Gates Industrial Corporation plc Q2 FY2025 earnings call

• Second quarter revenues outperformed guidance supported by favorable currency trends. Core revenue performance in line with April guidance. Replacement channel grew, personal mobility had double-digit growth, industrial off-highway flat with agriculture growth offsetting construction decline. Adjusted EBITDA margin solidly exceeding 22%, gross margin expanded 40 basis points. Balance sheet trended towards short-term target of below 2x net leverage, net leverage at 2.2x at quarter end. Free cash flow grew year-over-year. Updated 2025 guidance raised adjusted EBITDA midpoint to $780 million and adjusted EPS midpoint to $1.48. - Core sales performance by region: Key Asian geographies grew, Americas and EMEA had mixed macro conditions. North America core sales declined, replacement channel expanded; EMEA core sales fell, OEM and replacement sales had different performances; East Asia and India core growth ~4%; South America core sales low single-digit decline. - Cash flow and balance sheet: Free cash flow $74 million, growing 11% year-over-year. Net leverage ratio declined to 2.2x. Intend to pay down an additional $100 million of gross debt at end of July and aim to reduce net leverage below 2x by year-end 2025. - Data center product portfolio: Launched Data Master Hose, universal quick disconnect fitting, electric pump. Serving wide array of data center customers, in negotiations with major hyperscaler and secured design wins. - Personal mobility business: Continues to invest in new applications, support new product development. Opportunity pipeline exceeds $300 million, expects revenues over $300 million by 2028. - Balance sheet strengthening, believes shares undervalued, share repurchases good use of excess capital, plans to reduce gross debt in Q3 and work towards gross debt below $2 billion.

Power Transmission segment: Generated revenues of $550 million in the quarter, up slightly on a core basis. High single-digit growth in industrial OEM sales mostly offset by decline in automotive OEM sales. Personal Mobility grew 18% in the quarter, replacement channel stable with slight growth year-over-year. Adjusted EBITDA margin declined 50 basis points year-over-year. Fluid Power segment: Sales were $334 million, a 2.5% decrease on a core basis. End market dynamics mixed; On Highway weaker, agriculture had low single-digit growth (first positive since Q4 2022), replacement business healthy. Industrial OEM sales declined low double digits on a core basis. Adjusted EBITDA margin expanded 10 basis points.

• Updated 2025 guidance: Adjusted EBITDA range $765 million - $795 million, midpoint increased $15 million due to favorable currency trends. Adjusted EPS range $1.44 - $1.52 per share, midpoint increased $0.04. Third quarter estimated total revenues $845 million - $885 million, core revenues up ~3% at midpoint. Third quarter adjusted EBITDA margin expected to increase 50 - 90 basis points compared to Q3 2024. Annualized tariff impact ~$50 million, anticipate incurring 35% - 40% of impact in second half of 2025, intend to cover 85% - 90% of projected price impact.

• Tariff fluctuations could impact business, with an annualized impact of approximately $50 million, and need to address through various operational and supply chain actions.

Q: Confidence and conviction in the 3% growth in the third quarter, including order rates, backlog, and incremental price contribution between 3Q and 2Q?

A: Order rates as anticipated, end markets showing troughing with some still decelerating, but industrial replacement improving, automotive replacement stable, personal mobility accelerating, confident in seeing growth accretion.

Q: View on the data center opportunity set after getting color on the pipeline?

A: View is more bullish, product portfolio participates in data center cooling, has multiple programs, revenue expected to grow.

Q: Reason for auto OE softness?

A: Selective participation strategy, impact of tariffs on European production, lower OEM demand.

Q: Other areas seeing signs of industrial recovery besides ag bottoming?

A: PMI starting to stabilize, industrial replacement order rates not decelerating, automotive replacement positive, personal mobility strong.

Q: Confidence in buyback and free cash flow targets?

A: Balanced capital allocation, committed to reducing debt, free cash flow confidence high due to improved working capital investment and cash generation.

Q: EBITDA margin outlook?

A: High operating leverage in the back half of the year, expecting to continue seeing drop-through on earnings from growth opportunities and enterprise initiatives in 2026 and beyond.

Q: Demand rhythm and market outlook?

A: Markets mostly as expected, data center market has many opportunities, revenue expected to increase gradually.

Q: Impact of FX versus operational efficiency on guidance?

A: $15 million midpoint raise in EBITDA related to FX, pricing adjusted due to tariffs and other factors, customer feedback positive.

Q: Growth expectations between business segments?

A: PT expected to continue outperforming, FP affected by non-highway areas, data center revenue contributing in 2026 mainly.

Q: Carryover of cost savings?

A: Some cost savings carried over from 2025 to 2026, full impact of restructuring activities expected by end of 2026.