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    GTES
    Earnings call· Mar 2026(Q1 FY26)

    Gates Industrial Corp Q1 FY26 earnings call GTES

    May 1, 2026 Source

    Executive summary

    Gates Industrial Q1 FY26 — ERP Transition Navigated, Guidance Reaffirmed

    Gates Industrial successfully navigated a significant ERP transition in Europe during Q1 FY26, which, alongside fewer working days, created temporary headwinds to sales and margins. Despite these challenges, the company reaffirmed its full-year guidance, citing improving demand trends, particularly in industrial OEM orders and data centers. Management expressed confidence in achieving core revenue growth targets and expects operational efficiencies to stabilize in Q2, with margins approaching 23.5% in the second half.

    Highlights

    5

    • Core sales growth approximated mid-single digits year-over-year in March, with book-to-bill solidly above 1.

    • Adjusted EBITDA of $177 million was in line with expectations, resulting in a 20.8% margin.

    • Data center business revenue grew approximately 700% year-over-year from a low base.

    • Net leverage improved to 1.9x, down 0.4 turns compared to Q1 FY25.

    • Acquired Timken's Industrial Belt business, expected to close in Q3, augmenting Power Transmission in North America.

    Concerns

    4

    • Q1 core sales decreased 2.9%, impacted by ERP transition and 2 fewer working days, representing a 600 basis point headwind.

    • Adjusted EBITDA margin decreased 130 basis points year-over-year to 20.8% due to ERP inefficiencies and fewer working days.

    • Adjusted EPS of $0.35 was impacted by a $0.07 headwind from ERP transition and fewer working days.

    • EMEA core sales declined 8.5% year-over-year, with distribution inefficiencies leading to a build of past due backlog.

    Guidance & targets

    8
    CategoryTargetConfidence
    Full-year 2026 financial guidance
    Reiterated
    high materiality
    High
    Core growth
    Improve over the course of the year
    high materiality
    High
    Q2 revenue
    $905 million to $945 million
    high materiality
    High
    Q2 core growth
    Approximately 3.5%
    high materiality
    High
    Q2 adjusted EBITDA margin
    Decline 30 basis points
    medium materiality
    High
    Adjusted EBITDA margin
    Approaching 23.5%
    high materiality
    High
    Personal Mobility growth rate
    Mid-20s growth rate
    medium materiality
    High
    Data Center revenue
    $100 million to $200 million
    high materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    Power Transmission
    Core sales decrease primarily driven by fewer working days and ERP transition in Europe. Realized accelerating order trends during March. Personal Mobility growth was affected by project timing and ERP transition. Construction end market continued to improve, and the ag market is recovering.
    Personal Mobility expanded 6%
    		$533 million-2.5%——
    Fluid Power
    Decrease in core sales contributed by fewer working days and ERP implementation. Commercial on-highway was relatively weak, but North American orders inflected positively. Data center business performed in line with expectations, with revenue growing approximately 700% from a low base.
    Strong double-digit growth in APAC
    		$318 million-3.5%——

    Operational metrics

    24
    Adjusted EBITDA
    $177 million
    Q1 FY26

    In line with expectations.

    Adjusted EBITDA margin
    20.8%down 130 basis points YoY
    Q1 FY26

    Decrease primarily driven by ERP inefficiencies and fewer working days.

    Adjusted gross margin
    40.5%down approximately 20 basis points
    Q1 FY26

    Slight decrease year-over-year.

    Adjusted earnings per share
    $0.35down slightly
    Q1 FY26

    Impacted by headwinds from ERP transition and fewer working days.

    Headwind to adjusted EPS (ERP and fewer working days)
    $0.07
    Q1 FY26

    Combined impact of fewer working days and ERP transition.

    Underlying operating performance contribution to adjusted EPS
    $0.02
    Q1 FY26

    Positive contribution from operational performance.

    Other items benefit to adjusted EPS
    $0.02
    Q1 FY26

    Benefit from lower tax rate and share count.

    Free cash flow conversion
    101%
    LTM

    Strong conversion over the last 12 months.

    Net leverage
    1.9ximproved 0.4 turns compared to Q1 FY25
    Q1 FY26

    Strengthening of the balance sheet.

    Core sales decrease
    2.9%
    Q1 FY26

    Overall core sales decrease for the quarter.

    Core sales decrease
    2.6%
    Q1 FY26

    Core sales decline in the Americas region.

    Core sales decrease
    8.5%YoY
    Q1 FY26

    Core sales decline in the EMEA region, mostly in February.

    Core sales growth
    almost 4%
    Q1 FY26

    Fueled by industrial OEM and auto aftermarket.

    ERP upgrade impact on company's revenues
    24%
    Q3 FY25 (outlined)

    ERP upgrade done on approximately 24% of the company's revenues.

    Core sales headwind (ERP and fewer working days)
    600 basis points
    Q1 FY26

    Combined impact of ERP transition and fewer working days.

    EBITDA margin headwind (ERP and fewer working days)
    at least 200 basis points
    Q1 FY26

    Conservative estimate of margin headwinds in Q1.

    EBITDA margin headwind (ERP and footprint optimization)
    about 100 basis points
    Q2 FY26

    Expected margin headwinds in Q2, should be complete by end of Q2.

    Revenue impact from ERP distribution inefficiencies
    around $4 millionlower-than-expected
    Q1 FY26

    Slightly lower-than-expected revenues due to shipping lag.

    Timken acquisition annualized revenue
    $60 million
    Annualized

    Expected revenue contribution from the acquired business.

    Price realization
    a little bit higher
    Q1 FY26

    Price realization was slightly higher than 1.5 points, with more tariff pricing in H1.

    Revenue growth
    almost double digit
    April FY26

    Full recovery of Q1 lost revenue in April.

    ISM
    52.6%
    Current

    Analyst-cited Purchasing Managers' Index, indicating economic expansion.

    Implied organic growth
    around 4.5%
    H2 FY26

    Analyst-derived implied organic growth for the second half of the year.

    North America core sales
    a little less than 2%down
    Q1 FY26

    Core sales performance in North America, impacted by fewer working days.

    Industry KPIs

    6
    MetricValueDetails
    Tariff cost impactnot material
    Parts aftermarket businessquite healthy
    Data center prime power demand700%%
    Incremental margin operating leverage200 basis pointsbps
    Order backlog order intake by segmentsolidly above 1
    Industry production market size forecastsabove 50%%

    Orderbook & backlog

    2
    Book-to-bill ratiosolidly above 1Q1 FY26 end
    Past due backlogbuildQ1 FY26 end

    Due to distribution inefficiencies associated with ERP transition; expected to recover sales in Q2.

    Product announcements

    1
    ProductTypeDetails
    New products for liquid coolinglaunch

    Deals & partnerships

    1
    TimkenAcquisition of Timken's Industrial Belt business, highly complementary to Gates' Power Transmission segment in North America.

    The acquisition includes assets in a Mexico facility. Management views it as industry consolidation and a good transaction that is right at the core of Gates' business.

    Capital programs

    1
    Footprint optimization projectsunderway

    Benefit: Benefit adjusted EBITDA margin performance

    Expected to benefit adjusted EBITDA margin performance in the second half of this year. Costs are part of the Q1 and Q2 margin headwinds.

    Risks & headwinds

    3
    ERP transition and fewer working daysQ1 FY26, stabilizing in Q2 FY26

    600 basis point headwind to Q1 core sales; $0.07 headwind to adjusted EPS; 130 bps YoY decrease in adjusted EBITDA margin.

    Mitigation: Operational focus on optimizing customer service fill rates to pre-ERP levels; expect efficiencies to stabilize further in Q2.

    Potential escalation of conflict in the Middle EastOngoing

    No material financial impact anticipated.

    Mitigation: Implied ongoing monitoring, no specific mitigation stated.

    Higher input costs (oil derivatives, aluminum, steel)Ongoing

    Impacts resins, polymers, compounds, and high energy use materials; maybe 20 bps of dilution from tariff pricing.

    Mitigation: Confident in pricing for inflation; focused on surety of supply, supplier development, and alternative materials.

    What to watch in Q2 FY26

    5

    Europe ERP operational efficiency

    Q2 FY26
    CurrentStabilized, revenues on par with pre-ERP levels, somewhat above normal operating costs.
    TargetStabilize further, exit at normalized levels of shipping output and past due backlog.

    Why it matters

    Critical for overall company performance and achieving full-year guidance, as Europe represents a significant portion of revenue.

    We anticipate our operational efficiency in Europe to stabilize further during the second quarter.

    Q&A highlights

    6

    Assess confidence in core growth sustainability given Q1 headwinds and customer feedback, and how the year is tracking.

    Management expressed high confidence in achieving annual guidance, noting that excluding ERP and fewer working days, core growth would have been up 300 bps, aligning with expectations. April order flow was solid, with a strong inflection in industrial OEM orders.

    “Net of the 2 less selling days than the ERP, we would have been basically up 300 basis points on core, which is right in line with what we have expected for the year and is basically trending towards the midpoint of our annual guidance.”

    asked by Michael Halloran · answered by Ivo Jurek

    2 min read5 chapters

    Detailed Narrative

    01

    ERP Transition and Operational Efficiency

    The company successfully implemented a major ERP system in Europe, affecting approximately 24% of its revenues. This transition, alongside two fewer working days, created a 600 basis point headwind to Q1 core sales and a $0.07 headwind to adjusted EPS. While distribution inefficiencies led to a build of past due backlog and slightly higher operating costs, the European business stabilized by March, with revenues on par with pre-ERP levels. Management expects further stabilization and optimization of customer service fill rates to pre-ERP 'world-class' levels in Q2.

    02

    Demand Trends and Market Outlook

    Industrial OEM orders showed a positive inflection and continued momentum through Q1 and April, contributing to a book-to-bill ratio solidly above 1. Commercial construction is strong, the ag market is recovering, and energy and resources have stabilized. Management noted that the Purchasing Managers' Index (PMI) being above 50% is a positive sign for overall underlying trends, leading to confidence in achieving annual guidance. The company sees solid demand across its portfolio, with North American on-highway order flow improving.

    03

    Timken Industrial Belt Acquisition

    Gates announced the opportunistic acquisition of Timken's Industrial Belt business, expected to close in Q3 FY26. This acquisition is highly complementary, aligning directly with Gates' core business in Power Transmission in North America. It is expected to add approximately $5 million per month in annualized revenue (totaling ~$60 million annually) and is anticipated to be accretive, accelerating growth. Management sees significant opportunities to improve profitability post-integration, driving margins to company fleet average levels.

    04

    Data Center Business Growth

    The data center business experienced approximately 700% revenue growth year-over-year in Q1 from a low base, with strong order intake and accelerating penetration. Gates is actively developing specialized knowledge and launching new products tailored for liquid cooling needs, aiming to be a leading-edge supplier for next-generation chips. The company is on track for its long-term target of $100 million to $200 million in revenue by 2028, viewing this market as transitioning from an emerging application to a mainstream one.

    05

    Capital Allocation and Balance Sheet Strength

    The company maintains a balanced capital allocation approach, repurchasing additional shares in Q1. Net leverage improved to 1.9x, representing a 0.4-turn improvement compared to Q1 FY25. Moody's upgraded Gates' credit rating to Ba2 from Ba3. Management highlighted a robust M&A pipeline for highly accretive, core-portfolio assets, indicating a strong likelihood of more announcements within the calendar year, leveraging the company's healthy balance sheet and capacity.

    AI-generated summary of the company’s earnings call. Not investment advice.