Gates(GTES) - 2025 Q2 - Earnings Call Transcript

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]