Gates Industrial outlines $300M buyback and targets 23.5% EBITDA margin run rate amid restructuring in 2026

Earnings Call Insights: Gates Industrial Corporation plc (GTES) Q3 2025

MANAGEMENT VIEW

* CEO Ivo Jurek highlighted "solid third quarter results with positive core revenue growth of almost 2% on the macro industrial demand conditions that remain subdued." Personal Mobility achieved over 20% year-on-year growth, and the replacement channel saw low single-digit growth, mainly through mid-single-digit gains in automotive replacement. OEM sales were relatively flat, with Off-Highway showing global growth offset by weaker North American and European agriculture. Commercial On-Highway declined mid-single digits due to lower North American production rates. Jurek stated, "Our adjusted EBITDA margin increased nicely year-over-year to 22.9%. We generated record adjusted EBITDA dollars and margin for a third quarter."
* The company updated 2025 guidance by raising the adjusted EPS midpoint to $1.50 per share and maintained the adjusted EBITDA midpoint at $780 million, while slightly lowering the core sales growth outlook at the midpoint. Jurek announced "a new $300 million share repurchase authorization that will expire at the end of 2026."
* Jurek emphasized ongoing end market volatility, noting, "We did... enter the year with some expectations that the PMIs could begin to recover in the second half of 2025. That has not emerged to date." He expressed optimism for a more stable or improving demand environment in 2026.
* CFO L. Mallard reported, "The majority of our geographic regions generated core growth in the quarter, highlighted by EMEA's return to growth." He noted, "Our free cash flow was $73 million and represented 73% conversion to adjusted net income. Our net leverage ratio declined to 2.0x at the end of the third quarter."

OUTLOOK

* The company narrowed its 2025 core revenue growth midpoint to 1% with a range of 0.5% to 1.5% and kept the adjusted EBITDA midpoint at $780 million, narrowing the range to $770 million to $790 million.
* Adjusted EPS guidance was raised to $1.48 to $1.52 per share, with the $1.50 midpoint reflecting a $0.02 increase from prior guidance.
* Free cash flow conversion outlook was reduced to 80%-90%, down from 90% plus, due to increased restructuring outlays.
* Mallard stated, "We anticipate being at a 23.5% adjusted EBITDA run rate in the second half of 2026 in a volume-neutral environment."

FINANCIAL RESULTS

* Third quarter total sales were $856 million, with a core growth rate of 1.7%. Total revenues grew 3%, benefiting from favorable foreign currency.
* Adjusted EBITDA was $196 million, with an adjusted EBITDA margin of 22.9%. Adjusted earnings per share was $0.39, up approximately 18% year-over-year.
* Power Transmission segment revenues were $533 million with 2.3% core growth; Fluid Power segment sales were $322 million, just under 1% core growth.
* Net leverage improved to 2.0x, and the company paid down $100 million of gross debt during the quarter.

Q&A

* Nigel Coe, Wolfe Research: Asked about the 24% adjusted EBITDA margin outlook and cost impacts. Jurek clarified, "That margin walk was created... to provide you with an opportunity to model the impacts of the transitory costs to be incurred as a part of our restructuring program restart... this is kind of a foundational floor."
* Coe followed up on growth vectors and market bottoming. Jurek responded, "Personal Mobility... we anticipate Personal Mobility to grow kind of 30% year-on-year compound annually between kind of '25 and '28... liquid cooling and data centers... we are seeing tremendous amount of activities." He signaled optimism about market stabilization and growth in 2026.
* Deane Dray, RBC: Inquired about restructuring dimensions. Mallard described closures of "multiple factories, and there'll be hundreds of affected employees," with a "payback generally ranges from 1 to 2 years."
* Dray also asked about tariffs. Mallard noted, "We're probably seeing 30 to 40 bps of dilution because we're not getting anything in terms of bottom line add from the tariffs."
* Julian Mitchell, Barclays: Probed on Q4 guidance and exit rates. Jurek said, "We -- if you think about our Q4 revenue, it really is kind of taking exit rate Q3 environment, applying normalized seasonality."
* Mitchell asked about cash conversion and restructuring. Mallard explained, "We'll probably see some small headwinds related to the restructuring cash out versus how it shows up in adjusted net income, but probably not as much as we do this year."
* Jeffrey Hammond, KeyBanc: Sought clarity on margin transition. Jurek replied, "We're actually delivering on our midterm targets without getting any help from the underlying macro."
* Hammond asked about capital allocation shifts. Jurek said, "We'll certainly lean into buybacks. The Board authorized $300 million of buybacks... we will be leaning more aggressively towards bolt-on M&A."
* Andrew Kaplowitz, Citi: Questioned restructuring acceleration and 80/20 impact. Jurek responded, "We are really just executing on our original plan... 80/20 material cost reductions and driving a better operational focus has been really the attributes that have given us the opportunity to outperform."
* Tomohiko Sano, JPMorgan: Asked about data center revenue. Jurek shared, "It's in the millions, not in the tens of millions yet... we do continue to be quite optimistic that the data center growth as a vertical is going to ramp up rather nicely."

SENTIMENT ANALYSIS

* Analysts maintained a constructive but probing tone, seeking clarification on restructuring dimensions, margin outlook, and capital deployment, signaling interest in the company’s execution amid transitional costs.
* Management displayed a confident tone in prepared remarks, emphasizing execution and cost control, but acknowledged macro headwinds and restructuring impacts. During Q&A, management became more explanatory, providing transparency on restructuring and expressing optimism for 2026 growth. Jurek repeatedly referenced confidence in market stabilization and strategic growth vectors.
* Compared to Q2, management’s tone remains confident but more focused on operational execution and cost discipline amid muted demand, while analysts’ tone reflects increased scrutiny on restructuring and future margin realization.

QUARTER-OVER-QUARTER COMPARISON

* Guidance for adjusted EPS was raised to a midpoint of $1.50 from $1.48 in Q2, while the core sales growth midpoint was trimmed from 1.5% to 1%.
* Adjusted EBITDA midpoint remained at $780 million, but the range was narrowed.
* Free cash flow conversion guidance was reduced, citing higher restructuring cash outflows.
* Management’s confidence in Personal Mobility and data center as growth vectors increased, with Jurek offering more specific growth projections for Personal Mobility than in Q2.
* Analysts’ questions have shifted more toward the specifics and risks of restructuring and margin transition, with less focus on immediate demand recovery than in Q2.

RISKS AND CONCERNS

* Management cited continued end market volatility and the absence of a macro recovery in PMIs as ongoing challenges.
* Restructuring activities, including factory closures and ERP implementation, are expected to create additional costs and one-time operational impacts in the first half of 2026.
* Tariff-related margin dilution was identified, with Mallard citing 30 to 40 basis points of EBITDA margin impact.
* Agriculture and certain industrial markets, especially in North America and Europe, remain under pressure.
* Mallard outlined mitigation strategies, including footprint optimization, 80/20 cost initiatives, and pricing adjustments to offset inflation and tariffs.

FINAL TAKEAWAY

Management emphasized that Gates Industrial delivered record third quarter margins and continued to outperform underlying markets despite subdued demand. The company raised its adjusted EPS guidance, maintained its EBITDA outlook, and launched a new $300 million share repurchase program. Cost optimization, restructuring, and strategic investments in growth verticals like Personal Mobility and data centers are positioned to yield margin expansion and stability, with expectations for improved demand in 2026 and a targeted 23.5% adjusted EBITDA margin run rate in the second half of next year.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/gtes/earnings/transcripts]

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