Gates Industrial (GTES) Q2 2025 Earnings Call Transcript

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DATE

• Wednesday, July 30, 2025, at 11:30 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Ivo Jurek
• Chief Financial Officer — Brooks Mallard
• Vice President, Investor Relations — Rich Kwas

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RISKS

• North American core sales declined 1.3% in Q2 2025, with industrial OEM channel sales in the region down low teens due to lower demand in construction and on-highway.
• Fluid Power segment sales decreased 2.5% on a core basis in Q2 2025, reflecting incremental weakness in on-highway and continued softness in construction demand.
• Adjusted EBITDA margin in the Power Transmission segment declined 50 basis points year over year in Q2 2025, partially driven by elevated research and development spending.

TAKEAWAYS

• Total Sales: $884 million in Q2, representing a 0.6% core decline, with performance aligning with prior guidance.
• Adjusted EBITDA: Adjusted EBITDA was $199 million for Q2 2025, with an adjusted EBITDA margin of 22.5%, 30 basis points lower than last year, impacted by a one-time $7 million gain in the prior period.
• Gross Margin: 40.8% gross margin for Q2 2025, expanding 40 basis points, and staying above 40% for five consecutive quarters.
• Adjusted EPS: Adjusted earnings per share was $0.39 for Q2 2025, with operating performance contributing 4¢, partially offset by a 2¢ headwind from a nonrecurring gain recognized in the prior year period and a 1¢ FX drag.
• Free Cash Flow: Free cash flow was $74 million for Q2 2025, representing 73% conversion to adjusted net income.
• Net Leverage: Net leverage ratio declined to 2.2x in the quarter, down 0.1x sequentially and year over year, with a target below 2x net leverage by year-end 2025.
• Segment Revenue: Power Transmission posted $550 million in revenue for Q2 2025, up slightly on a core basis; Fluid Power generated $334 million in sales in Q2 2025, down 2.5% on a core basis due to weaker on-highway and construction.
• Personal Mobility: Sales grew 18% in personal mobility for Q2 2025; design wins continue to support rapid growth, with the opportunity pipeline currently exceeding $300 million.
• 2025 Guidance Update: Adjusted EBITDA guidance raised to $765 million–$795 million for full-year 2025; Adjusted EPS guided to $1.44–$1.52, with both midpoints increased due to more favorable FX.
• Q3 Outlook: Total revenue expected at $845 million–$885 million for Q3 2025; core revenue growth of approximately 3% at the midpoint for Q3 2025.
• Tariffs: Annualized impact expected at approximately $50 million in 2025, with 35%-40% incurred in 2025; 85%-90% to be mitigated through pricing.
• Replacement Channel: Posted low single-digit core growth in both automotive and industrial in Q2 2025, with the industrial replacement channel showing its first positive core growth since Q1 2023.
• Regional Performance: East Asia and India achieved approximately 4% core growth in Q2 2025; EMEA core sales fell just over 1%, with automotive weakness outweighing industrial growth.
• Data Center Segment: Data center opportunity pipeline now approaches $150 million, with new product launches and design wins supporting anticipated growth into 2026.
• Capital Allocation: Additional $100 million debt paydown planned in July.

SUMMARY

Gates Industrial Corp. (NYSE:GTES) reported results in line with previous guidance, with margin improvement despite modest revenue contraction and pressure in select end markets. Management raised full-year 2025 adjusted EBITDA and adjusted EPS guidance midpoints, attributing the increase primarily to favorable foreign exchange movements and stable core business trends. The company highlighted major investment and commercial progress in personal mobility and data center end markets, with large opportunity pipelines and significant design wins underpinning future growth. Segmental performance diverged, as robust personal mobility gains offset persistent challenges in construction and on-highway, while the replacement channel delivered steady expansion. Cash generation, leverage reduction, and capital allocation discipline remain central to the company's strategy, with share repurchases and further debt reduction reaffirmed for the second half of the year.

• CEO Jurek stated, Recovery in personal mobility is well underway, and we anticipate growth to inflect higher in the second half of 2025.
• CFO Mallard confirmed the midpoint of adjusted EBITDA guidance was increased by $15 million, "due to more favorable foreign currency trends since the beginning of the year."
• Management outlined the expectation that "most of our data center revenue ... is gonna be an FP [Fluid Power]" driver beginning in 2026, emphasizing momentum in this segment.
• The company confirmed its balance sheet continues to strengthen, with trailing twelve months' return on invested capital was 21.3% and additional high-return internal investments planned.
• Cost parity between belt and chain drives is projected within "twelve to twenty-four months" with ongoing R&D investments aimed at accelerating adoption in stationary industrial automation.

INDUSTRY GLOSSARY

• Personal Mobility: Segment focused on products for e-bikes, e-mountain bikes, and related two-wheeler power transmission applications.
• Design Win: Securing a customer's commitment to include a specific component or technology in future product builds, often leading to recurring revenue.
• Fluid Power: Gates segment comprising products and systems for hydraulics, hoses, tubing, and fittings used in industrial and mobile hydraulic applications.
• Data Center Liquid Cooling: Technology for cooling data center equipment using liquid-cooled components, increasingly replacing traditional air cooling solutions.
• Belt Drive: Power transmission technology using belts and sprockets to transfer motion and torque, often compared with legacy chain drives in industrial settings.
• Net Leverage: Ratio of net debt to adjusted EBITDA, used to measure financial risk and balance sheet strength.
• Replacement Channel: The market segment comprising aftermarket sales of Gates components and solutions, separate from original equipment manufacturer (OEM) supply.

Full Conference Call Transcript

Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gates Industrial Corporation plc Q2 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I'd now like to turn the call over to Rich Kwas, Vice President of Investor Relations. Please go ahead.

Rich Kwas: Greetings, and thank you for joining us on our second quarter 2025 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek. Before the market opened today, we published our second quarter 2025 results. A copy of the release is available on our website at investors.gates.com. Our call this morning is being webcast and is accompanied by a slide presentation. On this call, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website.

Please refer now to Slide two, which provides a reminder that our remarks include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K, and in other filings we make with the SEC, including our Q1 quarterly report on Form 10-Q that was filed in April 2025. We disclaim any obligation to update forward-looking statements.

This quarter, we will be attending the Jefferies Industrials Conference, the Morgan Stanley Laguna Conference, and the RBC Capital Markets Global Industrials Conference, all in September, and look forward to meeting many of you. Before we start, please note all comparisons are against the prior year period unless stated otherwise. And now I'll turn it over to Ivo.

Ivo Jurek: Thank you, Rich. Good morning, everyone, and thank you for joining us on our call today. Let's begin on Slide three of the presentation. In the second quarter, Gates Industrial Corporation plc delivered solid results as revenues outperformed our guidance supported by more favorable currency trends. Core revenue performance was in line with our April guidance. Core growth in our replacement channel was up, supported by low single-digit growth in both automotive and industrial. In the industrial end markets, personal mobility had another quarter of double-digit growth, and off-highway was flat with growth in agriculture, offsetting a decline in construction. We delivered solid operating performance in the quarter with adjusted EBITDA margin solidly exceeding 22%, in line with our expectations.

Gross margin expanded 40 basis points as we continue to make progress with our various enterprise initiatives. Our balance sheet continues to trend towards our short-term target of below two times net leverage. Our net leverage declined at the quarter end and grew year over year. We have updated our 2025 guidance, raising our adjusted EBITDA midpoint to $780 million and our adjusted EPS midpoint to $1.48. We have maintained our core growth midpoint of 1.5% and narrowed the range. Brooks will discuss the updated guidance in more detail later in the presentation. We continue to execute well in an uncertain macro environment, and we are focused on what we can control.

Our in-region, for-region operational structure is proving itself effective, as the enacted tariffs continue to fluctuate, and we have been able to mitigate the impact on our business. Please turn to Slide four. Second quarter total sales were $884 million, which represented a 0.6% decline on a core basis versus the prior year period. For our products, were as expected. We experienced strong growth in presumably, which we had anticipated at the start of the year. Our replacement channels constructed posting low single-digit growth. The industrial replacement channel realized positive core growth for the first time since Q1 2023. Our automotive end market was approximately flat with growth in auto replacement, offset by decline in auto OEM.

Additionally, industrial OEM sales were under pressure primarily due to soft demand in construction and on-highway. Adjusted EBITDA was $199 million with adjusted EBITDA margin coming in at 22.5%, a decrease of 30 basis points. Of note, a one-time $7 million gain on a real estate transaction recognized in the year-ago period had an 80 basis point impact on the adjusted EBITDA margin comparison. Gross margin was 40.8% in the quarter and has remained above 40% for five consecutive quarters despite uneven demand trends. We continue to progress towards our midterm margin target for both gross profit margin and adjusted EBITDA margin. Adjusted earnings per share was $0.39, an increase of approximately 8%.

Underlying operating performance contributed 4¢, partially offset by the nonrecurring real estate gain of 2¢ recognized in a year-ago period and unfavorable foreign exchange of 1¢. Lower interest expense and lower share count contributed about 2¢ on a combined basis. On slide five, we'll review our segment highlights. In the Power Transmission segment, we generated revenues of $550 million in the quarter and were up slightly on a core basis. High single-digit growth in industrial OEM sales was mostly offset by a decline in automotive OEM sales. Personal mobility grew 18% in the quarter, and we continue to execute well on the ramp-up of new design wins. The replacement channel will stay with slight growth year over year.

We are investing in our commercial front end and innovation in areas of strategic growth potential to position the company to capitalize on opportunities ahead of us. In the Fluid Power segment, our sales were $334 million, which translated to a 2.5% decrease on a core basis. End market dynamics were mixed in a quarter. On-highway was incrementally weaker as commercial truck production forecasts had been revised lower, particularly in North America. Softer construction demand continued; however, this was partially offset by low single-digit growth in agriculture, which is the first positive read since Q4 2022. We believe the ag market is close to the bottom of the current destocking cycle.

Demand in the replacement business was healthy, supported by automotive and industrial, which each grew low single digits. Industrial OEM sales declined low double digits on a core basis. Additionally, we are beginning to see a meaningful acceleration of quoting and booking activity in the data center market, which we expect to positively benefit the fluid power segment towards the end of this year and mainly as we enter 2026. Adjusted EBITDA margin for the Power Transmission segment declined 50 basis points year over year, partly due to higher spending on research and development projects to support new product development in personal mobility and industrial chain development.

Fluid Power expanded adjusted EBITDA margins by 10 basis points and benefited from more stable revenue performance in the off-road market and favorable replacement activity, partially offset by investments in data center initiatives. I will now pass the call over to Brooks for further comments on our results.

Brooks Mallard: Thank you, Ivo. I'll begin on slide six and review our core sales performance by region. Our key Asian geographies grew, contributing nicely to the quarter. This was offset by mixed macro conditions in The Americas and EMEA. In North America, core sales declined 1.3% and were primarily affected by lower OEM demand. Industrial OEM channel sales decreased low teens and were most impacted by lower demand in construction and on-highway. North American replacement channel sales expanded low single digits, led by mid-single-digit growth in industrial replacement, demonstrating a gradually improving trend. Auto replacement increased low single digits. At the end market level, personal mobility and diversified industrial were solid contributors. In EMEA, core sales fell just over 1%.

OEM sales were down mid-single digits with automotive weakness more than offsetting low single-digit growth in industrial. Replacement sales were mixed, with automotive replacement core growth in the low single digits and industrial replacement down mid-single digits. The energy and diversified industrial end markets were also down year over year. East Asia and India posted approximately 4% core growth and saw growth across all industrial end markets. Automotive OEM sales were down slightly, but this was more than offset by mid-teens growth in automotive replacement. China core sales expanded slightly year over year with growth in industrial end markets, partially offset by declines in auto. South America core sales declined low single digits.

On slide seven, we lay out the key drivers of our year-over-year change in adjusted earnings per share. Underlying operating performance contributed approximately 4¢ per share, driven by gross margin expansion. The operating performance was offset by a 2¢ headwind from the nonrecurring favorable benefit realized in the prior year period. Foreign exchange was a 1¢ drag on earnings per share. Lower interest expense and a lower share count contributed 2¢ on a combined basis. Slide eight offers an overview of our cash flow performance and balance sheet metrics for the second quarter. Our free cash flow was $74 million, growing 11% year over year and represented 73% conversion to adjusted net income.

Our last twelve months' free cash flow conversion is also trending up, reaching 80% in the quarter. Our net leverage ratio declined to 2.2 times, which was a 0.1 times improvement compared to the prior year period as well as the first quarter. Our cash balance continues to build and exceeded $700 million in the quarter. Furthermore, we intend to pay down an additional $100 million of gross debt in July. Through a balanced capital deployment strategy, we believe we are on track to reduce our net leverage below two times by year-end 2025.

Our trailing twelve months' return on invested capital was 21.3%, and we continue to invest in high-return internal projects that we believe will improve our competitive position. Turning to our updated 2025 guidance on Slide nine. We have increased our adjusted EBIT and adjusted earnings per share guidance at the midpoint. We are updating our full-year 2025 core revenue growth expectation to be in the range of 0.5% to 2.5%, maintaining the midpoint at 1.5%. We have increased our adjusted EBITDA guidance to a range of $765 million to $795 million.

Brooks Mallard: A $15 million increase at the midpoint due to more favorable foreign currency trends since the beginning of the year. Please recall heading into the year, we had about a $10 million profit headwind on foreign exchange relating to favorable hedge impacts that we realized in 2024. As FX rates have sworn to be favorable from a translation perspective, we have seen it roll through and have adjusted our guidance upward by $15 million. Embedded in the adjustment is the realization of some actual and expected unfavorable FX hedge impacts that we should realize in 2025.

We now expect adjusted earnings per share to be in the range of $1.44 per share to $1.52 per share, an increase of 4¢ at the midpoint. Our guidance for capital expenditures and free cash flow conversion remains unchanged. For the third quarter, we estimate total revenues to be in the range of $845 million to $885 million and core revenues to be up approximately 3% at the midpoint. For the third quarter, we expect our adjusted EBITDA margin to increase in a range of 50 basis points to 90 basis points compared to Q3 2024. Before I turn the call over to Ivo, I'll provide a brief update on tariffs.

At current tariff rates, we now expect an annualized impact of approximately $50 million and anticipate incurring approximately 35% to 40% of the impact in 2025. We intend to cover 85% to 90% of the projected impact with price and employ various operational and supply chain actions to cover the remainder. We continue to expect to be neutral for the year on a dollar basis. I will now turn the call back to Ivo.

Ivo Jurek: Thank you, Brooks. On slide 10, we outline our data center product portfolio and the types of customers we are presently supporting. On the left side, you see a sample of our product portfolio to accommodate the requirements of the industry. Earlier this month, we introduced our universal quick disconnect settings specified for the data center environment in multiple sizes. Our electric pump is gaining traction, and we continue to scale up our pump portfolio to accommodate the higher flow rates required in liquid-cooled data centers while preserving a compact size and energy efficiency. On the right side, you see we are serving a wide array of customers from data center operators to service contractors and everyone in between.

Currently, we are in negotiations with a major hyperscaler to supply in 2026. We have also secured a design win for our data center electric pump with an Asian-based EMS supplier in support of a large US-based server manufacturer that we estimate could be worth multiple millions of dollars in revenues as we get into full production in 2026. We have developed relationships with service contractors and engineering firms that are actively involved in the build-out of data centers and won additional business to supply our data master mega flexos in support of a data center campus project located in Texas.

Additionally, we have established close working relationships with critical infrastructure providers to the data center market and anticipate having additional design wins awarded through these partners in the near future. We are pleased with the momentum in our product development and commercial coverage, and we believe that our revenue base is poised to inflate nicely over the next couple of years. On slide 11, I'll provide a brief update on our personal mobility business. We continue to make investments to enter new applications and support new product development as well as expand and scale commercial competencies to drive penetration. Our innovation efforts are translating into relevance across new applications.

We have product offerings available for e-mountain bikes and value e-bikes, relatively new markets for us, that are gaining traction and augment our mid to long-term penetration opportunity. Our innovation efforts are centered on adding incremental performance at lower cost. At Gates, we are redefining how designers achieve the transmission of power to motion while enhancing look and feel. Our opportunity pipeline currently exceeds $300 million, and we believe the business is well-positioned to exceed $300 million of revenues by 2028, which implies a compound annual growth rate of approximately 30%. I'll summarize our thoughts and views on slide 12. First, we believe that we are managing the business well to the current economic uncertainties.

We are preparing the company for anticipated acceleration in core growth over the mid-term. Recovery in personal mobility is well underway, and we anticipate growth to inflect higher in the second half of the year. Our data center opportunity pipeline continues to expand, now approaching $150 million. The other replacement market remains constructive, and we see further opportunity for us to leverage our brand, product portfolio, and fulfillment capabilities to drive further market outgrowth. Of note, we believe the industrial off-road market has started to bottom, and we realized core growth in agriculture for the first time in two years this past quarter.

Concurrently, we remain highly focused on improving our gross margins through a mix of material cost savings, footprint optimization, and productivity. Second, our business possesses multiple secular growth opportunities. In personal mobility, the design wins we have achieved over the last couple of years are fueling outgrowth as the two-wheeler market has stabilized. Moreover, our opportunity pipeline exceeds $300 million, which provides us good visibility into our future outgrowth potential given our historical win rates. As we discussed previously on the data center slide, we are beginning to book relevant wins.

We believe the expansion of the liquid cooling market, coupled with the product development and people investments we are making, positions us to organically grow the business nicely to the end of the decade. Both personal mobility and data centers add a secular growth algorithm to our shareholder value proposition. Lastly, we anticipate our investments in new belts and sprockets are going to bring belt drives close to cost parity with chains over the next few years and potentially unlock a meaningful uptick in the chain-to-belt conversions across stationary industrial automation applications.

Our new product innovation pipeline is growing to support new applications as well as to improve existing work, and I am optimistic that our vitality rate is poised to increase nicely over the mid-term. Third, our balance sheet continues to strengthen, which enhances our capital allocation optionality. While our equity valuation has improved over the past several quarters, we believe our shares remain undervalued, and share repurchases are a good use of excess capital. We have taken a balanced approach to capital allocation historically and intend to reduce our gross debt in Q3 and make further progress towards our goal of lowering our gross debt below $2 billion.

Before taking your questions, I want to thank the 14,000 Global Gates associates for their effort and hard work towards satisfying our customers' needs on a consistent basis. With that, I'll now turn the call back over to the operator for Q&A.

Operator: At this time, I would like to remind everyone in order to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe: Oh, thanks. The confidence and conviction in that pivot to growth in the third quarter. The 3%. So just curious to what degree you're seeing. Obviously, the comps are getting easier, so that's one factor. But you know, what are you seeing in order rates, I don't know, backlog, and then maybe just the incremental price contribution in 3Q versus February. Just any help there would be welcome.

Ivo Jurek: Yeah. Good morning, Nigel. Thank you for your question. Look. Our order rates have been as we have anticipated. As we kind of entered Q2 and kind of as we exited July. We continue to see, you know, a nice portion of our end market that seem to be with maybe the on-highway exposure continuing to still decelerate a bit, but that's probably the primary market maybe with oil and gas that are still, you know, they are still kind of going down to a degree. But if you think about industrial replacement, industrial replacement is seeing slight improvements in demand. Automotive replacement remains stable and very accretive for us, obviously, globally.

And personal mobility, as I've indicated, has accelerated meaningfully post kind of a two-year destock that we have dealt with last year and the year before. So our degree of confidence is reasonably good. That you know, we will start seeing a very nice accretion in growth rates. I mean, it will be steady from where we sit. Yes. As you indicated, more of you know, maybe easier comp is a part of it. Personal mobility is going to continue to power forward and accelerate as I've indicated into the second half. Got a little bit of price. So all in, we feel reasonably positively about, obviously, about the guidance that we have provided the street.

Nigel Coe: That's great. Thank you, though. And my follow-on is shock horror surprise on data centers. So, I mean, we really appreciate the color on the pipeline. I think you've said in the past, Ivo, that this could easily be similar scale to the personal mobility market. So call it, you know, $100,150 million dollars in the next two or three years. Has your view changed on that opportunity set based on what you've seen out there?

Ivo Jurek: I want to be very careful how I represent it, Nigel, but I would probably say that I maybe see it even more bullishly than at that point in time. Obviously, there's no linear path from where we sit today up. But, look, we are invoicing dramatically more revenue today than we have done prior year from a very small base, obviously. But the amount of programs that we are involved with across the portfolio that we have delineated, and I would be remiss if I didn't throw our belts in there that go into the industrial HVACs. So, you know, our entire portfolio of products participates in data center cooling.

And I think what the inflection that we see, Nigel, is driven by the more rapid adoption of liquid cooling now. As everybody's realizing that the, you know, just forced air is not going to get you there. That's evolving super fast, and it's putting actually quite a bit of strain on our organization. And that's why we spoke a little bit about more investment to be able to keep up with it, to sample to, you know, to get certified qualified put on a stack. It's looking quite alright for us. So I think that certainly, that $150 million that I spoke in the past is totally doable.

Nigel Coe: Great. Thank you.

Ivo Jurek: Thanks, Nigel.

Operator: Your next question comes from the line of Deane Dray with RBC Capital Markets. Please go ahead.

Deane Dray: Thank you. Good morning, everyone.

Ivo Jurek: Morning. Good morning.

Deane Dray: Hey. Just want to circle up on the auto OE softness. And, look, everyone is seeing that. But what I think is unique about Gates is historically, you've always had strategically selectivity in terms of what auto OE first fit business you would go after? So on is the softness in any way reflected on some of the discretionary business that you have declined to pursue? Or is it entirely just lower production?

Ivo Jurek: Thank you for your question, Dean. I think that you're correct. I've spoken many years about selective participation, and we continued with that philosophy moving forward. It's really not that important part of our revenue stream. Again, to remind everybody, we've taken it from about 17, 18% at the IPO down to less than 10% presently. And we will continue with our process of selective participation. We have a tremendous amount of growth initiative organically focused that we believe will continue to dilute further that revenue mix. I would also say that there is a weakness in particular in Europe in production.

North America was, you know, slightly less in volumes than what I think the original assumptions used to be. But it's not, you know, it's not been the issue. The issue has been really more around Europe and the impact, I think, of tariffs on the production that was especially targeted for exports.

Deane Dray: That's really helpful. And just second question is I find it really interesting your point on the chain to belt conversion. Talk about how belts and sprockets are kind of a point where there's a, you know, they're equal to the kind of legacy chain cost. So what's been driving that? Can you maybe some numbers around how those two cost points compare? And, you know, does that make it even more compelling and accelerating this whole conversion?

Ivo Jurek: Yeah. Thank you for the question. It's a little more complex question, and I'll try to be brief. When we started this journey in 2018, 2019, the cost premium of belt drive to a chain drive was about two and a half times of a chain drive if you use a belt drive. But the payback on switching away from chain drive to a belt drive was very, very good because of the value we provide, uptime, no need to tension the drive, no need to lubricate, lower energy consumption. So the payback was very good for installed base.

But when we talked to machine builders, machine builders really wanted us to get much closer to the cost parity so that when they designed Bell Drive In, there would not be a cost premium. And as you can imagine, they are two different end users and an OEM that's building the equipment that's got different value drivers versus the end user that's utilizing the apparatus that's really more focused on efficiency and reduced maintenance amount.

So we've worked quite diligently over the last four or five years investing in alternative technologies of manufacturing, construction, and we are coming up with a sprocket technology that we believe is going to give us a rather substantial cost advantage and is to sprocket in particular that is required to drive that cost down.

And so while we are not at cost parity yet, and as I indicated in my prepared remarks, we are probably twelve to twenty-four months away from that, we believe that we are making rather meaningful progress with our cost structure and the technology evolution that will get us so much closer to that cost parity and open doors for adoption at the MOEMs on the industrial side and stationary application side.

Deane Dray: I really appreciate that color. Thank you, and best of luck.

Ivo Jurek: Thanks, Dean.

Operator: Please go ahead.

Jeffrey Hammond: Hey. Good morning, guys.

Ivo Jurek: Good morning.

Jeffrey Hammond: Just on this industrial recovery, I think you gave us some good color on end market. But outside of just ag bottoming, what other areas are you seeing kind of more signs that this kind of industrial replacement or industrial recovery is starting to take hold? And, you know, is it just simply getting clarity on tariffs or something else that's driving it?

Ivo Jurek: Yeah. And, Jeff, I think that, you know, it's a terrific question, and I, you know, I would probably try to again try to be brief here. Look. Demand environment is kind of evolving more or less as we anticipated when we entered the year. I mean, obviously, we didn't forecast tariffs brought in a tremendous amount of volatility and uncertainty in some of the things that we have been dealing with in Q2. And I think that people are kind of still processing about that capital of the year. We're quite encouraged about ag. Again, ag was over two, two and a half years negative. I think that you're starting to see some stability in there. PMI.

PMIs have been terrible, obviously, as you know, kind of, you know, with the exception of a couple of months. It's maybe, like, thirty-four months. That we have had negative PMI print. That I think is starting to stabilize. It's still below 50. It's starting to bring some stability. And my anticipation is and certainly that's when I look at our industrial replacement order rates, it would indicate that while, you know, it's not great, it's not decelerating. And actually, in Q2, we had a positive print on industrial replacement, which was quite good. Off-road still remains a headwind, particularly in construction. Enroad is incrementally worse. So I would say that those two end markets are still not great.

But our automotive replacement business continues to power forward. And it's quite positive delivering, you know, a great deal of stability for our revenue stream historically and on a forward-going basis. And auto is kind of around the edges what we've anticipated, maybe a little worse in Europe. But it's hanging in there in Asia and maybe marginally worse in North America. And personal mobility is just super hot. It's rebounding nicely. And it's giving us the opportunity to offset some of the negative print in some of the other markets. So hopefully, that gives you a better color.

Jeffrey Hammond: Oh, it's good. Can you just talk about how you're thinking about buyback into the second half of the year? And just the confidence that you hit your free cash flow conversion. I know there's, you know, some people have talked about benefits from the tax bill, but, you're just confidence in hitting the free cash flow targets as well.

Brooks Mallard: Yeah. So, you know, look. I think, you know, from a buyback versus debt pay down, first of all, look. You know, we take a balanced approach. You know, we are committed to getting our gross debt, you know, below $2 billion. We're committed to getting our leverage below 2. Right? And so that means we gotta lock in some of the cash generation by paying down debt. We're going to do in Q3. You know, we did we still think our stock is undervalued. So stock buyback remains a good option for us. So from a capital deployment perspective, you know, all options are on the table as we continue to generate cash.

You know, from a generating our 90% cash conversion, look. You know, over the past, you know, year and a half, we've, you know, we've invested in working capital. We've improved our service levels dramatically. We think it's paid dividends for us. Particularly on the replacement business. And now that's leveled off and some of our enterprise initiatives around supply chain are working, you know, we feel like we'll be able to dial down that investment certainly not increase it and dial it down some and drive working capital down. And maintain our service levels and be able to serve our replacement customers as well as we ever have.

So we've got good conviction that, you know, not only can we continue to invest, you know, from a capital spending perspective where we, you know, been investing more over the past six quarters, but we can continue to deliver, you know, very nice cash generation and cash conversion for 2025 and onward.

Jeffrey Hammond: Okay. Thanks so much.

Ivo Jurek: Thanks, Jeff.

Operator: The next question comes from the line of Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell: Hi, good afternoon. Maybe just the first question around the EBITDA margin outlook. So I think the second half guide is embedding a sort of high-30s operating leverage year on year in both quarters. Just wanted to make sure that's roughly accurate. And is that a good sort of placeholder when we start to think about 2026 assuming that sort of low single-digit organic sales growth backdrop can remain intact.

Brooks Mallard: You're no. You're spot on the, you know, kind of high thirties, almost a 40 leverage, both in, you know, how we're thinking about the back half of the year is where we should be. Yeah. And I think about, you know, '26 and going forward, you know, we're gonna continue to drop through, you know, on core growth to kind of that mid-thirties level plus the enterprise initiatives, you know, should put us in that kind of, you know, 40 candle, you know, range in terms of, you know, the drop through on the additional sales.

And you look at where our growth opportunities are and in mobility, you know, the replacement business is doing well, and that's a, you know, a little bit of a favorable mix kicker in there. So we feel pretty confident about that from an incremental earnings perspective.

Julian Mitchell: That's so thanks, Brooks. And then maybe one for Ivo more on the sort of demand backdrop. I guess one part is just have you seen anything interesting in terms of recent sort of cadence of demand moving around in the last month or two? And then maybe related to that, when you look at your sort of half a dozen main end market verticals, have you changed the perspective on any of them today in terms of the year's outlook versus January or April? It sounded like perhaps on highway North America is one that's changed for the worse. Any others to call out?

Ivo Jurek: Yeah. Julian, good afternoon to you. Not meaningfully, I think that the end markets are still around the edges more or less. As you have described, I would just say maybe meaningfully mid-single-digit kind of a worse in on-highway. As I've described. The rest of the markets are kind of hanging in there. Look, you know, we're speaking about markets, not about our opportunity to thrive. Growth. So as an example, I take a look at mobility and what we have represented by mobility. I mean, the end units are not growing. We're just driving, you know, dramatic level of penetration post-COVID destock.

And so while the market may be remaining, you know, somewhat positive around the edges, for us, we're delivering significant growth because of the design wins that we have won over the last couple of years. So I, you know, I think that we, you know, we are primarily focused on self-help, Julian. Where, you know, we believe that we can deliver revenue above market growth rate. And that's, you know, that's really what we want to continue to demonstrate taking on board some of the feedback that we have been receiving over the last couple of years from the market.

I would highlight that we do see in a particular data center, a liquid cooling market is kind of a feeding frenzy now. It's really quite amazing how many opportunities there are and, you know, just landing them. And this will be an opportunity for us where unlike maybe with some of the other traditional markets that Gates used to participate, we should start recognizing revenue reasonably quickly. So, you know, we anticipated we're gonna have some revenue from products that we're gonna be ramping up actually in Q4. I mean, it's not gonna be massive. But it's gonna be preproduction type revenue. And then a meaningful step up into 2026.

Julian Mitchell: That's great. Thank you.

Operator: Your next question comes from the line of Mike Halloran with Baird. Please go ahead.

Mike Halloran: Hey. Good morning, everyone.

Ivo Jurek: Good morning, everyone.

Mike Halloran: Yeah. A couple things. More follow-up than anything. One, just want to clarify. You guys are other than maybe personal mobility it doesn't sound like you're saying fundamentals are necessarily you're assuming a guidance and acceleration in underlying fundamentals more steady as she goes, normal sequentials in the back half of the year against relatively easy comps and then layering on some growth initiatives. Is that a fair characterization?

Ivo Jurek: Yes. It is.

Mike Halloran: Okay. And then second question, on the data side of things, just curious what the opportunity set looks like either organically or inorganically. Either new product development or acquisitions, layer on, you know, kind of broaden out the exposures there relative to what you're already doing. Obviously, very exciting. I'm curious if there's other tangential areas you see that complement what you're already pushing forward on.

Ivo Jurek: Yeah. Look. I think it's a terrific question. I, you know, I would probably punt on the M&A side, to be honest with you, because our opportunity set organically is rather significant. I think that when we start talking about the build-out of our portfolio, about a year, year and a half back or whenever it was, we were kind of scoping certain penetration of liquid cooling of new data center space. I would venture to say that's gonna be dramatically bigger than what we thought that it will be a couple of years ago. In essence, I think that there's gonna be a lot more liquid cooling penetration on a forward-going basis than I think anybody anticipated.

We have built a really nice portfolio around the core competencies that we have as a company. So we are not really stretching ourselves and reaching out to any sort of adjacent technologies. We are just chopping wood and keeping our head down with the core portfolio, tailoring our products around the requirements of liquid cooling. Obviously, you know, high degree of requirements, high reliability, precision, reliability of supply, those are core strengths to Gates Corporation. That's where we are good. And we believe that we will have a meaningful opportunity to deliver nice growth as we move forward over the next, you know, twelve, twenty-four, thirty-six months.

Mike Halloran: Thank you, though. Appreciate it.

Ivo Jurek: Thanks, Mike.

Operator: Your next question comes from the line of Damian Karas with UBS. Please go ahead.

Zach Walljasper: Hi. It's actually Zach Walljasper on for Damian today. Just a quick question clarifying the guidance for the year. I heard earlier comments about, like, FX being the tail to the revision higher in EBITDA, but I was just curious about the FX versus the more operational efficiency in nature. My second question is just around pricing. I know you guys put through a lot of price earlier in the year, but now we have, you know, copper and steel, and it's increasing focus and secure. So are you guys prepared to do, and then what customer feedback has been to the pricing? Thank you.

Brooks Mallard: Yeah. So, yeah, on the guidance, the $50 million midpoint raise was related to FX, and that's really, you know, kind of in the back half of the year, you know, where, you know, the dollar is gonna be weaker this year versus what it was last year. Right? I think we were pretty clear on that in terms of the remarks, but that's where the revision to the upside is coming both an earnings per share and from an EBITDA perspective. On the pricing side, look. You know, we waited to roll out our pricing till, you know, significantly later than we usually do. Because of the impact of tariffs.

And so we're gonna see, you know, sequentially, you know, as we move from a little bit more upside than we would normally see from Q2 to Q3. You know, having said that, you know, we've dialed our pricing back, you know, based on some of the tariff changes and based on some of the other things that are going on. And so we've, you know, we've said from the beginning, we're gonna be dollar neutral on tariffs. You know, we don't have to do as much stuff operationally because of some of the changes. And we don't need quite as much pricing as we thought we did, you know, because of some of the changes.

And so, you know, we feel like we're in a really good spot on tariffs. And then, you know, as we talk about the growth algorithm, in the second half, you being a little bit higher, I mean, that's part of it as well. We're getting a little bit of a bump from a little bit more second-half pricing relative to the first half than we normally see.

Zach Walljasper: Alright. Super clear. Thank you, guys.

Brooks Mallard: Thanks.

Operator: Your next question comes from the line of David Raso with Evercore ISI. Please go ahead.

David Raso: Hi. Thank you very much. I was just curious. The cadence for the rest of the year on the organic, obviously, PT has been outgrowing FP for a while. I'm just curious, given some of the bigger deltas potentially with the off-highway OEMs, do you expect Fluid to outgrow PT in the fourth quarter? I'm just getting a sense of the growth rates. Exiting '25 into '26. Any help between the business segments would be helpful.

Ivo Jurek: Yeah. I don't think so, Dave, because fluid power is pretty significantly represented with on-highway in construction, obviously, as you know, big hydraulics consumer and so on and so forth. So I think that PT has the opportunity to continue to outperform, particularly taking into account presumably. But we do see that most of our data center revenue, obviously, is gonna be an FP. So that's going to be accretive predominantly in 2026.

David Raso: Okay. So the ag improvement, we don't see construction up in the fourth quarter? I mean, it's something you think ag might be up, but just trying to extrapolate that to the big versus PT.

Ivo Jurek: You know, I wouldn't be providing guidance at this point in time further than would be provided on commercial construction. I mean, there's a probability that we can start seeing some inflection potentially as we exit the year. But, you know, I want to see another quarter of the market before, you know, I will be more, you know, before I lean towards providing additional support.

David Raso: On the savings, the activities around the factories and so forth, any base case savings that roll from 25 to 26 as we think about any margin help from those actions? And maybe any offsets, you mentioned some of the incremental spending on new product for personal mobility. I'm just trying to set up some puts and takes for exiting 25 into 26. Thank you.

Brooks Mallard: Yeah. I mean, we had embedded some of the things that we've already done in 25 into our guidance. So that's already in there for 25. You know, there'll be a slight bit of carryover as you move from 25 to 26. But if we send our, you know, in our earnings presentation, you know, we, you know, because of all the moving parts with tariffs and the trade. And so we're not gonna see the full throughput of some of our restructuring activities. Start to generate those through '26, but we won't see the full impact until '26.

David Raso: That's helpful. Thank you.

Rich Kwas: I'll now turn the call back over to Rich Kwas for closing remarks. Please go ahead.

Rich Kwas: Alright. Thanks, everyone. If you have any further questions, please feel free to reach out. Otherwise, have a great rest of the week. Take care.

Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.

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