BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - GATES INDUSTRIAL CORP LTD

Financial Performance:

• Generated approximately $770 million in adjusted EBITDA for the full year 2025 with an average 23% Return on Invested Capital (ROIC).
• Revenue mix consists of 70% from the aftermarket channel and 30% from OEMs; the company is a top-three market participant globally.
• Achieved 43% gross margin in Q3 2025, with expectations to settle in the low 40s for the second half of the year.
• Net leverage has reduced to 1.5x, creating a "high-quality" balance sheet positioned for strategic capital deployment.
• Q4 2026 adjusted EBITDA guidance is set for the second half of the year at a 23.5% margin, driven by improved gross margins and volume.
• Incremental EBITDA margins reached 41% in Q3, with Q4 2026 guidance targeting 42-43% (excluding 100 bps variable compensation headwinds).

Guidance and Future Outlook:

• Exited Q3 2025 with 5.5% year-over-year core growth, accelerating to 6.5% guidance for Q4 2026.
• Management signals a "cautiously optimistic" outlook, citing the beginning of a broad-based industrial recovery and constructive PMI data for two consecutive quarters.
• Sees a potential inventory restocking tailwind in the industrial channel emerging in 2027, following normalization in late 2026.
• Forecasts double-digit growth in off-highway/ag markets by 2027 as agricultural cycles bottom out.
• Aims to achieve "cost proximity" to industrial chain solutions by the end of 2027 to accelerate OEM adoption of belt drives.

Business Segments and Product Lines:

• Personal Mobility (E-mobility): Revenue grew from ~$10M in 2018 to ~$160M in 2026; maintaining a 20-30% CAGR with ~300M in design wins. Focus is on replacing chains with Gates carbon drives for e-bikes and scooters.
• Liquid Cooling: Products control the full cooling loop (hoses, couplings, fittings, pumps) for data centers; growing 2.5x year-over-year with a projected $100-200M opportunity by 2028.
• Industrial Chain-to-Belt: Targeting a $4-8 billion addressable market across logistics, food/pharma, and manufacturing; emphasizing maintenance-free and lubricant-free benefits.
• Automotive Aftermarket: Demonstrated 3.5% CAGR from 2015-2025, described as a resilient, high-cash-flow core portfolio segment.
• Off-Highway: Commercial construction remains robust; agricultural markets showing "green shoots" after three years of negative growth.

Market and Competitive Landscape:

• Displaced traditional chain and derailleur systems in the e-mobility sector, establishing a dominant position as the "only credible player."
• Liquid cooling competition is minimal due to the company's premium, differentiated, and engineered approach to optimizing flow rates in high-heat server environments.
• Strategic shift since 2018 involved reducing automotive OEM exposure by 50% to focus on a more profitable, diversified franchise.
• Market trends indicate a shift from inventory restocking (completed) to genuine industrial volume growth.

Risks and Challenges:

• Adoption Barriers: High initial cost of industrial belt solutions compared to chains remains a barrier, though management believes cost parity will be reached by end of 2027.
• Macro Volatility: Dependence on industrial PMI and OEM strength; recovery is described as "nascent" and requires sustained confirmation.
• Valuation Risks: M&A opportunities are abundant in the funnel (carve-outs, PE assets), but deal realization is constrained by valuation levels.
• Variable Costs: Near-term margins face headwinds from variable compensation structures, partially offsetting underlying operational improvements.

Management Commentary and Tone:

• Tone is confident and pragmatic, emphasizing "foundational work" and execution over cyclical recovery as the primary driver of margin improvement.
• Management highlights significant cost-reduction efforts since 2018 that have narrowed the cost gap between belt and chain drives.
• Emphasis on a "high-quality balance sheet" enabling flexible capital allocation between buybacks, M&A, and organic investment.
• Leadership is heavily promoting the upcoming Capital Markets Day (CMD) for detailed growth targets and AI strategy.

Analyst Questions and Answers:

• Organic Growth Strategy: Confirmed 3.5% CAGR organic growth since 2018; expects acceleration via liquid cooling, e-mobility, and industrial belt conversion.
• Pricing Power: Successfully priced to offset inflation in both OEM and aftermarket channels; generating mid-40s gross margins indicates pricing dominance.
• Capital Allocation: Plans to pursue accretive M&A (e.g., recent competitor carve-out) and stock buybacks, maintaining a disciplined approach to avoid diluting operating metrics.
• AI Implementation: Active front-footed adoption in front-end sales, supply chain optimization, and logistics; expected to drive significant productivity improvements over the next 3-4 years.
• Margin Trajectory: Future margin expansion driven primarily by volume leverage on existing high gross margins, rather than further facility overhauls.

Other Key Points:

• A small M&A transaction with a competitor concluded in Q4 2025, expected to become a meaningful revenue contributor in Q1 2026.
• Management reaffirmed that the automotive aftermarket has delivered 10 years of 3.5% compound growth, proving its resilience.
• The company utilizes proprietary carbon drive technology for e-mobility, positioning it as an elegant, maintenance-free alternative to traditional chains.
• Future growth in liquid cooling is tied to the physical constraints of server racks and the need for higher flow rates as chip heat generation increases.