Gates Industrial Corporation Ltd. Morgan Stanley's 14th Annual Laguna Conference

I think it is a great question. We love the asset and the company that we have, and I think the company has performed reasonably well, particularly in a differentiated manner over the last three or four years, where we have been operating in a pretty tough macro background with PMIs being negative for nearly four years, historical length of time. During that period of time, we continued to deliver growth and we continued to nicely improve our operating margins, EBITDA margins, and gross margins through the cycle, which I think is giving us a great opportunity and a great setup into what I see is a present time of finally seeing an inversion of that industrial activity.

Yeah, I think very good question here. What we have started seeing, particularly, I would say, starting with Q4 of last year, has been a pretty nice rebound of volume that was coming through from our industrial OEM side of our business. In our business, we frankly always have to see that the industrial OEMs have to recover first, and then two to three quarters thereafter, they start pulling in the rest of our business, so the industrial aftermarket business, the diversified industrial exposure that we have, and so on and so forth. So we have seen a very nice rebound in particularly commercial construction equipment in Q4 of last year. Q1, we started to see an improvement in order flow for commercial truck, Class 8, 5 to 7, so across that commercial transportation section. We have continued to see strength and robust performance with our personal mobility business.

Our oil and gas business has started to recover kind of second quarter of this year. You have a better sense of broader pull-through in the economic macro. As we entered Q3 of this year, I would have said that probably 70% or so of our portfolio exposure is in end markets or applications that have either inflected or already are demonstrating green shoots in demand. So I feel much greater level of conviction in what we see. Again, we exited about 5% core growth in Q2, and we've guided a 5.5% organic growth in Q3 and 6.5% in Q4, and we believe that we are trafficking exactly at that range.

Yeah. So look, we're still in kind of bottoming out of ag cycle. We believe that that bottom has been formed in the first half of this year. We certainly anticipated that ag is going to improve in the second half of the year, add-on session of the year, but I think that the most recent industrial news is signaling that that's actually playing out that way. So we anticipate that the ag exposure is going to start benefiting as we exit 2026 into 2027. 2027 we anticipate will be quite good for ag from a cycle perspective. Auto OEM is still, while this is a very insignificant amount of our revenue that comes from auto OEM, it's about 8%, auto OEM is still pretty dislocated today globally.

Yes. I believe that as the industrial distribution starts to firm up its belief that there is actually a real inflection, which as I have indicated, we believe that we have seen, they will start restocking more. Presently, as you indicated, is more pull-through, sell out equals sell in from the channel partner to us and us to them. It is very balanced. But I certainly anticipate in 2027 that the industrial distribution in particular should be more robust than what it has been so far in 2026. That being said, we did start seeing improvements in order rates in Q3, and we certainly anticipate that we are starting to see formation of a normal cycle.

Yeah. Look, when I take a look at my auto aftermarket business, which is about 36% of our revenue, it is the most underappreciated asset that we have in our portfolio, frankly. It is an amazing business that has got some terrific drivers of that business. If I take a look at the business over the last 10 years, the business has grown at 4.5% compound annual growth rate. So I will take a business that grows over a 10-year period of time at 4.5% any given time. That being said, the last three years, our automotive aftermarket business grew high single digits. So about three years, going back to 2023, that was predominantly driven by market share gains. So about half of that was kind of a normal market activity, and half of that was through market share gain. The dynamics are very solid.

Obviously, the age of car fleet ages, we predominantly benefit when the car fleet is seven years or older. So the car comes out of a warranty and then the end user is more interested in an affordable option for repair. That is where we come to play. Miles driven are still quite high. New car sales are impacted by different factors, cost of money, the cost of the vehicles, and so on and so forth. So the setup for our business to continue to outperform the general market is quite all right.

Yeah, look, I think that Gates is one of the pristine brands recognized globally. We specialize predominantly in the do it for you part of the market. We continue to be focused on ensuring that our operational cadence is right in line with the expectations of the end market. Our portfolio breadth continues to evolve to support the breadth of brands and breadth of end unit applications that are in use. There's very few companies that have the capability to do that in the automotive aftermarket to the extent that Gates Corporation does.