Executive Summary / Key Takeaways

• Gates Industrial Corporation plc delivered solid third-quarter 2025 results, achieving a record adjusted EBITDA margin of 22.9% and an 18% increase in adjusted EPS year-over-year, despite subdued industrial demand.
• The company is making significant progress on its balance sheet, reducing net leverage to 2.0x by the end of Q3 2025 and is on track to fall below 2x by year-end, enhancing capital allocation optionality.
• Strategic growth initiatives in Personal Mobility and data centers are gaining momentum, with Personal Mobility growing over 20% in Q3 2025 and the data center pipeline exceeding $150 million, providing secular tailwinds.
• Management has updated its 2025 guidance, raising the adjusted EPS midpoint to $1.50 per share, while maintaining the adjusted EBITDA midpoint of $780 million, reflecting confidence in internal execution.
• Ongoing footprint optimization and an ERP system conversion are expected to incur one-time costs in early 2026 but are projected to deliver significant structural cost savings and drive adjusted EBITDA margin to nearly 24% on a run-rate basis by the end of 2026, even without a broad volume recovery.

The Enduring Power of Gates: A Foundation of Engineered Solutions

Gates Industrial Corporation plc, a global leader in application-specific power transmission and fluid power solutions, has built a formidable reputation over more than 110 years since its founding in 1911. The company's core business revolves around designing, manufacturing, and distributing highly engineered components such as belts, hoses, and related accessories that perform mission-critical functions in demanding applications. These products are essential across a diverse array of end markets, including industrial off-highway (construction and agriculture), industrial on-highway (heavy-duty trucks and buses), energy and resources, automotive, and personal mobility.

A significant competitive advantage for Gates is its "in region, for region" manufacturing philosophy, a strategy initiated around 2015 following Blackstone's (BX) acquisition and further solidified with substantial investments between 2017 and 2019. This localized production model enhances the company's ability to serve local market needs, mitigate supply chain disruptions, and effectively manage the impact of global trade conflicts and tariffs. This strategic positioning is particularly crucial in a volatile global trade environment, where Gates aims to offset the majority of estimated tariff impacts through price increases and operational adjustments.

Technological Edge: Engineering Mission-Critical Solutions

Gates' competitive moat is significantly reinforced by its differentiated technology and continuous innovation. The company's core offerings, such as synchronous and asynchronous belts (V-belts, CVT belts, Micro-V belts) and related components like sprockets, pulleys, and water pumps, are engineered for superior efficiency and durability. These products are critical in applications where downtime is costly, fostering a willingness among end-users to pay a premium for performance and reliability.

In fluid power, Gates provides high-pressure hoses, tubing, couplings, and fittings for stationary and mobile hydraulic systems. The company's R&D efforts are actively expanding these capabilities into high-growth areas. For instance, in the burgeoning data center market, Gates launched its Data Master Hose in late 2024, subsequently adding larger sizes to accommodate increased flow requirements for liquid cooling systems. By mid-2025, it introduced a universal quick disconnect fitting and scaled its electric pump portfolio, which is gaining traction for its compact size and energy efficiency in liquid-cooled data centers. Management notes that these industrial pumps, designed in conjunction with partners, are "probably best-in-class in terms of power per cubic inch of space," a highly differentiated offering.

Furthermore, Gates is redefining power transmission in personal mobility, developing applications for new segments like e-mountain bikes and value e-bikes. The company is also working to incrementally reduce the cost of its belt drive systems to penetrate lower-priced, higher-volume e-bike and e-scooter applications. This strategic focus on innovation not only enhances product performance but also aims to achieve closer cost parity with traditional chain drives, opening doors for broader adoption in industrial and stationary automation applications. These technological advancements are pivotal to Gates' long-term growth strategy, contributing to its competitive moat, driving higher average selling prices (ASPs), and improving margins.

Operational Discipline Amidst Macro Headwinds

Gates' financial performance in the third quarter of 2025 demonstrated robust operational execution despite a challenging macroeconomic backdrop. The company reported net sales of $855.7 million, a 3.0% increase year-over-year, with core sales growth of 1.7%. This growth was achieved even as macro industrial demand remained subdued, with uneven performance across end markets.

Profitability metrics showed significant improvement. Adjusted EBITDA reached $195.8 million, resulting in a record third-quarter adjusted EBITDA margin of 22.9%, an increase of 90 basis points from the prior year. Net income attributable to shareholders rose to $81.6 million, or $0.31 per diluted share, a substantial increase from $47.6 million in the prior year. Adjusted earnings per share (EPS) was $0.39, an 18% increase year-over-year, benefiting from operating performance, a lower tax rate, and reduced interest expense and share count.

Segment-wise, Power Transmission generated revenues of $533.3 million, with core growth of 2.3% in Q3 2025, driven by strong performance in Personal Mobility (over 20% growth) and low single-digit growth in both replacement and OEM channels. Fluid Power sales were $322.4 million, with core growth of just under 1%. While Fluid Power faced headwinds from a mid-teens decline in Commercial On-Highway sales and a low single-digit decline in agriculture, it saw strong double-digit growth in Automotive Replacement. The company's gross profit for the three months ended September 27, 2025, was $341.6 million, up from $335.8 million in the prior year.

Strategic Growth Vectors: Fueling Future Expansion

Gates is actively cultivating several strategic growth vectors that are expected to drive future expansion, even as traditional industrial markets remain volatile. Personal Mobility continues to be a standout performer, with year-over-year growth exceeding 20% in Q3 2025. Management anticipates this segment will grow at a compound annual rate of approximately 30% between 2025 and 2028, fueled by design wins and a stabilized 2-wheeler market.

The data center market, particularly the liquid cooling opportunity, represents a significant emerging growth area. Gates' pipeline for data center opportunities exceeds $150 million, with robust design-in activities across a wide array of customers, including hyperscalers, server manufacturers, and cooling system integrators. The company is seeing a "tremendous amount of activities" and an acceleration of quoting and booking, with expectations for meaningful revenue acceleration in 2026.

The Automotive Replacement market also remains a stable and constructive growth driver, with management expecting continued growth in the 2-3% range through 2028. This segment benefits from an aging car fleet and Gates' ability to gain market share and expand its global presence.

Fortifying the Foundation: Restructuring and Capital Structure

Gates is undertaking significant structural initiatives to enhance its operational efficiency and cost base. The company initiated footprint optimization plans in the second half of 2024, which, alongside an ERP system conversion for its European operations, are expected to be completed by mid-2026. These projects are designed to consolidate manufacturing and distribution, streamline back-office functions, and relocate operations to lower-cost locations. While these initiatives are projected to incur one-time costs, with an anticipated unfavorable impact of 100 to 200 basis points on adjusted EBITDA margin in Q1 2026 and 25 to 75 basis points in Q2 2026, they are expected to yield 75 to 125 basis points of favorable impact in the second half of 2026. Overall, these activities are forecast to generate 0 to 25 basis points of adjusted EBITDA margin improvement for the full year 2026, excluding volume considerations. Management anticipates an adjusted EBITDA run rate nearing 24% exiting 2026 in a volume-neutral environment.

The company's balance sheet continues to strengthen. Net leverage declined to 2.0x at the end of Q3 2025, a 0.4x reduction from the prior year, and is on track to fall below 2x by year-end 2025. Gates paid down $100 million of gross debt in Q3 2025 and has no meaningful debt maturities until 2029. The Board recently approved a new $300 million share repurchase authorization, replacing the prior program, underscoring confidence in the company's financial health and commitment to returning value to shareholders. With a strong balance sheet, management is poised to utilize all three levers of capital deployment: strategic share repurchases, continued debt reduction, and increasingly, bolt-on M&A, while maintaining discipline for double-digit ROIC by year three for acquisitions.

Competitive Dynamics: A Differentiated Approach

Gates operates in a competitive landscape against both direct and indirect rivals. Direct competitors include diversified industrial players like Parker Hannifin Corporation (PH), Eaton Corporation plc (ETN), Timken Company (TKR), and Dana Incorporated (DAN). Gates distinguishes itself through its specialized focus on highly engineered power transmission and fluid power solutions, with a significant portion of its revenue derived from the replacement channel, which helps mitigate economic cyclicality.

Compared to Parker Hannifin, Gates' established brand in belts and hydraulics, coupled with its focus on replacement markets, may provide superior durability and customer loyalty in specific applications. While Parker Hannifin offers a broader product range and stronger integration in automation, Gates' "in region, for region" manufacturing strategy provides a distinct advantage in navigating trade complexities and ensuring localized support.

Against Eaton, Gates' specialized components for construction and automotive applications can offer materially lower operating costs in certain uses due to its engineered efficiency. However, Eaton's broader portfolio in electrical and power management, particularly its investments in electrification and data center solutions, presents a challenge in integrated systems. Gates is actively addressing this by expanding its own data center product portfolio and capabilities.

Timken, specializing in engineered bearings, competes in power transmission, but Gates' belt-driven systems may offer significantly greater efficiency in mobile applications. Dana, focused on drivetrain solutions, leads in e-drive technologies for electric vehicles, an area where Gates is also innovating with its Personal Mobility offerings. Gates' strong brand recognition, proprietary technology in power transmission belts, and extensive distribution channels serve as key competitive advantages, enabling pricing power and fostering customer loyalty.

Outlook and Risks: A Path to 24.5% Adjusted EBITDA

Gates has updated its full-year 2025 guidance, reflecting a pragmatic view of the current macro environment. The company now anticipates core sales growth in the range of 0.5% to 1.5% year-over-year, with an adjusted EBITDA between $770 million and $790 million. Adjusted EPS guidance has been raised to a midpoint of $1.50 per share, with a range of $1.48 to $1.52. Capital expenditures are projected at approximately $120 million, and free cash flow conversion is expected to be 80-90%.

Management believes many of its end markets are "troughing or are close to troughing" and anticipates a more stable to improving demand landscape in 2026. While the agriculture market got incrementally worse in Q3 2025, it is expected to be "significantly less bad" in 2026. The diversified industrial market is also believed to have bottomed out and should become more accretive in 2026.

Key risks include ongoing macroeconomic uncertainties, global trade conflicts, and potential supply chain disruptions. Tariffs, in particular, are expected to cause 30 to 40 basis points of gross margin dilution in the second half of 2025, though the company aims to be dollar-neutral through pricing and operational offsets. The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, is expected to result in a $3.2 million income tax expense in 2025. Despite these challenges, Gates' focus on internal execution and structural cost improvements positions it to achieve its midterm adjusted EBITDA margin target of 24.5% by 2026, with a run rate nearing 24% exiting next year, even without a broad volume recovery.

Conclusion

Gates Industrial Corporation plc stands as a compelling investment proposition, demonstrating remarkable operational resilience and strategic foresight in a dynamic industrial landscape. The company's record third-quarter 2025 adjusted EBITDA margin and strong EPS growth underscore its ability to generate robust profitability through disciplined execution of enterprise initiatives, even amidst subdued industrial demand. With a rapidly strengthening balance sheet, evidenced by a net leverage ratio on track to fall below 2x by year-end 2025, Gates possesses enhanced financial flexibility to pursue strategic capital deployment, including a new $300 million share repurchase authorization.

The core investment thesis is further bolstered by Gates' commitment to technological differentiation and its strategic focus on high-growth secular markets like Personal Mobility and data center liquid cooling, which are poised for significant revenue acceleration in the coming years. While near-term macro headwinds persist, particularly in certain industrial segments, the company's ongoing footprint optimization and ERP system conversion are expected to yield substantial structural cost savings, driving adjusted EBITDA margins towards its 24.5% midterm target by 2026, largely independent of a broad market recovery. This blend of operational excellence, strategic growth drivers, and a fortified financial position positions Gates Industrial for sustained value creation for its shareholders.