Gates Industrial Corporation plc (GTES) Earnings Call Transcript & Summary

All right. So for our late afternoon session, we are really excited to have Gates Corporation with us. I've gotten to know Ivo. Ivo has done a great job in a tough environment over the last few years. Ivo Jurek is the Chief Executive Officer. Ivo joined Gates as CEO in May 2015 after spending the entirety of his career in the industrials area, both in the U.S. and internationally, where he's held senior positions at some of the world's leading industrial companies.

So Ivo, I'm going to walk over and while I walk over to you, maybe I'd just ask you one current events question and sort of what's going on in your markets these days. You guided to 5% to 9% growth, which is obviously still strong growth. But what are the biggest expected drivers of the growth across your segments? And what are the biggest risks as we sit here today?

Yes. So thanks, Andy. It's really great to see you and appreciate you guys having this conference in person. Look, we had a -- we're coming out of a terrific, terrific year in 2021. We've delivered 21% core growth, which was kind of the upper decile of performance of industrial companies, and we have a terrific tailwind. As I said in my Q4 call, our book-to-bill continues to remain significantly north of 1. We have a strong backlog. And as you know, we know the backlog business, we are a book-and-ship business. So we would love to get that backlog worked out and worked off, maybe a better way to say it. But we -- I think we were pretty pragmatic about setting up our 2022 guidance, predominantly taking into account what is happening with availability of raw material, the availability of logistics and, frankly, availability of labor. On my Q4 call, I said, look, we are starting to slowly see a little bit of green shoots on the raw material side. And I know I get lots of questions from investors, "Hey, why are you seeing green shoots? Because most companies we talk to don't really see the green shoots." What I say is you got to be a little bit careful because we are a company that is an industrial technology company, material science-based. We use lots of highly specified compounds. Many of these compounds were restricted compounds during the peak of pandemic. They were part of the restricted list once the government invoked the Korean War Act, and that has expired at the end of Q4 of last year. So we're starting to see slow improvements in those -- in that supply chain. Not everything is breaking green, obviously, but we are more optimistic as we exit Q1 that raw materials are going to be less of a headache. Certainly, as COVID rolls through during January, we were seeing some peak rates in absenteeism driven by folks actually getting sick. So you've got to give them time off, and we want to make sure that they get healthy. And that has, frankly, driven a preview of what's going to happen in 2022. And frankly, as we discussed, there's a lot of uncertainty still. The business remains very strong. It is now upon each individual company to, frankly, create their own -- a little bit of their own fortune. And we're well positioned to do that as some of these impediments work themselves through. Q4 of last year, Q1 of this year, we believe, are going to be the worst to deal with and we anticipate that things are going to start getting better.

Ivo, you're very global, right, as a company. So maybe you can just address any geopolitical concerns you might have, given what's going on in Russia, Ukraine over the last couple of weeks. And you mentioned Omicron. February a much better month for you, I assume. And so let me stop there because I can string together 5 questions. I'll just string 2.

Look, I think that we are trying to still figure out what happens with the most recent situation in Ukraine. The good news for us is we don't actually have lots of revenue in Russia. We generate maybe 1% of our global revenue out of Russia. It's a great business for us, of course. But we are being very cautious about what will happen. Obviously, we are very much focused on ensuring that we don't get caught up in some crossfire with currencies and restrictions and so on and so forth. But I think that time will tell over the next couple of quarters and maybe a couple of months. When you take a look at Omicron, coming back to that, look, we start seeing pretty significant infection rates with our factories, particularly in the United States at the end of December. We were seeing peak more or less at the beginning of February. Things are starting to improve. People are coming back to work. But I also remind everybody, this is end of February. So we kind of got impacted for 2 months out of the 3. But that being said, we have accounted for that in our guidance. And that's why we were being, I think, pragmatic about what we can anticipate and what we will see in Q1.

Ivo, that's helpful. And so I think you said to me actually on the last call that once the supply chain [ problems ] ease, you'd be able to better show sort of the market outgrowth that you've talked about before, sort of the mid-single digits. But maybe you can update us on where you are with a lot of these initiatives and the sort of target that you have of 20% new product vitality, like how close you are and how you're progressing towards that goal.

So we are extremely pleased actually with what's happening with our business, vis-à-vis our business initiatives. Let me start maybe with the product vitality. For the last couple of years, I've been speaking about how much progress we have made with the revitalization of our Hydraulics business, in particular, Fluid Power business. That business is -- the revitalization of that business is nearly complete. We are doing really, really well. Just kind of a point of reference, about 77% of our 2021 revenues in fluid conveyance side of the business was generate -- was the contribution from the new products, okay? So of all Hydraulics, about 33% of the total Hydraulics revenue is from new products. So we're doing really, really well, and we are very excited about it. I also believe that -- the investments that we have made in '17 and '18 in the 3 Fluid Power facilities have been essential for us. And frankly, we have, I think, delivered incremental growth with these new products, these new facilities that resulted in taking market share. So we're very pleased with that. Now we are pivoting towards Power Transmission. We have -- I have spoken on the Q4 earnings call about some incremental machine capacity. So we're not doing any brick-and-mortar, but we are building some incremental machine capacity to be able to keep up with the transformation of Power Transmission and, frankly, to be able to keep up with the demand that we are generating on some of these initiatives, particularly in personal mobility, micromobility, call it whatever you want to. We call it personal mobility, a chain to build in personal mobility and, frankly, in diversified industrial. With industrial, should think about as well with just simply keeping up with market share gains that we have had in our belt business. Those businesses are doing great. A couple of examples. Last year, we have grown our personal mobility business by about 96%. Again, I remind everybody in 2018, that business was less than $15 million. The business is now 4% of our revenue of much greater company. So I would say that I give our team an A+ on delivering on that initiative. And we believe that we are only in early stages. So in '19, when we were talking about setting these targets in NPI, the new product vitality index, we were having an aspiration to get to about 20% NPI. We were, at that point in time, very low single-digit vitality. Taking into account the progress we are making, we are kind of in the low teens today and very much on the way to that 20% new product vitality index that we have committed to deliver.

Ivo, let me ask you a follow-up there. You mentioned you think you're taking market share. Are there any sort of -- how do you measure that? How do you look at that? And the ability to attract and maintain labor is a big deal these days. So maybe talk about how Gates is able to attract and retain labor in the current environment.

So look, we have a very detailed process where we assess what new platforms we are winning. Look, as an example, if I just focus on personal mobility for a second, right? All of that is an incremental market share gain. We're just not taking it from belt competitors because we are the only belt company in the world that can deliver belts instead of industrial chains. So we are taking market share away from nontraditional competitors, which to us is also a great example of market leadership and the execution of that technology that we are bringing into the marketplace. So retaining that is not only, frankly, key, but more importantly we believe that we have an incredible runway. This is a very large, very sizable market. We've talked about that market to be kind of $8 billion in the past. We have an Analyst Day that's coming up in a couple of weeks, and we're going to size that market up. And we're going to also offer an incremental line of sight of what we believe that the opportunities for our company and how big of a runway we have and how we can reward our shareholders that have been, frankly, very patient with us, and they have been very supportive of our execution.

So Ivo, of course, I want a sneak peek into that Analyst Day. So let me just ask you a question like this. So we know what's your midterm targets are, $4 billion of sales, 24% adjusted EBITDA margin, 20% ROIC, 100% cash conversion. Which target seems easiest to achieve? And which one do you think seems most difficult?

In the U.S.? U.S., right?

I tried to ask the question in a way that's...

Right. Well look, all these tough questions. But look, there are some targets that are easier to achieve than others. I'm very pleased how the team has delivered over the last 3 years despite the fact that we were dealing with a trade war induced with China or recession induced by the trade war with China and then we straight went into a pandemic. Look, I go back to those targets. There are some targets that we have actually already achieved. We are already north of our target on ROIC, as an example. We are very near our target that we've anticipated on free cash flow conversion. Yes, around the edges, but I believe that we are right there. If you take a look at our leverage, we have reached our midterm target in the short term. So we've already achieved our leverage. I feel very positively about revenue. The revenue, we are on a trajectory to reach our objective, I think, with a high degree of confidence. And then the target that's going to be a little more difficult for us is the 24% EBITDA margin. But I've got to tell you, I feel very good about that target as well. We are nowhere near going to de-commit the target. Absent of the unusual level of inflation that we have seen and frankly, the dilution of margin that you have seen even when you are taking price, that set us back a little bit. But we believe that we have a line of sight of how we're going to get there. And it's not going to take another 5 years. I mean we will recommit the target, and we will give you a line of sight of how we're going to get there in detail and when we believe that we can get there. But we are very optimistic about being able to grow earnings quite nicely over the midterm as well.

So let me ask you one follow-up to what you just said, which is the ability to price. Like what have you learned through this time period? You had some inflation in '18 and '19, as you know. Now you have massive inflation. What is the company doing in terms of pricing to maybe do a better job or improving its ability to price?

Yes. So Andy, I would say that we have done a really good job in 2020. We have been price material economics positive ever since I have taken over my leadership position at Gates. So that's an extended period of time where we have been able to price for inflation. I would tell you that one of the probably biggest challenges is being able to react to the acceleration in inflation. Even in 2020, for the full year, price material economics was neutral for the company, including logistics. We've got upside down in Q4, and that's been the sole reason of seeing the compression of margins that we have seen in Q4. But we are very positive about the pricing that we have taken since. We have done that knowingly because, as you know, Andy, we have a very broad portfolio of products. And to go in and price the full book with our channel partners is very complex. We would have maybe gotten a month out of the quarter. So would things be better? Yes, they would be better around the edges. And we just felt it's more orderly to do it starting in January, and we are in a very good place vis-à-vis pricing.

So let me ask you, I think for this year, your guidance is to be price cost neutral, right? What does it take to sort of get there? We already talked about maybe sort of material costs, which have started to come down a little. Do you assume that they continue to come down? Any more incremental price increases that you have to take? Like what are the conditions to get to your target?

So we -- first of all, I would say that what we've committed is that we're actually going to be margin neutral for the year.

Margin neutral.

Which is -- exactly. It's a much bigger deal, I think, than price material economics neutral. We're actually very positive on being price material economics neutral. What we felt is that we have taken adequate amount of pricing to be able to deliver on that objective, particularly as the business progresses through second half. As all the pricing ramps up, we have taken price through every customer, every channel. There's not one customer that we didn't touch, whether it is automotive OEM or it's a channel partner that is distributing our industrial products. It doesn't matter if you're in the United States or you are in China. We have taken price every region, every customer, every commodity. So we feel good about price. It's going to ramp up over the first half of this year. And we certainly anticipate that as we come out of the most difficult, most challenging period of time, which is Q1 into Q2, you will start seeing progressive improvements in our operating margins. We are confident of that. Then you will start seeing normalized incrementals, absent of something else of significance coming forward in the second half.

Right. So what's normal for you guys nowadays is mid-30s to 40%?

That's right.

Got it. Okay. So let me then go back to ask you about basically -- you talked about that 4% that's in personal mobility, right, and sort of growing. But you've also talked about accelerating trends to longer-term growth, high-end -- high-growth end markets accelerating trends. Like I guess what do you mean by that? Are you shifting a lot of your R&D that way? Is it just the markets have moved more toward it? I'd love to be outside on my bike or whatever during the pandemic. Like what is it that you're doing to accelerate?

So look, there's about 170 million 2-wheelers that are manufactured every year, okay? So when we talk about some of the trends, we are not relying on a dramatic growth in the output of these 2-wheelers, and 2-wheelers are bicycle, e-scooters, scooters, e-bikes and so on and so forth. The trend that we are seeing is a very rapid adoption of electrification in those devices, so whether it is an e-bike or it's a e-motorcycle or e-scooter. First of all, the easiest way to reduce pollution because in many regions, people rely on scooters as their primary mode of transportation. You don't have the same level of impediments that you have on a vehicle to support charging and the battery construction and battery sizing. And so as the generation of folks is getting a little bit older, people want to be more outside. It is -- there's a pull from the market to electrify those 2-wheelers. And when you electrify, you really want to have a Gates belt drive on that e-bike because it's quiet, it's reliable, it doesn't require maintenance. And frankly, it generates a much greater output based upon the size of the motors that are being mounted on those devices. And so that bodes well for us. So we don't necessarily depend on more 2-wheelers being manufactured, although there is a forecast that, that will grow very nicely over the next 10 years. It's the rate of electrification that we are very excited about where we play a major role and where we are the only alternative to a chain. And by far, better solution than that chain.

So maybe we could step back and think about electrification to the overall business, Ivo, because it's interesting, right? When we -- when you went public, a lot of people asked you about your content per car, blah, blah, blah. So as we sit here today, you have a very different business. You do have a much larger auto aftermarket business than auto OE business. So how do you look at electrification impacting your business? Does it accelerate growth outside of what you just talked about in e-bikes?

So we are very excited about our automotive business. Over the last 4 years, we have organically trimmed highly commoditized business in automotive OEM that we had no interest in. So we've lost about $100 million of revenue through the process, which was strategic, it was planned and it was executed. We presently have a nice sized business without OEMs that is very profitable, and we like the business. As you said, our replacement side of the business continues to grow nicely. It's a good business. We are generating tremendous amount of profitability and cash flow generation. That being said, we're excited about electrification because our content goes up by over 2x. The content on electrified platform goes up from about $125 to $300. But what I think people don't realize is that although we don't transmit electrons, so we don't make motors, so we don't make connectors or inverters, the function that our products serve is much more important in an electrified platform than in an ICE. Because the batteries, the motors and inverters need to be cooled and warmed. During winter, they need to be warmed. And during summer, they need to be cooled. And if you don't have a good thermal management system, you will run into difficulties. All you need to do is take a look at what's happening outside of the shores of Canary Islands, right? So I think that the opportunity is very exciting for us. But that being said, again, we are a replacement-focused business. We need -- and we serve customers that have cars that are 7 to 12 years old. That's our sweet spot. That being said, that means that 2 things need to happen for us to capitalize on that opportunity. First of all, that car part needs to grow and vis-à-vis [ electrify ], right?

They [ haven't yet ] then.

Right. So that's going to take some time before I see it turns into an EV in new car sales at that volume, right? And then it needs to age 7 to 12 years. So we have a great opportunity. We are very well prepared for it today. We are winning business on electrified platform with OEMs today. We actually talked on our earnings calls the last couple of quarters, we're already supplying our products today on the engine cooling side, on the battery cooling side. So we will continue to invest, and we'll make sure we protect our replacement franchise and then we scale up as that business scales up.

So Ivo, how does that reconcile with [ the size ] as you said, auto OEM, you've taken down over time. Does it now stabilize and you try to sort of convert it more into EV-type work?

So if you think about our OEM presence, we want to keep our OEM -- automotive OEM business, plus or minus, same in the dollar size. And as the company grows, obviously, the percentage is going to get a little bit smaller. But the dollars, we want to maintain. And we will be predominantly focused on taking electrified platforms only. Now we are very selective in our participation, frankly, on both sides of propulsion, electrified as well as ICE, and we will continue to be selective and be there when customers need us on the replacement side of the business.

And you mentioned to me during the earnings call that you were -- what's the word, cautious on auto OEM builds, maybe low single-digit growth [ adjust ] kind of in the high single digit. Like have you seen anything to make you feel better about that market? Or you still feel good about your conservative view?

I think that I feel very good about my view, frankly. Because unfortunately, every time you open up Wall Street Journal or Financial Times, you see some of these car companies de-committing more volume, right? I think that it's going to work itself out. But what I said in my earnings call, Andy, as you said -- I said, look, I believe that it will be tough sledding for the automotive OEMs in the first half. And I don't think that they're going to start seeing any improvements maybe until second half of the year. It is tough to ramp up capacity in semiconductors. And it doesn't happen overnight. And I think there may be a little more enthusiasm out there than the reality would warrant. And so we want to be grounded. We don't want to count on revenue that may be difficult to attain if the end market is not going to be able to support it. So I think that we are reasonably realistic about what's going to happen with our OEM business, and I think I will be proven probably more right than wrong.

So I'm guessing we'll talk about this more at the Investor Day, but I did want to go back to something you said around the 3 new Fluid Power factories. Like how have they really fared during the market where -- because they were designed for a market like this, right? And then you also -- if I remember from the last Investor Day you had, you had this sort of program where you're going to slowly take out old capacity and sort of replace it? Now I assume you've probably slowed that down with big demand. But how do you think about sort of the transformation of your assets, what that could mean going forward?

Andy, of course, and you remember the time frame, it was really tough because we were bringing this capacity online as one of the cycles was ending, and we were rolling into a -- somewhat of a recession, maybe unnatural recession that was induced by the trade war with China. So that being said, today, we are proven to be pretty foresightful. The business has grown very, very strongly. As you know, our entire business in 2021 has had a record year. Put Q4 aside, right, we have outgrown our premium industrial peer group in 2021. We feel very good about the growth opportunities that we have. We have been executing on those. In the Hydraulics, despite the fact that we have delivered very strong growth, I think, over 24% core last year. We have been able to service our customers much more effectively than we have been able to do that in 2018 -- '17 and '18 upcycle. And we are doing it through all the impediments that everybody has to be dealing with, so they just validated that strategy. And we are in places where you can find people more readily. You are in places where you can operate more effectively. So we are very pleased with the capacity. It allowed us to reposition ourselves. It gave us the opportunity to launch new products with new assets, with new technology. By the way, we'll talk about a little more of that during the Analyst Day as well. So we are very excited about where we sit as a company, and we are very excited about the transformation that we are driving. We are turning the company to be a premier supplier of highly engineered precision components that are mission-critical. And I think that it's going to bode well for our investors and for all of our stakeholders as we move forward. And despite the fact that there are day-to-day impediments, our team is executing quite well.

Is there any more low-hanging fruit? You mentioned you're trying to hit the 24% EBITDA margin target. Is there any more low-hanging fruit in terms of the cost structure to go after to help accelerate the process over the next couple of years?

Yes. No, absolutely. Look, hopefully, you took from my answer to your earlier question that we are still very optimistic about hitting that target over the kind of a -- sort of a -- at short to midterm. Well, there are 3 things that we believe are the biggest opportunities. First is new products. New products are lower cost, and they give us the opportunity to drive margin improvement as we drive adoption. We are in a good shape with Fluid Power. We are now on the trajectory to revitalize Power Transmission. So we believe that, that's going to help. All the initiatives that are giving us market share gains and the volume upload, that's going to give us another component of that margin uplift. Look, we still have lots of self-help that we can do. We still have a very broad, complex portfolio. A number of times, you and I spoke about how we are thinking about product line simplification. We have done that through innovation in Hydraulics, as an example. We have taken about 30 product line constructions. We have taken that down to 11. So we have done under-the-skin simplifications. We can now move into above-the-skin simplification. So we think that there is a great opportunity for us to improve profitability there. And frankly, there is some piece of continuation of restructuring and continuing to move production into places where you can find labor and, generally speaking, scale up those assets and give yourself an opportunity to have a much more efficient way of manufacturing these products. So that's kind of how we think about being able to get to that.

Yes, it's very helpful. So we have an audience question, I'll get to that. It's more of a cash flow or cash deployment question. Let me just ask you quickly about China in the sense that, that's been a bit more difficult to do business in over the last couple of quarters. But you still have a reasonably positive outlook for this year, up mid-single digits. So you have some real strengths there, auto replacement, your industrial business is good. Maybe talk about the confidence level you have in performing in China over the next year.

So look, I view China as -- look, first of all, we are in China for China, we have no expats. So we are basically a Chinese business in China, okay? We have Chinese nationals that manage it, we have Chinese assets, Chinese imports. We're doing development in China for our Chinese customers. And so we view our sources as a kind of a local business. We've made lots of investment in helping our customers to professionalize on the replacement side of the business, and we have continued to build our presence and scale, our presence in industrial applications. So very similar to what I've spoken about kind of in general about our business. Look, huge opportunity in personal mobility, particularly in places like China, where personal mobility, 2-wheeler mobility is huge. Light industrial automation, robotics, those are end markets that have a very positive tailwind. When I look at what happened in second half of the year, the biggest headwind that we have been dealing with is the one that we already talked about, which was automotive OEM. I mean they were hit just as hard in China as in the Western world, vis-à-vis semiconductor supply and construction equipment. There was a large overbuild of construction equipment in the prior 3 years. That slowed down. We have absorbed that reduction of volume. We have a great aftermarket business, and we see the programs that are ramping up in 2022. Look, Q1 is going to be challenging anyways, which we have anticipated. Olympics, COVID issues that are kind of popping up in China here and there. But we are very bullish about China long term, and we believe that the mid-single-digit growth for 2022 is absolutely in the cards.

Ivo, just maybe one follow-up there, the competitive landscape, like what's happened there over time? Has it been relatively stable? Because it seems like you've had good share in something like auto replacement. But how do you sort of stay ahead of the competition there? Because I imagine it's very different than here.

In a way, it is different. But in a way, it is identical, right? We are executing the same playbook that we have executed in any developing -- and I almost hate to call China a developing country. It's not a developing country. It is a developed country. But the channels are not well developed yet. And so we use the same playbook in developing channel partners. We have the broadest portfolio that we supply, particularly to the automotive aftermarket. We are #1 market share holder in automotive replacement for the products that we manufacture. So our playbook is working well, and we continue to grow. Even in 2021, and that may be a little tough year for us even by our standard -- by our standards, vis-à-vis growth. We still delivered positive core growth in most of our end markets and in channels with the absence of automotive OEM. So we continue to grow, and we believe that the opportunity is there. Look, the business has the potential to be the size of our European business. And China is a very industrialized country. They need our products. We are focusing on building all of the capabilities that we have everywhere else in the world locally in China, so that we can support those customers from that vantage point. And as we develop new technology, we'll put it there, and we'll compete against the industrial chain and against some other hose and belt manufacturers as we have done in the past.

How, if at all, have you changed your products or your pitch for ESG/sustainability trends?

That's a really good question. We actually view ESG as kind of a natural extension that generates demand for our products. And we are looking at it in 2 ways. Number one, we are looking at it from the end market. So look, we want to be a good steward for the environment. I think that we are a good steward of the environment. We are engineering harmful chemicals and harmful compounds out. We are developing products that if they go to landfill, they go there in significantly lower quantities. We are focused on consuming less power, and we are focused on consuming less water, just like everybody else. However, when we are developing products, we are looking at what type of constructions we can put in place, so that we can have a dramatic reduction of some of these attributes that we have done. On Q4 call, I talked about an incremental investment in capacity for Power Transmission. And I called it out specifically for a couple of reasons, number one, because it's going to give us a nice tailwind in supporting the demand that we see in the marketplace, kind of from the end of Q2 into the second half of the year. But it's also a new manufacturing process that is consuming significantly less energy to build the products that we build. And by the way, we are eliminating all harmful chemicals that we have put into those belts that's built on that equipment. So that's the attribute of what we control. But the other attribute is what type of pull we see from that end market, right? So if we can eliminate harmful chemicals from like lubricants that you need to use on industrial equipment. And you can put Gates' proprietary belts where you don't have to lubricate, you will consume less energy. You will have a higher uptime because you don't have to shut it down for maintenance. Those are real meaningful drivers that will drive demand for our products for -- over the midterm. So we're very excited about that. And in this front and center, we'll talk more about it as well a little bit. And we have turned a -- we have coined the term eco-innovation. That's how we think about everything that we do. And environmental attributes of new product development are as critical as cost, quality or construction.

So audience question is, debt has come down materially over time. Where do you go with capital allocation from here?

So this is a great question to start addressing. And I'm really pleased that I'm actually being asked that question because...

Yes. Usually, it was just debt.

And over the last 5 years, all right, we were trying to delever the business, right? I mean we -- and we have done a very nice job delevering the business. So now we're in a situation where all options are on the table. Clearly, we have had a $200 million share buyback authorization by the Board. So we feel pretty good about that, and we're going to continue to execute on that. But we do have an opportunity to do bolt-on M&A. There's a pretty good pipeline of assets that we have been developing. But look, we're going to be very pragmatic about the multiples that we pay for those assets. The sellers have a very heightened level of expectation of what their assets are viewed. And we feel very good about our opportunities to grow our business organically, so we're going to be very disciplined. But we will go out and buy assets if we believe that they're going to help us to accelerate our strategy or give us the opportunity to do something more meaningful and drive significant amount of synergy and accelerate our earnings growth. So we're in a very good shape. Look, we have also an opportunity to reduce the cost of debt, right? I mean, most recently, I think last week, we've got Moody's upgrade, which is a plug-in, and I'm very happy about that. But that's starting to put us on a trajectory where we can start refinancing at lower cost, spend less money on servicing our debt and do some of these other interesting things. The other thing, as you know, this business is not very capital intensive. I mean we don't need to spend more than kind of $80 million to $100 million of CapEx a year, which is less than our depreciation. So...

100% cash conversion. How far away is that?

I don't think we are very far away from that because if you think about it, we have an elevated level of working capital cost last year. And it was driven by 2 things. Number one, it was driven simply by inflation. Inflation has increased the overall level of inventory by that inflation factor. The other point was with the logistics issues that you are facing with the issues of lack of raw material availability, we wanted to make sure that we protect our output. And so as the logistics becomes more predictable, we can start drawing down the in-transit level of inventories that we have. As it becomes more predictable and as material becomes more available, we can start drawing down on maybe a little more of the safety stock that we have built out to support our customers. And so I believe that as we start exiting 2022, we ought to start seeing a little more normalized performance. Look, the inflationary factor on working capital inventories, that's going to be with us for a little while. So that's not going to change in 2022. But I think that we can do things that can drive self-help. And I don't think that we are too far away from being able to deliver 100% cash conversion. We've done it before. And certainly, over the midterm, we ought to be able to be there consistently.

I think we're out of time, Ivo. So we very much appreciate the time. It's great seeing you in person. See you again in a couple of weeks.

Sounds good. Thank you very much.

Thank you.