Gates Corporation Conference Call Summary Company Overview - Gates Corporation is a material science company focused on producing products for harsh and hazardous mission-critical applications across various industrial sectors [3][4] - The company operates in two main segments: Power Transmission and Fluid Power, where it is a top three market participant globally [5][6] Financial Performance - Gates has an EBITDA margin of 22% to 23%, with expectations to reach 24% adjusted EBITDA margins in the next 12 to 24 months [4] - The company has achieved margin expansion through footprint optimization, an 80/20 initiative, and material cost reductions [5][48] - Strong free cash flow generation is anticipated, with a focus on shareholder returns through buybacks and debt reduction [7][60] Market Trends and Challenges - The industrial PMIs have been challenging over the past 3.5 years, impacting end market demand [12] - The agricultural business is facing difficulties, while the automotive replacement market is performing well [14] - Personal mobility has seen a growth of approximately 20% in the first half of the year, with expectations of 30% compound annual growth over the next few years [15][20] Growth Opportunities - Gates is focusing on industrial chain-to-belt conversion, with a total addressable market (TAM) of $8 billion in industrial applications [27] - The company is also exploring opportunities in liquid cooling for AI-based data centers, with a potential market size of $1.8 billion to $2 billion [38] - A supply agreement has been secured with a hyperscaler data center operator, with expectations of significant revenue from this segment by 2028 [36][38] Margin Expansion Strategies - Gates has implemented various self-help initiatives to improve operational efficiency and reduce costs [45][48] - The company anticipates a margin expansion of 1,000 basis points better than normalized incrementals in the first 12 to 18 months of volume recovery [50] Tariffs and Cost Management - The company faces an annualized tariff headwind of $50 million, which is expected to be offset by pricing strategies [52][55] - Gates has a strong manufacturing presence in North America, minimizing exposure to imported finished goods [56] Balance Sheet and Capital Allocation - Gates' leverage is currently around 2.1x to 2.2x, with a target to reduce it below 2x by year-end [59] - The company plans to use surplus cash for debt paydowns and stock buybacks, while also considering M&A opportunities in the future [63][64] Conclusion - Gates Corporation is well-positioned for growth with a strong focus on margin expansion, operational efficiency, and strategic market opportunities in both personal mobility and industrial applications [7][49]

Financial Data and Key Metrics Changes - In Q2 2025, total sales were $884 million, representing a 0.6% decline on a core basis, with foreign currency slightly positive compared to the prior year [10][12] - Adjusted EBITDA was $199 million, with an adjusted EBITDA margin of 22.5%, a decrease of 30 basis points year over year [12][8] - Adjusted earnings per share increased by approximately 8% to $0.39 [12] Business Line Data and Key Metrics Changes - In the Power Transmission segment, revenues were $550 million, showing slight core growth, with personal mobility growing 18% [13] - The Fluid Power segment reported sales of $334 million, translating to a 2.5% decrease on a core basis, with mixed end market dynamics [14] - Industrial OEM sales in Fluid Power declined low double digits, while agricultural demand showed low single-digit growth for the first time since Q4 2022 [15] Market Data and Key Metrics Changes - North American core sales declined 1.3%, primarily affected by lower OEM demand, while replacement channel sales expanded low single digits [18] - EMEA core sales fell just over 1%, with mixed results in OEM and replacement sales [19] - East Asia and India posted approximately 4% core growth, with growth across all industrial end markets [20] Company Strategy and Development Direction - The company is focused on improving gross margins through material cost savings, footprint optimization, and productivity [32] - Investments in personal mobility and data center markets are expected to drive future growth, with a pipeline exceeding $300 million [30][31] - The company aims to reduce net leverage below two times by year-end 2025 through a balanced capital deployment strategy [23] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in a gradual recovery in personal mobility and industrial replacement markets, with expectations for growth to inflect higher in the second half of the year [31][39] - The company is optimistic about the data center market, anticipating significant growth driven by the adoption of liquid cooling technologies [41][42] - Management acknowledged challenges in the automotive OEM sector but emphasized selective participation in that market [50] Other Important Information - The company updated its 2025 guidance, raising the adjusted EBITDA midpoint to $780 million and adjusted EPS midpoint to $1.48 [9][24] - Tariff impacts are expected to be approximately $50 million annually, with plans to cover 85% to 90% of the projected impact through pricing and operational actions [26] Q&A Session Summary Question: Confidence in growth pivot for Q3 - Management indicated that order rates have been as anticipated, with improvements in industrial replacement and stable automotive replacement contributing positively [38] Question: Data center market opportunity - Management expressed increased optimism about the data center market, with expectations for significant revenue growth driven by liquid cooling adoption [41][42] Question: Auto OE softness and selective participation - Management confirmed that the softness is primarily due to lower production, particularly in Europe, and reiterated their strategy of selective participation in the auto OE market [50] Question: Chain to belt conversion cost parity - Management noted that they are making progress towards cost parity between belt and chain drives, which is expected to accelerate conversions in the industrial sector [54] Question: Industrial recovery signs - Management highlighted stability in agricultural markets and improvements in industrial replacement order rates, while acknowledging ongoing challenges in construction and on-highway markets [62] Question: Free cash flow and buyback strategy - Management confirmed a balanced approach to capital deployment, focusing on debt reduction while considering stock buybacks due to undervaluation [65] Question: EBITDA margin outlook - Management confirmed expectations for high operating leverage in the second half of the year, with continued focus on core growth and enterprise initiatives [71]

Financial Data and Key Metrics Changes - Total sales for the second quarter were $884 million, representing a 0.6% decline on a core basis [8] - Adjusted EBITDA was $199 million with an adjusted EBITDA margin of 22.5%, a decrease of 30 basis points [10] - Adjusted earnings per share increased by approximately 8% to $0.39 [10] - Free cash flow grew year over year to $74 million, representing 73% conversion to adjusted net income [20] - Net leverage ratio declined to 2.2 times, improving by 0.1 times compared to the prior year [21] Business Line Data and Key Metrics Changes - In the Power Transmission segment, revenues were $550 million, with high single-digit growth in industrial OEM sales offset by a decline in automotive OEM sales [11] - The Fluid Power segment reported sales of $334 million, translating to a 2.5% decrease on a core basis, with mixed end market dynamics [12] - Personal mobility grew 18% in the quarter, while the industrial replacement channel realized positive core growth for the first time since Q1 2023 [9][11] Market Data and Key Metrics Changes - North America core sales declined 1.3%, primarily affected by lower OEM demand [15] - EMEA core sales fell just over 1%, with OEM sales down mid single digits [16] - East Asia and India posted approximately 4% core growth, with growth across all industrial end markets [17] Company Strategy and Development Direction - The company is focused on executing well in an uncertain macro environment and is preparing for an anticipated acceleration in core growth over the mid-term [29] - Investments in commercial front-end and innovation are aimed at capitalizing on strategic growth opportunities [11][28] - The company anticipates that investments in new belts and sprockets will bring belt drives closer to cost parity with chains, unlocking potential market growth [30] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the recovery of personal mobility and anticipates growth to inflect higher in the second half of the year [29] - The company is seeing stability in agricultural markets and expects further opportunities in the industrial off-road market [29] - Management highlighted the importance of improving gross margins through material cost savings and productivity [30] Other Important Information - The company updated its 2025 guidance, raising the adjusted EBITDA midpoint to $780 million and adjusted EPS midpoint to $1.48 [7][22] - The anticipated annualized impact of tariffs is approximately $50 million, with plans to cover 85% to 90% of the projected impact through pricing and operational actions [24] Q&A Session Summary Question: Confidence in growth pivot in Q3 - Management indicated that order rates have been as anticipated, with improvements in industrial replacement and personal mobility driving confidence in growth rates [36][38] Question: Data center market opportunity - Management expressed a more bullish view on the data center market, anticipating significant revenue growth driven by liquid cooling adoption [40] Question: Auto OE softness and selective participation - Management confirmed that the softness is primarily due to lower production, particularly in Europe, and emphasized their strategy of selective participation in the auto OE market [46][47] Question: Chain to belt conversion cost parity - Management noted that they are making meaningful progress towards cost parity between belt drives and chain drives, which is expected to accelerate market adoption [50][51] Question: Industrial recovery signs - Management highlighted stability in agricultural markets and improvements in industrial replacement order rates, while noting ongoing challenges in construction and on-highway markets [58][59] Question: Buyback and free cash flow confidence - Management confirmed a balanced approach to capital deployment, focusing on debt reduction while also considering stock buybacks due to undervaluation [62][63] Question: EBITDA margin outlook - Management confirmed expectations of high operating leverage in the second half of the year, with continued focus on core growth and enterprise initiatives [70][71]