Gates Industrial Corporation Ltd. 2026 Q3 Earnings Call

Rich, please go ahead. Greetings, and thank you for joining us on our Third Quarter 2026 Earnings Call.

I will briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek, to be followed by Brooks Mallard, our CFO. Before the market opened today, we published our Third 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 2 of the presentation, which provides a reminder that our remarks 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 have described in our most recent annual report on Form 10-K and in other filings we make with the SEC, including our Q3 quarterly report on Form 10-Q that is expected to be filed later today. We disclaim any obligation to update these forward-looking statements. As a reminder, we are hosting our Capital Markets Day at the New York Stock Exchange on Thursday, November 19.

This is our first Capital Markets Day in over 2 and a half years, and we are excited to share with you our strategic vision for the company. We look forward to hosting you. Before we start, please note all comparisons are against the prior year period unless stated otherwise. I will turn the call over to Ivo.

Thank you, Rich, and good morning all. In the third quarter, we generated mid-single-digit core sales growth, consistent with our guidance, and delivered strong adjusted EBITDA margin, which approached 24%. Our core growth performance was fueled by high single-digit growth in our industrial end markets globally. Importantly, growth was broad-based, with the majority of our end markets growing. Our performance resulted in quarterly record results for adjusted EBITDA margin and adjusted EPS. We are on pace to deliver on our financial commitments for 2026, which we have increased progressively over the course of the year. The company is in good position to capitalize on the industrial upcycle that is presently taking hold and broadening. On that topic, the industrial demand recovery continued to evolve favorably in the third quarter. Relative to the second quarter, our industrial core growth accelerated to high single digits from mid-single digits.

While this was led by OEM channel strength, we also realized a nice uptick in industrial aftermarket growth relative to the last quarter. Furthermore, we were highly encouraged by the strengthening industrial demand in our North American business. Importantly, our global book-to-bill remained above 1 time for the quarter. Given our performance year-to-date and current demand trends, we are raising our full-year adjusted earnings per share guidance. We now anticipate double-digit growth in adjusted earnings per share at the midpoint for the year. We are reiterating our expectation for second-half core sales growth to approximately 6% at the midpoint, as well as second-half adjusted EBITDA margin to measure approximately 23.5%. Please turn to slide 4. Third quarter sales were approximately $904 million, representing total growth of 5.6% and core growth of 5.5%. Growth was driven by continued strength in our industrial markets. Diversified industrial sales increased high single digits.

This end market's strongest growth since fourth quarter of 2022. Additionally, commercial on-highway sales expanded more than 20%, and our sales into the global personal mobility markets increased approximately 35%. On a regional basis, North America growth accelerated exiting the quarter, an incremental positive sign for the enterprise. Adjusted EBITDA was $215 million and represented a 10% increase. Adjusted EBITDA margin increased 90 basis points to a company record of 23.8%, translating to an incremental adjusted EBITDA margin that exceeded 40% relative to the prior year period. The margin expansion was primarily driven by volume growth, manufacturing performance, and enterprise initiative improvements, slightly offset by investments in our strategic growth areas. Adjusted earnings per share increased approximately 21% with a quarterly record of $0.47. The increase was predominantly driven by core growth and stronger operating performance. Brooks will address in more detail later in a call.

On slide 5, we will review our segment highlights. In Power Transmission, sales were approximately $560 million, increasing 5.2% on a core basis. Industrial demand remained strong throughout the quarter, led by high-teens growth in industrial OEM. Personal mobility delivered approximately 40% growth driven by meaningful contributions from all major regions. Commercial on-highway was also a significant growth contributor, expanding over 20%. Our transmission delivered adjusted EBITDA margin of 24.5%, an increase of 160 basis points. Margin performance was driven by solid operating leverage on volume growth and strong operating performance. In Fluid Power, sales were approximately $343 million and grew over 6% on a core basis. Industrial OEM demand continued to strengthen during the quarter. Commercial on-highway increased more than 20%. Construction was also a nice contributor to the overall segment growth, growing high single digits. Agriculture grew slightly and increased mid-single digits on sequential basis.

We are encouraged by the gradual improvement in our customers' activities across the agriculture space and are optimistic about the end market experiencing a potential steady recovery during 2027. Our data center revenues increased about 2.5 times compared to the last year's third quarter. In data center applications, we continue to expand our product offering and customer base. We anticipate to deliver material growth in this end market as liquid cooling application adoption continues to accelerate. Adjusted EBITDA margin was 22.8%, down approximately 10 basis points. Importantly, segment gross margins improved 130 basis points year over year, driven by volume growth and execution on enterprise initiatives 2.0, offset by investments into our data center growth vertical. I will now turn the call over to Brooks.

Thank you, Ivo. I'll begin on slide 6 and review our core sales performance by region. All three regions posted solid core growth in the quarter, driven largely by strong performance in most of our industrial end markets. Americas grew 5.2% with high single-digit growth in North America, more than offsetting a decrease in South America. In North America, industrial OEM sales grew more than 20%, and the industrial aftermarket increased high single digits. At the end market level, diversified industrial, construction, and commercial on-highway were the largest contributors to North America's growth. In EMEA, core sales grew 4.6%, led by double-digit growth in the automotive aftermarket. Industrial OEM sales increased mid-single digits, partially offset by a slight decline in the industrial aftermarket. At the end market level, commercial on-highway and personal mobility expanded more than 20%, partially offset by softer demand in construction.

APAC grew 7.5%, fueled by double-digit growth across the industrial channels. Commercial on-highway, diversified industrial, and personal mobility increased double digits and were the strongest end markets in the region. On slide 7, we outline the primary drivers of our adjusted earnings per share growth. Adjusted EPS increased from $0.39 per share in the prior quarter to a record $0.47 per share. Improved operating performance contributed approximately $0.08 of the increase. A lower tax rate, favorable interest expense, and other items combined for $0.01 of growth. Unfavorable foreign exchange and other items were a $0.01 per share headwind. Slide 8 provides an overview of our cash generation and balance sheet. Our trailing 12-month free cash flow conversion was 82%. We anticipate our free cash flow conversion to increase nicely in the fourth quarter, consistent with historical seasonality.

Our net leverage ratio ended the quarter at 1.8 times, improving approximately 0.2 turns. We repurchased approximately $57 million worth of our shares in the third quarter. Our capital structure is strong, and we have significant optionality to deploy capital. Our return on invested capital was 21.5% on a trailing 12-month basis. Our business investments are beginning to pay dividends, and we anticipate generating higher returns on capital over the midterm. On slide 9, let's discuss updates to our 2026 outlook. We are reiterating our guidance for core sales growth at the midpoint and increasing our guidance for adjusted EBITDA and adjusted earnings per share. We have narrowed our full-year core sales growth to a range of 3.2%-3.8%, maintaining the 3.5% midpoint. For the full year, we estimate total growth of approximately 5% at the midpoint.

We now anticipate full-year adjusted EBITDA to be in the range of $809 million to $823 million. We have updated our full-year adjusted EPS to a range of $1.66 per share to $1.72 per share, a $0.03 per share increase relative to our prior guidance midpoint. Our guidance for capital expenditures and free cash flow conversion is unchanged. For the fourth quarter, we estimate total sales to be in the range of $905 million to $925 million, and core revenue growth to be approximately 6.5% at the midpoint. We anticipate our adjusted EBITDA margin to increase about 120 basis points at the midpoint. I will now turn the call back over to Ivo for summary remarks.