 which I think is approximately another $300,000,000 of debt pay down. So we’re still going to continue to pay down some debt. We have some tranches of debt that are a little bit more high cost than others. And so that’s still a good way for us to achieve the goals that we’ve committed to in addition to saving some dry gunpowder for when M and A does become more relevant, right? I think, look, just from a pure math perspective, right, it’s a tough putt to be trading at nine times and go acquire a company that’s trading at 12 or 13 times.

The math just doesn’t work. That’s a long way to go to make sure you’re not getting diluted by that acquisition. And so I think if you look at our recent history over the past three years, we’ve deployed about 1,100,000,000 of capital externally. About 45% of that was for debt pay down and about 55% of that was for stock buyback where we participated side by side when Blackstone was actually in the business. And I think that came to a pretty nice conclusion as we exited 2024.

And so I think as we look forward, we may lean a little bit more in on stock buyback in the short term, but we’re going to be pretty balanced in terms of our capital allocation. We continue to look at M and A targets. There’s a lot of things that fit our profile, critical to performance through distribution, higher margin business, nondiscretionary in spend. And so there’ll come a time when M and A will come more to the forefront from a capital allocation perspective. But I think here over the next year or two, we’re going to be much more we’re going to be focused on capital allocate I mean, stock buyback and debt pay down.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: Maybe I’ll open up to the audience to see if there are any questions.

Unidentified speaker, Audience Member: Sort of a small one, but you mentioned that one approach to the tariffs would be you have some facilities in The U. S. That you could flex back to. But then later on, you talked about facilities where you’ve moved away from because labor shortages, you move to where labor was more available. I’m assuming that those available facilities would be the ones that were more challenging from a labor standpoint.

So I guess how realistic would it be to actually flex back?

Operator: Yes. I don’t I’m not sure that’s 100% accurate. I mean, I think those are kind of two. I mean, the what we’re doing from a footprint optimization perspective and where we can flex our capacity, there’s not a lot of overlap there. So I think we can do both.

Yes.

Unidentified speaker, Audience Member: And do you think that’s how realistic is that? Everyone sort of seems to say, I’m going to price. I’m going to hope that it settles down. Our products stay in existing trade agreements. If not, I’m going to price.

And then maybe there’s something I can do to move manufacturing. But that third seems pretty distant in your

Operator: Yes. Well, I look, what I would say is, look, our footprint our footprint optimization project is in place. That’s for the long term. And at this point, I would say we’re focused on where we can flex our current manufacturing capability and where we’re going to be in The U. S.

Long term, where can we flex that. And then other than that, we’re looking at it like inflation, so it’s pricing. And like I said, when we were going through the material inflation of 2021, ’20 ’20 ’2, ’20 ’20 ’3, we were rolling out quarterly price increases. So look, some of our stuff will be covered under USMCA. Some of it will be, we’ll get a clawback depending on where the value is added.

But look, let me be very clear. We’re going to use price to offset tariffs. We’re not going to eat it. We’re going to use price to offset tariffs.

Shigusa Katoku, Multi Industry Analyst, JPMorgan: Okay. Thanks. With that, I think we’re out of time. Thank you so much for being with us today.

Operator: Thanks, Gusa. Appreciate it. Thank you. Thanks, everyone.

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