BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - GATES INDUSTRIAL CORP LTD

Hi, everybody, Mike Callender here with Baird. We're pleased to welcome the Gates management team with us today. We've got Ivo Jurek, CEO of RichQuast, who runs a handful of things, including IR. Ivo's going to give some prepared remarks, and then we're going to dive into Q&A sessions. So if you have any questions, let me know. Happy to integrate those into the conversation. You can either email me or just raise your hand, and we can go from there. But either way, Ivo, really appreciate you guys joining us today, Excellent. Thank you, Mike, and good afternoon, all. I have only a couple of slides that I wanted to remind everybody who we are. This is a representation of our actual results from 2025. So a highly diversified company, both from geography and market exposure. We really like the portfolio that we have. From a segment perspective, we have two segments of scale, power transmission and fluid power. Top three market participants everywhere we participate globally and generate about 70%, approximately 70% of our revenue through aftermarket channel. 30% of our revenue comes from OEMs. Again, a highly profitable company, 2025, generated about $770 million of adjusted EBITDA and very strong cash flow generating business in itself, running about 23% ROIC returns on average. So with that, let me kind of summarize where we exited our Q3 and what we anticipate to deliver in our Q4 2026 results. So our present guidance for 2026 Q4 is about 6.5% of core growth year-on-year that's accelerating from what we have reported in Q3, growth of 5.5%. Broadly, our end markets have inflected, and we are cautiously optimistic that we are seeing a very nice beginning of an industrial recovery. Our adjusted EBITDA guidance for second half of this year is 23.5%, which is meaningfully improved from last year and driven all predominantly by an improved performance of our gross margins. We have exited our Q3 with about 43% gross margin performance, and we anticipate second half this year to be in the low 40s. And by year end, we anticipate to have a high-quality balance sheet. Our net leverage is going to reach about one and a half times, which now opens up significant amount of opportunity for us to strategically deploy our cash into a number of different opportunities, be it M&A, stock buybacks, or other alternatives vis-a-vis return of the cash to our shareholders. so with that I will turn it over to Mike for Q&A so at the bottom there it says they have a capital markets day next Thursday so at the risk of front-running the capital markets Day with some of these questions maybe talk to how you think about through cycle organic growth or how the algorithm looks as we sit here today I know there's been some portfolio shifting there's some re-concentration of where you're focusing your time and efforts. Maybe just loosely, how does that translate from a portfolio growth perspective? Yeah, I think this is a terrific question. Look, if I reflect all the way back to 2018, when we took the company public, we have dramatically reduced our exposure to the automotive OEM market. We've cut our automotive OEM exposure by about 50%. Despite that, I would say from 2018 onwards, we have generated about 3.5% compound annual growth rate. And so that is an organic growth rate that is very much on par with the vast majority of premium industrial universe out there. So we feel that even over the last 10 years or so, eight years, we have delivered a very, very attractive growth rate while we have been retooling portfolio into a more Growy and more profitable Franchise so as we exit this year and you know, I would say over the last, you know three four or five years we have seen a very nice growth in a couple of secular Growth drivers one of which is personal mobility of the last couple of years. We start talking about our exposure into liquid cooling Into data centers while our exposure is still relatively small We did deliver a very nice growth rate. We are growing it about two and a half times versus prior year exposure that we have had. And the portfolio in liquid cooling, frankly, is not something that we had to go out and acquire. Those are products that we manufacture for industrial applications every day today. So we feel, you know, very fortunate that we are, frankly an exposure to that in market. And we continue to see that that's going to be a very pleasant opportunity for us to drive a higher organic growth rate as we move into 27 and beyond. And then lastly, we've talked a lot about the last leg of the stool in secular growth drivers, which is our industrial chain to build. We'll talk about it quite substantially next week at our CMD, but I think our shareholders are going to Be quite pleased with the base of revenue that we've started to generate. and certainly we now believe that that's going to be a very meaningful growth driver for us well into the future. So, absent of me coming and announcing the targets here, we will announce them next week, but I think that it will nicely increase the opportunity for us to drive through the cycle organic growth beyond, obviously, beyond the 3.5% that we have done in the last eight years. So, why don't we take those three secular pieces, talk about them a little bit, and then transition into what we're seeing in today's environment. Maybe start with the e-mobility piece. Strong growth, some choppiness in the middle there a little bit, but cumulatively strong growth. Maybe talk about the types of platforms you're on and why the growth has been so strong and why you view it as secular. Yeah, so let me start with last piece first. So it's a secular opportunity because, you know, in a way, the two-wheeler end market really doesn't grow dramatically it's about 200 million some odd units that are being manufactured a year but it's a secular growth driver for us because we are displacing a unnatural competitor to us maybe just explain what tubular is for everybody we are basically replacing a chain and a derailleur with gates sprockets and gates highly engineered carbon drive so these are for Electric bikes into scooters, electric scooters motorcycles and so on so forth. So it's more of a micro mobility type application. We have built a rather nice business for ourselves. We've we have we have indicated that that business was kind of 10-15 million dollars in 2018. We anticipate to exit this year at about 160 million dollar of invoiced revenue and with the you know with the exception of post couple of post-covid years this business has been growing kind of in 20 to 30 percent compound annual growth rate so we've grown it from again about 10 to 160 between 2008 and 2026 and we have committed to our shareholder base that you know we will be continuing to drive about 20 to 30 percent compound annual growth rate into the near term and I don't see anything changing there our business is a solution is a more elegant solution it's a solution that's more efficient it's clean doesn't require any maintenance or upkeep and so it offers lots of value for the end user we have a significant amount of design wins about 300 million dollars of a pipeline of opportunities. So we have a reasonably good view of what we anticipate to deliver into kind of the next two to three years. And while the business is never linear and no business is linear, we do believe that that 20 to 30 percent growth rate is quite meaningful. And competitively, you're better positioned there than almost anybody, right? Well, we have created this market. We have created these applications. And frankly, we are basically the only credible player into the marketplace. And so while you never necessarily, you never really want more competition, in a way that would not be a bad thing because in my view, that would just drive further adaption and more rapid conversion away from, I think, less favorable solution, which is a chain. And then how do you play in the liquid cooling side on the data center? What are the products specifically? Yeah, so on the liquid cooling side, we're actually quite pleased with our exposure. In a way, we have products that control the full cooling loop. So we manufacture hoses that carry the liquids, small, large, all sizes. We manufacture couplings and fittings that connect the hoses to all the apparatus, apparatus where it is a manifold or it is a source of liquid and we manufacture what I would say today is state of the art best in class pumps that have the opportunity to go on the 4U enclosures and give our customers an opportunity in the smallest footprint available highest flow rates that are obviously required to cool the infrastructure in servers and in manifolds. So we are very well positioned. We have the opportunity in a unique way to optimize flow rates. And as you know today, and as we move into the future applications or evolution of the chipsets, it is all about flow rates, the space can't get any bigger. The heat that is being generated by these servers is exponentially increasing in the same footprint, and so it's a game of how efficiently can you cool the racks in the data centers, and I believe that we are well positioned to capture good amount of revenue over the midterm and make it a very sustainable level of revenue generation for us, regardless of what happens with the debate about how many data centers will get built or will not get built what is the constraint for adopting your product at this point it's really a designing activity we have taken a little more time perhaps than some of the other folks that participate in this market because our philosophy is we want to offer differentiated solution we are not necessarily a company that likes to just participate in the market than BME2. We are a premium supplier. We generate strong margins. We want to be paid for the amount of work that we do in critical applications. Liquid cooling is a critical application. And we believe that our customized design of the products that we manufacture offer a unique cooling performance that is going to be super critical as this market evolves. And I'm sure you'll update this at the Analyst Day in some capacity, but you had talked to this as call it a $100 million-ish opportunity over time, right? $100 to $200 by 2028, and so there'll be an update next week. And then maybe just the chain-to-belt piece, maybe describe what you're specifically referring to, what the constraint has been for an adoption perspective at the factory level, and why you're so bullish. Yeah. So we've been talking about industrial chain to belt for a while. I think that next week we're going to kind of frame the level of revenue that we are generating today, which I think likely is going to be surprising to our shareholders and the analyst community, because I think it's a little bit better than what maybe folks have understood. the opportunity is taking an industrial change right which is present frankly it's omnipresent in every industrial apparatus from logistics and distribution to industrial bakeries to food and pharma manufacturing uh etc etc so it is a very large universe of applications kind of four to eight billion dollars depending upon how you frame that time so it's a very a large market opportunity. An industrial chain, frankly, from our vantage point, is a very inefficient apparatus to power transmission. It requires a significant amount of preventive maintenance. It requires corrosive lubricants that not only create problems that they are expensive and they are also a hazard in a factory, But they require a shutdown for the apparatus to be able to be tensioned and to be lubricated, and that means downtime. And downtime is a killer of productivity. Our industrial belt solution offers end users maintenance-free, lubricant-free lower power-consuming solution that has a very strong payback. But the barrier to entry for us has been associated with the fact that the cost of our system has been significantly higher than the cost of industrial chain. Now, since 2018, we have dramatically reduced that gap, and we believe that as we exit 2027, we're going to be reaching what we call cost proximity and as we reach cost proximity of a chain drive we believe that that's going to open up the slew a what much wider aperture of the uh industrial oem machine makers that give us an opportunity to penetrate much much more rapidly so maybe transition to more near-term thought process high level before i'll start asking some specific end market questions what are you seeing more broadly from a macro perspective are you seeing the right type of sequential dynamics as we track through the back half of the year here in the next year maybe just some high level thoughts yeah uh i think it's a great question look um we are seeing probably for the first time i think that i shared it with some some of our shareholders um in a couple of the sessions that we've had For the first time, I would say since 2018, we see the nascent increase, broad-based increase in industrial recovery. We really haven't seen that through the last seven or eight years. We have seen post-COVID inventory restart, but that really wasn't an industrial-based recovery. So you're seeing the right dynamics. You are seeing PMI behaving the right way for our business. We need to see PMI kind of being constructive for two quarters before we start seeing increase in our volumes. We have seen that. We have reported it on Q3, and we have taken our growth up in Q4 to 6.5. So we are definitely seeing that formation. we need to see strength in the industrial OEMs. And we have started to see a strength in industrial Oems kind of in the second half of last year. So that follow-through then goes into diversified industrial and industrial aftermarket. And for the first time, I think, in a while, we have actually seen that full formation. So I'm very optimistic that we are seeing the beginning of industrial recovery. I know that there's many questions about macro, but I think we also need to remind ourselves that we have had kind of seven years or so less supportive and market macro dynamics. And so regardless of what, you know, what you're thinking may be about what happens with the world in 2027, I think at the end of the day, we are starting to see the dynamics that will carry forward into 2027. Yeah, I remember we were talking earlier this year about where the inventory was coming back. And your comment at the time was the original equipment side and the original equipment vendors are who typically lead on the inventory and the distribution ultimately follows. It feels like you've been seeing that dynamic playing out as we've worked through the year. We have seen more constructive demand. We haven't seen any restocking. Yeah. I think that those are two critical, you know, different parameters. So there's definitely been an improvement in the industrial channel, and that's very constructive for us. But I also believe that you're not going to see any more restocking, if you would, of the industrial channel until sometime in 2027. They'll certainly not do it in the fourth quarter, where everybody works on their balance metrics. So my sense is that that's going to be probably a positive tailwind into 2027, Yeah, no. It meant more inventory normalization. I think we're on the same page. And so maybe a couple end markets here. You referenced in your earlier remarks about the shift away from auto OE towards the aftermarket piece. I think one of the misconceptions is how resilient that piece is. So maybe talk to the strength of that business, the resilience of that and what the outlook looks like. Yeah, thank you. I think that's a very thoughtful question here. So automotive aftermarket is a piece that is, It's almost a gem within our portfolio that is quite, I think, misunderstood by the shareholder community. It is a market that's very resilient. If I take a look back and I just look at, rather than cherry-pick any time frame, I say, look back from 2015 to 2025, because 2015 is when I started, and 2025 is the year of record that we have full-year data on. in the 10-year period, the automotive aftermarket has grown 3.5% compound annually. And I believe that any business that may be in your portfolio, I cannot imagine that you have businesses in your portfolio that grew 3.0% compound annually for 10 years in a row. Maybe you can cherry pick some time frame that those businesses did organically, not inorganically, right? And the businesses that generates high degree of profitability. It's very downturn resilient, and it has very strong cash flow dynamics for us. So we really like that business, and we believe that that is a core piece of our portfolio that provides stability for the long term. And by the way, if I look at how that business grew just kind of over the last five or so years, that business has grown a little bit faster than that 3.5%. So it's a terrific business for us to have. There may be a similar conversation on the on-off highway business you have. What are you seeing there specifically, and what could potentially make you more excited? Yeah, so on-highway in the first half of this year was somewhat negative, negative in volume, negative in growth, and it was predominantly driven, I think, by some of the challenges that were seen in logistics. However, in the third half of the year, we've seen pretty significant pickup in orders that has ultimately translated in Q3 into high single-digit growth for us. It's actually double-digits growth. Double-digity growth, yeah. So double-digits growth in third quarter. So we see that the order pickup that we have seen in the first half is translating into invoiced revenue. We anticipated that, and we believe that the dynamics will carry forward into 2027. In off-highway, it was kind of a tale of two cities. you had commercial construction which was quite robust in the second half of last year and that remains very constructive no pun intended and ag which was super negative for almost three years that we have indicated that is starting to bottom out and we start seeing nice amount of green shoots as we move from 26 to 27 so i believe that 27 is going to be a positive year for ag which bodes well for our growth rate into 27. Yeah, we already touched on the general industrial piece, seeing the right thing there. So maybe I'll transition to the margin side of things. Let's take a step back quick. Let's talk about the journey you've been to get to this 23.5% back half of your margin here over the last few years and then aspirationally, again, at the risk of front-running the analyst day, but aspirationally where do you think that we can take this over time? Yeah, look, there's nothing that says that this business couldn't be running nicely above the margin rates that we are driving and delivering today. Again, that doesn't mean that you're going to get there overnight, but I think that the foundational quality of this business is such that we see opportunities to continue to deliver, and we will frame those opportunities next week. You know, we have been on a journey that wasn't really an easy one, right? In our last CMD, we had committed that we will get to the rates of profitability that we are delivering today. But that being said, we are different components of the profitability improvement. And 150 basis point of the probability was going to come from a cyclical recovery that, frankly, we haven't ever gotten. Correct. So we really have delivered on our commitment on profitability, primarily driven by the hard work of our associates and execution on pretty significant improvement in our gross margins. And that's hard work. That's foundational work. And I think that that's a work that sets you towards having an opportunity to continue to deliver further improvements as you go forward. But those improvements are going to be more driven by incremental volume growth that you can now start capitalizing on the margins that you are generating. So I think that the next level of improvement is going to be more volume-driven, and there's still work that we can do to continue to consistently drive our EBITDA margins up, and we will, but I think the biggest portion is going comes from volume. And what do you increment at? We have incremented in Q3 we've delivered 41% incrementals and we have guided at the midpoint of our guidance for Q4 the incrementals to be 42-43% and that includes about 100 basis points year on year of headwind associated with variable comp. So I mean our underlying incrementals are a little bit better than the 42% to 43% absent of the variable comp. And if you think about that, our gross margins are going to improve in Q4 by about 200 basis points at the midpoint, and our EBITDA margins are gonna go up 120 basis points at the mid point. And how much more facility work do you think you have to do? You did the ERP stuff in the front, probably a little bit more facility work. Do you think it's towards the tail end, or is it still gonna be a measured march from here? Yeah, I think you always have opportunities to become more efficient and do more work, but I think that we have done most of the heavy lifting. We still have a little bit of work around the edges, but obviously we are being much more cautious today simply because of the recovery in the industrial demand that we see, and we'll prioritize ensuring continuity of service to our customers over any incremental work that, frankly, I think is going to be just marginally around the edges supportive. So, we're in a good place. We have the right amount of capacity. The capacity utilization continues to increase as the volume increases, and we believe that 27 should be a very good year for us. Male Speaker 1 So, two-fold question here. How are you thinking about pricing in the market, success levels, any signs of fatigue on one side? And then the other side, how are you think about the price-cost side of things, your ability to stay above that trend? Yeah. 70% of our revenue comes through aftermarket. In the aftermarket, you know, pricing, getting pricing through is a bit more easier, a little less complex is maybe a better way to place it. And generally speaking, we price every year. We price to offset inflation, and we'll continue to do that. In the OEM channel, it's a little bit more complex, but we have the right set of contractual agreements in place that give us the opportunity to come in and reset our pricing, and we do that. In 2026, frankly, we have seen a good amount of inflation, just as everybody else has done, but we've also been very early in looking at what pricing we needed to take to the marketplace to offset what the probability of inflation was going to become. And so today, we are fully priced for inflation. Again, we're generating gross margins in mid-40s, so around the edges, it may be somewhat dilutive, but it is very positive when it comes more than dollar-for-dollar coverage of the inflation. And again, our incrementals are accelerating. So what about capital usage in the short term here? Balance sheet's in a good spot. How do you think about the balance between further buybacks and being more aggressive or assertive on the M&A side? Yeah, I think that we've been pretty upfront about the fact that, A, first of all, we wanted to get to a point where our balance sheet is a high-quality balance sheet. I think we are there today, one and a half times levered. that gives us the opportunity to be very pragmatic about how do we spend that money. We believe that our stock is very attractive, and so I believe that stock buybacks have a very strong place to be part of that mechanism. But we also believe that we do have some opportunities to do accretive M&A. We did conclude a smaller transaction with one of our competitors. There was a carve-out that closed at the beginning of Q4 that will become a much more meaningful addition to our revenue gen in Q1 of next year. And we have opportunities to go in, but we will be very pragmatic, and we will make sure that we don't dilute the metrics, operating metrics that we have generated. We worked quite diligently to get here, and we will do deals that make sense and that will generate decent payback. And how do you think about the funnel? The funnel is very strong, actually. There are lots of opportunities out there where it is carve-outs from other companies to assets that are sitting on private equity books to other companies that, frankly, we compete with or that would be in our near adjacency. And, you know, the issue is valuation. Yeah. Last one here. What are you doing on the implementation of AI and how has that compared or accelerated versus last year? Any use cases, outcomes, anything worth mentioning? Yeah. We're actually very front-footed on AI adoption. We have done a number of different work streams. I think that one of the work streams that we have done is on our front end, and that's been very, very productive for us. Frankly, I believe in AI being a significant contributor to your productivity as you start adapting more of the tools into the back end, optimization of supply chain, optimization of logistics, optimization or uptime of the asset utilization, lots of opportunity out that, frankly, is going to be, I think, a significant driver of productivity improvement over the next three to four years. And we'll cover it more next week in the CMD. So a lot of plugs for the CMT next week. But we appreciate your time, Ivo, Rich. Thanks for coming. Please join me in thanking him. Thank you. Thanks, Michael.