Gates Industrial 2026 Q2 Earnings Call

Greetings and thank you for joining us on our second quarter 2026 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallard, our CFO. Before the market opened today, we published our second quarter 2026 results. A copy of the release is available on our website at investors.gates.com. Our call this morning is being webcast and is accompanied by a slide presentation. On this call, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the investor relations section of our website.

Please refer now to slide two of the presentation, which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we've described in our most recent annual report on Form 10-K and in other filings we make with the SEC, including our Q2 quarterly report on Form 10-Q that is expected to be filed later today. We disclaim any obligation to update these forward-looking statements. This quarter, we will be attending the Jefferies Industrials Conference and the Morgan Stanley Laguna Conference, both in September, and look forward to meeting with many of you.

Before we start, please note all comparisons are against the prior year period, unless stated otherwise. With that of the way, I will turn it over to Ivo.

Thank you, Rich. In the second quarter, we delivered strong performance as sales came in near the high end of our guidance, supported by incrementally constructive industrial end markets and contributions from our strategic growth initiatives. Sales grew approximately 7%, with core revenue growth of 4.9%, which enabled us to achieve record quarterly sales and adjusted earnings per share. Our adjusted EBITDA margin was above expectations, led by solid improvement in our adjusted gross margin. Importantly, we believe that we are in a good position to achieve our second half adjusted EBITDA margin target outlined earlier this year. Core growth in our industrial channels was up nicely, led by double-digit growth in industrial OEM, with strength building as we exited the quarter. Broadly speaking, we generated year-over-year growth in most of our end markets during the second quarter, and book-to-bill remained above one.

Given our solid second quarter financial results and the favorable shift in demand trends we observed exiting the quarter, we have raised our 2026 full year guidance for core sales growth and profitability. Our updated guidance implies incrementally better performance for second half of the year relative to our initial expectations. We believe we are also on track to deliver adjusted EBITDA margin of 23.5% or higher in the second half of 2026. Brooks will provide more details on guidance later in the presentation. Please turn to slide four. Our second quarter sales were $942 million, which represented record quarterly sales for Gates. Total sales expanded 6.6%, inclusive of foreign currency benefits. Core sales grew 4.9%. The underlying demand continued to improve with year-over-year growth strengthening during the second half of the quarter.

We saw momentum across most of the portfolio, highlighted by approximately 25% growth in personal mobility and 20%+ growth in commercial on-highway. Industrial OEM sales expanded low double digits, and our industrial aftermarket saw improved demand trends, which resulted in mid-single digit growth. In general, the bulk of our end markets have begun to inflect positively, and we are in a strong position to capitalize on the building end market momentum. Adjusted EBITDA was approximately $211 million and represented an adjusted EBITDA margin of 22.5%, modestly better than expectations. Adjusted gross margin increased by 50 basis points while we continue to make targeted investments to support our enterprise initiatives. Adjusted earnings per share increased 13% to a quarterly record of $0.44. The growth was driven by improved operating performance and other items. On slide five, we will review our segment highlights.

In the Power Transmission segment, sales were $589 million and translated to over 5% core growth. The expansion was led by high single-digit growth in our industrial end markets, which was driven by mid-teens growth in the industrial OEM channel globally. Power Transmission industrial aftermarket increased mid-single digits and supported by double-digit growth in EMEA and Asia Pacific. Automotive aftermarket grew high single digits with solid growth achieved across all geographies. At the end market level, personal mobility grew in the mid-20s and commercial on-highway increased similarly. Segment adjusted EBITDA margin increased 60 basis points. In the Fluid Power segment, sales were $353 million and increased 4.2% on a core basis. Similar to Power Transmission, industrial OEM sales were strong, growing double digits. Industrial aftermarket increased low single digits. Fluid Power's strongest end markets were commercial on-highway, which increased high teens, and construction, which grew mid-single digits.

Of note, diversified industrial grew mid-single digits and represented a good contributor to the segment's growth given its relative size within the segment. We continue to grow our data center business, which expanded more than 2x versus the prior year quarter. We anticipate sales contribution to step up in the second half as certain high-value project launches occur. Adjusted EBITDA margin in the Fluid Power segment decreased 120 basis points, primarily due to footprint realignment costs, as well as targeted investments into our enterprise initiatives. I will now turn the call over to Brooks for additional comments on our results.

Thank you, Ivo. I'll begin on slide six and review our core sales performance by region. All three regions had positive core growth during the second quarter. Americas grew 1.5% with low double-digit growth in North America, more than offsetting a decrease in South America, which was primarily driven by soft agricultural demand. In North America, industrial OEM sales were up mid-single digits, fueled by solid growth in commercial on-highway. North American automotive aftermarket grew high single digits. Importantly, overall North America sales momentum grew as the quarter progressed with an an exit rate in the mid-single-digit range. In EMEA, core sales grew 6.4%, led by double-digit growth in the industrial channels and many industrial end markets. Industrial OEM sales increased at a mid-teens level, and industrial aftermarket grew in the double digits.

At the end market level, commercial on-highway, diversified industrial, and personal mobility drove the strong growth in EMEA in the second quarter. APAC growth accelerated in the second quarter, increasing 11.5% with China and East Asia and India delivering comparable growth, led by strong double-digit growth across several industrial end markets. On slide seven, we show the primary drivers of our double-digit growth in adjusted earnings per share. Underlying operational performance and favorable foreign exchange combined to contribute $0.02 per share. A lower tax rate, share count, interest, and other represented $0.03 of adjusted earnings per share contribution. Slide eight offers an overview of our cash flow performance and balance sheet metrics for the second quarter. Our free cash flow was approximately $60 million. Trailing 12-month free cash flow to adjusted net income came in at 94%, which is above our historical average.

Our net leverage ratio declined to 1.8 times, which was a 0.4 times improvement compared to the prior year period. During the quarter, we repurchased approximately $22 million of our stock. Our trailing 12-month return on invested capital was 21.6%, up 30 basis points. We continue to fund high-return projects that we believe will improve our growth and profitability over the midterm. On slide nine, let's discuss our updated 2026 outlook. We are increasing our guidance for core sales growth, adjusted EBITDA, and adjusted earnings per share. We anticipate our full year core sales growth to be in the range of 2.5%-4.5%, representing a 100 basis point increase at the midpoint. We expect our full year adjusted EBITDA to be in the range of $800 million-$830 million, which is a $10 million increase at the midpoint.

Our full year adjusted earnings per share range is $1.62-$1.70, a $0.06 increase relative to our prior guidance midpoint. Our guidance for capital expenditures and free cash flow conversion is unchanged. For the third quarter, we estimate total revenues to be in the range of $880 million-$920 million, and core revenues to be up approximately 5.5% at the midpoint. We anticipate our adjusted EBITDA margin to increase in a range of 50 basis points-90 basis points compared to the third quarter of 2025. I will now turn the call back to Ivo for summary remarks.

I'll summarize our thoughts and views on slide 10. First, we've generated strong top-line growth in the second quarter. We believe that we have entered the early stages of an industrial recovery. Industrial OEM schedules are generally improving with some end markets further down the recovery curve. Industrial distributor orders are solid. We are well-positioned to generate attractive growth and margin expansion as the cycle evolves. As such, we anticipate producing incrementally stronger core growth in the second half of 2026 relative to our second quarter performance. Our updated 2026 guidance implies 6% core sales growth year-over-year in the second half, representing a significant uptick from approximately 1% core sales growth realized in the first half of the year. Second, we are delivering on our commitment to our investors and shareholders.