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    GTES
    Earnings call· Jun 2026(Q2 FY26)

    Gates Industrial Corp Q2 FY26 earnings call GTES

    Jul 31, 2026 Source

    Executive summary

    Gates Industrial Q2 FY26 — Record Sales and EPS, Raised Full-Year Guidance

    Gates Industrial delivered record Q2 FY26 sales and adjusted EPS, driven by strong core growth and improving industrial end markets. The company raised its full-year guidance for core sales, adjusted EBITDA, and adjusted EPS, anticipating stronger performance in the second half with a focus on strategic initiatives and operational efficiency. Management expressed confidence in achieving its midterm adjusted EBITDA margin target and capitalizing on the industrial recovery.

    Highlights

    5

    • Achieved record quarterly sales of $942 million, representing 6.6% total growth and 4.9% core growth.

    • Delivered record adjusted earnings per share of $0.44, an increase of 13% year-over-year.

    • Adjusted EBITDA margin was 22.5%, modestly better than expectations.

    • Book-to-bill ratio remained above 1, indicating strong demand.

    • Net leverage ratio declined to 1.8x, a 0.4x improvement compared to the prior year period.

    Concerns

    3

    • South America sales decreased, primarily driven by soft agricultural demand.

    • Fluid Power segment adjusted EBITDA margin decreased 120 basis points, mainly due to footprint realignment costs and targeted investments.

    • Oil-related cost increases necessitated pricing actions, causing a slight dilution to Q3 incremental margins (35-40% vs. 45%+ expected in Q4).

    Guidance & targets

    16
    CategoryTargetConfidence
    Full-year core sales growth
    2.5% to 4.5%
    high materiality
    High
    Full-year adjusted EBITDA
    $800 million to $830 million
    high materiality
    High
    Full-year adjusted EPS
    $1.62 to $1.70
    high materiality
    High
    Full-year capital expenditures
    unchanged
    medium materiality
    High
    Full-year free cash flow conversion
    unchanged
    medium materiality
    High
    Q3 total revenues
    $880 million to $920 million
    medium materiality
    High
    Q3 core revenues growth
    approximately 5.5%
    medium materiality
    High
    Q3 adjusted EBITDA margin increase
    50 basis points to 90 basis points
    medium materiality
    High
    Second half 2026 adjusted EBITDA margin
    23.5% or higher
    high materiality
    High
    Second half 2026 core sales growth
    6% year-over-year
    high materiality
    High
    Personal Mobility core growth
    25% to 30%
    medium materiality
    High
    Data center revenue
    $100 million to $200 million
    medium materiality
    High
    Q3 incremental margins
    35% to 40%
    medium materiality
    Medium
    Q4 incremental margins
    45% plus
    medium materiality
    High
    Price/cost spread
    at least neutral
    medium materiality
    High
    Automotive aftermarket growth rate
    mid low to mid-single-digit
    low materiality
    High

    Segment performance

    5
    SegmentRevenueYoYQoQMargin
    Power Transmission
    Led by high single-digit growth in industrial end markets, driven by mid-teens growth in industrial OEM globally. Automotive aftermarket showed solid growth across all geographies.
    Industrial end markets growth: high single-digitIndustrial OEM channel growth: mid-teens globallyIndustrial aftermarket growth: mid-single-digitIndustrial aftermarket growth (EMEA & Asia Pacific): double-digitAutomotive aftermarket growth: high single-digitPersonal Mobility growth: mid-20sCommercial On-Highway growth: mid-20s
    		$589 million>5% core growth—increased 60 basis points
    Fluid Power
    Similar to Power Transmission, industrial OEM sales were strong. Margin decrease primarily due to footprint realignment costs and targeted investments into enterprise initiatives.
    Industrial OEM sales growth: double-digitIndustrial aftermarket growth: low single-digitCommercial On-Highway growth: high teensConstruction growth: mid-single-digitDiversified Industrial growth: mid-single-digitData center business growth: more than 2x vs prior year quarter
    		$353 million4.2% core growth—decreased 120 basis points
    Americas
    Low single-digit growth in North America more than offset a decrease in South America, primarily driven by soft agricultural demand. North America momentum grew as the quarter progressed.
    North America growth: low single-digitSouth America growth: decreaseNorth America Industrial OEM sales growth: mid-single digitsNorth America Commercial On-Highway growth: solidNorth America Automotive aftermarket growth: high single digitsNorth America exit rate: mid-single-digit range
    		—1.5% core growth——
    EMEA
    Led by double-digit growth in industrial channels and many industrial end markets. Broad strength across end market exposure.
    Industrial channels growth: double-digitIndustrial OEM sales growth: mid-teens levelIndustrial aftermarket growth: double digitsEnd markets driving growth: Commercial On-Highway, Diversified Industrial, Personal Mobility
    		—6.4% core growth——
    APAC
    Growth accelerated, with China, East Asia, and India delivering comparable growth led by strong double-digit growth across several industrial end markets. Teams are executing extremely well.
    China growth: comparableEast Asia growth: comparableIndia growth: comparableGrowth driver: strong double-digit growth across several industrial end markets
    		—11.5% core growth——

    Operational metrics

    17
    Total sales
    $942 million
    Q2 FY26

    Represents record quarterly sales for Gates.

    Total sales growth
    6.6%YoY
    Q2 FY26

    Total sales expanded inclusive of foreign currency benefits.

    Core sales growth
    4.9%YoY
    Q2 FY26

    Underlying demand continued to improve with year-over-year growth strengthening during the second half of the quarter.

    Adjusted EBITDA
    $211 million
    Q2 FY26

    Adjusted EBITDA was approximately $211 million.

    Adjusted EBITDA margin
    22.5%
    Q2 FY26

    Represented an adjusted EBITDA margin of 22.5%, modestly better than expectations.

    Adjusted gross margin
    increased 50 basis pointsYoY
    Q2 FY26

    Adjusted gross margin increased by 50 basis points.

    Adjusted EPS
    $0.44up 13%
    Q2 FY26

    Adjusted earnings per share increased 13% to a quarterly record of $0.44.

    Trailing 12 months free cash flow to adjusted net income conversion
    94%
    TTM

    Trailing 12 months free cash flow to adjusted net income came in at 94%, which is above our historical average.

    Net leverage ratio
    1.8x0.4x improvement
    Q2 FY26

    Our net leverage ratio declined to 1.8x, which was a 0.4x improvement compared to the prior year period.

    Stock repurchased
    $22 million
    Q2 FY26

    During the quarter, we repurchased approximately $22 million of our stock.

    Trailing 12-month return on invested capital
    21.6%up 30 basis points
    TTM

    Our trailing 12-month return on invested capital was 21.6% up 30 basis points.

    FX contribution to adjusted EPS
    $0.02
    Q2 FY26

    Favorable foreign exchange combined to contribute $0.02 per share to adjusted EPS.

    Other items contribution to adjusted EPS
    $0.03
    Q2 FY26

    A lower tax rate, share count, interest and other represented $0.03 of adjusted earnings per share contribution.

    Core sales growth
    approximately 1%YoY
    H1 FY26

    Core sales growth realized in the first half of the year.

    Class A truck orders growth
    couple of hundred percentYoY
    Q2 FY26

    Very significant improvement in Class A truck orders for the industry in North America.

    ERP catch-up impact
    less than 100 basis points
    Q2 FY26

    De minimis to the overall company in terms of catch-up from ERP.

    ERP catch-up impact
    about 200 basis points
    Q2 FY26

    Tailwind as we caught up in Q2 in EMEA.

    Industry KPIs

    7
    MetricValueDetails
    Capacity expansion—
    Parts aftermarket businessmid-single-digit%
    Data center prime power demandmore than 2xmultiple
    Dealer inventory months of supplyreasonably lean
    Incremental margin operating leverage35% to 40%%
    Order backlog order intake by segmentabove 1ratio
    Industry production market size forecastscouple of hundred percent%

    Orderbook & backlog

    2
    Book-to-bill ratioabove 1Q2 FY26
    Bookings growthhigh single digitsQ2 FY26

    YoY

    Continued through July

    Risks & headwinds

    5
    Soft agricultural demandQ2 FY26

    South America sales decreased

    Fluid Power segment margin compressionQ2 FY26

    Adjusted EBITDA margin decreased 120 basis points

    Mitigation: Footprint realignment costs and targeted investments (expected to normalize in H2)

    Oil-related cost increasesQ3 FY26

    Slight dilution to Q3 incremental margins (35-40% vs. 45%+ expected in Q4)

    Mitigation: Implemented pricing to offset costs; expect to be at least price/cost neutral in H2

    ERP implementation SG&A headwindsQ2 FY26

    Some hyper tier headwinds in Q2

    Mitigation: Expected to go away in the second half; operating normally now

    Difficult comps in automotive aftermarketQ2 FY26

    Still delivered mid-single-digit core growth despite prior market share gains

    Mitigation: Business performing well globally; anticipated normalized growth of mid low to mid-single-digits for next 2-3 years

    What to watch in Q3 FY26

    5

    H2 2026 Adjusted EBITDA Margin

    H2 FY26
    Current22.5% (Q2 FY26)
    Target23.5% or higher

    Why it matters

    Verifies the company's ability to achieve its midterm margin target and leverage operational efficiencies.

    More importantly, we are on track to achieve an adjusted EBITDA margin of at least 23.5% in the second half of this year, putting us on a good path to achieve a midterm margin target outlined in 2024.

    Q&A highlights

    6

    What are the drivers for second-half margin improvement, and how should we think about incremental margins in the medium term, considering temporary headwinds are subsiding?

    Management attributes H2 margin improvement to footprint optimization, restructuring, and cost optimization. Q3 incrementals are expected to be 35-40% due to pricing to offset oil costs, then returning to 45%+ in Q4 and H1 next year, with benefits rolling through to the end of 2027.

    “So we expect them to be in the 35% to 40% range. We expect those to then move back to 45% plus as we move into Q4. And then for the first half of next year, we expect that trend to continue as the footprint optimization and the cost optimization work that we've done rolls through.”

    asked by Stephen Volkmann · answered by L. Mallard

    2 min read5 chapters

    Detailed Narrative

    01

    Industrial Market Recovery and Growth Acceleration

    Gates Industrial is experiencing the early stages of an industrial recovery, with incrementally constructive end markets and improving industrial OEM schedules. This positive shift is expected to drive a significant acceleration in core sales growth, from approximately 1% in the first half of 2026 to a projected 6% year-over-year in the second half. The company is well-positioned to capitalize on this momentum, with broad-based recovery observed across most end markets, though agriculture remains weak.

    02

    Strategic Initiatives Driving Outperformance

    The company's strategic initiatives are yielding strong results, particularly in Personal Mobility, which grew in the mid-20s and is projected to maintain 25-30% core growth for the next couple of years. The data center business also expanded more than 2x year-over-year, with anticipated sales contributions stepping up in the second half due to high-value project launches. These efforts, alongside industrial chain-to-belt conversions, are expected to deliver above-market growth rates.

    03

    Operational Efficiency and Margin Expansion

    Gates achieved record quarterly sales and adjusted EPS, supported by an adjusted EBITDA margin of 22.5%, exceeding expectations. The company's focus on operational performance, including footprint optimization and cost realignment, is contributing to margin improvement. Management is confident in achieving an adjusted EBITDA margin of at least 23.5% in the second half of 2026, aligning with its midterm margin target.

    04

    Strong Regional Performance

    All three regions demonstrated positive core growth in Q2. EMEA saw robust 6.4% core growth, driven by double-digit expansion in industrial channels and end markets like Commercial On-Highway and Personal Mobility. APAC accelerated to 11.5% core growth, with strong double-digit performance across industrial end markets in China, East Asia, and India, reflecting effective execution of regional strategies.

    05

    Capital Allocation and Redomicile Benefits

    The company maintains a strong balance sheet, with a net leverage ratio of 1.8x and a trailing 12-month free cash flow conversion of 94%. The recent redomicile to Bermuda is expected to streamline operations by eliminating the need for dual annual reports and audits, reducing bureaucracy, and aligning shareholder rights more closely with U.S.-domiciled companies, enhancing capital allocation flexibility.

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