Gates Industrial Corporation plc Stock

Good afternoon, everyone. My name is Brandon Knutson. I'm a part of the multi-industrial team here [ as ] the research team at Morgan Stanley. Today, I have a pleasure of speaking with Ivo Jurek, CEO of Gates.

And before we get started, I need to read a quick disclaimer. For important disclosures, please see the Morgan Stanley research website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. All right. So to start off, Ivo, what do you think is the most underappreciated or misunderstood piece of the Gates story?

I think it's a great question. We love the asset and the company that we have, and I think the company has performed reasonably well, particularly in a differentiated manner over the last 3 or 4 years where we have been operating in a pretty tough macro background with PMIs being negative for nearly 4 years, historical length of time. During that period of time, we continue to deliver growth, and we continue to nicely improve operating margins, EBITDA margins and gross margins through the cycle, which I think is giving us a great opportunity and a great setup into what I see is the present time of finally seeing the inversion of that industrial activity.

And what are you seeing today that gives you the most confidence that this is a real cyclical inflection rather than a few quarters of lapping easier comps?

Yes. I think very, very good question here. What we have started seeing, particularly, I would say, starting with Q4 of last year, has been a pretty nice rebound of volume that was coming through from industrial OEM side of our business. In our business, we frankly always have to see that the industrial OEMs have to recover first. And then 2 to 3 quarters thereafter, they start pulling in the rest of our business. So the industrial aftermarket business, the diversified industrial exposure that we have and so on and so forth. So we've seen a very nice rebound in particularly commercial construction equipment in Q4 of last year. Q1, we started to see an improvement in order flow for commercial truck, Class 8, 5 to 7. So across that commercial transportation section. We have continued to see strength and robust performance with our personal mobility business. Oil and gas business has started to recover, kind of, second quarter of this year. And so you have a better sense of broader pull-through in the economic macro. And as we entered Q3 of this year, I would have said that probably 70% or so of our portfolio exposure is in end markets or applications that have either inflected or already demonstrating green shoots in demand. So I feel much greater level of conviction in what we see. Again, we exited about 5% core growth in Q2, and we've guided a 5.5% organic growth in Q3 and 6.5% in Q4. And we believe that we are trafficking exactly at that range.

Great. You've highlighted some of the end markets that you've seen an inflection in. What's that 30% that is still yet to inflect? And is that something you see improving over the next 12 months?

Yes. So look, we still -- are still, in kind of, bottoming out of ag cycle. We believe that, that bottom has been formed in the first half of this year. We certainly anticipated that ag is going to improve in the second half of the year, at [ on-session ] of the year. But I think that the most recent industrial news is signaling that, that's actually playing out that way. And so we anticipate that the ag exposure is going to start benefiting as we exit '26 into '27. '27 we anticipate will be quite good for ag from a cycle perspective. Auto OEM is still -- while this is a very insignificant amount of our revenue that comes from our OEM, it's about 8%. Auto OEM is still pretty dislocated today globally.

Great. You said that it typically takes 2 to 3 quarters, right, for OEM activity to funnel into your activity. So that is encouraging on the ag side. Switching over to aftermarket. 2/3 of your business goes through distribution. One encouraging aspect is that distributors remain fairly lean and the growth appears to be more sell-through than restocking activity. Does that make you more confident in the quality and the durability of the current growth and potentially accelerating from these levels?

Yes. I believe that as the industrial distribution starts to firm up, its belief that there's actually a real inflection, which, as I've indicated, we believe that we have seen, they will start restocking more. Presently, as you indicated, is more pull-through sell-out equals sell-in from the channel partner to us and us to them. So it's very balanced, but I certainly anticipate in 2027 that the industrial distribution, in particular, should be more robust than what has been so far in 2026. Now that being said, we did start seeing improvements in order rates in Q3, and we certainly anticipate that we are starting to see formation of a normal cycle.

Okay. Then auto aftermarket has been really strong. How much of that business is driven simply by miles driven and vehicle age versus some Gates-specific share gains and initiatives?

Yes. So look, when I take a look at my auto aftermarket business, which is about 36% of our revenue, it's the most underappreciated asset that we have in our portfolio, frankly. It is an amazing business that's got some terrific drivers of that business. If I take a look at the business over the last 10 years, the business has grown at 4.5% compound annual growth rate. So I will take a business that grows over a 10-year period of time at 4.5% at any given time. That being said, the last 3 years, our automotive aftermarket business grew high single digits, so about 3 years going back to 2023. That was predominantly driven by market share gains. So about half of that was kind of, a normal market activity and half of that was through market share gain. The dynamics are very solid. Obviously, the age of car fleet ages. We predominantly benefit when the car fleet is 7 years or older. So the car comes out of a warranty and then the end user is more interested in an affordable option for repair. That's where we come to play. Miles driven are still quite high. New car sales are impacted by different factors, cost of money, the cost of the vehicles and so on and so forth. So the setup for our business to continue to outperform the general market is quite all right.

And what's been driving that share gain within aftermarket? And how do you see that continuing?

Yes. Look, I think that Gates is one of the pristine brands recognized globally. We specialize predominantly in the Do-It-For-Me part of the market. We continue to be focused on ensuring that our operational cadence is right in line with the expectations of the end market and our portfolio breadth continues to evolve to support the breadth of brands and breadth of end unit applications that are in use, and there's very few companies that have the capability to do that in the automotive aftermarket to the extent that Gates Corporation does.

Got it. I want to shift a little bit to data centers. So data center revenue, you've targeted a potential $100 million to $200 million of data center revenue by 2028. Given the momentum today, is that opportunity beginning to skew towards the higher end of that framework?

Yes. Look, we'll expand greater detail of our data center exposure and how we are presently thinking about that exposure during our CMD that's scheduled November 19 at the NYSE. But let's just say that we see significantly more opportunity today than we did maybe a year ago. Our pipeline of opportunities continue to grow and frankly, it grows exponentially presently. We are pretty bullish about what we see in the marketplace. Most recently, we have announced the initial production ramp-up of our industrial pumps that are going to the largest U.S.-based server manufacturer in rack cooling. So the portfolio continues to do exactly what we anticipated. We'll be exiting this year kind of, $25 million, $30 million of revenue base. Again, that's about 2.5x of what it was last year. And we anticipate that it's going to continue to scale up at a significant clip into '27, '28.

Okay. And then the revenue doubled -- more than doubled there in Q2, and you're ramping up programs that you've already talked about. What has been the product suite or application that you've been winning in today and then you just highlighted you've seen new opportunities for applications. What are those applications for Gates products?

Yes. So I would say that we have been ramping up design wins with the infrastructure builders. So I think the cooling infrastructure providers that are out there. We have launched and we are in -- presently in the process of launching a new suite of product offerings in the fittings and coupling space that are not only just specifically targeted for the data centers, but they're highly differentiated. We are super focused on ensuring that we actually are solving some of the biggest problems that our customers in liquid cooling have, which is liquid flow. I think offering higher flow rates from the same kind of a diameter of a space utilization. That's opening up some significant opportunity pretty much across a suite of those -- of that entire portfolio. And in general, that space is ramping up quite rapidly, and we believe that we are very well positioned to capitalize on the opportunities that are coming our way.

Great. And how much visibility do you have once you're specified into a data center platform? Is it similar to an OEM design win business? Or is it more a project-driven industrial business?

All of these projects are project-driven design wins. But once you are present on a project, as these projects repeat with those specific customers, in general, you get specified straight into the next project that goes into maybe a different geo location in a data -- in an application. So it's more, it's more project-driven design wins.

And what is the biggest constraint on growth within that market today?

For Gates, I don't believe that there are constraints other than just continuing to [ garnishing ] more design wins and then continue to ramp up our production capabilities. As I've indicated, as an example, ramping production of e-water pumps for use in rack cooling. We will be adding another set of capacities for us in Asia as that business continues to scale up. So I would say it's getting a foothold in having adequate capacity and continue to win the business as customers evolve.

And within that $100 million to $200 million of data center revenue, it sounds like that forecast was made when the opportunity set was a little smaller. So essentially, the update on that number should be positive probably coming in the Investor Day is what I would...

Look, I do think that, that space continues to evolve very, very rapidly and the set of opportunities continues to grow in scope. I do also believe that we've got to demonstrate meeting the commitments that we have set out there, certainly before we reset any sort of parameters. But I don't -- presently, I don't see that the opportunity set is getting anything other than bigger. And that just bodes well for the future of this set of applications for our company.

Is there any reason why margins may be better selling to data centers than the rest of the business? Or is it consistent?

I think the way that you should think about it is that the core parts of our portfolio, so if you're saying the hoses and the fittings and couplings, the margins are basically company-wide average. So they're quite good. And as we ramp up our water pump business, I think we are starting from a lower margin side because we are in early production cycle. And as that business ramps up to the volumes that we anticipate, we believe that those margins will be in line with company-wide margins.

Great. And then shifting to the other big secular driver. You all talk about personal mobility, how much of personal mobility growth is tied to the underlying market growth versus new design wins and conversion from chain-to-belt within the industry?

Yes. If you think about that end market, that end market actually doesn't grow dramatically, right? That opportunity set is pretty fixed. It's about 180 million units annually that are being produced in the 2-wheeler space. But for us, it's an opportunity of penetration where we are converting a nontraditional competitor. We are converting a belt drive into a space where a chain drive used to reside. So for us, it's driving penetration and market share gain.

And what is the penetration today relative to what you see as the long-term addressable market?

Yes. We're still starting -- this is still very early for us. We are starting from a very small penetration out of that 180 million units. So I would say, I think that we kind of, have a 2%, 3% market penetration today. we will exit the year kind of in that $160 million to $165 million of revenue on that 2% to 3% penetration. And we certainly believe that it is not unreasonable to anticipate that, kind of, over the next 10 years, we ought to have a 10% market share of that market, and that would bode really well for our company. That represents a rather significant potential growth driver for us.

And is there a difference in penetration between certain geographies or certain applications?

Yes. Look, we have done really, really well in Europe, in particular. The European still believe that a bike commute is more efficient than committing through -- via automobile. And that's also an end market that was accepting much more premium products from early on. Those bikes and e-bikes were more costly, and it was a good target for us to penetrate. But as we have developed more optionality, greater technical capability and expertise, and we were able to develop products that now can penetrate the mid-market portion of the 2-wheeler space, that opportunity set has opened up across all geographies for us. China, India are growing very nicely for us, United States is starting to grow very nicely for us. So we believe that we are well positioned to continue to capitalize on that opportunity set. And again, that's an opportunity set that's going to be with us for the next decade plus.

And in that 180 million unit market, is there a reason that -- is there a part of the market where it wouldn't make sense to transfer from a chain to a belt? Or is the TAM really 180 million potentially?

Yes. I would say that about 1/3 of that market is not going to be attainable for us. That's very low-cost devices where we just don't envisage that we want to break into that low-end market. So I would say the mid-market to premium market, that's a sweet spot where we will operate. And so think about it as kind of, 120 million type units of opportunity for us.

Okay. And the personal mobility grew roughly 25% in Q2. You've highlighted multiple times, you expect it to grow 25% to 30% over the next couple of years. What is giving you the confidence that this growth can remain at that level as the base becomes larger?

Yes. In this business, in particular, we have a large visibility because of the pipeline of opportunities that we are working on, the design wins that we have, we have been able to secure. Our pipeline of opportunities is north of $300 million today. So we have a much greater visibility of what we certainly anticipate is going to occur over a short period of time. And as you are penetrating and growing the base, you are starting to get a sense that there is an inflection point that's coming. And when that happens, we certainly believe that we continue -- we should continue to maintain rather healthy growth rates well into the future.

And how do you size that $300 million pipeline you talk about? Is there like a certain segment of the market that's refreshing products every 2 to 3 years? Or how are you determining what the pipeline is for the next 12 months?

Yes. That's a really good question. So first of all, all these products are getting refreshed couple -- every couple of years, number one. But number two, more importantly, if you continue to just participate with the same brand on the same application, that's really -- you're not going to be gaining market share. You're going to be kind of, stagnant, right? So for us, it is penetrating broader subset of manufacturers and broader subset of devices that have different price points, right? So again, we started with the high end and now we have migrated towards the mid-market set of applications. So if you are specialized, you're making bikes for the premium market and the mid-market and the more or less premium market. We've penetrated the mid and the premium market, and that's kind of how we drive penetration. And you go across different applications, right? So bikes and e-bikes is one set of applications, but there's scooters, there's electrically powered scooters, motorcycles and they range in size and capacity and breadth of product portfolio, and we are targeting all of those.

Great. And as this business scales, how does the margin profile in personal mobility compare with the Gates average?

Yes. So personal mobility margins are at or above our company fleet average. And as we continue to scale up, we anticipated that's going to be a strong driver of future EPS growth.

Great. And then shifting gears a little bit to Asia. We continue to materially outperform with you all, showing strong execution, not just in China but also East Asia and India. How much of the strength is end market recovery versus Gates-specific execution and share gains?

Yes. Look, I think that we have demonstrated, we consistently outperform our higher multiple and multi-industrial peer set in Asia. So we are delivering growth in both of the regions that you have highlighted, so China and East Asia and India based on opportunity set that's present to us. We believe that we are taking market share. Certainly, the numbers would speak for themselves as we're doing such. But more importantly, we have terrific teams there, and they execute really, really well. We don't focus our activities in East Asia and India and China on exports to the U.S. or export to Western economies. We are predominantly focused on capturing opportunities within the regional growth set that's available to us. So in China, we have -- are like any other Chinese competitor we compete for business in the local economy, on local applications as we do in India. And that bodes well for us.

Great. And China has been an area generally where other industrial companies remain cautious. What are you all seeing differently or doing differently on the ground to drive this continued strength?

Again, great team, terrific execution, focused predominantly around local manufacturing activities. I think that it is really easy to get negative on China, particularly when you read around the weakness in consumer in China. Obviously, some of the biggest brands in the United States are consumer oriented, and they are significantly impacted by lack of growth there. But our products are predominantly focused on industrial applications. The industrial economy in China is reasonably healthy. It's doing quite well. Industrial activity in China has been expanding over the last 3, 4, 5 quarters, and we have benefited from that. And I believe that, that is going to remain reasonably buoyant for the foreseeable future. I don't -- while I don't anticipate that China is going to be growing 11% every quarter, I'll take it, but I don't think it will. Certainly, in our view around China's growth kind of mid- to high single digit would be terrific for our company.

And the other industrial companies have talked about there being in China, higher competition where local companies may have a preference for local suppliers. I mean that's sort of getting a -- being a stronger trend over time. Is that something you're seeing as well?

Well, I don't know how to answer that question because we are a local supplier. We are a local company to serve the local economy. Yes. I'm just trying to be facetious in here. But look, we have -- when I joined the company in 2015, I actually joined it from China. I resided there 4 to 5 years. And one of the strategies that we have deployed pretty immediately after I joined the company is to retool our focus away from doing business with large multinationals and focus on doing business with local brands and local customers. So we have been doing that now for over a decade. And I believe that we are starting to see the reward of that effort. It isn't something that we have to overreact or overtorque to today. We have been doing that for an extended period of time. And I think that we are being viewed as a local operating unit, and we are more than capable to compete with the Chinese competitors. I think they have great competitors. They are very efficient. They are very innovative. But so are we. And I think that we like sitting where we sit in China.

Great. I appreciate all of that. Switching over to margins. You've done substantial work around footprint optimization, restructuring and cost optimization. How much incremental self-help remains beyond what investors will see in back half of this year and early '27?

Yes, look, maybe I'm a dinosaur, but I believe that, that work never stops. So you always have an opportunity set to continue to improve your operational performance through self-help. And whether or not it is 80/20, that journey is a long journey and offers many opportunities to drive operational improvements. I believe that we are on the cusp of realizing some AI-facilitated benefits in back end, so particularly in the manufacturing as you are going to deploy some of the higher-efficiency tool sets. Look, we are focused on driving innovation. We will be exiting 2026 kind of, around high teens of New Product Vitality Index. Our target is to be in the 20s -- in the mid -- low to mid-20s. Every time you launch a new product, you have an opportunity to enrich your margins because new products are generally more competitive than some of the subsets that you have been manufacturing for many, many years. I believe that we continue to have opportunities in harmonizing our raw materials and doing more internally in terms of mixing and compounding polymers and further differentiating our construction of the products that we manufacture. So I wouldn't just feel that the journey has ended. I don't think that it ever ends. That being said, I also do believe that our focus is pivoting towards driving more robust growth over the next period of time, next 3, 5 years and demonstrate that this company is capable of delivering differentiated growth algorithm. And that's going to reward our shareholders through better financial metrics as that volume is capable of delivering kind of 35%-plus incremental margins when you kind of normalize after maybe 4 quarters of delivering kind of 45% plus incrementals.

Yes. And part of that growth algorithm is going to come from price as well. And you've historically been pretty good at moving quickly on pricing. Does an improving demand environment make those conversations easier? Or are customers becoming more resistant after several years of industrial inflation?

Yes. Look, I mean, we price for value. So in general, our products are highly engineered mission-critical and the cost of our products is insignificant in comparison to an idle industrial asset. So in general, for us, the conversations are more around availability than price. And again, I think that we are being reasonable stewards and we try to ensure that pricing activities cover inflation and not necessarily are viewed as a price grab. So we indicated that even the latest bout of inflation that we actually feel quite okay with being able to pass the pricing on, and we've guided taking into account that we will exit the year with cost price neutrality dollar for dollar. And I don't think that that's difficult to defend in a reasonably high inflationary environment.

Right. And now switching over to capital allocation. With the cycle improving and you guys generating a good amount of cash, how do you rank buybacks, M&A and organic investment today?

Yes. Look, we have been very balanced over the last 3, 4, 5 years, particularly as we felt that we wanted to improve significantly the quality of our balance sheet. And I think we've done that. We anticipate that we'll exit this year kind of 1.6x plus or minus levered. So our balance sheet is in a very good shape. While we have been improving our balance sheet, we have also been stepping up our buyback activity and reducing our indebtedness. So we can do all 3 of these things at the same time. Now that being said, now we have a capability, we have the capability to go and deploy capital into inorganic activities. We have a reasonably sizable capacity with the balance sheet where it is at today, and we anticipate that we will be deploying that capacity over the next 12, 18, 24 months. we don't necessarily feel that we need to be rushed to do any transaction, but we certainly like the opportunity set that we have, and we have been working very diligently on cultivating a good amount of targets directly. And we anticipate that we'll be doing something interesting.

Within that opportunity set, what types of acquisitions are most attractive to you today? And how high would you take leverage for the right deal?

Yes. Look, we don't anticipate to step out of kind of our foundational core that we operate today. We believe that we don't necessarily have an aspiration that we need to build a third leg today, okay? Let me put it this way. From a leverage perspective, look, through the cycle, we want to kind of operate in between that 1.5x to 3x leverage. If there was a good deal and good opportunity to add high-quality assets to our portfolio and we need to improve -- increase the leverage to, kind of, 3.5x, would do that? We would have a robust debate about it. But we feel comfortable kind of residing in that 3, 3.5x maximum leverage. I don't think that we would lose enough sleep. But we would have to have a very good line of sight of very quickly delevering the balance sheet back to the 2x kind of, think 18 to 24 months.

Great. And then looking beyond '26 into '27, without giving guidance, how should investors think about the setup entering next year through industrial recovery, continued distributor restocking potentially takes place and secular initiatives are all contributing?

Yes. Look, again, we will not be giving guidance in here for 2027. But if you subscribe to the theory that we've discussed at the beginning of the session, right, and I have indicated that I believe that we are starting to see validation of a turning industrial cycle, that, by the way, we haven't had since 2018, right? We are accelerating our growth rate through the second half of the year, again, 5.5% core midpoint in Q3, 6.5% midpoint in Q4. I do not believe that it stops in Q4. As I indicated, I believe that '27 is going to be probably a very robust year. So you can kind of decide today, is it mid-single-digit growth rate? I don't know, we will provide that guidance on our January Q4 earnings update. But it is not unreasonable to anticipate that if things remain constructive as they are today, you could see a mid-single-digit volume growth. If you see mid-single-digit volume growth, we have already represented that in the first 2 quarters of next year, we anticipate to deliver 45%-plus incrementals on incremental volume. And in the back half, we anticipate we will deliver 35%-plus incrementals on incremental volume. So we believe the setup is quite positive today. And obviously, things can change. They have historically changed in the last 4, 5 years in a reasonably volatile world. But from where I sit today, we feel quite good about what we see, and we believe that we have -- we are at the beginning of a durable recovery.

Great. Well, that's our time for today, Ivo. Thank you for the time sitting with us today, and thanks for coming to the conference.

Thank you very much.

Appreciate it.

There we go. All right. We're off and running here. Welcome to the Gates show. And I'm very pleased to welcome 2 folks from Gates with us this afternoon. We have Ivo Jurek, who is the CEO; Rich looks after Investor Relations. We're going to run this as a bit of a fireside chat, I think. You don't have any slides to start with here.

So I will sort of kick things off. We'll have a bit of a conversation. We would love to have participation from anyone who's interested as well. So we'll make an opportunity for that. I think we're being webcast here today. So I was admonished this morning because I went through one of these sessions, and I didn't ask the company if there are any updates that they wanted to talk about since it was a webcast presentation.

So with that, having been learned, I will kick off that way. Is there anything you'd like to update us around since this is a webcast conversation?

Thank you, Steve. I don't think that we have any meaningful update to what we have discussed on our second quarter earnings call. Our business continues to evolve meaningfully in line with our updated guidance. And as a reminder for all, we've taken our guidance up by 100 basis points across board in revenue generation. So 5.5% core growth guidance for midpoint of Q3 and 6.5% core growth target for organic growth in Q4.

Right. Good. Okay. So that contrasts, if I'm not mistaken, to about 1% growth in the first half. So obviously, a nice inflection that you guys are seeing. How broad-based is that? What's driving it? And what gives you confidence in this fairly large increase in the second half?

Yes. So we have seen a very nice acceleration that, frankly, occurred in Q4 of last year. We went into Q1 with a well-broadcasted ERP implementation that has occurred on our European business in February that has resulted in about 300 basis points core headwind in Q2 due to the ERP implementation -- sorry, Q1, which, by the way, went flawlessly. It was executed well. And as we exited Q1, we've begun to fully recover on the revenue targets that we have set up. While we had a small cost headwind in Q2 associated with the ERP, we've already delivered very nice core growth acceleration in Q2 and that acceleration order intake that resulted in about 8% to 9% organic core growth in terms of orders in Q2.

And the 2 or 3 secular drivers that we have in our business, personal mobility, which as we have highlighted, has been growing in the mid-20s to about 30% compound annually that continues to drive about a point of incremental growth for our business, accelerating revenue generation in our exposure in data centers with our data center enterprise initiative. And frankly, reasonably broad-based strength across our core business. There are still -- while there are still some businesses that yet need to inflect, we've highlighted that while ag has stopped generating negative deceleration, and we anticipate in the second half of this year, ag is going to start recovering. We certainly are seeing those trends.

And I think the most recent announcement by major ag manufacturer would indicate that we have seen the bottom and we should start seeing a recovery into 2027. So while there are some puts and takes, in general, there is a broad strength. We've built a little bit of backlog in Q2, which, generally speaking, as a short-cycle book and ship business, we don't necessarily like to see, but that's just an indication of reasonably strong end market demand environment.

Great. I think that ag producers in the building actually and has reiterated your outlook again. Talk a little bit in case people aren't intimately familiar with it in terms of the personal mobility adoption opportunity.

Yes. So personal mobility business, it's actually quite an interesting opportunity for us. And in a nutshell, it is an opportunity where we are substituting a chain drive with the Gates engineered belt drive. It is much cleaner, much more efficient, much more elegant solution. And from our vantage point, it is an opportunity where we are converting or competing against a nontraditional competitor. So it is a story of penetration. And while we don't necessarily require the end market units to grow.

And for reference, there's about 180 million 2-wheelers that get manufactured every year. So it is a very broad-based, very large market opportunity. We have been very focusedly paying attention to engineering a solution that is cost appropriate that will get us to a much closer cost proximity of the chain drive in those 2-wheeler applications. And with all the other benefits that I have highlighted that we deliver to the end user, we believe that we have a decades-long opportunity to take market share away from chain and continue to deliver a premium growth over the midterm in that business for us.

Are there other areas in end markets where there could be this similar substitution?

Yes, absolutely. I think that what we have done in personal mobility is actually taking a very difficult set of applications. that are very sensitive to certain market dynamics in terms of price versus benefit. And we have demonstrated that we can deliver a solution that is efficient and that we can start delivering broad market adoption of those solutions. If you think about another market opportunity for us, it's an industrial chain drive. There is about $7 billion market opportunity that we view where the industrial chain resides today. And we have been working towards development of solutions that will be broadly adaptable for these industrial type applications.

And we have announced recently that we'll have a CMD or Capital Markets update on November 19, and we will be providing a pretty fulsome update on how we view that market, how we view that opportunity to continue to evolve for us. And while over the last 3 or so years, we have developed a very nice base of business. We believe that, that's another opportunity similar to what we are seeing with the personal mobility that we can realize, again, nicely incremental secular supplemental organic growth over the midterm.

Okay. Great. You mentioned the data center piece so let's dig in there for a second. What do you do that's applicable to data centers? And how does that outlook for you?

Yes. So interestingly enough for us, the data center opportunity resides in kind of our core products of our core portfolio in fluid power. We manufacture fluid conveyance products, hoses, couplings and fittings. And we've manufactured electric water pumps for applications in electric propulsion that happen to be extremely unique in construction and very energy efficient and very space efficient with very sizable throughput of liquids through those pumps. And so we manufacture for data centers, basically the end-to-end fluid cooling loop pump, hose, fittings that get adapted towards a manifold or a server rack or an on-chip liquid cooling directly on those -- in those server applications.

So core parts of our portfolio, specifically tailored for the data center application, obviously, various sort of specifications and certifications that are required to be complied with that we have now been able to secure, and we are working across the broad portfolio of broad spectrum of customers from the server manufacturers and their ODM partners to hyperscalers to infrastructure manufacturers to the construction companies that build the buildings and facilitate the great before you start actually getting into that white space for the IT equipment.

And you've talked about, I think, the opportunity for between $100 million and $200 million of revenue from this end market by 2028. Are you happy that we're on track there? Could that even be conservative?

Yes. So look, when we start talking about the $100 million to $200 million of market opportunity for us, the industry forecasts were that less than half of the data centers that will be coming out of the ground in the future will be liquid cooled. I would say that we all certainly view that being an extremely conservative estimate because frankly, everything that we see today that is going into that core AI-based infrastructure is liquid cooled. That also has expanded our TAM from about $1.5 billion to more than $2 billion just in the last 18 months, and we believe that, that size of the market will continue to evolve and get larger.

We've done a very good job in our minds in building pipelines of opportunities, building new customers. Those are all new applications for our company. So we've had to build our infrastructure, front-end infrastructure to be able to actually understand how to address these type of customers, these type of opportunities. So we have done that. We have tailored specific solutions for those customers. And we have discussed on our quarterly earnings calls that our business has been growing by hundreds of percent year-on-year from a small base.

We anticipate that this year, we'll deliver between $20 million and $30 million of revenue into that space. That will again grow pretty dramatically in 2027. And I certainly feel that our pipeline, our business awards and our opportunities that are in front of us should give us the opportunity to more than exceed that target that we have set for ourselves. Certainly, towards the end of the decade, we see that those numbers should be more than conservative.

Okay. And I guess if you had an Analyst Day coming up, there might be an opportunity to update that.

Yes, we will do that.

How about -- maybe let's switch topics a little bit. How much of your business, just remind us, goes through distribution these days? And what are you seeing in terms of distributor activity, stocking, et cetera?

Yes. So we're actually a very unique business because the channel partners or the distribution side of our business represent about 70% of our revenue or 70% plus. That's a very unique composition of revenue generation. And certainly, for the last 2 to 3 years, we have seen pretty subdued level of activity in the channel -- we continue to see an improvement in the channel activities. We have not seen any rebounds in inventory rebalancing, any signs of restocking of inventories. The channel partners have remained being very disciplined. Ordering patterns are very much in line with their end user demand. So the sell-out is very balanced with the sell-in that they take from their partners like Gates and our competitors and such.

Is that the new normal? Because we hear that actually from a lot of different companies that they're really not seeing much distributor stocking. And obviously, in previous cycles, we would have expected some of that. Are they just going to run leaner from here on out? Or are they just being careful and ultimately, they will restock?

Yes. Steve, if we kind of remind ourselves that we really haven't seen a pure industrial cycle since 2017, I'm not quite sure what the new normal means, to be honest with you. Everything is a new normal for us in an industrial set of complexities that we all deal with. I do think that there will be a restocking. I think that the natural instincts are as you see continuation of demand pull the channel partners recognize that their value is in availability. And ultimately, if you don't have availability and if you depend on your OEM component supplier like Gates or any other partner that they may have to be in a position to on demand supply, they will lose opportunities. So my view is that as the cycle matures, they will restock their inventory.

Okay. All right. Hopefully, we can look forward to that. Let's talk about auto aftermarket specifically a little bit here. So you were able to actually add a pretty significant new distributor, I think it was last year. You've now anniversaried that, but you're still growing the business pretty nicely. What are the dynamics that you're seeing there?

Yes. Look, first of all, I think that automotive aftermarket for our company is the most underappreciated gem in our portfolio. It is a terrific business. If I take a look at the last 26 years, that business has had one down year in 2009, and it was quite insignificant deceleration. It is a super stable business that provides durability to our portfolio. We like that business very much. And that business basically grows kind of low to mid-single digits throughout the cycle, net of any acquisition of market share or any market share gains.

We have, over the last 2 to 3 years, grown that business very, very nicely, way in excess of of that kind of a normalized rate trajectory. We do continue to see significant opportunities to grow that business. We have a very strong presence in Western world. We have built #1 market share position in products that we manufacture in China. We do believe that we have a similar opportunity in India. We see very nice growth rates in aftermarket in India. We have a very strong franchise in Latin America. And we still believe that there remain to be opportunities that we can execute on in market share gains in Western world. So while that business is very durable with kind of the natural market dynamics.

And I do remind everybody that our business relies predominantly on do-it-for-you professional mechanics service component. We only participate in opportunities on automobiles that are post auto warranty. So we don't really participate in the warranty period of time. So kind of that car park that is 7-plus year of age. This car park that has grown quite dramatically in the Western world is the oldest in history. Between Europe and North America, we're talking about 12 to 14 years of age, which is a very, very good sweet spot for our products.

We only manufacture products that are mission-critical that require to be replaced when they need that replacement. So we have nondiscretionary. We do not participate in discretionary. We have nondiscretionary repair critical components. And that serves well for the long-term stability of this business.

I think -- correct me if I'm wrong, but I think the car park even in China is now getting older, right?

It is. It's approached a 7-year sweet spot for us, and it's been a very good place to reside over the last certainly 4, 5, 6 years.

Okay. Good. All right. So another kind of key part of the Gates story, in my opinion, is the margin trajectory, which has been very strong. Maybe just bring us up to speed on kind of what you've accomplished and where you think you can go from here.

Look, we've been able to deliver very strong margin expansion during market downturn. We have demonstrated that over the last 3 years, we have been able to grow our margins over 300 basis points in a decelerating end market backdrop. That speaks to the resiliency of our franchise, the importance of our products, the criticality of our products. And frankly, the strategy that we have deployed in focusing on operational efficiency through enterprise initiatives. Our enterprise initiatives, to remind everybody, consisted of 80/20, which -- where we have seen a very nice incremental benefit. 80/20, in our case, did not necessarily mean that we were trimming our portfolio. We were just focusing 80/20 on the productivity improvements.

We've been able to gain significant margin expansion through reengineering our raw material composition deployed in construction of our products that we manufacture and frankly, through footprint optimization projects that we have been executing through the last 2 to 3 years that delivered a significant benefit. So with that, we will be exiting the 2026 second half at kind of the 23.5% plus EBITDA margins, which puts us in a very, I think, unique category as an industrial company. And frankly, we have been able to deliver that without a very significant benefit of volume. Volumes were very muted in the last 3 years, and we have been able to drive that expansion very, very nicely. So we're very proud of where we sit, and we believe that we have more opportunity to be able to do more.

So to your point on volume, how should we think about kind of normal incremental margin leverage as volume does start to come through?

Yes. So we tend to speak about our incremental margins kind of in a normalized run rate basis as kind of the 35%, 35% plus range. What we have indicated is that we believe that over the next kind of 3 to 4 quarters, so kind of Q3 of 2026 through end of Q2 of '27, we should be trafficking in that 40% to 45% incrementals. So you get more volume, you will start seeing better financial performance there. And then kind of in the second half of next year, again, get back to that normalized trend line of 35% plus.

Is there more footprint consolidation ahead?

Look, I think that you continue to have opportunities as you evolve your's franchise. But I do believe that footprint optimization is kind of a part of our ongoing algorithm that's going to be there. But I also believe that 80/20 continues to be part of our ongoing algorithm to continue to drive margin expansion. I also believe that AI-enabled back-end improvements will drive incremental margin expansion opportunities, so think optimization of distribution routes, optimization of real-time demand married to factory loading optimization, asset utilization optimization driven by more complex algorithms balancing your CapEx utilization. I think those are opportunities that reside in front of us that should be nicely accretive to what we envisage is continuation of driving our margins more towards the upper end of that 24% plus trajectory.

And longer term, how do you view the 2 segments can they be margin equal? Or is one of them sort of a better story?

Yes. So I think that if you look at our performance over the last couple of years, our margins on both of the segments were running plus or minus equal. We've had a little bit of a different performance last quarter, but it was predominantly driven by the fact that more of the footprint optimization was running in Fluid Power. So it was slightly penalized with some of the costs that we were allocating or that we were incurring, not allocating, incurring in footprint optimization on Fluid Power. But as we exit the year, you will see margins being more or less equal again. So there is no real fundamental difference between those 2 product line segments and the margins that we are able to generate from those segments.

Okay. Great. So we've talked a little bit about footprint consolidation. What are some of the other tools in the box in terms of how you've been able to drive margin forward? And I'm thinking about sourcing and design for manufacturing, whatever other tools? I don't want to put too many words in your mouth.

Yes. Well, I think that a bunch of them in the prior segment. But certainly, 80/20 is one of them. It is footprint optimization. It is raw material sourcing optimizations that we have done. We've done a very good job over the last 3 years where we have reengineered materials. And frankly, there was an opportunity that was spurred upon us in crisis when Russia invaded Ukraine and we start seeing very significant raw material shortages, we thought that we needed to control the outcome of our destiny more effectively. And we realized that we had a lot more capabilities to be able to reengineer some very complex and expensive polymers out of our raw material supply chain and commoditize them and then go back and recompound those materials in our own factories.

So we are basically, in essence, leveraging our own internal capability much more effectively through decompositioning some of the more complex raw materials that we were purchasing, and that gave us a very nice opportunity to drive further efficiency in our operational cost structure. Again, I spoke about, I think that we will see some significant productivity through deployment of more sophisticated AI models into the factories, into the back end of your enterprise. And I think that that's going to be very powerful as you move forward, as these models mature. They will be very unique to individual companies. We are building our own. And I think that they will be very, very incremental and very meaningful as we move towards the back end of this decade.

Look, we have a stated target of delivering about 20% plus of New Product Vitality Index. It is very well understood that the more of new products that you launch, the greater the opportunity to have better price cost algorithm, so to speak. So generally speaking, newer products are more profitable than the older products. And so we are very much focused on relaunching a ton of our key product portfolio, I anticipate that there will be a slew of new announcements over the next 12 months on innovation that we are launching. We're certainly doing an incredible job in the data center space with innovation that will position us not only to be sitting well on our ability to drive revenue growth, but also a profitable revenue growth.

Our mobility is running very high NPI vitality is running the 70%, 80% new product innovation vitality. And so that will continue as we're launching products to get into that broader penetration of that mid-market, mid-priced product portfolio offering. And so I would say that those are the key components of how we anticipate that we will continue the journey of driving margin expansion.

Okay. One question that I get a lot on the sort of price cost side is there's a perception, I guess, a bit of a misperception, that you're highly levered to oil prices. And yet, obviously, you've managed all that well. Just talk a little bit about that dynamic.

Yes. Look, I mean, I think that I would certainly like to know who is not levered to oil prices because oil price translate into energy costs. And so I think that we all consume energy. So yes, there is some leverage and there's correlation to oil prices. But you also have -- oil is a globalized commodity, energy is a globalized commodity. You have to have a portfolio and a franchise quality that is capable of passing that inflation into the marketplace, and we have been very effective in being able to do that. We have products that are essential. We are not -- we don't manufacture products that are nice to have. mission-critical products that go into harsh and hazardous applications. And generally speaking, the cost of our products is insignificant to the cost of the overall operating system. So it's not been super difficult to be able to be in a position where you can price for value that you provide.

Okay. Great. Maybe we'll take a second and see if anybody here wants to ask a question. I think there's one in the back row.

If you think about the aftermarket growth since maybe April of '25, the contribution of units versus price and what you see same SKU price inflation looking like into '27?

Yes. Look, we've actually been able to take quite a bit of market share during that period of time. We have signed up a major channel partner in the U.S. and that has delivered very significant unit growth for us. So I would say that the unit growth was probably more significant than price increases. But price is a component of the algorithm of growth. And we certainly anticipate that into '27, we will still see a nice unit growth and kind of balanced maybe 2/3 units, 1/3 price into '27.

Anyone else? Yes. Let's maybe switch and talk a little bit about capital deployment. And you made an acquisition earlier this year or in the process of integrating another belt business. And I think you've talked about opportunities for additional bolt-ons over time. How do you see that progressing?

Yes. Look, we've spent very focused effort on being able to get our balance sheet to be like a true best-in-class industrial company. Our balance sheet is -- we have about 1.8x levered, and we certainly anticipate that we'll continue to see the leverage drop through the rest of this year regardless of that small acquisition that we have made. So I think that we've positioned our balance sheet to have optionality to play offense. We will play offense. We believe that we have many opportunities out there through build-out of our reasonably robust pipeline to add to our portfolio.

We certainly remain very focused on our strategy, our top line strategy, execute on what we want to be. We certainly have desire to broaden our diversified industrial presence. We certainly understand well enough that there is an opportunity to consolidate the market. It's still a highly fragmented market despite the fact that 3 or 4 of the largest players, which Gates is one of, have a large share. If you combine 3 or 4 of the biggest players, we only have about 35% of the total market share.

And again, remind everybody, Gates is #1, #2, #3 in everything that we do globally in terms of market share participation. So we do have an aspiration to be #1 in market share in both of our product segments, product line segments. So we feel that the opportunities are there. We're going to be very disciplined. We have an opportunity to deploy capital through share buybacks as our shares are still rather inexpensive. We'll continue to do that opportunistically, but we will start leaning more towards M&A as we move into the future here.

And with these M&A opportunities, are you buying product, geography, I don't know, distributor relationships? What are the drivers?

I think that you can continue to add -- every company has -- regardless of what's your position in the marketplace. And despite the fact that we feel that we have a very strong market presence and market brand recognition, we do believe that we can plug some more holes in our portfolio with our products. We would like to scale up some geographies and different product line segments. We can broaden our participation in power transmission and fluid power around the edges without necessarily starting a new third so-called third leg.

We don't necessarily target that as the primary desire to do M&A. So we feel that we have an opportunity to broaden our geographic coverage as well as broaden our product portfolio. And with that, you always gain an opportunity to do business with new customers and new channel partners that maybe you haven't done in the past.

Okay. Great. Last chance for the room here. No. I'll ask one final one. I think you're redomiciling the business to Bermuda. So I get questions about why that is important.

Yes. Look, our biggest part of our business is in North America. We're an American company. We wanted to ensure that our shareholder rights are protected. And as we start looking at some of the complexities of being a company that's operating on a GAAP accounting principles and being domiciled in the U.K. and having to file annual reports and IFRS added complexities, added costs, and unnecessary filings, added audit fees.

So we looked at that and say, look, this is a win-win for our shareholders, as vast majority of our shareholders are American-based shareholders, North American-based shareholders, we wanted to make sure that the rights are protected and frankly, looking always at efficiency. And while it may not be a massive amount of dollars in a big scheme of things, if you can reduce complexity, so 80/20 your process out, right, reduce complexity. And this was kind of an 80-20 process, reducing complexity and becoming more North America shareholder-friendly.

Perfect. And Steve, I'll just add that, it does add strategic flexibility for us over the long term to grow the business relative to where our position was in the U.K. So it does help on that longer term.

Okay. Good. And it gives you an amazing place to have an Analyst Day if you choose to do that. We are out of time. Thank you guys so much. Really appreciate the insight.

Good morning, and welcome to the Gates Industrial Corporation Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to Rich Kwas. Senior Vice President, Investor Relations. Thank you. Please go ahead.

Greetings, and thank you for joining us on our second quarter 2026 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallard, our CFO.

Before the market opened today, we published our second 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 will 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've described in our most recent annual report on Form 10-K and in other filings we make with the SEC, including our Q2 quarterly report on Form 10-Q that is expected to be filed later today. We disclaim any obligation to update these forward-looking statements. This quarter, we will be attending the Jefferies Industrial Conference and the Morgan Stanley Laguna Conference both in September and look forward to meeting with many of you. Before we start, please note all comparisons are against the prior year period unless stated otherwise.

And with that out of the way, I will turn it over to Ivo.

Thank you, Rich. In the second quarter, we delivered strong performance as sales came in near the high end of our guidance supported by incrementally constructive industrial end markets and contributions from our strategic growth initiatives. Sales grew approximately 7% and with core revenue growth of 4.9%, which enabled us to achieve record quarterly sales and adjusted earnings per share.

Our adjusted EBITDA margin was above expectations, led by solid improvement in our adjusted gross margin. Importantly, we believe that we are in a good position to achieve our second half adjusted EBITDA margin target outlined earlier this year. Core growth in our industrial channels was up nicely, led by double-digit growth in industrial OEM with strength building as we exited the quarter. Broadly speaking, we generated year-over-year growth in most of our end markets during the second quarter, and book-to-bill remained above 1.

Given our solid second quarter financial results and the favorable shift in demand trends, we observed exiting the quarter. We have raised our 2026 full year guidance for core sales growth and profitability. Our updated guidance implies incrementally better performance or second half of the year relative to our initial expectations. We believe we are also on track to deliver adjusted EBITDA margin of 23.5% or higher in the second half of 2026.

Brooks will provide more details on guidance later in the presentation. Please turn to Slide 4. Our second quarter sales were $942 million, which represented record quarterly sales for Gates. Total sales expanded 6.6% inclusive of foreign currency benefits. Core sales grew 4.9%. The underlying demand continued to improve with year-over-year growth strengthening during the second half of the quarter.

We saw momentum across most of the portfolio, highlighted by approximately 25% growth in personal motility and 20% plus growth in commercial on highway. Industrial OEM sales expanded low double digits and our industrial aftermarket saw improved demand trends which resulted in mid-single-digit growth. In general, the bulk of our end markets have begun to inflect positively, and we are in a strong position to capitalize on the building and market momentum.

Adjusted EBITDA was approximately $211 million and represented an adjusted EBITDA margin of 22.5%, modestly better than expectations. Adjusted gross margin increased by 50 basis points, while we continue to make targeted investments to support our enterprise initiatives. Adjusted earnings per share increased 13% to a quarterly record of $0.44. The growth was driven by improved operating performance and other items.

On Slide 5, we will review our segment highlights. In the Power Transmission segment, sales were $589 million, and translated to over 5% core growth. The expansion was led by high single-digit growth in our industrial end markets, which was driven by mid-teens growth in the industrial OEM channel globally. Our transmission industrial aftermarket increased mid-single digits and supported by double-digit growth in EMEA and Asia Pacific.

Automotive aftermarket grew high single digits, with solid growth achieved across all geographies. At the end market level, Personal Mobility grew in the mid-20s and commercial on-highway increased similarly. Segment adjusted EBITDA margin increased 60 basis points. In the Fluid Power segment, sales were $353 million, and increased 4.2% on a core basis. Similar to Power Transmission, industrial OEM sales were strong, growing double digits.

Industrial aftermarket increased low single digits. Fluid Power strongest end markets for commercial on-highway, which increased high teens and construction which grew mid-single digits. Of note, diversified industrial grew mid-single digits and represented a good contributor to the segment's growth given its relative size within the segment. We continue to grow our data center business, which expanded more than 2x versus the prior year quarter, and we anticipate sales contribution to step up in the second half as certain high-value project launches occur.

Adjusted EBITDA margin in the Fluid Power segment decreased 120 basis points, primarily due to footprint realignment costs as well as targeted investments into our enterprise initiatives.

I will now turn the call over to Brooks for additional comments on our results. .

Thank you, Ivo. I'll begin on Slide 6 and review our core sales performance by region. All 3 regions had positive core growth during the second quarter. Americas grew 1.5% with low single-digit growth in North America, more than offsetting a decrease in South America, which was primarily driven by soft agricultural demand. In North America, industrial OEM sales were up mid-single digits, fueled by solid growth in commercial on-highway.

North American automotive aftermarket grew high single digits, Importantly, overall North America sales momentum grew as the quarter progressed with an exit rate in the mid-single-digit range. In EMEA, core sales grew 6.4% led by double-digit growth in the industrial channels and many industrial end markets. Industrial OEM sales increased at a mid-teens level and industrial aftermarket grew in the double digits. At the end market level, commercial on-highway, diversified industrial and personal mobility drove the strong growth in EMEA in the second quarter.

APAC growth accelerated in the second quarter, increasing 11.5% with China and East Asia and India delivering comparable growth led by strong double-digit growth across several industrial end markets. On Slide 7, we show the primary drivers of our double-digit growth in adjusted earnings per share. Underlying operational performance and favorable foreign exchange combined to contribute $0.02 per share. A lower tax rate, share count, interest and other represented $0.03 of adjusted earnings per share contribution.

Slide 8 offers an overview of our cash flow performance and balance sheet metrics for the second quarter. Our free cash flow was approximately $60 million and trailing 12 months free cash flow to adjusted net income came in at 94%, which is above our historical average. Our net leverage ratio declined to 1.8x, which was a 0.4x improvement compared to the prior year period. During the quarter, we repurchased approximately $22 million of our stock.

Our trailing 12-month return on invested capital was 21.6% up 30 basis points. We continue to fund high-return projects that we believe will improve our growth and profitability over the midterm. On Slide 9, let's discuss our updated 2026 outlook. We are increasing our guidance for core sales growth, adjusted EBITDA and adjusted earnings per share. We anticipate our full year core sales growth to be in the range of 2.5% to 4.5%, representing a 100 basis point increase at the midpoint.

We expect our full year adjusted EBITDA to be in the range of $800 million to $830 million, which is a $10 million increase at the midpoint. Our full year adjusted earnings per share range is $1.62 to $1.70, a $0.06 increase relative to our prior guidance midpoint. Our guidance for capital expenditures and free cash flow conversion is unchanged. For the third quarter, we estimate total revenues to be in the range of $880 million to $920 million and core revenues to be up approximately 5.5% at the midpoint.

We anticipate our adjusted EBITDA margin to increase in a range of 50 basis points to 90 basis points compared to the third quarter of 2025. I will now turn the call back to Ivo for summary remarks.

I'll summarize our thoughts and views on Slide 10. First, we've generated strong top line growth in the second quarter, and we believe that we have entered the early stages of an industrial recovery. Industrial OEM schedules are generally improving with some end markets further down the recovery curve and industrial distributor orders are solid. We are well positioned to generate attractive growth and margin expansion as the cycle evolves. As such, we anticipate producing incrementally stronger core growth in the second half of 2026 relative to our second quarter performance.

Our updated 2026 guidance implies 6% core sales growth year-over-year in the second half, representing a significant uptick from approximately 1% core sales growth realized in the first half of the year. Second, we are delivering on our commitment to our investors and shareholders. Our first half adjusted EBITDA margin outperformed the initial guidance we outlined on our fourth quarter 2025 earnings call in February.

More importantly, we are on track to achieve an adjusted EBITDA margin of at least 23.5% in the second half of this year, putting us on a good path to achieve a midterm margin target outlined in 2024. With the industrial markets turning positive, we intend to deliver attractive incremental adjusted EBITDA margins through the cycle. Third, we are highly focused on accelerating our top line growth and delivering above-average shareholder returns.

The strategy we deployed a few years back is yielding results. Our focus on improved operational performance has resulted in significant improvement in gross margins, and we are approaching our midterm adjusted EBITDA margin target. We believe our investments in strategic initiatives support future sales outgrow in excess of market growth rates. In our view, our strong second quarter execution and the clear inflection in our underlying end market demand trends provide a solid backdrop to deliver differentiated performance.

Our balance sheet is strong. We have significant optionality to deploy capital and will be judicious and responsible. We are broadly excited about the opportunity ahead and anticipate generating significant value for our shareholders. Before taking your questions, I want to thank the 13,000 global Gates associates with their dedication and perseverance in meeting our customers' needs.

With that, I will now turn the call back to the operator for Q&A.

[Operator Instructions] Our first question comes from Steve Volkmann from Jefferies.

Can we just unpack the -- it seems like we're sort of on plan here. We're getting past some of these margin headwinds as we expected. As we think about the second half margin -- how much of the improvement is kind of these temporary headwinds going away versus the better organic growth fall through. And I guess what I'm really trying to get at is as all the dust settles, how should we think about incrementals sort of on a more medium-term basis within the kind of adjusted cost structure, et cetera?

So I would say we're seeing the results of our footprint optimization, our restructuring, our cost optimization, that's all starting to come through. And as you said, as the headwinds go away, the core growth improves -- we expect to continue to improve margins, as we said, in the second half. If you think about the incrementals for Q3, we're implementing pricing to offset some of the oil-related cost increases, and that's going to cause a slight bit of dilution in Q3 are incremental.

So we expect them to be in the 35% to 40% range. We expect those to then move back to 45% plus as we move into Q4. And then for the first half of next year, we expect that trend to continue as the footprint optimization and the cost optimization work that we've done rolls through. And then after that, we'll update you at the end of the year on our full 2027 guide, but that's how to think about it over the next kind of 12 months or 4 quarters.

Great. Very helpful. And then just a follow-up. I was kind of surprised by EMEA, up 6.4%. That seems pretty healthy given what we're hearing from a lot of folks in that region. Just anything to call out relative to that growth?

Yes. Look, I mean, I think we have seen a pretty reasonably broad strength across our end market exposure. We are well diversified, and we have put the company on a trajectory to continue to deliver that growth. So the end markets that are performing quite well. Obviously, in EMEA, our automotive aftermarket, actually, the industrial -- diversified industrial expanded very, very nicely and highly expanded very nicely as well as personal mobility. So we feel pretty well about how our business is performing in Europe.

Our next question comes from Mike Halloran from Baird.

So it sounds like you guys are pretty constructive on the trajectory of your demand curve right now. Ivo, maybe put this in context of history. When you guys have organizationally seen this type of thing before, what does that mean? Put it in context, it's been a bit since you see -- it seems like you've seen this kind of momentum -- and so trying to get a sense of pervasiveness to the portfolio and then what it can mean for the organization if this has legs and it seems to be that you think it does have rights.

Yes. Thanks, Mike. There's a lot to unpack. Now obviously, when we look backwards and we see some of the market recoveries from a historical perspective, you should anticipate a reasonably solid acceleration for kind of the first 4 to 6 quarters. So the recovery. We have seen a nice extension in PMI. So obviously, that's no secret to anybody else. And what we are seeing is reasonably broad-based recovery and support across the exposure that we have in the end market. Now obviously, not everything is in solid shape yet, agriculture as an example, is still in bottoming out and troughing conditions today.

But we should see a very constructive demand. And look, that's reflected in our second half guidance. We are stepping up our forecast for core growth rather substantially year-over-year. And we certainly believe that it's just the beginning of what we should see. Now let me remind you, we have also done lots of work internally on self-help. So we've developed nice exposure to some secular end markets that we believe will continue to deliver incremental performance on the top of the end market support that we anticipate. And as I said on during my prepared remarks, we feel very constructive about where the company sits presently, and we are in a very good shape.

And then maybe some thoughts on pricing, price cost environment and how that's being managed and how you think about it moving into the second half of the year.

Yes. So we've -- we've implemented price increases to offset what we've seen from an oil and petroleum materials base increase. And so we feel good. We've got pricing in place, as I said earlier, it's a little bit dilutive to our incrementals as all the pricing gets in place for Q3, and then it will be fully in place for -- and it's impactful, but it's not really that big of a deal when you kind of look at some of the stuff that's happened in '22, '23, '24. So it's manageable. We've got all the pricing in place. And we feel pretty good about where we stand as we move through the back half of the year. And we expect to be at least price cost neutral in the back half of the year.

Our next question comes from Deane Dray from RBC Capital Markets.

Thank you. Good morning, everyone. Maybe you can put the spotlight on personal mobility and the construction on highway because you don't typically see 20% numbers like that in those verticals. I just -- what are the dynamics there? Are there any new products? Is this a catch-up? Is it an inventory sell-in higher? Just take us through that, that would be great.

Yes, sure. Thank you, Deane. I think as we spoke on our last call about the rebound in order trends in on-highway. Let me start with that, please. So as you start seeing some reports coming through very significant improvement in Class A truck orders for the industry in North America, in particular, they were up kind of a couple of hundred percent year-on-year, so very significant recovery there. The Class 5 and 7 truck orders are also trending nicely positively. So we feel that the market has definitely inflected as we anticipated.

And we have been the beneficiary of that performance. On Personal Mobility side, Look, maybe a year or so ago, we have committed that Personal Mobility should deliver kind of a mid-20% to 30% core growth for next couple of years that has been driven to our effort penetration, new design wins, broadening of our product portfolio across significant a broader-based set of applications. And so you see that playing itself out. And we have not really changed our mind about delivering 25% to 30% core growth in personal mobility over the next couple of years, and we are just on point to do just that.

Great. And second question, just to be clear, I'm not expecting the next analyst meeting to be in Bermuda, but I'd love to know just some more specifics around the redomicile move -- our understanding is England Wells had some pretty onerous restrictions on your capital allocation flexibility for buybacks and dividends and so forth. We just take us through what we should know about the redomicile and what changes, if anything, that might entail being in Bermuda now? .

Well, the biggest change is we don't have to do 2 annual reports and IFRS reporting and things of that nature anymore. So it's a pretty good thing for us folks on the accounting side, it's going to make life easier. So it's going to eliminate some costs. It's going to eliminate some kind of bureaucracy that we have to do in terms of filing annual reports in the U.K. and in the U.S., having audits in the U.K. and in the U.S., things like that. And then -- and so it's going to make it a lot easier from that perspective. Ivo, do you want to do the capital allocation? .

No, look, I think that the overall governance environment is getting more complex globally. And we just felt that as a North American company North American-based company, we wanted to make sure that our shareholders have shareholder rights that are very well aligned to the ones of companies that operate in this country. And I think that we accomplished that by redomiciling in Bermuda, where the governance is very, very similar to the governance of companies that are domiciled in the U.S. So I would say that between those 2 attributes. Those were the predominant drivers. And then obviously, capital allocation flexibility with capital allocation has been another component of our thoughts. But we had a reasonable level of capital allocation flexibility being domiciled in U.K. and Wales. So I just think that it's better for our shareholders and it makes it less complex for our company to operate.

Great. That was really good to hear, and it sounds like that was a smart move.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets. .

If you had given me the growth rates and to put on the map, I would have been completely wrong. That was not what I was expecting. Just on the the North America comment about going to mid-single digit. Is that just kind of timing of cycle inflection? Or would you say 2Q was still a little muted around ERP and facility consolidation versus the other geographies. And if you look to the second half map, would it look pretty balanced across the 3 geographies.

No. Thanks for the question, Jeff. I would say that North America, demand has been improving very, very nicely as the quarter progressed. And so you should almost think that we were exiting June kind of already in a mid-single-digit growth rate. And I would say that North America -- North America, in particular, was more impacted by ad, which is still weak and by automotive OEM that production output obviously has not been terrific in North America, but that has inflected by strength that we have seen in some of the other exposures like diversified industrial, personal mobility, construction and such and on-highway.

Obviously, as I mentioned as an answer to Deane's question, so we feel quite well about that inflection, and we believe that that's going to continue to accelerate in the second half of the year. Certainly, all the indications are there. South America, on the other side was reasonably weak, and that's predominantly driven by the fact that we have a large exposure to agriculture end market there and that has been reasonably weak. It has had a couple of very strong years in '24 and '25, and it's in an inflection in 2016. .

Okay. Good color, Ivo. Just on the short-cycle recovery, I'm just wondering if there's any want or visibility that your distributors are doing anything in terms of wanting to restock? Or are they wanting to run lean, and this is just all sell-through?

Yes. Right now, Jeff, we just sell through. We have seen a very nice recovery with our OE customers and as we monitor our channel partners -- channel partners in general, kind of delayed 1 to 2 quarters as the recoveries take a firm hold. So I would anticipate that kind of end of -- towards the end of this year or beginning of next year, that should be very supportive for continuation of growth into '27. But presently, the channel partners are being pretty judicious and inventories are reasonably lean. They are in a good place, and we don't see any significant rebound that would be restocking driven, certainly, we haven't seen that globally yet.

Next question comes from Andy Kaplowitz from Citigroup. .

Though your outperformance in Asia has continued to be relatively significant. So maybe you can give more color there into what's going on. I think you said China and East Asia about the same growth. What do you think about the durability of the strength you're seeing? Is it sort of more of your self-help? Or is it just the markets there being pretty strong.

Look, our teams are executing extremely well in Asia, not just in China but also in East Asia and India. We have put a strategy in place to capitalize on, frankly, on the broad-based industrial activities that you see in those regions. We are well exposed to all of those -- and frankly, outside of maybe energy, which we have a very little exposure to in Asia, everything has seen really a very, very decent performance -- so I'm quite optimistic about the fortunes in Asia for our company and certainly expect that we will continue to outperform our peer set as well as the underlying end markets there.

And then Brooks, could you give us a little more color on the impact on Fluid Power margin back in Q2? I think you had cited footprint realignment costs, investments in R&D and commercial front end costs. How are those impacts trending in the second half of '26? I know you said you're confident in 70 basis points of year-over-year improvement for the company in Q3. Does Fluidpower trail power transmission a little? Like how should we think about that?

Yes. So as we said at the beginning of the year and we reiterated in our Q1 call, the footprint optimization is almost entirely around the Fluid Power business. between that and some of the investments we're making and some of the enterprise initiatives, that's what drove the second quarter margin compression. That was expected. It was embedded in our guidance. going forward, that should normalize, and we expect to see that to continue to expand kind of a long well. the company margins as we move forward.

So as I said, we knew that was coming. We telegraphed it, we highlighted it, and it should be nothing to see as we move forward.

Our next question comes from Chris Snyder from Morgan Stanley.

I wanted to ask about the ERP dynamic in the first half. I think you guys called out maybe a 250, 300 basis points headwind in Q1, if I remember. I think you talked to maybe some opportunity for modest catch-up here in Q2. Just wondering if that came through and how it contributed to that 5% organic growth number, then do you guys anticipate any further catch up into the back half of the year?

Yes. So it was kind of de minimis to the overall less than 100 basis points to the overall company in terms of catch-up. When you think about EMEA, we're about 6.5% core growth. It was maybe about 200 basis points tailwind as we caught up in Q2. There'll be a slight bit of catch up as we move through the back half of the year, but nothing meaningful. And we continue to see a little bit of SG&A headwinds. That was when you think about year-over-year headwinds. We saw some hyper tier headwinds in Q2. Those again should go away in the second half. We're operating normally as we enter the second half of the year.

So we feel very good about the implementation, how it's gone and then how things are going to be moving forward.

I appreciate that. And I think earlier, you were talking about some better price realization into the back half following some of the actions, I guess, put in place I guess I wanted to maybe get some color on how you think cost inflation tracks for the back half. You guys have resin exposure. I imagine there was some cost inflation there in Q2, Q3. But just kind of wondering, like is that building off Q2 into the back half? Or could that actually be easing as we look into the end of the year, just kind of given some of the movements in the global commodity prices.

Well, it's not easy. I'd tell you that. The volatility of oil prices has kind of kept the cost increases that we've seen either stable or maybe slightly moving up. So we don't expect to see any relief. Now we put pricing in place, as I said earlier, to completely offset at least completely offset the cost increases that we've seen around oil-related products. We didn't see any real impact in Q2 because we were working through our lower cost inventory and the higher cost inventory doesn't really come into play until Q3, which is how we try to match up our price increases as we move forward.

So we've got price increases in place to make sure that we're in good shape. Pricing is something we think we do pretty well. We can get price increases out relatively quickly. We typically have some time to work through them. And so we feel comfortable about where we are from a price cost perspective. .

Next question comes from Brendan Shah from JPMorgan. .

I'd just like to touch a little bit more on your confidence in the second half acceleration. So you just walk us through how much of that anticipated second half acceleration is already visible in your order book, given you have a book-to-bill above 1x? And then how much of it is dependent more on continued demand improvement and sort of where you're seeing the most of least visibility?

Yes, sure. Look, we -- as I've indicated, we have seen strong bookings performance. I would think you can think about kind of high single digits year-on-year bookings growth in Q2. So we have seen a very reasonable strength. I would say that continued through July. So we feel very confident that second half will continue to track in accordance with the trajectory that we have we have anticipated -- we embedded in our guidance. We see very significant strength in personal mobility. We are ramping programs in support of our data center applications that we have been specified on.

So we do have some level of visibility to the overall underlying demand -- and in a way, we've built a little bit of a backlog in Q2 as that revenue start accelerating. So a decent level of visibility from where we sit.

Great. And then just one more for me, please. So you've mentioned acceleration of strategic initiatives to help you outgrow the overall market over the medium term. I guess can you just highlight if you could, just 2 or 3 of the initiatives you think will most meaningfully differentiate your growth and just widen that gap, please? And then actually how invest as your progress against it, please?

Yes. No, absolutely. One of the big initiatives that we have been speaking about for a while has been an initiative around personal mobility and and swapping out the industrial chain for our Gates belt drives. Obviously, that's been growing very, very nicely. It's growing 25% to 30% from a meaningful pace, and we certainly have a line of sight of delivering that level of growth over the next couple of years on a forward basis. We've spoken on a number of occasions about our exposure to data centers -- and while that is still a reasonably small level of revenue, it's inflecting meaningfully. We've indicated that we will be multiples of last year's revenue.

We have identified that we anticipate $100 million to $200 million of revenue being generated by 2028. We certainly feel a high degree of confidence in being able to deliver that. One of the areas that we have been ramping up our revenue gen is in our industrial water pumps that go in the applications in the data centers. We're now in process of actually ramping up our first sizable program with a major U.S.-based server manufacturer as we speak. So we anticipate that that's going to start delivering a nice amount of incremental revenue for us in the second half of the year.

We've spoken about industrial chain-to-belt conversions that are very similar in nature to what we have done with personal mobility. So I'd say that those are probably the three of the most meaningful secular type opportunities that we feel a high degree of confidence that will give us an incremental above-market growth rate that is meaningful for our company.

Our next question comes from David Raso from Evercore ISI.

My question is related to margins between the segments and auto replacement. By the fourth quarter, do we expect SP margins to surpass PT? And then on the auto replacement, the growth has been pretty impressive. I'm just trying to make sure I understand how much of that is the underlying market? And how much is it related to recent wins? And just trying to think through that growth rate if there's some comp issue related to some of the timing of the wins? Is that -- obviously, correct me if I'm wrong, I would assume that some of your highest margin business within PT?

Look, I'm going to stay away from being too predictive on forward-looking margins. We don't really give forward-looking margins on our product lines. I will say we do expect fluid power to normalize in the second half. There is some footprint optimization that's going to helpful with power, but there's stuff we're working on power transmission that's going to help as well. So we expect both product lines to continue to improve their margin profile as we move forward.

Yes. And I would say that we have done -- our teams have done a rather nice job in automotive aftermarket over the last certainly 2, 3 years. We spoke about some market share gains last year that has watched it sellout in comps -- so actually, our comps are reasonably difficult on a forward-going basis, taking into account the step-up that we have seen last year, and we still delivered mid-single-digit core growth with our automotive aftermarket business. So their business is performing quite well globally. And we certainly anticipate that, that business should be in a very normalized type run rate, delivering mid low to mid-single-digit growth rates between now and kind of the next 2 to 3 years. So I hope that, that color is helpful, please.

That is helpful. But -- so you've anniversaried the wins and you were still able to do mid-single in the second quarter for auto replacement.

That is correct.

That's great. Okay. And I know I'm generalizing here a little bit, but given its replacement, I would assume that some of your highest margin revenue within PT?

Look, as we indicated, we have profitable business across all of our channels. This is not kind of like an aerospace type business. We are -- we're very proud of our OEM margins. just as much as we obviously are proud of our aftermarket business margins. But it is somewhat more positive than the OE exposure and we anticipate certainly that that's going to be accretive. And look, we've indicated that we have a reasonably nice step-up in profitability in the second half of the year as well, we've indicated that we will be in that 23% plus at a minimum. And so I think that you are seeing the fruit of diligence and effort by our global teams, not only to execute on things that we can control operational performance enterprise initiatives, but also a favorable performance across the markets.

Our next question comes from Nigel Coe from Wolfe Research.

Brook, can you just remind us how much cost capture is falling into the second half of the year? Does that prior framework and then how much is then rolling into the first half of next year?

How much was?

Cost savings, restructuring savings, consolidation, et cetera. .

Yes. So well, so on the cost savings side, look, we've done a lot of work, as I said before, we've done a lot of work on improving margins through our footprint optimization through our cost realignment through restructuring. And the 23.5% embeds a lot of that or all of that in its forward-looking forecast, right? Now looking at the meaningful inflection that we've seen in demand, especially on the industrial side, -- we're balancing our footprint optimization and how quickly we move versus making sure we have plenty of capacity in place to take care of the customer. So we expect to see those benefits roll through over a little bit longer period. So I would say, to the end of '27. No, that doesn't change our margin outlook at all. In fact, if you look at our margins, we're actually at the midpoint, a little bit north of 23.5% when you look at the back half. So I would say it's pretty evenly spaced out over time, and we're going to manage that footprint optimization along with the customer service and capacity side of things to make sure we take full advantage of the up cycle we're seeing right now. .

Okay. We'll follow up off line there. And then obviously, EMEA really good performance in the quarter. I mean, I'm assuming there was a little bit of shift from 1Q to 2Q, but I'd be more curious Ivo, if you could maybe just spell out kind of what benefits you're getting post ERP transition in terms of day-to-day operations working capital management, et cetera. And do you think that means that you get just better growth in Europe?

Look, Nigel, I think that we are still so early on posting implementation. We just one quarter out. And my sense is that we will never have to talk about the implementation because we are done and we are just now focusing on optimization. I believe that we will get nice benefits as we roll into gives us the opportunities to optimize our working capital, gives us better opportunities to track our inventories and match our manufacturing activity to what we are seeing from the underlying perspective in the end market. So we will see more benefits. But I would say that we've done a lot.

Our teams have done a lot in Europe to drive penetration, market share gains and I think that you are seeing some of that included in our results. You're seeing terrific performance in personal mobility. That business has been growing very, very nicely. Our diversified industrial business has been growing very nicely the OE penetration on-highway and commercial construction up quite okay as well.

So we believe that the penetration, the performance, the focus on broadening our exposure in Europe is the right strategy, and we don't certainly believe that we will all this grow mid- to high single digits in Europe, but we certainly feel pretty well about the midterm prospects for our business there. And frankly, globally.

Yes. And just a very quick follow-on. I mean, Brooks, you don't like to give segment margin details. But as you look into '27, is there any reason why FP margins will be any significantly different to PT.

Again, look, I think we're going to see SP normalize, which will put it back closer to PT as we move through the back half of the year. And then we have seen significant margin improvement opportunities on both sides. And so they should both improve about the same rate. There's nothing structurally different about the businesses that should cause 1 to be significantly better or worse than the other. So we would anticipate kind of a return to normalization of FP and then a rate of improvement is very similar on both sides. .

Our last question comes from Jerry Revich from Wells Fargo.

Rich, I wonder given -- given the really good margin momentum that you folks are building over the course of this year, it looks like your exit rate and midpoint math is dangerous, but it looks like the exit rate is going to be somewhere in the 24% range and you folks have outlined cost savings coming in '27 versus '26. Is the 24.5% margin target that you laid out back at the '24 Analyst Day, is that within the possible range? I know the market has been weaker for a while, but it feels like you've got the underlying momentum and if you're still expecting incremental improvement '27 versus '26, it feels like 24.5% margins might be feasible in '27. Can you just touch on the puts and takes around that, please?

Thanks for your question, Jerry. That's definitely how we are thinking about that. And I think that we have spoken about being on the trajectory of travel despite the fact that the markets have really not been supported for us over the last 2 years since 2024 CMD. So we've done a lot with this franchise. We are positioning it to outperform, deliver meaningful outperformance for our shareholders. And we feel well where we sit. And as I also indicated, we don't believe that 24.5% is some magic endpoint, and we will provide update as we start to think about the next CMD likely in 2027.

Okay, super. And separately, thinking back to the '22-'23 time frame, lead times got blown out for a lot of categories, and we're running pretty heavy on over time. Can you just update us on how your footprints evolved since then? And give us a sense for what lead times look like now given the acceleration in that demand?

Sure. I mean we've done a lot again with that business. We've spoken about the footprint realignment, positioning ourselves to position where we have a better access to labor, direct labor in particular, we have accomplished that. We have a number of projects that are still in production ramp-up. So we do reasonably well. Now the demand inflection that we see is meaningful, and we will monitor our lead times very, very carefully and ensure that we are locking step with some of the demand that we see from our customers on forward calling basis.

We have no further questions. I would like to turn the call back over to Rich Kwas for closing remarks.

Thanks, everyone. Appreciate your participation. If you have any further questions, feel free to reach out, and we'll get back in touch Thanks. Have a great day and great weekend.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Started with the team from Gates and great pleasure to have Ivo Jurek on stage, CEO of Gates. I think this is the first time we've done a fireside chat for a long time, Ivo. So I'm looking forward to this. And Richard Kwas, Head of IR as well.

So Ivo, I don't think you've got opening remarks or anything, but maybe I'll just ask you. Do you have open remarks? Anything to say before we kick into the Q&A?

I really don't have anything specific prepared outside of the situation around the globe is actually reasonably constructive despite all of the turmoil that we see on the front pages of new news on a daily basis. And so I'm happy to go to the Q&A.

Great. Well, that's a great place to break the ice because lots of questions around how sustainable is the strength that we've seen. We've now had 4 months of ISM above 50%, global PMIs are actually in coordinating expansion for the first time in a very, very long time. So is this real? Is it prebuy? I mean, is it a head fake? Or do you think this is more sustainable?

Yes. Look, I think that we spoke about this a little bit in our Q1 earnings call. But when you take a look at POS, and as everybody knows, we have a large aftermarket business, about 65% of our revenue comes from aftermarket. So when we look at the POS data, the POS data would actually suggest that the business is -- the underlying business is maybe even a little bit better, whereas inventories are not building out or not building up in a channel. So any speak around prebuy, I think is not real. I think it's very emotional to talk about the prebuy because of what's happening in the markets and particularly in the supply chain around the world, but we feel pretty good about where the inventories stand.

When you take a look at the underlying demand for us, certainly for Gates, about 80% of our end market exposure is in expansionary type behavior, which is good. Not everything is growing super fast, but we got things that have turned from negative towards more neutral. And we have things that are actually seeing a reasonable level of strength in order intake and actually in business itself -- underlying business itself. So I would say that so far, so good. It feels better than just a head fake. But there's a lot that's happening globally that could come to fruition at any given time.

So it's actually remarkable that we've got essentially the Middle East shut down at this point in time, yet things feel really good. So I mean, obviously, we had a bit of a shock in March, which didn't seem to have a big ramification for our kind of demand profile, but that's continued. You're not seeing any second derivative impact at this point in time.

No, we don't. And we've actually had -- and I think I stated it on the earnings call, we had a pretty good strength that we saw reasonably broadly in April as well. The orders were trending very, very nicely. The revenue was trending very positively, very much in support of our midpoint of our guidance. And so we feel reasonably okay at this point in time or better than okay.

Yes, there's lots of uncertainty out there, but we also need to remind ourselves that we have been -- we're coming out of kind of almost an unprecedented period of time. We had 4 years of negative PMIs just about, right? And that's really quite unprecedented. You've got to go all the way back to World War II, and you still wouldn't see 4 years of negative PMIs. So I think that there's lots of underlying pent-up demand. And I do believe that if we start seeing a little more stability, I think that you can actually see even more constructive end market demand.

I think the PMIs in World War II are actually pretty good with all the war planes again producers at that point in time. Okay. And obviously, April was good. It sounds like May has continued on that track as well?

Yes. May is pretty much on trajectory as what we've anticipated.

Okay. And 80% is -- of your portfolio today is in expansionary phase. Just remind us on the 20% still kind of flattish or down?

I would say, actually, Auto OE is down, which is a very small part of our revenue. This is about 7%. Interestingly and maybe counterintuitively, energy is down still. And that's predominantly a result of the fact that we have fewer wells that drill actively today than we did even a year ago. I do believe that, that will invert with oil prices staying at the levels that they are staying. And should even the war resolve itself imminently, I believe that you're going to see a prolonged period of higher energy prices anyways before you can replenish the reserves that are being consumed.

So I think that there's going to be more drilling activity ultimately as we get into the second half of the year and exit 2026. So I think that, that end market should trend more positively as we get closer to the back side of the year. And then we have still seen negative on-highway. That being said, we spoke about positive inversion in orders, and we believe that second half of the year, that's going to invert as well. So I think that the Auto OE is going to remain under pressure for the year. But the other 2 end markets that kind of give us a 20% exposure, those should be a little more positive on the back side.

Okay. You reported down 3 and change organic in 1Q. You called out the selling days pressure. That was about 3-ish points -- 300 basis points. You had the ERP transition in Europe, which is another 300 basis points or thereabouts. I think you said, Ivo, that underlying ex those 2 items that you've done about 3% organic growth in 1Q -- that's...

Actually, the math was that we actually feel we were up 300 basis points. If you take those 2 headwinds and you look at it, we were actually down 270 basis points year-on-year in revenues that would kind of give you the underlying growth rate of about 300 basis points. And that was about kind of how it felt and how we felt the business to be performing. And so when you think about going from comparatively speaking, 300 basis points to 350 basis points in the middle of the second quarter, that's totally attainable for us and we feel quite comfortable with that.

Well, I actually think it actually feels a little bit conservative because you're assuming no real improvement, you've got a little bit of the push out from 1Q and you got some extra price going in. So 3.5% for 2Q might feel a little conservative. Is that a little bit spicy to say that? Or is it totally fair?

Look, I think that the underlying business activity remains quite okay. And again, I think we spoke -- there are lots of risks that can come into fruition. And so we are trying to be pragmatic in my -- resurrecting my favorite word pragmatic. So yes, I think that overall, the business should feel better than what we have guided, but we just want to be pragmatic.

Nigel, on your point about pricing, really, in terms of the inflationary impacts, we're really going to see that in earnest in the third quarter. There will be a little bit in the second quarter, but really August scheduled for the third quarter.

So maybe if I just through a lens on second half of the year, if we do see on-highway starting to pivot back to growth. It seems to me the shale activity in North America, given the production rates right now, has to inflect pretty hard in the second half of the year. It feels like there could be some nice upside in the second half. Again, you want to be pragmatic. But again, is that the way you're seeing the world right now?

Yes, we do. I think that the underlying activities again remain very constructive. We also believe that exiting kind of at 350 basis points of growth in Q2 and then kind of going into the back half and kind of 4.5% core feels totally doable for us, particularly when you take into account that you will be getting -- we've lost 2 days in Q1. We will get one of those days back in Q4. So we don't feel that back half of the year is a stretch in revenues, certainly, taking into account where we see the activities presently.

And on the margin side, we are getting about $10 million of benefit from the restructuring in North America that we are doing. So we are certainly on track of being able to deliver that, you will have no headwinds that we have experienced in the first and second quarter from the ERP implementation and the incremental cost of the restructuring. So the 23.5% of EBITDA at the back half of the year feels very doable for us.

Okay. Yes. I do want to come back to the EBITDA margin dynamics because there's a lot to unpack there. But I just wanted to take a step back and think about what you're doing to accelerate growth and kind of trying to make your own luck as opposed to just being a cycle jockey. So maybe talk about semi incentives and initiatives in play to really overdrive the cycle.

Yes. Look, first of all, I look at what we have done with this business over the last, say, 10, 7, 5 years vis-a-vis growth. Certainly, since we became a public company, we have reduced our automotive OEM exposure by 50%. So that's very dramatic, like it went from about 16% of our total revenue down to about 7%. We didn't shrink the company. The company grew during that period of time, nominally. When I take a look at the 10, 7, 5, 3, so not to cherry-pick, core generation of compound annual growth rate organic. We ran about 3% to 3.5% over all of those periods of time. So if you take a look and compare us to some of the multis and you look at their organic growth rates, we are very much smack in the middle of that pack.

So we have delivered growth while we have improved our portfolio. How did we do that? Well, we've done that by focusing on driving some organic initiatives within the company. So one of the big organic initiatives that we have driven was around our personal mobility. And personal mobility, as you know, is converting chains on bikes, motorcycles and scooters into a Gates' belt drive systems. That has delivered a very nice offset to that portfolio pruning that we have done with Auto OEs. That business has peaked at about $150 million, $160 million in 2022. We will certainly exceed that peak or get right on that peak in '26. That business now continues to grow at kind of 20% to 30% range. And we have quantified that we anticipate that business will continue to grow at that rate kind of through 2028.

And then we'll take a look and see if we can continue that level of growth in the future, which is not inconceivable, obviously. But at that point in time, that business is going to be much more sizable. Obviously, we have a nascent portfolio of data center applications in the liquid cooling side that we believe is going to be kind of the next leg for us into that '27, '28 time frame, and we framed that, that we see about $100 million to $200 million of opportunity. We have an initiative that we call industrial chain-to-belt conversion. While I haven't spoken a lot about that for a number of different reasons, we've actually built a very nice underlying franchise. And we believe that between '27 and '28, that's going to become much more relevant and continuing to drive growth for us in the industrial space, and we are certainly super excited about it, and we'll spend more time at our next CMD in '27, framing that opportunity and what it represents from what baseline.

So I would say that the incremental organic opportunities are there, and they are quite tangible and they're quite exciting for us in verticals that are probably being much more durable and sustainable over the midterm. And our core portfolio of products is actually growing as well nicely throughout the cycles, but that's more cyclical. So the organic opportunities that I have outlined are much less cyclical in nature. They're more secular. And I think that when you marry that cyclical portfolio and the secular opportunities, we feel that we can deliver again an organic growth in excess of 3.5% over the midterm.

Okay. And would that be 3.5% average across the cycle. So therefore, we could maybe expect 3.5% plus in '27, '28, especially as data center starts to kick in.

Yes, absolutely. I think that's kind of how we look at it. We are looking at through the cycle, and that's why I kind of started with the 10, 7, 5, and 3-year growth rates.

Maybe just bring us up to speed in terms of the path to commercialization for the liquid cooling portfolio. I think you said second half of this year, maybe fourth quarter, we start to see some meaningful benefit from that. Is that still the case? And you said $100 million to $200 million in 2028. That's quite a wide range. I mean, based on what you see right now, I mean, do you think midpoint of that range is most likely?

Yes. Look, I think what I see today is that the opportunity scope is getting bigger. I think we frame that, I think liquid cooling was very nascent technology in only smaller subset of data centers. I would say that today, we see these opportunities scaling up. Vast majority of data centers is going to be liquid cooled by '27, '28. And we feel confident that we will be able to deliver that range of revenue. And when we get to '27, we will talk more about what that revenue base is going to be. But the opportunity set is growing. Our pipelines are growing. Our exposure to projects is growing. When you start thinking about Vera Rubin, you see a bigger content of liquid cooling in those applications. So I feel reasonably confident that we should be right in the middle of that range.

And is the gating factor at this point in time, is it -- I don't know, is it the Vera Rubin rollout? Is it qualification on certain platforms as the gating factor?

It's qualification. It's a ramp-up of our technology. It's scaling up production in the applications. And we are in a full range of applications where we are already supplying. Obviously, we're talking about a very substantial growth rates that we are quantifying to the Street. And we have done that, yes, from a small revenue base, but growing very, very nicely. So we are generating good revenues, and we have more technologies that are ramping up. We anticipate that in the second quarter of this year.

So this quarter, we will be ramping up our e-water pumps in the first commercial application. So that's pretty exciting for us. Obviously, we have lots of fittings and coupling opportunities that we are now in process of scaling up and that capacity is going to be coming online in '27. So I think that the scale-up is what is going to give us more breadth of actual invoice revenue. The opportunities are there. They are pretty sizable, and they continue to grow because the exposure grows.

Okay. And then you mentioned going back to chain the belts. You said '27, '28 would be more impactful for that. Why?

Industrial -- predominantly because we are working on a couple of new technologies that will give us the opportunity to get to closer cost proximity of drive costs. So the sprockets and the chain or sprockets and the belt, and that opens a whole new subset of opportunities, particularly with the industrial OEMs who value a little different value proposition than maybe the end user operator. The end user operator is focused on greater efficiency, reduced energy consumption and lower maintenance, whereas the OEM is much more focused on getting the right price point into the apparatus that they're going to supply to the end user.

Great. I think the big news from last quarter was the acquisition of the Timken Belts business. Your first deal as a public company CEO, I think, Ivo. It seems like a great deal. But is that the bar? I mean, one deal every 8 years has to be a huge ROI type transaction? Or are we going to see more deals from here?

Well, obviously, it was the first transaction because for the last 7 or 8 years, we were working on cleaning up our balance sheet. And our balance sheet today is in a very, very good shape. It's nicely below 2x leverage, which we believe gives us the right to start thinking about how do we deploy our capital in efficient ways and more than just perhaps buybacks or organic investments. We see that there are a ton of opportunities to add to our capability right at the core of what we do. And the Timken transaction certainly, it was more opportunistic, but it gave us an opportunity to do a smart deal through acquiring assets that perhaps made less sense with the prior owner.

We certainly are a better owner of those assets. And so that will be an opportunity where we can not only improve that business over the midterm. But it's an asset that is right at the core of what we do, and we'll do well with it. So I wouldn't -- Nigel, I wouldn't say that we need to demonstrate that we can deploy capital in a very, very effective manner, and this is a very effective deal, and it will be a very, very smart transaction for us. But we will deploy capital much more frequently, and we have a good pipeline of opportunities, everything from things that we are in a due diligence on to things that we are in good discussions about getting engaged, and we feel pretty well that we'll be announcing something more this year.

And obviously, the Timken acquisition is straight down the belt, I guess, you could say. Is that the road map going forward? Is it more a case of just basically taking in smaller competitors, consolidating the markets, but essentially keeping the core philosophy?

I think certainly for the first few transactions, we believe that scaling up our product lines, plugging some holes that we have in portfolio perhaps, adding breadth and scale to geographic presence. I'm really big on in-region for-region manufacturing, in region for region customer support. And so I think that we have opportunities to scale that up. Obviously, we are super well present in North America. I think that there are opportunities for us to be more present in Europe, more present in Asia. And so those are things that my view are opportunities where we could deploy capital efficiently.

And we are not planning to do something that would be potentially viewed as adding a third leg presently. I don't think that, that's necessarily what -- where our focus is. We want to demonstrate we can do transactions that are reasonable where we will generate good returns for shareholders and where our shareholders can take a look and say, yes, I get it. This makes sense for the company to do that type of a deal.

Okay. If we were to dream of a third leg, I mean, when we think about some of your larger competitors that play within sort of hoses and hydraulic systems, filtration would be a natural area. Is that sort of where longer term, you could branch into those kinds of areas?

It depends on how you view the evolution of industrial complex over the longer term. I mean I think that it would be kind of a natural evolution that one could get to. But my view is that we want to be a much bigger player in industry automation. And we want to revolutionize how power is being transmitted in industrial automation. So obviously, we believe that mechanical transmission of power through belted system is more efficient than through chains. I think that there are opportunities around sensors, actuators that are in a very close proximity that give you a better presence to build up a nice portfolio of electromechanical automation. And I think that, that would be something that I would look at.

There are also opportunities where we are in -- we're obviously in well-defined end markets today, but there are opportunities with some of the things that we are working on presently vis-a-vis think data center applications, the fittings and couplings that we are deploying in the data center applications, they have great scalability and applicability in biopharma, in food and bev, in medical devices. And so you could also think about an expansion through penetration of some interesting new verticals through the product portfolio that we may potentially already have at our disposal. So I think that I would look at it in those 2 axes.

Okay. Any questions in the room? If you do, put your hand up. So Ivo, your stock is still very cheap. You've been leaning more on buybacks than M&A, obviously, in the last several years. How do we feel about that mix right now based on the pipeline of opportunities you see? Is there more bias towards M&A here than buybacks?

I think that we can do both. We generate a ton of free cash flow. As I said, presently, I mean, we are living in a certain neighborhood. I don't have the opportunity to go and pay 15x, 16x for some transaction because it may make sense. So I think that we'll be doing smart M&A where we don't overpay for assets that have the opportunity to return capital back to shareholders and drive appreciation. And along the way, because of our free cash flow profile, I think that we can also continue to do buybacks. And the stock is very inexpensive, I think, for the quality of that asset that we have.

Yes. I agree with that. Just want to finish off on margins. You mentioned -- obviously, we've got some headwinds you're absorbing, especially in 1Q, but also in 2Q. Second half, you said 23.5%. I think the words were very doable or was that effect. You said [indiscernible] 24% EBITDA margin for 2027 with no volume benefits. Is that -- with all the moving pieces on inflation, et cetera, is that still in play, the 24%?

Yes. Look, let me nuance that a little bit, okay? So in the first half of '24, we will get incremental $10 million, sorry, '27, I mean '26. In the first half of '27, we'll have an incremental $10 million benefit from the restructuring. That's the second half of the benefit that we will deliver in the second half of this year. So that should bring you very close to that 24% EBITDA at that point in time, obviously. You will want to get a little bit of a component of volume to continue that trajectory. But taking a look at where we sit today, it would be, frankly, inconceivable until something really broke that you wouldn't have some volume growth, right, and potentially have a decent volume growth.

So I don't look at the 24% as kind of a stopping end station. I only look at it as a kind of an intermediate station on our journey to continue to improve the quality of our asset. We have a great company, fantastic brand. We make things that people need in all scope of industrial applications, some traditional, some emerging and exciting new opportunities. And so I think that there's an opportunity to drive long-term value creation for shareholders that have a good horizon of time. And I think that the opportunities -- I'm super excited. I know that the best time is ahead of us, not behind us. And maybe better future than we have envisaged even 3 or 4 years ago.

That all sounds great. So if I had to say to you, what's your major concern right now? What keeps you up at night? What would that be?

I would say presently, it's more of the geopolitical instability that obviously is not helpful. But we have done a lot during '22, '23 to diversify our supply chain, invest a lot more heavily in material science, protect our supply chains, fortify them, diversify the supply chain viability. So -- and we continue to spend quite a bit of management resources and time on ensuring that during this present time, we can protect our customers and protect our ability to manufacture. And I feel reasonably okay that we're going to be able to do that even without a near-term resolution potentially to some of the things that are happening geopolitically.

And right now, the supply chain is functioning quite well, inflation on the check.

Yes. I think that the supply chain is still in a good shape. I mean we certainly are doing a lot to ensure that it stays that way. Look, inflation is going to be what inflation is. The commodities are what they are. We don't control those, so we will price for them.

Yes. But there's -- you wouldn't say the customers are right now in complete price fatigue mode, they're still accepting price?

Look, I think that everybody is in a price fatigue. We are in price fatigue. Our customers are in price fatigue, but this isn't something that we control. And in a way, I would say that with some customers, it may even become an easier conversation because they see those -- the inflation today is not vague. It comes from very well traded commodities, steel, aluminum, copper, oil, right? And so I think it's visible to everybody on a daily basis. And so in a way, that conversation is -- it's never easy, but it's easier. It isn't like, well, my wages have inflated and the conversation is very different when you have those type of [indiscernible] and they deal with it every day.

Yes, that's right. Well, Ivo, I think we'll draw a line there. Thanks for the conversation. That was a great conversation, and thanks for being here.

Thank you. Appreciate it.

Good morning, and welcome, everyone, to the Gates Industrial Corporation Corporation First Quarter 2026 Earnings Call. Today's conference is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to Rich Kwas, Senior Vice President, Investor Relations. Please go ahead.

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, iIvo Jurek; be followed by Brooks Mallard, our CFO.

Before the market opened today, we published our first quarter 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 will 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 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.

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 firm level of business transition. In particular, our Europe team successfully implemented a new ERP system and achieved higher efficiency rates as the quarter progressed.

Exiting the quarter, our Europe business has stabilized, was delivering revenues on par with prior pre-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 ERP transition, and the 2 fewer working days that affected the first 2 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 1. As we sit here today, and based on our present run rate. 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 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 ERP transition and working days relative to a prior year period combined represented approximately a 600 basis point 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 ERP transition and the impact of having 2 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 $0.35 and down slightly. The fewer working days in the quarter, an ERP transition combined to represent a $0.07 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 ERP conversion as well as the fewer working days. Looking past these items, we saw a very solid trend 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 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 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 the Fluid Power segment, our sales were $318 million, with a decrease in core sales of approximately 3.5%. Fewer working days and the year of ERP implementation, again, contributed to the decline. We realized strong double-digit growth in APAC during the quarter. Broadly, order intake was strong exiting the quarter. I would note that the commercial on-highway was relatively weak in the 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 some comments on our results.

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. 2 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 lag 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 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 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 $0.02 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 1.9x, 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 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 revenue 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 EBITDA margin to decline 30 basis points compared to the prior year period, influenced by temporary impacts from the ERP transition and our footprint optimization projects, which we expect to benefit adjusted EBITDA margin performance in the second half of this year.

I'll now turn it back to Ivo for closing thoughts.

Thanks, Brooks. On Slide 10, let me summarize our key messages. First, our team executed well and showed a great degree of resilience 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 ERP transition, and our team is highly focused on driving incremental efficiencies with the new system in place. We have shifted our operational focus to optimizing customer service fill rates to pre-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 experienced 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 Timken's 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 efforts supporting our customers' needs and executing on our strategic goals.

With that, I will now turn the call back to the operator for Q&A.

[Operator Instructions] We'll take our first question from Michael Halloran at Baird.

So maybe we just start where you were leaving off there a little bit, Ivo. So it sounds like growth -- core growth would have been positive in the quarter, excluding the ERP and some of the days issues, feels like the trajectory is what you're wanting to see exiting 1Q into 2Q 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 in the year.

Yes, Mike, thank you for the question. Look, we actually had a terrific quarter, taking into account the quantified issues that we highlighted on our Q3 earnings call last year, outlining that we have a major ERP upgrade that we are going to do on basically 24% of the [indiscernible] 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 2 less selling days than the 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 see it today, I feel quite confidently that we are in a very good position to be able to achieve our annual guidance. And we've actually put the business in a position to be able to do really well as as the revenue generation capabilities and the end markets stabilize. So we're in a very good shape.

Yes. That makes a lot of sense. And maybe just the Timken purchase. Why does it make sense now? What capabilities does it add that you lacked before? And then any sense of size, revenue, profitability, any of that? .

Yes. Look, it was very opportunistic. We were approached some time ago about the opportunity to acquire an asset that frankly -- when you talk about around the edges of what you do, this is right front and center of what we do, right? This is highly complementary in nature for us. The business has evolved. I think that there have been some highlights about what that business was about 10 years ago. I think the business has gone through some transitions.

We are buying assets in a facility in Mexico that is going to be highly complementary for us. The size, we think that, that business can kind of add maybe $5 million a month in annualized revenue. And so it's highly complementary, and I believe that it will be very accretive to us as we embed it into our operations, and it has the opportunity to continue to accelerate our growth rate.

we'll move to our next question from Jeff Hammond with KeyBanc.

This is David Tarantino on for Jeff. Maybe could you give us a little color on kind of the margin trends if you kind of back out the ERP transition? And maybe give us some color on price costs relative to the increased inputs, particularly around any oil derivative impacts or any tariff impacts you expect moving forward? It looks like the year is kind of playing out in line with expectations overall.

Okay. All right, David. That's a lot to unpack, so get ready. So first, let's start with the with the headwinds, the margin headwinds. As I look at Q1 conservatively, I would say we had at least 200 basis points of EBITDA margin headwinds. At least half of that was associated with the ERP transition in Europe. So that's a combination of lower sales, as we talked about, and then the impact of higher temporary SG&A cost as we move to the hypercare phase of that go-live. Those costs are temporary. They'll come out as we exit Q2.

And then the other half is a combination of the footprint optimization kind of cost out that we talked about in the first half of the year as well as the impact of less days, right, just kind of the leverage part of the less days. And so you kind of take that into account we're kind of pushing up towards 23% EBITDA from a one-off perspective.

And then I look at Q2, the midpoint, we're at 22.2%, I think -- 22.3% -- 22.2%. And I see we still have about 100 basis points of headwind. Again, about half of that coming from ERP, almost entirely coming from hypercare and increased SG&A. And then the rest really coming around the footprint and cost actions. That should be complete by the end of Q2.

And so again, before we get -- start to get any of the savings or anything, we're approaching 23%. And so as I look at those 2 kind of data points and I looked at the 23.5%, that Ivo talked about, in the back half of the year, well, I mean, we feel pretty good. We feel pretty good, getting through the ERP transition, exiting the way we did, [indiscernible] a little core growth in EMEA and then kind of looking at the rest of the business and starting to get a little bit of growth there, we feel pretty good about things.

From a tariff perspective, we don't really expect any impact from the 232 stuff. Most of ours was classified as automotive. And so that really doesn't impact us at all. We have a little bit of headwinds, maybe 20 bps of kind of dilution as we priced for tariffs. We're not even counting that though in any of our numbers. We're going to get to where we need to get irrespective of that.

From a -- when you think about what's going on in the Middle East and the cost of oil and how that kind of impacts through the enterprise, obviously, that's going to impact things like resins and polymers and compounds. It's going to impact things that have high energy use, like aluminum and steel. You're seeing those go up. And then there's ripple effects to the rest of the P&L.

When it comes to pricing for inflation, we're very confident on that, right? We've always been able to price for inflation. We're getting out ahead of that. And we learned some lessons as we think back post-COVID and the Russia-Ukraine conflict, and we're really focused on surety of supply for our customers. In addition, we've done a lot of work around our supply base. So supplier development, alternative materials, different things like that. And we feel like we're in a very solid position in terms of making sure we can take care of our customers, get surety of supply not have any kind of interruptions in the business. And then also, as I said, we know we can price for inflation, and we will make sure we take care of that. In addition, we're sticking by our guidance in the second half, and we feel pretty good about it, okay?

Great. That's really helpful. And then maybe following up on the demand trends. Could you just give us a little bit more color on the underlying demand trends relative to the strong order take you highlighted? How do the current customer conversations track with that initial end market framework provided last quarter?

Yes. Look, I mean, I don't think that anything really has fundamentally changed. I mean if there was a change, I would say, maybe the -- particularly in North America, on the highway, order flow has gotten better than where it was kind of exiting 2025. Outside of that, we see pretty solid demand trends across the portfolio. We see good behavior in automotive aftermarket. We feel well about industrial off-highway. I mean, obviously, commercial construction has been quite strong. Ag's been recovering very, very nicely. Energy and resources have stabilized, so that's kind of more still useful around the edges, but we anticipate that there may be an inflection taking into account what's happening in the Middle East. Diversified industrial is in a good place. Auto is soft. Auto is always soft, but it's such a small part of our business, and it is right where we anticipated.

So when I take a look at where we sit, we feel the concurrently that the midpoint of our guide for the year is super achievable.

We'll take our next question from Nigel Coe with Wolfe Research.

And by the way, congratulations on the deal. I think this is your first deal as a public company, right, Ivo?

It is. Thank you, Nigel, and it's kind of -- it's a very nice tuck-in transaction that -- it's not even middle of the fairway, I mean, in the middle of your household.

Yes, it does seem like [indiscernible] glove. Maybe just a bit more details on what you're seeing sort of through April. Number one, given the short cycle nature of your products, I'm just trying to understand why the push from the ERP transition. So I just want to understand how you're recovering those sales because I think we tend to think of a short sort of like won ne and done, it lost doesn't recover. So just want to understand that.

And then it sounds like you're seeing recovery in industrial OEM. You mentioned on-highway as an area of cover as well. I'm just wondering if some of the strength you're seeing is really being driven by some of this heavy industry recovery.

Yes. A lot to [indiscernible]. So look, why do we feel that we're going to recover the sales in Europe? Because we really -- the way to think about it, Nigel, is that we were live basically in the first week of February. And you have to back flush the system. So no matter what you do, you kind of lose 1 week of activity, and then you fire back your assets, and you restart them. And.

So everything was going the way that we've anticipated. We just -- it just took us -- think about it as 1 more day to undone our distribution centers. And we've just simply run out of calendar in March. Europe revenue in March was on par with prior year pre-ERP implementation, so they were fully recovered. And frankly, in the month of April, at the beginning of April, they've recovered the revenue from Q1. So actually, our year of business was up almost double digit in the month of April. So they've had full recovery. They are performing well. We are doing a really good job. The team is just executing in a world-class level. I feel quite well that we have recovered completely and not really lost any revenue. So again, 1 day, and that was nicely recovered.

When it comes to these demand trends, I believe that what you see on the heavier industry is more in line with that underlying economy around the large projects that are coming out of ground around the data centers and power gen and power infrastructure and you need lots of construction equipment, earth moving equipment and so on and so forth. And we've anticipated that those businesses were quite weak.for an extended period of time. And I think that you and I discussed that on our Q3 earnings that the outlook has been stabilizing, and we are now starting to actually see the outlook turn nicely positive.

And so PMI is above 50%, and that's good for kind of the overall underlying trend. And look, I'm not prepared to declare a victory in here, but I feel pretty positive about the demand trends.

ISM 52.6%, I think, this morning. So fourth month above 50%, so it's a bit of a trend now. And then just going back to the previous question about the inflation recovery, is there more price coming into 2Q versus 1Q? And then Brooks, the [indiscernible] day headwind in 1Q, does that come back in 4Q to be have some tailwind in the back half of the year?

We have an extra day in Q4. So that's -- as we kind of move through the year, whenever we actually talk about Q4, you'll see it a little bit higher and because of that extra day. From a pricing perspective, you might see a little leak in to the end of Q2, but that's mostly going to be a second half event. So that will evolve over Q2, and we'll give more guidance as we see how things evolve and we start to roll out our Q3 guidance after this quarter.

We'll take our next question from Julian Mitchell at Barclays.

Just trying to understand the sort of ERP catch up. So I think you had 3% sort of underlying growth ex-ERP in the first quarter. And then you're guiding for around that rate for Q2 and I think for the second half as well. But just wondered if you might have some ERP catch-up that would push up that underlying growth in the balance of the year from the 3% you did in Q1, particularly as your order trends seem pretty good, and you had a good book-to-bill. So I'm just trying to square those things. So I guess I'd say if you're running at 3% every quarter, underlying, but then you should get a catch-up from ERP, and the orders seem better. Why is it 3% every quarter through the year?

Yes. Look, Julien, a good question, right? So the ERP cut shop -- where I was talking about the ERP cut shop, you basically were about a day worse than what we've anticipated. We've lost 7 working days. And so the order returns are very, very solid. We are early in the year. I don't think that it is prudent to be making any adjustments to guidance this early in the year. Of course, when you take a look at the order trends, you would -- and I think that probably [indiscernible], we feel a lot more positively around where we sit for the year, but it's quite early in the year. And we will execute on within our control and manage our revenue generation to deliver on the guidance that we have put forward [indiscernible] done.

Got it. And then just my follow-up around price versus volumes in the revenue line. Maybe I missed it, but did you mention what price was in first quarter? And then I think for the year as a whole, you'd guided [ 1 ], [ 1.5 ] points of price. Is that still the case? Or there's a bit extra now because of the higher cost inflation?

Yes. As I said before, Julien, we're kind of seeing how things evolve. We've begun to roll out some price increases and then we're looking at the impact of some other things. And so there will definitely be an evolution of price versus volume as we work our way through the second quarter. But this is all relatively kind of late breaking, and we're still kind of working through some of the numbers.

And so I would say stay tuned for the second half of the year, we reiterated our guide. We feel comfortable with our with our numbers, both from a top line and a profitability perspective. And we'll update you on the components of it as we work through how the -- how all this oil increase in cost impacts our numbers, okay?

Got it. But in the first quarter, sort of reported price was, what, [ 1.5 ] points or something? .

A little bit higher.

Yes, a little bit higher. I mean we have a little bit more tariff pricing in the first half of this year because we kicked that off in the third quarter of last year. And it's a little bit more -- in the original numbers, a little bit more probably see in the first half related to tariffs.

We'll move to our next question from Andy Kaplowitz at Citigroup.

One. I think you said Personal Mobility up 6% in Q1. I know affected by ERP I know you've talked about Personal Mobility growing sort of that high 20s to 30% over the next few years. I think you said Q2 returned to more normalized growth run rates in Personal Mobility. So maybe just update us. Is that the case? Can you get back to those rates? And do you still expect '26 to grow at that sort of normalized high growth rate in Personal Mobility?

Yes. Thank you, Andy. Absolutely. We've had some delays with a couple of projects that they were supposed to ramp up in Q1. They are ramping up in Q2, and the ERP was an outsized impact because a very significant amount of our revenue base is euro based. And so that drove a pretty meaningful impact to the Q1 growth rate. But as I indicated in the prepared remarks, we certainly believe that the business is going to grow and deliver that mid-20s growth rate as we have committed in our original guidance.

Okay. And I think I have to ask you about that other big growth driver, data centers. I mean, I think you said up 700% off a low base. I don't know that probably puts you at, what, like $10 million for the quarter, maybe a little bit more, you tell me. But is there a way to more directly refine what '26 could look like? And then obviously, we're wondering how you fare versus that $100 million to $200 million rate by '28, like, so how's the progress versus that?

Yes. Look, we feel very good about where we sit today. I mean, our order intake and billings are strong in data centers and getting a really nice acceleration of penetration. I mean, obviously, it is from a small base last year, but we've started to accelerate our revenue gen and order intake in Q4. We continue to develop a much more wholesome understanding of the infrastructure partners and semiconductor partners, cooling technology and their needs. And look, we continue to drive and tailor our technology for those needs. We are launching new products, those products, we believe, put us at the forefront of the incremental improvements that are needed to facilitate much better liquid clean flow rates to improve the efficiency from the existing infrastructure and b, kind of a leading-edge supplier, kind of the next generation of the chips that -- they are now being developed.

So we are kind of building kind of the traditional approach that I have probably demonstrated over the last 10 years. We we go after an application that is exciting and emerging. We've developed a highly specialized knowledge and we tailor our products that will offer differentiated performance, and we build a sustainable, durable revenue stream on a forward-going basis. And I think that our data continues to demonstrate beyond that trajectory and have committed to you all and to our shareholders kind of $100 million to $200 million of revenue by '28. And I believe that we're on the trajectory.

So bottom line on track toward that goal in Q1, is how you characterize it?

That's correct.

We'll go next to Deane Dray at with RBC Capital Markets.

I'd love to circle back on the Timken deal, and congrats. Ivo, can you just give us some color strategically what this brings to Gates. Is this a product line extension? Because if I look at the SKUs, they're awfully similar. Maybe it's some on the sports equipment side. And does it bring any new distribution partners maybe to the table? I'd like to see the manufacturing facility coming in, but maybe if we could start there.

Deane, yes, those are all very good questions. I mean, I would think about it more as kind of industry consolidation more than anything else. I mean, as you know, Gates is the global leading supplier of all types of belts in all sorts of different applications. And this was just another competitor for us that was small and I think the Timken can sell that was not at the front and center of what they wanted to focus on, on forward-going basis, and it is something that is additive to us more across the customer base. I think that the technologies and the type of applications that they participated in and that business participates in, is very, it's complementary, and it's not something that is super new. We will be switching a whole bunch of the portfolio into Gates Constructions, and factories nice to have.

So I think that you should just think about it more as a kind of industry consolidation than anything else. They have some good folks there. That's all -- it's nice to bring into our family, and we welcome the employees to Gates organization with open arms. And we just think that it's a good transaction. It's right at the core of what we do, and we feel that we are the right owner and a good steward of that business on a forward-going basis.

Yes. That's really good to hear. And I know we don't have the terms. But based upon the sellers' previous comments about margins, it looks like this is coming in well below the power transmission margins for Gates. So that would suggest there's some nice accretion opportunity. Can you give any color or context there?

Yes. Look, I mean, I think that the business is certainly coming in kind of below what our North America or transmission fleet averages. A lot of that business is, frankly, OEM business. So in just a natural way, that's got a little bit lower margins. But for us, again, this is kind of core of what we do. So we believe that we have a significant opportunity to drive margins to be at a company fleet average and that's we just indicated, there's a very nice opportunity to improve profitability on that asset. And it should be a very good transaction for us once we have the opportunity to integrate it in and start running it under the Gates operating system and frankly drive the margins to where they should be.

Our next question comes from Chris Snyder at Morgan Stanley.

I wanted to follow up on some of the commentary on the ERP disruption and potential catch up. And I guess, we assume the ERP was a 3-point headwind in the quarter, I guess it would imply about $25 million, $30 million impact. But then I think, Ivo, you said that Europe has fully caught up on the lost revenue in April. So I just want to make sure I'm understanding that right. Like, was Europe a subsegment of that $25 million to $30 million? Just trying to understand how much catch-up there really was there in April.

Yes, Chris, thanks for the question. Let me just clarify. We came about $5 million light to the midpoint that we have guided on Q1. So my comment has been more around the $5 million that we came a little bit light on in Q1, that we have fully recovered, not the incremental $25 million that you are stipulating. That is something that we anticipate we will recover as the year progresses.

And that was built into our original guidance, right? And so Ivo was bridging the gap on Q1 versus the balance of the year.

Got it. Yes, I felt like the $25 million to $30 million was a lot. So I appreciate that clarification. And then if I could just follow up on data center. It's very nascent for you guys now. And I guess my question is, is this just a nascent market since it's tied to liquid cooling, which is still in the very early stages? Or is there already an established player that's out there in the market that you guys have to go and take share from? Because I think it's understandable why you guys have a right to win there. But then also just the question is, if this market is already developing, why aren't you guys a meaningful share already? But correct me if you already are meaningful share.

Yes. Look, I think it is a nascent market, right? I mean I think that we all started to talk about liquid cooling much more profound in about 12 months ago. We have started to quantify our growth rates in that market pretty meaningfully in the second half of the year. I think that our order intake does indicate that we are taking a fair share of the revenue. They are well-established players just like Gates is an established player. That will be competing for the available infrastructure build-out. But there's so many projects that, in our view, there will be room for more players to come in and for everybody to have plenty of opportunity to build strong solid revenue stream as this business becomes mainstream.

My sense is we didn't just kind of come up '28 as some random date. I mean we feel that by '28, this should become -- this should transition from emerging applications to mainstream where all data centers will be liquid.

Next, we'll move to David Raso at Evercore ISI.

With the second half of the year implying organic around 4.5%. I'm curious, the order strength that you've mentioned multiple times for March and April. Can you give us a sense of what the order growth is trending right now year-over-year?

Yes. So look, we -- obviously, order growth is outpacing core growth certainly in Q1 as we saw backlog build kind of across the business. And that's -- I think it's an indication of the industrial OEM strength that Ivo talked about. And so when -- that's really -- as we've going through a little bit of a trough that we've seen on the industrial side, the strength in the industrial OEM business has given us pretty good confidence. And so we had backlog build in Q1. We continue to -- we saw strength in April, which is why we highlighted that.

And so orders are on pace to support our core growth number right now. And I'd say also, remember that the second half of the year, there is some -- there's that extra day that we have in the second half of the year that kind of offsets the 2 days in the first quarter. And so that gives you a little bit higher growth rate in the second half. And then also, there's some catch up throughout the year on the EMEA side. And so when we look at it kind of from an overall perspective, we feel like it's pretty evenly paced throughout the year from a core growth perspective.

I'm sorry. What I would remind also everybody is that prior year comparisons are a little more difficult, right, because we had big step-up in AR business of the channel win that we had in the first half. So actually, the underlying performance in Q1 was quite good.

Well, that's -- I was just wondering, are we really seeing orders running above that second half organic growth rate? [indiscernible] bullet just trying to set that up.

I think when you look at the one-offs that I talked about in terms of the extra day, you look at the order rate right now and you look at the trend and kind of and what we've guided to for Q2, again, we feel pretty confident in our guide. And we feel good about where we stand from an orders perspective and a sales perspective.

It's really in the year, it's about right, David.

It's very early in the year.

Yes. Appreciate it. And I think if I heard you correctly about the second quarter, while the guide for the margin is around, I think, 22.2%, do you feel there's still about 100 bps in there of, I guess, ERP drag, if I heard correctly? Is that the right way to think about this? Yes, please go ahead.

Yes, it's about half ERP and half footprint optimization cost out. So it's kind of similar to what it was in Q1 but half. And you progress from 20.8% to 22.2%, you still have 100 bps of headwind. So you're kind of knocking on 23% from an EBITDA perspective when you adjust for the one-off. So again, we talked about the 23.5% target in the second half of the year. We feel pretty good about that.

We'll move to our next question from Jerry Revich at Wells Fargo.

Ivo, I'm wondering if you could just talk about the difference in demand cadence you're seeing on the replacement market by end market, if you have that type of visibility. We were surprised to hear from somebody else in the supply chain that parts demand and truck applications was really soft in the first quarter. I'm wondering if you're seeing that or if you have that level of granularity and visibility and any other replacement demand trends that you can talk about in terms of cadence would be helpful.

Yes. We don't really break out our replacement analysts by end market. What I will tell you is that the aftermarket in Q1 was quite healthy, absent of the 2 things that we have listed it was running at a trend line. So I wouldn't -- I would not be able to tell you that there was something out of ordinary that was not behaving well.

Our aftermarket is actually quite okay. And when I take a look at the POS, the POS data was very healthy. So there wasn't any indication of somebody trying to pull demand forward. We didn't see that. I mean, the sales out kind of outpaced our sales in slightly. So everything is -- I see a normal operating conditions, I wouldn't call that as extraordinary, out of line or positive or that it is negative at all. I think it's behaving the way that we anticipated.

Super. And separately, nice to see the transaction announced this morning. Can you talk about as you look at the M&A pipeline, are there additional opportunities that we should be thinking about over the next 12 to 18 months? What's the range of capital if you do have an active pipeline? What's the range of capital that you think you could deploy beyond the announcement today?

Yes. Look, we have a very healthy balance sheet. We spent -- I spent years on trying to get this balance sheet to be durable. We are right in line with what we have committed in our last CMD. We feel that we have a ton of capacity. I think that we are operating the business quite well. We're driving profitability forward. And we believe that there are many opportunities presently our pipeline is very robust. We are doing presently a ton of work on number of assets that would be highly accretive to what we do.

Again, front end center to our portfolio, we're not -- we are really not looking anything that would be an extension or a third leg. We don't believe that. That is the most meaningful way to add to our scale. And so we will talk to you as these things develop further, but I would say, yes, there's a very good likelihood of more announcements coming certainly within this calendar year.

And we'll take our next question from Tom Sano at JPMorgan.

Could you share your perspective on business opportunities for Gates and robotics, especially humanoid applications? Based on your discussions with the customers,and your technology services, what is Gates' potential in this space? And are there any specific technology services you see as a key differentiator?

Yes. Look, yes, we do see opportunities. There are some nice opportunities that we already participate on today. We have a very nice small scale business in China, in particular, in Japan in robotics. I would not be in a position, frankly, to tell you today whether or not there is some humanoid immunize opportunities very specifically. But we do have a very nice robotics power transmission business with small belts that them perhaps more cost efficient than the alternative technologies.

And we believe that it's going to be a small accretive end market as it develops on a forward-going basis.

And just a follow up on the Timken acquisition. Could you talk about expected impact on net leverage following these acquisitions? And how should we think about the capital allocation strategies cleaning the balance sheet, please?

Yes, it's a material. I mean it was a super positive purchase price -- opportunistic purchase price that we've acquired this business. Will be not needful on our net leverage.

And that concludes our Q&A session. I will now turn the conference back over to Rich for closing remarks.

Thanks, everybody, for participating. If you have any further questions, feel free to reach out to me. Otherwise, have a great weekend. Take care.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Thank you very much, everyone, for joining Gates Industrial Corporation. This is Tomo Sano SMID-cap Industrial Analyst at JPMorgan. And with me, we have Brooks Mallard, CFO; Rich Kwas, Senior Vice President, Investor Relations and Strategy. Brooks, Rich, thank you very much for joining.

Absolutely.

So before we begin, I wanted to highlight why Gates Industrial is such a compelling story for this conference. And Gates is a global leader in Power Transmission and Fluid Power with outsized growth in personal mobility, data centers and robotics and over 70% of sales coming from resilient aftermarket channels.

So their innovation-driven transformation has delivered record margins and strong free cash flow, positioning them for continued structural growth.

So to kick things off, Brooks, if you could help us to start with the introduction to Gates, who the company is, what you do and your story.

Well, look, I think one thing, Gates has got a long history, it's got a great brand name, but we're still a relatively young company, right? And so if you think about the DNA of Gates, going back many, many years, over 100 years, I think. They have a culture of material science, innovating new products, a very strong customer focus. And really being the brand of preference for the Power Transmission and Fluid Power products we make.

And you can go anywhere in the world, and you can see the Gates brand and you can talk to customers who will go, give me a Gates belt, give me a Gates coupling, and that's just what they walk in and ask for.

And so what have we added since we've been a public company, Blackstone acquired the company, I think back in 2015, we brought in a management team different people from different companies, primarily with an industrial focus on what have we added, right? What we think we've added is we've become a very data-driven company. We like to use data to make decisions. And then we've added a level of accountability in terms of, hey, look, you promise us this, and then we're going to give you the money to invest and then we're going to hold you accountable. And so we develop that culture of accountability. So everybody knows that we all have a we all have a part to play.

And then we've also got a focus of continuous improvement. We know that we're in a competitive environment. We know that we've got to go out there and develop better products. We've got to develop lower cost products. We got to service the customer better. We've got to do all these things to continue to drive improvement in the company.

And then organizationally, we've tried to create a lean organization, a culture of transparency and then also to be process driven, right? So we want to be driven by process -- by process capability, use that and data to make all the right decisions. And if you kind of put all that together to really make our customers happy.

And so I think that's really kind of the -- without getting into all the different products and everything, I mean that's the culture that we've built at Gates. And that's what we've been able to go through, if you think about the past 6 years, even going back to the last downturn in 2019 and you look at all the disruption that's happened over the course of the past 6 years, we went through COVID, then we went through material disruption and inflation and then Ukraine war and then tariffs, and now we've got the new thing. Well, when you look at where we are, and we kind of feel like we're at the trough from an industrial perspective, we've improved the profitability of the company over 300 basis points, right, kind of mid-19s to mid-22s from an EBITDA perspective. We've improved -- since 2020, we've delevered the company from 4.8x to under 2x, right?

So we're at our midterm target already in terms of leverage. We've deployed capital. We've paid down a significant amount of debt. In addition, we bought back about 15% of the company's float since 2020. And so we feel like the culture we've built and then the results that those have produced really kind of show where we are.

And then it goes back to kind of what you led off with. We feel like we're positioned now for that next phase of growth, particularly if we can get a little bit of help from the industrial macro.

And then based on your 70% over aftermarket sales business model, and for the cyclical perspective, like how do you say where we are in the cycle and how actually you try to embrace those and capture the opportunities for the cycle?

Yes. So I would say it's interesting. The automotive aftermarket business has typically for many years before we went public, has really been -- was really a very stable part of the business, right? And then like in 2019, when they had the first kind of trade tariff war they -- we saw some pretty significant disruption. You saw some stocking up and then some destocking and kind of a lot of different things going on in automotive aftermarket, which we believe weren't a big part of the trade war, but it was disrupting the market overall.

And then after that, you saw COVID. And so COVID affected the automotive aftermarket hugely. You saw people stop driving, guess what, when people stop driving, automotive aftermarket slows down a little bit and then it jumped back up. And then we started to see, again, like I went through before, some of the disruptions with materials and supply chain and things like that. And so it took us until about -- from the disruption of the trade war, it took us until about 2023 to get through all those disruptions.

And now if you look back over the course of '24 and '25 the automotive aftermarket business is actually working the way we always thought it would, right? It's kind of a strong business with strong margins. We've got great pricing power. So we're able to inflationary times, make sure we're able to maintain margins.

We've got opportunities to grow the business, particularly in some of the emerging markets. And it's -- that business is going to grow 2%, 3%, 4%. And so it's acting like we always hoped it would.

On the industrial side, I think that's where you've seen more of the headwinds over the past 3 years, especially. We've been kind of in a prolonged trough. I think if you go back and look at ISM and all these different metrics, we've been in a prolonged trough. And really, I think that's typically the last piece to come out of it. So what you'll typically see is the industrial OEM business start to perk up a bit. And we did start to see a little bit better orders in that.

And so in our last earnings call, we saw -- we were a little bit cautiously optimistic that what we were seeing on the industrial side with some of the OEM orders that maybe we're seeing a bit of a turnaround. And -- but then typically, after those come through and you start to see factory activity pick up, that's when you'll see the industrial aftermarket business start to pick up some.

So I would say that's kind of where we are right now. We're still kind of in a wait and see kind of how things turn out as we get through kind of the busy part of the season. But that's kind of how I see the aftermarket business as part of overall.

Let's talk about our growth engines, which are personal mobilities and data centers, robotics and automation. So personal mobilities and data center applications are driving outsized growth. So what are the key competitive advantage that you have and also allow Gates to sustain high growth and defend the share in these markets?

Yes. So on Personal Mobility, think of that as a market where electrification is penetrating the industry. So you probably all -- particularly if you're in city centers, you see a fair amount of electric bikes, and so that continues to permeate. And so the belt-driven applications that we provide are really attractive the bike manufacturers and the overall electrification. They're more efficient. There's less maintenance required and they're more durable. And they've just worked better with the overall electric powertrain.

So we've been able to get design wins over the last several years. And you saw our growth approximately close -- came close to 30% last year on a year-over-year basis. And so on an overall -- for the personal mobility market. And so we have a 30% CAGR targeted out through 2028. So we expect to achieve that over the next couple of years. And it's really just think about penetrating new applications within the electrification. So as you think about electric e-bikes, those in the developed markets are growing double digits, so through the balance of the decade. So that's creating a nice base. But then on top of that, we're penetrating applications within that.

So one example of that would be electric mountain bikes. That was an area that we've won some programs recently. That was an area we had not penetrated previously. So we're bringing the cost down of our belt drive and that's allowing us to penetrate higher-volume applications. And we continue to focus on that here going forward. That will allow us to -- if you think about lower-cost systems that will allow us to penetrate higher volume applications.

So that continues to be an opportunity. We see that a good growth trajectory through the balance of the decade and even longer.

On data center, that was under about -- under $10 million last year in terms of the base. We're really focused on liquid cooled applications. So if you think about how data centers are now being built. There's a lot of focus on liquid cooled applications. And so that creates an opportunity for us. We're more of a consumable though. So we come in on the back end. So with our hose and hose assembly and couplings. So that ends up being more on the back end of things.

So there's a -- we have a project pipeline that continues to build. We expect off the base in '25 to grow multiples of that in '26. We have a target of $100 million to $200 million of revenue by year-end 2028. And so we think with the liquid cooled applications permeating the market over the next few years, that creates a nice opportunity for us.

And so we're working across the board, whether you look about -- look through the hyperscalers, all the way down to the ODMs, working with the server manufacturers, the cooling distribution unit manufacturers across the board. And so there's significant opportunity. We think it will be a nice growth algorithm for us over the next few years.

And then we also have a focus on trying to develop new relationships and gain share of shelf with our replacement customers. And so that's an ongoing focus for us. And so couple -- within the last couple of years, we won a big North American auto distribution partner, and we've been serving them for the better over the last year or so.

And so there's opportunities that come across here and there. We're not going to get those wins every year that are that chunky, but there's always opportunities to gain new customers and also gain share of shelf with existing customers.

So double-click on data center reach, if you could talk about the pipelines cadence like from $10 million to over $100 million, $200 million, are you ready for in terms of capacities and how it's actually come to margin profiles for data centers?

Yes, we've added selectively on capacity, and we continue to do so. And so we've got -- we feel good about our capacity position here as we look out the next couple of years. From a margin standpoint, think of it as fleet average. So it's going to be a solid contributor -- we expect to be a solid contributor to our profitability.

And so as you think about, there's some incremental costs that we've been incurring here over the last year as we have commercial resources, deploy commercial resources, et cetera, and build the team behind it. We continue to hire people from the industry. So as the volume increases, we expect to lever that pretty nicely.

And then if we could talk about the robotics. Recently, JPMorgan, we published a note about the robotics automation opportunities in the U.S. And the Gates, advanced belts, power transmission solutions play a key role, I think, is for the robotic system running smoothly. So how do you see the gates role evolving on robotics automation adaptations for acceleration across the industrial space.

Yes. So look, we've been -- we've got a focus on applications within the four walls of the factory, going back here. Really, I think, since we've been public, right? And that's really our chain-to-belt conversion initiative, right? And we had great success with it on the mobility side, which is kind of more of a mobile application.

And we've always been very strong in mobile applications, whether it's two-wheels or four-wheels, heavy-duty truck, construction all these different things. And so what we really focused now on -- and this aligns directly with the robotics and the automation, the stuff within the four walls of a factory is making sure that we get in and we have a strong selling solution along with a strong product portfolio to sell to the machine OEMs, right?

We've had good success on retrofitting applications within the four walls of a factory using belt -- Gates belt drive systems. And we're trying to take that focus and apply it now to the machine OEMs. So we get in on the floor of all these applications. And the big driver there has been, as we've continued to work on cost productivity and material efficiency and new products is we're getting closer and closer to cost proximity with chain-driven systems.

And so the closer we get to cost proximity to where the actual decision on the cost between one and the other is very, very close. When you look at the energy efficiency when you look at the downtime when you look at the cleanliness of the Gates belt drive systems. When you look at all those and you've got cost proximity, then you've really got the equation that you need to go in there and really get some market share gains on the machine OEM-side. And that's really what we're focused on right now.

I think no. I think that's just think about getting in, in terms of that initial install cost, and we can penetrate that market. And we've had more success historically on the operating the user, end user in terms of conversion. And that is still ongoing, but there's a distinct opportunity with the machine builders to get installed first, and that creates obviously a replacement opportunity longer term.

And the key there was the cost proximity piece, right? Because like I say, chain-driven systems, they've been working on the since there's been chain, right? And this initiative has only been ongoing for 10 years, and we're already getting pretty close. And so we'll continue to work on that. And like I said, the closer we get on cost proximity, the more opportunity we're going to have.

And then if you could talk about the humanoid, any exposures and anything that we can be excited about the humanoid exposure?

I'd say it's a possible opportunity, I would say, though, that nothing to talk about materially today as it relates to that. But, always an opportunity.

Looking forward to it. All right. And if you could talk about the most important areas of innovations, whether it's actually material science, digital monitoring, predictive maintenance that will drive Gates differentiation, value creation in the next -- the phase of factory automation and robotic.

Yes. Look, I mean, I think from a -- Gates is really a material science company, right? That's what we are we're very focused on, right? And so we're going to continue to develop new material combinations. We're going to continue to look at continue to be flexible in terms of some of the different combinations of resins and compounds and things like that, that we do that produce products with specific -- with specifications that our customers want.

I do -- I think we have a lot of opportunity to use new digital tools and AI and things like that to expand our capability on material science, right? And so can you run iterations on compounding to see what the outcome is going to be. Can you get a lot faster in determining what's going to be success and what you might not want to do, right, when it comes to a material -- from a material science perspective, right? And so we're looking at all these different tools to improve our material science capability.

I think also, when you think about product applications, when you -- whether you're looking at to make yourselves better or you're looking at tools that other people are using to make themselves better. Our products are used in so many different applications, but it opens up a wide aperture for us.

And I think like the data center is a great example, right? I mean, when you think about hoses and couplings, these are things that doing for 100 years, right? And so as liquid cooling became a big opportunity, we already have the products, right? We already have the capability then it was just a matter of matching up specifics, specifications with capability and products with the right set of end users and customers and specifiers and things like that. And we've created this great new opportunity.

And so look, we're always going to look at all the different applications that are out there. We're going to look at the different tools that are out there, and we're going to use those to drive not only our material science focus, but our new product development and product application focus. And that's where you kind of marry those two up. And that's why I think customers love to do business with Gates, because we can marry those two up. And really kind of scratch any itch they have, right, and really take care of the customer in a great way.

And let's talk about execution, operational excellence and margin expansion. So despite the macro headwinds, Gates has delivered record margins and strong free cash flow. And then from your perspective, so what are the key drivers behind this on the ground culture how do you maintain it across the organizations, especially during the recent large-scale ERP and footprint optimization projects.

Yes. So look, I think when I talked earlier the culture of the company. I mean I think really this is the key element of how do you drive continued improvement on your financial metrics through the cycle, right?

And so from a material science perspective, right, we always had a strong capability in materials science. And I will tell you that when we went through the big issues with material availability with what went on with the Ukraine Russia war and some of the displacement that was going on there and things like that. We shifted our focus somewhat on our material science efforts.

And we started looking at, hey, look, we've got some issues in terms of material availability, with cost, with things like that. How do we look at that and say let's focus on cost and how do we start getting our costs realigned and looking at what we can do to kind of have the same specifications but do it at a lower cost or do it with materials that are much to get, right? And so we refocused our efforts and said, okay, let's do this. And we've seen great success over the past 2 years, and we think we'll have great success year in terms of being able to kind of realign our material costs, right, and get better there.

From a cost perspective, right, we've done a lot of work on taking cost out kind of in line with what we've seen from some of the volume headwinds to try to maintain our cost productivity the factories.

And then to kind of cover a point that you were talking about. And then we've also looked at -- look, let's take a look at our overall footprint and see what we need to do from a cost productivity perspective as well as the labor availability perspective and kind of where you see an inflation in your labor force and realign our footprint so that we're going to be able to do better from a conversion cost perspective with labor and overhead costs and things like that.

And so again, I mean, that's really kind of focus on being focused on data being focused on making sure that you take cost out every year kind of that and then focus on that continuous improvement effort, right.

To kind of switch gears on to the ERP. The -- look, I've been through ERP implementations before, and they're never easy. But they're necessary sometimes. And the one that we did in the EMEA region was necessary, given kind of some of the infrastructure things that were going on there.

I will tell you that the team came together and has done a good job. So far, we're where we thought we would be from an ERP perspective. And look, I think as they get through the heavy lifting on that, then they're going to come out a much better baseline in terms of understanding where they are and then a system to run it to then start to put in more improvements and start to get better as they move forward.

So I will tell you that as we sit here and look today at it, I'm very encouraged as we get through this quarter and then get through next quarter about the future for EMEA in terms of improving a lot of things not just the cost side, but really the working capital side. So we're going to have better visibility, inventory management. We're going to have a better visibility to customer demand and forecasting and things like that. So I'm very encouraged about what they can do in the future.

And then shifting gear to regional performance. Your global player engaged has outperformed in Europe and China versus peers, what are the key factors behind this success? And how replicable is it in other regions as well?

Yes. I mean -- so I think if you go back to the fourth quarter, we had solid growth in the EMEA region were up almost 6% year-over-year on a core basis. And I think over the course of the second half of 2025, you saw some improved demand trends in general in the market over there. And so we were able to capitalize on that.

And so things turn the corner a little bit, if you will. As you all know, some of the PMIs have kind of crept back towards 50 and maybe have exceeded 50 at this point in certain those jurisdictions. And we saw good receptivity in the back half of the year in terms of our -- particularly on the industrial OE side, and that kind of fed our comments somewhat around improved demand trends on industrial OE orders as we exited the year.

So -- and then in China and generally in Asia, we've seen solid sturdy demand trends really for the most of the last couple of years. And so we have a very strong franchise in China. I think our team is really well versed over there and well positioned, done a great job. And we've transformed some of the mix of that business, which was maybe a little more auto-centric, if you go back a decade ago. And while we still have a strong position in auto, it's really transitioned to more of a replacement mix rather than an OE mix in China, and we've grown the industrial side of things there.

And then in North America, I think we started the year towards the end of last year. And really, in the fourth quarter, we saw improved OE order trends in North America as well, and that kind of also helped us as we exited the year. And then as we started this year, we saw improved order trends on the OE side in North America. And that kind of fed some of our cautious optimism here as we entered this year.

And so we typically see one thing that's different now versus maybe the last couple of years when we saw a little bit of a head fake with the PMIs in '24 and '25 is that the industrial OE orders have started to improve, and our book-to-bill was solidly above 1. And what typically happens is when you see industrial OE orders turn, you'll ultimately see the replacement aftermarket start to turn. It takes them a little longer, but that gives us some greater optimism overall that, that market will start to turn as we get through 2026.

Before I open up the Q&A, I wanted to ask about the capital allocation, M&A, leverage record lows and strong cash flow generation. How do you prioritize between buybacks, organic investment and M&A at this moment?

Yes. So look, I mean organic investments are always going to be our first use of capital because they typically have the highest IRRs. They typically have a 25% plus IRR. Now there's only so much money. I mean, typically, from a capital perspective, your sweet spot for our company at the current size right now, maybe $100 million to $120 million. And then -- and that's how you can get the right people focused on the right projects, make sure you get them to the end, declare victory and then move on to the next one.

We typically have significantly more of a pipeline of good projects, then you can really execute on in the short run, right? It's just -- it's a matter of people and time and effort things like that, you want to be balanced in your approach on working on projects versus daily productivity and delivery to the customers and all these other things, right? So that's always a good first use of capital.

We still think our stock is undervalued in terms of where we rank compared to our peer group. We've still got a significant amount of ability left in our current stock repurchase program that we plan to use. And so we'll continue to use that. We'll continue to look at debt paydown as an opportunity, especially as -- if interest rates do start to pull back and we start to see some opportunity there to kind of reconfigure our debt and maybe shave some basis points off of that, we'll certainly look at that as an opportunity.

But then M&A, as I think is something that we're opening up the aperture on, right? And so look, M&A is tricky, right? There has to be something that's actionable, right? It's got to make sense for your business. It's got to have the right payback.

We certainly would like to, I think, add some inorganic to our profile. That's something that's been missing from the company. And so I think that's something we want to add in. So given all that, we -- from an M&A perspective, we're going to stay close to the core, right? It's going to be something that aligns with our current product portfolio. It's going to be something that has -- that looks very much like what Gates does today. It's going to have something that's critical application in nature. You have to have our products to run whatever it is you're running, whether it's a combine harvester or whether it's automated machine in any different vertical or whether it's an electric bike or whatever it is.

Typically, we'd like it to have a large replacement business. The large aftermarket business that we can tap into and tap into kind of our total distribution system. And we like it to have good financial metrics, right. And a large synergy play that we could fold in into our business.

So thank you, Brook. So I would pause here to see anyone have any questions.

Moving a little bit more. And you talk about under-appreciation about the valuations Brooks. So are there aspects of Gates business aftermarket material innovation, digitalization, your role in the robotics, automation and value chains that you believe are underappreciated? Any thoughts?

Yes. I would say -- I'll give one thought, and then I'll let Rich go and then we'll see how much time we have left.

I think one thing that people have underestimated about the business is the cash generation part of our business. We're able to generate cash at a high level year in and year out, good cycle, bad cycle. When you go back to 2020, we delevered the business almost 3x in addition to, as I said, buying back, about 15% of the outstanding float as Blackstone exited the business and they're no longer own any shares of the business at all.

And when you can generate cash like that during -- even when the cycle is down and things aren't great, it puts you an opportunity whether you want to use that as an opportunity to buy back stock when you think it's really undervalued or you want to step up your M&A capability and things like that. And it's something that I hope that investors will take to heart and go, if we do a little bit more M&A or if we don't, this business is going to delever over time, half a turn every year. It's just what's going to happen. And whether we use to take that cash and buy back stock or do M&A or pay down debt, it's going to generate cash year in and year out, right? And that's going to give us great, great flexibility and opportunity from a capital allocation perspective, which we think is one of the absolute key things that's going to drive shareholder value in the future.

I was just going to say, I think the sturdiness of the franchise is underestimated. This brand is known across the world. You'll walk into any part of Asia, any part of Europe, people recognize the Gates brand. It's unlike other companies, maybe that have added acquisitions over the years and maybe their core brand is relevant in one part of the geography, half the world, but the other half, they use other brands to drive their value proposition. This is a one core brand, and I think that's pretty unique among many companies.

And I'd say the other thing is just in general, the company has been around 115 year, our management team, our Board is focused on keeping this business running for the next 115 years. And we -- I think they're -- we're starting -- you're starting -- you've seen that with personal mobility where we've created a new market essentially. There's opportunities to do that in the future, and we intend to do it.

All right. Thank you. I think it's time up. So I'd like to wrap it up with the many thanks, Brooks and Rich, and thank you, everyone, for joining.

Thank you.

Thank you.

Fantastic. Well, it's my pleasure to have up next Gates Industrial Corporation. Ivo Jurek, CEO. So Ivo, thanks very much for being here today.

I suppose we'll start off with a topic that's been exercising a lot of people's minds this week, is around what green shoots, how bright or thick are they? Or whatever in terms of the U.S. industrial economy. So Gates has some very broad exposures across the motion control industry. So maybe help us understand what you're seeing on that front, please.

Yes. Thank you, Julian, for hosting. Look, we've just reported our Q4 earnings, and I think we've given pretty substantial color about what we are seeing there. And we've discussed the green shoots that we see, particularly on the industrial OEM side that actually have been more robust than what we truly have anticipated. We've exited the quarter with very robust book-to-bill.

Our book-to-bill was about 1.06, which is very, very good for us. When I take a look back at some of the prior cycles, for Gates specifically, to be able to see kind of a more robust recovery in demand, you really need to see a strong performance out of the industrial OEs. And so we have seen that. I spoke about some strength in commercial construction, equipment makers. We've talked about ag being less bad, but recovering. And I think there are certain components of the ag makers that are recovering and they're recovering nicely. On-Highway has been doing better. So I think that those are all green shoots that give us some degree of cautious optimism that 2026 should be a much better year than the last couple of years that we have operated in.

And as you said, you've seen a lot of cycles down the years. With this particular sort of emergence from that 2-year plus soft patch, what do you think were some of the drivers of that? Was it just kind of deferred stocking or relief that the tariffs weren't a bigger problem? How do you see some of the kind of root causes of this acceleration that we've seen recently?

Well, you really had more than 3 years of pretty negative industrial -- underlying industrial economy, frankly, absent a couple of very specific end markets, right? So the general industrial business has not been very healthy for over 3 years. And the PMIs have been negative basically more or less 38 months. You got to go back all the way to World War II to see that type of a negative performance. So the underlying health of the industrial economy wasn't good.

And so I think that, to me, that felt like it was a result of that massive restock post-COVID and generally, a malaise-type industrial economies globally. We didn't have China to pull the rest of the world out of that. China was pretty weak over the last 3 years as well. Obviously, Europe wasn't great and the U.S. wasn't really a real engine of growth. So I think that you're just getting from a period of weakness, and I certainly am not qualified to call it a V-shaped recovery or anything of that sort. But I just think that there's a good formation of solid backdrop for demand to firm up. And that in itself is hugely positive because we all have operated in a pretty negative end market. And so, A stop deceleration for a small re-acceleration almost feels like a V-shaped recovery to us.

Yes. And when you think back historically, you mentioned the sort of industrial OEMs, very important for their animal spirits to pick up for the cycle to get going, and that seems to have happened. What does it normally take for the distributors? Is there just kind of a natural lag when you think historically of the OEM distribution turning? And sort of what are you looking for? What are the conversations with distributors kind of telling you right now?

Yes. Look, I think the strength from the large equipment makers, then generally speaking, carries into more of the smaller OEMs, and get serviced by the industrial channel partners because it's a much more efficient business operating model for them. And so when that starts happening, I think that, that provides some degree of confidence or better confidence for the channel partners to see that there is a need for them to carry more robust or more ready investment so that they can support the demand. And that will, generally speaking, result in more of a carry-through of that up cycle.

My sense is that, that generally speaking happens kind of 1 to 2 quarters out. I do think that you need to see firming of the PMIs. I'm a big believer that you have to see the manufacturing PMI component of that survey to firm-up for maybe 2 or 3 more months. And when that happens, I think that just gives folks a better confidence that the economy has firmed-up, the manufacturing economy has firmed-up and you're getting better utilization of your industrial complex. And then in itself, that feeds that industrial channel partner level of confidence. So I don't think that we are that far off, but I think that you just need to see that validation, particularly taking into account that you had a couple of head fakes last couple of years.

Right. Yes. But to your point, I guess, you feel -- I think you're always quite skeptical of the last 2 years about a recovery. This time you've seemed as you said, cautiously optimistic about it.

I am. Look, I mean, I don't want to oversell my level of enthusiasm in here, but we haven't really seen in a very long time, the strength that we have seen in order intake and again, that industrial OE performance, and that just gives me much greater degree of confidence that we should see a follow-through. But a couple more months, time will tell. And that happens, I think good things will happen to the manufacturing economy. And I think that you hear it from many different folks in very different segments.

I mean I think that for us, the Diversified Industrial end market is reasonably good exposure for us over 20% of our revenues. It's good to hear the Rockwells of the world and the Parkers of the world to talk about in-planned recovery of demand. So you can start seeing that follow-through that will be good for the broader general economy.

And then I think some of the sort of extremes on demand, I think very strong market and company growth in data center. So maybe kind of remind us of the main products that you've got there and the overall exposure at Gates? And then secondly, unrelated, Personal Mobility, not hyper-growth market, but very high Gates growth. So just help us understand kind of how sustainable that outgrowth is?

Right. So let me start with Personal Mobility, and then I'll finish on the data center question that you had. But in Personal Mobility, look, we have created a new market. We are competing against nontraditional competitor for Gates, which is an industrial chain. We have developed a, by far better solution, more elegant solution for 2-wheel applications. We have been at it from pragmatically post-IPO. We have taken a very intensive build-out of that end market. We have been now growing at high 20s from a very good base. I mean, obviously, about 3 years ago, it was about 3% of our overall revenue. So it's a nice meaningful starting point.

We have spoken about significant amount of design wins over the last couple of years. Those are now turning into invoice-able revenues that's coming through. And we've committed to our shareholders and The Street that we anticipate to deliver kind of high 20s, 30% compound annual growth rate between 2025 and 2028. We've talked about delivering about $300 million of revenues by 2028, and we are very nicely on the trajectory presently. And look, for me, I will say that, that's kind of an opportunity for the next 50 years because even at $300 million, that will represent maybe 3%, 4% of penetration of 2-wheel applications. And I believe that we will continue to drive that penetration forward, as we continue to evolve our technology, as our technology starts getting near, or to cost parity of the change drive, that will further open more opportunities. So I'm pretty bullish about the long term, not just the midterm opportunity to grow the Personal Mobility space.

On data centers, look, for data centers, we estimate that by 2028, we will have about a $2 billion market opportunity for our products, and that's hoses, couplings and electric water pumps, that move fluids through the liquid cooling applications. As the liquid cooling applications take hold, and everybody is talking about liquid cooling, obviously, the liquid cooling applications are just on the front-end of being adopted. And I believe that, that is a good opportunity for our company for the midterm.

We've spoken -- I've spoken about our order intake was up sequentially about 400% Q3 to Q4, about 700% year-on-year. Our invoiced revenue was multiples of prior year. Obviously, it was from a small base. We have invoiced approximately $10 million in 2025, and we anticipate to invoice multiples of that revenue in 2026. We've quantified that we anticipate that by 2028, the exit of 2028, we should be kind of about $100 million to $200 million run rate of revenue. So we are very firmly focused on executing to that, and we will continue to talk about our pipeline, about design wins. So very similarly to what we have spoken about in Personal Mobility. And then we will hopefully start talking about it being a couple of points of revenue in a Diversified Industrial quantified market presence.

And then switching maybe to automotive. You had a read, I think, since joining Gates a sort of steady reduction deliberately to auto OE. And the cost of that has been a headwind to the overall company growth rate. Where are we on that kind of continuous pruning of OE exposure? Near the end of it or now it's a continuous...

Look, our auto OE exposure is about 8% of our revenue. So it's really quite de minimis in nature. It's down from about 15% in 2018. So you're correct. So we have taken a big chunk of that revenue out, and we've really done that through a process that we call selective participation. If we can make the appropriate returns from doing business with those customers, we will have that business. We'll take that business. If we don't, we don't need that revenue, and we will not take on the risks associated with doing business with these customers under a pretax that we can make appropriate returns.

Look, I will point out that while we have shrunk that exposure, we have still delivered organic growth that is on par with our high multiple multi-industrial peer set. We have delivered an organic growth rate of about 3% over a 7-year period of time, at the same time that we have been shrinking our exposure to that end market. So we feel quite good about our growth. We feel excellently about our opportunity to deliver accelerated organic growth in the next 3 to 4 to 5 years. The opportunities are outstanding. Many of those opportunities are new and they are accelerating. So we feel quite good about where we sit.

And lastly, kind of on the end market front, automotive aftermarket, very large one for you. How do you see kind of the top line playing out this year? And how does your strategy there differ from the OE auto side?

So look, that's a fantastic end-market to participate in. It's a very steady market. If I chart that presence of our company in that market, the market is really noncyclical. It constantly chugs along at kind of a GDP-plus growth. And we do have the occasional years where we take a nice amount of market share. And we had that year last year where we signed up a large channel partner, and that represented a very nice jump in our growth rate of the automotive aftermarket.

Generally speaking, that market kind of grows at GDP-plus. We have had a big -- we have a big actually comp in Q1 where we have had a big distribution center load-in with that large channel partner that we have signed up last year. But we still -- we still anticipate that we'll deliver positive organic growth in that broad presence in 2026. The market dynamics are actually quite good. Car fleet is aging. It's getting -- the car park gets bigger with an aged car fleet, and that continues to represent a good opportunity for us to deliver kind of low- to mid-single-digit core growth over the long term.

Sort of self-help front around margins and operations. Where are we exactly on that European ERP rollout? And are we sort of past the point of maximum risk now?

Yes, absolutely. Well, thank you for asking that question. We are definitely past the the point of maximum risk. The biggest risk is when you press the button for go. We've pressed the button and the engine started. I'm pleased to say that we are taking orders. We are processing manufacturing orders. The materials are moving, and we are manufacturing things. They're moving into the warehouse. We are shipping, we are invoicing. So all of those things are proceeding maybe better than what we've anticipated, candidly speaking.

There's still an efficiency that needs to improve. There's going to be an efficiency headwind for kind of 1, 1.5 quarters for us before we get into -- before we get on par with how we were operating in Europe prior to the go-live. We will have some headwinds of incremental costs where some of the consultants, some of the outside services that may have been capitalized in the past are now being taken directly into the P&L. So we've taken that into account with our guidance, and we've spoken about that to our shareholders. So we feel very well where we sit. And I think that we are now on the trajectory of just driving the efficiencies to the prior operating capability.

And then footprint optimization. This has been in a way going on through your whole tenure at Gates. So kind of what's different about this latest stage? And when should this round be complete? And will there be another round thereafter?

Look, we have a 115-year-old company. So the company has been around for a long time, and I will make sure that the company is around for the next 100 years, right? And so what we have done, and you are correct, Julian, we have been resetting our structural costs. Look, I am super proud of the fact that we are exiting a down-cycle at the record level of profitability. So we have completely reset the capability to expand earnings for our company as we are going to enter, hopefully, what would be the next industrial up cycle. Our exit from a down cycle is, we are a more profitable company, and we are a bigger company than we were in prior peak. So I'm actually quite proud of what our team has delivered.

We anticipate coming back to the specifics. And part of that was the reset of our cost structure, right? So you're correct, we have been molding our manufacturing footprint more to be flexible and have access to direct labor, frankly speaking, than necessarily just resetting our cost structure. So becoming a more efficient manufacturer through the cycle, and I think we are accomplishing that. The most recent manufacturing footprint realignment, we anticipate to be complete more or less in kind of the second, third quarter of this year. And as we have indicated, that's going to give us a nice earnings benefit in the second half of this year into 2027. So it's just another step in a journey. And if history is a guide, I will tell you that there's probably more to come.

And then on the sort of shorter term, more variable cost side of things, a lot of inflation on metals and so forth, some chips as well. Do you see any sense of kind of price fatigue among customers? Or no, you're pretty confident these costs can be passed through?

Yes. Look, we actually don't see a lot of inflation interestingly enough in materials. There is inflation and maybe more severe inflation in labor and energy costs. So utilities and direct labor in certain regions of the world. And look, we will continue to price, over 65% of our revenue comes from aftermarkets, where I think that it's a little bit easier to pass inflationary costs through, not that you certainly want to continue to do that, but we have demonstrated that we can and we will, to do just that. And we are, frankly, also quite intent to pass inflation on to the OEs. We certainly do that with the auto guys, and we will continue to do that. And we'll be pretty pragmatic about what needs to be done.

But let's also be clear, we are driving efficiency improvements. We have reset our supply chains. We have done a lot on the material science side. So we are reengineering our materials to give ourselves an opportunity to lower our cost through productivity of better materials. And that journey is not complete. We have a long ways to go there as well. And I know that's counterintuitive, taking into account that we have been around for such a long time, but there's so much advancement in material science. And there's so much more opportunity to leverage some of those advancements. And look, AI gives you lots of opportunities to look at, processing information differently and taking advantage of massive computational power to come out with new raw materials that may give you a better efficiency, and we're certainly deploying it there.

And there's a lot of moving parts at the moment, the ERP, the footprint optimization, the volume environment seems to be getting better. So kind of rolling it together, it looks optically quite a back-end loaded year for Gates, just the sort of financials, but I suppose there's a lot of kind of one-off factors in the first half. So kind of how do you feel about the seasonality of earnings this year and kind of the confidence in that guide with that kind of weighting?

Yes. There is a little bit more complexity, I think, as you said, because we have some moving pieces in our first and second quarter. But if you kind of remove those and put them on the side for a second, and I'll come back to them, actually, this is probably the most level-loaded year in my 11 years of the tenure, both from a demand side as well as from kind of earnings evolution side.

From a demand side, we have some headwind in first quarter. Half of that headwind is just because we simply have 2 less days in first quarter of this year versus prior year. So that's about 250 basis points of headwind. And then we've quantified about 250 basis of efficiency loss through the ERP implementation in Europe. We will get 1 day back in the December quarter from those 2 days. So -- and if you say that our guidance is embedding 2.5% decline in Q1 that would analytically tell you that we are growing at 2.5% organic growth rate, absent of those 2 headwinds. And we basically embedded 2.5% growth rate across the entire calendar year. So we have a very level-loaded year. We don't have a hockey stick in the second half.

Coming back to the headwinds on the earnings side, I mean, those are quantified earnings in terms of the ERP implementation. Normalizing for those, we will be exiting the year kind of at the 23.5% EBITDA margins, around that zone. So we will benefit from about $10 million to $15 million of improvement in earnings through the footprint realignment project that we have discussed. So we actually -- I feel very, very good about where we sit, underpinning the guidance through kind of the organic growth of about 2.5%. And that growth rate really doesn't embed any substantial recovery in the end markets, right. So that's really something that could be a nice upside for us.

And as you said, sort of once these measures are complete, assuming you get that some volume pickup, incrementals should be very high because you have the footprint savings plus the early part of the recovery tends to offer richer operating leverage?

Absolutely. I mean I think we've quantified that in the first 12 months. So kind of think about second half of '26 into second -- in the first half of '27, we've kind of quantified that our incremental should be 45% to 50%. And then as we exit into maybe a second half of the year, I mean, our incrementals should be kind of in that 35% plus on a normalized basis.

Capital deployment, there's been sort of steady reduction in leverage down the year. So you have certainly good flexibility now versus ever before. The stock is pretty cheap. So I can see the buyback appeal. You have that -- the ROIC hurdle in the 20s seems quite demanding for much M&A to pass that hurdle. So do we assume that M&A probably remains very muted for some time?

Well, first of all, I'm delighted that I will never have to talk about leverage again being 1.8x levered, right? So -- and again, just to remind everybody, we de-lever at about 0.5 turn a year. So leverage is not really an issue that I will ever hopefully have to speak about again. We generate a ton of free cash flow. We have -- reminding everybody, we have over $800 million sitting on the balance sheet. We still have about $200 million buyback authorization. As you said, the stock is dirt cheap. So we will probably lean quite a bit into that as we move through the year.

We see good opportunities for M&A, interestingly enough. We are working through a number of potential deals that are out there. We will be super disciplined. As you said, the ROIC is something that we are super proud of, and we want to continue to -- if we do things, continue to get on a trajectory to meet those hurdles. So I don't necessarily think that, that would be something that would scare us away from doing a good transaction. But as I see it, Julian, we would do deals that are highly accretive. Those deals need to generate decent returns for us in a very short period of time. That means that they need to be highly synergistic, they cannot be dilutive. They need to be accretive pretty much from the get-go. And there are potential transactions out there that meet those criteria.

Fantastic. Well, with that, we'll switch to the audience survey questions, please.

So the first question is around kind of current ownership of Gates? So around sort of typical number around 65% no.

Second question is on sort of general attitude or bias towards the name right now? So positive bias, but low ownership.

Third question is around EPS growth through-cycle for Gates versus kind of multi-industry average? So in line to slightly above.

Next question is, what we discussed around sort of uses of excess cash from here? So mostly buyback focused, and again, yes, no need for debt paydown anymore, which is good to see.

Next question is on valuation. What's the appropriate kind of year 1 PE that Gates should trade at? So kind of high teens PE.

And then last question, what's the biggest single anchor on the valuation multiple? So organic growth in common with many others.

So with that, thanks so much, Ivo, for being here again. Great discussion as always.

Thank you.

Get started again. We've got Gates Corporation with us today, which we're very excited about. Ivo Jurek, who's the CEO. Ivo, as I walk over to you, you've been -- I'm going to see at this conference for a long time, which we very much appreciate.

So the temptation to ask you is why is this year different than the last couple of years, right? Like it seems like there's some green shoots out there, maybe even more than green shoots. I think you just reported earnings, so I won't ask you about orders for the last 2 days. But at the same time, I think you talked about 4 of 7 of your major markets growing, only one modestly decreasing, markets such as personal mobility and data center driving you. So it seems like '26 could be a stronger growth year, yet you forecast 1% to 4% organic growth. So maybe talk about the puts and takes there.

Yes. I think it's a good way to open it, Andy, and thank you for having me in Gates here at the conference. Look, when you kind of look back for maybe the last couple of years, I think both in '24 and '25, we have seen some positive earlier incursions of PMI, some sentiment shifting around in both years, kind of ending up with a little bit of a head fake and overcoming some more impediments.

So when you kind of fast forward maybe to end of '25 and the quarter that we've just reported, I would say that we have seen a slow and steady buildup in kind of more positive picture across some of our larger industrial OEM markets, commercial construction, less bad behavior in ag, in particular. And exiting '25, we've reported reasonably good strength in order intake, as you indicated.

What's really different, I think, in my mind is that for us to see more foundationally based recovery of our business, we need to see an industrial OEM strengthening order trends, and we have seen that. So I think that, that's a good early indicator.

I think when you combine that with kind of 3 years of really tough macro background, which is highly unusual, right? You have to go kind of all the way back to World War II to see that type of behavior. And then you start seeing maybe early formation of a little more constructive PMI, it starts to feel like maybe things are improving.

I think it's early in the year. As we indicated, yes, our markets are anticipated to be better this year than they were last year. Some of them already are. So you now have more than one data point that would tell you things potentially are forming to be much more supportive in 2026 than we have seen in '25.

And Ivo, when you say like industrial OEMs look a little better, like any sort of examples you talk about?

Yes. Look, we have seen much stronger trends in commercial construction equipment builders. We have seen better ag OEM order trends. We have reported actually our ag business was up high single digits in Q4. And that's taking into account that those OEMs are still reporting pretty negative numbers.

So we are doing some things better maybe than the market. So we are outperforming the markets, as we have indicated in our call. And we're certainly quite pleased. Now when you combine that with super strength in personal mobility, we have had really another year of good end market support in automotive replacement side of our business.

So the aftermarkets are doing really, really well in the auto side. We still see positive trends, car fleet that is aging, it's still growing. Cars are keeping -- people are keeping their cars longer. They're servicing them better. Nothing that we do is of choice. I mean, if you -- we make critical -- mission-critical applications, support application -- mission-critical applications. So you will have to replace those components when they fail. So those are all positive things that are happening there.

Got it. And we talked on your Q4 call about some distributors having carefully managed their inventory. I think that was specific to your industrial aftermarket business. So maybe comment broadly on how you characterize channel inventory today? And what are you seeing versus sell-in versus sellout and whether you see potential need for channel restocking if PMI were to get better?

Yes. Look, I'm not really concerned with the performance or the behavior of the industrial aftermarket channel inventories simply because it was kind of more seasonal, not really something that is kind of a consistent level of destock. I think that the channel partners they frankly didn't have a great year last year. And so there's no real reason to preposition yourself for '26. You have an opportunity to have a really good '26.

And my sense is that as PMI strengthens and frankly, as the industrial OEM businesses strengthen, that benefits nicely the industrial aftermarket channel partners. And so my sense is, as you continue that to recover, as you continue to see the PMI signals to get healthier, I think that you will start seeing that the inventories are getting replenished maybe more aggressively than they have been over the last 3 years, and you should be setting yourself up for a nice rebound in performance in the aftermarket on the industrial side.

Yes, that would be interesting. So I want to go back to your last Investor Day, I think, was 2024, right? And you had talked about sort of various ways to outgrow industrial production. You mentioned then on a baseline of 2% industrial production growth, the Gates could grow 3% to 5% through programs such as eco-innovation, chain-to-belt, personal mobility. So maybe talk about the progress you've had in these areas. We talk about personal mobility a lot. We don't talk about these other things that much. So I'm just curious where you are in this stuff.

Yes. So I think that -- let me not spend a ton of time on personal mobility because I think that we have demonstrated that, that algorithm is working really well. It's very healthy.

We continue to take -- we continue to penetrate much more meaningfully that space, and we certainly believe that that's a long-term trajectory of growth for us. And as we have highlighted over the next 3 years, we anticipate to deliver kind of mid-20s to 30% compound annual growth rate. So that's very healthy from a $140-ish million base.

On industrial chain-to-belt, look, we're doing some really good things there. We feel that as we are approaching close proximity to the cost of industrial chain, that opens up the opportunities and I think in a similar fashion that we see in personal mobility. So we are quite optimistic that, that will start adding a really nice growth for us.

We have demonstrated a really nice performance in automotive aftermarket. We have grown that business very steadily. Actually, in a way, it was a nice chunky growth in 2025. And we certainly believe that the long-term trajectory of the business remains to be kind of GDP plus in addition to some market share gains around the edges. So that offers a good opportunity for us to add to our growth rate.

What I'll say is that during that 2024 CMD, we did take into an account that we anticipated to have more positive end market backdrop. And if you think about it, Andy, while we haven't really delivered exactly at the growth rate, I think that we have grown in line with our high multiple, multinational industrial peer set. On average, we have grown as well as they have.

And that is in addition to continuing to do a selective participation in our auto OE segment. So while we continue to grow the business, we are improving the quality of our portfolio, our mix, and we continue to grow at the rate of some of our peer group aspiring competitors.

Yes. And your margins have come up pretty significantly. So that's kind of what I want to ask you about. There was, as you remember, a couple of quarters ago, some confusion around what you were saying about your margin in '27. So maybe let's try and clear it up again here.

So if I'm interpreting your '26 adjusted EBITDA margin guidance correctly, it looks like you should be exiting the year around 24% margin. And your '27 target, I think, right now is 24.5%. So like I know growth is a huge variable here, but let's say you deliver the middle of your organic growth range, 1% to 4% in '26, it looks like you set up to well achieve that 24.5%. Anything I'm saying there that that's not right or -- yes.

No, I don't think so, Andy. I think that we have a couple of rather large projects that we have undertaken that are a bit of a headwind for us in the first half of this year. I mean, obviously, we've spoken about the deployment of the ERP in Europe, which has actually gone quite well.

We have some footprint realignment projects that we are working on that we anticipate will be completed in the first half of the year that will be a benefit and accretion to second half of the year. We have committed that we will be exiting the year at 23.5% EBITDA margin, which is the lower end of what we have forecasted during the CMD in 2024.

But during the CMD, we also have anticipated that over that period of time, we will see 500 to 600 basis points of organic growth through that 3-year period of time. Now obviously, that has not happened because of the end markets, but we have yet still delivered a rather significant margin expansion, and we are hitting the bottom end of our range at that negative kind of end market backdrop.

So we are exiting, I think, we are troughing the end market macros. We are exiting that troughing environment at record level of profitability, near record level of margins, and we are very, very bullish about our ability to not only deliver on what we have committed, but frankly, probably overachieve if you take into account that our first 12 months incremental margin opportunities kind of in that 45% to 50% fall-through kind of from the second half of this year onwards.

So I want to ask you about that because I think you've got separate programs, right? One is delivering 50 basis points of material savings from here. I think you've been pretty bullish on that and then 100 basis points of footprint optimization savings. I think they're both supposed to contribute to the '27 target. So I know you said you've got -- you had $10 million so far from footprint work that's going to impact this year. But then obviously, it's got to ramp up from there. So how do you think about these programs?

Yes. The programs are performing quite well. Actually, the material cost savings and some of the efficiency projects like 80/20 and some other restructuring that we have continued to do through the cycle have done, have created bigger benefits than what we have anticipated, taking into account that we have been able to offset that lack of growth through the end market backdrop. So I think that I'm quite pleased with that.

I think that our footprint optimization, I think on the call, Brooks has indicated that we feel quite confidently that in the second half of the year, it may be $10 million plus that will ramp up into 2027, and we anticipate that in the first half of '27, we'll deliver another $10 million on that project alone.

So we are in a really good shape and '27 certainly -- 2027 certainly should be a year of terrific performance. But we're also quite pleased with what -- how we have framed our guidance for '26. We don't need to skip necessarily over '26. I think '26 is going to be quite an okay year for us.

And goes...

Yes, it does.

So maybe just digging into 80/20 just a little bit more. Maybe how much more runway do you have in the journey on 80/20? And how do you think about 80/20 in terms of like an annual margin tailwind? Like how do you think about that?

Yes. Look, I think that 80/20 is a long-term journey for us. We -- I think we have done quite a bit of work on the front end. If you think about this project, this front to back, and I think that that's a really right way to think about it. We are just starting -- we're kind of in the middle of a journey for us on taking 80/20 into our factories into the back end. So I think that there's a ton of opportunity to work through there.

I do think that going through the ERP implementation in Europe that will give us some incremental opportunities to drive some more efficiency in our European footprint and how we manage our business there in addition to just driving 80/20. So I do think that you have a good runway for a number of years ahead.

And when I think about our business, I don't -- somebody asked me this question, when you get to 24.5%, do you think that that's kind of the end of the journey? So no, that's not the end of the journey. That's kind of the next train station that we are planning to stop by and that we'll continue to drive the train forward.

Yes, that makes sense. And then just maybe honing in on this quarter, Q1 '26. I think you talked about 2% to 2.5% organic revenue decline in the quarter. I think 500 basis points of headwind, right, from 2 fewer business days in the selling season and then your ERP implementation in Europe.

So being an analyst, I'll exclude it on the go, your underlying growth is pretty good compared to how it's been. So like why is it pretty good? Is it because Europe has been trending better lately as you talked about? You talked about construction and ag and personal mobility. Are those markets starting to really pick up? Maybe what's in that underlying 3% growth or whatever it is, 2.5%, 3%?

Yes. By the way, Andy, thank you for actually doing the fundamental work. So we actually have a very, very, I think, doable guide. We have no ramp-up in second half of the year. If you think about it and you carry forward the 2.5% of our organic growth, that's kind of what it is for average of the year.

One would assume that certainly, if our thesis plays itself out, you should start seeing further acceleration in the second half as the recovery takes hold. Presently, again, strong performance in personal mobility, that's almost 100 basis points of growth that we are delivering on the enterprise. You're going to have a little bit of pricing, certainly an improvement in ag and commercial construction in the industrial OE side. Europe has been doing better. I mean, we have grown in Q3 and Q4.

Interestingly enough, I think that Europe is performing rather well for us. And I think you certainly sense a degree of kind of relief in -- from the European customers and certainly from our European teams. And look, our Asia business has been doing quite well. We've been growing in China nicely.

I think we have probably differentiated our performance versus our peer set. In East Asia and India, I think that they are kind of at an inflection point of delivering some sustained level of growth as well. So things just feel better.

So IvoI don't know if anybody on the stage today said the words Europe and well together. So maybe you can talk about why Europe is performing well for you guys. Is it the market? Is it something you guys are doing?

Yes. Look, I think that our team is executing really well in Europe. And we're focusing on things that are within our control. Look, I don't control what happens in the macros, and they are what they are. We've got to deal with that. But we have had tremendous growth in personal mobility in Europe. I mean our personal mobility in Europe has grown like 75% rate. That's...

They do like to ride their bicycles there, right?

They do riding their bicycles then and the adoption of the Gates drive is rather significant in Europe. I think that we have been doing a really good job in automotive aftermarket in Europe. So that's been performing well. Look, the industrial businesses are recovering. I mean, similar to what we have seen in the U.S., I would say that maybe Europe is a little bit ahead in Ag and commercial construction recovery. Ag has been quite bad in Europe since 2023. So we feel better about what's happening in Europe.

Maybe same question on China, Ivo, because again, I think you've generally been outperforming in China for a while versus other U.S. multi. So -- and I think you expect continued growth in China. So what does Gates do better than peers in China? Is it the same thing there? What's the outlook? I think you talked about the outlook a little bit for the rest of Asia.

Yes. Look, I think we have a terrific team, and we have had a very focused strategy to build our industrial footprint. If you look at our business in China over the last 10 years or so since I have been at Gates, we have very dramatically retooled our portfolio.

We have diversified the applications that we participate in. We have been able to take a nice amount of market share. We have built a rather significant automotive aftermarket presence. Today, we are the #1 market shareholder in China of the products that we manufacture in the automotive aftermarket. So our business in China is nicely diversified, and it continues to perform well. It's a large industrial economy, and we like what we do there.

And then I'm going to open it up to the audience in a second, but I wanted to follow up on ERP more specifically. I think you talked on the call about ERP being a 140, 150 basis point drag on EBITDA margin in Q1, 50 basis points in Q2. So can you remind us where you are in terms of ERP implementations in general? So once you get through this European implementation in the first half of '26, what's left or what's next on ERP?

Yes. I think that there was kind of the last large piece for us. We were operating in Europe on very legacy obsolete systems that were coming out of support. We needed to derisk it. So we have decided to go and launch SAP.

About 2.5 years ago, we have deployed the SAP finance module. So we felt like we have kind of had at least Phase 1 covered. So we got a good experience with it in Europe. Meanwhile, we have launched a bunch of SAP applications in Asia. Those worked well and ran well. And so this was a rather large-scale project. It was a big bang.

We have gone live early in February. Kind of one of these things, right, you kind of push the button and see if the engine starts. Engine started really well. We are taking orders. We are shipping. We are dropping manufacturing orders. We are making things. We are transitioning things from factories to DCs and back and forth. We are invoicing. There are days they are really good. There are days they are less efficient.

And so the drag is really more associated with the cost of support to get back to a standard operating efficiency. But presently, we feel quite well about where we sit. The team has done a terrific job. And while there are still efficiency issues to work through, we are able to do all the functions that we need to do and we needed to do as you restart on a new system. I certainly don't envisage that there will be another implementation of any size anytime soon. We got all regions basically operating on reasonably good systems at this point in time.

Got it. It's good to know. Any questions from the audience? No one. No one has questions.

Okay. So maybe if I dig into the businesses a little bit more, Ivo. So let's talk personal mobility again. So it was up greater than 25% for you last year. You talked about the business compounding at high 20s to 30% to 28%. So can you remind us of the size of the business today for Gates?

And then when you think about these elevated growth rates, I mean, we just talked about Europe. Is that the region that stands out or other regions? Like where does personal mobility have the best traction?

Yes. So look, the personal mobility business is about $140 million business that presently is about 3%, 3.5% of total company revenue. So it's not super large, but it's a nice size.

We have committed that we anticipate the business to be about $300 million by 2028. We surely are on the trajectory to be able to deliver that. This business really took off in Europe about 3 or 4 years ago before we start seeing some of the destock with -- post COVID. That business has completely reaccelerated back at those very high growth rates.

We see good growth in Asia as well, and we have a ton of opportunity with that business in North America as North America is embracing a little better quality e-bikes in particular. So we feel that for us, it's a penetration story, and we are competing against nontraditional competitor, industrial chain.

We think that we have a better technological solution for electrified 2-wheel application. And so now we are getting Andy to a point where we feel we are on a cusp of mass adoption. And we have done that through 2 things. Number one, we have demonstrated this is a better solution than chain; and two, by very focused execution on innovation to drive the cost of our drive to near cost proximity to industrial chain. And we are approaching that level of performance, and you see a pretty broad-based adoption of that solution.

There's still no real competition in belts, right, for personal mobility, correct?

Not real competition. Gates got basically the vast majority of the market share gains.

So it's just conversion from chains out that you need, right?

It's a penetration...

And is that just happening a little faster in places like Europe than the U.S.? Is that?

It is because the solutions in Europe are -- people actually do care about the quality solution. They want low maintenance and the price points have been a little bit higher there. As we are approaching the cost proximity, it opens up doors to much broader penetration. And look, I mean, we do have some interesting applications. I mean, I think if you go for anybody that shops at Costco, you can go to Costco site and you can buy your kids bike with Gates Drive. So we are starting to get to a level where that cost is no longer being...

It's an interesting question, because it's like you are -- I mean, I remember it was the premium product in most respects, right? So how do you balance like competing and I hate to say that U.S. is a lower-cost market, right? But like how do you balance that and still be premium? Can you do it?

No, absolutely. I think that the solution is still a premium solution. I think that the belt drive is a premium solution to an industrial chain. I think what we have done is we have continued to innovate in a way that gives us still a premium capability through development of a new technology. And the technology, I think, is now getting broadly adopted. And you will have an opportunity to support kind of the mid-market products all the way up to the super premium applications.

Got it. So moving on to data centers. I know it's also a small business for Gates, but you seem pretty positive that getting to $100 million to $200 million by '28. Liquid cooling adoption continues to ramp. So if I think about your products, do they need to -- they have to be spec-ed in by customers? Like how does it work? And are there particular customers or regions that you view as better opportunities for Gates within data centers?

Yes. So first of all, it's a brand-new set of applications for our company, right? We really have not participated in that part of the technology. And so we had to start with developing a technical expertise in what problem are we trying to solve.

And I think that we have not only understood the problem, I think that we have developed a specific set of solutions that differentiate us from our main competitors. And we have developed a front-end sort of professionals in the commercial applications as well as the engineering applications to be able to go and work across the spectrum of customer base to get our products designed in.

So to your questions, look, we have projects with hyperscalers. We have projects with server manufacturers and design products into server cooling and racks. We have projects with the large infrastructure providers. We have projects that we supply our hoses and our couplings. We have projects where we supply our water pumps. And we have projects where we supply our water pumps and our hoses and our couplings. So full spectrum of portfolio.

And look, we have talked about a business that we won with a hyperscaler that's being fulfilled through an Asian ODM. We have a number of nice project awards with large server manufacturers for integration. We're working on specs that will get us into the critical infrastructure. So it's quite positive. We talked on a Q release about the fact that our sequential order growth rate in this segment in the data center segment grew nearly 400% sequentially, 700% year-on-year.

Our revenues have increased 5x in 2025, and we anticipate the revenue to grow in a multiple of 2025 in 2026. So we continue to demonstrate the trajectory of that growth. And I think as a team, as an organization, we are quite confident that we will get to that $100 million to $200 million of revenue by 2028.

Yes, that's great to hear. So maybe to some of your larger businesses, industrial off-highway, second largest business behind auto aftermarket. And we talked about it a little bit. I know commercial construction is driving and things like that. Is it global? It's getting better? Like is it more construction than anything else? Like you said ag was a little bit better in Europe. So any more color there would be helpful.

Yes. Look, we started to see a little better performance in commercial construction kind of towards the end of Q3. We have seen continuation of that trend in Q4. So I think commercial construction is recovering.

Ag, as I said, has done reasonably better in Europe. We have now started to see inflection in North America as well. Ag has been actually quite okay in Latin America in 2025. So if you have kind of 3 of the larger economies that are doing okay, I feel a little more optimistic about it not being a drag in '26 and being accretive to our growth.

Yes, that's good to know. And then auto aftermarket, it's always kind of a steady Ivo. It's your largest end market. So maybe talk about the trends you're seeing there. Obviously, the global car park continues to get older. That should be helpful to you. So level of visibility and anything you're doing differently in that vertical to outperform the markets?

Yes. Well, we have been outperforming the markets over the last several years. That is a large important market for us. The trends, as you indicated, are very good, right? The car park grows, the car park is aging. People are trying to take care of their cars more or better, I guess, is the right choice of words. So that's an opportunity for us to continue to deliver the GDP plus growth.

But Andy, while we represent this business as GDP plus business, we are not satisfied with GDP plus performance even in this market. We want to outgrow the market materially. And we've demonstrated we can do that. I mean we have onboarded a large customer in the U.S. in '25.

We believe that we still have opportunities globally to continue to add nice chunks of revenue. And so if we can just grow kind of 2x GDP, I think we will be quite satisfied. We're going to be able to do that every year? I don't think so. But we will have years where we're going to get some chunky meaty wins.

Are there prospects out there like that for '26 or?

Yes, there are prospects like that in '26, but we also -- we have added that new account that we've added in '25 there was meaty, but I think that there's a large opportunity to continue to scale that participation. So I think that there's still a lots of opportunity in automotive aftermarket.

Got it. And then maybe diversified industrial has been a little hard to get a read on. It's pretty big, too, almost 20% of your revenue. So maybe -- I know you're expecting growth in the market in diversified industrial for '26. So maybe talk about what's driving that growth in '26. I think you might have been down in the 4Q.

Yes. So look, diversified industrial, I think, is really well torque towards PMI. And when you start hearing anecdotes, I mean, even from our peer set, right, whether it's Rockwell or Parker indicating pretty good strength in factory automation. Those are all drivers of of our revenue sources as well.

So we are certainly closely monitoring the PMIs. We believe that the market is improving as well. But I would like to see more validation on the PMI side before we kind of go and declare victory on strength in diversified industrials.

I know at OEM, it's just going to be like high single digits of the company and kind of being...

I think so. Look, the auto OE business that we have is a really good business. We make good money on it. We will continue to practice selective participation. We don't really spend lots of resources on that business. The business generates a nice amount of free cash flows and good profitability. And while it's there, we will have it. We will not be chasing any business in that set of applications. We are really focused on growing our industrial businesses.

And remember, we shrunk that business now to about 8% of revenue, and that's been doing while the industrial businesses haven't done well. So when the industrial business is start reaccelerating, that will naturally continue to compress that participation. And we really have an aspiration to be a broad industrial company, not being necessary, just over torque to [indiscernible].

Got it. So let's shift to cash flow and balance sheet because you mentioned cash flow. I think you had a good cash flow year in '25. You're guiding to 90% plus in '26. Free cash flow does tend to be a little lumpy for you guys at times. So maybe talk about what's different now that supports consistency moving forward?

Yes. Look, I would actually say that our cash flow, while it has been lumpy, it's been lumpy because we have been making significant investments into our business. We are investing in the front end. We are investing in new plant and equipment. We have done quite a bit of restructuring.

So net-net-net, I think that we are kind of at approximately 100% free cash flow conversion as a percent of adjusted net income. In 2026, again, we are forecasting 90% plus, and that's why we are spending more on CapEx and more on cash restructuring, right? So as those abate, and we anticipate that those will abate in '26, we have a very high degree of confidence that we'll get back on a consistent trajectory of 100% plus free cash flow conversion. And that just gives us lots of optionality.

This is a business that generates a ton of cash. And we are very happy with our performance. And again, I would say that we have yet again outperformed our peer sets in 2026 -- 2025. So I think that just gives us lots of optionality to deploy that cash, whether or not it is through share repos. So now maybe being more thoughtful about M&A.

Yes. So you ended '25 with a net leverage under 2x, 1.85. I think it's the lowest it's been since you became public. So how are you thinking about capital allocation in the current environment? Can we see lean into buybacks more if you don't do deals? Like how are you thinking about it?

Yes. Look, I mean, we have exited the year with over $800 million of cash on our balance sheet. So we have about slightly under $200 million of buyback authorization. We have bought $105 million worth of -- we have returned $105 million of cash back to shareholders through buyback in Q4 alone.

We generated a ton of free cash flow in 2026, our forecasted too. So I anticipate that we will be more active. Whether or not the game, it is in buyback. I mean our stock is reasonably inexpensive as a comparison to some of the peers that we comp ourselves against. So I think that, that still is a good opportunity for us to do that.

But I will say that we are significantly ahead of the game of what we have committed on deleveraging, the financial deleveraging. And that now gives us that opportunity to look at M&A more aggressively. And there are some good assets available that I think could be very highly accretive to be added to our portfolio.

Could you do a transformational deal? Or are you looking more bolt-ons?

I don't think -- I think that we need to earn the right to do a transformational deal. And I think that we will start with things that we know a lot about, so something that is very near our core business. And gives us a meaningful opportunity to add a decent amount of revenue and profitability. And I don't think necessarily you need to do a transformational deal, but you can still do a reasonably sizable transaction that's actually meaningful to your level of profitability and will be highly accretive in terms of your capability.

For sure. Okay. So last question here, though. So I've asked this every year. What are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the current discourse?

Look, I'm always surprised at finding new applications through adoption of the core technology that we have developed. So if you think about it, while I don't necessarily believe that the whole electrified propulsion of vehicles have played differently than what I have believed, I think I've been pretty consistent believer that there's going to be room for it, but it will be just another option that the consumer is going to have.

We've developed some interesting technology for the application in those vehicles. And we've taken that application, and we are now adapting it into data centers that we would have otherwise not been able to support. We are developing a number of new applications of the technology into personal mobility, where we're going to continue to broaden our ability to become more integrated provider of drive systems.

I think that a lot of technology is evolving, but what we're also finding out is that there's fundamental need for our products. And as technologies evolve and new adoptions are being brought to the forefront, it just offers more opportunities for companies that provide foundationally sound technologies that are just required on a daily basis, and we don't really think about them.

So I would say that the bigger surprises for me from a technology perspective is how we can continue to branch out and see significantly better future than the past 115 years that we have experienced. I'm really super excited about what's ahead of us. And I do believe that the best times are ahead of our company, not behind.

Awesome. Well, it's a good time to stop. Ivo, thank you very much.

Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to the Gates Corporation Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to Rich Kwas, VP of Investor Relations and Strategy. Rich, please go ahead.

Greetings, and thank you for joining us on our fourth quarter and full year 2025 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek; will be followed by Brooks Mallard, CFO. Before the market opened today, we published our fourth quarter and full year 2025 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 will 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 was filed in October 2025. 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 you start, please note that all comparisons are against the prior year period unless stated otherwise. Also, moving forward, please note we will be making changes to our geographic disclosures in our future presentations. We'll consolidate China and East Asia and India into an Asia Pacific disclosure, and we will consolidate North America and South America into an Americas disclosure. This approach aligns with how we manage our in-region, for-region strategy. Now I'll turn the call over to Ivo.

Thank you, Rich. Good morning, everyone, and thank you for joining us today. Let's begin on Slide 3 of the presentation. Let me begin with a brief recap of the year. Gates delivered solid results in 2025. We've posted nearly 1% core growth and outperformed our end markets, many of which remain in contraction. Our secular growth drivers are accelerating with personal mobility business exceeding 25% core growth in 2025 and in our data center business growing 4x compared to 2024.

In addition, the Gates team delivered record adjusted earnings metrics in 2025 during an uneven macro environment, producing both record adjusted EBITDA dollars and record adjusted EPS. Furthermore, we've made incremental improvements to our balance sheet, bringing our net leverage ratio down to 1.85x at year-end 2025. We returned capital to shareholders via share repurchases and were aggressive during the fourth quarter, repurchasing over $100 million of our shares at an attractive valuation. We believe our business is well positioned to accelerate core growth with our various strategic top line initiatives as well as to expand margins. In essence, we are exiting the down cycle with a structurally improved business while delivering near record adjusted EBITDA margin performance.

We entered 2026 with cautious optimism about an industrial demand recovery. Our book-to-bill exiting 2025 was nicely above 1x and order trends in January sustained a positive threshold. We are seeing improving industrial OEM demand activity and are positioned to support an uptick in demand. enterprise resource planning system transition has kicked off successfully, and we are operating our business in Europe, a bit ahead of our expectations. Our other footprint optimization initiatives are also on track. Brooks will provide more color on these items and our 2026 guidance later in the presentation.

On Slide 4, we show our record performance against key financial metrics for 2025. Adjusted EBITDA dollars grew to an all-time record, and we generated near-record adjusted EBITDA margins. Our adjusted EPS grew 9% to a record $1.52, which was the top end of our guidance in what we believe was its troughing demand landscape accompanied by uncertain trade policy.

Our net leverage ratio decreased by almost 0.4 turns, and we finished below 2x net leverage for the first time. We are proud of these accomplishments and believe the company is well positioned moving forward to capitalize on a potential industrial recovery.

Please turn to Slide 5 to review our full year EPS performance. Our adjusted EPS grew $0.13 or 9% year-over-year to $1.52. The bulk of the year-over-year growth in adjusted EPS came from operating performance, which contributed $0.10 year-over-year. We were pleased with the operating performance contribution, particularly considering the relatively soft demand backdrop in several of our end markets.

On Slide 6, I'll review our fourth quarter results. The sales were $856 million, which represented core growth of nearly 1%. Total revenues grew slightly above 3% and benefited from favorable foreign currency translation. At the end market level, while mixed, we realized growth in our industrial markets led by the Off-Highway markets and personal mobility. A decrease in automotive OEM was a partial offset. At the channel level, OEM sales expanded approximately 4%, while aftermarket sales declined about 1%. Aftermarket did not increase as much as expected, as many of our distributors carefully manage their inventory into calendar year-end. In addition, we faced a difficult comparison from prior year period. We were pleased with the growth in OEM sales, which represented a nice step-up from third quarter levels.

Our adjusted EBITDA approximated $188 million in the fourth quarter, and our adjusted EBITDA margin measured 21.9%, up approximately 10 basis points compared to the prior year period. We managed SG&A spending well, which offset unfavorable mix and lower production output. Our adjusted earnings per share was $0.38, an increase of approximately 7% year-over-year. Higher operating income contributed the year-over-year growth, partially offset by other items.

On Slide 7, we'll cover our segment highlights. In Power Transmission segment, we generated revenues of $537 million in the quarter and flat core growth versus prior year period. Our Personal Mobility business grew 28% year-over-year, and our Off-Highway business expanded low single digits. At the channel level, our automotive OEM business decreased but our industrial OEM sales grew solid double digits year-over-year. In the Fluid Power segment, our sales were $320 million and approximated 1% core growth.

Our Off-Highway markets grew low double digits, partially offset by declines in on-highway, diversified industrial and energy. At the channel level, industrial aftermarket sales declined mid-single digits, partially offset by a mid-single-digit increase in industrial OEM sales. Our automotive aftermarket increased high single digits compared to prior year period. I'll now pass the call over to Brooks for further comments on our results.

Thank you, Ivo. I'll begin on Slide 8 and discuss our core sales performance by region. In North America, core sales decreased about 2.5% in Q4 compared to the prior year period. At the channel level, aftermarket sales decreased low single digits and OEM sales were about flat. The aftermarket decrease was influenced by distributor inventory management that Ivo referenced earlier in his remarks as well as a tough automotive aftermarket comparison as we started loading new product for the North American distribution partner we secured in 2024 during the fourth quarter of last year.

We saw a nice increase in OEM industrial sales which were up approximately 4%, offset by lower automotive OEM sales. At the end market level, core sales and diversified industrial commercial on-highway and automotive fell versus the year ago period, while off-highway and personal mobility increased. In EMEA, core sales grew 5.8% in Q4 compared to the prior year period. Industrial markets are beginning to recover with construction, agriculture and personal mobility, all producing double-digit growth.

Commercial on-highway and Diversified Industrial also posted solid growth while automotive OEM was a headwind. At the channel level, OEM sales increased double digits, while aftermarket sales expanded low single digits. China core sales grew about 3.5% year-over-year. Industrial markets were mixed, but we experienced strong growth in commercial, on-highway, personal mobility and construction. Automotive OEM declined. East Asia and India realized a slight decrease in core sales versus last year.

Declines in diversified industrial and automotive more than offset growth in agriculture and commercial on highway. In South America, our core sales in Q4 grew slightly compared to prior year period, fueled by commercial on-highway and agriculture partially offset by automotive OEM, energy and construction.

Slide 9 shows the components of our year-over-year improvement in adjusted earnings per share. Operating performance contributed $0.03 of benefit and foreign exchange related to favorable currency translation represented $0.01 of improvement. Other items combined to be approximately a $0.02 offset.

Slide 10 provides an overview of our free cash flow and balance sheet position. Our free cash flow conversion was 238% of adjusted net income for the fourth quarter, which brought our full year 2025 free cash flow conversion to 92%. Of note, our 2025 free cash flow conversion included over $30 million of cash restructuring related to footprint optimization initiatives and other restructuring, which is above average spending for our business.

Our net leverage ratio declined to 1.85x at the end of the year which was over a 0.3 turns improvement relative to year-end 2024. We finished 2025 with a record low net leverage ratio and over $800 million of cash on the balance sheet. In December, S&P upgraded our credit rating to BB from BB- with a stable outlook.

Further, we believe the strength of our business is return on invested capital which ended the year at 23.4%. We continue to make investments in capital projects and enterprise initiatives that we believe will deliver enhanced efficiencies and improve profitability over the medium to long term.

Turning to Slide 11. We outline our initial 2026 guidance. We believe the majority of our end markets should grow in 2026 and Ivo will address this in more detail in a few minutes. As such, we estimate our core sales to grow in a range of 1% to 4% versus the prior year period. We forecast our adjusted EBITDA to be in the range of $775 million to $835 million. At the midpoint, we estimate our adjusted EBITDA margin rate to be up slightly year-over-year.

Please recall, we are incurring costs related to our ERP transition in Europe as well as our footprint optimization initiatives that we anticipate will dampen our adjusted EBITDA margin performance during the first half of the year. Collectively, we estimate the cost will represent about a 100 basis points drag year-over-year on our adjusted EBITDA margin during the first half of 2026, all else equal.

We anticipate these costs to run off by the middle of the year and expect benefits from our footprint optimization initiatives to contribute approximately $10 million of adjusted EBITDA in the second half of the year. We have initiated an adjusted earnings per share range of $1.52 per share to $1.68 per share which represents 5% growth at the midpoint. Our adjusted earnings per share guidance assumes no incremental share repurchases. At the end of the year, we had approximately $194 million outstanding under our current share repurchase authorization.

We have budgeted $120 million of capital expenditures for 2026. We project 90%-plus free cash flow conversion, assuming above average spending on CapEx and cash restructuring. For the first quarter, we are guiding to a range of $845 million to $875 million in revenue, which factors a core sales decline of 2% to 2.5% year-over-year at the midpoint. Our core sales guidance incorporates a 500 basis points core growth headwind related to this quarter having 2 fewer business days relative to the prior year period as well as estimated efficiencies related to our ERP transition.

We anticipate recovering most of the sales impacted during the balance of the year. For the first quarter, we estimate an adjusted EBITDA margin decrease of 140 basis points at the midpoint, again, negatively impacted by the aforementioned headwinds of working days and the ERP transition.

On Slide 12, we outlined the key drivers of our anticipated year-over-year adjusted earnings per share growth for 2026. Moving from left to right, we estimate contribution from operating performance will contribute about $0.03 per share. Importantly, this estimate is net of anticipated cost associated with our ERP implementation in Europe and footprint optimization activities. The weaker U.S. dollar is anticipated to yield favorable translation benefit of approximately $0.04 per share. Tax interest share count and other items net to $0.01 of adjusted earnings per share contribution. I will now turn the call back to Ivo.

Thank you, Brooks. On Slide 13, we show our assumptions for our end markets for 2026. Relative to 2025, we believe most of our end markets will be flat to up in 2026. Specifically, we estimate end markets that represent almost 80% of our sales should grow this year, including improved demand dynamics for our industrial Off-Highway and diversified industrial end markets. We believe these end markets have troughed and anticipate some recovery in 2026.

Furthermore, we expect stable demand for automotive OEM and industrial On-Highway in 2026. We continue to expect aftermarket and personal mobility market demand to remain constructive in 2026. In general, we believe our business will have some market tailwinds this year. As a reminder, this would be the first time in about 3 years that our business would be experiencing end market support.

With that, let me provide some closing thoughts on Slide 14. First, 2025 was a record year for our company. We generated record annual adjusted EBITDA dollars and adjusted earnings per share and reduced our net leverage ratio to under 2x. We delivered these results in what we believe was trapping demand environment for some of our key end markets. Second, with more demand stability, we are optimistic about 2026 top line potential, while our book-to-bill was solidly above 1x exiting 2025, and we are realizing improved order rates to start the year. We remain pragmatic this early in the year.

That said, while we are incrementally optimistic about our near-term growth prospects, we do not anticipate a short recovery in 2026. Third, we are highly focused on our key strategic revenue initiatives to generate market outgrowth. We continue to invest resources in personal mobility and data center markets, in which we expect to increase our market share through the end of the decade. We anticipate both verticals to grow at significantly higher rates than our fleet average.

While we are intent on driving attractive core growth, our balance sheet is well positioned to support potential inorganic growth opportunities that may become available. Before taking your questions, I want to thank all of our global Gates associates for their effort and commitment supporting our customers' needs and helping make 2025 a successful year for Gates. With that, I will now turn the call back over to the operator for Q&A.

[Operator Instructions] And your first question comes from the line of Andy Kaplowitz with Citigroup.

Can we delve into your commentary a little more regarding that book-to-bill over 1 in Q4 and January orders compare in that trend. As you know, we've kind of seen green shoots before and they haven't fully developed. So maybe you can give us a little more color on what's driving your order acceleration. Would you call it more broad-based? And have you seen your aftermarket distributors stock destocking, which you said was happening in Q4 yet?

Yes, Andy, thank you. Look, we've actually seen probably the most positive order trend exiting 2025 in maybe 2 or 3 years. And in general, when I kind of look. As you know, I have a reasonably good tenure here, as I look to my past 2 cycles, I think, that we have seen here. You have to see recovery in industrial OE segment that in general leads the other end markets, the other applications where we participate. And so this was the first time that we have seen in a while that we have seen a reasonably nice recovery, a very strong recovery in order trends in the industrial OE. So that was a very positive sign for us. I would say that both I think that the end markets in the off-highway are stabilizing, and we are clearly seeing a nice outperformance over those markets. In Q4, we did see kind of a choppiness in the -- particularly in the industrial distribution. I think that folks were kind of exiting the year trying to manage their inventories. Nothing that I would say was dis concerning to me. But I would anticipate a little better recovery as we progress through Q1 to Q2 in the industrial aftermarket, in particular, in January, we've kind of seen a continuation of that trend of what we have seen exiting 2025. So as I said in the prepared remarks, we are cautiously optimistic to your point, Andy, I would like to see PMI few months north of 50. As you said, we have seen that head fake both years in '24 and in '25. So hopefully, we will be seeing the validation of that PMI activity, and we can confirm ultimately over the next couple of months that's occurring, and I think that would bode really well, particularly for the latter part of the year as we progress through the year. So cautiously optimistic would say that based on what we have seen so far, should indicate should bode well for 2026.

That's helpful. And I just want to go back to Q4 for a minute. Your adjusted EBITDA margin was down a little bit sequentially on flattish sales. I know you mentioned mix. Maybe it was just aftermarket destock, was there anything else that sort of hits you there, difficult price cost, any sort of dynamics there because I think you mentioned mix too for Q4.

Yes. I would say the other thing is we managed our output as we exited the year, and we were really focused on making sure that we had our working capital positions in a good position as we exited the year. So we trimmed our production output. That resulted in better than forecasted cash flow as we ended up over 90%, a little bit over 2% and our best leverage metrics ever. And also, we bought back $105 million worth of stock in Q4. So it was really around managing our internal output and setting ourselves up to make sure that we had a good, strong start to 2026.

Your next question comes from the line of Julian Mitchell with Barclays.

Maybe -- just wanted to try and understand sort of the phasing of the year a little bit more clearly. So first quarter, I think, is something like the EBITDA for the year, and you've obviously got a lot of the ERP and footprint headwinds loaded into that. Trying to understand kind of how you're thinking about the second quarter, could we expect organic growth in that quarter? Is that what's embedded -- and maybe I missed it, but any sense of kind of the first half of the year, how much of EBITDA that should be, I think, often, it's about 50%, but realized this year has some first half dynamics going on?

Yes, Julie. So we -- so if you think about it in halves, we have about 100 bps net headwind kind of in the first half of the year relative to relative to the ERP implementation and the footprint optimization. So you kind of think about it in pieces, right? We kind of have the 50 bps -- 150 bps endpoint in Q1. So that would lead you to believe kind of be 50 bps midpoint in Q2. I would say that once we given that our midpoint is 250 bps of core growth, you should expect organic core growth each quarter as we move through the year. And as we looked at our seasonalization, it's pretty balanced. It's pretty balanced for the year. So I would expect we're going to be less. I mean, if you take that 100 bps and apply it, absent that, you're going to have the -- you have 2 less shipping days in the first half versus the second half, and so that's going to affect it a little bit. But absent the 100 bps of headwind pretty normalized split between the front and the back.

Okay. Got it. So the first half is maybe like a high 40% share of the year's EBITDA or something.

That's right.

Yes. Perfect. And then just a follow-up. Eva, you mentioned data center exposure a couple of times. Understandably, I think sales you said were up 4x last year. So maybe just flesh out kind of what is the dollar kind of revenue base in your data center exposure, kind of what are the products you're doing the best in? And do you have any sense of kind of backlog there or growth expectations in revenue for the year ahead in data center, please?

Yes. Look, we anticipate that the business in '26 again, is going to grow multiples of 2025. That being said, we do see obviously a very nice adoption of the liquid cooling, and we anticipate that's going to be there for an extended period of time. Our products Again, to remind everybody, our hoses, couplings, fittings and water pumps. I think that we see a nice penetration across all 3 of these product lines that we offer. And we've kind of flushed that $100 million to $200 million target there for '28. And I think that, as I've indicated last year, we should see nice progression through '26 into '27 to ultimately reach that the target by '28. So everything that I see today, Julian gives me a reasonably good level of confidence that we are getting a fair share. I think that I've indicated that if I just think about orders, as an example, in Q4, sequentially, our orders grew 350%. And year-on-year, our orders grew nearly 700%. So we are seeing, a, the pipeline being built up nicely. We are seeing good conversion. And yes, it was from a reasonably small base last year of the year prior to that as well, but that's ramping up nicely and again, it's not going to be 2 or 3 points of revenue as a percent of our total revenue pie that's going to take a couple more years maybe through 2028. But we feel pretty good about where we sit, and we see a nice ramp up. But look, we also have a very terrific presence in all of our businesses. And so I think that that's just going to be a nice contribution to above-market growth rate.

Your next question comes from the line of Tomas Daniel with JPMorgan Chase.

I'd like to ask about personal mobilities. It was up 28% in Q4? And how sustainable is this into 2026? And could you give us more color of key demand product and supply drivers as well as the cost of parities from the customer perspective?

Yes. Thank you for your question, [indiscernible]. That business has been doing outstanding performing in an outstanding fashion for us in 2025. What we have indicated is that we anticipate that business is going to continue to grow high 20s, kind of a 30% compound annually through 2028 and certainly have an incredibly high degree of confidence that we will continue to do that. We see a continuation of very strong trends. Our pipeline has been very robust. We've been converting that pipeline as we demonstrate through our invoiced revenue and now it's becoming again a meaningful part of our revenue contribution. So we have a high degree of confidence that, that business will continue to grow. And as you're driving adoption of electrified mobility to bill mobility, that is extremely well suited for changing that technology from chain to pallet. So we feel that, that's a great business for a very, very long time. for a very long horizon of future visibility.

And follow up on the net leverage and an pipelines and strategies, please. So if you could talk about the net leverage perspective to 2026. And any opportunities for inorganic growth, which is a mandate for filing the pace sort of bolt-on acquisitions? Or are you thinking about more platform types of acquisitions, please?

Yes. Look, I would remind everybody that on this metric, we are quite nicely ahead of what we've committed to the shareholders in terms of deleveraging. I'll also say that the business, the cash generation profile and the profitability of this business is so so terrific that we, in a natural way, delever about 0.5 turn a year. So that can give you some perspective of what the range of leverage could be as we exit 2026. That being said, coming back to M&A. Look, we don't anticipate that we would be doing any type of transformational M&A. We do have a significantly increased appetite to execute logical and nontransformational M&A that may be businesses that could be nice bolt-ons and there are things out there that we are looking at today. And there could be businesses that could be of more scale while not non-transformational, they could be nicely additive to our portfolio. So we're looking at full spectrum will be very pragmatic. We also believe that our stock is quite inexpensive. So we will be very carefully measuring the returns where we can generate the best value creation for our shareholders, and we'll be very, very committed to deploy our capital in a way that rewards our shareholders.

Your next question comes from the line of Deane Dray with RBC Capital Markets.

Thank you. Good morning, everyone. Can we just circle back on the footprint optimization. I know you've given us your assumptions. But could you remind us on either the number of facilities or what percent of your manufacturing square footage these actions represent?

Yes. Well, from a facilities perspective, including manufacturing and distribution, it's kind of in the single digits kind of number. I mean we're still working through that. And from a manufacturing footprint perspective, I don't have that right in front of me, so I have to go back and check on that. I will tell you, we feel better as we look at the different cost actions we're taking relative to the footprint optimization and the restructuring and getting our cost aligned, we feel better about where we are in terms of the cost out. And if anything, remember, we said we were going to have $10 million of year-over-year savings in the back half of '26 and then another $10 million in the first half of '27. Probably feel better about the upside related to that as we look at the cost actions we're taking and kind of how things are unfolding. So I would say when you look at our target probably upside and sooner rather than later in terms of achieving that target. And we'll be in a better position kind of midway through '26, I think, to talk about that in more detail. in terms of where we are and what we're doing as opposed to where we are right now because there's still a lot of things that we have to announce and things we have to talk to different people about. So -- but net-net, we feel good about where we are right now in terms of the whole savings that we communicated to you all.

All right. That's helpful. I appreciate that. And then as a follow-up, can you -- Brooks, can you talk about what the upgraded S&P does for you? Is there an interest save that we might see? And then related to it, just a really good quarter on free cash flow conversion, but this is seasonally your strongest free cash flow quarter. Is there any opportunity to level out the free cash flow? I know there's some seasonal aspects, but you just remind us because instead of having the hockey stick in 4Q?

Yes. So on the S&P look, I think on the one hand, you always hope that there is some upside when you get upgraded. On the other hand, when you look at the way our debt trades and you look at how people pilot into our debt when we either issue new term loans or we repriced or anything like that. I wonder if we don't trade through a lot of that, and we end up getting really good interest rates and really good participation. So I don't know that we would get -- I don't know what the actual impact of that would be. But what we would expect, if anything, there would be some upside to what's already really good trading in terms of our debt. On the second part of your question, part of the issue is because we're seasonal in terms of usually our sales in the first half. A lot of the working capital kind of comes through in the second half. And that's why you see that hockey stick on the working capital. We get more sales in the first half and more collections and things like that in the second half. So we're always trying to get more seasonal in terms of -- or we're trying to get more normalized in terms of our working capital. But I'm not sure how much upside there is to that, to be honest with you.

Deane, let me maybe chat a couple of more points in here, right? So vis-a-vis SAP implementation [indiscernible]

Your next question comes from the line of Jeff Hammond with KeyBanc.

Just on this ERP noise, I think third quarter, you said $30 million to $35 million one, is that unchanged? And then just is that inclusive of the revenue disruption? Or is that additive? And how much revenue disruption do you think you have in the first half all in?

Yes. Well, I think most of the revenue disruption is going to be in Q1. And then we kind of get it back as we go through the balance of the year. The $30 million to $35 million is really kind of -- is the all-in cost net of -- without the revenue in there, right? That's just the cost headwind. And that's like 100 bps of that, that's flowing through adjusted EBITDA. And so then -- so if you think of 100 bps in the first half, and that also includes footprint optimization. So it's not all in the first half, that would be kind of approximately $20 million. And then there's about $10 million or $15 million that's restructuring and add back that's in the first half as well. So that's where that $30 million to $35 million number comes back. About $20 million of it kind of flowing through the adjusted EBITDA number in terms of higher SG&A inefficiencies, stuff that you can't necessarily add back and then the $10 million to $15 million that you could add back. I would say also, since we're talking about that, our launch has gone better than planned, I would say. We're pretty conservative and pragmatic in terms of how we look at things. But our plans are made what they need to make we're working out the parameters in terms of the front to back and we're getting the right signal sent to the plants to produce stuff for the distribution dinners. I would say right now, what we're really working on is tweaking some of the kind of external stuff when you think about advanced ship notices to customers and different things like that. We're just tweaking that a little bit to get them aligned with kind of the standard SAP functionality. And so we're really pleased with the launch. We started up. We're making stuff. We're shipping stuff. And we feel really good about where we are with the SAP implementation right now.

Okay. Great. I think auto aftermarket has been a pretty good trend for you guys. Just what are you seeing underlying there? What are -- where do kind of channel inventory stand? And then -- when do you expect that we lap this kind of new customer comp dynamic?

Yes. So the markets are quite stable. We're reasonably good about that. The cars are getting older. People are driving the ongoing economy is reasonably okay. So we feel very constructive about that market kind of being what it traditionally is outside of us acquiring a large customer like we did last year. So I think more green shoots than not. In terms of lapping, we should be so that tough comp by the end of Q1. So basically from Q2 onwards, it should be more normalized. But let me remind you, I mean, we did see growth in aftermarket in Q4 as well despite the fact that we had a reasonably tough comp.

Your next question comes from the line of Steve Volkmann with Jefferies.

[Audio Gap]

Yes. Thank you for the question. It's very thoughtful, Steve. Look, let me kind of start with the journey a little bit, right? So if I look back and let's just kind of presume that we have troughed and we are exiting the down cycle here I certainly believe that that's the case. Again, I'm not going to forecast when it's going to completely rebound, but let's just presume that we have troughed and we are exiting the down cycle. We're exiting the down cycle with over 300 basis points of improved profitability versus the prior down cycle. So we have materially improved the quality of the company. We also believe that we have projects in play that will give us an ability to continue to drive profitability to the midterm target. And frankly, when I look at what we have been able to achieve in a very negative end market backdrop. We are nicely ahead what we've committed to the shareholders despite the fact that the end markets have been very, very negative for the last 3 years. So that gives me a high degree of confidence that we have a nice way to go beyond what we have committed in terms of profitability with the improvements that we continue to do structurally to this business. Now put it aside, we have nicely improved our balance sheet. We're generating a ton of free cash flow that gives us kind of optionality. I think that when you listen to some of the things that Brooks said about how well we have executed on the ERP implementation. I think that when we have a decent planning place, we execute well, and we managed to execute well despite many different impediments that are unplanned that we have to absorb. So I think that we now have an optionality to go in and start adding nice thesis to our portfolio that we have within gates and drive synergies with potential M&A transactions that would give us the opportunity to get to our company fleet averages. So in a nutshell, Steve, I think that it's a little bit all of the above. I think that we can continue to drive profitability forward on a structural basis. I believe that the incremental capacity that our balance sheet offers us now and we were very patient to get to this point in time gives us the opportunity to add different assets in, improve those assets and start compounding earnings on a forward-going basis.

Your next question comes from the line of Mike Halloran with Baird.

Just a quick follow-up to the first half of that last question there. So how do you think about what your incremental margins look like once you get through the ERP consolidation and you hit a more normal run rate for growth?

Well, so -- well, it's -- I'm struggling to figure out what normal is. So in the -- after we get to the ERP implementation, we ought to be -- as we're working through the footprint optimization and restructuring stuff, we ought to be at an enhanced level of drop-through 45% plus over about a 12-month period, okay? Now through the cycle, what we said is we think that the drop-through should be more like 35%. And the reason being is you're definitely going to mix toward more OEM-type business through the cycle as you kind of go to the upside or as you go to kind of the core growth increase. And that's why it's a little bit less than you might otherwise think, right you might think more like 40%. But you're definitely going to mix to the OEM side, which is going to be a little bit lower from a gross margin perspective. And it's got some better cash flow characteristics, but from a margin perspective, that's where it probably is. And then as you move through the cycle, that can flex a little bit up and down. But I would say second half of '26 through the first half of '27, you're going to be 45% plus. And then after that, a more normalized basis, 35% on the low end, maybe moving up to 40%, depending on what the mix is.

That's great. Super helpful. And then just a question on how you're thinking about the year here. If you adjust for the first quarter, the 500 basis points between those 2 items, are you assuming relatively normal seasonality if you adjust for those factors, it doesn't sound like you're embedding some sort of improvement of scale in the revenue build through the year. So maybe just talk about what those assumptions look like.

Yes. That's the right way to think about it, Mike, we we've quantified the headwinds associated with fewer shipping days in Q1 and some of the efficiency losses due to the ERP implementation. Again, we feel better about the ERP implementation, but you still need to improve efficiency and get everybody comfortable operating in new structure. Once that normalizes from Q3 through Q4, it's more normalized, you will gain back 1 calendar day in Q4 versus kind of the loss of 2 days in Q1. So more or less, normal calendar.

Your next question comes from the line of Jerry Revich with Wells Fargo.

Wanted to ask, just given the improved demand environment, if we do see sales move towards above the high end of your guided range. How would you counsel us to think about operating leverage in that scenario?

I think that Brooks has highlighted that, Jerry, about 45% plus incremental leverage on on incremental yes, in the back half on the incremental revenue.

Yes. And that's really kind of the footprint optimization and restructuring flowing through, on top of the kind of 35% normal leverage. But if we were to see things move more towards the high end it's going to be very OEM based. It's going to be pickup in the industrial OEM side of things where you start to see those things start to rebound, like I said, a little bit lower margin profile there. But still pretty nice.

Got it. that's constructive. And then in terms of where lead times stand today, you've mentioned the year-over-year orders. How far out are we from a lead time standpoint, how does that compare versus other periods of time where demand was equally tight. Can you just give us a perspective? And can you just talk about for the industrial replacement side, it feels like we're seeing a really strong desire to restock across end markets there. Is that part of the driver of the order acceleration that you step through any additional color there would be helpful.

Yes. Look, I think I've indicated that the significant inversion in order uptake that we have seen was predominantly on the OE side, presently on the industrial OE side. So we are seeing that -- our lead times are still normal. We haven't seen any creep up at this point in time. Obviously, we are in a very good position vis-a-vis our capacity. We have been improving the business in the last 3 years. spending capital to ensure that we can capitalize on the up cycle when it comes. I would say that we need to see the industrial distributors who want to restock. But I would also say that in general, they are quite late to the party. And my anticipation would be we should start seeing that more maybe in Q2 of this year. history serves as a guide. So we are well positioned. Again, we have trimmed our working capital exiting Q4. We've positioned ourselves for a maximum benefit as the recoveries take hold.

Your next question comes from the line of Nigel Coe with Wolfe Research.

So just maybe just kind of piggybacking off a previous question. You laid out your end market assumptions, Ivo. And I'm just wondering, when we look at the industrial off-highway on-highway, are you seeing any difference between OE and aftermarket and your plan?

So right now, we are seeing a nice inversion in the OE side. Again, I would anticipate, Nigel, that we will start seeing improvements in the industrial aftermarket kind of into second quarter of this year. But it gives me a great deal of confidence. I would say that when you see that inversion, that's a very good sign, when you combine that with at least the very early indications on the PMI, while I'm not certainly ready to call it yet because we did have a couple of [indiscernible] last couple of years. This is this feels better than in '24 and '25. And so we start getting a couple more data points on the PMIs. I'm saying things should work out pretty nicely for everybody in the industrial complex. It's included.

I'm just curious if you're baking in any sort of mix headwinds for the year, but it doesn't sound like it is, but -- that would be helpful. And then on the pricing, I'm sorry if I missed this in your prepared remarks, but what are your big import price contribution for the year? And then expanding out to the raw material basket, Unlike a lot of the companies we cover, are facing a whole lot of steel and base metal inflation. In fact, some of your raw materials should be a little bit [indiscernible] flat. So I'm just curious how you're viewing the price cost equation for the year.

So yes, I think, look, we got some carryover tariff pricing that's still in I mean but pricing is going to be relatively low, kind of 100 to 150 bps for the year. One thing that we look at, you look at tariffs, you look at utilities, you look at material. But also, you've heard me talk about labor inflation as well, right? And especially around the world where you see kind of outside labor inflation. So we take all those into account. But right now, things are fairly stable. And so we feel like we've got things covered from a pricing perspective. But it's it's relatively normalized, maybe a little bit less than normal June given the state of things right now.

Nigel, maybe I'll just pin something in here, too. We've done quite a bit of work on raw material improvements over the last couple of years that has nicely supported our improvement -- structural improvement in the business, that's not going to stop. So we're going to continue to drive that and continue to position ourselves into a position of strength and better profitability as we move into '26 and '27.

Our next question comes from the line of David Raso with Evercore ISI.

Yes. I was just curious, currency in the guide. I'm just trying to figure out what the overall margin guidance with the EBITDA number. Are you including about 2% of currency. So we're looking at 4.5% total sales growth a little less than that, David. It's like 1.5 points or thereabouts. I mean the first half.

Yes, it's very weighted in the first half. And in the second half, it kind of normalizes out. So let me kind of find my currency stuff here. So from a -- if you think about it from a translation perspective, it's a little bit kind of 125 bps for the year, but weighted much more in the first half, so 125 bps in terms of kind of growth.

Okay. Full year. Okay. Following up on the comment on pricing, 100 to 150 bps, I mean, it's implying volume up only 1%. And again, I appreciate the early year being conservative on extrapolating trends. But I mean, if personal mobility is up 30%, that's 1% growth for the entire company. So I'm just trying to understand, is it just -- we're just being cautious in the beginning or is there some other area of decline? Because obviously, I'm basing a little bit on Slide 13. You only have one market that's down, right, energy and resources. And I'm just trying to just understand the level of conservatism in the top line?

Yes. David, I think that you have friended correctly. I will restate what I said earlier, right? We have seen a couple of [indiscernible] in '24 and '25. While I do feel we as a management team feel better when you look backwards into how things progress when you do have a recovery, the signs are very positive, but we are very pragmatic in our outlook for the start of the year. We have only seen 1 PMI print that has given us, I think, all of us a nice degree of boosting confidence that things are going to improve. We are seeing that fall through to our industrial orders. Some of these markets are reasonably well behaved. Personal Mobility is doing really well, you stated it correctly. So we are more constructive on these end markets, but there are some markets that their question marks, right, what will happen [indiscernible] I mean I think that that's probably going to be somewhat of a overall, when you take a look at the consumer, the pricing, the timing of recovery. While we are -- again, we are more positive on those end markets, it will not happen on January 15, right? It will not happen on February 2. Some of these markets are going to be progressing through rolling recovery. And so while we are positive, we are being pragmatic and I would much rather let you know in the next earnings call or the one thereafter, that we are seeing terrific improvement and great for through. And I think everybody is going to be much happier about that. I will remind we have one less shipping day in '26d than we did in '25.

That concludes our question-and-answer session. I will turn it back over to Rich Kwas for closing comments.

Thanks, everyone. Thanks, everyone, for your interest in Gates. If you have any follow-up questions, feel free to touch space with me. Have a great day and rest of the week.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.

All right. Good afternoon, everyone. Look to the fireside chat with Gates Corporation here. I'm Clay Williams from Goldman Sachs. And with us from Gates I have Brooks Mallard, Executive Vice President and Chief Financial Officer; and Rich Kwas, Vice President of Investor Relations and Strategy. Brooks, Rich, thanks for joining us today.

Absolutely.

Yes. So to get it started, dig in on the 2026 targets. On last quarter's call, you outlined how you expect to arrive at your midterm adjusted EBITDA margin target. Could you refresh us on your plan to get within the target adjusted EBITDA margin range and how you've been able to expand margins in the negative volume environment we've been in.

Yes. So in our Capital Markets Day back in Q1 of '24, we're coming off a challenged 2023, we were right at under 21% EBITDA margins, and we've just come through kind of the post-COVID challenges around material availability and things like that. And we put together a walk that included a path for us to get to 24.5% at midpoint EBITDA margins. And about 100 to 150 of that was coming from volume. Market recovery in a CAGR of about 3% to 5% per year. And so what's happened over the course of the past couple of years is actually we've seen about 500 to 600 points of volume headwind related to some of the end markets like agriculture and oil and gas and things that have been struggling a little bit.

But we've still been able to expand margins in our current midpoint for 2025 is 22.5% EBITDA. So that's 150-plus basis points of improvement. And most of the improvement that we've gotten so far has really been through our material cost out program. And so as we came through kind of the post-COVID material inflation issues, we put together a program to really focus on taking material cost out because that's really a volume-agnostic kind of endeavor. And that's driven most of our improvement and driven us to the higher margins and where we are today.

As we look forward, we still have $40 million of restructuring about half of which is going to start hitting in the back half of 2026, right, which is going to put us at about 23.5% EBITDA margins for the back half of 2026. And then we still have another $20 million of restructuring cost out, which is currently in the plans, but we haven't announced the timing of that yet. So we feel like, again, kind of volume stays the same. We're going to get some uplift from mobility, which is growing nicely again. We expect that to grow 30% CAGR over the medium term, give a little bit of data center growth. We feel like the 24-plus-percent margin targets are well within reach over the course of the next 12 to 18 months. And so we would say we -- while we've -- while we haven't achieved some of the volume-related margin improvements, we've more than offset that.

And if you look at what we said at the Capital Markets Day, in a volume-agnostic environment, we needed to get through the end of 2026 and see the full benefit of all of our restructuring to get to that 24%. So we felt like we're right where we're supposed to be. In fact, probably overcome some pretty significant margin headwinds in the meantime.

Super interesting. Maybe to dig in on some of those cost-out programs. I think over the next couple of quarters, you're executing an ERP conversion and some footprint optimization in Europe. Can you just refresh us on the process? I think you guys did something similar here in North America. Just curious, the company's experience going through this.

Right. The footprint optimization is mostly North America. That's the continuation of the program in North America. And really, the interesting thing about that is when we initially started our footprint optimization program that was really built more around labor availability because what we have found was, it was difficult for us in some of our locations to flex labor through the cycle. So it's difficult to flex labor up, costly to flex labor down based on the volume through the cycle. And so we were looking to optimize our footprint where there was more labor availability.

At the same time, as we did this, we were looking to recapitalize on some of our assets, putting some more efficient capacity and then also take some cost down, both through fixed cost reduction and through lower cost manufacturing primarily with labor. And so we've been working on that here for the past 18 to 24 months. We kind of had to take a pause when some of the tariff and global trade policy uncertainty was going on to make sure that we had all of our bases covered from a supply chain and from a manufacturing perspective.

But then we kicked it back in after we got some certainty there. And we expect that to, like I said, contributed about $5 million a quarter year-over-year, each quarter from the back half of '26 through the first half of '27.

On the ERP we've been slowly upgrading our systems capability in Asia. We implemented the finance module of SAP in Europe about 3 years ago. So we've been working on that for quite some time. And then we've been working on this larger implementation for Europe to replace an antiquated system that's kind of out of service. And then that's going to hit in the first half of 2026, primarily in Q1. So we've got a -- I've been through a lot of implementations myself. I've done implementations in my prior roles. Our CEO has got implementations. We have a strong group of individuals that have all been through this before. We've done ERP implementations before they just weren't of the size -- and they've also done a significant amount of testing and day-in-the life testing and different things like that.

So we feel confident that we're going to be able to launch this in Q1 with a minimum of impact. Having said that, we wanted to make sure that all of our investors and everyone externally understood what we were doing, and we wanted to ring fence hey, we're going to make sure we take care of the customer. We're going to make sure we get this launch properly. I don't want to put some numbers out there in terms of onetime headwinds that we expect to see in the first half of 2026.

Great to hear. And then where does that put us on the time line, the targets in 2027, I think most of these will take through most of '26, some into '27, what's beyond the next stage for it.

Right. Well, the quicker we can get a little bit of help from the market, the better we're going to be from an EBITDA margin perspective. Like I said before, we expect to be to 23.5% in the back half -- and we still got $20 million of savings to go, with respect to our footprint optimization programs, stuff that we haven't announced yet. So depending on when that hits, we would expect some time in 2027 to get to the run rate of 24-plus-percent EBITDA. .

Speaking on margins regarding tariffs, you noted you'd be pricing dollar neutral versus margin neutral to cover tariff costs. How big of a headwind are tariffs as they stand now to that second half run rate of 23.5% in 2026?

Yes. So tariffs, most of tariffs, we offset with price. Some we did with operational improvements. It's about a 30 to 40 basis point headwind, which really started in Q4. We didn't really implement the pricing impacts until kind of later in Q3 because we didn't have certainty on exactly how much we needed to raise prices based on what tariffs were going to be in play. So you should expect kind of 30 to 40 basis points per quarter until we lap that in Q3 of 2026.

Well, having said that, we've got other things we're doing from a productivity perspective. We still think we're going to be able to get material cost out. That's going to be additive. If we get some help from volume, that's going to be additive. So there's some offsets to that 30 to 40 bps of profitability improvement. From a dollars perspective, we're hold. It's not going to impact us from an EBITDA dollars perspective. But from an EBITDA percentage perspective, 30 to 40 bps.

Yes. So turning to some of the growth opportunities, particularly data centers are really exciting. One, can you just talk a little bit about the data center opportunities besides the content opportunity at $100,000 per megawatt and a total global liquid cooling TAM is about $2 billion. You still have to dive into product, anything you guys can share with the growth of the TAM.

Yes, Clay. So as we look at our portfolio, we do hoses, hose assemblies and data center water pumps. And we're really focused on the liquid cooling opportunity. As many of you know, up to now, more or less, it's been primarily an air-cooled phenomenon, and this is transitioning quickly to liquid cool. And so we're in a good position to support the needs of our customers. And importantly, we're ubiquitous with regards to supplying customers. We're going everywhere from hyperscalers down to service contractors in terms of support of these various products to build out the liquid cooling system.

So as you mentioned, we have -- we've recently increased our total addressable market at $2-plus billion. We're a little bit kind of more in the range of $1.5 billion to $2 billion previously. So we've increased that. And as you mentioned, it's over $100,000 per megawatt, so is in terms of the content opportunity. So -- we've done a really nice job over the last year getting specified with the various constituencies, the customers, et cetera, in the market. And so we continue to build that out. Back in the second quarter, we talked about winning a hose assembly business with a hyperscaler. That is now -- what's interesting there is that was going to start here in the fourth quarter. Now it's been pushed into 2026 because of their cooling needs.

They need more extensive cooling needs. They need a bigger capability, bigger hose to support their needs. So they reevaluated what they need. And so that -- we're specified and we'll support that as we get into 2026. But we're broadening the product suite. We were at the super compute event a few weeks ago and some of you in the audience were there. And we continue to broaden out the hose and hose assembly capability. We just -- we've been introducing a new suite of couplings, quick disconnect, universal disconnect. So these are opportunities in terms of broadening out the product suite to support the needs of our customers.

And then the water pump, we already have the smallest footprint for a water pump. So as the flow needs for the customers, for the data centers to continue to increase, we're going to be in a position to support greater flow needs for that, and we're in the midst of working on a new water pump that will be even more powerful and provide more flow capacity than what we have on the market today. And so that will be coming here hopefully in the not-too-distant future.

So we feel really good about the position we're in and to level set everybody, this is a less than $10 million business for us right now. We're targeting $100 million to $200 million by 2028. So we expect that there'll be nice growth next year in 2026. But we do think the bulk of that will come in '27 and '28 in terms of getting to $100 million to $200 million target. So we're -- we feel really good.

And then a quick follow-up on some of those products. you talked about, one, how would you view the competitive landscape for these projects? Is there a lot of companies competing? Or are they pretty concentrated? And two, are these typically sold as a la carte to the provider or is it more part of like a bundled solution?

Well, I mean, on the last part, we can do both. So I think based on what the customer needs are, we can sell a solution set or we can sell components. So again, we're flexible on that front. We -- in a lot of cases, we're providing design services almost these customers to help figure out the best solution for them. So we think that's a competitive advantage for us.

From a competitive set, there's some different -- both the product lines are in terms of where we focus on between water pumps and hose assemblies. There's a slightly different set of customers. We think we're in a good position from being a global player with global scale, global manufacturing capacity to support the key customers in this space. I think to your point, there are regional players out there and smaller competitors. But ultimately, at the end of the day, given the mission-critical nature of this business, and the needs of the customers, we feel we're in a strong position to support.

And is there any replacement cycle opportunity with these products, I assume we get worn out being in the data centers given the run time that they have.

Yes. So we think there is. It's early, though, as we've discussed liquid cooling. It's just really getting underway in earnest here in terms of the build-out. So we think there's going to be a replacement piece -- we did not include that in our $2 billion plus TAM though. So that's upside potential as we look out the next few years in terms of expanding the addressable market.

And just the cadence of the growth maybe to help us, when in the data center construction life cycle are you guys typically being brought into from announcing the data center and...

Yes, we're towards the back end of things. So typically, we will get pulled in towards the end. You obviously have to be specified with the customer, et cetera. So you have to be on kind of think of it as like the menu, you have to be able to be selected. But we're getting pulled in. So as these projects get completed and closer to completion, we're going to get pulled out. .

And then I'll turn now to capital deployment. You guys have done bolt-on M&A opportunities. Is there possibilities here in this end market or other white spaces you guys see for potential acquisitions?

I'd say we're going to be close to home in terms of what we do. As you've seen recently, there's been some data center transactions out there pretty lofty multiples. I think we're going -- that's not an area that necessarily we're going to be overly focused on. I think, think of it as being close to home, mission-critical stuff with high replacement coverage and stuff that I think is -- would be additive, ideally additive to our top line that we can get some synergies out of. But we were very specific on the last quarter call about talking about bolt-ons. So we really intend this to be digestible and something that makes sense to our investor constituency.

And then beyond M&A, how do you view remaining capital allocation?

Yes. So look, the -- if you go back to 2020, we were 4.8x levered then, right? And at the end of Q3 we were 2x levered on our way to be being below 2, right? And so we're very close to our midterm target, which was 1.5 to 2, being below 2 being kind of the key metric there. And so over that time period, we paid down close to $675 million of debt, but we also bought back almost $625 million worth of stock at prices significantly less than they are today. And we helped facilitate Blackstone and their exit from the company to where it's fully traded and fully liquid on the New York Stock Exchange now.

And so -- so over the course of 5 years, we delevered over 0.5 turn a year, plus we bought back significant almost 15% of our outstanding stock. And so that's worked very well for the company. We're going to be able to add M&A on to that. But we feel -- we still feel our stock's undervalued. We just got an additional $300 million of buyback authorization from the Board. at the end of Q3. We plan on deploying that. We still want to continue to pay down some debt. That helps us preserve dry gun powder in case we do, do M&A, gives us some -- a little bit of cash benefit from our cash flow and earnings per share perspective.

But the key is we've been very -- I think, very pragmatic stewards of our capital both buying back stock is I think a great way to return capital to shareholders. We think there's some M&A out there that really makes sense from a strategic perspective that will be a great return to shareholders and then continuing to delever the business and lock in some of the cash that we generate and lowering our leverage and lowering our overall debt is something we want to continue to do as well. So all 3 of those actions, we think will continue to be a very nice return of capital to our shareholders.

Yes. Got you. So I want to turn to some of the end markets. Volumes like you said, have been weak. PMI continues to be weak. What gives you some of the optimism that at least may be approaching flat to potential growth in 2026? And then conversely, where do we still see even more continued signs of weakness?

Yes. So let me start on one side of the business, and I'll let him finish on the other side since that's a fairly long question. We participate in a lot of end markets. From an automotive perspective, the automotive replacement business, when we first went public back in 2018, we went through the first trade war, then we went through COVID, then we went through kind of all the material shortages, the Russia-Ukraine war, which caused some material shortages around petroleum-based products and things like that. And so there was some stocking, some destocking, different things in the automotive replacement business. And a business that historically has not been very cyclical was cyclical for 3 or 4 years.

Over the past couple of years, as things -- as the operating environment has evened out. And even in the face of some of the global trade policy uncertainty that we saw in 2025, the business has started to act as it has historically. So it's a consumer cyclical kind of business, you're going to be able to get price every year. We think we've got opportunity to grow share both in our mature markets like North America and EMEA, and we think we've got opportunity to grow in emerging markets like we have in China so we can continue to grow in emerging markets like Brazil and India and things like that. And that's over 35% of our business, and we think that we ought to be able to grow that over the long term kind of in that low to mid-single digits, right?

And so then the flip side of that is automotive OEM, right, where we've continued to be selective in how we participate, balanced in our approach in terms of going after internal combustion, kind of continuation programs versus new EV programs. But we're going to continue to be very selective in how we participate, kind of deemphasize the automotive OEM business.

And then lastly, kind of similar, at least in terms of being mobile, our mobility business, right? Our mobility business started off growing very significantly went through kind of -- has gone through an inventory balancing both at the retailer and at the manufacturer over the past 6 quarters. And now we've started growing again kind of how we thought we would, which is kind of this 30% CAGR over the midterm, right? And we want to grow that business to, what would you say, $300 million, $400 million...

$300 million.

$300 million business over the course of the next 2 to 3 years. And we've got the confidence that we're going to be able to do that. We've said that we're going to grow it at a 30% CAGR over the midterm. We're winning programs. The programs are coming through. You're seeing it in our growth rates. I think Europe grew 75% in Q3, which is our biggest market. And so we've got confidence that when you look at that mobility business, that that's going to add 100% -- 100 bps of core growth to the overall enterprise, right, over the midterm. And so you get that, you get your replacement business and that in that low single-digit growth rate as well. And you've got a nice base of core growth that you could build off of if you can get some help from the industrial end markets.

I'm going to let Rich cover that.

Yes. And so we outlined a few weeks ago on a slide kind of initial views on 2026. And I'd say, if you were to look at the markets where there's been some various levels of pressure. The ones where we're more optimistic on flipping to positive next year, that diversified industrial end market, which is about 20% of our sales and then the construction end markets, which we saw growth on a year-over-year basis in the third quarter. And so as we get into '26, we feel more comp we're getting levels -- higher levels of confidence that we're going to see growth in construction. And so that's part of our industrial off-road, which is in total about 20% and construction within that, it's a little more than half of that. So those 2 markets, diversified industrial and construction are a pretty meaningful percentage of our end market base. And so we think that those flip to positive.

We think there's still some struggles in certain industrial markets. For example, oil and gas, Brooks has mentioned, is kind of with $60 oil or less. Still going to be a struggle. We think ag is going to be -- still going to be some pressure into 2026 at least into the first half. We think there's going to be some level of stability as we get through the balance of the year, particularly in North America, but still going to be a bit of a struggle. And I think most of you saw kind of how John Deere guided for large ag for 2026 a week or so ago. So still some pressure points there.

I'd say commercial truck, which is high single digits as a percentage of sales, there's some inventory destock. The order rates are still under pressure here, as you saw from yesterday in North America. But you do see, I think that inventory will start to get rightsized as we go through the first half. And we think that with -- it looks like the emission standards for 2027 look like they're going to hold in. So there's likely to be some level of pre-buy that starts to emerge in 2026 in North America. And also, I just also mentioned that's not entirely -- that exposure is not entirely in North America. We have a good exposure in the European market there as well. So I think that covers -- I don't know if I'm missing anything else.

I got a couple of quick follow-ups there, especially about those '26 targets. I think you mentioned in diversified industrials, where you see potential for growth. Even outside data center, I think in the slide, you have positive inflection in general manufacturing. I'm just curious what -- if there's any end markets or verticals there, where you're seeing the upside there just.

It's more so that -- that market has been flat to down slightly for us for the last several quarters. And you just haven't seen the inventory build up at the distribution level. There just hasn't been enough confidence, but we think that's going to start to turn in '26. So that gives us some confidence. We feel like we're at a level where there's any sort of greater confidence is going to lead to some inventory build that's going to help support growth.

And then on the mobility business, the growth there, doubling that business by '28, really exciting. How is the margins on that business versus Gate's average?

Yes, they're at fleet average or accretive, right, depending on what they are, right? And the great thing about the mobility business is there's really 2 growth vectors, right? One is as the total mobility market, which you think about bikes and scooters and e-bikes and electric mountain bikes and commuter bikes and all those. As that goes more and more electrical, that is our sweet spot in terms of the Gates belt drive system and all the components that go into that. And so that's the preferred option for a lot of manufacturers out there. It's a smoother shifting, doesn't require as much maintenance, doesn't require oil and all that kind of stuff. And so that's one part of it.

The other part of it is, as that business matures, we continue to get to cost points that are more and more competitive with chain drive systems. And you think chain has been on bicycles since they were bicycles, right? And so they've had all this time to work on their cost positioning. And we've only been in this business 8 or 10 years. And every year, we keep improving our cost positioning, improving our cost positioning. You add more volume to it, that helps improve your cost positioning. And so we've gotten very cost competitive. When you're at the high end, very expensive bikes, cost is not that big of a deal. As you get more to the midpoint, that cost competitiveness is more of a big deal. And we feel like we're there.

I mean, we're very competitive in the midpoint of electric bikes and some of the mountain bikes and things like that. And we're going to keep working on that to keep expanding our competitiveness across the entire market. And that's how we continue to grow. Even if the market doesn't grow, as we continue to improve our cost positioning and our competitiveness, we continue to take more of the market.

And then moving maybe more of a regional perspective. in particular, China, it seems like demand has been pretty stable there for you guys in 2025. Curious how it's going there, maybe both industrial and auto.

Yes. China has been seen some growth this year, not massive, but solid growth this year. And it's really been driven by more of the industrial markets. I'd say our auto channel there has been solid, but industrial has -- we've seen pockets of decent growth in the industrial markets there. And that also goes for East Asia and India, which is a confluence of different jurisdictions there. But the one that I'd say is got to watch for over the next few years and we're starting to see it now is the automotive aftermarket in India is really -- it's still relatively small base, but it's starting to grow nicely this year. And we expect that to continue.

The age of the vehicle park there is expanding and the actual vehicle park is growing there as they move more middle class, middle class starts to permeate there. So that's a nice opportunity over the next 5 years or so. And we kind of have the same playbook there as we have in the Chinese market where we've done a nice job growing the auto replacement business. And that market there is now crossed into kind of closer to the 7-year age, average age, which is the start of our sweet spot.

Where is India at from the average in car park?

It's a little bit less than that, but -- so it's not quite at the sweet spot, but it's moving in that direction and the vehicle park continues to grow. And the other thing is we put some resources in terms of coverage and product coverage, commercial coverage, that's helping as well.

Super interesting. And then moving on to your distribution network. What are the most meaningful opportunities moving forward for you guys to making major -- make improvements there? Are there geographies where you have meaningful white space for expanding the distribution?

Yes. Well, look, I think there's different avenues of industrial distribution in North America, we could take. I mean there's a rental market, which is expanding pretty dramatically in terms of renting equipment and then the maintenance of that equipment. And so we feel like the rental market is a place where we can expand. The HVAC distribution market, our belts and hoses are used in different aspects of that market. And so making sure we have a good footprint there. I think broader, more general industrial distributors is another avenue. And so we feel like we've got some pretty good coverage now, but we think there's some existing alternative distribution opportunities to really expand our coverage in different verticals, which can help us as well. .

And then we're running close on time here. I got a question on -- you brought it up, but on electric vehicles. I'm just curious, are you still being selective on the first fit. Curious about the aftermarket opportunity there on EVs as it relates to ICE vehicle?

Yes. I mean, so we have a -- we're supporting the aftermarket today. I'd say the key message there is that the average age is -- North America is, I think, under 5 years still. So we're still not in that replacement cycle. But we've got a business that's growing exponentially off a low base with some of the more aged vehicles out there. And so we're going to have the coverage to support the aftermarket going forward. We're just in early stages. I think as we get into the next decade, 2030 and beyond, that's going to start to be more relevant.

Got it. And then maybe one last one here. I'll go back to some of the end markets. Just curious on channel inventory, you talked a little bit there. But just curious where we sit from there, I know there's been some destocking as we -- especially on the first-fit side. Just curious on the aftermarket side, how channel inventories are?

Yes. I mean we feel like they're pretty stable. We haven't seen a lot of -- we haven't seen, I think, here recently, a lot of stocking or destocking. I think people have heard different things about pre-buys in front of tariffs and things like that. And we really haven't seen that kind of noise in our distribution network. I think when you get to the end of the year, it becomes more difficult to discern. I mean you have different customers who may be buying a little bit more for one reason or buying a little bit less for one reason or something like that.

So the year-end it can kind of be a little bit difficult to tell what's going on. But I think over the course of the year, channel inventories have been -- look, volumes have been relatively muted. So I think channel inventories are kind of average to kind of lower. So there hasn't been any restocking. And there's been probably some selective destocking along the way where people who just carry a little bit less inventory because of less volumes. And then, quite frankly, we've had pretty good service levels. And so we can count on the service being there.

Yes. I mean one last one for me. And then -- just on the margin targets, you talked about them being volume agnostic in a scenario where I think we get some positive volume. I wonder what are you guys targeting for incremental margins around that?

Yes. So as you look forward, and so I'm going to be -- try to be as transparent as I can on this and so nobody misunderstands. I mean we have the operational initiatives, the cost out initiatives on material and restructuring and things like that. And those are all going to be additive to incrementals. But when we think about incrementals on pure volume, we kind of think it in the 35% range, right? So kind of gross margin, less than variable SG&A, less some reinvestment in SG&A.

Now if you think over the next 12 to 18 months, those numbers are going to be 45% plus incrementals depending on how much cost savings we have flowing though. So we're going to see outsized incremental fall-through on volumes when they come through. as we get to that 24% target. And that's just kind of the math of, hey, look, we've got a lot of cost savings projects running through that on top of the volume impact is going to drive those outsized incrementals.

And that's really starting with Q3 next year because we have headwinds in the first half that we incurred.

All right. Great. I think we are out of time, Brooks. Rich, thanks so much for joining us.

Thanks for having us. Appreciate it. .

Appreciate it.

So hi, everybody, Mike Halloran here. We got Ivo and Rich, who are going to help tell the Gates story today. Ivo Jurek, the CEO, is going to tell -- give some quick intro comments, talk about a few things that he's very excited about for the organization. Then Ivo and Rich and I are going to have a fireside chat run through whatever questions you all might have. So if you have questions, let me know, Either e-mail me or raise your hand, and we'll make sure to incorporate it. But Ivo, thanks for coming. Appreciate it.

Well, thank you, Mike. Thank you for having me here today, and I'm quite pleased that then I can provide you with an update on progress that the Gates global team has made on some of the terrific opportunities available to us that we anticipate shall create a long-term value creation for our shareholders. Before we get started, let me make sure I get my skills coordinated in here. So before we get started, let me remind everyone that some of our remarks include forward-looking statements within the meaning of the Private Securities Litigation Reform Act that are covered by our safe harbor disclaimers.

So with that out of the way, let me move to Page 3 of our presentation. And here is a brief overview of our business. For the full year 2024 kind of to set the foundation, we've generated about $3.4 billion in global revenues. We are an industrial leader in Power Transmission and Fluid Power applications. We are well diversified geographically and across end markets with over 2/3 of our revenue coming from replacement of reoccurring markets and applications.

Historically, we have grown more than 2x industrial production and have multiple attractive secular growth opportunities available to us to add to our growth algorithm. Our business possesses solid levels of profitability with an adjusted EBITDA margin well above 22%. We pride ourselves on driving strong returns on capital with ROIC above -- solidly above 20%, while we continue to strengthen our balance sheet towards our midterm target of 1.5x net leverage. 2024 represented another year where we've delivered exceptional results in a very difficult macro environment.

On Page 4, here's a brief overview of our Q3 results we've released a couple of weeks ago. We grew revenues 3%, including approximately 2% on core. We realized 90 basis points of year-over-year increase in adjusted EBITDA margin and generated seasonal record in adjusted EBITDA dollars and margins. We've delivered strong year-over-year growth in adjusted EPS, and we have been driving very solid operating performance in a subdued end market demand. It was another quarter of solid execution by our Global Gates teams.

Moving to Slide 5. Over the last few years, we have been focused on designing activities in secular markets that are additive to our leadership position in our traditional markets. We anticipate that the focused execution in the secular growth drivers position us well to deliver above-market growth as we enter 2026. We believe that our traditional industrial markets are troughing as we exit 2025, and we expect them to improve next year. In our secular growth opportunities, we anticipate significant market outgrowth. Our Personal Mobility business is generating over 20% this year, 20% growth this year, and we expect the growth to accelerate and ramp up to approximately 30% compound annually through 2028. We have nascent data center business that is positioned well to support anticipated strong adoption of liquid cooling technologies used in advanced AI-centric data centers. While this business is relatively new, it is ramping up nicely. We continue to advance our industrial chain-to-belt initiative with strong emphasis on converting machine OEMs to use belts to help power their applications more effectively, more quietly and generate lower overall carbon footprint to the life of the application. So collectively, we believe these initiatives can add approximately 200 basis points of outgrowth over and above traditional and market participation.

On Slide 6, we dig a little bit deeper on our opportunity in Personal Mobility. Over the last several years, our commercial and engineering teams have built a solid pipeline of opportunities to convert traditional chain drives into Gates' belt drives in 2 wheel devices. One of the fastest-growing segments in the 2-wheeler market are e-bikes, which are anticipated to grow at double-digit clip and in developed markets through the end of the decade. e-bikes as well as e-scooters and other electrified 2-wheeler applications are scaling up well. We are anticipating to participate significantly as we expect a greater share of this market to adapt the belt drives, which deliver improved efficiency and compelling performance relative to alternative systems.

Additionally, we continue to broaden our product portfolio, higher volume applications. We anticipate our revenue base to more than double over the next 3 years and expect the business to be a meaningful contributor to our top line growth rate. As you can see, the total addressable market here is significant and we have a strong opportunity to continue to expand our market share through 2028 and well beyond.

On next page, I'll outline a bit more opportunity in the emerging liquid cooling application in the AI-powered data center market. As you know, these new chip stacks generate rather significant amount of heat by powering AI-centric computing needs. We see the liquid cooling solutions are expanding significantly. And while we are in the very early stages of application growth, we anticipate it become highly prevalent moving into the near-term future. We have an expanding product offering that supports the cooling needs across the entire data center architecture from facilitating waterflow as the water enters the building to efficiently conveying fluid to cool server racks and other infrastructure in the white space. We estimate that our content per megawatt is approximately $100,000 plus. We are working across a broad spectrum of customers, from hyperscalers, server manufacturers to EPCs and other customers across this rapidly growing application set.

We have been investing in the front end of the business by building designated application and commercial teams as well as the back end of the infrastructure to support the volume requirements as our customers scale up. We have an emerging revenue opportunity with pipeline that currently exceeds over $150 million and is growing nicely. We are excited about the revenue potential for this business and anticipate achieving revenue in the range of $100 million to $200 million by 2028, which would be very nicely accretive to our revenue base.

On Page 8, we wanted to discuss our progress with the various margin initiatives. On the left side of the slide, we would like to remind you as to what we expected would happen back in 2024. At that time, a substantial amount of our expected margin improvement was related to self-help initiatives. However, we did assume 100 to 100 basis points of margin expansion would be contributed from operating leverage associated with an estimated 3% to 5% core growth compound annually to 2026. On the right-hand side of the slide, we show our progress and where we stand presently. We expect to end 2025 with approximately 22.5% adjusted EBITDA margin at the midpoint of our full year guide. Since the end of 2023, we have absorbed the negative impact of lower industrial volumes as seen on this chart, and still expanded our adjusted EBITDA margin 160 basis points through self-help initiatives, such as material cost reductions and our 80/20 initiative.

We recently announced the restart of our footprint optimization program and expect savings from that initiative as well as continued incremental savings from material reduction projects to deliver additional approximately 150 basis points of structural margin improvement next year and into 2027. This would position us well to achieve our anticipated adjusted EBITDA margin target as market demand begins to inflect positively, volume growth would be additive to our anticipated margin goals and lead our adjusted EBITDA margins above the 24.5% target, all else equal. What we see is the potential for outstanding execution that should position Gates amongst the premium peer set we comp ourselves against.

So on Slide 9, we've taken a first view of how we view the performance of the end markets where we participate, but staying away from providing you with 2026 guidance. We are quite cautiously optimistic that the industrial economy is going to turn in 2026. We anticipate our major end markets are going to experience flat to improving demand next year. We believe improving market trends, coupled with contribution from our secular growth initiatives should drive positive core growth for our business in 2026.

Lastly, I'll -- before I turn it over to Mike for Q&A. I want to summarize our thoughts. First, we delivered solid Q3 results with core revenue growth, attractive margin expansion, strong EPS growth year-over-year and nicely improving balance sheet metrics. Second, we have secular growth drivers in place that we expect to contribute to outsized growth on a go-forward basis. And lastly, we believe we are a high-quality asset with further opportunity to enhance our structural margins. We anticipate our market to begin to recovery in '26 and our balance sheet is well positioned to help us drive shareholder value into the future.

Thank you. And with that, I'll turn it over to Mike for a Q&A.

Great. I want to bring the clicker too because I think some of the questions might refer back to the slides. But why don't we start on just this slide right here, which goes in conjunction with the next one. I think a lot of the inbound questions after the call were about the margins and what you were thinking for growth next year. And I think there was probably a little bit of a misconception here. The way we interpret it, and I'd love your response to this is you just essentially increased the volume-neutral margin target that you have organizationally without making a comment on whether there was growth next year. But internally, I think you do think there's volume growth, you're just not sure how much, right? Is that a fair thought process?

Yes, Mike, I think it's a great question, and I think it's super fair to represent it other way. I would probably go maybe one step further and state that we certainly anticipate growth next year. What we've tried to get across to our shareholder base and to the sell-side community is that, look, as you are building your models, as we have these moving pieces around the structural improvements that we are driving to our business, here are the puts and here are the takes to the cost and to the benefits. And moreover, I think ineffectively perhaps we wanted to get across that we are going to get to our anticipated targets from our Capital Market Day in '24, actually without the help of margins. So if you think about that...

Without that volume.

Sorry, without the volume contribution. So if you think about that, as the volume in flex, and we do anticipate growth in '26, we anticipate that, that will be accretive to our 24.5% margins kind of rolled over into 2024. So ultimately, I think we are kind of updating the structural profitability of our business. And we feel actually quite good about what we have done with the business with having to deal with number of complexities in the operating environment.

And where do you think you are in the footprint optimization and material savings in terms of the execution and laying out the plan and then getting the internal buy-in.

Yes. Look, we have been on a journey of material cost reductions for the last couple of years. And that has served us quite well, that has been a big driver of our margin expansion. 80/20 has been a big driver of our margin expansion. And we anticipate that there are still solid opportunities to continue the journey. And again, we anticipate that in '26, there's going to be yet another leg up in material cost reductions. We believe that we are in early stages of 80/20. So we should have many, many years forward going to drive 80/20 forward.

In the footprint optimization, this is going to be a phase that helps us to complete what we have discussed with our shareholders, I want to say kind of a year ago. So that will come -- this will complete that phase, and we always have more to do. There is not a lack of projects. So we certainly fundamentally believe that we will have an opportunity to continue to drive efficiency of our footprint to continue to drive improvements in how we service our customers, better proximity to our customers and offer them products that are easier for them to use, purchase and distribute.

And you referenced early stages of 80/20, which implies some mobility potential relative to what's laid out on this chart. Maybe talk about where you are in that adoption curve as well as how you look at what the fundamental output or goal or vision of success looks like.

Yes. Look, when we started this process, I think that everybody was starting with me on kind of the front end, the cascading optimization of the product portfolio, looking at rebalancing our pricing structures. And I would say that, that has been done quite well across our footprint, well adapted, well understood by our teams and really implemented without much of much of an impediment, if you would. I'd say that the opportunity, and I feel, and I think we spoke about it perhaps sometimes last year, I truly believe that you have a massive opportunity in the operating footprint with deployment of 80/20, the optimization of your builds, the optimization of how you approach scheduling and building your products, how do you optimize what pieces of equipment, what lines you're going to deploy on what type of products that you manufacture do offer you some good opportunities to continue to drive nice improvements on the back end. And I think that that's in the very early stages of our deployment.

And maybe some just end market thought processes here. First question is just how do you look at the inventory levels from a channel perspective? And where do you feel like things have just flat out bottomed. Some of those are probably where you'd see growth next year coming off the bottom, coming off a destock. But how do you think about the inventory levels, fundamental bottoming?

Yes. So look, I think that when you think about it from kind of the channel partners, my sense is that what we believe is that the channel inventories are in a good position in the replacement markets. I think that they have been bottoming out over the last couple of years. We have been talking about destocking for a while. And I certainly believe that we are in a good position vis-a-vis inventories in the channel. I think where we have seen perhaps some deterioration in 2025 has been around the heavy machinery equipment builders.

So I think that you are starting to see better situation where the ag equipment, dealer inventories with commercial construction equipment dealer inventories. I think it was reasonably painful, but I think that, that situation is getting better. I think that we can have probably a 2-sided conversation about do we think that that's in a place where it needs to be? Is there a little more to go?

My view is that perhaps there's a little more to go, but I think we're in a significantly better place than we were entering 2025. And I think that the heavy-duty machinery manufacturers, I think, have done a good job in taking builds down reasonably significantly in '25 to clear off the inventories and position themselves for more positive inflection in 2026.

So all in, my sense is that most of our market exposure while we don't necessarily anticipate that it's going to be off to the races. Everything is going to turn green. We do see green shoots across significant amount of our end markets and significantly less bad performance in others that bodes quite well for '26 I think.

And what do you think it takes to normalize things out from here? Do you think it just takes normal sequentials, gradual type recovery and that's enough. Do you think it takes some sort of catalyst from a market perspective, rates, tariff uncertainty? I mean, you tell me, what are you looking for most to get comfort that, that base is at a more normal level?

Yes. Look, I mean I think that you're going to start getting some policy certainty. I think that folks are getting comfortable with what would happen around the April time frame, I think people are getting comfortable with how to operate their businesses, what impact it has on your business as a business operator. I do believe that inventory overhang was there. And I think that that's getting cleared out. I do think that you have some positive that we -- historically, we would all be reasonably excited about and nobody really is paying attention to at this point in time. And that's the accelerated depreciation benefit that you're going to have in CapEx deployment.

So that could potentially be a nice catalyst into some bigger pieces of investments in equipment and plants that people will do. So my sense is that, that all should be supportive of inversion of the PMI behavior that we have seen and I mean, PMI has been trending up. It wants to -- I think it wants to break through 50 and get north of 50. I don't think none of us are smart enough. And certainly, I know on our end here as a company that we can predict when it's going to happen, but it does feel like it finally does want to invert and move properly into that positive growth trajectory.

So the data center piece, you put a press release out last night about an innovation on the thermal line side there. I think the straightforward question here is talk to your entitlement to win and play in this marketplace and where the differentiation in your product is versus a competitor product?

Yes. So look, we've built a pretty strong portfolio of moving liquids inside of the data center. So everything from pumping that liquids to transferring that liquids from point A to point B, not just through the infrastructure, but also through the devices themselves. And that is a breadth of capability. And if you think about the nascence of this opportunity and the importance of thermal management and as these chip stacks are getting more sophisticated and generate more heat and the need for liquid cooling becomes prevalent. And certainly, my sense is that vast majority of that infrastructure is going to be liquid cooled as we move into the future.

That presents a very substantial opportunity for our organization. And the fact that we do have a good understanding of how to move the liquids, how to simulate the flows of these liquids from the input all the way through on chip cooling that positions us really well and differentiates us from some of our other competition.

Moreover, I would remiss if I didn't say that everything that we do for data centers is not a general standard product that we manufacture. We have applications specifically engineered these, and every one of these components that we manufacture has some degree of competitive advantage against any of our competitors. And so we feel good. We feel well positioned, we are a leader, a global leader in fluid conveyance in harsh and hazardous applications, and this is kind of a front and center for us when you think about the requirements, the precision, the leak-proof necessity of these assemblies. And frankly, we offer supplemental services that we have not done for some of the other folks when it comes to offering some of these assemblies for folks like the hyperscalers that we do business with.

And does anybody else offer the kind of the suite there where you have the connected, the couplings and then the thermal. I mean, does anybody else offer that as a package? Or is that part of what you're referring to?

Yes. I think that we are unique in that space. I think that you have folks, I mean, obviously, there's plenty of competition in this space, plenty of folks that offer couplings, plenty of folks that offer hoses a different subset of competitors, that offer pumps. But I think we are kind of unique in being able to move fluid from the entry all the way to the chip. And that also gives us kind of a, not only right to play, but it invites us to the table as the thermal management becomes such a critical attribute and thermal management is going to become more significant in the design of these data centers as we move forward.

And again, we believe that, that positions us truly well in not only being able to capitalize on some of these opportunities, but also seeing our total available market to scale up and become bigger as there is a greater clarity about what's being put in place.

And then switching gears back to just kind of a higher-level thought process here. What's the thought with capital usage. Obviously, the internal piece is the focal point first and foremost with the restructuring, funding growth, et cetera. How do you think about the equation of buybacks versus starting to think about M&A.

Yes. Look, I think that this is kind of an amazing conversation for me taking into account that when I started at the company, the company was 7x levered a long time ago, 10 years ago. We are finally in a position that our balance sheet is super healthy at 2x net leverage well on the way to below 2x leverage by the end of this year. We have most recently announced a new share buyback authorization by our Board of Directors. We have gotten an authorization of about $300 million. We certainly anticipate to use it fully in the next 12 months. We still have a desire to continue to pay down debt. We have repaid another $100 million of gross debt in July, we are very close to our midterm target of what we have committed to the Street. So I think that those are 2 levers that we can do. But we generate a ton of free cash flow.

We have a ton of cash sitting on our balance sheet that we can deploy to other uses other than buybacks and paying down debt. So we will start pivoting much more intently towards kind of a bolt-on type M&A activity where we can improve our portfolio, we can broaden our geographic leverage, but we will do anything around our core franchise and do things that will be highly additive to what we do in our profitability.

Please join me in thanking Ivo and Rich for their time today.

Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gates Industrial Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

Thank you. I would now like to turn the conference over to Rich Kwas, Vice President of Investor Relations. Rich, the floor is yours.

Greetings, and thank you for joining us on our third quarter 2025 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallard, our CFO.

Before the market opened today, we published our third quarter 2025 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 will include forward-looking statements within the meaning of 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've described in our most recent annual report on Form 10-K and in other filings we make with the SEC, including our Q2 quarterly report on Form 10-Q that was filed in July of 2025. We disclaim any obligation to update these forward-looking statements.

This quarter, we will be attending the Baird Global Industrial Conference, the UBS Global Industrials and Transportation Conference and the Goldman Sachs Industrials and Materials Conference and look forward to meeting many of you. Before we start, please note all comparisons are against the prior year period unless stated otherwise.

And now I'll turn the call over to Ivo.

Thank you, Rich. Good morning, everyone, and thank you for joining our call today. Let's begin on Slide 3 of the presentation.

Gates posted solid third quarter results with positive core revenue growth of almost 2% and the macro industrial demand conditions that remain subdued. Our replacement channel grew low single digits, supported by mid-single-digit growth in automotive replacement. Our OEM sales were relatively flat. At the end market level, industrial was mixed. Globally, Off-Highway realized positive growth with stabilizing demand in construction offsetting incremental weakness in North American and European agriculture. Commercial on-highway declined mid-single digits impacted by decreasing production rates in North America. Personal Mobility generated another strong quarter of growth, exceeding 20% year-on-year.

Our adjusted EBITDA margin increased nicely year-over-year to 22.9%. We generated record adjusted EBITDA dollars and margin for a third quarter. Our net leverage ratio declined to 2.0 turns, a 0.4 turn reduction compared to last year's third quarter. With that, we are on pace to reduce our net leverage to under 2x by year-end. We have updated our 2025 guidance, raising our adjusted EPS midpoint to $1.50 per share. We have maintained our full year 2025 adjusted EBITDA midpoint of $780 million while slightly lowering our core sales growth outlook at the midpoint. Brooks will provide more color and comments about our updated guidance assumptions later in the presentation.

Additionally, our Board recently approved a new $300 million share repurchase authorization that will expire at the end of 2026. The new authorization replaces the prior authorization which had over $100 million remaining. On Slide 4, we have heard from a number of you on the call that you would like to see an update on what is occurring in the end markets. So we have laid out an updated view of our underlying end markets and how they have progressed during 2025. Coming into the year, we did not anticipate the broad macro recovery, but we have continued to see uneven end market performance since we set our initial expectations for the year in February. We did, however, 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. Industrial off-highway demand trends have continued to languish and softened a bit relative to our expectation during the third quarter in certain geographies on reduced build rates, and dealer inventory destock. Additionally, in the On-Highway end market, the North American commercial truck production levels deteriorated as the third quarter evolved. Despite some of these near-term headwinds, we are still outperforming our underlying markets and believe that many of our challenged end markets are [ tracking ] or are close to traffic. Our automotive replacement and personal mobility business continues to grow nicely, while our data center opportunity set continues to expand. As such, we are optimistic that demand in the majority of our end markets will be more stable to improving at some point in 2026.

Please turn to Slide 5. Third quarter total sales were $856 million, which translated to core growth of 1.7%. Total revenues grew 3% and benefited from favorable foreign currency. As I have highlighted earlier, the end market performance was mixed in the quarter. Personal Mobility continued to trend nicely higher with its year-over-year growth rate accelerating compared to the second quarter. Off-highway grew mid-single digits with growth in construction and agriculture globally. However, ag declined incrementally in both North America and Europe. Diversified industrial and energy were both down slightly and on-highway demand was soft. Automotive grew low single digits with solid growth in auto replacement more than offset a slight decline in auto OEM. Our key growth verticals, personal mobility and other replacement contributed to the performance.

Our revenues from data center also continues to increase, although from a small base and we see the liquid cooling opportunity in early stages of more broad-based adoption. Adjusted EBITDA was $196 million with adjusted EBITDA margin coming in at 22.9%, an increase of 90 basis points and representing a record third quarter margin rate for the company. Our adjusted earnings per share was $0.39, an increase of approximately 18% year-over-year. Operating performance contributed $0.02 while a lower tax rate and consolidated mix of other items each contributed to sales. We believe we are effectively managing the enterprise across all aspects.

On Slide 6, we will review our segment highlights. In the Power Transmission segment, we generated revenues of $533 million in the quarter and core growth of 2.3%. Most industrial end markets realized growth. Personal Mobility continues to be a strong contributor with growth exceeding 20% in the quarter. At a channel level, replacement grew with automotive and industrial channel core growth each growing low single digits. OEM sales also grew low single digits with an industrial sales growth more than offsetting a decrease in automotive. We continue to invest in our strategic sales initiatives and innovation to help drive potential outgrowth in the future. Our mobility opportunity pipeline is staying robust.

In the Fluid Power segment, our sales were $322 million, representing core growth of just under 1%. Many of our key end markets in Fluid Power continued to experience various levels of demand pressure, but our teams have helped its own. Commercial On-Highway sales decreased mid-teens as industry inventories are elevated. Off-Highway grew with positive construction trends offsetting a low single-digit decline in ag. The agricultural performance year-over-year was worse impacted by incremental OEM production cuts to better align our customers' inventory levels heading into the year-end. We believe the underlying ag market is troughing and should be better positioned for recovery sometimes in 2026. Replacement demand was strong, driven by double-digit growth in automotive replacement globally with broad-based growth across regions Industrial OEM sales declined mid-single digits on a quarter basis, driven by soft demand trends in agriculture and commercial truck.

Our data center opportunity pipeline exceeds $150 million and design-in activities remain robust. With respect to profitability, both segments expanded adjusted EBITDA margins at a similar rate.

I will now pass the call over to Brooks for further comments on our results.

Thank you, Ivo. I'll begin on Slide 7 and review our core sales performance by region. The majority of our geographic regions generated core growth in the quarter, highlighted by EMEA's return to growth.

In North America, core sales were about flat. The incremental demand weakness experienced in agriculture and commercial On-Highway during the quarter was primarily concentrated within the North American region and led to a low double-digit decline in industrial OEM sales. Industrial replacement sales were also down slightly. Industrial was offset by growth in automotive as automotive replacement sales increased high single digits, supported by year-over-year growth contribution from our new channel partner. Automotive OEM sales grew low single digits. In EMEA, core sales grew 2.6%. Industrial end markets were mixed, construction returned to growth and more than offset weak demand in agriculture. On-Highway grew while energy and diversified industrial saw declines.

Personal mobility was very strong, growing almost 75%. At the channel level, OEM sales grew high single digits, supported by construction, On-Highway and mobility partially offset by lower automotive OEM. Sales into replacement channels increased slightly. East Asia and India posted approximately 5% core growth. Most industrial end markets grew. Automotive OEM sales decreased slightly, which was more than offset by high teens growth in automotive replacement. China core sales expanded 6% year-over-year with growth across all channels and most end markets. South America core sales declined low to mid-single digits.

On Slide 8, we show the key components of our year-over-year change in adjusted earnings per share. Operating performance contributed approximately $0.02 per share driven by core growth and higher adjusted EBITDA margin. Our lower tax rate contributed $0.02 per share. Other items including lower interest expense, lower share count and other income together generated about $0.02 per share. Slide 9 provides a summary of our cash flow performance and balance sheet metrics. Our free cash flow was $73 million and represented 73% conversion to adjusted net income. Our restructuring cash outflows have increased which impacted our free cash flow conversion. Our net leverage ratio declined to 2.0x at the end of the third quarter, which was an improvement on a year-over-year and sequential basis.

During the quarter, we paid down $100 million of gross debt. We expect our net leverage to be under 2x at calendar year-end 2025. Our trailing 12-month return on invested capital was 21.6%, an improvement sequentially as improved operating performance helped offset the impact from internal investments in high-return projects. On Slide 10, we provide our updated 2025 guidance. We have trimmed our core revenue growth midpoint to 1% and narrowed the range from 0.5% to 1.5% to reflect current macro conditions for the balance of the year. In addition, we have maintained our $780 million adjusted EBITDA midpoint and narrowed the range to $770 million to $790 million. We have raised our adjusted earnings per share guidance to the range of $1.48 per share to $1.52 per share, the upper half of our previous range. The $1.50 per share midpoint reflects a $0.02 per share increase relative to our prior guidance.

Our guidance for capital expenditures is unchanged. We have lowered our free cash flow conversion outlook to a range of 80% to 90% from 90% plus as a result of increased restructuring cash outlays as part of our footprint optimization and restructuring initiatives.

Turning to Slide 11. We want to provide an update of our ongoing restructuring plans as well as a strategic system conversion that we have been working on and that we expect to be complete by the middle of 2026. Beginning late in Q4 2025 and finishing by the end of Q2 2026, we expect to close multiple factories, complete a labor realignment and go live with an ERP conversion for most of our European footprint. As we complete these activities, we will be focused on providing continuity and service for our customers and our effective team members. We expect to incur additional costs and other onetime operational impacts from these projects in the first half of 2026. From a financial perspective, we anticipate an unfavorable year-over-year impact of 100 to 200 basis points to our adjusted EBITDA margin in the first quarter and a more modest unfavorable effect in the second quarter, ranging from 25 basis points to 75 basis points year-over-year.

In the second half of 2026, as we look towards completion of these various projects, we expect operations to normalize and realize favorable impact to our adjusted EBITDA margin from our restructuring activities of 75 to 125 basis points year-over-year. Excluding volume considerations, we expect our footprint optimization, restructuring and material cost-out activities to generate 0 to 25 bps overall adjusted EBITDA margin improvement year-over-year for the full year 2026. We anticipate being at a 23.5% adjusted EBITDA run rate in the second half of 2026 in a volume-neutral environment. As I said, we have not taken volume impacts into this analysis and plan to update those assumptions as well as provide further insight into our restructuring activities when we initiate our formal 2026 guidance in conjunction with our Q4 earnings call in February.

I will now turn the call back over to Ivo.

Thank you, Brooks. Moving to Slide 12. This is our illustrative update on our walk towards the midterm stated adjusted EBITDA margin target of 24.5%. In 2025, we have experienced a highly fluid business environment and continuation of prolonged negative PMI prints resulting in constrained volume performance. With that as a backdrop, we now anticipate to complete our initial phase of the committed footprint optimization projects by mid-2026 and still expect that those projects will achieve 100 basis points of savings from the footprint optimization program exiting 2026.

Coupled with our ongoing focus on material cost savings in 80/20, we estimate that our adjusted EBITDA margin will be nearing 24% on a run rate basis exiting next year. Most importantly, this does not assume any margin benefit from a potential broad volume recovery in our industrial end markets. While the end market volatility has not been supportive, we are very pleased with our execution and performance to date. We believe the prospects for incremental improvement over the midterm are positive, especially as the end market conditions begin to potentially inflect.

With that, let me summarize our views on Slide 13. We believe we have executed well delivering solid results given the lackluster demand environment we have encountered throughout this year. We generated record third quarter adjusted EBITDA margin rate and achieved our highest quarterly core growth rate since Q2 2023. For the year, we are on target to deliver adjusted EBITDA margin expansion and earnings growth in a muted demand backdrop. We continue to make progress with our personal mobility and data center strategic initiatives and believe we will encounter a better industrial demand landscape in 2026. We continue to adjust our structural cost base, and we expect our savings to begin to compound during the second half of '26 and anticipate our adjusted EBITDA margin rate to be approaching near 24% exiting next year. With that as a baseline level we would expect any volume improvement to be additive to our margin performance.

Lastly, we believe we now possess a strong balance sheet that can be utilized to support various potentially value-creating capital deployment options. Our Board recently approved a new $300 million share repurchase authorization. Separately, debt reduction continues to be an option. We just repaid $100 million of debt during the third quarter. And of course, at this juncture, our ability to execute bolt-on M&A transactions is increasing as we move towards our midterm financial leverage target.

Before taking your questions, I want to thank the approximately 14,000 global gas associates with their diligence and commitment supporting our customer needs. With that, I will now turn the call back over to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Nigel Coe with Wolfe Research.

I just wanted to maybe clear up some -- just some questions around Slide 12. So it's very clear that the 24% for 2027 is tribes more of a floor here, right? I mean if we continue to just bump along the bottom here, 24% is where you see margins and then volume gives us some upside. I just want to make sure that, that's the case. And then maybe just kind of dig into some of these kind of costs you're flagging for the first half of the year? And what sort of benefits you see from this ERP implementation?

Yes. Thanks, Nigel. Let me take the first part of your question, and then I'll pass it off to Brooks on the ERP side and some of the other attributes of the cost question that you've had. But Thinking about Slide 12, right? So the margin walk was created if you think about it, more 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. And the program is intended to significantly improve our cost structure all else equal, right? So not representative of growth forecast for our top line in '26.

So to your point, this is kind of a foundational floor. We do expect growth in '26. The margin impact for the full year in our presentation deck, however, excludes any benefit from revenue growth. Frankly, because we are not providing you an updated guidance for '26 yet. As you know, we will do that at the conclusion of our Q4 fiscal year as we'll do that in January, right? So we -- look, we certainly believe that many of our end markets are at trough of close to troughing, as I said in my prepared remarks, and we believe that they will turn positive in '26. In addition, we are excited -- and I said in a number of these calls over the last couple of quarters, we are quite excited about the strategic revenue generation initiatives for next year. And we certainly expect them to contribute nicely to our growth trajectory in 2026.

With that, Brooks, if you want to take the second part of the question, please?

Yes. So there's several things that we expect from a onetime cost perspective, relative to the restructuring and the head count alignment, as we do the restructuring, there will be -- we expect some additional freight costs, expediting costs, redundant labor costs and productivity cost as we move through some of these relocations, and that's a normal course of business. We do expect to Ivo's point, I want to remind everyone, a lot of the backdrop for the reason we're doing a lot of these and optimization activities is to support our growth.

And so yes, we're going to get a cost benefit. But even moreover, we're going to have additional capacity, both from a machinery and equipment perspective, but more importantly, more capacity from a labor perspective to ramp through the cycle. From an ERP perspective, we're replacing a fairly antiquated system with a new system that's going to provide us much more capability in terms of warehouse management in terms of managing the front end of the business to the back end of the business. But we really haven't built any of those benefits into our outlook.

We've been very neutral on building those benefits in, but we definitely expect to improve our efficiencies and capabilities and again, support the strategic initiatives of the company with the ERP. But it does take -- we do think it will take us the first half of the year to get all lined out, which is why we wanted to be transparent and provide you an update of the cost and the impact associated with those activities.

Yes. We definitely appreciate that. Just wanted a couple of click on growth. You mentioned growth about 4, 5x there. What kind of tailwinds or visibility do you have right now on some of the structural growth vectors like data center, personal mobility? I'm guessing you're going to have some price carry for next year. But more importantly, when you talk about the bottoming in some of these off-highway, on-highway markets, how much visibility do you have on production schedules for your OEM partners? And do you have any visibility or maybe kind of a turn in production for those end markets?

Yes. Sure. So look, great question, Nigel. Thank you for asking that. Very, very optimistic, as you probably noticed over the last couple of earnings calls about some of the growth factors such as personal mobility and liquid cooling and data centers. The personal mobility, I think, on the last call, we suggested that we anticipate kind of over the next 3 years. And again, while that's not going to be every quarter, I want to kind of remind everybody that things are not always linear, right? But it's going to take the next 3 years, personal mobility.

We anticipate personality to grow kind of 30% year-on-year compound annually between as '25 and '28, right? And there will be time that it's going to grow 22% to 25% [indiscernible] going to grow 35%. But on aggregate, we believe that, that's going to grow about 30% compound annually. And we have that confidence because of the design wins that we've been talking to you about over the last couple of years the destock post COVID has occurred. And obviously, we are delivering a real nice acceleration to the growth trajectory, and that will continue into the next couple of 2 to 3 years. So we're quite positive about that.

We've talked about the accelerated adoption of liquid cooling. And while I'm not ready to give you a forward-looking revenue forecast for '26 today, and I'll do more of that on our next call. we are seeing tremendous amount of activities out there. And there are some real positive attributes because what we are realizing is there's more cooling that's required, not less in the projects that we are involved with. And we are seeing pretty substantial growth across the various customer base in the designing activity. And that's a really good precursor into what will be occurring over the next 12, 24, 36 months. So think about it kind of in a similar vein as when we were discussing personal mobility. So we believe that over the next 1 to 2 quarters, we're going to be giving you some more tangible attributes associated with the dollars and sense about what that's going to represent in '26 and '27.

But so far, quite optimistic about what we see there. our automotive replacement market, while we don't necessarily talk about it as necessarily a growth pork we have been growing that market quite substantially and quite nicely over the last couple of years. provided a great deal of stability for our revenue generation. And we believe that, that's going to continue as we move into '26, '27 and '28. There's still plenty of opportunity, plenty of firepower left to be able to continue to grow the market in that kind of 2% to 3% range, which has got a nice for kind of a more mature type level of applications. So put that aside from kind of the incremental over and above if you would growth trajectory to kind of our standard base.

Then when I take a look at some of our more traditional end markets, look, we certainly believe that the auto OE business, while it does not represent a significant size of our business that's stabilizing, and we believe that we will start seeing more additive growth rates in North America and ultimately in 2026 in Europe. So we believe that those markets are stabilizing post liberation day announcements of these companies are starting to -- different countries are developing different agreements with our administration, and I think things are starting to stabilize there. I think people are becoming a little more optimistic about that end market. We see some positive I would say, formation of green shoots and certainly in commercial construction end market, and we are starting to hear more positive news about what our customers expect there.

Ag is still challenged, and I talked about as actually got incrementally worse for us in Q3, while we have delivered maybe a positive core growth overall in a it got a little bit worse than what we've anticipated, but we do believe that that's dropping. And that while it's not going to go off to the races in '26, it's going to be significantly less bad than it has been over the last 8 quarters. And so we have somewhat positive about that. And then ultimately, the diversified industrial market, we've talked about it being kind of more kind of bottoming out over the last couple of quarters, and we certainly believe that that's bottomed out and that should start being more accretive in 2026.

So I want to give anybody an idea that we have come out and we have given a forecast that we will not anticipate to have an organic growth rate in 2026. We're actually quite optimistic about it, but we just wanted to give you a visibility on modeling of certain structural cost removals that are going to be going in and out over the first half of the year and resetting our cost structure becoming more competitive and giving ourselves the opportunity to actually support the growth rate, which we are very optimistic about.

Your next question comes from the line of Deane Dray with RBC Capital Markets.

I wanted to circle back on Slide 12 again. I know you've given this as a margin walk. But -- and I don't know if you've provided this previously, but can you give us some dimensions of the restructuring, like how many plants, where are they? What kind of head count reduction, the dollar amount being invested and the dollar kind of payback cadence? I know you're providing it as a margin, but it would be helpful if you provide that dimension to it as well. Maybe you're restricted, I know that if it's outside the U.S., you've got some works council. But maybe if you could start there, that would be helpful.

Yes. So look, Deane, it's fairly complicated because it's a combination of -- if you remember, when we said we were doing the restructuring, it was mostly around North America and EMEA, right? So we'll kind of leave it at that we're closing multiple factories. And there'll be hundreds of affected employees.

I would say the payback generally ranges from 1 to 2 years, depending on the amount of severance, the amount of move, the amount of investment that we need to make. When we talk about the headwinds, just to kind of size it, we talked about the 100 to 200 bps and 25 to 75 bps. That's kind of a $30 million to $35 million onetime expectation for the first half of 2026. And that also includes the system conversion and all the costs associated with that. And so from -- I'd say the other part, if you think about our increased capital spend over the past couple of years, that's part of the investment as well, right? And so if you look at what we spent over the past couple of years, you could say maybe $20 million last year, $20 million this year. So that's part of the investment as well. So when you calculate all that up, that kind of gives you that 1- to 2-year payback. Again, depending on the timing of when the projects get implemented and when the savings come through.

And as I said, we feel as we exit the second half of '26, the first part of all that restructuring will be complete and you'll see the flow through in the second half. But let me also say that we're still working on additional projects. And there's still money that we're spending right now that's kind of part of that group that investment I talked about that we haven't put into our run rate yet that we haven't disclosed yet, right? Because we -- when you think about the back half of the year, there's probably $5 million per quarter. So $10 million in the back half of the year of savings, which will also roll over in the first half of '27. So that's kind of $20 million or half of the $40 million. So we're still working on the other half. And those projects will be implemented, and we'll disclose those here over the next year or so. Hopefully, that kind of gives you enough color in terms of how all those things are working.

Yes. It really did. I appreciate that additional color. And then as a follow-up, was hoping you could take us through kind of the tariff impact pricing? And do you see any -- and it sounds like there could be some volume fall off because of some demand destruction. But just kind of where does tariffs stand on a net basis?

So let me take the cost piece, and I'll let Ivo talk about the volume piece. So from a cost basis, we're okay in terms of the total EBITDA impact. What I would say, though, as you look at some of the gross margin dilution in the back half of 2025. And that will fall through to EBITDA dilution. We're probably seeing 30 to 40 bps of dilution because we're not getting anything in terms of bottom line ad from the tariffs, right? We're just kind of holding our own and making sure that we don't cost ourselves money. So the impact from a profitability perspective is kind of 30 to 40 bps, $0 from a total EBITDA dollars perspective, and then I'll pass it over to Ivo to talk about the volume.

Yes. Deane, I think that, that's -- I'm not sure when I would call it volume destruction or what have you. But I think I would preferably call it more of a short-term transitory growing pains. I believe that there's probably some impact to ag, in particular. Certainly, the freight environment has gotten more challenging, particularly for farmers. And that's kind of what we have seen in terms of probably delayed recovery in ag overall. And as I said on the call, ag in Q3 got slightly worse than what we've anticipated at the beginning of Q3 around the edges, but we do believe that, that market will also start normalizing as we enter '26 and sometimes doing '26 that it should start getting a little less negative.

So around that, I think that you're starting to see more stabilization around the auto businesses. Overall, I think you start seeing forecast maybe getting a little more positive in terms of production output by the carmakers. So I think that some of those transitory headwinds are probably. And as we enter '26, I think the environment should be more stable.

Your next question comes from the line of Julian Mitchell with Barclays.

Maybe just a first question, trying to drill into perhaps a little bit the sort of exit rate from 2025. Just looking at the fourth quarter, for example, you mentioned, Ivo, was sort of firming of the industrial environment in the prepared material, but I think the revenue guide seems to embed sort of fairly normal seasonality for the fourth quarter. Just wondered if you could clarify that. And then similarly on kind of the EBITDA rate in the fourth quarter often down sequentially. I think this time, it's sort of flat to up. Just wondered if there was anything to call out there in terms of enterprise initiative benefits or mix or something.

Yes. So Julian, I think that you said it correctly. I mean, we -- if you think about our Q4 revenue, it really is kind of taking exit rate Q3 environment applying normalized seasonality. So there really isn't anything peculiar. I wouldn't say that we have baked in any further recoveries. We're obviously very cautious around ag, but we're taking that present environment and we say, you're probably not going to really see any tangible change in Q4 and taking into an account that many of these end markets, many of our customers have had somewhat challenging years. I don't see anybody trying to preposition themselves for 2026.

And that, in a way, I would say, is positive. That folks are not prepositioning themselves. I think that people are now focusing more on '26. And we are seeing -- we are hearing certainly more kind of an optimistic outlook about in certain segments of our business. So that being set on the demand. And I'll let Brooks chime in on the on the EBITDA for Q4.

Yes. So from a Q4 perspective, we're still seeing some -- we're seeing some of our initiatives roll through around material cost. That's sort of -- that's offset by some of the tariff dilution and the kind of normal seasonality in terms of Q4, we're pretty -- I think we're pretty happy with where our inventories are in terms of service and then building, being ready for some of these activities in Q1. So we're not building significant inventories as we head into the end of the year. So all in, nothing -- there's some puts and takes, right, in terms of things working in our favor. Other things that we're taking on and making sure that we're able to deliver EBITDA growth year-over-year, but nothing structurally different as we end the year.

Julian, we are also executing rather well, right? I mean we were 18% EPS growth in Q3, record level of margins in a reasonably muted end market environment. So I think that the organization is doing a good job in managing during some of these challenging times. And frankly, delivering differentiated operating results.

Great. And then just one quick follow-up on the sort of cash conversion. I think you walked down the guide a bit there. There's some higher cash restructuring. Should we expect much improvement in conversion next year? Or no, because of the EMEA and North America restructuring charges will sort of weigh on next year?

Yes. We'll have to take a look at that. I mean, I would think that the bigger part of what's affecting us in 2025 is the restructuring charges that get -- that are an add back to EBIT -- adjusted EBITDA and adjusted net income, but flow through the free cash flow and then the higher CapEx as well. I would say that we're going to continue to spend CapEx, although I would imagine it starts to dial down just a tad in 2026. And we will 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.

And again, we called out the headwinds. Those are going to show up in the numbers and show up in the cash. And so that won't really affect the overall cash conversion number because those will be in both places. So we'll update that and we'll make sure that we call that out specifically when we update our guidance for 2026. But again, that's really just a kind of -- it's in one number, it's not in the other number, so it's a little bit out of balance. We need to make sure we call that out in our cash conversion.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Appreciate all the color. So just to kind of put a bow on this noise around margins and the margin bridge? Because I think the message is getting confused that next year is a transition year and maybe your long-term targets getting pushed out. It seems like to me, you had said to get to your margin target, you needed 100 to 150 basis points from volume, and that hasn't played out. And it seems like you've maybe outperformed on internal execution, material savings and the volume has been the whole, but maybe just level set me on that.

I think, Jeff, you said it perfectly. We're actually delivering on our midterm targets without getting any help from the underlying macro. And we feel really good about that, right, because it's really tough to execute in such negative PMI environment. And so I think that there was the point of delineation where we want to ensure that we communicate to the market that the company is executing well. We certainly believe that the volume is going to inflect. We all certainly know that none of us are very good at being able to call the inflections in the macroeconomics, taking into account that there are so many different moving pieces associated with trade policies and industrial policies and kind of the global behavior of these end markets itself.

But I think all of us would anticipate it after 36 months of negative PMI, we would be on a virgin some point in time to see some inversion. And when that occurs, obviously, that's incremental to what we have described in our presentation.

Okay. Great. And then just on capital allocation, I sense a little bit of a tone change where you'd kind of been saying before, hey, we're just going to buy back our stock. The market doesn't appreciate what we're doing here and the multiple hasn't expanded relative to our peers. But now it seems like you're maybe talking a little more about bolt-ons. And so am I reading that right? Or do we lean in on a day where our stock is down 6% and the market's confused?

Yes. Look, I mean, our stock is -- I think our stock is inexpensive it's trading at a valuation that is not akin to the performance that the company is delivering. So we'll certainly lean into buybacks. The Board authorized $300 million of buybacks. So we'll certainly be utilizing what we can. But the company as well is generating a tremendous amount of free cash flow. So I think that we can do all of the things that have been outlined as possible outcomes for capital deployment.

We've bought back -- I mean we've paid down some more debt. We will be strategic about buying back our stock, but we also believe that as our balance sheet is trending towards below the 2x leverage that we have kind of put in, in a place as a demarcation point for us. And so hopefully, I won't have to be talking about leverage in the future. We believe that we can use all 3 levers for capital to format, and we will be leaning more aggressively towards bolt-on M&A.

Your next question comes from the line of Andy Kaplowitz with Citigroup.

You've been talking about accelerating footprint optimization and doing 80/20 since your Investor Day 1.5 years ago. But obviously, your growth in [indiscernible] has been somewhat slow. So I'm just trying to figure out if you're accelerating or enhancing any of your restructuring plans versus when you updated us at that Investor Day? And then maybe can you update us on how 80/20 is impacting gates as you go into '26 and beyond? If you do organically grow, can you do core incrementals over 40%?

Yes. Look, I think that we've -- I want to kind of be fully transparent, right? So as deliberation, they came forward in April, we kind of took a little pause to try to understand what will the new mercantile regime look like? And how do we think about our overall operating structure as a company. And obviously, we have been in region for region for a long time. So we just wanted to reassess and get a better sense of what is happening in the world.

I think that as we get more comfortable with what we are seeing and how we are organized we've come to a conclusion that our original plan was the right plan. As Brooks indicated, we need to be capable of having an access to labor that will give us an ability to flex up and down as these cycles occur. We believe that we're on a verge up cycle. We've got to be positioned well to support the growth that we anticipate over the next upcoming upcycle. And so we are really just executing on our original plan, Andy. Nothing really has dramatically changed around what we have anticipated vis-a-vis footprint optimization and restructuring. So we are -- I think we are in a very, very good shape, and it also validated in that plan was the right plan, which is needed to hit a pause for a couple of quarters. So that's going to beyond us and we are moving forward.

As to 80/20. Look, 80/20 material cost reductions and driving a better operational focus have been really attributes that have given us the opportunity to outperform what we've anticipated during our Capital Markets Day in 2023 and still deliver on our midterm targets without the growth. So it's a very powerful tool. We again believe that we have a very early innings. We take a look at somebody like ITW that has been doing it for over a decade plus and they continue to deliver good margin expansion. We believe that we not only have the opportunity for very certainly immediate future to continue to support 80/20 as the key attributes of our enterprise initiatives to add to our profitability, but also grow our franchise through our strategic growth verticals. So we think that we can do both, and we think that 80/20 is going to be very additive to us.

And if you exclude the benefits from restructuring. And again, I want to be very specific. If you if you exclude the benefits that we have described on Slide 12, we still believe that in a normalized growth environment that we anticipate kind of in '26 and beyond, we should be generating 30% to 35% incremental over and above the benefits that are described on that page.

That's helpful. And then just in terms of growth by region, I think you explained what's going on in North America well. But you also mentioned EMEA return to growth, which is interesting. And China continues to put up durable growth for you guys. So maybe you could sort of click on or give us a little more color about what you're seeing?

Yes. Look, I mean, I think that North America has been probably most challenged from kind of agriculture end market exposure that got slightly worse. And remember, it wasn't a ton of dollars that we -- that it got around the edges less supportive than what we've anticipated. So it's just around the edges less supportive there.

The other end markets, look, I mean automotive overall grew nicely. Automotive replacement grew really well for us in North America. Our industrial replacement market is growing. So things are not -- they're not bad in any form of imagination. They're kind of around what we've anticipated this may be slightly worse behavior in the ag environment. South America has been tough last quarter, but it's been predominantly tough after extraordinary several quarters or maybe 6 quarters of significant growth so it's currently more normalization. And we again anticipate that South America is going to start moving into the growth phase as we kind of exit '26 -- I mean, '25 into '26.

Yes. I mean Europe has been a little bit surprising to us, right? I mean it behaved a little bit better than what we've kind of envisaged with positive core growth I would say that the auto markets are quite negative in Europe. I don't think I'm telling you anything that has not been already communicated, but our AR business is performing well. Our industrial first, particularly around the commercial construction segment and mobility has been performing quite well. And IR has been stabilizing and starting to perk up a little bit in Q3. So maybe around the edges more green shoots than less. And China has been okay. Automotive has been doing quite all right for us in China. Industrial replacement has been doing quite all right for us. So China has been behaving more or less as we have seen over the last several quarters.

And the East Asian, in India is growing. I mean we are growing nicely. Automotive replacement business in India. The industrial for pit business is doing well. I mean I think that India is poised to continue to be on a trajectory of nice growth with the overall economy evolving nicely and becoming a real alternative to China over the midterm. So we are quite optimistic about what we can see out of India in particular. So overall, we actually reasonably tending to be more optimistic than less. And we believe that '26 should be more positive than perhaps might have been taken out of our release today.

Your next question comes from the line of Tomo Sano with JPMorgan.

I'd like to ask about the data centers of the $322 million in Fluid Power revenue this quarter, how much was related to data center sales? And what is your expectations for 2025 data center revenue and the conversions of your $150 million plus pipeline in 2026, please?

Yes. Tomo, we're not going to be addressing exactly the revenue flows because it's still reasonably a small size of revenue that is growing rather nicely for us, but from a very, very small base. So I don't think it's worth to, at this point in time, to spend time yet on the sizing of this in millions, not in the tens of millions yet. Designing activities remains very, very robust. I mean, we see a significant number of new customers that are coming to us, and we are working with on new designing opportunities.

And we will be providing you with some additional color in January, early February on our Q4 earnings call, but we do continue to be quite optimistic that the data center growth as a vertical is going to ramp up rather nicely and we still feel that, that $80 million to $200 million -- $100 million to $200 million by 2028 is certainly comparable for us as an intermediate target for us over the next 2 to 3 years. We also infinitely are going to be at the show [ Supercompute ] next, I think, 2 weeks from now in St. Louis. So we would invite anybody to still buy and have a conversation with us about some of the new products innovation, we can provide additional color on what we are working on from a technology perspective there as well.

And a follow-up on pricing perspective. Could you talk about how effective you have been in passing through cost inflation in Q3? And what is your pricing strategy for 2026, please?

Well, I mean, we've all -- going back, I mean, we've always been I would say, as effective as anybody in terms of passing pricing through from an inflation perspective. We -- when the tariff all the new tariffs came out, for the most part, we're able to cover that with pricing. I mean there are certain regions that are a little bit more pricing challenged, particularly in Asia, where we're able to offset it more operationally than through pricing. We've always been very transparent in terms of we're going to cover material utility inflation on a yearly basis with pricing. And then the 80/20, when we implemented 80/20, we added a value pricing lever to our pricing kind of tactical approach. We make hundreds of thousands of SKUs, right?

And so some of these SKUs, you want to be more competitive on some of them, you're the only ones that make it, and you can price those based on the value you bring because you may be the only one that makes that particular part. And so we continue to use our 80/20 playbook to optimize pricing. And in the aggregate, we're always going to make sure that we use pricing to cover our material and utility inflation.

That concludes our question-and-answer session. I will now turn the conference back over to Rich for closing comments.

All right. Thanks, everyone, for joining. If you have any further questions, feel free to reach out. Otherwise, have a great rest of the week. Take care.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.