On Friday, Gates Industrial Corp (NYSE:GTES) discussed first-quarter financial results during its earnings call. The full transcript is provided below.
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Access the full call at https://events.q4inc.com/attendee/933052327
Summary
Gates Industrial Corp reported first-quarter sales of $851 million, a core sales decrease of 2.9%, impacted by ERP implementation and fewer working days.
Adjusted EBITDA was $177 million with a margin of 20.8%, down 130 basis points year-over-year due to ERP inefficiencies and fewer working days.
The company reiterated its 2026 financial guidance, projecting improved core growth and adjusted EBITDA margin in the second half of the year.
Notable operational highlights include the successful ERP transition in Europe, which temporarily increased operating costs but is expected to stabilize.
Gates Industrial Corp announced the acquisition of Timken’s Industrial Belt business, expected to enhance its power transmission position in North America.
Full Transcript
OPERATOR
Good morning and welcome everyone to the Gates Industrial Corp first quarter 2026 earnings call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time I would like to turn the conference over to Rich Quozzo, Senior Vice President, Investor Relations. Please go ahead.
Rich Quozzo
Greetings and thank you for joining us on our first quarter 2026 earnings call. I’ll briefly cover our non GAAP and forward looking language before passing the call over to our CEO Ivo Yorick, will be followed by Brooks Mallard, our CFO. Before the market opened today, we published our first quarter results. 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 will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 annual report on Form 10-K that was filed in February 2026. We disclaim any obligation to update these forward looking statements. We’ll be attending several conferences over the coming weeks and look forward to meeting with many of you. And before we start, please note all comparisons are against the prior year period unless stated otherwise. Now I’ll turn the call over to Ivo.
Ivo Yorick (Chief Executive Officer)
Thank you Rich and Good morning, everyone. We appreciate your participation on our call today. I will start on slide 3 with a brief recap of the first quarter. Our team executed well on our business priorities during the first quarter, navigating successfully through a fair level of business transition. In particular, our Europe team successfully implemented a new Enterprise Resource Planning (ERP) system and achieved higher efficiency rates as the quarter progressed. Exiting the quarter, our Europe business had stabilized and was delivering revenues on par with prior three Enterprise Resource Planning (ERP) implementation periods, although with still somewhat above normal operating costs. We anticipate our operational efficiency in Europe to stabilize further during the second quarter. On a global basis, our sales dollars and margin rate, were broadly consistent with expectations we have outlined in February, excluding the impact of the anticipated headwinds from the Enterprise Resource Planning (ERP) transition and the two fewer working days that affected the first two months of the quarter. Overall demand trends improved during the quarter. Core sales growth approximated mid single digits year over year. In March, we finished the quarter with a book-to-bill solidly above one. As we sit here today and based on our present run rates, we feel good about our core sales growth prospects for the year absent of any additional potential escalation of the conflict in the Middle East. In addition, we do not anticipate any material financial impact from the recent revisions in Section 232 tariffs,. As such, we are reiterating our 2026 financial guidance. Please turn to slide 4. Our first quarter sales were $851 million, representing a core sales decrease of 2.9% relative to our core sales guidance provided in February. We experienced some small incremental distribution inefficiencies associated with the Enterprise Resource Planning (ERP) transition which led to a build of past due backlog as we exited the quarter. We expect to recover these sales in the second quarter and Brooks will go into more detail later on the call. The European Enterprise Resource Planning (ERP) transition and fewer working days relative to a prior year period combined represented approximately a 600 basis points headwind, to our core sales. Entering 2026 we experienced a positive inflection in industrial OEM orders and that trend has continued. Adjusted EBITDA was $177 million in line with expectations, resulting in an adjusted EBITDA margin, of 20.8% down 130 basis points year over year. The decrease was primarily driven by inefficiencies related to the Enterprise Resource Planning (ERP) transition and the impact of having too fewer working days compared to prior year period. Our adjusted gross margin was 40.5%, down approximately 20 basis points. Our adjusted earnings per share was 35 cents and down slightly. The fewer working days in a quarter and Enterprise Resource Planning (ERP) transition combined to represent a 7 cent headwind to adjusted EPS. Operational performance and a lower adjusted tax rate were modest Benefits. On slide 5, I will cover segment highlights all year over year. Comparisons were substantially impacted by the Enterprise Resource Planning (ERP) conversion as well as the fewer working days. Looking past these items, we saw a very solid strength across both of our segments with noted underperformance in commercial on highway production common to both in the Power Transmission segment, we generated revenues of $533 million in the quarter, a decrease of approximately 2.5% on a core basis, primarily driven by the fewer working days and Enterprise Resource Planning (ERP) transition In Europe. The Power Transmission segment realized accelerating order trends during March, personal mobility expanded 6% and our growth rate, was affected by project timing as well as the Enterprise Resource Planning (ERP) transition. In Europe, the region with the largest exposure to personal mobility. We anticipate a return to our normalized levels in personal mobility starting in Q2. Additionally, the construction end market continued to improve and the ag market is recovering. In a fluid power segment, our sales were $318 million with a decrease in core sales of approximately 3.5%. Fewer working days and the Europe Enterprise Resource Planning (ERP) implementation again contributed to the decline. We realized strong double digit growth in Asia-Pacific (APAC) during the quarter. Broadly, order intake was strong exiting the quarter. I would note that the commercial on highway was relatively weak in a quarter. That said, North American orders have inflected positively to start 2026. Our data center business continues to perform in line with our expectations and revenue grew approximately 700% from a low base in the prior year period. I’ll now pass the call over to Brooks for further comments on our results.
Brooks Mallard (Chief Financial Officer)
Thank you Ivo. I’ll begin on slide 6 and discuss our core sales performance by region. In the Americas, core sales declined approximately 2.6% in the first quarter. Two fewer working days in our first quarter relative to the prior year period had an unfavorable impact on growth. North America core sales were down a little less than 2%. Excluding the working days impact, North America core sales would have increased compared to the prior year. In EMEA, core sales declined approximately 8.5% year over year, most of which was incurred in February. While production outpaced targets, finished goods shipping lagged production output in February and through the first part of March. This led to slightly lower than expected revenues of around 4 million and higher pass through backlog than normal as we exited Q1. Overall, we were pleased with our improvement through the quarter. We delivered positive core growth in EMEA in March and that trend has continued through the early stages of Q2. We expect to further improve our distribution efficiencies through the second quarter and exit at normalized levels of shipping output and past due backlog. Our Asia-Pacific (APAC) region grew almost 4%. Industrial OEM and auto aftermarket both grew nicely and fueled the performance. slide 7 shows the components of our year over year change to adjusted earnings per share on a combined basis, the temporary headwinds of the Enterprise Resource Planning (ERP) transition and fewer working days represented a $0.07 headwind to adjusted earnings per share. Underlying operating performance contributed $0.02 per share. Other items, including a lower tax rate and share count, represented a 2 cent benefit. Slide 8 provides an overview of our free cash flow and balance sheet position over the last 12 months. We delivered free cash flow conversion of approximately 101%. Stronger operating cash flow drove positive free cash flow for the quarter. We continue to strengthen the balance sheet, exiting the quarter with net leverage at 1.9 times, representing an improvement of approximately 0.4 turns compared to the first quarter of 2025. Our capital allocation approach remains balanced and we repurchased additional shares in the first quarter. In late February, we received a credit rating upgrade from Moody’s to Ba2 from Ba3. Our return on invested capital remains strong while incurring margin headwinds associated with the Enterprise Resource Planning (ERP) transition and continuing to make investments in our key process and growth initiatives. Turning to Slide 9, we have reiterated our full year 2026 financial guidance. We anticipate core growth to improve over the course of the year. For the second quarter, we are guiding revenues to a range of $905 million to $945 million at the midpoint. Core growth is estimated to be approximately 3.5% year over year. We project adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin to decline 30 basis points compared to the prior year period influenced by temporary impacts from the Enterprise Resource Planning (ERP) transition and our footprint optimization projects, which we expect to benefit adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin performance in the second half of this year. I’ll now turn it back to Ivo for closing thoughts.
Ivo Yorick (Chief Executive Officer)
Thanks Brooks on slide 10, let me summarize our key messages. First, our team executed well and showed a great degree of resiliency during a period of significant business transition. We delivered slightly better adjusted EBITDA margin than expected and solid free cash flow on a seasonal basis. Our European business is operating as expected post the Enterprise Resource Planning (ERP) transition and our team is highly focused on driving incremental efficiencies. With a new system in place, we have shifted our operational focus to optimizing customer service fill rates to pre Enterprise Resource Planning (ERP) implementation levels which were at world class. Second, we continue to see improving demand trends across most of our end markets. Industrial OEM orders are gaining momentum and we experience good demand trends in April in emea. Our revenue is trending nicely above expectations to start the quarter. As such, we have good confidence in achieving our core revenue growth guidance with where we sit today.. Third, we believe our Business is in a strong position. We are executing on our footprint optimization projects and anticipate achieving an adjusted ebitda margin approaching 23.5% in the second half of the year. In addition, our balance sheet is in a strong shape. We announced a small acquisition today acquiring Timkens Industrial Belt business which we expect to close in the third quarter. The acquisition augments our part transmission position in North America and should supplement growth moving forward. We intend to remain opportunistic, deploying capital to enhance shareholder returns. Before taking your questions, I want to thank all of our global Gates Associates for their diligence and effort, supporting our customers needs and executing on our strategic goals. With that, I will now turn the call back to the operator for Q and A.
OPERATOR
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press Star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press Star one. Again, we ask that you please limit yourself to one question and one follow up to allow everyone an opportunity to ask a question. We’ll take our first question from Michael Holloran at Baird.
Michael Holloran (Equity Analyst at Baird)
Hey, morning everyone. Maybe we just start where you were leaving off there a little bit. Ivo. So it sounds like core growth would have been positive in the quarter excluding Enterprise Resource Planning (ERP) and some of the days issues. Feels like the trajectory is what you’re wanting to see, exiting Q1 into Q2 holistically, maybe just confidence in the sustainability. As we sit here today, any areas of concern? What are your customers saying? Just kind of generically help us understand how you think this tracks to the year.
Ivo Yorick (Chief Executive Officer)
Yeah, Mike, good morning and thank you for the question. Look, we actually had a terrific quarter. You know, taking into account the quantified issues that we have highlighted on our Q3 earning call last year outlining that we have a major Enterprise Resource Planning (ERP) upgrade that we are going to do on basically 24% of the global company’s revenues in a Big Bang type event. And we have executed in an amazing way. I’m super proud of our Europe team. They have done a fantastic job and the business performed as we have anticipated. The business continues to behave in a very strong fashion. Net of the two less selling days than the Enterprise Resource Planning (ERP), we would have been basically up 300 basis points on core, which is right in line with what we have expected for the year and is basically trending towards the midpoint of our annual guidance. April,, we have exited in a very strong position as well. The Order flow is very solid. We have highlighted on last couple of calls that we have seen a very nice inflection in the industrial OEM order flow that remained throughout Q1 and into April,. So as far as I, you know, as far as I, you know, as I see it today, I feel quite confidently that we are in a very good position to be able to achieve our annual guidance and, and, you know, we’ve actually put the business in a position to be able to do really well as, you know, as the revenue generation capabilities and the end market stabilize. So we’re in a very good shape.
Michael Holloran (Equity Analyst …
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